Page 75 of 87 Pages
October 12, 2000
E. Kenneth Seiff
Chairman, CEO & President
Bluefly, Inc.
42 West 39th Street
New York, New York 10018
Dear Mr. Seiff:
The purpose of this letter is to confirm the interest of Quantum Industrial
Partners LDC and affiliates ("QIP"), a strategic equity fund advised by Soros
Fund Management LLC and its affiliate Soros Private Equity Partners, along with
any party mutually acceptable to Bluefly, Inc. ("Bluefly" or the "Company") and
QIP (collectively, the "Purchasers"), in making a further strategic investment
in Bluefly for the purpose of significantly improving the financial condition of
the Company and providing it with working capital.
We envision a two-step transaction in which the Purchasers would invest a total
of up to $15,000,000 in the Company. In the first transaction, the Purchasers
will invest $5 million in the form of Senior Convertible Notes (the "New
Notes"), to be funded immediately upon execution of definitive agreements. The
aggregate principal amount of and accrued interest on the New Notes would
automatically convert into shares of the Series B Stock (as defined below) at a
price of $2.34 per share immediately following the Company obtaining shareholder
approval of the transactions described herein. The New Notes would pay interest
at the rate of 11% per annum, payable upon conversion, redemption or liquidation
(including a change of control approved by the Company's Board of Directors).
Other terms applicable to the New Notes are set forth on the attached term
sheet.
In connection with the issuance of the New Notes and the Rights Offering
described below, and subject to shareholder approval: (i) the terms of the
Series A Preferred Stock would be amended to fix the initial conversion price at
$2.34 per share and remove the anti-dilution protection for below conversion
price issuances and to make certain other changes described in the term sheet;
and (ii) the $15 million of notes previously issued pursuant to the Note and
Warrant Purchase Agreement among the Company and certain of the Purchasers dated
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March 28, 2000 (the "Existing Notes") would convert into convertible preferred
shares of the Company (the "Series B Stock") at a price of $2.34 a share. The
Series B Stock will have a cumulative compounding dividend of 8% per annum,
payable upon conversion, redemption or liquidation. The conversion price would
initially equal the purchase price. The Note Purchase Agreement will include a
covenant that the Company will not agree to or take any action to approve or
otherwise facilitate any merger or consolidation or Change of Control (as
defined in the attached term sheet), 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 (as described in the attached term sheet) for the shares
of Series A Stock and Series B Stock held by them. The terms of Series B Stock
are more fully set out in the attached term sheet.
As part of the second step of the transaction, we envision an offering (the
"Rights Offering") to be made by the Company to the holders of common stock of
the Company (the "Public Holders") enabling them to buy their pro rata share (as
a class) of up to $20 million of Common Stock at a price of $2.34 per share. In
the event that less than the full $20 million of Common Stock is purchased by
the Public Holders, the Purchasers will purchase, at $2.34 per share, Common
Stock with an aggregate purchase price equal to the lesser of (i) the difference
between $20 million and the amount purchased by the Public Holders and (ii) $10
million. The Purchasers' commitment to participate in the Rights Offering will
be contingent upon the Company obtaining shareholder approval of the
transactions contemplated hereby and migrating the Company to a Delaware
corporation.
We are prepared to negotiate definitive agreements by October 20, 2000. We
request that the Purchasers and their representatives continue to have full
access to the Company's officers, directors, counsel, representatives, auditors,
and books and records, and full opportunity to investigate the Company's title
to property and the nature and condition of its assets, businesses and
liabilities. Final approval and terms of an investment by the Purchasers in the
Company will be subject to approval of the Purchasers, which may be withheld in
their sole discretion.
By accepting this letter, the Company agrees with QIP that neither the Company
nor QIP (or their respective officers, representatives, partners or affiliates)
or management of the Company will publicly disclose the existence of this letter
or make known any facts related to the proposed transaction without the prior
written consent of the other parties, except to its respective advisors or
counsel, or as required by applicable law; provided that the Company may provide
a copy of the letter to (x) the Nasdaq SmallCap Market and/or the Boston Stock
Exchange in connection with any discussion regarding the Company's compliance
with the listing requirements of such exchanges, (y) a source of inventory
financing and (z) prospective equity investors in the Company.
The Company will reimburse all reasonable legal fees and expenses incurred by
the Purchasers in connection with the transaction, up to a total of $200,000,
whether or not this transaction is completed and the expenses of any filings
required under the Hart-Scott-Rodino Act.
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3
This letter agreement shall be construed and governed in accordance with the
laws of the State of New York, without giving effect to the conflicts of laws
principles thereof. The paragraphs relating to non-disclosure and expenses are
the only paragraphs that are binding on the parties.
We understand that the Board of Directors has established an independent
committee to consider this transaction. We look forward to working with that
committee and the Company to close this transaction, improve the financial
security of the Company and make the Company a success.
If this letter and the indicative, but non-binding term sheet are acceptable,
please sign below.
Respectfully submitted,
/S/ MICHAEL C. NEUS
--------------------------------
Michael C. Neus
Attorney-in-Fact
Soros Private Equity Partners
Agreed and accepted:
/S/ E. KENNETH SEIFF
---------------------------------
E. Kenneth Seiff
Chairman, CEO & President
Bluefly, Inc.
Date: October 12, 2000
