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SUMMARY TERM SHEET
Issuer: BLUEFLY, INC. ("BLUEFLY" or the "Company").
Purchasers: Quantum Industrial Partners LDC and
affiliates ("QIP"), a strategic equity fund
advised by Soros Fund Management LLC and its
affiliate Soros Private Equity Partners
("SPEP"), and any other party mutually
acceptable to the Company and QIP
(collectively, the "Purchasers").
Holders of Common Stock will be offered the
right to purchase their pro rata share as a
class of up to $20 Public Holders: million of
Common Stock (the "Rights Offering").
Securities Offered: 8,673,720 shares of Series B Convertible
Preferred Stock (the "Series B Stock") plus a
number of shares of Series B Stock equal to
the interest accrued and unpaid on (i) the
Existing Notes (as defined below) from
October 1, 2000 through the date of
conversion and (ii) the Notes (as defined
below) from the date of issuance through the
date of conversion. (6,536,967 shares
relating to the conversion of $15 million in
currently existing debt ("Existing Notes")
plus interest through September 30, 2000, and
2,136,752 shares relating to the conversion
of the principal amount of the Notes).
Up to 8,547,009 shares of Common Stock.
Senior Convertible Notes in the aggregate
principal amount of $5 million (the "Notes").
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Purchase Price: $2.34 per share ("Per Share Price") for the
Series B Stock, $20,000,000 in the aggregate
(including $15 million of currently existing
Senior Convertible Notes to be converted into
Series B Stock in connection with the
transaction).
$2.34 per share for the Common Stock, up to
$20 million in the aggregate.
Uses of Proceeds: Working capital and general corporate
purposes.
DESCRIPTION OF THE SERIES B STOCK:
Ranking of the Series B Stock: Senior to the Common Stock of the Company and
pari passu with the Series A Stock.
Dividends: The Series B Stock will bear a cumulative
compounding dividend of 8% per annum payable
upon conversion, at the Company's option, in
cash or Common Stock, or upon liquidation,
payable in cash. In addition, the Series B
Stock will share pari passu with all other
equity holders of the Company on an as-
converted basis in cash dividends and other
distributions, if any, other than stock
splits effected as dividends. If the Company
elects to pay the dividend in shares of
Common Stock, such dividend will be the
number of shares of Common Stock obtained by
dividing the cash value of the dividend by
the average closing price of the Company's
Common Stock on NASDAQ for the thirty trading
days immediately prior to such conversion.
Conversion Price: The initial conversion price of the Series B
Stock will be equal to the Per Share Price
(the "Conversion Price"), subject to
anti-dilution protection described below.
Optional Conversion: Each share of the Series B Stock shall be
convertible at any time after the date of
issuance at the option of the holder into the
number of shares of Common Stock obtained by
dividing the Per Share Price by the
Conversion Price.
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Automatic Conversion: None for the Series B Stock. The Series A
Stock will be automatically converted as set
forth in the Certificate of Amendment, except
that (i) the trigger price will be four times
the Conversion Price; (ii) the conversion can
only occur on or after October 12, 2001;
(iii) the Company can convert only 25% of the
outstanding Series A in any one calendar
quarter; and (iv) the Common Stock into which
the Series A is converted must be subject to
a registration statement.
Optional Redemption: The Company may redeem for cash all but not
less than all of the Series A Stock and
Series B Stock on not less than 30 days
written notice to the holders thereof, during
the periods and at a price set forth below,
in each case, plus accrued but unpaid
dividends; provided that if it is necessary
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to redeem shares of Common Stock held by the
Purchasers in order to ensure that the
redemption is not treated as a dividend
treatment under Section 302(b)(2) of the
Internal Revenue Code for the redemption of
the Series A Stock and Series B Stock, then
to avoid such treatment the Company shall
effect such redemption of Common Stock to the
extent necessary; and provided further that
there shall be a registration statement in
effect for the Common Stock into which the
Series A Stock and Series B Stock can be
converted.
Second anniversary of closing through the
fourth anniversary - 4 times the Conversion
Price; Fourth anniversary of closing through
the sixth anniversary - 4.5 times the
Conversion Price; After the sixth anniversary
- 5 times the Conversion Price.
The right of redemption may be exercised and
a determination on how to fund the redemption
may be made only by a vote of the majority of
the directors not appointed by the
Purchasers.
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Voting Rights: The Series B Stock will have the right to
vote on all matters that come before the
common shareholders of the Company on an as
converted basis.
For so long as at least 60% in the aggregate
of the shares of Series A Stock or at least
40% of the shares of Series B Stock, as the
case may be, outstanding on the closing date
remain outstanding, the approval of the
holders of a majority of the shares of Series
A Stock or Series B Stock, as the case may
be, will be required for the Company to take
any of the following actions: (i) merge,
consolidate or liquidate the Company or
acquire another business entity; (ii) create
a joint venture, partnership or one or more
non-wholly owned subsidiaries requiring an
investment in cash or kind of more than
$500,000; (iii) sell Company assets, which
individually or in the aggregate exceed
$2,000,000; (iv) incur indebtedness in excess
of $1,000,000 or impose a lien against or
encumber assets of the Company in excess of
$1,000,000 (other than a financing secured by
inventory); (v) enter into or amend any
contract not contemplated by an approved
budget or in excess of $250,000 in any one
year or $1 million over the life of the
contract in the aggregate; (vi) issue or sell
securities of the Company (excluding
securities issued upon exercise of options
under the stock option or employee incentive
plans existing on October 12, 2000 or
contemplated by this term sheet or as a
result of the conversion of the Series A
Stock, any outstanding notes and warrants,
the Series B Stock and the Notes); (vii)
declare dividends, repurchase or redeem
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securities of the Company or debt, except to
the extent such debt is due in accordance
with its terms and except for dividends,
repurchases or redemption set forth in this
term sheet or applicable to the Series A
Stock, the Notes and the Series B Stock;
(viii) make capital expenditures in excess of
110% of capital expenditures set forth in the
annual budget; (ix) grant registration rights
or register securities under the Securities
Act of 1933, as amended, except pursuant to
the registration rights agreement currently
in effect and the registration rights granted
pursuant to the transactions contemplated
hereby or registrations on Form S-8 or
similar forms; (x) enter into any contract
with an Affiliate; (xi) amend the Company's
Certificate of Incorporation or Bylaws; (xii)
increase or decrease the number of members of
the Company's Board of Directors or the
voting rights of the directors; (xiii) change
the Company's independent public accountants;
(xiv) approve the annual budget, and any
changes to the business plan and five year
budget and any successor thereto; (xv) adopt
or amend employment contracts with Company
officers and senior executive managers with
authority equivalent to that of Executive
Vice Presidents; or (xvi) amend or alter the
transaction documents.
Board Representation: (a) The Board of Directors will be composed
of seven (7) members
(b) During such time as at least 20% of the
shares of Series A Stock or at least 20% of
the shares of Series B Stock as the case may
be, held on the closing date remains
outstanding, the holders of each such series,
by the vote of a majority of the outstanding
shares of each such series, will designate a
director, and each such director will have
one vote on all matters considered by the
Board or any committee of the Board.
(c) Notwithstanding clause (b), during such
time as at least 60% of the shares of Series
A Stock or 40% of the Series B Stock, as the
case may be, held on the closing date remains
outstanding, the director designated by the
holders of a majority of the Series A Stock
and the director designed by the holders of a
majority of the Series B Stock will each be
entitled to seven votes on all matters
considered by the Board or any committee of
the Board.
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Pre-emptive Rights: The holders of Series B Stock will have the
same pre-emptive rights as the Series A
Stock.
Liquidation Preference: Holders of the Series B Stock will have
priority in liquidation over all holders of
Common Stock. The liquidation preference per
share will equal the greater of (i) the price
that, when combined with the consideration
received by the Purchasers for their Common
stock, provides for the recovery of the
entire investment made by the Purchasers
pursuant to this Term Sheet (which shall
include, without limitation, the purchase
price of the Notes converted into Series B
Stock and the purchase price for the shares
of common stock purchased pursuant to this
term sheet), plus any accrued but unpaid
dividends thereon; and (ii) the amount that
the holders of the Series B Stock would
receive in a liquidation if they were to
convert the Series B Stock into Common Stock
immediately prior to such liquidation.
To the extent necessary, the Certificate of
Designation for the Series A Stock shall be
amended to: (w) adjust the $20 referred to in
Section 4(a) to take into account stock
splits or similar adjustments to the number
of outstanding shares of Series A Stock; (x)
substitute "$2.34" for "$10.50" in Section
6(a)(ii) thereof; (y) provide that, upon a
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liquidation as described herein, the holders
of the Series A Stock shall be entitled to a
liquidation preference per share equal to the
greater of (i) the price that provides for
the recovery of the entire investment made by
the holders thereof in the Series A Stock,
plus any accrued but unpaid dividends
thereon; and (ii) the amount that the holders
of the Series A Stock would receive in a
liquidation if they were to convert the
Series A Stock into Common Stock immediately
prior to such liquidation; and (z) delete the
optional redemption provision and references
to change in control in Section 7 and Section
3(a)(iii), respectively.
Protective Provisions: The affirmative vote of the holders of at
least two-thirds (66 %) of the outstanding
shares of Series B Stock will be required for
the Company to (i) alter or change the
rights, preferences or privileges of the
shares of Series B Stock so as to affect
adversely such shares or (ii) merge or
consolidate with another Person or enter into
a transaction which results in a Change of
Control. "Change of Control" means any person
or "group" (within the meaning of Section
13(d)(3) of the Securities Exchange Act of
1934, as amended (the "Exchange Act)",
becoming the beneficial owner, directly or
indirectly, of outstanding shares of stock of
the Company entitling such Person or Persons
to exercise 50% of more of the total votes
entitled to be cast at a regular or special
meeting, or by action by written consent, of
the shareholders of the Company in the
election of directors (the term "beneficial
owner" shall be determined in accordance with
Rule 13d-3 of the Exchange Act.
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DESCRIPTION OF THE NOTES:
Interest: The Notes will bear interest at a rate of 11%
per annum, based on a 365- or 366-day year,
as the case may be, and the actual number of
days elapsed. Interest is payable only upon
conversion or repayment of the principal.
Maturity Date: April 1, 2001. The maturity date of the
existing notes will be extended to April 1,
2001.
Mandatory Prepayment: The Notes shall be repaid upon the occurrence
of an event of default (as defined in the
Senior Convertible Notes that are currently
outstanding).
The Purchasers will have the right to require
the prepayment of the principal and all
accrued interest on the Notes upon a Change
of Control (other than a Change of Control as
a result of the transactions contemplated by
this Term Sheet).
Optional Prepayment: The Company may not prepay the Notes or the
existing notes.
Automatic Conversion: Each Note automatically converts into the
number of shares of Series B Stock obtained
by dividing the outstanding principal amount
of the Note and all accrued interest by the
Conversion Price immediately upon the Company
obtaining shareholder approval for the
transactions contemplated hereby.
Conversion Price: $2.34
Subordination: To $15,000,000 of inventory financing on
terms reasonably acceptable to the
Purchasers.
Additional Provisions Applicable
to the Series B Stock or the Notes:
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Anti-Dilution Protection: The Series B Stock and the Notes will include
customary anti-dilution provisions, in
addition to a full ratchet adjustment to the
Conversion Price in the event the Company
issues new equity or convertible securities
at an issue price or conversion price below
the then applicable Conversion Price. The
foregoing shall not apply to (i) any equity
securities issued pursuant to the Company's
employee option or stock incentive plan
existing on October 10,2000 or as
contemplated herein or (ii) in consideration
for services of third parties, in an
aggregate amount not to exceed 100,000 shares
of Common Stock per year.
Registration Rights: The holders of Series B Stock and Notes will
have the same piggy-back rights as the Series
A Stock and unlimited shelf registration
demands where the aggregate anticipated
proceeds to the selling holders would equal
or exceed $3,000,000.
Disclosure: The holders of Series B Stock and the Notes
will have the same rights as the holders of
Series A Stock.
Conditions to Closing: The purchase of the Common Stock and the
conversion of the Notes into shares of Series
B Stock are conditioned on: (i) approval of
the shareholders of the Company of the
issuance of the Series B and the Common
Stock; (ii) receipt of applicable
Governmental approval (or the expiration of
applicable waiting periods); (iii) conversion
of Company into a Delaware corporation; (iv)
the conclusion of a rights offering of the
Common Stock; and (v) the absence of a
material adverse change in the business,
assets, liabilities, prospects, financial
condition or results of operation of the
Company.
The purchase of the $5 million in Notes is
conditioned on: (i) negotiation and execution
of definitive documentation governing the
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transactions contemplated by the letter of
intent and term sheet, in form and substance
satisfactory to the Company and the
Purchasers by November 15, 2000, and (ii) the
absence of a material adverse change in the
business, assets, liabilities, prospects,
financial condition or results of operation
of the Company.
Public Filings: The Purchasers will have the right to approve
all filings made with U.S. Government
agencies and any material provided to
shareholders.
Employee Options: The Company will set aside 2,519,862 shares
of Common Stock to be reserved for officers,
employees and consultants, as approved by the
Board of Directors (the "New Stock Option
Plan"). The New Stock Option Plan will be
subject to shareholder approval. The options
granted to existing employees of the Company
will be priced at the fair market value on
the date of this term sheet. Options granted
under the existing stock option plans,
including options that were granted subject
to shareholder approval will remain in place.
Miscellaneous: The Note Purchase Agreement will include a
covenant that the Company shall not agree to
or take any action to approve or otherwise
facilitate any merger or consolidation or
Change of Control (including granting
approvals required under applicable
anti-takeover statutes), unless provision has
been made for the holders of Series A Stock
and Series B Stock to receive as a result of
and in connection with the transaction an
amount equal to their respective aggregate
liquidation preference for the shares of
Series A Stock and Series B Stock held by
them. The covenant will survive the
conversion of the Notes and be enforceable by
specific performance.
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