Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
|
|
|
x
|
|
ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
OF
1934
|
|
|
For
the fiscal year ended December 31,
2008
|
¨
|
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT
OF 1934
|
|
|
For
the transition period from_________ to
__________
|
Commission
File Number 000-24821
(Name
of registrant as specified in its charter)
|
|
|
Delaware
|
|
13-3612110
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(I.R.S.
Employer Identification Number)
|
|
|
|
42
West 39th
Street, New York, NY
(Address of
principal executive offices)
|
|
10018
(Zip
Code)
|
Registrant’s telephone number:
(212) 944-8000
Securities
registered pursuant to Section 12(b) of the Securities Exchange Act of
1934:
|
|
|
Title
of each class
Common
stock, par value $.01 per share
|
|
Name
of Exchange on Which Registered
The
Nasdaq Stock Market LLC
|
Securities
registered under Section 12(g) of the Exchange
Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ¨ No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes ¨ No
x
Indicate
by check mark whether the registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days. Yes x No
¨
Indicate
by check mark whether disclosure of delinquent filers in response to Item 405 of
Regulation S-K is not contained in this form, and will not be contained, to the
best of the registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer or a smaller reporting
company. See the definitions of “larger accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer ¨
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company x
(Do not
check if a smaller reporting company)
Indicate
by check mark if the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes ¨ No
x
As of
February 27, 2009, there were 18,831,950 shares of Common Stock, $.01 par value,
of the registrant outstanding. The aggregate market value of the
voting and non-voting common equity held by non-affiliates as of June 30, 2008,
based upon the last sale price of such equity reported on the Nasdaq Capital
Market, was approximately $8.3 million.
DOCUMENTS
INCORPORATED BY REFERENCE
Certain
information required by Part III of Form 10-K is incorporated by reference to
the Registrant’s proxy statement for the 2009 Annual Stockholders Meeting, which
will be filed with the Securities and Exchange Commission.
BLUEFLY, INC.
ANNUAL
REPORT ON FORM 10-K
INDEX
|
|
|
|
Page
|
|
|
Part I.
|
|
|
|
|
|
|
|
|
Special
Note Regarding Forward-Looking Statements
|
|
3
|
|
Item
1.
|
|
Business
|
|
3
|
|
Item
1A.
|
|
Risk
Factors
|
|
6
|
|
Item
2.
|
|
Properties
|
|
12
|
|
Item
3.
|
|
Legal
Proceedings
|
|
12
|
|
Item
4.
|
|
Submission
of Matters to a Vote of Security Holders
|
|
12
|
|
|
Part II.
|
|
|
|
|
|
|
Item
5.
|
|
Market
for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
|
12
|
|
Item
6.
|
|
Selected
Financial Data
|
|
14
|
|
Item
7.
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
15
|
|
Item
7A.
|
|
Quantitative
and Qualitative Disclosures About Market Risk
|
|
23
|
|
Item
8.
|
|
Financial
Statements and Supplementary Data
|
|
23
|
|
Item
9.
|
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
|
23
|
|
Item
9A(T).
|
|
Controls
and Procedures
|
|
23
|
|
Item
9B.
|
|
Other
Information
|
|
24
|
|
|
Part III.
|
|
|
|
|
|
|
Item
10.
|
|
Directors,
Executive Officers and Corporate Governance
|
|
24
|
|
Item
11.
|
|
Executive
Compensation
|
|
24
|
|
Item
12.
|
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
|
24
|
|
Item
13.
|
|
Certain
Relationships and Related Transactions, and Director
Independence
|
|
24
|
|
Item
14.
|
|
Principal
Accountant Fees and Services
|
|
24
|
|
|
Part IV.
|
|
|
|
|
|
|
Item
15.
|
|
Exhibits
and Financial Statement Schedules
|
|
24
|
|
|
|
|
|
|
|
Signatures
|
|
30
|
|
|
|
|
|
Financial
Statements
|
|
F –
1
|
|
PART
I.
Special
Note Regarding Forward-Looking Statements and Associated Risks
This
Annual Report contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Forward-looking statements include, without limitation,
any statement that may predict, forecast, indicate, or imply future results,
performance, or achievements, and may contain the words “believe,” “anticipate,”
“expect,” “estimate,” “project,” “will be,” “will continue,” “will likely
result,” or words or phrases of similar meaning. Forward-looking
statements involve risks and uncertainties that may cause actual results to
differ materially from the forward-looking statements (“Cautionary Statements”).
The risks and uncertainties include, but are not limited to those matters
addressed herein under “Risk Factors.” All subsequent written and
oral forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by the Cautionary Statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of their dates. We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise.
Item
1. Business
General
Bluefly,
Inc. is a leading online retailer of designer brands, fashion trends and
superior value. During 2008, we offered over 50,000 different styles
for sale in categories such as men’s, women’s and accessories as well as house
and home accessories from over 350 brands at discounts up to 75% off retail
value. We launched the Bluefly.com Web site (the “Web site”) in September
1998. Since its inception, www.bluefly.com has
served over one million customers and shipped to over 13 countries.
Our
common stock is listed on the Nasdaq Capital Market under the symbol “BFLY” and
we are incorporated in the state of Delaware. Our executive offices are located
at 42 West 39th Street, New York, New York 10018, and our telephone number is
(212) 944-8000. Our Internet address is www.bluefly.com. We
make available, free of charge, through our Web site, our annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Exchange Act as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the Securities and
Exchange Commission (the “SEC”).
In this
report, the terms "we," "us," "Bluefly" and the "Company" refer to Bluefly, Inc.
and its predecessors and subsidiaries, unless the context indicates
otherwise.
Business
Strategy
Our goal
is to offer our customers the best designer brands and latest fashion trends at
superior values. We offer the same types of on-trend and in-season
designer merchandise as are sold in luxury department stores at discounted
prices. Similarly, we are able to offer an upscale shopping experience not
available at off-price stores or outlet malls because of our merchandise
selection and the presentation and product search capabilities offered by our
site. The
frequent addition of new on-trend products to our Web site is also one of the
key factors to our marketing strategy, as it gives our shoppers reason to visit
the site and encourages them to be loyal and active.
Our
business is also designed to provide a compelling value proposition for our
suppliers and, in particular, the more than 350 top designer brands that we
offer on our Web site. Because we work with our suppliers both at the beginning
and throughout the season, we are able to help them manage inventory and cash
flow. We also create an environment that is respectful of the brands we sell.
Our buyers all have backgrounds in a full price branded retail environment. Our
Web site creates a high-end retail environment that offers only the best
designer brands and the most current trends. In doing so, we support
our vendors’ brands, rather than diluting them as traditional off-price channels
do.
We do not
believe that we can accomplish these goals without using the Internet as a
platform. The direct marketing of products that are available in
limited quantities and sizes, and that are not replenishable, requires a
cost-effective medium that can display a large number of products. We believe
print catalogs are not well suited to this task. The paper, printing,
mailing and other production costs of a print catalog can be significant and the
lead times required to print a catalog make them significantly inflexible in
addressing inventory sell outs, price changes and new styles. To work
around these limitations, a traditional cataloger typically requires products
that are replenishable, available in a full range of sizes and in substantial
quantities. Similarly, retailing on television is costly and requires
substantial quantities of products that are available in all sizes in order for
it to be an economical medium. In addition, the number of items that
can be displayed on television is limited, and television does not allow viewers
to search for products that interest them.
The
Internet, however, can be a far less expensive and far more effective
medium. By using the Internet as our platform, the number of items
that we offer is not limited by the high costs of printing and mailing
catalogs. With the Internet, we can automatically
update
product
images as new products arrive and other items sell out. By using a
real-time inventory database, we can create a personalized shopping environment
and allow our customers to search for the products that specifically interest
them and are available in their size. In addition, we believe that we
are able to more economically and consistently maintain an upscale environment
through the design of a single online storefront.
We
believe that we have created a customer experience that is fundamentally better
than that offered by traditional off-price retailers. Similarly, we
believe that our upscale atmosphere, professional photography and premium
merchandise offering create a superior distribution channel for designers who
wish to liquidate their end-of-season and excess merchandise without suffering
the brand dilution inherent in traditional off-price channels. Our customer
research suggests that this strategy has been successful.
E-Commerce
And The Online Apparel Market
The
continued growth of e-commerce has been widely reported. According to
projections published by Forrester Research, Inc., U.S. online retail sales are
expected to rise 11% to $156 billion this year. Online sales are
expected to make up 6% of overall retail revenue in 2009, compared with 5% in
2008.
Marketing
Our
marketing efforts are focused both on acquiring new customers and retaining
existing customers. Active Bluefly customers visit the site frequently and
purchase from one season to the next at high levels with great
predictability. A significant portion of our sales to existing
customers are driven by our customer emails, which highlight new promotions and
products, and provide special previews to customers who have asked to be
included in our email list. In addition, we believe that our sales to
existing customers are driven by all aspects of our customer experience,
including our Web site design, packaging, delivery and customer
service.
Prior to
2005, we acquired new customers primarily through online advertising,
word-of-mouth, sweepstakes and our affiliate program. In September 2005, faced
with low awareness numbers, we began a national advertising campaign that
featured both print and television. Over the past three and a half years we have
increased awareness by targeting general advertising efforts to a more fashion
focused customer. Over the past two years we further refined our marketing
strategy by aligning ourselves with entertainment properties, such as
BravoTV.com, Project Runway, Bride Wars and Confessions of a
Shopaholic.
Merchandising
We buy
merchandise directly from designers as well as from other third party indirect
resources. Currently, we offer products from more than 350 name brand
designers. We believe that we have been successful in developing
vendor relationships, in part because we have devoted substantial resources to
establishing Bluefly.com as a high-end retail environment. We are
committed to displaying all of our merchandise in an attractive manner, offering
superior customer service and gearing all aspects of our business towards
creating a better channel for top designers.
Warehousing
And Fulfillment
When we
receive an order, the information is transmitted to our third party warehouse
and fulfillment center located in Ohio, where the items included in the order
are picked, packed and shipped directly to the customer. Our
inventory database is updated on a real-time basis, allowing us to display on
our Web site only those styles, sizes and colors of product available for
sale.
We focus
on customer satisfaction throughout our organization. In December 2008, during
our peak weeks of the holiday season, the vast majority of our orders were
shipped within one business day from receipt of the customer’s
order.
Customer
Service
We
believe that a high level of customer service and support is critical to
differentiating ourselves from traditional off-price retailers and maximizing
customer acquisition and retention efforts. Our customer service
effort starts with our Web site, which is designed to provide an intuitive
shopping experience. An easy-to-use help center is available on the
Web site and is designed to answer many of our customers’ most frequently asked
questions. For customers who prefer e-mail, chat or telephone
assistance, customer service representatives are available seven days a week to
provide assistance. We utilize customer representatives from a third
party call center that has a team dedicated to our business. We also
maintain a supervisor in our New York office, who provide special services and
assist in the training and management of the other representatives. To ensure
that customers are satisfied with their shopping experience, we generally allow
returns for any reason within 90 days of the sale for a full
refund.
In
November 2008 we were awarded the “International Service Excellence Award” from
the International Council of Customer Service Organizations. This
award recognizes customer service excellence in management systems worldwide. We
were also awarded the “E-tailing Excellence Award” from the e-tailing group in
January 2007 for the second consecutive year. This award recognizes online
merchants who excel in customer service.
Technology
We have
implemented a broad array of state-of-the-art technologies that facilitate Web
site management, complex database search functionality, customer interaction and
personalization, transaction processing, fulfillment and customer service
functionality. Such technologies include a combination of proprietary technology
and commercially available, licensed technology. To address the critical issues
of privacy and security on the Internet, we incorporate, for transmission of
confidential personal information between customers and our Web server, Secure
Socket Layer Technology such that all data is transmitted via a 128-bit
encrypted session. The computer and communications equipment on which our Web
site is hosted are currently located at a third party co-location facility in
New York.
We have
developed a new version of our Web site, using certain technology of the Art
Technology Group, Inc., which was placed into service in August 2008. We expect
that the more robust tools provided by the upgraded Web site will allow us to
better create and manage, and measure the performance of, on-site marketing
promotions. In addition, we believe that the new Web site will
provide a more efficient platform from which to scale our technology
infrastructure should any future growth in our business dictate such a
need.
Competition
E-commerce
generally, and, in particular, the online retail apparel and fashion accessories
market, is a relatively dynamic, high-growth market. Our competition
for online customers comes from a variety of sources, including existing
land-based retailers that are using the Internet to expand their channels of
distribution, established Internet companies and less established companies. In
addition, our competition for customers comes from traditional direct marketers,
designer brands that may attempt to sell their products directly to consumers
through the Internet and land-based off-price retail stores, which may or may
not use the Internet in the future to grow their customer base. Many
of these competitors have longer operating histories, significantly greater
resources, greater brand recognition and more firmly established supply
relationships. Moreover, we expect additional competitors to emerge
in the future.
We
believe that the principal competitive factors in our market include: brand
recognition, merchandise selection, price, convenience, customer service, order
delivery performance and site features.
Intellectual
Property
We rely
on various intellectual property laws and contractual restrictions to protect
our proprietary rights in services and technology, including confidentiality,
invention assignment and nondisclosure agreements with employees and
contractors. Despite these precautions, it may be possible for a
third party to copy or otherwise obtain and use our intellectual property
without our authorization. In addition, we pursue the registration of
our trademarks and service marks in the U.S. and internationally and the
registration of our domain name and variations thereon. However,
effective intellectual property protection may not be available in every country
in which the services are made available online.
We also
rely on technologies that we license from third parties. These
licenses may not continue to be available to us on commercially reasonable terms
in the future. As a result, we may be required to obtain substitute
technology of lower quality or at greater cost, which could materially adversely
affect our business, financial condition, results of operations and cash
flows.
We do not
believe that our business, sales policies or technologies infringe the
proprietary rights of third parties. However, third parties have in
the past and may in the future claim that our business, sales policies or
technologies infringe their rights. We expect that participants in
the e-commerce market will be increasingly subject to infringement claims as the
number of services and competitors in the industry grows. Any such
claim, with or without merit, could be time consuming, result in costly
litigation or require us to enter into royalty or licensing
agreements. Such royalty or licensing agreements might not be
available on terms acceptable to us, or at all. As a result, any such
claim of infringement against us could have a material adverse effect upon our
business, financial condition, results of operations and cash
flows.
Governmental
Approvals And Regulations
We are
not currently subject to direct regulation by any domestic or foreign
governmental agency, other than regulations applicable to businesses generally,
and laws or regulations directly applicable to online commerce. We
are not aware of any permits or licenses that are required in order for us,
generally, to sell apparel and fashion accessories on the Internet, although
licenses are sometimes required to sell products made from specific
materials. In addition, permits or licenses may be required from
international, federal, state or local governmental authorities to operate or to
sell certain other products on the Internet in the future. No
assurances can be given that we will be able to obtain such permits or licenses.
We may be required to comply with future national and/or international
legislation and statutes regarding conducting commerce on the Internet in all or
specific countries throughout the world. No assurance can be made that we will
be able to comply with such legislation or statutes. Our Internet operations are
not currently impacted by federal, state, local and foreign environmental
protection laws and regulations.
Seasonality
And Fashion Trends
Our
business is affected by seasonality, which historically has resulted in higher
sales volume during our fourth quarter, which ends December 31. We
recognized 29%, 33% and 35% of our annual revenue during the fourth quarter of
2008, 2007 and 2006, respectively. In addition, our business
fluctuates according to changes in customer preferences dictated in part by
fashion trends. The cyclical nature of our business
requires us to carry a significant amount of inventory, especially prior to peak
selling seasons when we generally build up our inventory levels. As a
result, we are vulnerable to demand and pricing shifts and to errors in
selection and timing of merchandise purchases.
Employees
As of
February 27, 2009, we had 87 full-time employees and 1 part-time employee, as
compared to 102 full-time employees and 3 part-time employees as of February 27,
2008. None of our employees are represented by a labor union, and we consider
our relations with our employees to be good.
Item
1A. Risk Factors
We Have A History Of Losses And
Expect That Losses Will Continue In The Future. As of December
31, 2008, we had an accumulated deficit of $143,878,000. We incurred
net losses of $11,340,000, $15,829,000 and $12,193,000 for the years ended
December 31, 2008, 2007 and 2006, respectively. During the year ended
December 31, 2008, net cash used in operating activities was $3.2
million. We have incurred negative cash flows and net losses since
inception. Although we have experienced revenue growth in recent
years, this growth should not be considered indicative of future performance,
particularly given the challenging environment that we now face.
We
believe that we have sufficient liquidity from current funds and operating cash
flow despite the disruption of the capital markets and the continued decline in
economic conditions. Moreover, we believe that our existing cash
balance, combined with working capital, will be sufficient to enable us to meet
planned expenditures under a streamlined business plan through at least the next
12 months. The streamlined business plan calls for, among other
things, reductions in marketing and capital expenditures, delaying new hires and
making selective inventory purchases.
In
addition, should we experience unforeseen increases in expenditures or should
estimated revenues not materialize, these conditions could significantly impair
our ability to fund future operations. Should we experience unanticipated losses
or expenditures that exceed current estimates, management would implement a cost
reduction plan, that includes a reduction in work force as well as reductions in
overhead costs and capital expenditures, and/or attempt to raise additional debt
or equity financing. There can be no assurance that we will achieve or sustain
positive cash flows from operations or profitability. If we are unable to
maintain adequate liquidity, future operations will need to be scaled back or
discontinued.
Soros, Maverick And Prentice Each Own
A Large Amount Of Our Stock And Therefore Can Exert Significant Influence Over
Our Management And Policies. As of February 27, 2009,
affiliates of Soros Fund Management L.L.C (“Soros”) owned approximately 36% of
our Common Stock and private funds associated with Maverick Capital, Ltd.
(“Maverick”) and investment entities and accounts managed and advised by
Prentice Capital Management, LP (“Prentice”) each owned approximately 22% of our
Common Stock. We are parties to a voting agreement with Soros,
Maverick and Prentice (the “Voting Agreement”), pursuant to which Soros has the
right to designate three designees to our Board of Directors, and Maverick and
Prentice each have the right to designate one designee. The
Voting Agreement also provides that one designee of Soros and the designee of
each of Maverick and Prentice have the right to serve on the Compensation
Committee and the Governance and Nominating Committee of the Board of
Directors. If we establish an Executive Committee, the designees of
Soros, Maverick and Prentice will be entitled to serve on such
committee.
In view
of their large percentage of ownership, Soros, Maverick and Prentice each have
the ability to exert significant influence over our management and policies,
such as the election of our directors, the appointment of new management and the
approval of any other action requiring the approval of our stockholders,
including any amendments to our certificate of incorporation, a sale of all or
substantially all of our assets or a merger.
The Deterioration in the Global
Economic Environment, and Resulting Declines in Consumer Confidence and
Spending, Will Have an Adverse Effect on Our Operating
Results. The global economic environment deteriorated
substantially during 2008. The declining values in real estate,
reduced credit lending by banks, solvency concerns of major financial
institutions, increases in unemployment levels and recent significant declines
and volatility in the global financial markets have negatively impacted the
level of consumer spending for discretionary items. This has affected
our business as it is dependent on consumer demand for our
products. As a result, during the fourth quarter of 2008, our
revenues declined by approximately 8%, compared to the fourth quarter of 2007 as
this is a highly promotional environment. If the global economic
environment continues to be weak or deteriorates further, there will likely be a
negative effect on our revenues and earnings for the remainder of the current
fiscal year and continuing into fiscal 2010.
Our Stock May Be Delisted From
Nasdaq, Which May Adversely Affect Our Ability To Raise Capital and Stockholders
Ability To Sell Their Shares. Under Nasdaq Marketplace Rule
4310(c)(4) requirement, if the bid price of the Company’s common stock closes
below the minimum $1.00 per share for 30 consecutive business days, the
Company’s common stock is subject to potential delisting from the Nasdaq Capital
Market. Given the extraordinary market conditions, Nasdaq has
suspended this requirement until April 20, 2009. The bid price of the
Company’s common stock has closed below $1.00 for 30 consecutive business days
so the Company could be subject to potential delisting if the stock stays below
$1.00 and the requirement is reinstated. In that case, the Company
would be given 180 calendar days, to regain compliance by maintaining a bid
price of at least $1.00 for 10 consecutive business days.
We Will Operate Under a Streamlined
Business Plan Unless We Are Able To Raise Additional Funds. Our ability
to meet our obligations in the ordinary course of business is dependent upon our
ability to establish profitable operations or raise additional financing through
public or private debt or equity financing, or other sources of financing to
fund operations. The disruption of the capital markets and the continued decline
in economic conditions negatively impacts our ability to raise additional
financing, and, accordingly, we have developed a streamlined operating plan,
which we intend to pursue unless and until additional capital becomes available
on acceptable terms. We believe that our existing cash balance, combined with
working capital, and our availability under our existing credit facility, will
be sufficient to enable us to meet our planned expenditures under this
streamlined business plan through at least the next 12 months. The
streamlined business plan calls for, among other cost cutting measures,
reductions in marketing and capital expenditures, delaying new hires and being
more selective in inventory purchases. However, in order to optimize the growth
of our business, we will need to seek to raise additional debt or equity
financing. There can be no assurance that we will be able to identify
a source of such financing, or that such financing will be available on terms
acceptable to us. Moreover, should the opportunity to raise additional capital
arise, any additional debt or equity financing could result in significant
dilution of the existing holders of common stock.
Our Lender Has Liens On Substantially
All Of Our Assets And Could Foreclose In The Event That We Default Under Our
Credit Facility. Under the terms of our credit facility, our
lender has a first priority lien on substantially all of our assets, including
our cash balances. If we default under the credit facility, our
lender would be entitled to, among other things, foreclose on our assets
(whether inside or outside a bankruptcy proceeding) in order to satisfy our
obligations under the credit facility.
Our Ability To Maintain And Pay Our
Indebtedness Under Our Credit Facility Is Dependent Upon Meeting Our Business
Plan. We are required to pay interest under our credit
facility on a monthly basis. Assuming we meet our business plan, we
will be able to pay our interest as required. To a certain extent, however, our
ability to meet our business plan, is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control, and therefore we cannot assure you that based on our business plan we
will generate sufficient cash flow from operations to enable us to pay our
indebtedness under the credit facility and maintain our minimum availability
requirement throughout the term of the agreement. If we fall short of
our business plan and are unable to raise additional capital, we could default
under our credit facility. In the event of a default under the credit facility,
our lender would be entitled, among other things, to foreclose on our assets
(whether inside or outside a bankruptcy proceeding) in order to satisfy our
obligations under the credit facility. See “Risk Factors – Our
Lenders Have Liens On Substantially All Of Our Assets And Could Foreclose In The
Event That We Default Under Our Credit Facility.”
If We Are Not Accurate In Forecasting
Our Revenues, We May Be Unable To Adjust Our Operating Plans In A Timely
Manner. Because our business has not yet reached a mature
stage, it is difficult for us to forecast our revenues
accurately. We base our current and future expense levels and
operating plans on expected revenues, but in the short-term a significant
portion of our expenses are fixed. Accordingly, we may be unable to
adjust our spending in a timely manner to compensate for any unexpected revenue
shortfall. This inability could cause our operating results in some
future quarter to fall below the expectations of securities analysts and
investors. In that event, the trading price of our Common Stock could
decline significantly. In addition, any such unexpected revenue
shortfall could significantly affect our short-term cash flow and our net worth,
which could require us to seek additional financing and/or cause a default under
our credit facility. See “Risk Factors – Our Ability To Maintain And
Pay Our Indebtedness Under Our Credit Facility Is Dependent Upon Meeting Our
Business Plan.”
Our National Advertising Campaign and
Other Marketing Initiatives May Not Be Successful. Our success depends on
our ability to attract customers on cost-effective terms. We have relationships
with online services, search engines, and other Web sites and e-commerce
businesses to provide other links that direct customers to our Web site. In
addition, during 2005 we launched our first national television and advertising
campaign, and we have continued and expanded on that campaign since that time.
Such campaigns are expensive and may not result in the cost effective
acquisition of customers. We are relying on the campaign as a source
of traffic to our Web site and new customers. If these campaigns and initiatives
are not successful, our results of operations will be adversely
affected.
We Purchase a Substantial Portion of
Our Inventory from One Supplier. In
2008 and 2007, we purchased approximately 31% and 38%, respectively, of our
inventory from one supplier. Should our relationship with this supplier
deteriorate or terminate, or should this supplier lose some or all of its access
to the products that we purchase from it, our performance could be adversely
affected. Under such
circumstances,
we would be required to seek alternative sources of supply for these products,
and there can be no assurance that we would be able to obtain such products from
alternative sources on the same terms, or at all. A failure to obtain such
products on as favorable terms could have an adverse effect on our revenue
and/or gross margin.
We Do Not Have Long Term Contracts
With Our Vendors And Therefore The Availability Of Merchandise Is At
Risk. We do not have any agreements controlling the long-term
availability of merchandise or the continuation of particular pricing
practices. Our contracts with suppliers typically do not restrict
such suppliers from selling products to other buyers. There can be no
assurance that our current suppliers will continue to sell products to us on
current terms or that we will be able to establish new or otherwise extend
current supply relationships to ensure product acquisitions in a timely and
efficient manner and on acceptable commercial terms. In addition, in
order to entice new vendors to open up relationships with us, we sometimes are
required to either make prepayments or agree to shortened payment
terms. Our ability to develop and maintain relationships with
reputable suppliers and obtain high quality merchandise is critical to our
success. If we are unable to develop and maintain relationships with
suppliers that would allow us to obtain a sufficient amount and variety of
quality merchandise on acceptable commercial terms, our ability to satisfy our
customers’ needs, and therefore our long-term growth prospects, would be
materially adversely affected. See “Risk Factors - Brand Owners Could
Establish Procedures to Limit Our Ability to Purchase Products Indirectly” and
“Risk Factors – We Purchase a Substantial Portion of Our Inventory from One
Supplier.”
Unexpected Changes In Fashion Trends
Could Cause Us To Have Either Excess or Insufficient
Inventory. Fashion trends can change rapidly, and our business
is sensitive to such changes. There can be no assurance that we will
accurately anticipate shifts in fashion trends and adjust our merchandise mix to
appeal to changing consumer tastes in a timely manner. If we misjudge
the market for our products or are unsuccessful in responding to changes in
fashion trends or in market demand, we could experience insufficient or excess
inventory levels or higher markdowns, either of which would have a material
adverse effect on our business, financial condition and results of
operations.
We Will Be Subject To Cyclical
Variations In The Apparel And E-Commerce Markets. The apparel industry
historically has been subject to substantial cyclical variations. The recent
economic downturn has effected retailers especially hard. The National Retail
Federation, a retail trade association, recently announced that it forecasts a
0.5% decline in retail sales for 2009. Furthermore, Internet usage slows down in
the summer months. We and other apparel vendors rely on the
expenditure of discretionary income for most, if not all,
sales. Economic downturns, whether real or perceived, in economic
conditions or prospects could adversely affect consumer spending habits and,
therefore, have a material adverse effect on our revenue, cash flow and results
of operations. Alternatively, any improvement, whether real or
perceived, in economic conditions or prospects could adversely impact our
ability to acquire merchandise and, therefore, have a material adverse effect on
our business, prospects, financial condition and results of operations, as our
supply of merchandise is dependent on the inability of designers and retailers
to sell their merchandise in full-price venues. See “Risk Factors –
We Do Not Have Long Term Contracts With Our Vendors And Therefore The
Availability of Merchandise Is At Risk.”
We Purchase Product From Some
Indirect Supply Sources, Which Increases Our Risk of Litigation Involving The Sale Of Non-Authentic
Or Damaged Goods. We purchase merchandise both directly from
brand owners and indirectly from retailers and third party
distributors. The purchase of merchandise from parties other than the
brand owners increases the risk that we will mistakenly purchase and sell
non-authentic or damaged goods, which could result in potential liability under
applicable laws, regulations, agreements and orders. Moreover, any claims by a
brand owner, with or without merit, could be time consuming, result in costly
litigation, generate bad publicity for us, and have a material adverse impact on
our business, prospects, financial condition and results of
operations.
Security Breaches To Our Systems And
Database Could Cause Interruptions to Our Business And Impact Our Reputation
With Customers, And We May Incur Significant Expenses to Protect Against Such
Breaches. A fundamental requirement for online commerce and
communications is the secure transmission of confidential information over
public networks. There can be no assurance that advances in computer
capabilities, new discoveries in the field of cryptography, or other events or
developments will not result in a compromise or breach of the algorithms we use
to protect customer transaction and personal data contained in our customer
database. A party who is able to circumvent our security measures could
misappropriate proprietary information or cause interruptions in our
operations. If any such compromise of our security were to occur, it
could have a material adverse effect on our reputation with customers, thereby
affecting our long-term growth prospects. In addition, we may be required to
expend significant capital and other resources to protect against such security
breaches or to alleviate problems caused by such breaches.
Brand Owners Could Establish
Procedures To Limit Our Ability To Purchase Products
Indirectly. Brand owners have implemented, and are
likely to continue to implement, procedures to limit or control off-price
retailers’ ability to purchase products indirectly. In addition, several brand
owners in the U.S. have distinctive legal rights rendering them the only legal
importer of their respective brands into the U.S. If we acquire such
product indirectly from distributors and other third parties who may not have
complied with applicable customs laws and regulations, such goods could be
subject to seizure from our inventory by U.S. Customs
Service,
and the importer may have a civil action for damages against us. See “Risk
Factors - We Do Not Have Long Term Contracts With Our Vendors And Therefore The
Availability Of Merchandise Is At Risk.”
We Are Heavily Dependent On
Third-Party Relationships, And Failures By A Third Party Could Cause
Interruptions To Our Business. We are heavily dependent upon
our relationships with our fulfillment operations provider, third party call
center and Web hosting provider, delivery companies like UPS and the United
States Postal Service, and credit card processing companies such as Paymentech
and Cybersource to service our customers' needs. To the extent that
there is a slowdown in mail service or package delivery services, whether as a
result of labor difficulties, terrorist activity or otherwise, our cash flow and
results of operations would be negatively impacted during such slowdown, and the
results of such slowdown could have a long-term negative effect on our
reputation with our customers. The failure of our fulfillment
operations provider, third party call center, credit card processors or Web
hosting provider to properly perform their services for us could cause similar
effects. Our business is also generally dependent upon our ability to obtain the
services of other persons and entities necessary for the development and
maintenance of our business. If we fail to obtain the services of any
such person or entities upon which we are dependent on satisfactory terms, or we
are unable to replace such relationship, we would have to expend additional
resources to develop such capabilities ourselves, which could have a material
adverse impact on our short-term cash flow and results of operations and our
long-term prospects.
We Are In Competition With Companies
Much Larger Than Ourselves. E-commerce generally and, in particular, the
online retail apparel and fashion accessories market, is a dynamic, high-growth
market and is rapidly changing and intensely competitive. Our
competition for customers comes from a variety of sources
including:
|
·
|
existing
land-based, full price retailers, that are using the Internet to expand
their channels of distribution;
|
|
·
|
less
established online companies;
|
|
·
|
traditional
direct marketers; and
|
|
·
|
traditional
off-price retail stores, which may or may not use the Internet to grow
their customer base.
|
Competition
in our industry has intensified, and we expect this trend to continue as the
list of our competitors grows. Many of our competitors and potential
competitors have longer operating histories, significantly greater resources,
greater brand name recognition and more firmly established supply
relationships. We believe that the principal competitive factors in
our market include:
|
·
|
order
delivery
performance; and
|
There can
be no assurance that we will be able to compete successfully against competitors
and future competitors, and competitive pressures faced by us could force us to
increase expenses and/or decrease our prices at some point in the
future.
We Need To Further Establish Brand
Name Recognition. We believe that further establishing,
maintaining and enhancing our brand is a critical aspect of our efforts to
attract and expand our online traffic. The number of Internet sites
that offer competing services, many of which already have well established
brands in online services or the retail apparel industry generally, increases
the importance of establishing and maintaining brand name
recognition. Promotion of Bluefly.com will depend largely on our
success in providing a high quality online experience supported by a high level
of customer service, which cannot be assured. In addition, to attract
and retain online users, and to promote and maintain Bluefly.com in response to
competitive pressures, we may find it necessary to increase substantially our
advertising and marketing expenditures. If we are unable to provide
high quality online services or customer support, or otherwise fail to promote
and maintain Bluefly.com, or if we incur excessive expenses in an attempt to
promote and maintain Bluefly.com, our long-term growth prospects would be
materially adversely affected.
There Can Be No Assurance That Our
Technology Systems Will Be Able To Handle Increased Traffic; Implementation Of
Changes To Web Site. A key element of our strategy is to
generate a high volume of traffic on, and use of,
Bluefly.com. Accordingly, the satisfactory performance, reliability
and availability of Bluefly.com, transaction processing systems and network
infrastructure are critical to our reputation and our ability to attract and
retain customers, as well as maintain adequate customer service
levels. Our revenues will depend on the number of visitors who shop
on Bluefly.com and the volume of orders we can handle. Unavailability
of our Web site or reduced order fulfillment performance would reduce the volume
of goods sold and could also adversely affect consumer perception of our brand
name. We may
experience periodic system interruptions from time to time. If there
is a substantial increase in the volume of traffic on Bluefly.com or the number
of orders placed by customers, we will be required to expand and upgrade further
our technology, transaction processing systems and network
infrastructure. There can be no assurance that we will be able to
accurately project the rate or timing of increases, if any, in the use of
Bluefly.com or expand and upgrade our systems and infrastructure to accommodate
such increases on a timely basis. In order to remain competitive, we must
continue to enhance and improve the responsiveness, functionality and features
of Bluefly.com, which is particularly challenging given the rapid rate at which
new technologies, customer preferences and expectations and industry standards
and practices are evolving in the online commerce
industry. Accordingly, we redesign and enhance various functions on
our Web site on a regular basis, and we may experience instability and
performance issues as a result of these changes.
We May Be Subject To Higher Return
Rates. We recognize that purchases of apparel and fashion accessories
over the Internet may be subject to higher return rates than traditional
store-bought merchandise. We have established a liberal return policy
in order to accommodate our customers and overcome any hesitancy they may have
with shopping via the Internet. As a result, our reserve for returns and credit
card chargebacks for fiscal 2008, 2007 and 2006 has been 39.1%, 39.6% and 39.6%,
respectively. If return rates are higher than expected, our business, prospects,
financial condition, cash flows and results of operations could be materially
adversely affected.
Our Success Is Largely Dependent Upon
Our Executive Personnel. We believe our success will depend to
a significant extent on the efforts and abilities of our executive personnel. In
particular, we rely upon their strategic guidance, their relationships and
credibility in the vendor and financial communities and their ability to recruit
key operating personnel. Our current employment agreements with our
Chief Executive Officer and Chief Financial Officer run through July 2009 and
March 2011, respectively, however there can be no assurance that any of them
will not terminate their employment earlier. The loss of the services
of any of our executive officers could have a material adverse effect on our
credibility in the vendor communities and our ability to recruit new key
operating personnel.
Our Success Is Dependent Upon Our
Ability To Attract New Key Personnel. Our operations will also depend to
a great extent on our ability to attract new key personnel with relevant
experience and retain existing key personnel in the future. The
market for qualified personnel is extremely competitive. Our failure to attract
additional qualified employees could have a material adverse effect on our
prospects for long-term growth. We are currently operating under a streamlined
business plan and delaying new hires.
We May Be Liable For Infringing The
Intellectual Property Rights Of Others. Third parties may assert
infringement claims against us. From time to time in the ordinary course of
business we have been, and we expect to continue to be, subject to claims
alleging infringement of the trademarks and other intellectual property rights
of third parties. These claims and any resulting litigation, if it occurs, could
subject us to significant liability for damages. In addition, even if we
prevail, litigation could be time-consuming and expensive and could result in
the diversion of our time and attention. Any claims from third parties may also
result in limitations on our ability to use the intellectual property subject to
these claims unless we are able to enter into agreements with the third parties
making these claims.
We May Be Liable for Product
Liability Claims. We sell products manufactured by third
parties, some of which may be defective. If any product that we sell
were to cause physical injury or injury to property, the injured party or
parties could bring claims against us as the retailer of the
product. Our insurance coverage may not be adequate to cover every
claim that could be asserted. If a successful claim were brought
against us in excess of our insurance coverage, it could have a material adverse
effect on our cash flow and on our reputation with
customers. Unsuccessful claims could result in the expenditure of
funds and management time and could have a negative impact on our
business.
We Cannot Guarantee The Protection Of
Our Intellectual Property. Our intellectual property is
critical to our success, and we rely on trademark, copyright, domain names and
trade secret protection to protect our proprietary rights. Third parties may
infringe or misappropriate our trademarks or other proprietary rights, which
could have a material adverse effect on our business, prospects, results of
operations or financial condition. While we enter into
confidentiality agreements with our employees, consultants and strategic
partners and generally control access to and distribution of our proprietary
information, the steps we have taken to protect our proprietary rights may not
prevent misappropriation. We are pursuing registration of various
trademarks, service marks and domain names in the United States and
abroad. Effective trademark, copyright and trade secret protection
may not be available in every country, and there can be no assurance that the
United States or foreign jurisdictions will afford us any protection for our
intellectual property.
There
also can be no assurance that any of our intellectual property rights will not
be challenged, invalidated or circumvented. In addition, we do not
know whether we will be able to defend our proprietary rights since the
validity, enforceability and scope of protection of proprietary rights in
Internet-related industries is uncertain and still evolving. Moreover, even to
the extent that we are successful in defending our rights, we could incur
substantial costs in doing so.
Our Business Could Be Harmed By
Consumers' Concerns About The Security Of Transactions Over The Internet.
Concerns over the security of transactions conducted on the Internet and
commercial online services, the increase in identity theft and the privacy of
users may also inhibit the growth of the Internet and commercial online
services, especially as a means of conducting commercial transactions. Moreover,
although we have developed systems and processes that are designed to protect
consumer information and prevent fraudulent credit card transactions and other
security breaches, failure to mitigate such fraud or breaches could have a
material adverse effect on our business, prospects, financial condition and
results of operations.
We Face Legal Uncertainties Relating
To The Internet In General And To Our Industry In Particular And May Become
Subject To Costly Government Regulation. We are not currently subject to
direct regulation by any domestic or foreign governmental agency, other than
regulations applicable to businesses generally, and laws or regulations directly
applicable to online commerce. However, it is possible that laws and
regulations may be adopted that would apply to the Internet and other online
services. Furthermore, the growth and development of the market for
online commerce may prompt calls for more stringent consumer protection laws
that may impose additional burdens on those companies conducting business
online. The adoption of any additional laws or regulations may
increase our cost of doing business and/or decrease the demand for our products
and services and increase our cost of doing business.
The
applicability to the Internet of existing laws in various jurisdictions
governing issues such as property ownership, sales and other taxes, libel and
personal privacy is uncertain and may take years to resolve. Any such
new legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to our business, or the
application of existing laws and regulations to the Internet and online commerce
could also increase our cost of doing business. In addition, if we were alleged
to have violated federal, state or foreign, civil or criminal law, we could face
material liability and damage to our reputation and, even if we successfully
defend any such claim, we would incur significant costs in connection with such
defense.
We Face Uncertainties Relating To
Sales And Other Taxes. We are not currently required to pay
sales or other similar taxes in respect of shipments of goods into states other
than Ohio and New York. However, state taxation laws and regulations
may change in the future, and one or more states may seek to impose sales tax
collection obligations on out-of-state companies, such as our company, that
engage in online commerce. In addition, any new operation in states outside Ohio
and New York could subject shipments into such states to state sales taxes under
current or future laws. A successful assertion by one or more states
or any foreign country that the sale of merchandise by us is subject to sales or
other taxes, could subject us to material liabilities and, to the extent that we
pass such costs on to our customers, could decrease our sales.
The Holders Of Our Common Stock May
Be Adversely Affected By The Rights Of Holders Of Preferred Stock That May Be
Issued In The Future. Our certificate of incorporation and
by-laws, as amended, contain certain provisions that may delay, defer or prevent
a takeover. Our Board of Directors has the authority to issue up to
15,479,250 additional shares of preferred stock, and to determine the price,
rights, preferences and restrictions, including voting rights, of those shares,
without any further vote or action by the stockholders. Accordingly,
our Board of Directors is empowered, without approval of the holders of Common
Stock, to issue preferred stock, for any reason and at any time, with such rates
of dividends, redemption provisions, liquidation preferences, voting rights,
conversion privileges and other characteristics as it may deem necessary or
appropriate. The rights of holders of Common Stock will be subject
to, and may be adversely affected by, the rights of holders of any preferred
stock that may be issued in the future.
We Rely On The Effectiveness Of Our
Internal Controls. Section 404 of the Sarbanes-Oxley Act of 2002 requires
that we establish and maintain an adequate internal control structure and
procedures for financial reporting and assess on an on-going basis the design
and operating effectiveness of our internal control structure and procedures for
financial reporting. Our independent registered public accounting firm will be
required to audit the design and operating effectiveness of our internal
controls and attest to management’s assessment of the design and the
effectiveness of our internal controls. The first such audit will be
required for our fiscal year ending December 31, 2009. It is possible
that, as we prepare for this audit, we could discover certain deficiencies in
the design and/or operation of our internal controls that could adversely affect
our ability to record, process, summarize and report financial data. We have
invested and will continue to invest significant resources in this process.
Because an audit of our internal controls has not been required to be reported
in the past, we are uncertain as to what impact a conclusion that deficiencies
exist in our internal controls over financial reporting would have on the
trading price of our Common Stock.
Item
2. Properties
We lease
approximately 26,000 square feet of office space in New York City. The property
is in good operating condition. The leases covering such office space expire in
2009 through 2012. Our total lease expense for such office space during 2008 was
approximately $633,000.
Item
3. Legal Proceedings
In June
2007, we received a Civil Investigative Demand (the "Discovery Request") from
the Federal Trade Commission (the "FTC") that requested the production of
certain documents and other information regarding the labeling and advertising
of apparel containing products that contain fur or faux fur components. The
Discovery Request was issued in connection with a petition filed by the Humane
Society of the United States with the FTC regarding the labeling and advertising
of fur products by a number of national retailers and apparel manufacturers. We
have cooperated fully with the Discovery Request. As of December 31, 2008, we
have received no further requests from the FTC.
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
4. Submission of Matters to a Vote of Security Holders
No matter
was submitted to a vote of stockholders of the Company during the fourth quarter
of 2008.
PART II.
Item
5. Market For Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
Market
Information
The
Company’s common stock, par value $.01 per share (“Common Stock”), is quoted on
The Nasdaq Capital Market. The following table sets forth the high and low sales
prices for the Common Stock for the periods indicated, as reported by the Nasdaq
Capital Market:
|
|
|
|
|
|
|
Fiscal
2008
|
|
|
|
|
|
|
First
Quarter
|
|
$ |
7.90 |
|
|
$ |
3.80 |
|
Second
Quarter
|
|
$ |
5.00 |
|
|
$ |
2.05 |
|
Third
Quarter
|
|
$ |
4.17 |
|
|
$ |
1.64 |
|
Fourth
Quarter
|
|
$ |
2.54 |
|
|
$ |
0.55 |
|
Fiscal
2007
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$ |
13.80 |
|
|
$ |
9.80 |
|
Second
Quarter
|
|
$ |
12.00 |
|
|
$ |
9.80 |
|
Third
Quarter
|
|
$ |
10.30 |
|
|
$ |
8.50 |
|
Fourth
Quarter
|
|
$ |
9.70 |
|
|
$ |
6.60 |
|
On March
13, 2008, the Board of Directors approved a one for ten reverse stock split,
which went into effect on April 3, 2008. Retroactive restatement has
been given to all share numbers in this report, and accordingly, all amounts
including per share amounts are shown on a post-split basis.
Holders
As of
February 27, 2009, there were less than 500 holders of record of the Common
Stock. We believe that there were less than 5,000 beneficial holders of the
Common Stock as of such date.
Dividends
We have
never declared or paid cash dividends on our Common Stock. In addition, the
terms of our credit facility prohibit us from paying cash dividends without the
consent of our lender. See Note 13 to the Financial Statements. We currently
intend to retain any future earnings to finance future growth and, therefore, do
not anticipate paying any cash dividends in the foreseeable
future.
Equity
Compensation Plan Information
The
following table sets forth information as of December 31, 2008 with respect to
the Company’s equity compensation plans which have been approved by its
stockholders. The Company has one equity compensation plan that was not approved
by its stockholders.
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
|
|
|
|
(c)
|
|
|
|
Number of
|
|
|
|
|
|
Number of Securities
|
|
|
|
Securities
|
|
|
|
|
|
Remaining Available for
|
|
|
|
to Be Issued
|
|
|
(b)
|
|
|
Future Issuance under
|
|
|
|
upon Exercise of
|
|
|
Weighted Average
|
|
|
Equity Compensation
|
|
|
|
Outstanding
|
|
|
Exercise Price of
|
|
|
Plans
|
|
|
|
Options,
|
|
|
Outstanding Options,
|
|
|
(Excluding Securities
|
|
Plan Category
|
|
Warrants and Rights
|
|
|
Warrants and Rights
|
|
|
Reflected in Column (a))
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans approved by security holders
|
|
|
625,075
|
(1)
|
|
$
|
9.81
|
(2)
|
|
|
995,306
|
|
Equity
compensation plans not approved by security holders
|
|
|
22,706
|
|
|
$
|
10.17
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
647,781
|
|
|
$
|
9.83
|
|
|
|
995,306
|
|
|
(1)
|
Includes
354,856 options to purchase shares of Common Stock, 6,750 shares of
Restricted Stock and 286,175 Deferred Stock
Units.
|
|
(2)
|
Calculated
based on the exercise price of the 354,856 options referred to in Note (1)
above.
|
The
following is a summary of the material provisions of the Bluefly, Inc. 2000
Stock Option Plan (the “2000 Plan”), our only equity compensation plan that has
not been approved by our stockholders.
Eligibility. Key
employees of the Company who are not officers or directors of the Company and
its affiliates and consultants to the Company are eligible to be granted
options.
Administration of the 2000
Plan. The Option Plan/Compensation Committee administers the 2000 Plan.
The Option Plan/Compensation Committee has the full power and authority, subject
to the provisions of the 2000 Plan, to designate participants, grant options and
determine the terms of all options. The 2000 Plan provides that no
participant may be granted options to purchase more than 1,000,000 shares of
Common Stock in a fiscal year. The Option Plan/Compensation Committee
is required to make adjustments with respect to options granted under the 2000
Plan in order to prevent dilution or expansion of the rights of any holder. The
2000 Plan requires that the Option Plan/Compensation Committee be composed of at
least two directors.
Amendment. The
2000 Plan may be wholly or partially amended or otherwise modified, suspended or
terminated at any time or from time to time by the Board of Directors, but no
amendment without the approval of our stockholders shall be made if stockholder
approval would be required under any law or rule of any governmental authority,
stock exchange or other self-regulatory organization to which we are
subject. Neither the amendment, suspension or termination of the 2000
Plan shall, without the consent of the holder of an option under the 2000 Plan,
alter or impair any rights or obligations under any option theretofore
granted.
Options Issued Under 2000
Plan. The Option Plan/Compensation Committee determines the
term and exercise price of each option under the 2000 Plan and the time or times
at which such option may be exercised in whole or in part, and the method or
methods by which, and the form or forms in which, payment of the exercise price
may be paid.
Upon the
exercise of an option under the 2000 Plan, the option holder shall pay us the
exercise price plus the amount of the required federal and state withholding
taxes, if any. The 2000 Plan also allows participants to elect to
have shares withheld upon exercise for the payment of withholding
taxes.
The
unexercised portion of any option granted to a key employee under the 2000 Plan
generally will be terminated (i) 30 days after the date on which the optionee's
employment is terminated for any reason other than (a) Cause (as defined in the
2000 Plan), (b) retirement or mental or physical disability, or (c) death; (ii)
immediately upon the termination of the optionee's employment for Cause; (iii)
three months after the date on which the optionee's employment is terminated by
reason of retirement or mental or physical disability; or (iv) (A) 12 months
after the date on which the optionee's employment is terminated by reason of his
death or (B) three months after the date on which the optionee shall die if such
death occurs during the three-month period following the termination of the
optionee's employment by reason of retirement or mental or physical
disability. The Option Plan/Compensation Committee has in the past,
and may in the future, extend the period of time during which an optionee may
exercise options following the termination of his or her
employment.
Under the
2000 Plan, an option generally may not be transferred by the optionee other than
by will or by the laws of descent and distribution. During the
lifetime of an optionee, an option under the 2000 Plan may be exercised only by
the optionee or, in certain instances, by the optionee's guardian or legal
representative, if any.
Purchases of Equity Securities by the
Issuer and Affiliated Purchasers
|
|
|
|
|
|
|
|
Total Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
as
|
|
|
Maximum Dollar
|
|
|
|
Total Number
|
|
|
Price
|
|
|
Part of Publicly
|
|
|
Value that May Yet
|
|
|
|
of Shares
|
|
|
Paid
|
|
|
Announced
|
|
|
be Purchased Under
|
|
Period
|
|
Purchased
|
|
|
per Share
|
|
|
Programs
|
|
|
the Programs
|
|
|
|
(1)
|
|
|
|
|
|
|
|
|
|
|
October 1,
2008 – October 31, 2008
|
|
|
57,740
|
|
|
$
|
2.40
|
|
|
|
N/A
|
|
|
|
N/A
|
|
November 1,
2008 – November 30, 2008
|
|
|
—
|
|
|
$
|
—
|
|
|
|
N/A
|
|
|
|
N/A
|
|
December 1,
2008 – December 31, 2008
|
|
|
14,992
|
|
|
$
|
1.43
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
– Three months ended December 31, 2008
|
|
|
72,732
|
|
|
$
|
2.20
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
(1)
|
These
shares were withheld by the Company to satisfy the tax withholding
obligations of certain officers and employees of the Company in connection
with the distribution of common stock in respect of deferred stock units
held by such officers and
employees.
|
Item
6. Selected Financial Data
The
following selected financial data should be read in conjunction with the
financial statements and the notes thereto and the information contained in Item
7, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations.” Historical results are not necessarily indicative of future
results. The selected financial data for the years ended December 31, 2005 and
2004 and at December 31, 2006, 2005 and 2004 are derived from our audited
financial statements not included in this report. In January 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 stock-based
payment transactions be recognized in the financial statements at their fair
values. Results for prior periods have not been restated for SFAS No. 123(R).
All data is in thousands, except share data:
Statements of Operations Data:
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
95,774
|
|
|
$
|
91,493
|
|
|
$
|
77,062
|
|
|
$
|
58,811
|
|
|
$
|
43,799
|
|
Cost
of sales
|
|
|
60,288
|
|
|
|
58,754
|
|
|
|
46,153
|
|
|
|
35,816
|
|
|
|
27,393
|
|
Gross
profit
|
|
|
35,486
|
|
|
|
32,739
|
|
|
|
30,909
|
|
|
|
22,995
|
|
|
|
16,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing
expenses
|
|
|
14,523
|
|
|
|
16,063
|
|
|
|
14,196
|
|
|
|
6,961
|
|
|
|
2,120
|
|
Selling
and fulfillment expenses
|
|
|
19,620
|
|
|
|
18,898
|
|
|
|
15,808
|
|
|
|
12,880
|
|
|
|
11,783
|
|
General
and administrative expenses
|
|
|
12,191
|
|
|
|
13,848
|
|
|
|
13,001
|
|
|
|
6,299
|
|
|
|
6,408
|
|
Total
operating expenses
|
|
|
46,334
|
|
|
|
48,809
|
|
|
|
43,005
|
|
|
|
26,140
|
|
|
|
20,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss(2)
|
|
|
(10,848
|
)
|
|
|
(16,070
|
)
|
|
|
(12,096
|
)
|
|
|
(3,145
|
)
|
|
|
(3,905
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(554
|
)
|
|
|
(260
|
)
|
|
|
(599
|
)
|
|
|
(856
|
)
|
|
|
(733
|
)
|
Interest
/other income
|
|
|
62
|
|
|
|
501
|
|
|
|
502
|
|
|
|
181
|
|
|
|
847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(11,340
|
)
|
|
$
|
(15,829
|
)
|
|
$
|
(12,193
|
)
|
|
$
|
(3,820
|
)
|
|
$
|
(3,791
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net loss per common share(4)
|
|
$
|
(0.90
|
)
|
|
$
|
(1.21
|
)
|
|
$
|
(2.28
|
)
|
|
$
|
(5.43
|
)
|
|
$
|
(5.52
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted weighted average number
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
common shares outstanding available to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
stockholders(1),
(4)
|
|
|
13,369,257
|
|
|
|
13,091,130
|
|
|
|
8,017,053
|
|
|
|
1,615,302
|
|
|
|
1,458,675
|
|
Balance
Sheets Data:
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
4,004
|
|
|
$
|
6,730
|
|
|
$
|
20,188
|
|
|
$
|
9,408
|
|
|
$
|
7,938
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories,
net
|
|
|
23,157
|
|
|
|
28,492
|
|
|
|
24,189
|
|
|
|
16,893
|
|
|
|
12,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
current assets
|
|
|
4,347
|
|
|
|
3,589
|
|
|
|
4,229
|
|
|
|
3,536
|
|
|
|
2,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
37,750
|
|
|
|
45,019
|
|
|
|
52,430
|
|
|
|
33,045
|
|
|
|
25,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
16,250
|
|
|
|
17,922
|
|
|
|
14,603
|
|
|
|
11,936
|
|
|
|
9,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable to related party shareholders
|
|
|
3,106
|
|
|
|
60
|
|
|
|
—
|
|
|
|
5,244
|
|
|
|
4,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
18,394
|
|
|
|
27,037
|
|
|
|
37,827
|
|
|
|
15,865
|
|
|
|
11,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Weighted
average shares increased to approximately 8.02 million in 2006 as a result
of an equity financing consummated in June 2006 and the conversion of the
Company’s preferred stock into common stock in connection with such
financing.
|
|
(2)
|
This
amount includes non-cash expense of approximately $2.7 million, $6.2
million and $4.5 million in 2008, 2007 and 2006, respectively, relating to
stock-based compensation, recorded in accordance with
SFAS123(R).
|
|
(3)
|
Includes
restricted cash of $1,253.
|
|
(4)
|
All
share amounts, including per share amounts, have been restated to reflect
a one for ten reverse stock split that occurred in
2008.
|
Item
7. Management’s Discussion And Analysis Of Financial Condition And
Results Of Operations
This
discussion and analysis of our financial condition and results of operations
contains forward-looking statements that involve risks and
uncertainties. We have based these forward-looking statements on our
current expectations and projections of future events. However, our
actual results could differ materially from those discussed herein as a result
of the risks that we face, including but not limited to those risks stated in
“Risk Factors,” or faulty assumptions on our part. In addition, the
following discussion should be read in conjunction with the audited financial
statements and the related notes thereto included elsewhere in this
report.
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.
Our net
sales increased approximately 5% to $95,774,000 for the year ended December 31,
2008 from $91,493,000 for the year ended December 31, 2007. On a quarterly
basis, our net sales increased by approximately 14%, 8% 10%, respectively, in
the first three quarters and decreased 8% in the fourth quarter, as compared to
the same periods in 2007. The decrease in the fourth quarter of 2008 was a
result of the overall downturn in the economy especially in the retail and
apparel sector. Our gross margin increased to 37.1% for the year
ended December 31, 2008 from 35.8% in 2007. Our gross profit increased by
approximately 8% to $35,486,000 for the year ended December 31, 2008 from
$32,739,000 for the year ended December 31, 2007. The increase in gross margin
was primarily related to a decrease in inventory reserves (as the prior year
included approximately $550,000 of additional inventory reserves and a write-off
of inventory of approximately $1.5 million that occurred at the end of fiscal
2007) and a slight decrease in the rate of returns caused by a shift in our
merchandise mix. Our operating loss decreased by over $5,222,000 or
33%, to $10,848,000 in 2008 from $16,070,000 in 2007. This decrease was
primarily related to a decrease in share–based compensation of approximately
$3,488,000, a decrease in marketing expenses of approximately $1,346,000 and a
decrease in incremental costs incurred in connection with our transition to the
new fulfillment center of approximately $721,000. These decreases
were slightly offset by increases in selling and fulfillment expenses of
$964,000.
Total
marketing expenses decreased by 10% to $14,523,000 for the year ended December
31, 2008 from $16,063,000 for year ended December 31, 2007. We decreased our
spending in marketing (excluding staff related costs) by 9% to $13,562,000 for
the full year 2008 from $14,908,000 for the full year 2007. This decrease is
primarily a result of a decrease in fixed costs relating to offline programs of
approximately 22% and a corresponding shift in variable costs related to online
programs, which have increased approximately 6% compared to 2007. Marketing
expenses as a percentage of net sales decreased to 15.2% for the year ended
December 31, 2008 from 17.6% for the year ended December 31, 2007. The mix of
marketing spend will continue to shift toward online as the Company believes
that online marketing programs are more efficient as they are more trackable and
can be optimized to achieve certain sales goals.
Our
reserve for returns and credit card chargebacks for the year ended December 31,
2008 slightly decreased to 39.1% compared to 39.6% and 39.6% of gross sales for
the years ended December 31, 2007 and 2006 respectively. Historically, our
merchandise mix had been shifting towards higher end products which tend to
drive return rates higher. During 2008, we refined our merchandising mix to be
skewed toward more contemporary merchandise and accordingly, we believe
experienced a slight decrease in the return rate.
A portion
of our inventory includes merchandise on a pack and hold basis, where 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. While we have historically increased the amount of inventory
purchased on a pack and hold basis, we have made increased selective purchases
of inventory in order to take advantage of opportunities in the current economic
environment.
On
January 1, 2006, we adopted SFAS No. 123(R), which requires expensing of stock
options on the modified prospective approach. As a result, we
recorded total share-based compensation expenses of $2,706,000, $6,194,000 and
$4,454,000 for the years ended December 31, 2008, 2007 and 2006,
respectively.
We have
developed a new version of our Web site, which was placed into service in August
2008. We have capitalized a total of $5,299,000 in connection with
the development of the new Web site, resulting in increased depreciation of
approximately $736,000 during the year ended December 31, 2008.
At
December 31, 2008, we had an accumulated deficit of $143,878,000. 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. 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, particularly given the challenging economic
environment that we now face.
Critical
Accounting Policies
Management
Estimates
The
preparation of the 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 disclosures of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Significant estimates and assumptions include the adequacy of the allowances for
sales returns, recoverability of inventories, useful lives of property and
equipment, the realization of deferred tax assets, and the calculations related
to stock-based compensation. Actual amounts could differ
significantly from these estimates.
In
addition, we currently estimate that we will have adequate liquidity to fund
operations beyond one year from December 31, 2008. Such estimate is based
on projected revenues, expenses and timing of various payments. Should
unforeseen events occur or should actual results differ from current estimates,
we may be unable to meet payment obligations as they come due which would have a
material adverse impact on our operations.
Revenue
Recognition
We
recognize revenue in accordance with Staff Accounting Bulletin No. 104 “Revenue Recognition” (“SAB
104”). Gross sales consists primarily of revenue from product sales and shipping
and handling charges and is net of promotional discounts. Net sales represent
gross sales, less provisions for returns, credit card chargebacks, and
adjustments for uncollected sales taxes. Revenue is recognized when all the
following criteria are met:
|
·
|
A
customer executes an order.
|
|
·
|
The
product price and the shipping and handling fee have been
determined.
|
|
·
|
Credit
card authorization has occurred and collection is reasonably
assured.
|
|
·
|
The
product has been shipped and received by the
customer.
|
Deferred
revenue, which consists primarily of goods shipped to customers but not yet
received and customer credits is classified as current liabilities on our
Balance Sheets.
Shipping
and handling billed to customers are classified as revenue and freight cost
incurred in connection with purchasing merchandise is classified as cost of
goods sold in accordance with Financial Accounting Standards Board (“FASB”)
Emerging Issues Task Force (“EITF”) No. 00-10, “Accounting for Shipping and Handling
Fees and Costs” (“EITF No. 00-10”).
Provision
for Sales 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. For the years ended December 31,
2008, 2007 and 2006, our returns reserves have been 39.1%, 39.6% and 39.6%,
respectively, of sales. Actual charges have not varied materially
from historical percentages.
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. This
valuation requires us to make judgments based on currently available
information, about the saleability of such merchandise, the selling price, etc.
Based upon this evaluation, 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.
Effective
January 1, 2007, we adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48
prescribes a comprehensive model for the manner in which a company should
recognize, measure, present and disclose in its financial statements all
material uncertain tax positions that we have taken or expect to take on a tax
return. As of the date of adoption, there were no tax positions for which it is
reasonably possible that the total amounts of unrecognized tax benefits will
significantly increase or decrease within twelve months from the date of
adoption of FIN 48 or from December 31, 2007. As of December 31, 2008 and 2007,
the only tax jurisdiction to which we are subject to is the United States. Open
tax years relate to years in which unused net operating losses were generated.
Upon the adoption of FIN 48, our open tax years extend back to 1998. In the
event that we conclude that we are subject to interest and/or penalties arising
form uncertain tax positions, we will present interest and penalties as a
component of income taxes. No amounts of interest or penalties were recognized
in our Statements of Operations or Balance Sheets upon adoption of FIN 48 or as
of and for the years ended December 31, 2008 and 2007.
Stock-Based
Compensation
As of
January 1, 2006, we adopted SFAS No. 123(R) which requires us to measure
compensation cost for stock awards at fair value and recognize compensation over
the service period for awards expected to vest. Determining the fair value of
stock-based awards at the grant date requires considerable judgment, including
estimating expected volatility, expected term, risk-free interest rate and
expected forfeitures. If factors change and we employ different
assumptions, stock-based compensation expense may differ significantly from what
we have recorded in the past.
Results
Of Operations
The
following table sets forth our Statements of Operations data for the years ended
December 31st. All data is in thousands except as indicated below:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
As a % of
|
|
|
|
|
|
As a % of
|
|
|
|
|
|
As a % of
|
|
|
|
|
|
|
Net Sales
|
|
|
|
|
|
Net Sales
|
|
|
|
|
|
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
95,774 |
|
|
|
100.0 |
% |
|
$ |
91,493 |
|
|
|
100.0 |
% |
|
$ |
77,062 |
|
|
|
100.0 |
% |
Cost
of sales
|
|
|
60,288 |
|
|
|
62.9 |
|
|
|
58,754 |
|
|
|
64.2 |
|
|
|
46,153 |
|
|
|
59.9 |
|
Gross
profit
|
|
|
35,486 |
|
|
|
37.1 |
|
|
|
32,739 |
|
|
|
35.8 |
|
|
|
30,909 |
|
|
|
40.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing
expenses
|
|
|
14,523 |
|
|
|
15.2 |
|
|
|
16,063 |
|
|
|
17.6 |
|
|
|
14,196 |
|
|
|
18.4 |
|
Selling
and fulfillment expenses
|
|
|
19,620 |
|
|
|
20.5 |
|
|
|
18,898 |
|
|
|
20.7 |
|
|
|
15,808 |
|
|
|
20.5 |
|
General
and administrative expenses
|
|
|
12,191 |
|
|
|
12.7 |
|
|
|
13,848 |
|
|
|
15.1 |
|
|
|
13,001 |
|
|
|
16.9 |
|
Total
operating expenses
|
|
|
46,334 |
|
|
|
48.4 |
|
|
|
48,809 |
|
|
|
53.4 |
|
|
|
43,005 |
|
|
|
55.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(10,848 |
) |
|
|
(11.3 |
) |
|
|
(16,070 |
) |
|
|
(17.6 |
) |
|
|
(12,096 |
) |
|
|
(15.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income (expense) and other income, net
|
|
|
(492 |
) |
|
|
(0.5 |
) |
|
|
241 |
|
|
|
0.3 |
|
|
|
(97 |
) |
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(11,340 |
) |
|
|
(11.8 |
)% |
|
$ |
(15,829 |
) |
|
|
(17.3 |
)% |
|
$ |
(12,193 |
) |
|
|
(15.8 |
)% |
We also
measure and evaluate ourselves against certain other key operational metrics.
The following table sets forth our actual results based on these other metrics
for the years ended December 31st, as
indicated below:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Order Size (including shipping & handling)
|
|
$
|
279.72
|
|
|
$
|
276.58
|
|
|
$
|
257.64
|
|
New
Customers Added during the Year*
|
|
|
201,044
|
|
|
|
198,884
|
|
|
|
177,213
|
|
*Based on unique
email addresses
In
addition to the financial statement items and metrics listed above, we also
report gross sales, which is a non-GAAP financial measure. We define
gross sales as the total dollar amount of orders received by customers
(including shipping and handling) net of customer credits, but before any
reserves are taken for returns or bad debt. We believe that the
presentation of gross sales is useful to investors because it provides
an alternative measure of the total demand for the products sold by the
Company and it provides a basis upon which to measure the percentage of total
demand that is reserved for both returns and bad debt. Management
uses the gross sales measure for these same reasons.
For
The Year Ended December 31, 2008 Compared To The Year Ended December 31,
2007
Net sales: Gross sales for the
year ended December 31, 2008 increased by approximately 4% to $157,248,000 from
$151,435,000 for the year ended December 31, 2007. The increase in
gross sales is attributable to increased sales orders and a slight increase in
average order size. The provision for returns and credit card
chargebacks and other credits was approximately 39.1% and 39.6% for 2008 and
2007, respectively, resulting in a provision of approximately $61,474,000 and
$59,942,000 for the years ended December 31, 2008 and 2007,
respectively.
After the
necessary provisions for returns, credit card chargebacks and adjustments for
uncollected sales taxes, our net sales for the year ended December 31, 2008 were
$95,774,000. This represents an increase of approximately 5% compared
to the year ended December 31, 2007, in which net sales totaled
$91,493,000. The increase in net sales resulted primarily from a
slight increase in the number of new customers acquired and in the gross average
order size compared to the prior year. Net sales grew at a slightly higher rate
than gross sales because of a slight improvement in return rates. Shipping and
handling revenue (which is included in net sales) increased by 12% to $5,380,000
for the year ended December 31, 2008, from $4,798,000 for the year ended
December 31, 2007. Shipping and handling revenue increased at a greater
percentage than revenue as a whole as a result of an increased number of
customer orders shipped express compared to the prior year. In
addition during part of 2007, in connection with the transition to the new
warehouse, we were not able to offer customers express shipping.
Cost of sales: Cost
of sales consists of the cost of products sold to customers, in-bound and
out-bound shipping costs, inventory reserves, commissions and packing materials.
Cost of sales for the year ended December 31, 2008 totaled $60,288,000,
resulting in a gross margin of approximately 37.1%. Cost of sales for the year
ended December 31, 2007 totaled $58,754,000, resulting in a gross margin of
35.8%. The increase in gross margin was attributable to a decrease in inventory
reserves (as the prior year included approximately $550,000 of additional
inventory reserves relating to our transition to a new fulfillment center and a
write-off of approximately $1,500,000 of inventory in the fourth quarter of
2007) which were partially offset by decreased product margins.
Gross Profit: As a
result of the increases in net sales, gross profit increased by approximately
8%, to $35,486,000 for the year ended December 31, 2008, from $32,739,000 for
the year ended December 31, 2007. The increase in gross profit was primarily the
result of an increase in net sales and a decrease in cost
of sales resulting from a decrease in inventory reserves and a slight decrease
in the rate of returns of products with higher product margins.
Marketing
expenses: Marketing expenses decreased by 10% to $14,523,000
for the year ended December 31, 2008 from $16,063,000 for the year ended
December 31, 2007.
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. As a percentage of net sales, our marketing expenses decreased to
15.2% for the year ended December 31, 2008 from 17.6% for the year ended
December 31, 2007. Total expenses related to the national print and
television advertising campaign for the year ended December 31, 2008 totaled
$6,030,000 compared to $7,600,000 for the year ended December 31,
2007. This decrease of approximately $1,570,000 is was primarily due
to a reduction in production costs and a decrease in placement and agency fees.
Total marketing expenses for the year ended December 31, 2008 decreased by
approximately $1,346,000 as
compared
to December 31, 2007. Expenses related to affiliates, comparison engines and
online integration increased by $123,000, $358,000 and $400,000,
respectively. These increases were offset by the following decreases:
$137,000 related to paid search, $162,000 related to sweepstakes and $202,000
related to direct mail campaigns.
Selling and fulfillment
expenses: Selling and fulfillment expenses increased by 4% for
the year ended December 31, 2008 compared to the year ended December 31, 2007.
Selling and fulfillment expenses were comprised of the following:
|
|
Year Ended December 31,
|
|
|
Percentage
|
|
(All data
in thousands)
|
|
2008
|
|
|
2007
|
|
|
Difference
|
|
|
|
|
|
|
As
a % of
|
|
|
|
|
|
As
a % of
|
|
|
Increase
|
|
|
|
|
|
|
Net
Sales
|
|
|
|
|
|
Net
Sales
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
$ |
10,179 |
|
|
|
10.6 |
% |
|
$ |
10,554 |
|
|
|
11.6 |
% |
|
|
(3.6 |
)
% |
Technology
|
|
|
5,979 |
|
|
|
6.2 |
|
|
|
4,693 |
|
|
|
5.1 |
|
|
|
27.4 |
|
E-Commerce
|
|
|
3,462 |
|
|
|
3.6 |
|
|
|
3,651 |
|
|
|
4.0 |
|
|
|
(5.2 |
) |
Total
selling and fulfillment expenses
|
|
$ |
19,620 |
|
|
|
20.5 |
% |
|
$ |
18,898 |
|
|
|
20.7 |
% |
|
|
3.8 |
% |
As a
percentage of net sales, our selling and fulfillment expenses decreased to 20.5%
for the year ended December 31, 2008 from 20.7% for the year ended December 31,
2007.
Operating
expenses include all costs related to inventory management, fulfillment,
customer service, and credit card processing. Operating expenses for the year
ended December 31, 2008 decreased by approximately 3.6% compared to the year
ended December 31, 2007 as a result of decreased variable costs related to
fulfillment rates per unit associated with order fulfillment (e.g., picking and
packing orders and processing returns) and a decrease in incremental expenses
relating to our transition of the fulfillment center of approximately $721,000
incurred in 2007. These decreases were offset by increases in credit
card fees of approximately $162,000 compared to the prior year.
Technology
expenses consist primarily of staff related costs, amortization of capitalized
costs and Web site hosting. For the year ended December 31, 2008, technology
expenses increased by approximately 27.4% compared to the year ended December
31, 2007. This increase, primarily driven by the new site, resulted from an
increase in depreciation, software support, web hosting expenses and consulting
expenses. Consulting expenses incurred for 2008 were related to the
development of our new Web site and capitalized accordingly. Approximately
$5,299,000 of expenses was capitalized in connection with the development of our
new Web site, of which $1,666,000 was incurred during 2008. Depreciation
expenses relating to the new Web site were approximately $736,000 and are
included in technology expenses.
E-Commerce expenses include expenses
related to our photo design studio, image processing, and Web site design. For
the year ended December 31, 2008, e-commerce expenses decreased by approximately
5.2% compared to the year ended December 31, 2007, as increases in salary
expenses were offset by decreased expenses associated with photo
shoots.
General and administrative
expenses:
General and administrative expenses include merchandising, finance and
administrative salaries and related expenses, insurance costs, accounting and
legal fees, depreciation and other office related expenses. General
and administrative expenses for the year ended December 31, 2008 decreased by
approximately 12.0% to $12,191,000 as compared to $13,848,000 for the year ended
December 31, 2007. The decrease in general and administrative
expenses was primarily the result of a decrease in equity based compensation
related to equity awards of approximately $3,150,000 included in the prior year
period. These amounts were offset by an increase in rent expense of $163,000,
consultants and professional fees of $88,000, and an increase in salary and
salary related expenses of $1,154,000, which includes approximately
$551,000 of expenses in connection with compensation of former
executives.
As a
percentage of net sales, general and administrative expenses for the year ended
December 31, 2008 decreased to approximately 12.7% from 15.1% for the year ended
December 31, 2007.
Loss from
operations: Operating loss decreased for the year ended
December 31, 2008 to $10,848,000 from $16,070,000 for the year ended December
31, 2007.
Interest income (expense) and other
income, net: Interest and other income for the year ended December 31,
2008 decreased to $62,000 from $501,000 for the year ended December 31, 2007.
These amounts related primarily to interest income earned on our cash
balances.
Interest
expense for the year ended December 31, 2008 totaled $554,000 compared to
$260,000 for the year ended December 31, 2007. Interest expense
consists of fees paid in connection with our credit facility, interest expense
relating to our outstanding subordinated convertible notes issued to Soros and
Maverick in July 2008 and amortization expense from warrants issued to certain
related parties.
Net loss per
share: Net loss per share decreased to $0.90 per share for the
year ended December 31, 2008 from $1.21 per share for the year ended December
31, 2007.
For
The Year Ended December 31, 2007 Compared To The Year Ended December 31,
2006
Net sales: Gross sales for the
year ended December 31, 2007 increased by approximately 19% to $151,435,000 from
$127,556,000 for the year ended December 31, 2006. The increase in
gross sales was partially offset by lost sales and cancelled orders attributable
to start-up issues at our new distribution center. The provision for
returns and credit card chargebacks and other credits was approximately 39.6%
for 2007 and 2006, resulting in a provision of $59,942,000 for the year ended
December 31, 2007 and $50,494,000 for the year ended December 31,
2006.
After the
necessary provisions for returns, credit card chargebacks and adjustments for
uncollected sales taxes, our net sales for the year ended December 31, 2007 were
$91,493,000. This represents an increase of nearly 19% compared to
the year ended December 31, 2006, in which net sales totaled
$77,062,000. The increase in net sales was largely driven by the
increase in gross average order size (approximately 7% higher than the full year
2006) and an increase in the number of new customers acquired (approximately 12%
higher than the full year 2006). Shipping and handling revenue (which is
included in net sales) increased by 9% to $4,798,000 for the year ended December
31, 2007, from $4,403,000 for the year ended December 31, 2006. Revenue from
shipping and handling increased at a lower rate than overall revenue due to
shipping concessions made during the warehouse move.
Cost of sales: Cost
of sales consists of the cost of product sold to customers, in-bound and
out-bound shipping costs, inventory reserves, commissions and packing materials.
Cost of sales for the year ended December 31, 2007 totaled $58,754,000,
resulting in a gross margin of approximately 35.8%. Cost of sales for the year
ended December 31, 2006 totaled $46,153,000, resulting in a gross margin of
40.1%. The decrease in gross margin percentage is largely attributed to a
write-off of inventory in the fourth quarter of 2007. The effect of this
write-off on gross margin dollars was approximately $1.5 million. In addition,
the growth in the high-end designer items had a significant impact on the
Company’s overall merchandise mix, which continues to negatively impact the
gross margin percentage. The combination of the high demand amongst
retailers for high-end merchandise and the decline in value of the US Dollar
relative to the Euro had a negative impact on our gross margins related to
designer accessory items. In addition, the gross margin was
negatively affected by additional inventory reserves, and expedited shipping
expenses that were recorded during the third quarter of 2007 and incurred in
connection with our transition to a new fulfillment center.
Gross Profit: As a
result of the increases in net sales, gross profit increased by nearly 6%, to
$32,739,000 for the year ended December 31, 2007, from $30,909,000 for the year
ended December 31, 2006.
Marketing
expenses: Marketing expenses increased by 13% to $16,063,000
for the year ended December 31, 2007 from $14,196,000 for the year ended
December 31, 2006. This increase was due to an increase in online advertising,
offline advertising and sponsorship and direct mail postcards. While overall
marketing expenses increased, marketing expenses as a percentage of net sales
decreased to 17.6% for the year ended December 31, 2007 from 18.4% for the year
ended December 31, 2006. We spent approximately $7.6 million and $7.1
million on our national advertising campaign in 2007 and 2006,
respectively.
Marketing
expenses include expenses related to our national ad campaign, sponsorships,
online and print advertising, “sweepstakes” promotions as well as staff related
costs. Costs in connection with the national campaign are recorded as the
magazines and commercials are being released.
Selling and fulfillment
expenses: Selling and fulfillment expenses increased by
approximately 20% for the year ended 2007 compared to the year ended 2006.
Selling and fulfillment expenses were comprised of the following:
|
|
Year Ended December 31,
|
|
|
Percentage
|
|
(All data
in thousands)
|
|
2007
|
|
|
2006
|
|
|
Difference
|
|
|
|
|
|
|
As
a % of
|
|
|
|
|
|
As
a % of
|
|
|
Increase
|
|
|
|
|
|
|
Net
Sales
|
|
|
|
|
|
Net
Sales
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
$ |
10,554 |
|
|
|
11.6 |
% |
|
$ |
8,353 |
|
|
|
10.8 |
% |
|
|
26.3 |
% |
Technology
|
|
|
4,693 |
|
|
|
5.1 |
|
|
|
4,203 |
|
|
|
5.5 |
|
|
|
11.7 |
|
E-Commerce
|
|
|
3,651 |
|
|
|
4.0 |
|
|
|
3,252 |
|
|
|
4.2 |
|
|
|
12.3 |
|
Total selling and fulfillment
expenses
|
|
$ |
18,898 |
|
|
|
20.7 |
% |
|
$ |
15,808 |
|
|
|
20.5 |
% |
|
|
19.5 |
% |
Operating
expenses include all costs related to inventory management, fulfillment,
customer service, and credit card processing. Operating expenses increased in
2007 by 26% compared to 2006 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 customer service and salary related
expenses as well as
incremental
costs of approximately $721,000 incurred in connection with our transition to
the new third party distribution center. Variable operating expenses as a
percentage of sales decreased in 2007 to approximately 7% from 8% in
2006.
Technology
expenses consist primarily of staff related costs, amortization of capitalized
costs and Web site hosting. For the year ended December 31, 2007, technology
expenses increased by approximately 12% compared to the year ended December 31,
2006. This increase was attributed to an increase in staff and related costs,
software support, depreciation and training and was partially offset by a
decrease in consulting expenses. A majority of the consulting
expenses incurred for the year ended December 31, 2007 were related to the
continued development of our Web site and capitalized accordingly. As of
December 31, 2007, approximately $3,633,000 was capitalized in connection with
the continued development of our Web site.
E-Commerce expenses include expenses
related to our photo studio, image processing, third party software and Web site
design. For the year ended December 31, 2007, this amount increased by
approximately 12% as compared to the year ended December 31, 2006. This increase
was due to increased expense related to SFAS No. 123R costs, salary related
expenses, as well as an increase in expenses associated with software used to
support the Web site.
General and administrative
expenses:
General and administrative expenses include merchandising, finance and
administrative salaries and related expenses, insurance costs, accounting and
legal fees, depreciation and other office related expenses. General
and administrative expenses for the year ended December 31, 2007 increased to
$13,848,000 as compared to $13,001,000 for the year ended December 31,
2006. The increase in general and administrative expenses was primarily
the result of a $1,646,000 increase in equity based compensation, $431,000
increase in salary and salary related expense related to additional headcount
and increased consulting and professional fees of $302,000. These increases were
partially offset by a decrease in bad debt expense of $400,000 related to a
receivable due from a third party service provider that purchased inventory from
us to be distributed internationally in 2006, public company expenses of
$242,000 as well as a decrease in bonuses paid compared to 2006 of
$1,016,000.
As a
percentage of net sales, general and administrative expenses decreased to 15.1%
in 2007 from 16.9% in 2006.
Loss from
operations: Operating loss increased by over 32% in 2007, to
$16,070,000 from $12,096,000 in 2006. While net sales increased this year, the
increase in net sales was offset by the recording of a write-off of the
Company’s inventory which resulted in a charge of approximately $1.5 million,
additional stock based compensation expense of approximately $1.7 million in
accordance with SFAS No.123(R) and the $550,000 inventory charge.
Interest expense and interest, net:
Interest and other income for the year ended December 31, 2007 was
relatively unchanged compared to December 31, 2006. These amounts relate
primarily to interest earned on our cash balances.
Interest
expense, is comprised primarily of interest paid on our credit facility and
certain convertible notes which had been held by Soros. For the year ended 2007,
interest expense decreased to $260,000 compared to $599,000 for the year ended
2006. The convertible notes were repaid in June 2006, which resulted
in the decrease in interest expense for 2007.
Net loss per
share: Net loss per share decreased to $1.21 per share from
$2.28 per share, as the number of weighted average shares outstanding increased
to 13.1 million in 2007 as a result of the equity financing consummated in June
2006 and the conversion of the Company’s preferred stock into common stock in
connection with such financing.
Liquidity
And Capital Resources
General
At
December 31, 2008, we had approximately $4.0 million in cash and cash
equivalents compared to $6.7 million and $20.2 million at December 31, 2007 and
2006, respectively. Working capital at December 31, 2008, 2007 and 2006 was
$15.3 million, $20.9 million and $34.0 million, respectively.
During
the year ended December 31, 2008, net cash used in operating activities was $3.2
million. As of December 31, 2008, we had an accumulated deficit of
$143.9 million. We have incurred negative cash flows and net losses
since inception. Although we have experienced revenue growth in
recent years, this growth should not be considered indicative of future
performance, particularly given the challenging environment that we now
face.
We
believe that we have sufficient liquidity from current funds and operating cash
flow despite the disruption of the capital markets and the continued decline in
economic conditions. Moreover, we believe that our existing cash
balance, combined with working capital, will be sufficient to enable us to meet
planned expenditures under a streamlined business plan through at least the next
12 months. The streamlined business plan calls for, among other
things, reductions in marketing and capital expenditures, delaying new hires and
making selective inventory purchases.
In
addition, should we experience unforeseen increases in expenditures or should
estimated revenues not materialize, these conditions could significantly impair
our ability to fund future operations. Should we experience unanticipated losses
or expenditures that exceed current estimates, management would implement a cost
reduction plan, that includes a reduction in work force as well as reductions in
overhead costs and capital expenditures, and/or attempt to raise additional debt
or equity financing. There can be no assurance that we will achieve or sustain
positive cash flows from operations or profitability. If we are unable to
maintain adequate liquidity, future operations will need to be scaled back or
discontinued.
Standby
Financing Commitment
In March
2008, Soros and Maverick agreed to provide up to $3,000,000 of debt financing to
us, on a standby basis, available until March 2009, provided that the commitment
amount would be reduced by the gross proceeds of any equity financing
consummated during 2008. In July 2008, we drew down on the full amount of
such commitment. The draw down is evidenced by subordinated convertible
notes. The subordinated convertible notes have a term expiring three
years from the date of issuance and bear interest at the rate of 8% per annum,
compounded annually. Interest is payable upon maturity or
conversion. The subordinated convertible notes are convertible, at the
holder’s option into (a) equity securities that we might issue in any subsequent
round of financing at a price equal to the lowest price per share paid by any
investor in such subsequent round of financing or (b) Common Stock at a price
per share equal to $3.65, which represents the 20-day trailing average stock
price on the date of issuance of the subordinated convertible
notes.
Credit
Facility
Pursuant
to the terms of our credit facility, as amended, Wells Fargo provides us with a
revolving loan and issues letters of credit in favor of suppliers or
factors. The credit facility is secured by a lien on substantially
all of our assets. Availability under the credit facility is determined by a
formula that takes into account a certain percentage of our inventory and a
certain percentage of our accounts receivable. The maximum availability is
currently $7,500,000, but can be increased to $12,500,000 at our request,
subject to certain conditions. As of December 31, 2008, total
availability under the credit facility was approximately $6.0 million of which
$4.2 million was committed for letters of credit in favor of suppliers, leaving
approximately $1.8 million available for further borrowings. The
terms of the credit facility contain a material adverse condition
clause. This feature may limit our ability to obtain additional
borrowings or result in a default on current outstanding letters of
credit.
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 3.25%. We also pay a monthly commitment fee on the
unused portion of the credit facility (i.e., $7,500,000 less the amount of loans
outstanding) equal to 0.50% and a servicing fee of $3,333 per
month. 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 of such letter of
credit, or a portion thereof, remains open.
Total
availability under our credit facility is based primarily upon our inventory
levels. In addition, both availability under our 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
provide credit support under our credit facility. In some instances,
new vendors may require prepayments. We may make prepayments in order to open up
these new relationships, or to gain access to inventory that would not otherwise
be available to us. In addition, from time to time we make prepayments in
connection with our advertising campaign, as in some circumstances we need to
pay in advance of production. As of December 31, 2008, we had approximately
$155,000 of prepaid inventory and approximately $174,000 of prepaid
marketing on our Balance Sheet compared to $294,000 and $483,000 as of December
31, 2007 and $616,000 and $102,000 as of December 31, 2006.
Commitments
and Long Term Obligations
As of
December 31, 2008, we had the following commitments and long term
obligations:
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
More Than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing
and Advertising
|
|
$ |
1,559,000 |
|
|
$ |
1,559,000 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Operating
Leases
|
|
|
1,601,000 |
|
|
|
655,000 |
|
|
|
946,000 |
|
|
|
— |
|
|
|
— |
|
Long-Term
Obligations
|
|
|
3,000,000 |
|
|
|
— |
|
|
|
3,000,000 |
|
|
|
— |
|
|
|
— |
|
Employment
Contracts
|
|
|
1,936,000 |
|
|
|
1,113,000 |
|
|
|
823,000 |
|
|
|
— |
|
|
|
— |
|
Total
commitments and long-term obligations
|
|
$ |
8,096,000 |
|
|
$ |
3,327,000 |
|
|
$ |
4,769,000 |
|
|
$ |
— |
|
|
$ |
— |
|
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.
Off
Balance Sheet Arrangements
Warrants
issued in conjunction with certain preferred stock financing transactions that
we entered in prior years 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 SFAS 133 and are accordingly not
accounted for as derivatives for purposes of SFAS 133, but instead included as a
component of equity. See Note 11 to the financial statements and the Statements
of Shareholders’ Equity for more information.
Recent
Accounting Pronouncements
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, (“SFAS 161”). SFAS 161 amends and
expands the disclosure requirements of SFAS 133, “Accounting for Derivative
Instruments and Hedging Activities.” SFAS 161 requires qualitative disclosures
about objectives and strategies for using derivatives, quantitative disclosures
about fair value amounts of gains and losses on derivative instruments and
disclosures about credit-risk-related contingent features in derivative
agreements. This statement is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008. The adoption
of SFAS 161 is not expected to have a material affect on our financial condition
and results of operations, but may require additional disclosures if the Company
enter into derivative and hedging activities.
In April
2008, the FASB issued EITF 07-05, Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own Stock, (“EITF
07-05”). EITF 07-05 provides guidance on determining what types of
instruments or embedded features in an instrument held by a reporting entity can
be considered indexed to its own stock for the purpose of evaluating the first
criteria of the scope exception in paragraph 11(a) of FAS 133. EITF 07-05
is effective for financial statements issued for fiscal years beginning after
December 15, 2008 and early application is not permitted. The adoption of
this standard is not expected to have a material impact on our financial
condition and operating results relating to our convertible
securities.
In May
2008, the FASB issued Staff Position No. APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement) ("FSP APB 14-1") that requires the liability and equity
components of convertible debt instruments that may be settled in cash upon
conversion (including partial cash settlement) to be separately accounted for in
a manner that reflects the issuer's nonconvertible debt borrowing rate. The
resulting debt discount would be amortized over the period during which the debt
is expected to be outstanding (i.e., through the first optional redemption date)
as additional non-cash interest expense. The equity component is
determined by deducting the fair value of the liability
component. FSP APB 14-1 will become effective beginning in our first
quarter of 2009 and is required to be applied retrospectively to all presented
periods, as applicable. The adoption of this standard is not expected
to have a material impact on our financial position and operating results
relating to our convertible debt.
Item
7A. Quantitative and Qualitative Disclosures About Market Risk
We have
assessed our vulnerability to certain market risks, including interest rate risk
associated with financial instruments included in cash and cash equivalents. Due
to the short-term nature of these investments we have determined that the risks
associated with interest rate fluctuations related to these financial
instruments do not pose a material risk to us.
Item
8. Financial Statements and Supplementary Data
The
financial statements and supplementary data required by this item are included
in Part IV, Item 15 of this Form 10-K and are presented beginning on page
F-1.
Item
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Item
9A(T). Controls and Procedures
Disclosure
Controls and Procedures
As of the
end of the period covered by this Form 10-K, 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 as
of December 31, 2008 to ensure that information required to be disclosed 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 Securities and
Exchange Commission’s rules and forms, and such information is accumulated and
communicated to our management, as appropriate, to allow timely decisions
regarding required disclosure.
Internal
Control Over Financial Reporting
Management’s
Report on Internal Control Over Financial Reporting.
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a – 15(f) and 15d – 15(f)
under the Securities Exchange Act of 1934, as amended. Our management has
assessed the effectiveness of our internal control over financial reporting
based on the criteria set forth in Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”). Based on its assessment under the criteria set forth in Internal
Control — Integrated Framework, our management concluded that our internal
control over financial reporting was effective as of December 31,
2008. This annual report does not include an attestation report of
the Company’s registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to
attestation by the Company’s independent registered public accounting firm
pursuant to temporary rules of the Securities and Exchange Commission that
permit the Company to provide only management’s report in this annual
report.
Changes
in Internal Control Over Financial Reporting
There
have been no changes in our internal control over financial reporting that
occurred during the Company's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
Item
9B. Other Information
None.
PART
III.
Item
10. Directors, Executive Officers and Corporate
Governance
The
information required by this Item is incorporated by reference to the Company’s
definitive proxy statement for the 2009 annual meeting of
stockholders.
Item
11. Executive Compensation
The
information required by this Item is incorporated by reference to the Company’s
definitive proxy statement for the 2009 annual meeting of
stockholders.
Item
12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
The
information required by this Item is incorporated by reference to the Company’s
definitive proxy statement for the 2009 annual meeting of
stockholders.
Item
13. Certain Relationships and Related Transactions and Director
Independence
The
information required by this Item is incorporated by reference to the Company’s
definitive proxy statement for the 2009 annual meeting of
stockholders.
Item
14. Principal Accountant Fees and Services
The
information required by this Item is incorporated by reference to the Company’s
definitive proxy statement for the 2009 annual meeting of
stockholders.
PART IV.
Item
15. Exhibits and Financial Statement Schedules
|
(1)
|
Financial
Statements:
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
|
FINANCIAL
STATEMENTS:
|
|
Balance
Sheets as of December 31, 2008 and 2007
|
|
Statements
of Operations for the Years Ended December 31, 2008, 2007 and
2006
|
|
Statements
of Changes in Shareholders’ Equity for the Years Ended December 31, 2008,
2007 and 2006
|
|
Statements
of Cash Flows for the Years Ended December 31, 2008, 2007 and
2006
|
|
Notes
to Financial Statements
|
|
(2)
|
Financial
Statement
Schedule:
|
SCHEDULE
II — Valuation and Qualifying Accounts For the Three Years Ended December
31, 2008
|
Exhibit No.
|
|
Description
|
3.1
|
|
Certificate
of Incorporation of the Company (incorporated by reference to the
Company’s Annual Report on Form 10-K for the year ended December 31,
2000).
|
|
|
|
3.2
|
|
Certificate
of Amendment to Certificate of Incorporation of the Company, dated April
3, 2008 (incorporated by reference to the Company’s Current Report on Form
8-K, dated April 4, 2008).
|
|
|
|
3.3
|
|
By-Laws
of the Company (incorporated by reference to the Company’s Annual Report
on Form 10-K for the year ended December 31, 2007).
|
|
|
|
3.4
|
|
Amendment
to Bylaws of the Company (incorporated by reference to the Company’s
Annual Report on Form 10-K for the year ended December 31,
2007).
|
|
|
|
3.4
|
|
Certificate
of Powers, Designations, Preferences and rights of Series F Preferred
Stock of the Company (incorporated by reference to the Company’ Current
Report on Form 8-K, dated June 28, 2005).
|
|
|
|
10.1
|
|
Amended
and Restated 1997 Stock Option Plan (incorporated by reference to the
Company’s Definitive Proxy Statement on Schedule 14A, filed with the
Commission on June 29, 2004).
|
|
|
|
10.2
|
|
Lease
Agreement by and between the Company and John R. Perlman, et al., dated as
of May 5, 1997 (incorporated by reference to the Company’s Quarterly
Report on Form 10-QSB for the quarterly period ended March 31,
1997).
|
10.3
|
|
Lease
Agreement by and between the Company and Adams & Co. Real Estate,
Inc., dated March 22, 1999 (incorporated by reference to the Company’s
Quarterly Report on Form 10-QSB for the quarterly period ended June 30,
1999).
|
|
|
|
10.4
|
|
Lease
Agreement by and between the Company and Adams & Co. Real Estate,
Inc., dated May 4, 2000 (incorporated by reference to the Company’s
Quarterly Report on Form 10-Q for the quarterly period ended June 30,
2000).
|
|
|
|
10.5
|
|
Bluefly,
Inc. 2000 Stock Option Plan (incorporated by reference to the Company’s
Quarterly Report on Form 10-Q for the quarterly period ended June 30,
2000).
|
|
|
|
10.6
|
|
Investment
Agreement, dated November 13, 2000, by and among the Company, Bluefly
Merger Sub, Inc., Quantum Industrial Partners LDC and SFM Domestic
Investments LLC (incorporated by reference to the Company’s Quarterly
Report on Form 10-Q for the quarterly period ended September 30,
2000).
|
|
|
|
*10.7
|
|
Software
License and Services Agreement, dated March 12, 2002, by and among the
Company and Blue Martini Software, Inc. (incorporated by reference to the
Company’s Annual Report on Form 10-K for the year ended December 31,
2001).
|
|
|
|
10.8
|
|
Common
Stock and Warrant Purchase Agreement, dated May 24, 2002, by and between
the Registrant and the investors listed on Schedule 1 thereto
(incorporated by reference to the Company’s Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 2002).
|
|
|
|
10.9
|
|
Note
and Warrant Purchase Agreement, dated January 28, 2003, by and between the
Registrant and the investors listed on Schedule 1 thereto (incorporated by
reference to the Company’s Annual Report on Form 10-K for the year ended
December 31, 2002).
|
|
|
|
10.10
|
|
Common
Stock and Warrant Purchase Agreement dated January 9, 2004 by and among
the Company and the Investors listed on Schedule 1 thereto (incorporated
by reference to the Company’s Current Report on Form 8-K, dated January
13, 2004).
|
|
|
|
*10.11
|
|
Master
Service Agreement, dated as of February 28, 2005, by and between the
Company and Level 3 Communications, LLC (incorporated by reference to the
Company’s Current Report on Form 8-K, dated March 4,
2005).
|
|
|
|
*10.12
|
|
Customer
Order Addendum, dated as of February 28, 2005, by and between the Company
and Level 3 Communications, LLC (incorporated by reference to the
Company’s Current Report on Form 8-K, dated March 4,
2005).
|
|
|
|
10.13
|
|
Preferred
Stock and Warrant Purchase Agreement, dated as of June 24, 2005, by and
among the Company and the Investors listed on the signature page thereto
(incorporated by reference to the Company’s Current Report on Form 8-K,
dated June 28, 2005).
|
|
|
|
10.14
|
|
Loan
and Security Agreement, dated July 26, 2005, by and between the Company
and Wells Fargo Retail Finance, LLC (incorporated by reference to the
Company’s Current Report on Form 8-K, dated July 29,
2005).
|
|
|
|
10.15
|
|
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 (incorporated by reference
to the Company’s Current Report on Form 8-K, dated June 7,
2006).
|
|
|
|
10.16
|
|
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
(incorporated by reference to the Company’s Current Report on Form 8-K,
dated June 7, 2006).
|
|
|
|
10.17
|
|
Fee
Letter, dated June 5, 2006, by and among Bluefly, Inc., Quantum Industrial
Partners LDC and SFM Domestic Investments, LLC (incorporated by reference
to the Company’s Current Report on Form 8-K, dated June 7,
2006).
|
|
|
|
10.18
|
|
Waiver
Letter, dated June 5, 2006, by and between Bluefly, Inc. and Wells Fargo
Retail Finance, LLC (incorporated by reference to the Company’s Current
Report on Form 8-K, dated June 7, 2006).
|
|
|
|
10.19
|
|
First
Amendment to Loan and Security Agreement, dated as of August 14, 2006, by
and between the Company and Wells Fargo Retail Finance, LLC (incorporated
by reference to the Company’s Current Report on Form 8-K, dated August 14,
2006).
|
|
|
|
10.20
|
|
Master
License Agreement, dated as of September 28, 2006, by and between the
Company and Art Technology Group, Inc. (incorporated by reference to the
Company’s Current Report on Form 8-K, dated October 3,
2006).
|
|
|
|
10.21
|
|
Bluefly,
Inc. Amended and Restated 2005 Stock Incentive Plan (incorporated by
reference to the Company’s Definitive Proxy Statement on Schedule 14A,
filed with the Commission on April 16, 2007).
|
|
|
|
10.22
|
|
Employment
Agreement, dated as of November 14, 2006 by and between Bluefly, Inc. and
Melissa Payner-Gregor (incorporated by reference to the Company’s Annual
Report on Form 10-K for the year ended December 31,
2007).
|
|
|
|
*10.23
|
|
Fulfillment
Services Agreement, dated as of April 11, 2007, by and between the Company
and Fulfillment Technologies, LLC (incorporated by reference to the
Company’s Current Report on Form 8-K, dated April 17,
2006).
|
|
|
|
10.24
|
|
Service
Agreement, dated as of May 9, 2007, by and between the Company and VIPdesk
Connect, Inc. (incorporated by reference to the Company’s Current Report
on Form 8-K, dated May 10, 2007).
|
|
|
|
*10.25
|
|
Letter
Agreement, dated as of December 21, 2007, by and between the Company and
Fulfillment Technologies, LLC (incorporated by reference to the Company’s
Current Report on Form 8-K, dated December 27, 2007).
|
|
|
|
10.26
|
|
Amended
and Restated Employment Agreement, dated as of December 1, 2008, by and
between the Company and Barry Erdos (incorporated by reference to the
Company’s Current Report on Form 8-K, dated December 2,
2008).
|
|
|
|
10.27
|
|
Lease
Agreement by and between the Company and 42-52 West 39th
Street, LLC, dated February 7, 2008 (incorporated by reference to the
Company’s Annual Report on Form 10-K for the year ended December 31,
2007).
|
|
|
|
10.28
|
|
Second
Amendment to Loan and Security Agreement, dated as of November 15, 2007,
by and between the Company and Wells Fargo Retail Finance, LLC
(incorporated by reference to the Company’s Annual Report on Form 10-K for
the year ended December 31,
2007).
|
10.29
|
|
Third
Amendment to Loan and Security Agreement, dated as of January 17, 2008 and
effective as of January 15, 2008, by and between the Company and Wells
Fargo Retail Finance, LLC (incorporated by reference to the Company’s
Annual Report on Form 10-K for the year ended December 31,
2007).
|
|
|
|
10.30
|
|
Amended
and Restated Employment Agreement, dated as of March 19, 2008, by and
between the Company and Kara B. Jenny (incorporated by reference to the
Company’s Current Report on Form 8-K, dated March 19,
2008).
|
|
|
|
10.31
|
|
Fourth
Amendment to Loan and Security Agreement, dated as of March 26, 2008 by
and between the Company and Wells Fargo Retail Finance, LLC (incorporated
by reference to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2007).
|
|
|
|
10.32
|
|
Standby
Commitment Agreement, dated as of March 26, 2008, by Quantum Industrial
Partners LDC, SFM Domestic Investments LLC and private funds associated
with Maverick Capital, Ltd. in favor of the Company (incorporated by
reference to the Company’s Annual Report on Form 10-K for the year ended
December 31, 2007).
|
|
|
|
10.33
|
|
Amended
and Restated Warrant No. 1, dated April 8, 2008 and effective as of March
26, 2008, issued to Quantum Industrial Partners LDC (incorporated by
reference to the Company’s Quarterly Report on Form 10-Q for the quarter
ended March 31, 2008).
|
|
|
|
10.34
|
|
Amended
and Restated Warrant No. 2 dated April 8, 2008 and effective as of March
26, 2008, issued to SFM Domestic Investments LLC (incorporated by
reference to the Company’s Quarterly Report on Form 10-Q for the quarter
ended March 31, 2008)..
|
|
|
|
10.35
|
|
Amended
and Restated Warrant No. 3 dated April 8, 2008 and effective as of March
26, 2008, issued to Maverick Fund USA, Ltd. (incorporated by reference to
the Company’s Quarterly Report on Form 10-Q for the quarter ended March
31, 2008).
|
|
|
|
10.36
|
|
Amended
and Restated Warrant No. 4 dated April 8, 2008 and effective as of March
26, 2008, issued to Maverick Fund LDC (incorporated by reference to the
Company’s Quarterly Report on Form 10-Q for the quarter ended March 31,
2008).
|
|
|
|
10.37
|
|
Amended
and Restated Warrant No. 5 dated April 8, 2008 and effective as of March
26, 2008, issued to Maverick Fund II, Ltd. (incorporated by reference to
the Company’s Quarterly Report on Form 10-Q for the quarter ended March
31, 2008).
|
|
|
|
10.38
|
|
Fifth
Amendment, dated as of June 30, 2008, to Loan and Security Agreement,
dated as of July 25, 2006, by and between the Company Wells Fargo Retail
Finance, LLC (incorporated by reference to the Company’s Quarterly Report
on Form 10-Q for the quarter ended June 30, 2008).
|
|
|
|
10.39
|
|
Note
Purchase Agreement, dated as of July 23, 2008, by and among the Company,
Quantum Industrial Partners LDC, SFM Domestic Investments LLC, Maverick
Fund USA Ltd., Maverick Fund, L.D.C. and Maverick Fund II, Ltd.
(incorporated by reference to the Company’s Current Report on Form 8-K,
dated July 24, 2008).
|
|
|
|
10.40
|
|
Convertible
Promissory Note, dated as f July 23, 2008, issued by the Company in favor
of Quantum Industrial Partners LDC (incorporated by reference to the
Company’s Current Report on Form 8-K, dated July 24,
2008).
|
|
|
|
10.41
|
|
Convertible
Promissory Note, dated as of July 23, 2008, issued by the Company in favor
of SFM Domestic Investments LLC (incorporated by reference to the
Company’s Current Report on Form 8-K, dated July 24,
2008).
|
10.42
|
|
Convertible
Promissory Note, dated as of July 23, 2008, issued by the Company in favor
of Maverick Fund USA, Ltd. (incorporated by reference to the Company’s
Current Report on Form 8-K, dated July 24, 2008).
|
|
|
|
10.43
|
|
Convertible
Promissory Note, dated as of July 23, 2008, issued by the Company in favor
of Maverick Fund, L.D.C. (incorporated by reference to the Company’s
Current Report on Form 8-K, dated July 24, 2008).
|
|
|
|
10.44
|
|
Convertible
Promissory Note, dated as of July 23, 2008, issued by the Company in favor
of Maverick Fund II, Ltd. (incorporated by reference to the Company’s
Current Report on Form 8-K, dated July 24, 2008).
|
|
|
|
*10.45
|
|
Letter
Agreement, dated as of November 19, 2008, by and between the Company and
Fulfillment Technologies, LLC (incorporated by reference to the Company’s
Current Report on Form 8-K, dated November 24, 2008).
|
|
|
|
10.46
|
|
Amendment
No. 1 to Employment Agreement, effective as of December 18, 2008, by and
between the Company and Melissa Payner.
|
|
|
|
10.47
|
|
Amendment
No. 1 to Employment Agreement, effective as of December 18, 2008, by and
between the Company and Kara B. Jenny.
|
|
|
|
10.48
|
|
Sixth
Amendment, dated as of February 17, 2009, to Loan and Security Agreement,
dated as of July 25, 2006, by and between the Company Wells Fargo Retail
Finance, LLC (incorporated by reference to the Company’s Current Report on
Form 8-K, dated February 19, 2009).
|
|
|
|
23.1
|
|
Consent
of PricewaterhouseCoopers LLP.
|
|
|
|
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.
|
*
Confidential treatment has been granted as to certain portions of this
Exhibit. Such portions have been redacted and were filed separately
with the Securities and Exchange Commission.
SIGNATURES
Pursuant to the requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
duly 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
|
March 5,
2009
Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signature
|
|
Title
|
|
Date
|
/s/
David Wassong
|
|
|
|
|
David
Wassong
|
|
Interim
Chairman of the Board
|
|
March
5, 2009
|
|
|
|
|
|
/s/
Melissa Payner Gregor
|
|
|
|
|
Melissa
Payner-Gregor
|
|
Chief Executive Officer (Principal Executive Officer)
Director
|
|
March
5, 2009
|
|
|
|
|
|
/s/
Kara B. Jenny
|
|
|
|
|
Kara
B. Jenny
|
|
Chief
Financial Officer (Principal Accounting
Officer)
|
|
March
5, 2009
|
|
|
|
|
|
/s/
Riad Abrahams
|
|
|
|
|
Riad
Abrahams
|
|
Director
|
|
March
5, 2009
|
|
|
|
|
|
/s/
Mario Ciampi
|
|
|
|
|
Mario
Ciampi
|
|
Director
|
|
March
5, 2009
|
|
|
|
|
|
/s/
Barry Erdos
|
|
|
|
|
Barry
Erdos
|
|
Director
|
|
March
5, 2009
|
|
|
|
|
|
/s/
Michael Helfand
|
|
|
|
|
Michael
Helfand
|
|
Director
|
|
March
5, 2009
|
|
|
|
|
|
/s/
Ann Jackson
|
|
|
|
|
Ann
Jackson
|
|
Director
|
|
March
5, 2009
|
|
|
|
|
|
/s/
Martin Miller
|
|
|
|
|
Martin
Miller
|
|
Director
|
|
March
5, 2009
|
|
|
|
|
|
/s/
Neal Moszkowski
|
|
|
|
|
Neal
Moszkowski
|
|
Director
|
|
March
5, 2009
|
|
|
|
|
|
/s/
Anthony Plesner
|
|
|
|
|
Anthony
Plesner
|
|
Director
|
|
March
5,
2009
|
Bluefly,
Inc.
Index to Financial
Statements and Schedule
|
|
Page
|
|
|
|
Number
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
|
|
F –
1
|
|
|
|
|
|
|
FINANCIAL
STATEMENTS:
|
|
|
|
|
|
|
|
|
|
Balance
Sheets as of December 31, 2008 and 2007
|
|
|
F –
2
|
|
|
|
|
|
|
Statements
of Operations for the Years Ended December 31, 2008, 2007 and
2006
|
|
|
F –
3
|
|
|
|
|
|
|
Statements
of Changes in Shareholders’ Equity for the Years Ended December 31, 2008,
2007 and 2006
|
|
|
F –
4
|
|
|
|
|
|
|
Statements
of Cash Flows for the Years Ended December 31, 2008, 2007 and
2006
|
|
|
F –
5
|
|
|
|
|
|
|
Notes
to Financial Statements
|
|
|
F –
6 to F – 21
|
|
|
|
|
|
|
SCHEDULE
II — Valuation and Qualifying Accounts For the Three Years Ended December
31, 2008
|
|
|
S –
1
|
|
Report
of Independent Registered Public Accounting Firm
To the
Board of Directors and Shareholders
of
Bluefly, Inc.
In our
opinion, the financial statements listed in the index appearing under Item
15(a)(1) present fairly, in all material respects, the financial position of
Bluefly, Inc. at December 31, 2008 and December 31, 2007, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2008 in conformity with accounting principles
generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule listed in the index appearing
under Item 15(a)(2) presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related financial
statements. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our
audits of these statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
As
discussed in Note 2 to the financial statements, the Company changed the manner
in which it accounts for uncertain tax positions in 2007.
/s/
PricewaterhouseCoopers LLP
New York,
New York
March 5,
2009
Bluefly,
Inc.
Balance
Sheets
December
31, 2008 and 2007
(dollars
rounded to the nearest thousand)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
4,004,000
|
|
|
$
|
6,730,000
|
|
Accounts
receivable, net of allowance for doubtful accounts
|
|
|
3,300,000
|
|
|
|
2,102,000
|
|
Inventories,
net
|
|
|
23,157,000
|
|
|
|
28,492,000
|
|
Prepaid
expenses and other current assets
|
|
|
1,047,000
|
|
|
|
1,487,000
|
|
Total
current assets
|
|
|
31,508,000
|
|
|
|
38,811,000
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
6,058,000
|
|
|
|
6,019,000
|
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
184,000
|
|
|
|
189,000
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
37,750,000
|
|
|
$
|
45,019,000
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
8,344,000
|
|
|
$
|
8,460,000
|
|
Allowance
for sales returns
|
|
|
3,707,000
|
|
|
|
4,204,000
|
|
Accrued
expenses and other current liabilities
|
|
|
1,323,000
|
|
|
|
2,052,000
|
|
Deferred
revenue
|
|
|
2,876,000
|
|
|
|
3,206,000
|
|
Total
current liabilities
|
|
|
16,250,000
|
|
|
|
17,922,000
|
|
|
|
|
|
|
|
|
|
|
Notes
payable to related party shareholders
|
|
|
3,106,000
|
|
|
|
—
|
|
Other
long-term obligations
|
|
|
—
|
|
|
|
60,000
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
19,356,000
|
|
|
|
17,982,000
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Series
F Preferred stock – $.01
par value; 7,000 shares authorized; 0 and 571.43 shares issued and
outstanding as of December 31, 2008 and 2007, respectively (liquidation
preference as of December 31, 2007: $571,000 plus accrued dividends
of $105,000)
|
|
|
—
|
|
|
|
—
|
|
Common
stock – $.01 par
value; 200,000,000 shares authorized; 14,061,237 and 13,426,803
shares issued as of December 31, 2008 and 2007, respectively; and
13,831,950 and 13,275,730 shares outstanding as of December 31, 2008 and
2007, respectively
|
|
|
138,000
|
|
|
|
133,000
|
|
Treasury
stock
|
|
|
(1,612,000
|
)
|
|
|
(1,430,000
|
)
|
Additional
paid-in capital
|
|
|
163,746,000
|
|
|
|
160,160,000
|
|
Accumulated
deficit
|
|
|
(143,878,000
|
)
|
|
|
(131,826,000
|
)
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity
|
|
|
18,394,000
|
|
|
|
27,037,000
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
37,750,000
|
|
|
$
|
45,019,000
|
|
The
accompanying notes are an integral part of these financial
statements.
Bluefly,
Inc.
Statements
of Operations
Years
Ended December 31, 2008, 2007 and 2006
(dollars
rounded to the nearest thousand, except per share data)
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
95,774,000
|
|
|
$
|
91,493,000
|
|
|
$
|
77,062,000
|
|
Cost
of sales
|
|
|
60,288,000
|
|
|
|
58,754,000
|
|
|
|
46,153,000
|
|
Gross profit
|
|
|
35,486,000
|
|
|
|
32,739,000
|
|
|
|
30,909,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing
expenses
|
|
|
14,523,000
|
|
|
|
16,063,000
|
|
|
|
14,196,000
|
|
Selling
and fulfillment expenses
|
|
|
19,620,000
|
|
|
|
18,898,000
|
|
|
|
15,808,000
|
|
General
and administrative expenses
|
|
|
12,191,000
|
|
|
|
13,848,000
|
|
|
|
13,001,000
|
|
Total operating
expenses
|
|
|
46,334,000
|
|
|
|
48,809,000
|
|
|
|
43,005,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(10,848,000
|
)
|
|
|
(16,070,000
|
)
|
|
|
(12,096,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(554,000
|
)
|
|
|
(260,000
|
)
|
|
|
(599,000
|
)
|
Interest
income
|
|
|
62,000
|
|
|
|
501,000
|
|
|
|
502,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(11,340,000
|
)
|
|
|
(15,829,000
|
)
|
|
|
(12,193,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock dividends
|
|
|
(37,000
|
)
|
|
|
(44,000
|
)
|
|
|
(2,252,000
|
)
|
Deemed
dividend related to beneficial conversion feature on Series F Preferred
Stock
|
|
|
(712,000
|
)
|
|
|
—
|
|
|
|
(3,857,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common
shareholders
|
|
$
|
(12,089,000
|
)
|
|
$
|
(15,873,000
|
)
|
|
$
|
(18,302,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per
common share
|
|
$
|
(0.90
|
)
|
|
$
|
(1.21
|
)
|
|
$
|
(2.28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding (basic and diluted)
|
|
|
13,369,257
|
|
|
|
13,091,130
|
|
|
|
8,017,053
|
|
The
accompanying notes are an integral part of these financial
statements.
Statements
of Changes in Shareholders' Equity
Years
Ended December 31, 2008, 2007 and 2006
(Dollars
rounded to the nearest thousand)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$.01
Par value
|
|
|
$.01
Par Value
|
|
|
Treasury
Stock
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
Number
of
|
|
|
|
|
|
Number
of
|
|
|
|
|
|
Number
of
|
|
|
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Shareholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2006
|
|
|
9,363,007 |
|
|
|
94,000 |
|
|
|
1,905,917 |
|
|
$ |
19,000 |
|
|
|
- |
|
|
$ |
- |
|
|
$ |
115,699,000 |
|
|
$ |
(99,947,000 |
) |
|
$ |
15,865,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of Preferred Stock
|
|
|
(9,362,436 |
) |
|
|
(94,000 |
) |
|
|
4,854,553 |
|
|
|
49,000 |
|
|
|
- |
|
|
|
- |
|
|
|
45,000 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
based compensation
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,454,000 |
|
|
|
- |
|
|
|
4,454,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale
of Common Stock, net of issuance expenses of of approximately $2.0
million
|
|
|
- |
|
|
|
- |
|
|
|
6,097,561 |
|
|
|
61,000 |
|
|
|
- |
|
|
|
- |
|
|
|
47,969,000 |
|
|
|
- |
|
|
|
48,030,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock to Placement Agent
|
|
|
- |
|
|
|
- |
|
|
|
100,000 |
|
|
|
1,000 |
|
|
|
- |
|
|
|
- |
|
|
|
1,079,000 |
|
|
|
- |
|
|
|
1,080,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
Issued to Third-Party
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
67,000 |
|
|
|
- |
|
|
|
67,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
Paid to Related Party Shareholders
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(19,512,000 |
) |
|
|
- |
|
|
|
(19,512,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deemed
Dividends related to beneficial conversion on Series F Preferred
Stock
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,857,000 |
|
|
|
(3,857,000 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of Employee Options
|
|
|
- |
|
|
|
- |
|
|
|
4,333 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
36,000 |
|
|
|
- |
|
|
|
36,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Restricted Stock
|
|
|
- |
|
|
|
- |
|
|
|
86,122 |
|
|
|
1,000 |
|
|
|
- |
|
|
|
- |
|
|
|
(1,000 |
) |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(12,193,000 |
) |
|
|
(12,193,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
|
571 |
|
|
|
- |
|
|
|
13,048,486 |
|
|
$ |
131,000 |
|
|
|
- |
|
|
$ |
- |
|
|
$ |
153,693,000 |
|
|
$ |
(115,997,000 |
) |
|
$ |
37,827,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
based compensation
|
|
|
- |
|
|
|
- |
|
|
|
(2,968 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6,194,000 |
|
|
|
- |
|
|
|
6,194,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Restricted Stock
|
|
|
- |
|
|
|
- |
|
|
|
42,619 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delivery
of Restricted Stock Units
|
|
|
|
|
|
|
|
|
|
|
184,601 |
|
|
|
2,000 |
|
|
|
- |
|
|
|
- |
|
|
|
(2,000 |
) |
|
|
- |
|
|
|
- |
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of Treasury Stock
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
151,073 |
|
|
|
(1,430,000 |
) |
|
|
- |
|
|
|
- |
|
|
|
(1,430,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of Employee Options
|
|
|
- |
|
|
|
- |
|
|
|
2,806 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
25,000 |
|
|
|
- |
|
|
|
25,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reversal
of legal expenses related to June 2006 financing
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
250,000 |
|
|
|
- |
|
|
|
250,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of Related Party Warrant
|
|
|
- |
|
|
|
- |
|
|
|
186 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(15,829,000 |
) |
|
|
(15,829,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
|
571 |
|
|
|
- |
|
|
|
13,275,730 |
|
|
$ |
133,000 |
|
|
|
151,073 |
|
|
$ |
(1,430,000 |
) |
|
$ |
160,160,000 |
|
|
$ |
(131,826,000 |
) |
|
$ |
27,037,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
based compensation
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,706,000 |
|
|
|
- |
|
|
|
2,706,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delivery
of Restricted Stock Units
|
|
|
- |
|
|
|
- |
|
|
|
301,454 |
|
|
|
3,000 |
|
|
|
- |
|
|
|
- |
|
|
|
(3,000 |
) |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
of Series F Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Converted
into Common Stock
|
|
|
(571 |
) |
|
|
- |
|
|
|
254,766 |
|
|
|
2,000 |
|
|
|
- |
|
|
|
- |
|
|
|
(2,000 |
) |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
Issued to Third-Party
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
173,000 |
|
|
|
- |
|
|
|
173,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Treasury Stock
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
78,214 |
|
|
|
(182,000 |
) |
|
|
- |
|
|
|
- |
|
|
|
(182,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deemed
Dividends related to beneficial conversion on Series F Preferred
Stock
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
712,000 |
|
|
|
(712,000 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(11,340,000 |
) |
|
|
(11,340,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2008
|
|
|
- |
|
|
|
- |
|
|
|
13,831,950 |
|
|
$ |
138,000 |
|
|
|
229,287 |
|
|
$ |
(1,612,000 |
) |
|
$ |
163,746,000 |
|
|
$ |
(143,878,000 |
) |
|
$ |
18,394,000 |
|
The
accompanying notes are an integral part of these financial
statements
Bluefly,
Inc.
Statements
of Cash Flows
Years
Ended December 31, 2008, 2007 and 2006
(dollars
rounded to the nearest thousand)
|
|
2008
|
|
2007
|
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(11,340,000
|
)
|
|
$
|
(15,829,000
|
)
|
|
$
|
(12,193,000
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
2,476,000
|
|
|
|
1,726,000
|
|
|
|
1,532,000
|
|
Warrants issued to
supplier
|
|
|
—
|
|
|
|
—
|
|
|
|
153,000
|
|
Provisions for
returns
|
|
|
(496,000
|
)
|
|
|
(840,000
|
)
|
|
|
1,636,000
|
|
Bad debt
expense
|
|
|
553,000
|
|
|
|
669,000
|
|
|
|
643,000
|
|
Reserve for inventory
obsolescence
|
|
|
290,000
|
|
|
|
2,735,000
|
|
|
|
1,000,000
|
|
Stock based
compensation
|
|
|
2,706,000
|
|
|
|
6,194,000
|
|
|
|
4,454,000
|
|
Warrants issued to
consultant
|
|
|
—
|
|
|
|
—
|
|
|
|
67,000
|
|
Change in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease
in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,751,000
|
)
|
|
|
(52,000
|
)
|
|
|
(1,645,000
|
)
|
Inventories
|
|
|
5,045,000
|
|
|
|
(7,038,000
|
)
|
|
|
(8,449,000
|
)
|
Prepaid
expenses
|
|
|
446,000
|
|
|
|
(1,293,000
|
)
|
|
|
(134,000
|
)
|
Other
assets
|
|
|
(198,000
|
)
|
|
|
(114,000
|
)
|
|
|
443,000
|
|
Increase (decrease)
in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and other long-term liabilities
|
|
|
(176,000
|
)
|
|
|
3,698,000
|
|
|
|
(840,000
|
)
|
Accrued
expenses and other current liabilities
|
|
|
(548,000
|
)
|
|
|
1,839,000
|
|
|
|
1,932,000
|
|
Interest
payable to related party shareholders
|
|
|
106,000
|
|
|
|
—
|
|
|
|
(1,217,000
|
)
|
Deferred
revenue
|
|
|
(330,000
|
)
|
|
|
376,000
|
|
|
|
1,046,000
|
|
Net
cash used in operating activities
|
|
|
(3,217,000
|
)
|
|
|
(7,929,000
|
)
|
|
|
(11,572,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and
equipment
|
|
|
(2,327,000
|
)
|
|
|
(4,110,000
|
)
|
|
|
(2,148,000
|
)
|
Net
cash used in investing activities
|
|
|
(2,327,000
|
)
|
|
|
(4,110,000
|
)
|
|
|
(2,148,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of related party
notes
|
|
|
—
|
|
|
|
—
|
|
|
|
(19,512,000
|
)
|
Dividends paid to related
party shareholders
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,000,000
|
)
|
Purchase of treasury
stock
|
|
|
(182,000
|
)
|
|
|
(1,430,000
|
)
|
|
|
—
|
|
Payments of capital lease
obligation
|
|
|
—
|
|
|
|
(14,000
|
)
|
|
|
(54,000
|
)
|
Net proceeds from exercise of
stock options
|
|
|
—
|
|
|
|
25,000
|
|
|
|
36,000
|
|
Proceeds from notes issued to
related party shareholders
|
|
|
3,000,000
|
|
|
|
—
|
|
|
|
—
|
|
Net proceeds from June 2006
financing
|
|
|
—
|
|
|
|
—
|
|
|
|
48,030,000
|
|
Net
cash provided by (used in) financing activities
|
|
|
2,818,000
|
|
|
|
(1,419,000
|
)
|
|
|
24,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(2,726,000
|
)
|
|
|
(13,458,000
|
)
|
|
|
10,780,000
|
|
Cash
and cash equivalents – beginning of year
|
|
|
6,730,000
|
|
|
|
20,188,000
|
|
|
|
9,408,000
|
|
Cash
and cash equivalents – end of year
|
|
$
|
4,004,000
|
|
|
$
|
6,730,000
|
|
|
$
|
20,188,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for interest
|
|
$
|
264,000
|
|
|
$
|
130,000
|
|
|
$
|
1,658,000
|
|
Deemed
dividend related to beneficial conversion feature on Series F Preferred
Stock
|
|
$
|
712,000
|
|
|
$
|
—
|
|
|
$
|
3,857,000
|
|
Warrants
issued to related party shareholders
|
|
$
|
173,000
|
|
|
|
—
|
|
|
|
—
|
|
Issuance
of common stock to placement agent
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,080,000
|
|
Conversion
of preferred stock to common stock
|
|
$
|
2,000
|
|
|
$
|
—
|
|
|
$
|
391,000
|
|
The
accompanying notes are an integral part of these financial
statements.
Bluefly,
Inc.
Notes
to Financial Statements
December
31, 2008
NOTE
1 – THE COMPANY
Bluefly,
Inc., a Delaware corporation, (the “Company”), is a leading Internet retailer
that sells over 350 brands of designer apparel, accessories and home products at
discount prices. The Company’s e-commerce Web site (“Bluefly.com” or
“Web site”) was launched in September 1998. The Company operates
in one business segment that has no operations outside the United
States.
The
Company has sustained net losses and negative cash flows from operations since
inception. During the year ended December 31, 2008, net cash used in
operating activities was $3,217,000. As of December 31, 2008, the
Company had an accumulated deficit of $143,878,000. Although the
Company has experienced revenue growth in recent years, this growth should not
be indicative of future performance, particularly given the challenging
environment that the Company now faces. The Company believes that it
has sufficient liquidity from current funds and operating cash flow despite the
disruption of the capital markets and the continued decline in economic
conditions. Moreover, the Company believes that its existing cash
balance, combined with working capital and the funds available in connection
with the Company’s existing Credit Facility, will be sufficient to
enable the Company to meet planned expenditures under a streamlined business
plan through at least the next 12 months. The streamlined business
plan calls for, among other things, reductions in marketing and capital
expenditures, delaying new hires and making selective inventory
purchases.
In
addition, should the Company experience unforeseen increases in expenditures or
should estimated revenues not materialize, these conditions could significantly
impair the ability of the Company to fund future operations. Should
the Company experience unanticipated losses or expenditures that exceed current
estimates, management would implement a cost reduction plan, that includes a
reduction in work force as well as reductions in overhead costs and capital
expenditures, and/or attempt to raise additional debt or equity
financing. If the Company is unable to maintain adequate liquidity,
future operations will need to be scaled back or discontinued.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue
Recognition
The
Company recognizes revenue in accordance with Staff Accounting Bulletin No. 104
“Revenue Recognition”
(“SAB 104”). 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
tax. Revenue is recognized when all the following criteria are
met:
|
·
|
A
customer executes an order.
|
|
·
|
The
product price and the shipping and handling fee have been
determined.
|
|
·
|
Credit
card authorization has occurred and collection is reasonably
assured.
|
|
·
|
The
product has been shipped and received by the
customer.
|
Deferred
revenue, which consists primarily of goods shipped to customers but not yet
received and customer credits, totaled approximately $2,876,000 and $3,206,000
as of December 31, 2008 and 2007, respectively.
Shipping
and handling billed to customers is classified as revenue and freight cost
incurred in connection with purchasing merchandise is classified as cost of
goods sold in accordance with Financial Accounting Standards Board (“FASB”)
Emerging Issues Task Force (“EITF”) No. 00-10, “Accounting for Shipping and Handling
Fees and Costs” (“EITF No. 00-10”).
Provisions
for Sales Returns and Doubtful Accounts
The
Company generally permits returns for any reason within 90 days of the
sale. The Company performs credit card authorizations and checks the
verifications of its customers prior to shipment of
merchandise. Accordingly, the Company establishes a reserve for
estimated future sales returns and allowance for doubtful accounts at the time
of shipment based primarily on historical data. Accounts receivable
is presented on the Balance Sheets net of the allowance for doubtful
accounts. As of December 31, 2008 and 2007, the allowance for
doubtful accounts was $80,000 and $106,000, respectively, and the allowance for
sales returns was $3,707,000 and $4,204,000, respectively.
Bluefly,
Inc.
Notes
to Financial Statements
December
31, 2008
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with an original maturity of
three months or less to be cash and cash equivalents.
Inventories,
Net
Inventories,
which consist of finished goods, are stated at the lower of cost or
market. Cost is determined by the first-in, first-out (“FIFO”)
method. The Company reviews its inventory levels in order to identify
slow-moving merchandise and establishes a reserve for such merchandise.
Inventory reserves are established based on historical data and management’s
best estimate of excess inventory. Inventory may be marked down below cost if
management determines that the inventory stock will not sell at its currently
marked price. Inventory is presented net of reserves on the Balance
Sheets.
As of
December 31, 2008 and 2007, inventories, net consists of the following,
respectively:
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Inventory
on hand
|
|
$
|
22,751,000
|
|
|
$
|
30,146,000
|
|
Inventory
to be recovered due to returns
|
|
|
2,095,000
|
|
|
|
2,032,000
|
|
Inventory
reserves
|
|
|
(1,689,000
|
)
|
|
|
(3,686,000
|
)
|
Total
inventories, net
|
|
$
|
23,157,000
|
|
|
$
|
28,492,000
|
|
Property
and Equipment, Net
Property
and equipment are stated at cost net of depreciation. Equipment and
software are depreciated on a straight-line basis over two to seven
years. Leasehold improvements are amortized over the shorter of their
estimated useful lives or the term of the lease. Lease amortization is included
in depreciation expense. Maintenance and repairs are expensed as
incurred.
Certain
equipment held under capital leases is classified as property and equipment and
amortized using the straight-line method over the lease terms and the related
obligations are recorded as liabilities.
Web
Site Development Costs
In 2007,
the Company began the process of developing an improved version of its Web site
based on new licensed software pursuant to a Master License Agreement (the
“Master License Agreement”) with a service provider. In connection
with the new version of its Web site, the Company has spent approximately
$5,299,000, which has been capitalized. In August 2008, the Company’s
new version of its Web site was placed into service.
Costs
related to the upgrade and development of the Web Site is accounted for in
accordance with EITF Issue No. 00-02 “Accounting for Website Development
Costs”, and to the extent they are capitalized, are amortized over 36
months.
Long-Lived
Assets
The
Company’s policy is to evaluate long-lived assets for possible impairment
whenever events or changes in circumstances indicate that the carrying amount of
such assets may not be recoverable. This evaluation is based on a
number of factors, including expectations for operating income and undiscounted
cash flows that will result from the use of such assets. The Company
has not identified any such impairment of assets.
Income
Taxes
The
Company recognizes deferred income tax assets and liabilities on the differences
between the financial statement and tax bases of assets and liabilities using
enacted statutory tax 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 includes the enactment
date. In addition, valuation allowances are established when it is
more likely than not that deferred tax assets will not be realized.
Effective
January 1, 2007, the Company adopted Financial Accounting Standards Board
(“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48
prescribes a comprehensive model for the manner in which a company should
recognize, measure, present and disclose in its financial statements all
material uncertain tax
Bluefly,
Inc.
Notes
to Financial Statements
December
31, 2008
positions
that the Company has taken or expects to take on a tax return. As of the date of
adoption, there were no tax positions for which it is reasonably possible that
the total amounts of unrecognized tax benefits will significantly increase or
decrease within twelve months from the date of adoption of FIN 48 or from
December 31, 2007. As of December 31, 2008 and 2007, the only tax jurisdiction
to which the Company is subject is the United States. Open tax years relate to
years in which unused net operating losses were generated. Upon the adoption of
FIN 48, the Company’s open tax years extend back to 1998. In the event that the
Company concludes that it is subject to interest and/or penalties arising form
uncertain tax positions, the Company will present interest and penalties as a
component of income taxes. No amounts of interest or penalties were recognized
in the Company’s Statements of Operations or Balance Sheets upon adoption of FIN
48 or as of and for the years ended December 31, 2008 and 2007.
Stock-Based
Compensation
The
Company’s Board of Directors has adopted three stock based employee compensation
plans, one in April 2005, one in July 2000 and one in May 1997
(collectively the “Plans”), which are described more fully in Note
11. The Plans, which provide for the granting of restricted stock,
deferred stock unit awards and stock options, and other equity and cash awards,
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. Vesting term for
restricted stock generally range from one quarter to one year, while deferred
stock unit awards vest quarterly over one to three years. Options are
granted in terms not to exceed ten years and become exercisable as specified
when the option is granted and vesting terms range from immediately to a ratable
vesting period of four years. The Plans have an aggregate of
15,700,000 shares authorized for issuance.
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 Statements 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 Statements
of Operations for the years ended December 31, 2008, 2007 and 2006 was
$2,706,000, $6,194,000 and $4,454,000, respectively.
Net
Loss Per Share
The
Company has determined Loss Per Share in accordance with Statement of Financial
Accounting Standards No. 128, “Earnings per Share.” Basic
net 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
net loss per share is computed by dividing net loss available to common
shareholders by the weighted average number of common shares outstanding for the
period, adjusted to reflect potentially dilutive securities using the treasury
stock method for options, warrants, restricted stock awards and deferred stock
unit awards, and the if-converted method for Subordinated Notes (defined in Note
10). Due to the Company’s net loss, (i) options and warrants to purchase shares
of Common Stock, (ii) Preferred Stock and Subordinated Notes convertible into
shares of Common Stock, (iii) restricted stock awards that have not yet vested
and (iv) deferred stock unit awards for shares that have not yet been delivered
were not included in the computation of diluted loss per share as the effects
would be anti-dilutive and accordingly, basic and diluted weighted average
shares outstanding are equal for the periods presented:
Bluefly,
Inc.
Notes
to Financial Statements
December
31, 2008
|
|
2008
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(11,340,000
|
)
|
|
$
|
(15,829,000
|
)
|
|
$
|
(12,193,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock dividends
|
|
|
(37,000
|
)
|
|
|
(44,000
|
)
|
|
|
(2,252,000
|
)
|
Deemed
dividend related to beneficial conversion feature on Series F Preferred
Stock
|
|
|
(712,000
|
)
|
|
|
—
|
|
|
|
(3,857,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss available to common shareholders
|
|
$
|
(12,089,000
|
)
|
|
$
|
(15,873,000
|
)
|
|
$
|
(18,302,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding (basic)
|
|
|
13,369,257
|
|
|
|
13,091,130
|
|
|
|
8,017,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
and warrants(1),
(2)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock and subordinated notes(1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
stock and deferred stock awards(1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding (diluted)
|
|
|
13,369,257
|
|
|
|
13,091,130
|
|
|
|
8,017,053
|
|
(1)
|
As
of December 31, 2008, 2007 and 2006, respectively, the Company had
weighted average shares of the following potentially dilutive securities
that were excluded from the computation of net loss per
share:
|
Options
and warrants
|
|
|
—
|
|
|
|
29,228
|
|
|
|
34,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock and subordinated notes
|
|
|
364,231
|
|
|
|
571
|
|
|
|
4,234,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
stock and deferred stock awards
|
|
|
1,134,312
|
|
|
|
1,051,458
|
|
|
|
125,761
|
|
(2)
|
Under
the treasury-stock method, the Company excluded all options and warrants
from the computation of weighted average shares as a result of the average
market price of the Company’s Common Stock being greater than the exercise
price of the options and warrants.
|
Marketing
Expenses
In
addition to marketing salaries, marketing expenses consist primarily of online
advertising, print and media advertising, costs associated with sweepstakes,
direct mail campaigns as well as the related external production costs. In
accordance with SOP 93-7 “Reporting on Advertising
Costs,” the costs associated with online and print advertising are
expensed as incurred, with the exception of production costs related to print
and television advertising which are expensed entirely the first time the
advertising takes place. The costs associated with direct mail campaigns are
capitalized and charged to expense over the expected future revenue stream.
There were no amounts associated with direct mail campaigns capitalized at
December 31, 2008 and 2007. For the years ended December 31, 2008, 2007 and
2006 marketing expenditures (excluding staff related costs) were approximately
$13.6 million, $14.9 million and $13.0 million, respectively.
Fulfillment
Expenses
The
Company utilizes a third party to perform all of its order fulfillment including
warehousing, administrative support, returns processing and receiving
labor. For the years ended December 31, 2008, 2007 and 2006,
fulfillment expenses totaled $5,352,000, $4,390,000 and $4,409,000,
respectively.
Fair
Value of Financial Instruments
The
carrying amounts of the Company’s financial instruments, including cash and cash
equivalents, other assets, accounts payable, and accrued liabilities,
approximate fair value due to their short maturities.
Recent
Accounting Pronouncements
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, and (“SFAS 161”). SFAS 161 amends and
expands the disclosure requirements of Statement of Financial Accounting
Standards No. 133, “Accounting
for Derivative Instruments and Hedging Activities.” SFAS 161 requires
qualitative disclosures about objectives and strategies for using derivatives,
quantitative disclosures about fair value amounts of gains and losses on
derivative instruments and disclosures about credit-risk-related contingent
features in derivative agreements. This statement is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008. The adoption of SFAS 161 is not expected to materially affect the
Company’s financial condition and results of operations, but may require
additional disclosures if the Company enters into derivative and hedging
activities.
In April
2008, the FASB issued EITF 07-05, Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own Stock, (“EITF
07-05”). EITF 07-05 provides guidance on determining what types of
instruments or embedded features in an instrument held by a reporting entity can
be considered indexed to its own stock for the purpose of evaluating the first
criteria of the scope exception in paragraph 11(a) of FAS 133. EITF 07-05
is effective for financial statements issued for fiscal years beginning
after
Bluefly,
Inc.
Notes
to Financial Statements
December
31, 2008
December
15, 2008 and early application is not permitted. The adoption of this
standard is not expected to have a material impact on the Company's financial
position and operating results relating to its convertible
securities.
In May
2008, the FASB issued Staff Position No. APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement) ("FSP APB 14-1") that requires the liability and equity
components of convertible debt instruments that may be settled in cash upon
conversion (including partial cash settlement) to be separately accounted for in
a manner that reflects the issuer's nonconvertible debt borrowing rate. The
resulting debt discount would be amortized over the period during which the debt
is expected to be outstanding (i.e., through the first optional redemption date)
as additional non-cash interest expense. The equity component is
determined by deducting the fair value of the liability
component. FSP APB 14-1 will become effective beginning in our first
quarter of 2009 and is required to be applied retrospectively to all presented
periods, as applicable. The adoption of this standard is not expected
to have a material impact on the Company’s financial position and operating
results relating to its convertible debt.
Concentration
The
Company acquired approximately 31% and 38% of its inventory from one supplier
for fiscal 2008 and 2007, respectively.
Use
of 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 disclosures of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the reporting
periods. Significant estimates and assumptions include the adequacy
of the allowances for sales returns, recoverability of inventories, useful lives
of property and equipment, realization of deferred tax assets, and the
calculations related to stock-based compensation. Actual results
could differ from those estimates.
The
Company currently estimates that it will have adequate liquidity to fund
operations beyond one year from December 31, 2008. Such estimate is
based on projected revenues, expenses and timing of various
payments. Should unforeseen events occur or should actual results
differ from current estimates, the Company maybe unable to meet payment
obligations as they come due which would have a material adverse impact on our
operations.
NOTE
3 – REVERSE STOCK SPLIT
On March
13, 2008, the Company’s Board of Directors approved a 1-for-10 reverse stock
split of the Company’s Common Stock. The record date for the reverse stock split
was April 3, 2008, and the reverse stock split was effective as of 11:59 P.M.
EST on the same date. Retroactive restatement has been given to all
share numbers in this report, and accordingly, all amounts including per share
amounts are shown on a post-split basis.
NOTE
4 – NASDAQ COMPLIANCE
From
August 2007 to April 2008, the Company was not in compliance with the $1.00
minimum per share requirement for continued listing as set forth in Nasdaq
Marketplace Rule 4310(c)(4). Following the implementation of the reverse stock
split described in Note 3, the Company’s Common Stock closed at a price of $1.00
or more for ten consecutive trading days, and regained compliance with such rule
on April 17, 2008. In addition, on April 16, 2008, the Company
received a letter from the Nasdaq Listing Qualifications Staff (the “Staff”)
stating that it had determined that the Company had failed to comply with the
shareholder approval rules set forth in Nasdaq Marketplace Rule 4350(i)(1)(A)
because certain warrants issued to affiliates of Soros Fund Management LLC
(“Soros”) and private funds associated with Maverick Capital, Ltd. (“Maverick”)
(each of whom has representation on the Company’s Board of Directors) in
connection with their debt financing commitment had originally been issued with
an exercise price based on the twenty-day trailing average trading price of the
Company’s Common Stock, which was lower than the market value of the Company’s
Common Stock on the day immediately preceding the issuance of the
warrants. The Staff advised the Company that the issuance of the
warrants to Soros and Maverick at a price less than the market value would be
treated as equity compensation and would require shareholder approval pursuant
to Nasdaq Marketplace Rule 4350(i)(1)(A), unless the exercise price of the
warrants was increased to market value. Thereafter, the Company,
Soros and Maverick agreed to amend the terms of the warrants to increase the
exercise price of the warrants to a price equal to the market value of the
Company’s Common Stock on the day immediately preceding the issuance of the
warrants. As a result,
Bluefly,
Inc.
Notes
to Financial Statements
December
31, 2008
the Staff
determined that the Company had regained compliance with such rule by amending
the warrants to increase the exercise price.
NOTE
5 – PROPERTY AND EQUIPMENT
As of
December 31, 2008 and 2007, property and equipment, net consists of the
following:
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Leasehold
improvements
|
|
$
|
1,924,000
|
|
|
$
|
1,853,000
|
|
Office
equipment
|
|
|
632,000
|
|
|
|
627,000
|
|
Computer
equipment and software
|
|
|
10,090,000
|
|
|
|
9,505,000
|
|
Capitalized
web site development costs
|
|
|
5,299,000
|
|
|
|
3,633,000
|
|
|
|
|
17,945,000
|
|
|
|
15,618,000
|
|
Less:
accumulated depreciation
|
|
|
(11,887,000
|
)
|
|
|
(9,599,000
|
)
|
|
|
$
|
6,058,000
|
|
|
$
|
6,019,000
|
|
Depreciation
and amortization of property and equipment was approximately $2,288,000,
$1,639,000 and $1,419,000, for the years ended December 31, 2008, 2007 and
2006, respectively.
NOTE
6 – PREPAID EXPENSES AND OTHER CURRENT ASSETS
As of
December 31, 2008 and 2007, prepaid expenses and other current assets consists
of the following:
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Prepaid
expenses
|
|
$
|
470,000
|
|
|
$
|
777,000
|
|
Prepaid
inventory
|
|
|
155,000
|
|
|
|
294,000
|
|
Other
current assets
|
|
|
422,000
|
|
|
|
416,000
|
|
|
|
$
|
1,047,000
|
|
|
$
|
1,487,000
|
|
NOTE
7 – ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
As of
December 31, 2008 and 2007, accrued expenses and other current liabilities
consists of the following:
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Salary,
vacation and bonus accrual
|
|
$
|
435,000
|
|
|
$
|
802,000
|
|
Accrued
media expenses
|
|
|
686,000
|
|
|
|
977,000
|
|
Other
accrued expenses
|
|
|
202,000
|
|
|
|
273,000
|
|
|
|
$
|
1,323,000
|
|
|
$
|
2,052,000
|
|
Bluefly,
Inc.
Notes
to Financial Statements
December
31, 2008
NOTE
8 – INCOME TAXES
Significant
components of the Company’s deferred tax assets and liabilities as of December
31, 2008 and 2007 are summarized as follows:
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Net
operating losses
|
|
$
|
37,927,000
|
|
|
$
|
34,765,000
|
|
Depreciation
and amortization
|
|
|
22,000
|
|
|
|
213,000
|
|
Accounts
receivable and inventory reserves
|
|
|
852,000
|
|
|
|
374,000
|
|
Other
accruals
|
|
|
139,000
|
|
|
|
304,000
|
|
Stock
options
|
|
|
1,705,000
|
|
|
|
2,146,000
|
|
Returns
reserve
|
|
|
1,448,000
|
|
|
|
1,641,000
|
|
|
|
|
42,093,000
|
|
|
|
39,443,000
|
|
Valuation
allowance
|
|
|
(42,093,000
|
)
|
|
|
(39,443,000
|
)
|
Net
deferred tax asset (liability)
|
|
$
|
—
|
|
|
$
|
—
|
|
The
Company is in an accumulated loss position for both financial and income tax
reporting purposes. The Company has U.S. Federal net operating loss
carryforwards of approximately $97,000,000 at December 31, 2008 which have
expiration dates from 2019 through 2028. Pursuant to Section 382 of
the Internal Revenue Code, the usage of these net operating loss carryforwards
may be limited due to changes in ownership that have occurred or that may occur
in the future. The Company has not yet determined the impact, if any,
that changes in ownership have had on net operating loss
carryforwards. The Company provided a full valuation allowance on the
entire deferred tax asset balance to reflect the uncertainty regarding the
realizability of these assets due to operating losses incurred since
inception.
The
Company’s effective tax rate differs from the U.S. Federal Statutory income tax
rate of 35% as follows:
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Statutory
federal income tax rate
|
|
|
(35.00
|
)% |
|
(34.00
|
)% |
|
(35.00
|
)%
|
State
tax benefit, net of federal taxes
|
|
|
(4.06
|
)% |
|
(5.04
|
)% |
|
(5.41
|
)%
|
Equity
compensation
|
|
|
8.95
|
% |
|
0.00
|
% |
|
2.13
|
%
|
Adjustment
for prior year taxes
|
|
|
5.24
|
% |
|
0.00
|
% |
|
0.00
|
%
|
Other
|
|
|
1.16
|
% |
|
0.93
|
% |
|
0.10
|
%
|
Valuation
allowance on deferred tax asset (liability)
|
|
|
23.17
|
% |
|
38.11
|
% |
|
38.18
|
%
|
Effective tax
rate
|
|
|
00.00
|
% |
|
00.00
|
% |
|
00.00
|
%
|
NOTE
9 – COMMITMENTS AND CONTINGENCIES
Employment
Contracts
The
Company has employment agreements with certain of its executive officers. These
employment agreements have terms expiring through March 2012. As of
December 31, 2008, the Company's aggregate cash commitment for future base
salary under these employment contracts are as follows:
2009
|
|
$
|
1,113,000
|
|
2010
|
|
|
420,000
|
|
2011
|
|
|
233,000
|
|
2012
|
|
|
170,000
|
|
2013
& thereafter
|
|
|
—
|
|
|
|
$
|
1,936,000
|
|
Bluefly,
Inc.
Notes
to Financial Statements
December
31, 2008
Leases
The
Company leases space under operating leases that expire at various dates through
2012. Future minimum lease payments under these operating leases, excluding
utilities, that have initial or remaining non-cancelable terms in excess of one
year are as follows:
2009
|
|
$
|
655,000
|
|
2010
|
|
|
469,000
|
|
2011
|
|
|
335,000
|
|
2012
|
|
|
142,000
|
|
2013
& thereafter
|
|
|
—
|
|
|
|
$
|
1,601,000
|
|
Rent
expense (including amounts related to commercial rent tax) aggregated
approximately $663,000, $500,000 and $566,000 for the years ended
December 31, 2008, 2007 and 2006, respectively.
Marketing
Commitments
As of
December 31, 2008, the Company has advertising and marketing commitments in
connection with email services, agency fees and costs in connection with a
national ad campaign of approximately $1,559,000 through December 31,
2009.
Subordinated
Notes Obligation
As more
fully discussed in Note 10, for each of the next five years and thereafter, the
principal balance of the Company’s Subordinated Notes (defined thereafter)
matures as follows:
2009
|
|
$
|
—
|
|
2010
|
|
|
—
|
|
2011
|
|
|
3,000,000
|
|
2012
|
|
|
—
|
|
2013
& thereafter
|
|
|
—
|
|
|
|
$
|
3,000,000
|
|
Legal
Proceedings
The
Company is, from time to time, involved in litigation incidental to the conduct
of its business. However, the Company is not party to any lawsuit or proceeding
which, in the opinion of management, is likely to have a material adverse effect
on its financial condition.
NOTE
10 – 2008 COMMITMENT FROM RELATED PARTY
In March
2008, the Company entered into an agreement (the “Commitment”) with affiliates
of Soros Fund Management LLC (“Soros”) and private funds associated with
Maverick Capital, Ltd. (“Maverick”) pursuant to which they agreed to provide up
to $3,000,000 of debt financing to the Company, on a standby basis, available
until March 2009, provided that the commitment amount would be reduced by the
gross proceeds of any equity financing consummated during the year. The
Company drew down the entire $3,000,000 of debt in July 2008. The draw
down is evidenced by subordinated convertible notes (the “Subordinated Notes”)
that have a term expiring three years from the date of issuance and bear
interest at the rate of 8% per annum, compounded annually. Interest is
payable upon maturity or conversion. The Subordinated Notes are
convertible, at the holder’s option into (a) equity securities that the Company
might issue in any subsequent round of financing at a price equal to the lowest
price per share paid by any investor in such subsequent round of financing or
(b) Common Stock at a price per share equal to $3.65, which represented the
20-day trailing average stock price on the date of issuance of the Subordinated
Notes.
As the
interest expense on the outstanding principal balance of the Subordinated Notes
are payable at maturity, the Company recorded approximately $106,000 of interest
expense in its Statement of Operations for the year ended December 31, 2008 and
recorded approximately $106,000 in its Balance Sheet as of December 31, 2008,
which is included as part of the principal balance.
Bluefly,
Inc.
Notes
to Financial Statements
December
31, 2008
As a
result of the issuance of the Subordinated Notes, the conversion price of the
Company's Series F Convertible Preferred Stock, automatically decreased from
$8.20 to $3.65. In accordance with FASB Emerging Issue Task Force Issue No.
00-27, “Application of EITF
Issue No. 98-5, ‘Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios’, to Certain
Convertible Instruments,” this reduction in the conversion price of the
Company's Series F Preferred Stock resulted in a beneficial conversion feature
of approximately $712,000 as part of its third quarter financial results. This
non-cash charge, which is analogous to a dividend, resulted in a reduction in
net loss available to common shareholders and, consequently an adjustment to the
Company's computation of Net Loss Per Share.
In
connection with the Commitment, the Company issued warrants to Soros and
Maverick to purchase an aggregate of 52,497 shares of Common Stock at an
exercise price equal to the trailing 20-day average stock price, or
$4.40. On April 8, 2008, the warrants were amended to increase the
exercise price from $4.40 per share to $5.10 per share. The exercise
price of $5.10 per share equals the closing price of the Company’s Common Stock
on the day immediately preceding the issuance of the warrants. The
modification had no accounting impact.
The
Company used the Black-Scholes option pricing method
(assumptions: volatility 79.6%, risk free rate 2.96%, a five year
expected life and zero dividend yield) to calculate the value of the 52,497
warrants issued in connection with the Commitment. Using those assumptions, a
value of approximately $173,000 was assigned to the warrants. This amount was
credited to Additional paid-in capital and is being accounted for as interest
expense over the life of the Commitment which is one year.
NOTE
11 – SHAREHOLDERS’ EQUITY
Authorized
Shares
The
Company is incorporated in the State of Delaware and has 200,000,000 authorized
shares of common stock, $.01 par value per share (“Common Stock”), and
25,000,000 authorized shares of preferred stock, $.01 par value per share (the
“Preferred Stock”). The Preferred Stock is designated as
follows: 500,000 shares of Series A Convertible Preferred Stock (the
“Series A Preferred Stock”); 9,000,000 shares of Series B Convertible Preferred
Stock (the “Series B Preferred Stock”); 3,500 shares of Series C Convertible
Preferred Stock (the “Series C Preferred Stock”); 2,100 shares of Series 2002
Convertible Preferred Stock (the “Series 2002 Convertible Preferred Stock”);
7,150 shares of Series D Convertible Preferred Stock (the “Series D Preferred
Stock”); 1,000 shares of Series E Convertible Preferred Stock (the “Series E
Preferred Stock”); 7,000 shares of Series F Convertible Preferred Stock (the
“Series F Preferred Stock”); and 15,479,250 shares undesignated and available
for issuance.
Following
the effective date of the reverse stock split as described in Note 3, the par
value of the Common Stock remained at $.01 per share. As a result,
the Company has reclassified certain amounts within Stockholders’ Equity by
reducing Common Stock in the Balance Sheets and Statements of Changes in
Shareholders Equity included herein on a retroactive basis for all periods
presented, with a corresponding increase to Additional paid-in
capital.
Preferred
Stock
Outstanding
Shares
In June
2006, all of the Series A, B, C, D and E shares of Preferred Stock, as well as a
significant portion of the Series F Preferred Stock, were converted into shares
of Common Stock, as more fully discussed in the “June 2006 Financing”
below. At December 31, 2008, at the option of the Series F Preferred
Stock holders, all of the Company’s remaining Series F Preferred Stock, plus all
outstanding accrued dividends, was converted into shares of Common
Stock.
The terms
of the Series F Preferred Stock were as follows:
Dividends
Each
share of Series F Preferred Stock bore a cumulative compounding dividend,
payable upon conversion in cash or Common Stock, at the Company’s option, at the
rate of 7% per annum.
Ranking
The
Series F Preferred Stock ranked senior to the Common Stock, with respect to the
payment of distributions on liquidation, dissolution or winding up of the
Company and with respect to the payment of dividends.
Bluefly,
Inc.
Notes
to Financial Statements
December
31, 2008
Conversion
The
Series F Preferred Stock contained anti-dilution provisions pursuant to which,
subject to certain exceptions, in the event that the Company issued or sold its
Common Stock or new securities convertible into its Common Stock in the future
for less than the conversion price of the Series F Preferred Stock, the
conversion price of the Series F preferred stock would be decreased to the price
at which such Common Stock or other new securities are sold. As more
fully described below, the conversion price of the Series F Preferred Stock was
reduced from a stated value of $23.20 per share to $8.20 per share in connection
with the June 2006 Financing as a result of these anti-dilution
provisions.
As more
fully described in Note 10, as a result of the Company’s issuance of
Subordinated Notes, the conversion price of the Series F Preferred Stock was
further reduced from $8.20 per share to $3.65 per share in connection with the
2008 Commitment from a related party.
June
2006 Financing
On June
15, 2006 (the “Closing Date”), the Company completed a private placement (the
“Private Placement”) through the sale of 6,097,561 shares of its common stock,
par value $0.01 per share (the “Common Stock”), at a price of $8.20 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 were
$50,000,000, almost half of which was purchased by each of Maverick and
Prentice. The purchase price of $8.20 per share represented 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 20,302 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 Preferred Stock into 4,472,996
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 107,394 shares of Common
Stock. The placement agent for the Private Placement 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,
$1,000,000 was paid through the issuance of Common Stock and the remainder was
paid in cash.
On the
Closing Date, the Company paid Soros $25,000,000 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 were used by the Company for
general corporate purposes. Subsequent to the Private Placement and
the conversion of the Preferred Stock, Soros collectively owned approximately
39% of the Company’s Common Stock, and each of Maverick and Prentice owned
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 $23.20 to $8.20. In accordance with FASB Emerging
Issue Task Force Issue No. 00-27, “Application of EITF Issue No. 98-5,
‘Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios’, 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 2006 financial results. This non-cash charge, which
is analogous to a dividend, resulted in an adjustment to the Company's
computation of Net Loss Per Share.
The
Company 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 Registration
Statement has since been filed and declared effective.
In
connection with the June 2006 Private Placement, $603,928 of cumulative unpaid
dividends was settled through the issuance of 79,464 shares of Common Shares.
These shares were computed by using the conversion price of the Series D
Preferred Stock ($7.60) as required by the terms of the Private
Placement.
Bluefly,
Inc.
Notes
to Financial Statements
December
31, 2008
In
connection with the June 2006 Financing, the Company repaid the Convertible
Promissory Notes issued to Soros in July and October 2003 (the
“Notes”). The Company paid $4,000,000 of principal and $1,488,376 of
interest. The Notes were set to mature in May 2007 and bore interest at 12% per
annum.
Warrants to Purchase Common
Stock
Warrants
to Soros
The
Company has issued warrants to Soros in connection with past and recent
financings, including the 2008 Commitment described in Note 10, as well as in
connection with the Company’s previous Loan Facility (which has since been
refinanced).
Warrants
Issued to Consultant
In
February 2006, the Company issued a warrant to a consultant in exchange for
investor relations services. The Company used the Black-Scholes option pricing
method (assumption: volatility 118%, risk free rate 4.49%, five years
expected life and zero dividend yield) to calculate the value of the 10,000
warrants issued in connection with a warrant issued to a consultant. Using those
assumptions a value of approximately $67,000 was assigned to the warrant and
charged to general and administrative expenses. These warrants expire in
February 2011.
Warrants
Issued to Maverick
In
connection with the 2008 Commitment, the Company issued warrants to Maverick to
purchase shares of Common Stock. Warrants issued to Maverick are
included in the table below and are more fully described in Note
10.
Warrants
Issued to Investors
The
Company used the Black-Scholes option pricing method
(assumption: volatility 79%, risk free rate 3.86% one and a half year
expected life and zero dividend yield) to calculate the value of the 60,345
warrants issued in connection with the June 2005 Financing. Using those
assumptions a value of approximately $423,000 was assigned to the warrant. In
accordance with EITF 00-27, “Application of EITF Issue No. 98-5, “Application of EITF Issue No. 98-5,
‘Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios’, to Certain Convertible
Instruments” the Company evaluated the total value ascribed to the
warrants under Black-Scholes and compared that to the total proceeds raised. The
Company recognized a beneficial conversion feature of approximately
$87,000.
The
following table represents warrants issued to purchase Common Stock as of
December 31, 2008:
|
|
Number of
|
|
|
Exercise Price
|
|
Expiration
|
Party
|
|
Warrants
|
|
|
Range
|
|
Dates
|
|
|
|
|
|
|
|
|
Investors
|
|
|
38,577 |
|
|
|
$39.60
|
|
January 2009
|
Soros
|
|
|
45,201 |
|
|
|
$5.10 – $8.80
|
|
September 2011 – March 2013
|
Maverick
|
|
|
19,796 |
|
|
|
$5.10
|
|
March 2013
|
Consultant
|
|
|
10,000 |
|
|
|
$10.00
|
|
February 2011
|
|
|
|
113,574 |
|
|
|
|
|
|
Stock-Based
Compensation Plans
The
Company’s Board of Directors has adopted three stock based employee compensation
plans. The Plans, which provide for the granting of restricted stock,
deferred stock units, stock options and other equity and cash awards, 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.
In
November 2006, the Company entered into three year employment contracts with its
Chief Executive Officer (“CEO “) and then Chief Financial Officer (“CFO”). In
connection with these agreements, the CEO and CFO were entitled to, among other
things, (i) restricted stock awards under our Plans for a total of 86,122 shares
of our Common Stock, (which vested in full on January 1, 2007) plus cash bonuses
of $517,890 (intended to compensate them for the income taxes payable on such
restricted stock awards) in exchange for
Bluefly,
Inc.
Notes
to Financial Statements
December
31, 2008
the
forfeiting of their right to certain fully vested and out-of-the-money stock
options that would have been exercisable to purchase an aggregate of 251,849
shares of Common Stock; (ii) deferred stock unit awards under the Plan for
17,274 underlying shares of Common Stock (which vest quarterly over a two year
period), in exchange for the forfeiting of their right to certain unvested and
out-of-the-money stock options that would have been exercisable to purchase an
aggregate of 32,645 shares of Common Stock; and (iii) subject to the approval of
the Company’s stockholders of certain amendments to the Plans, deferred stock
unit awards representing 826,452 shares of Common Stock with one-third of such
deferred stock units vesting quarterly, in equal amounts, over a twelve month
period, one-third vesting quarterly, in equal amounts, over a twenty-four month
period, and one-third vesting quarterly, in equal amounts, over a thirty-six
month period. The vesting period for all awards commenced on October 1, 2006. In
May 2007 the Company’s stockholders approved these amendments to the
Plans.
The
Company recorded the exchange of the options for restricted stock and deferred
stock unit awards as replacement awards, and therefore under SFAS No. 123R
treated the exchange as a modification of the original option grant and recorded
incremental compensation cost measured as the excess of the fair value of the
replacement awards, measured immediately after modification, over the fair value
of the cancelled award, measured immediately before modification, at the
modification date. Total incremental compensation expense was approximately
$507,000. In connection with these new awards, the Company recognized an expense
of $9.3 million over three years beginning in the fourth quarter of 2006.
Approximately $2.0 million, $4.5 million and $2.1 million of this expense was
recognized in 2008, 2007 and 2006, respectively.
In
connection with these grants described above, the Company has given the employee
holders of the shares of Restricted Stock and Restricted Stock Units the ability
to settle taxes due upon delivery of the shares on a net share basis. Shares
used to satisfy taxes are then charged to Treasury Stock. During 2008, the
Company acquired 78,214 shares of Treasury Stock.
Restricted
Stock and Deferred Stock Unit Awards
The
following table is a summary of activity related to restricted stock and
deferred stock units grants for key employees at December 31,
2008:
|
|
|
|
|
Weighted Average
|
|
|
Deferred
|
|
|
Weighted Average
|
|
|
|
Restricted
|
|
|
Grant Date
|
|
|
Stock
|
|
|
Grant Date
|
|
|
|
Stock
|
|
|
Fair Value
|
|
|
Unit Awards
|
|
|
Fair Value
|
|
Balance
at December 31, 2005
|
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
Shares
/ Units Granted
|
|
|
86,122 |
|
|
$ |
9.50 |
|
|
|
986,227 |
|
|
$ |
9.40 |
|
Shares
/ Units Forfeited
|
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
Balance
at December 31, 2006
|
|
|
86,122 |
|
|
$ |
9.50 |
|
|
|
986,227 |
|
|
$ |
9.40 |
|
Shares
/ Units Granted
|
|
|
42,619 |
|
|
$ |
12.60 |
|
|
|
54,440 |
|
|
$ |
12.20 |
|
Shares
/ Units Forfeited
|
|
|
(2,968 |
) |
|
$ |
12.70 |
|
|
|
(2,938 |
) |
|
$ |
12.70 |
|
Shares
/ Units Restriction Lapses
|
|
|
(86,122 |
) |
|
$ |
9.50 |
|
|
|
(322,984 |
) |
|
$ |
9.40 |
|
Balance
at December 31, 2007
|
|
|
39,651 |
|
|
$ |
12.60 |
|
|
|
714,745 |
|
|
$ |
9.60 |
|
Shares
/ Units Granted
|
|
|
8,625 |
|
|
$ |
3.71 |
|
|
|
250,000 |
|
|
$ |
4.99 |
|
Shares
/ Units Forfeited
|
|
|
(1,875 |
) |
|
$ |
4.08 |
|
|
|
(305,627 |
) |
|
$ |
6.82 |
|
Shares
/ Units Restriction Lapses
|
|
|
(39,651 |
) |
|
$ |
12.60 |
|
|
|
(372,943 |
) |
|
$ |
9.41 |
|
Balance
at December 31, 2008
|
|
|
6,750 |
|
|
$ |
3.60 |
|
|
|
286,175 |
|
|
$ |
8.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
Grant Date Fair Value
|
|
$ |
24,300 |
|
|
|
|
|
|
$ |
2,518,340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting
Service Period of Shares Granted
|
|
1
year
|
|
|
|
|
|
|
12 – 36 months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Shares / Units Vested During
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Shares / Units Non-vested at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006
|
|
|
86,122 |
|
|
|
|
|
|
|
986,227 |
|
|
|
|
|
Bluefly,
Inc.
Notes
to Financial Statements
December
31, 2008
Number
of Shares / Units Vested During
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
|
86,122 |
|
|
|
|
322,984 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Shares / Units Non-vested at
|
|
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
|
39,651 |
|
|
|
|
714,745 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Shares / Units Vested During
|
|
|
|
|
|
|
|
|
|
|
December
31, 2008
|
|
|
39,651 |
|
|
|
|
372,943 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Shares / Units Non-vested at
|
|
|
|
|
|
|
|
|
|
|
December
31, 2008
|
|
|
6,750 |
|
|
|
|
56,327 |
|
|
For the
years ended December 31, 2008, 2007 and 2006 the Company recognized expense of
approximately $2,274,000, $5,678,000 and $2,159,000, respectively, in connection
with these awards.
As of
December 31, 2008, the total compensation cost related to non-vested restricted
stock and deferred stock units not yet recognized was $731,000. Total
compensation cost is expected to be recognized over one year on a weighted
average basis.
Stock
Options
The following table summarizes the
Company’s stock option activity:
|
|
Number of
|
|
|
Weighted Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
Balance
at December 31, 2005
|
|
|
803,853 |
|
|
$ |
19.70 |
|
Options
granted
|
|
|
52,100 |
|
|
$ |
9.60 |
|
Options
cancelled
|
|
|
(309,908 |
) |
|
$ |
23.20 |
|
Options
exercised
|
|
|
(4,333 |
) |
|
$ |
8.20 |
|
Balance
at December 31, 2006
|
|
|
541,712 |
|
|
$ |
16.80 |
|
Options
granted
|
|
|
6,000 |
|
|
$ |
9.70 |
|
Options
cancelled
|
|
|
(202,028 |
) |
|
$ |
27.60 |
|
Options
exercised
|
|
|
(2,806 |
) |
|
$ |
8.90 |
|
Balance
at December 31, 2007
|
|
|
342,878 |
|
|
$ |
10.60 |
|
Options
granted
|
|
|
38,000 |
|
|
$ |
4.40 |
|
Options
cancelled
|
|
|
(26,022 |
) |
|
$ |
10.87 |
|
Options
exercised
|
|
|
— |
|
|
$ |
— |
|
Balance
at December 31, 2008
|
|
|
354,856 |
|
|
$ |
9.83 |
|
|
|
|
|
|
|
|
|
|
Vested
at December 31, 2006
|
|
|
368,288 |
|
|
$ |
18.30 |
|
|
|
|
|
|
|
|
|
|
Vested
at December 31, 2007
|
|
|
287,113 |
|
|
$ |
10.40 |
|
|
|
|
|
|
|
|
|
|
Vested
at December 31, 2008
|
|
|
317,064 |
|
|
$ |
10.32 |
|
Bluefly,
Inc.
Notes
to Financial Statements
December
31, 2008
The stock
options are exercisable in different periods through 2018. Additional
information with respect to the outstanding options as of December 31,
2008, is as follows:
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
Options
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Options
|
|
|
Exercise
|
|
|
Contractual
|
|
Range
of Exercise Prices
|
|
Outstanding
|
|
|
Life
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
|
Life
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.51
– $2.50
|
|
|
3,000 |
|
|
9.7
Years
|
|
|
$ |
2.30 |
|
|
|
— |
|
|
$ |
— |
|
|
9.7
Years
|
|
$2.51
– $5.00
|
|
|
34,000 |
|
|
9.2
Years
|
|
|
$ |
4.57 |
|
|
|
8,432 |
|
|
$ |
4.58 |
|
|
9.2
Years
|
|
$5.01
– $7.50
|
|
|
— |
|
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
$7.51
– $10.00
|
|
|
191,930 |
|
|
2.4
Years
|
|
|
$ |
9.06 |
|
|
|
185,638 |
|
|
$ |
9.07 |
|
|
2.4
Years
|
|
$10.01
– $12.50
|
|
|
62,250 |
|
|
4.9
Years
|
|
|
$ |
11.93 |
|
|
|
61,922 |
|
|
$ |
11.93 |
|
|
4.9
Years
|
|
$12.51
– $15.00
|
|
|
59,926 |
|
|
4.9
Years
|
|
|
$ |
12.94 |
|
|
|
57,728 |
|
|
$ |
12.95 |
|
|
4.9
Years
|
|
$15.51
– $17.50
|
|
|
2,000 |
|
|
6.8
Years
|
|
|
$ |
16.30 |
|
|
|
1,594 |
|
|
$ |
16.30 |
|
|
6.8
Years
|
|
$17.51
– $20.00
|
|
|
1,000 |
|
|
0.8
Years
|
|
|
$ |
17.70 |
|
|
|
1,000 |
|
|
$ |
17.70 |
|
|
0.8
Years
|
|
$20.51
– $25.00
|
|
|
375 |
|
|
2.1
Years
|
|
|
$ |
21.60 |
|
|
|
375 |
|
|
$ |
21.60 |
|
|
2.1
Years
|
|
$25.51
– $30.00
|
|
|
375 |
|
|
5.3
Years
|
|
|
$ |
27.30 |
|
|
|
375 |
|
|
$ |
27.30 |
|
|
5.3
Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.51
– $30.00
|
|
|
354,856 |
|
|
4.0
Years
|
|
|
$ |
9.83 |
|
|
|
317,064 |
|
|
$ |
10.32 |
|
|
4.0
Years
|
|
The total
fair value of the 50,319 options that vested during the year was approximately
$519,000. At December 31, 2008, the aggregate intrinsic value of the
fully vested options was $0 and the weighted average remaining contractual life
of the options was 4.0 years. The Company has not capitalized any compensation
cost, or modified any of its stock option grants for the years ended December
31, 2008 and 2007, except for those described in connection with the Offer to
Exchange. Other selected information is as follows:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
intrinsic value of outstanding options
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
881,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
intrinsic value of options exercised
|
|
$ |
— |
|
|
$ |
7,000 |
|
|
$ |
7,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average fair value of options granted
|
|
$ |
2.86 |
|
|
$ |
9.70 |
|
|
$ |
7.90 |
|
As of
December 31, 2008, the total compensation cost related to non-vested stock
option awards not yet recognized was $75,000. Total compensation cost is
expected to be recognized over one year on a weighted average
basis.
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 the U.S. Treasury note in effect on the date of
the grant.
The table
below presents the assumptions used to calculate the fair value of options
granted for the year ended December 31, 2008, 2007 and 2006
respectively:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free
interest rate
|
|
|
2.65 |
% |
|
|
4.56 |
% |
|
|
4.65 |
% |
Expected
life (in years)
|
|
|
5.0 |
|
|
|
5.5 |
|
|
|
6.0 |
|
Dividend
yield
|
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
Expected
volatility
|
|
|
79.47 |
% |
|
|
94.00 |
% |
|
|
101.00 |
% |
In
January 2007, the Company commenced an exchange offer pursuant to which it is
offering to exchange certain outstanding stock options issued to employees and
non-employee directors for restricted stock awards and/or deferred stock unit
awards. See Note 12 below.
NOTE
12 – OFFER TO EXCHANGE
In
January 2007, the Company commenced an exchange offer (the “Offer”) pursuant to
which it offered to exchange certain outstanding stock options issued to
employees and non-employee directors for restricted stock awards and/or deferred
stock unit awards.
Bluefly,
Inc.
Notes
to Financial Statements
December
31, 2008
Employees
(other than the CEO and CFO, who already had exchanged certain of their options
pursuant to their employment agreements) and non-employee directors who held
stock options with an exercise price greater than $15.00 were eligible to
participate in the Offer. Eligible options that were vested as of
August 31, 2006 could be exchanged for restricted stock awards, and eligible
options that were not vested as of that date could be exchanged for deferred
stock unit awards. Both the restricted stock awards and the deferred
stock unit awards are subject to vesting provisions. The number of
restricted stock awards and/or deferred stock unit awards issued in exchanged
for an eligible option grant was determined by the exchange ratio applicable to
that particular option.
The
Company had instituted the exchange offer because a considerable number of its
employees had held options that had exercise prices higher than the current and
recent trading prices of its common stock. The purpose of the exchange offer was
to promote the interests of the Company’s stockholders by strengthening its
ability to motivate and retain valued employees.
The
exchange offer began on January 25, 2007 and ended on February 23, 2007. In
connection with the Offer, an aggregate of 156,200 options were tendered in
exchange for an aggregate of 47,247 shares of restricted stock and 39,441 shares
of deferred stock unit awards. This represented approximately 95% of the total
options that were eligible for exchange. The Company accounted for the exchange
of Options for restricted stock and deferred stock unit awards as replacement
awards in accordance with SFAS No. 123(R) and recognized an expense of $436,000
for the year ended December 31, 2007.
In
February, 2008, the Company delivered 26,857 shares of Restricted Stock Issued
in connection with this Offer.
NOTE
13 – FINANCING AGREEMENT
In March
2008 and in February 2009, the Company agreed to amendments to its credit
facility (the credit facility as amended is hereafter referred to as the “Credit
Facility”) with Wells Fargo Retail Finance, LLC (“Wells Fargo”) to (i) extend
the term until July 26, 2011 from July 26, 2008; (ii) increase the rate at which
interest accrues on the average daily amount under the Credit Facility during
the preceding month to a per annum rate equal to the prime rate plus 0.75% or
LIBOR plus 3.25%; (iii) increase the monthly commitment fee on the unused
portion of the Credit Facility to 0.50% from 0.35%; (iv) include a servicing fee
of $3,333 per month; (v) increase the early termination fee to 1% of the
revolving credit ceiling, from 0.50% through maturity; and (vi) amend the
standby and documentary letter of credit fees to 3.25% and 2.75%,
respectively.
In
addition, the amendment provides that no revolving credit loans shall be made
unless the full amount available pursuant to the Commitment has been advanced to
the Company and is outstanding. Under the terms of a Subordination and
Intercreditor Agreement, dated as of March 26, 2008 (the “Subordination
Agreement”), Soros and Maverick have the right to purchase all of the Company’s
obligations from Wells Fargo at any time if the Company is in default under the
Credit Facility.
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. Availability under the Credit Facility is
determined by a formula that takes into account a certain percentage of the
amount of the Company’s inventory and a certain percentage of the Company’s
accounts receivable. The maximum availability is currently $7.5 million, but can
be increased to $12.5 million at the Company’s request, subject to certain
conditions. As of December 31, 2008, total availability under the
Credit Facility was approximately $6.0 million, of which $4.2 million was
committed for letters of credit in favor of suppliers, leaving approximately
$1.8 million available for further borrowings. The terms of the credit facility
contain a material adverse condition clause. This feature may limit
the Company’s ability to obtain additional borrowings or result in a
default on current outstanding letters of credit.
For the
years ended December 31, 2008, 2007 and 2006, the Company incurred approximately
$264,000, $130,000 and $170,000 of interest expense and fees, respectively,
under the Credit Facility.
Bluefly,
Inc.
Notes
to Financial Statements
December
31, 2008
NOTE
14 – QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Amounts
in thousands, except per share data:
|
|
Quarter Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
25,245 |
|
|
$ |
23,334 |
|
|
$ |
19,802 |
|
|
$ |
27,393 |
|
Gross
profit
|
|
$ |
8,936 |
|
|
$ |
9,098 |
|
|
$ |
7,307 |
|
|
$ |
10,145 |
|
Net
loss
|
|
$ |
(2,938 |
) |
|
$ |
(2,036 |
) |
|
$ |
(4,993 |
) |
|
$ |
(1,373 |
) |
Preferred
stock dividends(3)
|
|
$ |
(11 |
) |
|
$ |
(11 |
) |
|
$ |
(12 |
) |
|
$ |
(3 |
) |
Net
loss available to common shareholders(2)
|
|
$ |
(2,949 |
) |
|
$ |
(2,047 |
) |
|
$ |
(5,717 |
) |
|
$ |
(1,376 |
) |
Net
loss per common share – basic and diluted(2)
|
|
$ |
(0.22 |
) |
|
$ |
(0.15 |
) |
|
$ |
(0.43 |
) |
|
$ |
(0.10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
22,108 |
|
|
$ |
21,608 |
|
|
$ |
18,079 |
|
|
$ |
29,698 |
|
Gross
profit
|
|
$ |
8,374 |
|
|
$ |
8,463 |
|
|
$ |
5,728 |
|
|
$ |
10,174 |
|
Net
loss
|
|
$ |
(3,103 |
) |
|
$ |
(2,142 |
) |
|
$ |
(5,028 |
) |
|
$ |
(5,556 |
) |
Preferred
stock dividends
|
|
$ |
(11 |
) |
|
$ |
(11 |
) |
|
$ |
(11 |
) |
|
$ |
(11 |
) |
Net
loss available to common shareholders(1)
|
|
$ |
(3,114 |
) |
|
$ |
(2,153 |
) |
|
$ |
(5,039 |
) |
|
$ |
(5,567 |
) |
Net
loss per common share – basic and diluted(1)
|
|
$ |
(0.24 |
) |
|
$ |
(0.16 |
) |
|
$ |
(0.39 |
) |
|
$ |
(0.42 |
) |
(1)
|
Amount
includes a write-off of approximately $1.5 million of inventory recorded
in the fourth quarter.
|
(2)
|
Includes
a beneficial conversion feature charge of approximately $712,000 in the
third quarter.
|
(3)
|
As
of December 31, 2008, all Series F Preferred Stock have been converted
into Common Stock.
|
Schedule
II – Valuation and Qualifying Accounts
For
the Three Years Ended December 31, 2008
Column A
|
|
Column B
|
|
|
Column C
|
|
|
Column D
|
|
|
Column E
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charged to
|
|
|
Charged to
|
|
|
|
|
|
Balance End of
|
|
|
|
Beginning Balance at
|
|
|
Costs and Other
|
|
|
Other
|
|
|
|
|
|
Period
|
|
Description
|
|
December 31, 2007
|
|
|
Expenses
|
|
|
Accounts
|
|
|
Deductions
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for Sales Returns
|
|
$ |
(4,204,000 |
) |
|
$ |
(59,665,000 |
) |
|
$ |
— |
|
|
$ |
60,162,000 |
|
|
$ |
(3,707,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for Doubtful Accounts
|
|
$ |
(106,000 |
) |
|
$ |
(553,000 |
) |
|
$ |
— |
|
|
$ |
579,000 |
|
|
$ |
(80,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory
Reserves
|
|
$ |
(3,686,000 |
) |
|
$ |
(290,000 |
) |
|
$ |
— |
|
|
$ |
2,287,000 |
|
|
$ |
(1,689,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
Tax Valuation Allowance
|
|
$ |
(39,443,000 |
) |
|
$ |
(3,257,000 |
) |
|
$ |
607,000 |
|
|
$ |
— |
|
|
$ |
(42,093,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column A
|
|
Column B
|
|
|
Column C
|
|
|
Column D
|
|
|
Column E
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charged to
|
|
|
Charged to
|
|
|
|
|
|
|
Balance End of
|
|
|
|
Beginning Balance at
|
|
|
Costs and Other
|
|
|
Other
|
|
|
|
|
|
|
Period
|
|
Description
|
|
December 31, 2006
|
|
|
Expenses
|
|
|
Accounts
|
|
|
Deductions
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for Sales Returns
|
|
$ |
(5,043,000 |
) |
|
$ |
(59,107,000 |
) |
|
$ |
— |
|
|
$ |
59,946,000 |
|
|
$ |
(4,204,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for Doubtful Accounts
|
|
$ |
(397,000 |
) |
|
$ |
(669,000 |
) |
|
$ |
— |
|
|
$ |
960,000 |
|
|
$ |
(106,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory
Reserves
|
|
$ |
(1,055,000 |
) |
|
$ |
(2,735,000 |
) |
|
$ |
— |
|
|
$ |
104,000 |
|
|
$ |
(3,686,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
Tax Valuation Allowance
|
|
$ |
(34,459,000 |
) |
|
$ |
(5,460,000 |
) |
|
$ |
476,000 |
|
|
$ |
— |
|
|
$ |
(39,443,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column A
|
|
Column B
|
|
|
Column C
|
|
|
Column D
|
|
|
Column E
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charged to
|
|
|
Charged to
|
|
|
|
|
|
|
Balance End of
|
|
|
|
Beginning Balance at
|
|
|
Costs and Other
|
|
|
Other
|
|
|
|
|
|
|
Period
|
|
Description
|
|
December 31, 2005
|
|
|
Expenses
|
|
|
Accounts
|
|
|
Deductions
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for Sales Returns
|
|
$ |
(3,407,000 |
) |
|
$ |
(50,126,000 |
) |
|
$ |
— |
|
|
$ |
48,490,000 |
|
|
$ |
(5,043,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for Doubtful Accounts
|
|
$ |
(78,000 |
) |
|
$ |
(643,000 |
) |
|
$ |
— |
|
|
$ |
324,000 |
|
|
$ |
(397,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory
Reserves
|
|
$ |
(782,000 |
) |
|
$ |
(1,000,000 |
) |
|
$ |
— |
|
|
$ |
727,000 |
|
|
$ |
(1,055,00 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
Tax Valuation Allowance
|
|
$ |
(30,712,000 |
) |
|
$ |
(4,656,000 |
) |
|
$ |
909,000 |
|
|
$ |
— |
|
|
$ |
(34,459,000 |
) |