SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): November 20, 2000
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BLUEFLY, INC.
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(Exact name of registrant as specified in its charter)
NEW YORK 333-22895 13-3612110
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(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
42 West 39th Street, New York, New York 10018
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 944-8000
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N/A
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(Former name or former address, if changed since last report.)
ITEM 5. OTHER EVENTS.
Subsequent to the date that Bluefly, Inc. (the "Company") filed its 1999
financial statements on Amendment No. 1 to Form 10-KSB, in anticipation of the
receipt of additional financing, the Company increased the level of operating
expenses and operating cash outflows beyond those previously contemplated.
Although the Company has entered into a definitive agreement with respect to
such financing, there can be no assurance that such financing will be
consummated. Therefore, in connection with an anticipated filing of a
Registration Statement on Form S-3, the Company has revised its financial
statements to include a subsequent event disclosure regarding this change. See
Note 13 to the 1999 consolidated financial statements.
A copy of the revised report is included in Exhibit 99.1 and incorporated
herein by reference.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
Exhibit 99.1 - Consolidated Financial Statements of Bluefly, Inc. as of
December 31, 1999 and 1998 and for the three Years Ended
December 31, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report be signed on its behalf by the
undersigned hereunto duly authorized.
BLUEFLY, INC.
Date: November 20, 2000 By: /s/ E. Kenneth Seiff
--------------------------------------
E. Kenneth Seiff
Chairman of the Board, Chief Executive
Officer and President
Exhibit 99.1
BLUEFLY, INC.
CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1999 and 1998
and for the three years ended December 31, 1999
TABLE OF CONTENTS
Report of Independent Accountant F-1
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-3
Consolidated Statements of Operations for the three years
ended December 31, 1999, 1998 and 1997 F-4
Consolidated Statements of Changes in Shareholders' Equity
and Redeemable Preferred Stock for the three years
ended December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for the three years
ended December 31, 1999, 1998 and 1997 F-6
Notes to Consolidated Financial Statements F-8
2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of Bluefly, Inc.:
In our opinion, the accompanying balance sheet as of December 31, 1999 and
related consolidated statements of operations, changes in shareholders' equity
and redeemable preferred stock and of cash flows present fairly, in all material
respects, the financial position of Bluefly, Inc. and its subsidiary at December
31, 1999, and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States of America, which 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
audit provides a reasonable basis for our opinion.
As discussed in Note 12 to the accompanying financial statements, the Company
has revised the consolidated financial statements as of December 31, 1999 to
present $9,943,000 of preferred stock as redeemable preferred stock outside of
shareholders' equity.
As discussed in Note 13 to the consolidated financial statements, subsequent
to May 2000, and in anticipation of the receipt of additional financing, the
Company increased the level of operating expenses and operating cash outflows
beyond those previously contemplated. The Company will continue to incur net
operating cash outflows through December 31, 2000 and beyond to accomplish
its longer term business objectives. In November 2000, the Company entered
into an agreement by which an existing investor/debt holder would provide the
Company, subject to certain conditions, an additional $15 million. Under the
terms of this agreement, during November 2000, the Company received $5 million,
in the form of a loan convertible into equity upon satisfaction of such
conditions.
PricewaterhouseCoopers LLP
New York, N.Y.
February 11, 2000 except Note 11, as to which the date
is March 28, 2000; Note 12, as to which the date is
May 12, 2000; and Note 13, as to which the date is November 15, 2000
F-1
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Bluefly, Inc.
We have audited the accompanying consolidated balance sheet of Bluefly, Inc. as
of December 31, 1998 and the related consolidated statements of operations,
changes in shareholders' equity, and cash flows for the years ended December 31,
1998 and 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Bluefly, Inc. as of
December 31, 1998, and the results of its operations and its cash flows for the
years ended December 31, 1998 and 1997 in conformity with generally accepted
accounting principles.
As more fully discussed in Notes 1 and 9 to the financial statements, on June
25, 1998, the Company's Board of Directors adopted a plan to discontinue its
golf sportswear division. Historical assets and operations of the golf
sportswear division have represented a substantial portion of the Company's
assets and results of operations.
M.R. Weiser & Co. LLP
March 26, 1999
New York, N.Y.
F-2
BLUEFLY, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- --------------------------------------------------------------------------------
1999 1998
(Revised See Note 12)
ASSETS
Current assets:
Cash and cash equivalents $ 7,934,000 $ 2,830,000
Funds deposited with factor - 2,264,000
Inventories, net 7,020,000 429,000
Prepaid expenses and other current assets 1,080,000 624,000
Current assets of discontinued operations - 553,000
----------- -----------
Total current assets 16,034,000 6,700,000
Property and equipment, net 1,037,000 497,000
Other assets 38,000 15,000
----------- -----------
$17,109,000 $ 7,212,000
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,287,000 $ 489,000
Accrued expenses and other current liabilities 2,236,000 267,000
----------- -----------
Total current liabilities 6,523,000 756,000
Deferred income taxes - 64,000
----------- -----------
6,523,000 820,000
----------- -----------
Commitments and contingencies (Note 7)
Redeemable preferred stock - $.01 par value;
2,000,000 shares authorized, 500,000 shares issued
and outstanding in 1999, (liquidation preference:
$20 per share plus accrued dividends) 9,943,000 -
Shareholders' equity:
Common stock - $.01 par value; 15,000,000 shares authorized,
4,924,906 and 3,433,255 shares issued and
outstanding, respectively 49,000 34,000
Additional paid-in capital 17,825,000 10,395,000
Accumulated deficit (17,231,000) (4,037,000)
----------- -----------
643,000 6,392,000
----------- -----------
$17,109,000 $ 7,212,000
----------- -----------
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
BLUEFLY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- --------------------------------------------------------------------------------
1999 1998 1997
Net sales $ 4,951,000 $ 215,000 $ -
Cost of sales 3,766,000 266,000 -
------------ ------------ ------------
GROSS PROFIT (LOSS) 1,185,000 (51,000) -
Selling, marketing and fulfillment expenses 11,424,000 1,121,000 -
General and administrative expenses 3,460,000 1,166,000 819,000
Internet business start up costs - 332,000 -
------------ ------------ ------------
TOTAL OPERATING EXPENSES 14,884,000 2,619,000 819,000
------------ ------------ ------------
OPERATING LOSS FROM CONTINUING OPERATIONS (13,699,000) (2,670,000) (819,000)
Interest and other income, net 440,000 142,000 123,000
------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (13,259,000) (2,528,000) (696,000)
Income tax benefit 2,000 50,000 227,000
------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS (13,257,000) (2,478,000) (469,000)
------------ ------------ ------------
Discontinued operations - Note 9:
Income (loss) from operations, net of income tax
provision of $0, $105,000 and $45,000, respectively 63,000 (1,178,000) 88,000
------------ ------------ ------------
NET LOSS $(13,194,000) $ (3,656,000) $ (381,000)
------------ ------------ ------------
Preferred stock dividends (342,000) - -
------------ ------------ ------------
Net loss available to common shareholders $(13,536,000) $ (3,656,000) $ (381,000)
------------ ------------ ------------
Basic and diluted (loss) income per common share:
Continuing operations (2.83) (.89) (.22)
Discontinued operations .01 (.43) .04
------------ ------------ ------------
BASIC AND DILUTED LOSS PER SHARE $ (2.82) $ (1.32) $ (.18)
------------ ------------ ------------
Weighted average shares outstanding used in calculating basic
and diluted income (loss) per common share 4,802,249 2,770,869 2,149,315
------------ ------------ ------------
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
BLUEFLY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND
REDEEMABLE PREFERRED STOCK
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
DOLLARS ROUNDED TO THE NEAREST THOUSAND
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REDEEMABLE COMMON STOCK,
PREFERRED STOCK $.01 PAR VALUE
-------------------- ---------------------
NUMBER OF NUMBER OF ADDITIONAL ACCUMULATED
SHARES AMOUNT SHARES AMOUNT PAID-IN CAPITAL DEFICIT TOTAL
Balance at January 1, 1997 - $ - 1,200,000 $ 12,000 $ 397,000 $ - $ 409,000
Issuance of warrants - bridge financing - - - - 138,000 - 138,000
Cancellation of warrants - bridge financing - - - - (55,000) - (55,000)
Sale of units ($5.00 per share) - - 1,500,000 15,000 5,924,000 - 5,939,000
Net loss - - - - - (381,000) (381,000)
------- ---------- --------- -------- ------------ ------------ ----------
Balance at December 31, 1997 - - 2,700,000 27,000 6,404,000 (381,000) 6,050,000
Issuance of common stock for services - - 24,755 - 49,000 49,000
Issuance of common stock for exercise of
warrants ($5.00 per share) - - 573,250 6,000 2,861,000 2,867,000
Issuance of common stock for exercise of
unit purchase options ($8.00 per share) - - 135,250 1,000 1,081,000 1,082,000
Net loss (3,656,000) (3,656,000)
------- ---------- --------- -------- ------------ ------------ ----------
Balance at December 31, 1998 - - 3,433,255 34,000 10,395,000 (4,037,000) 6,392,000
Issuance of Series A Preferred Stock
($20.00 per share) net of expenses
of $57,000 500,000 9,943,000 - - - - -
Exercise of warrants and stock options - - 1,491,651 15,000 7,381,000 - 7,396,000
Issuance of stock options to consultants - - - - 49,000 - 49,000
Net loss - - - - - (13,194,000) (13,194,000)
------- ---------- --------- -------- ------------ ------------ ----------
Balance at December 31, 1999 (Revised
- See Note 12) 500,000 $9,943,000 4,924,906 $ 49,000 $ 17,825,000 $(17,231,000) $ 643,000
------- ---------- --------- -------- ------------ ------------ ----------
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
BLUEFLY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
DOLLARS ROUNDED TO THE NEAREST THOUSAND
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1999 1998 1997
Cash flows from operating activities:
Loss from continuing operations $ (13,257,000) $(2,478,000) $ (469,000)
Adjustments to reconcile loss from continuing operations
to net cash provided by operating activities:
Loss on equipment disposition - 7,000 7,000
Depreciation and amortization 130,000 84,000 31,000
Common stock issued for services 7,000 49,000 -
Deferred income taxes 50,000 5,000 -
Non cash compensation 49,000 - -
Changes in operating assets and liabilities:
Increase in:
Inventories (6,591,000) (429,000) -
Prepaid expenses and other current assets (507,000) (399,000) (128,000)
Other assets (23,000) - -
(Decrease) increase in:
Accounts payable, accrued expenses and
other current liabilities 5,767,000 (381,000) 756,000
Deferred tax liability (64,000) - -
------------- ----------- ----------
NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES - CONTINUING OPERATIONS (14,439,000) (3,542,000) 197,000
------------- ----------- ----------
Income/loss from discontinued operations 63,000 (1,178,000) 88,000
Adjustments to reconcile income from discontinued operations
to net cash provided by (used in) operating activities:
Loss on equipment disposal - - 3,000
Write-down of property and equipment - 259,000 -
Write-down of prepaid expenses and other current assets - 101,000 -
Write-down of other assets - 119,000 -
Amortization of deferred costs for bridge financing - - 293,000
Amortization of debt discount - - 83,000
Depreciation and amortization - 44,000 45,000
Deferred income taxes - 94,000 -
Changes in operating assets and liabilities:
(Increase) decrease in:
Inventories 187,000 1,413,000 (578,000)
Non-factored receivables - (136,000) (10,000)
Prepaid expenses and other current assets - 70,000 (84,000)
Increase (decrease) in:
Income taxes receivable 195,000 7,000 (315,000)
------------- ----------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES - DISCONTINUED OPERATIONS 445,000 793,000 (475,000)
------------- ----------- ----------
NET CASH USED IN OPERATING ACTIVITIES (13,994,000) (2,749,000) (278,000)
------------- ----------- ----------
Cash flows from investing activities - continuing operations:
Purchase of property and equipment (670,000) (88,000) (519,000)
Funds deposited with factor 2,264,000 (960,000) (4,920,000)
Increase of funds deposited with factor - 553,000 3,063,000
------------- ----------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES - CONTINUING OPERATIONS 1,594,000 (495,000) (2,376,000)
------------- ----------- ----------
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
BLUEFLY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- --------------------------------------------------------------------------------
1999 1998 1997
Cash flows from investing activities - discontinued operations:
Purchase of property and equipment $ - $ (22,000) $ (236,000)
Trademark costs - (1,000) (7,000)
----------- ----------- ----------
NET CASH USED IN INVESTING ACTIVITIES -
DISCONTINUED OPERATIONS - (23,000) (243,000)
----------- ----------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 1,594,000 (518,000) (2,619,000)
----------- ----------- ----------
Cash flows from financing activities - continuing operations:
Net proceeds from issuance of Preferred Stock 9,943,000 - -
Net proceeds from warrant redemption and unit purchase options 7,130,000 3,949,000 -
Net proceeds from option exercise 260,000 - -
Net proceeds from initial public offering - - 5,939,000
Deferred costs association with initial public offering - - 53,000
----------- ----------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES -
CONTINUING OPERATIONS 17,333,000 3,949,000 5,992,000
----------- ----------- ----------
Cash flows from financing activities - discontinued operations:
Net change in due to/from factor 171,000 2,093,000 (2,211,000)
Repayments of bridge financing - - (1,500,000)
Repayments of notes payable and short-term loan - - (644,000)
Net proceeds from bridge financing - - 1,207,000
Deferred costs associated with bridge financing - - 75,000
----------- ----------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES - DISCONTINUED OPERATIONS 171,000 2,093,000 (3,073,000)
----------- ----------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 17,504,000 6,042,000 2,919,000
----------- ----------- ----------
Net increase in cash 5,104,000 2,775,000 22,000
Cash balance - beginning of year 2,830,000 55,000 33,000
----------- ----------- ----------
CASH BALANCE - END OF YEAR $ 7,934,000 $ 2,830,000 $ 55,000
----------- ----------- ----------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest - $ 8,000 $ 75,000
----------- ----------- ----------
Income taxes $ 17,000 $ 5,000 $ 125,000
----------- ----------- ----------
Non-cash transactions:
Issuance of warrants in connection with bridge financing - $ - $ 138,000
----------- ----------- ----------
Cancellation of warrants in connection with bridge financing - $ - $ 55,000
----------- ----------- ----------
Exchange of goods for services provided $ 19,000
-----------
The accompanying notes are an integral part of these consolidated
financial statements.
F-7
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
DOLLARS ROUNDED TO THE NEAREST THOUSAND
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1. THE COMPANY
The Company is an internet retailer of designer fashions and home
accessories at outlet store prices. The full service Web store
("Bluefly.com" or "Web Site") sells over 300 brands of designer
apparel, accessories and house and home products at discounts of up to
75%. Bluefly.com, which launched in September 1998, also offers
information on current fashion trends.
The Company has sustained net losses and negative cash flows from
operations since the formation of Bluefly.com. The Company's ability to
meet its obligations in the ordinary course of business is dependent
upon its ability to establish profitable operations or raise additional
financing through public or private equity financing, collaborative or
other arrangements with corporate sources, or other sources of
financing to fund operations. During 1999, the Company received
additional financing of approximately $17 million. Should the need
arise, the Company has received a commitment from a preferred
stockholder to finance anticipated working capital deficiencies up to
$15 million, if any, through December 31, 2000. Management believes
that its current funds and the funds under commitment from a preferred
stockholder will be sufficient to enable the Company to meet its
planned expenditures through at least December 31, 2000. If anticipated
operating results are not achieved, the Company intends to obtain
additional equity or debt financings. If such financings are not
available on terms acceptable to the Company, the Company will delay or
reduce its expenditures in order to meet its obligations.
On June 25, 1998, the Company's Board of Directors voted to discontinue
the operations of its golf sportswear division and devote all of the
Company's energy and resources to building Bluefly.com. See Note 9.
Effective October 29, 1998, the Company's shareholders approved a
resolution to change the name of the Company from Pivot Rules, Inc. to
Bluefly, Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary. All significant intercompany
balances and transactions have been eliminated in consolidation.
REVENUE RECOGNITION
The Company recognizes revenue on product sales when goods are shipped
to the customer.
Net sales include reductions for estimated returns, uncollectible
accounts and sales discounts. The Company does not record proceeds
received for shipping and handling as sales.
F-8
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- --------------------------------------------------------------------------------
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). SAB 101 summarizes certain of the SEC's views
in applying generally accepted accounting principles to revenue
recognition in financial statements. SAB 101 is not a rule or
interpretation of the SEC, however, it represents interpretations and
practices followed by the Division of Corporation Finance and the
Office of the Chief Accountant in administering the disclosure
requirements of the Federal securities laws. The Company does not
believe that the interpretations outlined in SAB 101 will have an
impact on the Company's revenue recognition policies.
RISKS AND UNCERTAINTIES
The Company has a limited operating history and its prospects are
subject to the risks, expenses and uncertainties frequently encountered
by companies in the new and rapidly evolving markets for Internet
products and services. These risks and uncertainties include, but are
not limited to, the following: the competitive nature of the business
and the potential for competitors with greater resources to enter such
business; the Company's limited operating history and need for
additional financing; consumer acceptance of the Internet as a medium
for purchasing apparel; rapid technological change of online commerce
and the potential for security risks; governmental regulation and legal
uncertainties, as well as other risks and uncertainties. In the event
that the Company does not successfully implement its business plan,
certain assets may not be recoverable.
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 disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Significant estimates include
inventory valuation and reserves for returns and allowance for doubtful
accounts. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all short-term marketable securities having an
original maturity of three months or less to be cash equivalents.
INVENTORIES
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.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Equipment and software is
depreciated on a straight-line basis over three to seven years.
Leasehold improvements are amortized over the shorter of their
estimated useful lives or the term of the lease. Maintenance and
repairs are expensed as incurred.
INCOME TAXES
The Company recognizes deferred 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 in the
period that includes the enactment date. In
F-9
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- --------------------------------------------------------------------------------
addition, valuation allowances are established when it is more likely
than not that deferred tax assets will not be realized.
LONG-LIVED ASSETS
The Company's policy is to evaluate long-lived assets and certain
identifiable intangibles 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.
STOCK BASED COMPENSATION
The Company applies Statement of Financial Accounting Standards No.
("SFAS") 123 "Accounting for Stock Based Compensation," in accounting
for its stock based compensation plan. In accordance with SFAS No. 123,
the Company applies Accounting Principles Board Opinion No. 25 and
related Interpretations for expense recognition. In connection with
stock option grants to employees, no compensation expense has been
recorded in fiscal years 1999, 1998 and 1997, because the exercise
price of employee stock options equals or exceeds the market price of
the underlying stock on the date of grant.
NET LOSS PER SHARE
The Company has adopted SFAS No. 128, "Earnings Per Share." Basic
earnings (loss) per share excludes dilution and is computed by dividing
earnings (loss) available to common shareholders by the weighted
average number of common shares outstanding for the period.
Diluted earnings (loss) per share is computed by dividing earnings
(loss) available to common shareholders by the weighted average number
of common shares outstanding for the period, adjusted to reflect
potentially dilutive securities. Due to the loss from continuing
operations, options to purchase 1,110,150 shares of Common Stock and
Preferred Stock convertible into 952,381 of Common Stock shares were
not included in the computation of diluted earnings per share because
the result of the exercise of such inclusion would be antidilutive.
ADVERTISING
Advertising costs are expensed as incurred. Advertising expenses for
the years ended December 31, 1999 and 1998 amounted to approximately
$6,540,000 and $443,000 respectively. For the year ended December 31,
1997, the Company incurred approximately $908,000 in advertising
expense relating to the discontinued operations.
FULFILLMENT
The Company utilizes a third party to perform all of its order
fulfillment. For the years ended December 31, 1999 and 1998,
fulfillment expenses totaled $557,000 and $54,000, respectively. These
amounts are included in selling, marketing and fulfillment expenses in
the statements of operations.
RESEARCH AND DEVELOPMENT
Research and development costs, incurred in connection with
enhancements to the Web Site, prior to technological feasibility, are
expensed when incurred. During the years ended December 31, 1999 and
1998 amounts charged to research and development expense amounted to
$146,000 and $347,000 respectively.
F-10
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- --------------------------------------------------------------------------------
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income" ("SFAS No.130"). This statement
requires companies to classify items of other comprehensive income by
their nature in the financial statements and display the accumulated
balance of other comprehensive income separately from retained earnings
and additional paid-in capital in the equity section of a statement of
financial position. SFAS No.130 is effective for financial statements
issued for fiscal years beginning after December 15, 1997. The Company
has had no other comprehensive income items to report.
START UP COSTS
In June 1998, the Company adopted Statement of Position ("SOP") 98-5
"Reporting on the Costs of Start-Up Activities." Startup activities
include (i) one-time activities relating to the introduction of a new
product or service, conducting business in a new territory, conducting
business with a new class of customer or commencing a new operation and
(ii) organization costs. Start-up activities are expensed as incurred.
For the year ended December 31, 1998, $332,000 of start up costs
relating to the formation of the Internet business were expensed as
incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments, including
cash and cash equivalents, funds deposited with factor, accounts
payable and accrued liabilities, approximate fair value due to their
short maturities.
RECLASSIFICATIONS
Certain amounts in the consolidated financial statements of the prior
periods have been reclassified to conform to the current period
presentation for comparative purposes.
3. PROPERTY AND EQUIPMENT
As of December 31, 1999 and 1998, property and equipment for continuing
operations consist of the following:
1999 1998
Leasehold improvements $ 488,000 $ 287,000
Office equipment 308,000 167,000
Computer equipment and software 471,000 142,000
---------- ---------
1,267,000 596,000
Less accumulated depreciation 230,000 99,000
---------- ---------
$1,037,000 $ 497,000
---------- ---------
Depreciation and amortization of property and equipment was
approximately $130,000, $84,000 and $31,000, for the years ended
December 31, 1999, 1998 and 1997, respectively.
F-11
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- --------------------------------------------------------------------------------
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
As of December 31, 1999 and 1998, prepaid expenses and other current
assets consist of the following:
1999 1998
Due from credit card companies $ 350,000 $ 27,000
Other current assets 453,000 68,000
Prepaid expenses 213,000 424,000
Income taxes receivable 34,000 55,000
Other receivables 30,000 -
Deferred income tax - 50,000
---------- ---------
$1,080,000 $ 624,000
---------- ---------
5. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
As of December 31, 1999 and 1998, accounts payable, accrued expenses
and other current liabilities consist of the following:
1999 1998
Accounts payable $4,287,000 $ 489,000
Accrued expenses 646,000 105,000
Provision for returns and bad debt 868,000 47,000
Accrued media expenses 407,000 -
Salary and bonus accrual 315,000 115,000
---------- ---------
$6,523,000 $ 756,000
---------- ---------
F-12
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- --------------------------------------------------------------------------------
6. INCOME TAXES
The components of the provision (benefit) for income taxes is comprised
of the following:
CONTINUING OPERATIONS
---------------------------------------------------
1999 1998 1997
Current
Federal $ (2,000) $ (55,000) $(220,000)
State - - (7,000)
--------------- ---------------- ----------------
(2,000) (55,000) (227,000)
--------------- ---------------- ----------------
Deferred
Federal $ - $ 3,000 $ 1,000
State - 2,000 (1,000)
--------------- ---------------- ----------------
- 5,000 -
--------------- ---------------- ----------------
$ (2,000) $ (50,000) $(227,000)
--------------- ---------------- ----------------
DISCONTINUED OPERATIONS
---------------------------------------------------
1999 1998 1997
Current
Federal $ - $ 11,000 $ 45,000
State - - -
--------------- ---------------- ----------------
- 11,000 45,000
--------------- ---------------- ----------------
Deferred
Federal $ - $ 81,000 $ -
State - 13,000 -
--------------- ---------------- ----------------
- 94,000 -
--------------- ---------------- ----------------
$ - $ 105,000 $ 45,000
--------------- ---------------- ----------------
F-13
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- --------------------------------------------------------------------------------
Significant components of the Company's deferred tax assets and
liabilities are summarized as follows:
1999 1998
Deferred tax assets
Net operating losses $ 6,222,000 $ 920,000
Foreign tax credits 13,000 -
Depreciation and amortization 216,000 -
Accounts receivable and inventory reserves 95,000 50,000
Other 4,000 -
----------- ---------
6,550,000 970,000
Valuation Allowance (6,550,000) (920,000)
----------- ---------
50,000
Deferred tax liability
Tax over book depreciation - (64,000)
----------- ---------
NET DEFERRED TAX ASSET (LIABILITY) $ - $ (14,000)
----------- ---------
The Company has tax credit carryforwards of $13,000 which have
expiration dates through 2001. In addition, the Company has
approximately $15,785,000 of net operating loss carryforwards which
have expiration dates through 2019. The Company provided a full
valuation allowance on the entire deferred tax asset balance due to the
uncertainty regarding the realizability of these assets due to recent
losses.
The Company's effective tax rate differs from the U.S. Federal
Statutory income tax rate of 34% as follows:
1999 1998 1997
Statutory federal income tax rate (34.00)% (34.00)% (34.00)%
State taxes, net of federal tax benefit (5.40) 0.40 1.70
Other 0.20 - -
Valuation allowance on deferred tax asset 39.18 35.10 -
--------- -------- ---------
Effective tax rate (0.02)% 1.50% (32.30)%
--------- -------- ---------
F-14
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- --------------------------------------------------------------------------------
7. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT CONTRACTS
The Company has entered into certain employment contracts, which expire
through December 31, 2003. As of December 31, 1999, the Company's
aggregate commitment for future base salary under these employment
contracts is:
2000 $1,045,000
2001 1,045,000
2002 767,000
2003 182,000
----------
TOTAL $3,039,000
----------
OPERATING LEASES
The Company leases equipment and space under various leases which
expire beginning 2000 through 2009. Rent expense aggregated
approximately $156,000, $78,000 and $95,000 for the years ended
December 31, 1999, 1998 and 1997. As of December 31, 1999, future
minimum rentals, excluding utilities, are as follows:
2000 $1,902,000
2001 1,150,000
2002 215,000
2003 219,000
2004 224,000
Thereafter 898,000
----------
TOTAL $4,608,000
----------
MARKETING AND ADVERTISING COMMITMENTS
As of December 31, 1999, the Company has advertising and marketing
commitments in connection with its online and offline relationships of
approximately $1,695,000 through December 31, 2000.
LEGAL PROCEEDINGS
The Company is, from time to time, a party to routine litigation
arising in the normal course of its business. The Company believes that
none of these actions will have a material adverse effect on the
business, financial condition, operating results or cash flows of the
Company.
The Company was named as a defendant in an action commenced by Tommy
Hilfiger Licensing, Inc. ("Hilfiger") in August 1999 in the United
States District Court for the Southern District of New York. In its
complaint, Hilfiger specifically alleged that ten styles of Hilfiger
product sold by the Company were not authentic Hilfiger merchandise and
also alleged, upon information and belief, that the Company had sold
other styles of Hilfiger merchandise that were not authentic. The
Company sold less than $5,000 of the styles of product that Hilfiger
has specifically alleged to be inauthentic. Subsequent to year end, the
Company and Hilfiger settled the lawsuit on terms acceptable to both
parties. The Company does not believe that the settlement will have a
material adverse effect upon its business, financial condition or
results of operations.
F-15
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- --------------------------------------------------------------------------------
8. SHAREHOLDER'S EQUITY AND REDEEMABLE EQUITY
AUTHORIZED SHARES
In May 1997, the Company's Board of Directors authorized for issuance
2,000,000 shares of preferred stock, $.01 par value per share, and
increased the aggregate number of shares of Common Stock, $.01 par
value per share ("Common Stock"), authorized for issuance from
10,000,000 shares to 15,000,000 shares.
SERIES A CONVERTIBLE PREFERRED STOCK
On July 27, 1999, the Company entered into an Investment Agreement with
an investor group led by affiliates of Soros Private Equity Partners,
LLC (the "Soros Investment Agreement") pursuant to which it issued
500,000 shares of Series A Convertible Preferred Stock (the "Series A
Preferred Stock") for an aggregate purchase price of $10 million. The
Series A Preferred Stock is convertible into shares of Common Stock at
a rate of $10.50 per share, and bears a cumulative compounding dividend
of 8% per annum, payable upon conversion at the Company's option in
cash or in Common Stock. The Series A Preferred Stock has a liquidation
preference equal to the face value of the Series A Preferred plus
accrued dividends and ranks 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.
The Series A Preferred Stock may be converted into Common Stock at any
time by the holders thereof and will automatically be converted into
Common Stock if the closing price of the Common Stock is $31.50 or
higher for 30 consecutive trading days, or immediately prior to the
consummation of a merger or sale of all or substantially all of the
assets of the Company pursuant to which shareholders of the Company are
to receive cash, securities and/or other property worth at least $31.50
per share of Common Stock of the Company. Excluding shares of Common
Stock that may be issued as payment for accrued dividends, the 500,000
shares of Series A Preferred Stock are convertible into 952,381 shares
of Common Stock, subject to customary antidilution provisions. The
holders of the Series A Preferred Stock have certain rights to appoint
a designee to the Company's Board of Directors. Certain actions of the
Company may not be taken without the approval of such designee. In
addition, holders of the Series A Preferred Stock have certain
registration rights with respect to the Common Stock issuable upon
conversion of the Series A Preferred Stock and certain pre-emptive
rights with respect to future issuances of capital stock by the
Company.
INITIAL PUBLIC OFFERING
In May 1997, the Company completed an initial public offering ("IPO")
of 1,500,000 units ("Units"), each Unit consisting of one share of the
Company's Common Stock and one redeemable common stock purchase warrant
("Warrants"). The Company received net proceeds of $5,939,000 (which
are net of underwriting costs and expenses), of which approximately
$2,032,000 was used to repay Company indebtedness, including the
repayment of notes issued by the Company in connection with the bridge
financing. The funds from the IPO were deposited with the Company's
Factor and invested at a rate of 1.75% below prime. As a result of the
repayment of the notes issued in the bridge financing, the Company has
written-off $83,000 of unamortized debt discount and $256,000 of
unamortized debt issuance costs.
F-16
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- --------------------------------------------------------------------------------
UNIT PURCHASE OPTIONS
In May 1997, the Company sold to the underwriter of the IPO, for an
aggregate purchase price of $100, 150,000 Unit Purchase Options
("UPO's"). Each UPO entitles the holder thereof to purchase one Unit.
The UPO's are exercisable initially at a price of $8.00 per Unit during
the four-year period commencing on May 15, 1998. During the fourth
quarter of 1998, 135,250 UPO's were exercised and during 1999, 3,250
UPO's were exercised. As of December 31, 1999, there were 11,500 UPO's
outstanding.
WARRANTS
In connection with the Company's IPO, the Company issued 1,500,000
units ("Units"), with each Unit consisting of one share of common stock
and one redeemable common stock purchase warrants ("Warrant"). These
Warrants entitled the holders to purchase one share of Common Stock at
$5.00 per share during the four-year period commencing May 15, 1998;
all Warrants became exercisable on such date. The Company had the right
to redeem the Warrants at any time after they became exercisable, at a
price of $.01 per Warrant, provided that the market price of the stock
exceeded $8.25 for a specific period of time, and upon specific notice
provisions. On December 21, 1998, the Company provided notice of its
election to redeem the Warrants. In the first quarter of 1999,
1,412,374 Warrants were exercised, resulting in proceeds of $7,062,000.
Substantially all of the Warrants included in the Units were exercised
prior to the redemption.
BRIDGE FINANCING
On January 2, 1997, the Company issued 15 units, each consisting of one
convertible subordinated secured promissory note in the principal
amount of $100,000 per unit ("Note") and warrants to purchase 40,000
shares of common stock of the Company, no par value, at an exercise
price of $2.50 per share ("Bridge Warrants"), for gross proceeds of
$1,500,000. Net proceeds amounted to $1,207,000, after agency expenses
and brokerage fees, but before additional debt issuance costs. A
portion of the gross proceeds has been allocated to the Bridge Warrants
based on an estimate of their fair market value, resulting in
approximately $138,000 of original issue discount and a $138,000
increase in paid-in capital.
The Notes bore interest at the rate of 10% per annum from January 2,
1997 through April 30, 1997, and thereafter at the rate of 12% per
annum, until such notes were repaid from the proceeds of the Company's
IPO.
In May 1997, the Bridge Warrant holders surrendered 237,000 out of the
600,000 Bridge Warrants issued in connection with the bridge financing.
The cancellation of such Bridge Warrants resulted in a reduction of
interest expense, and additional paid-in capital of $55,000. The
remaining Bridge Warrants were converted in May 1997 (on a one-for-one
basis) into warrants with the same terms as the warrants sold in the
IPO.
STOCK OPTION PLAN
In May 1997, the Company's Board of Directors adopted a stock option
plan (the "Plan") 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.
Options are granted in terms not to exceed ten years and become
exercisable as specified when the option is granted. Vesting terms of
the options range from immediately to a ratable vesting period of four
years. In 1999, the Company amended the plan in order to increase the
maximum number of shares that may be granted under the Plan to
1,500,000.
F-17
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- --------------------------------------------------------------------------------
The following table summarizes the Company's stock option activity:
NUMBER WEIGHTED
OF AVERAGE
SHARES EXERCISE PRICE
Options granted 117,000 $ 5.00
Options canceled (24,500) 5.00
----------
Balance at December 31, 1997 92,500 5.00
----------
Options granted 221,100 2.73
Options canceled (53,625) 4.05
----------
Balance at December 31, 1998 259,975 3.27
----------
Options granted 958,050 11.90
Options canceled (40,000) 12.04
Options exercised (67,875) 4.12
----------
Balance at December 31, 1999 1,110,150 10.35
----------
Eligible for exercise at December 31, 1998 96,694 4.21
----------
Eligible for exercise at December 31, 1999 169,763 7.15
----------
The stock options are exercisable in different periods commencing in
1998 through 2009.
Additional information with respect to the outstanding options as of
December 31, 1999, is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ -------------- -------------------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF AVERAGE AVERAGE AVERAGE
EXERCISE OPTIONS REMAINING EXERCISE OPTIONS EXERCISE
PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
$2.16-$3.22 163,600 8.52 Years $ 2.59 80,542 $ 2.48
$5.00 28,500 6.25 Years 5.00 26,750 5.00
$8.34-$9.66 169,250 9.60 Years 9.12 9,104 9.10
$10.28-$13.81 514,700 9.89 Years 11.24 5,942 10.77
$14.38-$16.60 234,100 9.13 Years 15.07 47,425 15.09
--------- -------
$2.16-$16.60 1,110,150 9.43 Years 10.35 169,763 7.15
F-18
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- --------------------------------------------------------------------------------
The Company does not recognize compensation expense for stock options
granted at or above fair market value, as permitted by the accounting
standards. The fair value of options granted during 1999, 1998 and 1997
was approximately $8.6 million, $332,000 and $112,000, respectively.
The Company calculated the fair value of each option grant on the date
of the grant using the Black scholes option pricing model as prescribed
by SFAS No. 123. The following assumptions were used in applying the
model:
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1999 1998 1997
Risk-free interest rates 4.80-6.55% 4.46-5.72% 5.98-6.67%
Expected lives (in years) 6 6 6
Dividend yield 0% 0% 0%
Expected volitility 62% 49% 40%
Had compensation expense for the Plan been determined consistent with
the provisions of SFAS No. 123, the effect on the Company's basic and
diluted net loss per share would have been as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1999 1998 1997
Basic and diluted net loss as reported $13,194,000 $ 3,656,000 $ 381,000
Basic and diluted net loss per share, as reported $ 2.82 $ 1.32 $ 0.18
Basic and diluted net loss, pro forma $14,009,000 $ 3,988,000 $ 493,000
Basic and diluted net loss per share, pro forma $ 2.92 $ 1.44 $ 0.23
As of December 31, 1999 the Company has reserved an aggregate of
2,085,531 shares of Common Stock for the exercise of the UPO's, Stock
Options and the conversion of Preferred Stock.
9. DISCONTINUED OPERATIONS
The operating loss from discontinued operations of $1,178,000 in 1998
includes a $479,000 loss relating to the write down of the assets of
the golf sportswear division. The Company does not anticipate any
future losses from its discontinued operations.
In September 1998, the Company sold all of its trademarks related to
the discontinued golf sportswear division to Klear Knit Sales, Inc.
Under the terms of the agreement, the Company received $400,000 in cash
and is entitled to receive future payments for a period up to five
years based on certain performance measures. Total future payments to
be made to the Company, if any, during the five year period, are capped
at an aggregate amount of $290,000. A non-employee, non-director
shareholder of the Company acted as a broker on the sale of the
F-19
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- --------------------------------------------------------------------------------
trademarks and is entitled to a broker's fee equal to 11.9% of future
payments received, if any, by the Company (a maximum of $34,500 in fees
may be due under the agreement).
The disposal of the golf sportswear division has been accounted for as
a discontinued operation and, accordingly, its net assets have been
segregated from continuing operations in the accompanying consolidated
balance sheet, and its operating results are segregated and reported as
discontinued operations in the accompanying consolidated statements of
operations and cash flows.
Information relating to the discontinued operations of the golf
sportswear division for the years ended December 31, 1999, 1998 and
1997 are as follows:
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
Net sales $ - $ 3,914,000 $10,323,000
Cost of sales - 3,838,000 7,392,000
------- ----------- -----------
GROSS PROFIT - 76,000 2,931,000
Income from adjustments to allowances and
accruals 67,000 - -
Selling, marketing, design and administrative 8,000 1,155,000 2,200,000
Writedown of property and equipment - 379,000 -
------- ----------- -----------
OPERATING INCOME (LOSS) 59,000 (1,458,000) 731,000
Income from sale of trademarks - 400,000 -
Other income (expenses) 4,000 (15,000) (305,000)
Amortization and write-off of deferred costs
for bridge financing - - (293,000)
------- ----------- -----------
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES 63,000 (1,073,000) 133,000
Provision for income taxes - (105,000) (45,000)
------- ----------- -----------
NET INCOME (LOSS) $63,000 $(1,178,000) $ 88,000
------- ----------- -----------
F-20
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- --------------------------------------------------------------------------------
The net assets of the golf sportswear division included in the
accompanying balance sheet at December 31, 1998 are as follows:
DECEMBER 31,
1998
Due from factor $ 171,000
Non-factored receivables 187,000
Income taxes receivable 195,000
----------
TOTAL CURRENT ASSETS OF
DISCONTINUED OPERATIONS $ 553,000
----------
The Company's liabilities will not be assumed by others, therefore, in
accordance with the accounting standards for the presentation of
discontinued operations all such liabilities are recorded as continuing
operations.
10. CONCENTRATION
The Company acquired approximately 14.6% and 40.6%, respectively, for
the years ended December 31, 1999, and 1998 of its inventory from one
supplier.
11. SUBSEQUENT EVENTS
Subsequent to year end, the Company has obtained a commitment from
affiliates of Soros Private Equity Partners ("Soros") to provide, at
the Company's option, up to $15 million of financing at any time during
2000 on terms reflecting market rates for such financings at the time
such financing is provided (the "Soros Commitment"). The Company's
investment banker, Credit Suisse First Boston, is advising it in
determining its most prudent strategy for financing, including whether
to proceed with a round of financing with Soros pursuant to the Soros
commitment, with one or more private investors, or some combination
thereof. In the interim, Soros has provided the Company with $3 million
in debt financing, in a note that bears interest at a rate of 8% per
annum and is due in January 2002 (the "Soros Note"). The Soros Note
provides that amounts due thereunder will convert into securities sold
in the Company's next round of financing and will be considered as part
of the $15 million of financing committed under the terms of the Soros
Commitment. In connection with the Soros Commitment and Soros Note, the
Company has granted Soros a warrant pursuant to which it has the right
to purchase up to 175,000 shares of Common Stock (subject to certain
vesting provisions relating to the timing of the Company's next round
of financing) at an exercise price equal to the value of a share of
Common Stock as determined in the Company's next round of financing,
exercisable at any time during the next 5 years.
F-21
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- --------------------------------------------------------------------------------
12. EFFECTS OF REVISED REPORTING OF REDEEMABLE EQUITY
As described in Note 8, the Company issued 500,000 shares of Series A
Preferred Stock in July 1999. The Series A Convertible Preferred Stock
is subject to optional redemption upon a change in control of the
Company that results in the holders of Series A Convertible Preferred
Stock receiving cash or marketable securities with an aggregate value
of less than 3 times the conversion price of the Series A Preferred
Stock.
Although the Company believes that the likelihood of redemption
occurring is remote, it has revised the financial statements as of
December 31, 1999 to account for the Series A Convertible Preferred
Stock pursuant to the SEC Accounting Series Release No. 268, as
redeemable equity on the accompanying balance sheet.
The revision of the financial statements for the matter described
above had no effect on the Company's net loss, total assets, total
liabilities, or cash position. The Company's redeemable equity, total
shareholders' equity at December 31, 1999, as previously reported and
as revised, are as follows:
December 31, 1999
Redeemable equity - previously reported $ --
Adjustment related to the presentation of the Series A
Convertible Preferred Stock as redeemable 9,943,000
-----------
As revised $ 9,943,000
===========
Shareholders' equity - previously reported $10,586,000
Adjustment related to the presentation of the Series A
Convertible Preferred Stock as redeemable (9,943,000)
-----------
As revised $ 643,000
===========
F-22
13. SUBSEQUENT EVENTS -- LIQUIDITY
As discussed in Note 11, in March 2000, the Company received a
commitment from affiliates of Soros Private Equity Partners ("Soros")
to provide, at the Company's option, up to $15 million of financing at
any time during 2000 on terms reflecting market rates for such
financings at the time such financing is provided (the "Soros
Commitment"). Based upon its then existing business plan, management
believed that its then existing funds and the funds from the Soros
Commitment would be sufficient to enable the Company to meet its
planned expenditures through at least December 31, 2000. Soros
provided the $15 million related to the March 2000 funding commitment
(the "Soros Notes") and has made additional commitments and provided
additional funding as discussed below.
Subsequent to May 2000, and in anticipation of the receipt of
additional financing, the Company increased the level of operating
expenses and operating cash outflows beyond those previously
contemplated. The Company will continue to incur net operating cash
outflows through December 31, 2000 and beyond in order to achieve its
business objectives. On November 13, 2000, the Company entered into an
agreement with Soros pursuant to which affiliates of Soros have agreed
to invest up to an additional $15 million in the Company, subject to
certain conditions (the "New Soros Financing"). Under the terms of the
agreement, Soros has invested an additional $5 million in the form of
a note (the "New Note"), convertible into Preferred Stock at the price
of $2.34 per share.
The New Soros Financing agreement requires the Company to offer the
public shareholders of the Company, as of a date to be determined, the
right to purchase up to an aggregate of $20 million of Common Stock at
$2.34 per share. If the public shareholders purchase less than $20
million of Common Stock, Soros would purchase the difference between
$20 million and the amount purchased by the public shareholders, up to
a total of $10 million, all at the rate of $2.34 per share. As part of
the transaction, and subject to shareholder approval, the Soros Notes,
as well as the New Notes, would be converted into preferred stock at a
price of $2.34 per share, and the conversion price of the preferred
stock previously issued to Soros and other investors would be reduced
to $2.34 per share. All of the preferred stock would earn dividends at
the rate of 8% per year, payable in cash or stock, at the Company's
option, upon conversion. The preferred stock issued pursuant to the
New Soros Financing would be convertible into shares of Common Stock
of the Company on a one-for-one basis.
Assuming the transaction is consummated, Soros would likely own a
majority of the Company's voting and equity interests. In addition,
the preferred stock would provide Soros with veto rights over certain
Company actions and would allow Soros to control any vote of the
Company's board of directors.
Closing of the New Soros Financing requires approval by the
shareholders of the Company and is subject to certain other closing
conditions. The New Note bears interest at the rate of 11% until it is
converted. There can be no assurance that the shareholders will
approve the New Soros Financing or that the New Soros Financing will
be consummated. If it is not consummated, the Soros Notes and the New
Notes shall become payable on May 1, 2000.
F-23