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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number: 333-22895
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BLUEFLY, INC.
(Name of small business issuer in its charter)
New York 13-3612110
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
42 West 39th Street, New York, NY 10018
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (212)-944-8000
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Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock,
$.01 par value
Check whether the issuer (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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB [ ]
The issuer's revenues for its most recent fiscal year were: $4,951,000
The aggregate market value of the voting and non-voting common equity held by
non-affiliates as of March 15, 2000 based upon the last sale price of such
equity reported on the National Associated of Securities Dealers Automated
Quotation SmallCap Market was approximately $39,500,000.
As of March 15, 2000, the issuer had outstanding 4,924,906 of shares of Common
Stock, $.01 par value.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Bluefly, Inc. (the "Company" or "Bluefly") is a leading Internet retailer of
designer fashions and home furnishings at outlet store prices. The Company sells
over 300 brands of designer apparel and home accessories at 25 to 75 percent off
of retail prices via its Web Site ("Bluefly.com" or the "Web Site"). The Web
Site, which also offers a variety of fashion-related content, was launched in
September 1998.
The Company's goal is to create a superior marketplace for end-of-season and
excess apparel by addressing inherent deficiencies in the traditional market for
off-price apparel that limit its appeal to both customers and designers. The
Company believes that the economic advantages provided by Internet retailing,
including inventory management efficiencies resulting from centralized
warehousing and distribution and the ability to more easily maintain an upscale
atmosphere through the design of a single online storefront, provide a unique
opportunity to address these deficiencies. The Company's goal is to utilize
these economic advantages to create a new retail paradigm that combines the best
practices of a number of successful retail and fashion companies. Accordingly,
the Company strives to combine:
1. the breadth of product selection found at Bloomingdale's;
2. the quality of customer service provided by Nordstrom;
3. the type of values typically found at traditional off-price retailers such as
T.J. Maxx;
4. the atmosphere of an upscale department store such as Barney's;
5. the type of content found at a national fashion magazine such as Vogue; and
6. the convenience of Amazon.com
In addition, Bluefly.com features MyCatalog(SM) - the Company's proprietary
database search technology which allows a user to create a personalized catalog
that features only the brands, sizes and styles in which the user is interested.
The Company believes that it has created a customer experience that is
fundamentally better than that offered by traditional off-price retailers.
Similarly, the Company believes that its upscale atmosphere, fashion content and
premium brand selection 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.
The Company was incorporated under the laws of the State of New York in 1991 as
Pivot Corporation. In 1994, the Company changed its name to Pivot Rules, Inc.,
and, in October 1998, changed its name to Bluefly, Inc. Bluefly.com was publicly
launched in September 1998. In June 1998, prior to the launch of Bluefly.com,
the Company discontinued its Pivot Rules division, which marketed a collection
of golf sportswear, in order to devote all of its energy and resources to
building Bluefly.com.
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MARKET OPPORTUNITY
THE ONLINE APPAREL MARKET
The dramatic growth of e-commerce has been widely reported and is expected to
continue. Forrester Research ("Forrester") estimates that online purchases by
U.S. consumers will grow from approximately $20 billion in 1999 to $184 billion
by 2004, representing a compound annual growth rate of 56%. International Data
Corporation estimates that the number of total online purchasers will grow from
approximately 31 million in 1998 to 183 million in 2003, representing a compound
annual growth rate of 43%. The Company believes that a number of factors will
contribute to the growth of e-commerce, including (i) shoppers' growing
familiarity and comfort with shopping online; (ii) the proliferation of devices
to access the Internet, and (iii) technological advances that make navigating
the Internet faster and easier.
The NDP Group ("NDP") reported that online apparel sales reached $1.1 billion in
1999, approximately twice the amount of 1998 sales. NPD expects triple digit
growth in online apparel sales again in 2000. According to Forrester
projections, apparel and accessory purchases will grow to $26 billion in 2004.
The Company believes that the market for online sales of apparel is growing
faster than many other categories as a result of a confluence of trends,
including (i) the growth of women online, (ii) the expansion of online traffic
from technology oriented users to users with mainstream demographics and (iii)
the development of sophisticated tools (such as the Company's MyCatalog) to
search complex product categories such as apparel.
As of January 1999, according to Jupiter Communications ("Jupiter"), women
comprised 48% of the online population, up from 45% as of January 1998.
According to Jupiter, by 2001, it is expected that women will represent over
half of the online population. Since women, according to Jupiter, spend almost
three times as much as men on the remote purchase of apparel, the Company
believes that the increasing number of women online is likely to fuel the growth
of online apparel sales. In addition, as the online audience expands from
technology savvy pioneers to include mainstream consumers, demand for online
goods and services should more closely mimic the general population's demands,
and categories such as apparel will likely benefit disproportionately. In light
of these factors, Jupiter projects that the apparel category will be one of the
fastest growing product categories online through 2002. Of course, there can be
no assurance that such expectations will prove to be correct or that they will
have a positive effect on the Company's business.
CATALOG SALES AS A PREDICTOR OF FUTURE GROWTH
In many respects, shopping for apparel online is similar to purchasing apparel
through a print catalog. In both cases, the tactile experience is absent from
the transaction and shoppers must make purchase decisions on the basis of a
photograph and a textual description. While the Company believes that
sophisticated database technology, collaborative filtering, and the
interactivity of the Web will ultimately make the Internet a far more compelling
medium than catalogs, it also believes that the success of apparel sales via
catalogs is a good predictor of the future success of apparel sales via the
Internet.
In this regard, it is worth noting that, according to a 1997 report by the
Direct Marketing Association, apparel and accessories was the largest product
category sold via catalogs and represented approximately $16 billion, or 34%, of
the industry's $48 billion of consumer sales. The success of companies such as
J.Crew and Land's End is perhaps the best evidence that people are prepared to
purchase clothing and accessories remotely despite the fact that no catalog can
convey the tactile element of clothing or provide a fitting room in which
consumers can try on clothing. In fact, nearly 23% of all adults in the United
States made at least one clothing purchase in 1995 through remote channels
according to Simmons Market Research.
In contrast, the direct-to-consumer book category, which has shown early success
on the Internet, represents a market approximately one fifth of the size of the
direct-to-consumer apparel market. In 1996, the direct marketing of books
accounted for $2.75 billion of sales according to Maxwell Sroge Company. The
Company therefore believes that it is competing in a market which is
substantially larger than the one in which Amazon.com began. Of course,
differences in markets and products make comparisons difficult.
THE MARKET FOR OFF-PRICE APPAREL
According to Discount Store News, traditional retailers of off-price apparel
such as T.J. Maxx, Marshalls and Loehmanns, Inc. sold approximately $18.5
billion dollars worth of goods in 1997. In addition, the International Council
of Shopping Centers reported that factory outlet sales of apparel and
accessories equaled $8.3 billion dollars in 1997. The Company believes that this
$26.8 billion dollar market has generally failed to address a number of consumer
needs, including convenience and customer service, and has created brand
dilution for designers who participate in the market.
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By offering only the best fashion brands and products at competitive prices in a
more convenient and compelling format with a high level of customer service, the
Company intends to provide a meaningful alternative to both consumers and
designers and revolutionize the off-price apparel industry.
THE BLUEFLY STRATEGY
The Company's objective is to become the preeminent Internet retailer of excess
and end-of-season apparel, fashion accessories, and home products. The Company
was the first to devote substantial time and resources to developing and
promoting the direct-to-consumer market for off-price name brand apparel and
accessories. This could be because, until recently, no medium existed that could
accommodate both a high volume of traffic and the logistical infrastructure
necessary to sell end-of-season and excess apparel inventory directly to
customers in an efficient and economical manner.
The direct marketing of excess inventory and end-of-season apparel requires a
cost effective medium that can display a large number of products, many of which
are in limited supply and some of which are neither available in all sizes nor
easily replenished. The Company believes print catalogs are not well suited to
this task. The paper, printing, mailing, and other production costs of a print
catalog can be significant. To support these costs, a traditional cataloger
requires products that are replenishable, available in a full range of sizes and
in substantial quantities. Similarly, television is a costly medium which
requires substantial quantities of products that are available in a full size
scale 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 cannot
permit viewers to search for products which interest them.
The Internet, however, is a far less expensive and, in many ways, more effective
medium. By using the Internet as its platform, the Company can display an almost
limitless number of items to a global audience without the high costs of
printing and mailing. With the Internet, the Company can automatically update
product images as new products arrive and other items sellout. By integrating a
sophisticated relational database with the power of the Internet, the Company
seeks to create a personalized shopping environment and allow its customers to
search for the products that specifically interest them. Accordingly, the
Company believes that the Internet is a medium which will permit it to market
its products globally in a cost-effective manner.
MARKETING INITIATIVES
The Company has implemented an aggressive advertising and marketing campaign to
increase awareness of the Bluefly brand and acquire new customers. The Company
is seeking to position the Bluefly brand as the world's first full service
outlet store, combining the service and selection found at the best high-end
retailers such as Saks Fifth Avenue or Nordstrom with savings typically
available only at off-price stores such as TJ Maxx, Ross or company-owned outlet
stores. The Company seeks to incorporate this branding effort into all aspects
of its operations, including advertising, customer service, site experience,
packaging and delivery.
The Company plans to acquire new customers through multiple channels, including
traditional and online advertising, direct marketing and the expansion of its
strategic online relationships. The Company has established strategic marketing
alliances with many of the top Internet portals, including AOL, Yahoo!, MSN,
Lycos and Excite, as well as with more targeted vertical portals such as
Women.com and Alloy Online and online search engines such as Inktomi. The
Company also obtains online advertisements through short-term agreements with a
variety of Web sites. The Company believes that it has been able to negotiate
favorable rates and positioning on most of these Web sites in part because the
portals may have recognized that online consumers will not be fully satisfied by
the single brands offered by vertical retailers such as Gap, Inc., J.Crew Group,
Inc., Spiegel, Inc. (i.e. Eddie Bauer), and Land's End, which have thus far
dominated apparel sales in the online apparel category's brief history. The
Company believes that, as an early leader in the online off-price apparel
category, it has been able to leverage its broad product offering and compelling
value for apparel to obtain favorable position on many of the major portals.
The Company's traditional advertising efforts have focused on print media. The
Company's current print media campaign, which commenced in May 1999, has run in
over 20 national magazines, including Vogue, Harper's Bazaar, Elle, InStyle,
Esquire, GQ and Seventeen. The Company also tested a radio campaign in the New
York metropolitan area during November and December 1999.
MERCHANDISING
The Company's merchandising efforts are led by a team of 7 buyers who hail from
such venerable retailers as Saks Fifth Avenue, Bergdorf Goodman and Henri
Bendel. The Company buys products directly from designer brands as well as from
retailers and other third party indirect resources. Currently, the Company
offers products from more than 300 top, name brand designers, which
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the Company believes to be the widest selection of designers available on the
Internet. It has established direct supply relationships with over 200 of such
designers. The Company believes that it has been successful in opening up more
than 200 direct relationships in part because it has devoted substantial
resources to establishing Bluefly.com as a high-end retail environment. In this
regard, the Company is committed to displaying all of its merchandise in an
attractive manner, offering superior customer service and gearing all aspects of
its business towards creating a better channel for top designers to liquidate
their excess inventory. In 1999, approximately 14.6% of the Company's inventory
was purchased from one supplier, down from 40.6% in 1998. Based upon its
successes to date in establishing both direct and indirect supply relationships,
the Company believes that it will be able to obtain the quantity, selection and
quality of fashion products necessary to operate its business, however there can
be no assurance that this will be the case.
The Company takes title and delivery of its inventory prior to offering it
online because of the apparel industry's widespread practice to short ship
product and reallocate products after purchase orders are placed. This step is
taken to assure that customers' purchases are in-stock and available for
immediate shipment. Although several competitive online business models exist
that rely on suppliers to fill orders for Web stores, the Company believes that
its business model is superior. The Company's approach also significantly
increases the pool of potential suppliers since many major vendors will not
enter into a relationship with an online retailer if it obligates the vendor to
operate on a consignment basis or fulfill product directly. In several cases,
the Company has entered into, and will continue to enter into, consignment
relationships with certain of its suppliers where it is beneficial to the
Company. To date, such relationships have not been material. The Company does
not anticipate that consignments will comprise a meaningful part of its business
in the near future.
For a number of reasons, the Company believes that its inventory risk can be
lower than that of traditional retailers:
(i) By centralizing its inventory, the Company believes it will be able to
optimize its inventory turns because it is not forced to anticipate sales
by region or allocate merchandise between multiple locations.
(ii) The Company's Web Site captures a tremendous amount of customer data
that the Company intends to use to optimize its purchase of inventory. For
example, as a customer navigates through the virtual store, the Company
can track the customer's path and draw certain conclusions based on which
departments, sizes, designers and product categories are clicked on as
well as the products that are actually being purchased. This will
significantly aid the Company in planning inventory purchases. In
addition, the Company's MyCatalog feature also can facilitate better
inventory planning. In order to use this service, customers enter their
sizes, favorite departments, product categories and designers to produce a
personalized catalog of all the products currently in stock that match
their interest. As a result of this wealth of customer data, the Company
may be able to better predict the demand for certain brands and product
categories, as well as make more informed buying decisions.
(iii) Unlike traditional brick and mortar retailers, the Company can change
the pricing of its products almost instantaneously and can price products
based on supply and demand.
(iv) Unlike traditional brick-and-mortar retailers, which have a limited
amount of shelf space, significant rent payments and attendant sales
personnel costs, the Company holds its inventory in a warehouse with a
lower per square foot rental charge, minimal personnel costs and a vast
amount of shelf space. These factors create lower inventory carrying
costs.
(v) The Internet is global and the Company ships products to over 20
countries in the northern and southern hemisphere. Consequently, the
Company may be less susceptible to seasonal markdowns, because, as the
northern hemisphere is entering its Summer, the southern hemisphere is
entering its Winter.
BLENDING COMMERCE AND CONTENT
The Company also believes that the Internet provides it with the opportunity to
create an innovative contextual merchandising environment by integrating its
product offerings into fashion content. As a result, the Company hopes to
collapse the opinion forming, browsing and buying stages of the purchase process
into a single step. As part of this effort, the Company has developed exclusive
content relationships with popular fashion magazines such as Harper's Bazaar,
Marie Claire, Esquire, Seventeen and Metropolitan Home. These magazines produce
co-branded pages displayed on Bluefly.com that present the latest fashion trends
and highlight products available for sale on Bluefly.com that allow readers to
keep up with those trends.
WAREHOUSING AND FULFILLMENT
The Company stores its inventory at a third party warehouse and fulfillment
center located in Niles, Illinois. When the Company receives an order, the
information is transmitted to the fulfillment center which picks and packs the
items included in the order and ships it directly to the customer. The Company's
inventory database is updated on a real-time basis, allowing the Company to
display on its Web Site only those styles, sizes and colors of product available
for sale. The Company strives to pick, pack and ship all of its orders within
two business days.
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CUSTOMER SERVICE
The Company believes that a high level of customer service and support is
critical to differentiating itself from traditional off-price retailers and
maximizing customer acquisition and retention efforts. The Company's customer
service effort starts with its 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 customers' most frequent questions.
For customers who prefer e-mail or telephone assistance, the Company's customer
service representatives are available seven days a week to provide assistance.
To insure that customers are satisfied with their shopping experience, the
Company generally allows returns for any reason within 90 days of the sale for a
full refund.
TECHNOLOGY
The Company has implemented a broad array of state-of-the-art technology that
facilitates Web site management, complex database search functionality, customer
interaction and personalization, transaction processing, fulfillment and
customer service functionality. Such technology includes a combination of
proprietary technology and commercially available, licensed technology. To
address the critical issues of privacy and security on the Internet, the Company
incorporates, for transmission of confidential personal information between
customers and the Company's Web server, Secure Socket Layer Technology ("SSL")
such that all data is transmitted via a fully DES 128-bit encrypted session.
The Company utilizes a major Internet service provider to host Bluefly.com and
provide certain hardware and software as well as year round 24 hour systems
support. The server and network architecture is designed to provide high speed,
reliable access 24 hours a day, 365 days a year and allow for rapid scaling of
hardware and bandwidth to accommodate sudden increases in site traffic.
COMPETITION
Electronic commerce generally, and, in particular, the online retail apparel and
fashion accessories market, is a new, dynamic, high growth market. The Company's
competition for online customers comes from a variety of sources, including
existing land-based retailers such as The Gap, Nordstrom, and Macy's which are
using the Internet to expand their channels of distribution, and less
established companies such as Boo.com, which are building their brands online.
In addition, the Company's competition for customers comes from traditional
direct marketers such as L.L. Bean, Lands' End, J.Crew and Spiegel's, television
direct marketers such as QVC, land-based off price retail stores, such as T.J.
Maxx, Marshalls, Filene's Basement and Loehmanns, which may or may not use the
Internet to grow their customer base, and real estate companies who own
land-based retail properties such as Prime Retail. Many of these competitors
have longer operating histories, significantly greater resources, greater brand
recognition and more firmly established supply relationships. Moreover, the
Company expects additional competitors to emerge in the future.
The Company believes that the principal competitive factors in its market
include: brand recognition, selection, convenience, order delivery performance,
customer service, site features, content and price. Although the Company
believes that it compares favorably with its competitors, it recognizes that
this market is relatively new and is evolving rapidly, and, accordingly, there
can be no assurance that this will continue to be the case.
INTELLECTUAL PROPERTY
The Company relies on various intellectual property laws and contractual
restrictions to protect its 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 the Company's intellectual
property without its authorization. In addition, the Company pursues the
registration of its trademarks and service marks in the U.S. and
internationally. However, effective intellectual property protection may not be
available in every country in which the Company's services are made available
online.
The Company relies on technologies that it licenses from third parties. These
licenses may not continue to be available to the Company on commercially
reasonable terms in the future. As a result, the Company may be required to
obtain substitute technology of lower quality or at greater cost, which could
materially adversely effect the Company's business, financial condition, results
of operations and cash flows.
The Company does not believe that its 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 the Company's business, sales policies
or technologies
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infringe their rights. The Company expects 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 the
Company to enter into royalty or licensing agreements. Such royalty or licensing
agreements might not be available on terms acceptable to the Company or at all.
As a result, any such claim of infringement against the Company could have a
material adverse effect upon the Company's business, financial condition,
results of operations and cash flows.
GOVERNMENTAL APPROVALS AND REGULATIONS
The Company is 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.
Although the Company is not aware of any permits or licenses that are required
in order for it to sell apparel and fashion accessories on the Internet, 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 such permits or licenses
will be obtainable. The Company 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 the Company will be able to comply with such legislation or
statutes. The Company's Internet operations are not currently impacted by
federal, state, local and foreign environmental protection laws and regulations.
EMPLOYEES
As of March 15, 2000, the Company had 75 full-time employees and 7 part-time
employees. None of the Company's employees are represented by a labor union and
the Company considers its relations with its employees to be good.
RISK FACTORS
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 the Company or persons acting on the Company's 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. The Company undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
LIMITED WORKING CAPITAL; NEED FOR ADDITIONAL FINANCING. The Company's business
is capital intensive, and it needs additional financing to effect its business
plan. The Company has obtained a commitment from affiliates of Soros Private
Equity Partners ("Soros"), the Company's largest shareholder, 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 finacings at the time that such
financing is provided (the "Soros Commitment"). The Company anticipates, based
on current plans and assumptions relating to its operations, that the proceeds
from the Series A Preferred Stock Financing, the Soros Note and the Company's
next round of financing (whether through the Soros Commitment or otherwise)
together with existing resources and cash generated from operations, should be
sufficient to satisfy the Company's current cash requirements through the end of
2000. However, the Company intends to seek additional debt and/or equity
financing during 2000 through a public offering, private placement or otherwise
in order to maximize the growth of its business. There can be no assurance that
additional financing will be available to the Company upon acceptable terms, or
at all. The failure to obtain additional financing, when needed, would have a
material adverse effect on the Company's business, financial condition and
results of operations, and significantly slow the pace of both customer and
revenue growth. See "Management's Discussion and Analysis - Liquidity and
Capital Resources."
POTENTIAL DILUTION. To the extent that the Company raises additional capital by
issuing equity securities (whether through the Soros Commitment or otherwise),
current shareholders of the Company may experience significant dilution.
Moreover, in connection with such a transaction, the Company could issue
securities that have rights senior to the rights of holders of the
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Common Stock. In addition, in the event that, in connection with any private
financing, the Company issues (1) Common Stock at less than $10.50 per share or
(2) securities convertible into Common Stock at a rate of less than $10.50 per
share, the holders of the Series A Preferred Stock would be entitled to
additional securities as a result of their anti-dilution rights under the
Company's Certificate of Incorporation. See "Management's Discussion and
Analysis - Liquidity and Capital Resources."
LACK OF OPERATING HISTORY OF INTERNET BUSINESS; DIFFICULTY IN FORECASTING. The
Company initiated the planning of Bluefly.com in March 1998 and launched
Bluefly.com in September 1998. As a result of its limited operating history, it
is difficult for the Company to forecast its revenues accurately. Moreover, the
Company bases its current and future expense levels and operating plans on
expected revenues, and a significant portion of its expenses are, to a large
extent, fixed in the short term. Accordingly, the Company may be unable to
adjust its spending in a timely manner to compensate for any unexpected revenue
shortfall. This inability could cause its net loss in a given quarter to be
greater than expected and could also cause the Company's operating results in
some future quarter to fall below the expectations of securities analysts and
investors. In that event, the trading price of the Company's Common Stock could
decline significantly.
START-UP RISKS. The Company has incurred and expects to continue to incur
significant expenditures in connection with the establishment, expansion and
maintenance of Bluefly.com. These expenses include advertising and marketing
expenses which are necessary to attract a high volume of traffic to Bluefly.com,
research and development costs and other infrastructure costs.
RECENT LOSSES; ANTICIPATED FUTURE LOSSES. The Company incurred a net loss from
continuing operations of $13,257,000 in 1999 and $2,478,000 in 1998. The Company
anticipates that losses will continue for the foreseeable future as it incurs
and expends substantial amounts on the development, marketing, advertising and
operations of Bluefly.com to build recognition and market share.
DEPENDENCE ON INDIRECT SUPPLY SOURCES; RISK OF LITIGATION. The Company purchases
products both directly from brand owners, and indirectly from retailers and
third party distributors. The purchase of product through indirect sources
increases the risk that the Company will mistakenly purchase and sell
non-authentic or damaged goods. The Company has taken steps to insure that it
sells only authentic, high quality name brand products and to avoid selling any
non-authentic or damaged goods. While the Company believes that its procedures
are effective, the possibility for error exists and therefore it faces potential
liability under applicable laws, regulations, agreements and orders for the sale
of non-authentic or damaged goods. Moreover, any claim by a brand owner, with or
without merit, could be time consuming, result in costly litigation and generate
bad publicity for the Company. In addition, brand owners could establish
procedures to limit or control the Company's ability to purchase products
indirectly, and 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.
In the event that the Company acquires 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, and the importer may have a civil action for damages against us.
DIFFICULTIES IN MANAGING GROWTH. The Company's historical growth has placed, and
any further growth is likely to continue to place, a significant strain on the
Company's management and administrative resources. Any failure to manage growth
effectively could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company has grown from 27
employees in March 1999 to 82 employees in March 2000. To be successful, the
Company must continue to implement management information systems and improve
its operating, administrative, financial and accounting systems and controls.
The Company will also need to train new employees and maintain close
coordination among its executive, accounting, finance, marketing, merchandising,
operations and technology organizations. Moreover, the Company's business is
dependent upon its ability to expand its third party fulfillment operations,
technology infrastructure and inventory levels to accommodate increases in
demand, particularly during the peak holiday selling season. In addition, the
Company's planned expansion efforts in these areas could cause disruptions in
its business. Any failure to expand the Company's third party fulfillment
operations, technology infrastructure and inventory levels at the pace needed to
support customer demand could have a material adverse effect on the Company's
business, financial condition and results of operations.
DEPENDENCE ON THIRD PARTIES AND CERTAIN RELATIONSHIPS. The Company will be
heavily dependent upon its relationships with its fulfillment operations
provider and Web hosting provider, as well as delivery companies like United
Parcel Service of America, Inc., to service its customers' needs. The Company's
business is also generally dependent upon its ability to obtain the services of
programmers and Web site designers and other persons and entities necessary for
the development and maintenance of Bluefly.com. The failure of the Company to
obtain the services of any person or entity upon which it is dependent on
satisfactory terms, or the inability to replace such relationship would have a
material adverse impact on the Company's business prospects, financial condition
and results of operations.
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COMPETITION. Electronic commerce generally and the online retail apparel and
fashion accessories market are new, rapidly changing and intensely competitive.
See "Competition."
AVAILABILITY OF MERCHANDISE. Although the Company believes it has and will
continue to establish relationships with vendors which will offer competitive
sources of name brand apparel and fashion accessories for Bluefly.com, there can
be no assurance that it will be able to obtain the quantity, selection or brand
quality of items which the Company believes is necessary to operate. See
"Merchandising."
UNCERTAIN ACCEPTANCE OF BRAND. The Company believes that establishing,
maintaining and enhancing its brand is a critical aspect of its efforts to
attract and expand its online traffic. Promotion of Bluefly.com will depend
largely on the Company's success in providing a high-quality online experience
supported by a high level of customer service, which cannot be assured.
Establishing brand recognition will also require significant advertising and
marketing expenditures. The Company's future success, and in particular its
revenues and operating results, depend upon its ability to successfully execute
several key aspects of its business plan. The Company must continually increase
the dollar volume of transactions booked through Bluefly.com, either by
generating significantly higher and continuously increasing levels of traffic to
Bluefly.com or by increasing the percentage of visitors to its online sites who
purchase products, or through some combination thereof. The Company must also
achieve a high level of repeat purchasers. In addition, the Company must deliver
a high level of customer service and compelling content. Although the Company
has established relationships with portal companies such as, America Online,
Lycos, The Microsoft Network, Women.com, TheGlobe.com, Inktomi and Yahoo!, there
can be no assurance that these relationships can be maintained.
RELIANCE ON INTERNALLY DEVELOPED SYSTEMS; SYSTEM DEVELOPMENT RISKS. A key
element of the Company's 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 and its transaction-processing systems and
network infrastructure are critical to the Company's reputation and its ability
to attract and retain customers.
INFRASTRUCTURE NECESSARY TO SUPPORT EXPLOSIVE GROWTH OF INTERNET. The Internet
and other online services may not be accepted as a viable commercial marketplace
for a number of reasons, including potentially inadequate development of the
necessary network infrastructure or delayed development of enabling technologies
and performance improvements. To the extent that the Internet and other online
services continue to experience significant growth in their number of users,
their frequency of use or an increase in their bandwidth requirements, there can
be no assurance that the infrastructure for the Internet and other online
services will be able to support the demands placed upon them. In addition, the
Internet or other online services could lose their viability due to delays in
the development or adoption of new standards and protocols required to handle
increased levels of Internet or other online service activity, or due to
increased governmental regulation. Changes in or insufficient availability of
telecommunications services to support the Internet or other online services
also could result in slower response times and adversely affect usage of the
Internet and other online services generally and Bluefly.com in particular.
RAPID TECHNOLOGICAL CHANGE. To remain competitive, the Company must continue to
enhance and improve the responsiveness, functionality and features of
Bluefly.com. The online commerce industry is characterized by rapid
technological change, evolving user and customer requirements and preferences,
frequent new product, service and technology introductions, and the emergence of
new industry standards and practices.
DEPENDENCE ON CONTINUED GROWTH OF ONLINE COMMERCE AND OF ONLINE PURCHASES OF
APPAREL. The Company's future revenues and any future profits will be dependent
upon the widespread acceptance and use of the Internet and other online services
as an effective medium of commerce by consumers.
UNCERTAINTIES IN APPAREL MARKET; UNEXPECTED CHANGES IN FASHION TRENDS. The
apparel industry historically has been subject to substantial cyclical
variations. The Company and other apparel vendors rely on the expenditure of
discretionary income for most, if not all, sales. Any downturn, whether real or
perceived, in economic conditions or prospects could adversely affect consumer
spending habits and the Company's business, financial condition and operating
results. Fashion trends can change rapidly, and the Company's business is
sensitive to such changes. There can be no assurance that the Company will
accurately anticipate shifts in fashion trends and adjust its merchandise mix to
appeal to changing consumer tastes in a timely manner. If the Company misjudges
the market for its products or is unsuccessful in responding to changes in
fashion trends or in market demand, it could experience insufficient or excess
inventory levels or higher markdowns, either of which would have a material
adverse effect on its business, financial condition and results of operations.
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SEASONALITY AND QUARTERLY FLUCTUATIONS; COST OF RETURNS. The Company expects
that its Internet business will be subject to seasonal fluctuations affecting
apparel vendors generally as well as to the slowdown of Internet usage during
the summer months. The Company recognizes that remote purchases of apparel and
fashion accessories may be subject to higher return rates than traditional store
bought merchandise. The Company has established a liberal return policy in order
to accommodate its customers and overcome any hesitancy they may have with
remote purchasing. If return rates are higher than expected, the Company's
business, prospects, financial condition and results of operations could be
materially adversely affected.
DEPENDENCE ON KEY PERSONNEL. The Company believes its success will depend to a
significant extent on the efforts and abilities of its Executive Officers. The
Company has entered into employment agreements with Mr. Seiff, Mr. Barry, Mr.
Stevens and Mr. Morris which expire in December 2002, July 2002, November 2003
and July 2002, respectively. The Company maintains a $1.2 million key person
life insurance policy on the life of Mr. Seiff. The Company's operations will
also depend to a great extent on its ability to attract new key personnel with
Internet experience and retain existing key personnel in the future. The market
for personnel with Internet experience is extremely competitive.
RISKS ASSOCIATED WITH ENTRY INTO NEW BUSINESS AREAS. The Company may choose to
expand its operations by developing new Web sites, promoting new or
complementary products or sales formats, expanding the breadth and depth of
products and services offered, expanding its market presence through
relationships with third parties, adopting non-Internet based channels for
distributing its products, or consummating acquisitions or investments.
Expansion of the Company's operations in this manner would require significant
additional expenses and development, operations and editorial resources and
would strain the Company's management, financial and operational resources.
There can be no assurance that the Company would be able to expand its efforts
and operations in a cost-effective or timely manner or that any such efforts
would increase overall market acceptance. Furthermore, any new business or Web
site (including Bluefly.com) that is not favorably received by consumer or trade
customers could damage the Company's reputation.
RISKS ASSOCIATED WITH INTERNATIONAL SALES AND OPERATIONS. International sales
are subject to inherent risks, including: unexpected changes in regulatory
requirements and tariffs, difficulties in staffing and managing foreign
operations, longer payment cycles, greater difficulty in accounts receivable
collection, potentially adverse tax consequences, price controls, or other
restrictions on foreign currency, differing laws governing intellectual property
rights and difficulties in obtaining export and import licenses. To the extent
the Company develops significant revenues from international sales, gains and
losses on the conversion of foreign payments into U.S. dollars may contribute to
fluctuations in the Company's results of operations and fluctuating exchange
rates could cause reduced gross revenues and/or gross margins from
dollar-denominated international sales.
SUBSTANTIAL OWNERSHIP BY SOROS. Soros currently owns 460,000 shares of the
500,000 outstanding shares of the Company's Series A Preferred Stock. The shares
of Series A Preferred Stock owned by Soros are convertible into 876,190 shares
of the Company's Common Stock (exclusive of any dividends on the Series A
Preferred Stock, which may be paid, at the option of the Company, through the
issuance of Common Stock), or approximately 15% of the Company's outstanding
Common Stock. The holders of the Series A Preferred Stock vote on an
"as-converted" basis with the holders of the Common Stock. In addition, in
connection with the Soros Note and the Soros Commitment, Soros received a
warrant 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 (the "Soros Warrant"),
exercisable for a term of 5 years. By virtue of their ownership of the Series A
Preferred Stock, Soros has certain rights to appoint a designee to the Company's
Board of Directors, and the Company is required to get the approval of such
designee prior to taking certain actions. In addition, the holders of the Series
A Preferred Stock have certain pre-emptive rights to participate in future
equity financings and certain anti-dilution rights which could result in the
issuance of additional securities to such holders, and may purchase additional
equity securities of the Company pursuant to the Soros Note and the Soros
Commitment. Because of Soros' large percentage of ownership and its rights as
the holder of Series A Preferred Stock, Soros may have significant influence
over the Company's management and policies, such as the election of the
Company's directors, the appointment of new management and the approval of any
other action requiring the approval of the Company's shareholders, including any
amendments to the Company's certificate of incorporation and mergers or sales of
all or substantially all of the Company's assets.
SHARES ELIGIBLE FOR FUTURE SALE. The market price of the Company's Common Stock
could decline as a result of future sales of substantial amounts of its Common
Stock, or the perception that such sales could occur. Furthermore, the holders
of the Series A Preferred Stock have the right to require the Company to
register the shares of Common Stock underlying these securities under certain
circumstances, which may facilitate their sale of shares in the public market.
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ITEM 2. PROPERTIES
The Company leases approximately 17,300 square feet of office space in New York
City. The property is in good operating condition. The lease expires in 2009.
The Company's total lease payments for the current space during 2000 will be
approximately $214,000. The Company is currently seeking additional office
space.
ITEM 3. LEGAL PROCEEDINGS
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. In March 2000, 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Shareholders (the "Meeting") was held on
December 9, 1999. At the close of business on the record date for the Meeting
(which was October 28, 1999) there were 4,920,206 shares of Common Stock issued
and outstanding, each entitled to one vote, and 500,000 shares of the Company's
Series A Preferred Stock, $.01 par value (the "Series A Preferred Stock"), each
entitled to two votes. The total number of votes entitled to vote at the Meeting
was therefore 5,920,206. Holders of Common Stock and/or Series A Preferred Stock
entitled to cast 5,533,418 votes were present at the Meeting, either in person
or by proxy. The following individuals were elected to the Company's Board of
Directors, to hold office until the Company's Annual Meeting of Shareholders in
the year indicated below and until their respective successors are duly elected
and qualified:
NOMINEE IN FAVOR WITHHELD TERM
- ------- -------- -------- ----
Red Burns 5,510,093 23,325 2000
Martin Miller 5,510,093 23,325 2000
Robert G. Stevens 5,510,093 23,325 2000
E. Kenneth Seiff 5,510,093 23,325 2001
Mark H. Goldstein 5,510,093 23,325 2001
Ellin J. Saltzman 5,510,093 23,325 2001
In addition, prior to the Meeting, the holders of the Series A Preferred Stock
designated Neal Moszkowski to the Board of Directors pursuant to their rights
under the Company's Certificate of Incorporation.
At the Meeting, shareholders also approved certain amendments to the Company's
1997 Stock Option Plan (the "Plan") to (i) increase the aggregate number of
shares of Common Stock which may be the subject of options granted pursuant to
the Plan from 500,000 shares to 1,500,000 shares; (ii) decrease the number of
options initially granted pursuant to the Plan to each non-employee director
upon election or appointment as a director from 5,000 shares to 3,750 shares of
Common Stock; and (iii) increase the size of the annual option grant made
pursuant to the Plan to each non-employee director who is a member of the Board
of Directors on April 30 of each year during the term of the Plan from 2,500
shares to 3,750 shares of Common Stock. Voting on this matter was as indicated
below:
IN FAVOR AGAINST ABSTAINED BROKER NON-VOTES
- -------- ------- --------- ----------------
2,744,864 62,558 7,751 2,718,245
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock, par value $.01 per share ("Common Stock") is quoted
on The Nasdaq SmallCap Market. The following table sets forth the range of high
and low bid price information for the Common Stock based on quotations from the
Nasdaq SmallCap Market for the periods indicated:
FISCAL 1998 HIGH LOW
----------- ---- ---
First Quarter $2.13 $1.94
Second Quarter $6.59 $1.50
Third Quarter $4.67 $1.94
Fourth Quarter $24.19 $2.00
FISCAL 1999 HIGH LOW
----------- ---- ---
First Quarter $17.88 $8.69
Second Quarter $12.88 $7.50
Third Quarter $14.00 $8.00
Fourth Quarter $16.69 $8.50
As of March 15, 2000, there were approximately 82 holders of record of the
Common Stock. The Company believes there were substantially in excess of 5,000
beneficial holders of the Common Stock as of such date.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
The Company is a leading Internet retailer of designer fashions and home
furnishings at outlet store prices. The Company offers an extensive selection of
designer products from over 300 brands, which the Company believes to be the
broadest selection of designer products available on the Internet.
The Company derives revenue primarily from the sale of designer products on its
Web Site. Merchandise revenue is recognized when goods are shipped to the
Company's customers from its third party warehouse, which occurs only after
credit card authorization. For sales of merchandise, the Company is responsible
for pricing, processing and fulfilling the orders. The Company processes
merchandise returns and bears the credit risk for these transactions. The
Company generally permits returns for any reason within 90 days of the sale.
Accordingly, the Company reserves for estimated future returns and bad debt at
the time of shipment based on historical data. Historically, the Company's rate
of product returns and bad debt has been approximately 27%. However, the
Company's future return and bad debt rates could differ significantly from
historical figures.
The Company has incurred substantial costs to develop its Web Site and
infrastructure. In order to expand its business, the Company intends to invest
heavily in sales, marketing, merchandising, operations, information systems,
site development and additional personnel to support these activities. The
Company, therefore, expects to continue to incur substantial operating losses
for the foreseeable future.
In June 1999, the Company launched a house and home division, and, in July 1999,
the Company launched a complete redesign of its Web Site, which, among other
things, introduced a teens department and a gifts department. The Company
believes that the redesigned Web Site offers consumers a better shopping
experience, including significantly improved navigation and search options,
larger image sizes and a faster checkout process. The redesigned Web Site can
also handler larger volumes of traffic and order flow. During July and August of
1999, the Company implemented real-time credit card authorization and fraud
screening software designed to increase the order fill rate and reduce
fraudulent credit card charges. Throughout 1999, the Company added additional
Web servers and technology to speed the Web Site's response time.
In July 1999, the Company leased an additional 8,300 square feet of space for
its corporate headquarters. This additional space allowed the Company to hire
more employees and move its customer service department in-house. As a result of
these changes, response times to customer inquiries have improved significantly.
The additional space also allowed the Company to expand its
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production studio space in order to nearly triple the number of products it can
style, photograph and describe each week.
In August 1999, the Company moved to a larger, more robust third party warehouse
and fulfillment center in order to accommodate increased inventory levels and
higher order volume. The new facility has over three times the amount of square
footage as was available at the Company's previous third party warehouse and
fulfillment center.
In December 1999 and January 2000, the Company entered into a series of
strategic alliances with fashion magazines, including Harpers' Bazaar, Esquire,
Marie Claire, Metropolitan Home and Seventeen, through which the magazines
provide exclusive content for the Web Site highlighting current fashion trends
and products sold by Bluefly that help a customer to keep up with current
trends.
The Company's quarterly net sales grew throughout 1999, from $305,000 during the
first quarter, to $741,000 in the second quarter, to $863,000 in the third
quarter, to approximately $3 million in the fourth quarter.
Similarly, the Company's success at converting traffic into revenues has
continued throughout the year, with monthly average gross revenue per unique
visitor (as measured by Media Metrix) increasing from $.70 during the first
quarter, to $.93 during the second quarter, to $1.49 during the third quarter,
to $2.76 during the fourth quarter. The Company believes that this increase in
its ability to convert visitors into customers reflects the wide scale
improvements that it made to its Web site design, technology infrastructure and
merchandising mix throughout the year.
The Company also made significant strides in broadening its selection of
designer products to include over 300 brands, of which over 200 have entered
into direct supply relationships with the Company.
Bluefly.com was publicly launched in September 1998. In June 1998, prior to the
launch of Bluefly.com, the Company discontinued its Pivot Rules division, which
marketed a collection of golf sportswear in order to devote all of its resources
to building Bluefly.com.
The Company has presented its financial statements in order to reflect the
discontinued operations in accordance with generally accepted accounting
principles. Although the start-up phase of Bluefly.com did not begin until April
1998 and the site was not launched until September 8, 1998, in accordance with
generally accepted accounting principles, the Company reflected in continuing
operations for 1998 (i) general and administrative expenses, (ii) interest
income, and (iii) related tax provisions, all of which relate to on-going
corporate activities. Accordingly, net losses from continuing operations in
1998, attributable to those aspects of the business which have continued were
$197,000.
RESULTS OF OPERATIONS
NET SALES: For 1999, gross sales (revenue from product sales before any
adjustment for reserves) totaled $6,871,000. The Company recorded a provision
for returns and credit card chargebacks and other discounts of $1,920,000, or
approximately 27.9% of gross sales. The reserve allowance takes into account the
Company's 90-day return policy and actual experience to date, which may vary
over time. After the necessary provisions for returns and credit card
chargebacks and adjustments for uncollected sales taxes, the Company's net sales
for 1999 were $4,951,000. Bluefly.com was launched in September 1998. Net sales
for the period from launch to December 31, 1998 were $215,000.
COST OF SALES: Cost of sales for 1999 totaled $3,766,000, resulting in gross
margin of 23.9%. Cost of sales consists of the cost of product sold to
customers, in-bound shipping costs, inventory reserves and packing materials.
Bluefly.com was launched in September 1998. Cost of sales for the period from
launch to December 31, 1998 were $266,000, resulting in negative gross profit of
$51,000. The negative gross profit in 1998 was the result of inventory reserves
arising from situations during the start-up phase of Bluefly.com in which the
Company pre-paid for merchandise and (i) received merchandise from suppliers
that did not meet the high standards of quality set by the Company and (ii)
received less than the amount purchased.
SELLING, MARKETING AND FULFILLMENT EXPENSES: Selling, marketing and fulfillment
expenses totaled $11,424,000 for 1999, representing costs associated with online
strategic marketing relationships, print and radio advertising, Web Site
hosting, inventory management, including outbound shipping costs, fulfillment
and customer service. Selling, marketing and fulfillment expenses for 1998 were
approximately $1,121,000.
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GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses were
$3,460,000 for 1999, compared to $1,166,000 for 1998. General and administrative
expenses include salaries and related expenses, recruiting fees, insurance
costs, accounting and legal fees, depreciation and other office related
expenses. The increase in general and administrative expenses in 1999, as
compared to 1998, was largely the result of an increase in employees, fees paid
to consultants and search firms and legal expenses. The Company has increased
its head count across all departments, growing the Company from 12 employees as
of December 31, 1998 to 75 as of December 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999 and March 29, 2000, the Company had approximately $7.9
million and $4.0 million, respectively, of liquid assets, entirely in the form
of cash and cash equivalents. As of December 31, 1999, the Company had
approximately $7,020,000 of inventory.
Pursuant to the Soros Commitment, Soros has agreed, at the Company's option, to
provide 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 Company's investment banker, Credit Suisse First Boston, is
advising it in determining its most prudent financing strategy, including
whether to proceed with a round of financing with Soros pursuant to the Soros
Commitment, with one or more other private investors or some combination
thereof. In the interim, Soros has provided the Company with $3 million in debt
financing through the issuance of a note that bears interest at the 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 the Soros Note, the Company has granted Soros the Soros
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.
In July 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 in cash or in
Common Stock, at the Company's option. 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. Excluding shares of Common Stock that may be issued as payment
for accrued dividends, the 500,000 shares of Series A Preferred Stock will be
convertible into 952,381 shares of Common Stock, subject to customary
anti-dilution provisions. The Series A Preferred Stock has a liquidation
preference equal to the face value of the Series A Preferred Stock 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 dividends. The holders of the Series A Preferred Stock vote on an "as
converted" basis with holders of Common Stock and 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.
In April 1999, because it had divested its golf wholesale division, the Company
terminated its credit arrangement and Retail Collection Factoring Agreement with
its factor. All funds deposited with the factor were transferred to the Company.
In May 1997, the Company completed an initial public offering (the "IPO") of
equity securities. Pursuant to the IPO, the Company sold 1,500,000 units (the
"Units"), with each Unit consisting of one share of Common Stock and one
redeemable common stock purchase warrant entitling the holder thereof to
purchase one share of Common Stock at $5.00 per share during the four-year
period commencing on May 15, 1998 (the "Warrants"). In connection with the IPO,
the Company also sold to the underwriter of the IPO, for an aggregate purchase
price of $100, 150,000 Unit Purchase Options ("UPO's"), with each UPO entitling
the holder thereof to purchase one Unit at an initial price of $8.00 per Unit
during the four-year period commencing on May 15, 1998.
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. In December 1998, the Company provided notice of its election to
redeem the Warrants. Included in the redemption were 1,500,000
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outstanding Warrants that were issued in connection with the IPO in May, 1997,
363,000 outstanding Warrants that were issued in connection with the Company's
1997 bridge financing, and, 135,250 Warrants that were issued in connection with
the exercise of the UPO's. During December 1998, 573,250 Warrants were exercised
for gross proceeds of $2,867,000 and an additional 1,412,374 Warrants were
exercised in January 1999 for gross proceeds of $7,062,000. In addition,135,250
UPO's were exercised in December 1998 for gross proceeds of $1,082,000 and 900
UPO's were exercised in January 1999 for proceeds of $7,000. As of December 31,
1999, there were 11,500 UPO's outstanding.
The Company anticipates, based on current plans and assumptions relating to its
operations, that the proceeds from the Series A Preferred Stock financing, the
Soros Note, and the Company's next round of financing (whether through the Soros
Commitment or otherwise), together with existing resources and cash generated
from operations, should be sufficient to satisfy the Company's current cash
requirements through the end of 2000. However, the Company intends to seek
additional debt and/or equity financing during 2000 through a public offering,
private placement or otherwise in order to maximize the growth of its business.
There can be no assurance that any additional financing or other sources of
capital will be available to the Company upon acceptable terms, or at all. The
inability to obtain additional financing, when needed, would have a material
adverse effect on the Company's business, financial condition and results of
operations and significantly slow the pace of both customer and revenue growth.
See "Risk Factors - Limited Working Capital; Need for Additional Financing" and
"Potential Dilution."
As of December 31, 1999, the Company has marketing and advertising commitments
of $1,695,000 through December 31, 2000. In addition, the Company believes that
in order to grow the business, the Company will need to make additional
marketing and advertising commitments in the future.
In order to continue to expand its customer base and establish its brand name,
the Company intends over the next 12 months to expand its advertising and
commerce relationships with the major portals and national publications.
However, the Company's marketing budget is subject to a number of factors,
including the Company's results of operations as well as the Company's ability
to raise additional capital. See "Risk Factors - Limited Working Capital; Need
for Additional Financing."
In order to continue to expand its product offerings, the Company intends to
expand its relationships with suppliers of end-of-season and excess name brand
apparel and fashion accessories. The Company expects that its suppliers will
continue to include retail stores and designers that sell excess inventory as
well as third party end-of-season apparel aggregators. See "Risk Factors-Limited
Working Capital; Need for Additional Financing." To achieve its goal of offering
a wide selection of top name brand designer clothing and fashion accessories,
the Company may acquire certain goods on consignment and may explore leasing or
partnering select departments with strategic partners and distributors. See
"Risk Factors-Availability of Merchandise."
The Company expects to hire and train additional employees for the operations
and development of Bluefly.com. However, the Company's ability to hire such
employees is subject to a number of factors, including the Company's results of
operations as well as the Company's ability to raise additional capital.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Commission issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 summarizes
certain of the Commission's views in applying generally accepted accounting
principles to revenue recognition in financial statements. SAB 101 is not a rule
or interpretation of the Commission, however, it represents interpretations and
practices followed by the Division of Corporate Finance and 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.
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ITEM 7. FINANCIAL STATEMENTS
(a) The following Financial Statements are attached hereto in response to
Item 7:
Report of Independent Accountant F-2
Independent Auditors' Report F-3
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-4
Consolidated Statements of Operations for the three years ended
December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Changes in Shareholders' Equity for
the three years ended December 31, 1999, 1998 and 1997 F-6
Consolidated Statements of Cash Flows for the three years ended
December 31, 1999, 1998 and 1997 F-7
Notes to Consolidated Financial Statements F-9
16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of Bluefly, Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 7 on page 16 present fairly, in all material respects, the
consolidated financial position of Bluefly, Inc. at December 31, 1999 and the
results of their operations and of their 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 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 the opinion expressed above.
PricewaterhouseCoopers LLP
New York, N.Y.
February 11, 2000 (except with respect to Notes 1 and 11,
as to which the date is March 28, 2000)
F-2
<PAGE>
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-3
<PAGE>
<TABLE>
BLUEFLY, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- ---------------------------------------------------------------------------------------------------------------
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
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)
Shareholders' equity:
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) 5,000 -
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 27,763,000 10,395,000
Accumulated deficit (17,231,000) (4,037,000)
------------ ------------
10,586,000 6,392,000
------------ ------------
$ 17,109,000 $ 7,212,000
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-4
<PAGE>
<TABLE>
BLUEFLY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
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 fulfilment 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.
</TABLE>
F-5
<PAGE>
<TABLE>
BLUEFLY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
PREFERRED STOCK, COMMON STOCK,
$.01 PAR VALUE $.01 PAR VALUE
------------------ --------------------
NUMBER OF NUMBER OF ADDITIONAL ACCUMULATED
SHARES AMOUNT SHARES AMOUNT PAID-IN CAPITAL DEFICIT TOTAL
------ ------ ------ ------ --------------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
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 5,000 - - 9,938,000 - 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 500,000 $ 5,000 4,924,906 $ 49,000 $27,763,000 $(17,231,000) $10,586,000
======= ======= ========= ======== =========== ============ ===========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-6
<PAGE>
<TABLE>
BLUEFLY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- ----------------------------------------------------------------------------------------------------------------
<CAPTION>
1999 1998 1997
--------------- -------------- --------------
<S> <C> <C> <C>
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.
</TABLE>
F-7
<PAGE>
<TABLE>
BLUEFLY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- ----------------------------------------------------------------------------------------------------------------
<CAPTION>
1999 1998 1997
--------------- -------------- --------------
<S> <C> <C> <C>
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-tem 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.
</TABLE>
F-8
<PAGE>
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- --------------------------------------------------------------------------------
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 for
it 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.
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.
F-9
<PAGE>
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- --------------------------------------------------------------------------------
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 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.
F-10
<PAGE>
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- --------------------------------------------------------------------------------
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.
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.
F-11
<PAGE>
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- --------------------------------------------------------------------------------
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.
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
========== ==========
F-12
<PAGE>
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- --------------------------------------------------------------------------------
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
========== ==========
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
<PAGE>
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
<PAGE>
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
<PAGE>
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- --------------------------------------------------------------------------------
8. SHAREHOLDER'S 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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C> <C>
$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
</TABLE>
F-18
<PAGE>
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 minimum fair value of each option grant on the date of the
grant using the minimum value option pricing model as prescribed by SFAS
No. 123. The following assumptions were used in applying the model:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
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%
</TABLE>
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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
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
</TABLE>
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 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).
F-19
<PAGE>
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- --------------------------------------------------------------------------------
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:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
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
----------- ----------- -----------
</TABLE>
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
----------
F-20
<PAGE>
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- --------------------------------------------------------------------------------
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
Subsquent 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 financings
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 Committment. In connection with the Soros Committment
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
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE ACT
The executive officers and directors of the Company, their ages and their
positions are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
E. Kenneth Seiff 35 Chairman of the Board of Directors, Chief Executive Officer,
President and Treasurer
Patrick C. Barry 37 Chief Financial Officer and Executive Vice President
Jonathan B. Morris 32 Executive Vice President and Secretary
Robert G. Stevens 46 Executive Vice President and Director
Red Burns 74 Director
Mark H. Goldstein 38 Director
Martin Miller 69 Director
Neal Moszkowski 33 Director
Ellin J. Saltzman 62 Director
</TABLE>
E. KENNETH SEIFF, the founder of the Company, has served as the Company's
Chairman of the Board, Chief Executive Officer and Treasurer since its inception
in April 1991. He became President of the Company in October 1996.
PATRICK C. BARRY has served as an Executive Vice President of the Company since
July 1998 and as Chief Financial Officer of the Company since August 1998. From
June 1996 to July 1998, Mr. Barry served as the Chief Financial Officer and the
Vice President of Operations of Audible, Inc., an Internet commerce and content
provider. From March 1995 to June 1996, Mr. Barry was the Chief Financial
Officer of Warner Music Enterprises, a direct marketing subsidiary of Time
Warner, Inc. From July 1993 to March 1995, Mr. Barry served as Controller of
Book-of-the-Month Club, a direct marketing subsidiary of Time Warner, Inc.
JONATHAN B. MORRIS has served as an Executive Vice President and Secretary of
the Company since June 1998. From November 1995 to June 1998, Mr. Morris was an
attorney with Brown, Raysmann, Millstein, Felder & Steiner LLP, a New York based
law firm which specializes in Internet and technology law. From September 1993
to November 1995, Mr. Morris was an attorney with Mudge, Rose, Guthrie,
Alexander & Ferdon, a New York based law firm.
ROBERT G. STEVENS has served as a Director of the Company since December 1996
and as an Executive Vice President of the Company since December 1999. From
December 1994 to December 1999, Mr. Stevens was a Vice President of Mercer
Management Consulting, Inc. ("Mercer"), a management consulting firm. From
November 1992 to December 1994, Mr. Stevens was a Principal at Mercer.
GOLDIE BURNS (AKA RED BURNS) has served as a Director of the Company since
August 1998. Since September 1993, Ms. Burns has served as the Chairman of the
Interactive Telecommunications Program at New York University, where she is
currently Chairman and Professor of the Interactive Telecommunications Program
and has been named the Tokyo Broadcasting System Chair.
MARK H. GOLDSTEIN has served as a Director of the Company since December 1999.
Since August 1999, Mr. Goldstein has served as an Internet Executive at Softbank
Holdings ("Softbank"), a venture capital fund that specializes in investments in
Internet companies, and since December 1999, he has served as the Chief
Executive Officer of Bluelight.com, a joint venture of K-Mart and Softbank. From
September 1997 to July 1999, Mr. Goldstein served as the Chief Executive Officer
of Impulse Buy Network, a developer of direct marketing applications for the
Internet, that was acquired by Inktomi Corporation in April 1999. From September
1995 to March 1997, Mr. Goldstein served as Executive Vice President of Firefly
Networks, a software development subsidiary of Microsoft Corporation.
17
<PAGE>
MARTIN MILLER has served as a Director of the Company since July 1991. Since
October 1997, Mr. Miller has been a partner in the Belvedere Fund, L.P., a fund
of hedge funds. From September 1986 to October 1997, Mr. Miller was President
and a director of Baxter International, Inc., a New York based apparel
wholesaler. From January 1990 to April 1996, Mr. Miller was Chairman of Ocean
Apparel, Inc., a Florida based sportswear firm.
NEAL MOSZKOWSKI has served as a Director of the Company since August 1999. Since
August 1998, Mr. Moszkowski has been a partner of Soros Private Equity Partners
LLC ("Soros"). Prior to joining Soros, Mr. Moszkowski was an Executive Director
of Goldman Sachs International and a Vice President of Goldman Sachs & Co., an
investment banking firm, in its Principal Investment Area. He joined Goldman
Sachs & Co. in August 1993. Mr. Moszkowski is also a Director of Integra Life
Sciences Holdings Corporation, a biotechnology company, and MedicaLogic, Inc., a
medical records company.
ELLIN J. SALTZMAN has served as a Director of the Company since December 1999.
From 1994 to 1997, Ms. Saltzman served as Vice President and Corporate Fashion
Director for The Limited, Inc. From 1992 to 1994, she served as Senior Vice
President and Fashion Director for Bergdorf Goodman. From 1989 to 1992, she
served as Senior Vice President and Corporate Fashion Director for R.H. Macy &
Co., and from 1974 to 1989, she held the same position with Saks Fifth Avenue.
Since 1997, Ms. Saltzman has been an independent consultant to various companies
in the fashion industry.
The Board of Directors has established an Audit Committee ("Audit Committee")
comprised of Neal Moszkowski and Martin Miller. The Audit Committee is
responsible for recommending to the Board of Directors the appointment of the
Company's outside auditors, examining the results of audits, reviewing internal
accounting controls and reviewing related party transactions.
The Board of Directors has also established an Option Plan/Compensation
Committee ("Option Plan/Compensation Committee") consisting of Neal Moszkowski,
Mark H. Goldstein and Martin Miller. The Option Plan/Compensation Committee
administers the Company's 1997 Stock Option Plan ("Plan"), establishes the
compensation levels for executive officers and key personnel and oversees the
Company's bonus plans.
The Company's executive officers are appointed annually by, and serve at the
discretion of, the Board of Directors. Ms. Burns and Messrs. Miller, Stevens and
Moszkowski hold office as a Director of the Company until the next annual
meeting of the Company or until their successors have been duly elected and
qualified, and Messrs. Seiff and Goldstein and Ms. Saltzman hold office as a
Director of the Company until the annual meeting of the Company in 2001 or until
their successors have been duly elected and qualified. There are no family
relationships among any of the executive officers or directors of the Company.
The Company maintains a "key person" life insurance policy in the amount of $1.2
million on the life of Mr. Seiff.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), requires the Company's directors and executive officers and persons who
beneficially own more than ten percent of the Common Stock (collectively, the
"Reporting Persons") to file with the Securities and Exchange Commission (the
"Commission") initial reports of beneficial ownership and reports of changes in
beneficial ownership of the Common Stock. Reporting Persons are required to
furnish the Company with copies of all such reports. To the Company's knowledge,
based solely on a review of copies of such reports furnished to the Company and
certain representations of the Reporting Persons, the Company believes that
during the 1999 fiscal year all Reporting Persons complied with all applicable
Section 16(a) reporting requirements, except as set forth in the following
sentence. Mr. Goldstein's and Ms. Saltzman's initial statements of beneficial
ownership on Form 3 were inadvertently filed late, but were filed on January 10,
2000, and a statement of change in beneficial ownership on Form 4 of Mr. Seiff,
reflecting the exercise of options to purchase 3,000 shares of Common Stock by
Mr. Seiff's wife, was inadvertently filed late, but was filed on September 21,
1999.
ITEM 10. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
The Company's directors are paid a cash stipend of $500 for each board or
committee meeting attended in person and are reimbursed for expenses incurred on
behalf of the Company. Prior to January 1999, each non-employee director
received an option to purchase 5,000 shares of Common Stock under the Plan at
the time that such director was appointed (the "Initial Grant") and an annual
grant of an option to purchase 3,750 shares of Common Stock under the Plan (the
"Annual Grant"). Commencing in January 1999, the Initial Grant for non-employee
directors was decreased from 5,000 shares to 3,750 shares, and the Annual Grant
for non-employee directors was increased from 3,750 shares to 5,000 shares. In
addition, on January 27, 1999, the Company's
18
<PAGE>
then-current non-employee directors also received a one-time option grant of
2,000 shares.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth information concerning the compensation paid by
the Company during the fiscal years ended December 31, 1999, 1998 and 1997 to
the Company's Chief Executive Officer and the two other executive officers of
the Company who received a total compensation from the Company in excess of
$100,000 in 1999 (the "Named Executive Officers").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
--------------------------------------------- ------------------------------
AWARDS
------
SECURITIES
OTHER ANNUAL RESTRICTED UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION STOCK AWARDS OPTIONS
- --------------------------- ---- ------ ----- ------------ ------------ -------
<S> <C> <C> <C> <C> <C> <C>
E. Kenneth Seiff 1999 $206,519 $25,491 $1,000 $-- 100,000(1)(3)
Chief Executive Officer, President and 1998 $165,000 $25,000 $1,000 $-- 25,000(1)
Treasurer 1997 $164,461 $ -- $1,000 $-- --
Patrick C. Barry 1999 $150,958 $25,491 $ 590 $-- 99,900(2)(3)
Chief Financial Officer and Executive 1998 $ 59,076 $ -- $ -- $-- 55,100(2)
Vice President 1997 $ -- $ -- $ -- $-- --
Jonathan B. Morris 1999 $150,958 $25,491 $ 330 $-- 100,000(2)(3)
Executive Vice President 1998 $ 47,423 $ -- $ -- $-- 55,000(2)
1997 $ -- $ -- $ -- $-- --
</TABLE>
- ----------
(1) Options granted at an exercise price equal to 110% of the fair market value
on the date of grant.
(2) Options granted at an exercise price equal to 100% of the fair market value
on the date of grant.
(3) Represents options granted in January 1999 for the 1998 fiscal year and
options granted in December 1999 for the 1999 fiscal year.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with each of the Named
Executive Officers. Each such employment agreement provides for a base salary,
subject to increase by the Board of Directors, and an annual bonus to be
determined by the Board of Directors. Mr. Seiff's employment agreement provides
that, at the discretion of the Board of Directors, all or part of such bonus may
be paid through the issuance to Mr. Seiff of capital stock of the Company,
provided that at the request of Mr. Seiff, a portion of such bonus sufficient to
pay any income taxes arising from such bonus will be paid in cash rather than in
capital stock of the Company. Mr. Seiff's base salary under his employment
agreement is $250,000, and the base salaries of Messrs. Morris and Barry under
their respective employment agreements are currently $175,000. Mr. Seiff's
employment agreement expires in January 2003, Mr. Morris' employment agreement
expires in July 2002 and Mr. Barry's employment agreement expires in July 2002.
Each such employment agreement obligates the Company to make certain severance
payments in connection with a termination of such Named Executive Officer's
employment, other than for cause, not exceeding five months' salary, except as
set forth below. In the case of Mr. Seiff, the Company would be obligated to pay
Mr. Seiff an amount equal to the total amount due to him during the remaining
term of the contract. Mr. Seiff's employment agreement also provides for the
immediate vesting of any stock options held by him in the event that certain
events classified as a "Change In Control" occur. In addition, the Company
maintains a $1.2 million key person life insurance policy on the life of Mr.
Seiff.
19
<PAGE>
OPTIONS GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the grant of stock options
under the Plan to the Named Executives Officers during the fiscal year ended
December 31, 1999:
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
NUMBER OF SECURITIES % OF TOTAL OPTIONS
UNDERLYING OPTIONS GRANTED TO EMPLOYEES IN EXERCISE OR
NAME GRANTED (#) FISCAL YEAR (%) BASE PRICE ($) EXPIRATION DATE
---- ----------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
E. Kenneth Seiff 50,000 5.4% $16.60 1/22/04
50,000 5.4% $12.34 12/22/04
Patrick C. Barry 49,900 5.4% $15.09 1/22/09
50,000 5.4% $11.22 12/22/09
Jonathan B. Morris 50,000 5.4% $15.09 1/22/09
50,000 5.4% $11.22 12/22/09
</TABLE>
The Company does not currently grant stock appreciation rights.
OPTION HOLDINGS
The following table sets forth information with respect to the Named Executive
Officers concerning the exercise of options during the last fiscal year and the
unexercised options held at December 31, 1999. None of the Named Executive
Officers exercised any outstanding options during the fiscal year ended
December 31, 1999.
<TABLE>
<CAPTION>
SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS AT DECEMBER 31, 1999 (#) OPTIONS AT DECEMBER 31, 1999 ($)
-------------------------------- --------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
E. Kenneth Seiff 36,457 88,543 $203,825 $ 0
Patrick C. Barry 30,945 124,055 $157,317 $286,954
Jonathan B. Morris 37,391 117,609 $193,057 $206,158
</TABLE>
20
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
COMMON STOCK
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock of the Company as of March 15, 2000,
for (i) each person who is known by the Company to own beneficially more than 5%
of the Common Stock, (ii) each of the Company's directors, (iii) the Named
Executive Officers, and (iv) all directors and executive officers as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME (1) BENEFICIALLY OWNED PERCENTAGE (2)
- -------- ------------------ --------------
<S> <C> <C>
E. Kenneth Seiff 545,780(3)(4) 11.0%
Red Burns 10,750(5) *
Mark H. Goldstein -- --
Martin Miller 16,250(6)(7) *
Neal Moszkowski (8) -- --
Ellin J. Saltzman -- --
Robert G. Stevens 40,687(9) *
Patrick C. Barry 39,694(10) *
Jonathan B. Morris 58,170(11) 1.2%
Quantum Industrial Partners LDC 848,400(12) 14.7%
George Soros 876,190(13) 15.1%
All directors and executive officers as a group (9 persons) 711,330(14) 14.3%
</TABLE>
- ----------------
*Less than 1%.
(1) Except as otherwise indicated, the address of each of the individuals
listed is c/o Bluefly, Inc., 42 West 39th Street, New York, New York
10018.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission ("Commission") and generally includes
voting or investment power with respect to securities. Shares of Common
Stock issuable upon the exercise of options or warrants currently
exercisable or exercisable within 60 days are deemed outstanding for
computing the percentage ownership of the person holding such options or
warrants but are not deemed outstanding for computing the percentage
ownership of any other person.
(3) Includes 3,000 shares of Common Stock held by Nicole Seiff, the wife of E.
Kenneth Seiff, as to which Mr. Seiff disclaims beneficial ownership.
(4) Includes 40,623 shares of Common Stock issuable upon exercise of options
granted under the Plan.
(5) Includes 10,750 shares of Common Stock issuable upon exercise of options
granted under the Plan.
(6) Includes 3,000 shares of Common Stock held by Madge Miller, the wife of
Martin Miller, as to which Mr. Miller disclaims beneficial ownership.
(7) Includes 13,250 shares of Common Stock issuable upon exercise of options
granted under the Plan.
(8) Mr. Moszkowski's address is c/o Soros Private Equity Partners LLC, 888
Seventh Avenue, New York, New York 10106.
(9) Includes 25,748 shares of Common Stock issuable upon exercise of options
granted under the Plan.
(10) Includes 39,694 shares of Common Stock issuable upon exercise of options
granted under the Plan.
(11) Includes 45,307 shares of Common Stock issuable upon exercise of options
granted under the Plan.
(12) Represents 848,400 shares of Common Stock issuable upon conversion of
445,410 shares of Series A Preferred Stock (the "QIP Shares") held in the
name of Quantum Industrial Partners LDC ("QIP"). QIP is a Cayman Islands
limited duration company with its principal address at Kaya Flamboyan 9,
Willemstad, Curacao, Netherlands Antilles. The sole general partner of QIP
is QIH Management Investor L.P., a Delaware limited partnership ("QIHMI"),
which is vested with investment discretion with respect to portfolio assets
held for the account of QIP. The sole general partner of QIHMI is QIH
Management, Inc., a Delaware corporation ("QIH Management"). George Soros,
the sole shareholder of QIH Management, has entered into an agreement with
Soros Fund Management LLC, a Delaware limited liability company ("SFM
LLC"), pursuant to which Mr. Soros has agreed to use his best efforts to
cause QIH Management to act at the direction of SFM LLC. Mr. Soros, as
Chairman of SFM LLC, and Stanley F. Druckenmiller, as Lead Portfolio
21
<PAGE>
Manager of SFM LLC, may each be deemed to have shared voting power and
shared investment power with respect to the QIP Shares. Accordingly, each
of QIHMI, QIH Management, SFM LLC and Messrs. Soros and Druckenmiller may
be deemed to be the beneficial owners of the QIP Shares. Each has their
principal office at 888 Seventh Avenue, 33rd Floor, New York, New York
10106. The foregoing information was derived, in part, from certain
publicly available reports, statements and schedules filed with the
Commission.
(13) Represents both (i) 27,790 shares of Common Stock issuable upon conversion
of 14,590 shares of Series A Preferred Stock (the "SFMDI Shares") held in
the name of SFM Domestic Investments LLC, a Delaware limited liability
company ("SFMDI"), and (ii) the QIP Shares referenced in Note 13 above. As
managing member of SFMDI, Mr. Soros may also be deemed the beneficial owner
of the SFMDI Shares. The principal address of SFMDI is at 888 Seventh
Avenue, 33rd Floor, New York, New York 10106. The foregoing information was
derived, in part, from certain publicly available reports, statements and
schedules filed with the Commission.
(14) Includes 175,372 shares of Common Stock issuable upon exercise of options
granted under the Plan.
SERIES A PREFERRED STOCK
The following table sets forth certain information with respect to the
beneficial ownership of the Series A Preferred Stock of the Company as of March
15, 2000, for (i) each person who is known by the Company to own beneficially
more than 5% of the Series A Preferred Stock of the Company, (ii) each of the
Company's directors, (iii) the Named Executive Officers, and (iv) all directors
and executive officers as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME (1) BENEFICIALLY OWNED PERCENTAGE (2)
- -------- ------------------ --------------
<S> <C> <C>
E. Kenneth Seiff -- --
Red Burns -- --
Mark H. Goldstein -- --
Martin Miller -- --
Neal Moszkowski (3) -- --
Ellin J. Saltzman -- --
Robert G. Stevens -- --
Patrick C. Barry -- --
Jonathan B. Morris -- --
Quantum Industrial Partners LDC 445,410(4) 89.1%
George Soros 460,000(5) 92.0%
All directors and executive officers as a group (9 persons) -- --
</TABLE>
- ----------------
*Less than 1%.
(1) Except as otherwise indicated, the address of each of the individuals
listed is c/o Bluefly, Inc., 42 West 39th Street, New York, New York
10018.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission ("Commission") and generally includes
voting or investment power with respect to securities. Shares of Common
Stock issuable upon the exercise of options or warrants currently
exercisable or exercisable within 60 days are deemed outstanding for
computing the percentage ownership of the person holding such options or
warrants but are not deemed outstanding for computing the percentage
ownership of any other person.
(3) Mr. Moszkowski's address is c/o Soros Private Equity Partners LLC, 888
Seventh Avenue, 33rd Floor, New York, New York 10106.
(4) Represents the QIP Shares held in the name of QIP. QIP is a Cayman
Islands limited duration company with its principal address at Kaya
Flamboyan 9, Willemstad, Curcao, Netherlands Antilles. The sole general
partner of QIP is QIHMI, which is vested with investment discretion with
respect to portfolio assets held for the account of QIP. The sole
general partner of QIHMI is QIH Management. Mr. Soros, the sole
shareholder of QIH Management, has entered into an agreement with SFM
LLC, pursuant to which Mr. Soros has agreed to use his best efforts to
cause QIH Management to act at the direction of SFM LLC. Mr. Soros, as
Chairman of SFM LLC, and Stanley F. Druckenmiller, as Lead Portfolio
Manager of SFM LLC, may each be deemed to have shared voting power and
shared investment power with
22
<PAGE>
respect to the QIP Shares. Accordingly, each of QIHMI, QIH Management, SFM
LLC and Messrs. Soros and Druckenmiller may be deemed to be beneficial
owners of the QIP Shares. Each has their principal office at 888 Seventh
Avenue, 33rd Floor, New York, New York 10106. The foregoing information was
derived, in part, from certain publicly available reports, statements and
schedules filed with the Commission.
(5) Represents both (i) the SFMDI Shares held in the name of SFMDI and (ii)
the QIP Shares referenced in Note 4 above. As managing member of SFMDI,
Mr. Soros also may be deemed the beneficial owner of the SFMDI Shares.
The principal office of SFMDI is at 888 Seventh Avenue, 33rd Floor, New
York, New York 10106.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In November 1999, the Company entered into an employment agreement with Robert
G. Stevens, a director of the Company. Mr. Stevens has agreed to serve as the
Company's Executive Vice President for a term of four years, which began in
December 1999. Mr. Stevens will receive an annual base salary of $175,000,
subject to increase by the Board of Directors and an annual bonus to be
determined by the Board of Directors. Mr. Stevens has also been granted an
option to purchase 100,000 shares of Common Stock. Mr. Stevens' option is
exercisable at the fair market value of the Common Stock on the date of the
grant and vests monthly over a four year period according to the following
schedule: 12.5% of the option vests on the six-month anniversary of the date of
grant and 2.0833% of the option vests each month thereafter until the option has
completely vested.
23
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following is a list of exhibits filed as part of this Annual Report on
Form 10-KSB:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
3.1 (a) Restated Certificate of Incorporation of the Company.
3.2 (e) Amended and Restated By-Laws of the Company.
3.3 (e) Certificate of Amendment of the Company's Certificate of Incorporation dated October 28, 1998.
3.4 (d) Certificate of Amendment of the Company's Certificate of Incorporation dated July 27, 1999.
4.1 Form of Senior Convertible Note
10.1 Employment Agreement by and between the Company and E. Kenneth Seiff, dated December 29, 1999.
10.2 Amended and Restated 1997 Stock Option Plan.
10.3 (b) Lease Agreement by and between the Company and John R. Perlman, et al., dated as of May 5, 1997.
10.4 (c) Employment Agreement dated as of July 13, 1998 by and between the Company and Patrick Barry.
10.5 (c) Employment Agreement dated as of June 15, 1998 by and between the Company and Jonathan Morris.
10.6 (c) Agreement dated as of May 13, 1998 by and between the Company and Kaufman Patricof Enterprises ("KPE").
10.7 (c) Amendment to Agreement dated August 17, 1998 between the Company and KPE.
10.8 (d) Investment Agreement among the Company, Quantum Industrial Partners LDC, SFM Domestic Investments LLC and Pilot
Capital Corp., dated July 27, 1999.
10.9 (d) Lease by and between the Company and Adams & Co. Real Estate, Inc., dated March 22, 1999.
+10.10 (e) Service Agreement by and between the Company and Marketing-Out-Of-The-Box, Inc., dated August 16, 1999.
10.11 Employment Agreement dated as of November 3, 1999 by and between the Company and Robert G. Stevens.
10.12(f) Trademark Purchase Agreement, dated as of September 14, 1998, by and between the Company and Klear Knit Sales
Inc.
10.13 Note and Warrant Purchase Agreement, dated as of March 28, 2000, by and among The Company, Quantum
Industrial Partners LDC and SFM Domestic Investments LLC.
16.1 (g) Letter from M.R. Weiser & Co., LLP to Bluefly, Inc.
21.1 Subsidiaries of the Registrant.
27 Financial Data Schedule.
</TABLE>
(a) - Incorporated by reference to the Company's Form SB-2 registration
statement and amendments thereto (File No. 333-22895).
(b) - Incorporated by reference to the Company's Quarterly report filed on
Form 10-QSB for the quarterly period ended March 31, 1997.
(c) - Incorporated by reference to the Company's Quarterly report filed on
Form 10-QSB for the quarterly period ended September 30, 1998.
(d) - Incorporated by reference to the Company's Quarterly report filed on
Form 10-QSB for the quarterly period ended June 30, 1999.
(e) - Incorporated by reference to the Company's Quarterly report filed on
Form 10-QSB for the quarterly period ended September 30, 1999.
(f) - Incorporated by reference to the Company's report filed on Form 8-K,
dated September 15, 1999.
(g) - Incorporated by reference to the Company's report filed on Form 8-K,
dated December 9, 1999.
+ Confidential treatment granted as to certain portions of this Exhibit.
Such portions have been redacted.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K, dated December 9, 1999, regarding a
Change in the Company's Certifying Accountant.
24
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
BLUEFLY, INC.
By: /s/ E. Kenneth Seiff
-------------------------
E. Kenneth Seiff
Chief Executive Officer and President
________________, 2000
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ E. Kenneth Seiff
- -------------------------
E. Kenneth Seiff Chairman of the Board of Directors, Chief __________, 2000
Executive Officer, President,
and Treasurer (Principal Executive Officer)
/s/ Patrick C. Barry
- -------------------------
Patrick C. Barry Chief Financial Officer __________, 2000
(Principal Accounting Officer)
/s/ Red Burns
- -------------------------
Red Burns Director __________, 2000
/s/ Martin Miller
- -------------------------
Martin Miller Director __________, 2000
/s/ Robert G. Stevens
- -------------------------
Robert G. Stevens Director __________, 2000
/s/ Neal Moszkowski
- -------------------------
Neal Moszkowski Director __________, 2000
/s/ Mark H. Goldstein
- -------------------------
Mark H. Goldstein Director __________, 2000
/s/ Ellin J. Saltzman
- -------------------------
Ellin J. Saltzman Director __________, 2000
</TABLE>
25
<PAGE>
Exhibit 4.1
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE. THE SECURITIES MAY NOT BE
TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH
ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS.
BLUEFLY, INC.
SENIOR CONVERTIBLE NOTE
$
---------------
New York, New York March 28, 2000
FOR VALUE RECEIVED, the undersigned, BLUEFLY, INC., a New York
corporation (the "Payor" or the "Company"), promises to pay to the order of
_________ or its registered assign (the "Payee"), the principal sum of _________
DOLLARS ($_________) and interest on the outstanding principal balance as set
forth herein.
1. Securities Purchase Agreement. This Senior Convertible Note is the
Senior Convertible Note issued pursuant to the Note and Warrant Purchase
Agreement, dated as of March 28, 2000, among the Payor, the Payee and _________
(the "Securities Purchase Agreement"). The Payee is entitled to the benefits of
(and subject to the obligations expressly contained in) this Senior Convertible
Note and the Securities Purchase Agreement and may enforce the agreements of the
Payor contained herein and therein and exercise the remedies provided for hereby
and thereby or otherwise available in respect hereto and thereto. Capitalized
terms used herein without definition shall have the meaning ascribed to such
terms in the Securities Purchase Agreement.
2. Interest Rate; Payment.
(a) The outstanding principal balance of this Senior Convertible
Note shall bear interest at an annual rate equal to 8% per annum, with interest
accruing, from and including the date hereof, on a cumulative, compounding
basis. Interest shall be computed on the basis of a 365- or 366-day year, as the
case may be, and the actual number of days elapsed, and shall be payable only
upon repayment of the principal on any Repayment Date (as defined below).
<PAGE>
(b) The outstanding balance of any amount owed under this Senior
Convertible Note which is not paid when due shall bear interest at the rate of
2% per annum (the "Default Interest") above the rate that would otherwise be in
effect under this Senior Convertible Note with the Default Interest accruing,
from and including such due date, on a cumulative, compounding basis.
(c) The outstanding principal and all accrued and unpaid interest
shall be paid in full no later than January 2, 2002 (the "Maturity Date"),
unless repaid earlier pursuant to the provisions of Section 3 (the date of any
payment pursuant to Section 3 and the Maturity Date, collectively referred to as
a "Repayment Date"). On a Repayment Date, the Payor shall pay the applicable
amount of principal and interest in lawful money of the United States of America
by wire or bank transfer of immediately available funds to an account designated
by the Payee in writing from time to time.
(3) Prepayment.
(a) Mandatory Prepayment.
(i) Upon the occurrence of an Event of Default (as defined in
Section 5), the outstanding principal of and all accrued interest on this Senior
Convertible Note shall be accelerated and shall automatically become immediately
due and payable, without presentment, demand, protest or notice of any kind, all
of which are expressly waived by the Payor, notwithstanding anything contained
herein to the contrary.
(ii) The Payee shall, at its sole option, have the right to
require the Payor to pay the outstanding principal of and all accrued interest
on this Senior Convertible Note upon the occurrence of any of the following
events: (1) Payor entering into an agreement to effectuate any sale or other
disposition of all or substantially all of its assets, in one transaction or in
a series of transactions, (2) the Company entering into an agreement to
effectuate any consolidation or merger into another entity, or (3) any sale of a
majority of the outstanding equity of the Company (or any other event that
constitutes a Change of Control of the Payor), in one transaction or in a series
of transactions. Immediately upon the occurrence of either of the events set
forth in clauses (1) or (2) above, or immediately upon obtaining knowledge that
any person has entered into an agreement to effectuate, the event set forth in
clause (3) above, the Payor shall give written notice of such event to the
Payee. Change of Control means any Person or "group" (within the meaning of
Section 13(d)(3) of the Exchange Act) other than a Principal Shareholder,
becoming the beneficial owner, directly or indirectly, of outstanding shares of
stock of the Company entitling such Person or Persons to exercise 50% or more of
the total votes entitled to be cast at a regular or special meeting, or by
action by written consent, of the stockholders 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).
<PAGE>
(iii) Any mandatory prepayment under this Section 3(a) shall
include payment of reasonable costs and expenses, if any, associated with such
prepayment.
(b) Optional Prepayment. The Payor may prepay all or any portion of
this Senior Convertible Note, at any time, by paying an amount equal to the
outstanding principal amount of this Senior Convertible Note, or the portion of
this Senior Convertible Note called for prepayment, together with interest
accrued and unpaid thereon to the date of prepayment and any other amounts due
under this Senior Convertible Note and the Securities Purchase Agreement,
without penalty or premium.
4. Mandatory Conversion.
(a) This Senior Convertible Note plus interest accrued and unpaid
thereon shall be automatically converted simultaneously with the Next Round
Financing (the "Triggering Event') into that number of fully paid and
non-assessable Next Round Securities which is equal to the quotient obtained by
dividing the then outstanding principal amount of this Senior Convertible Note
plus interest accrued and unpaid thereon to the date of conversion by the price
per Next Round Security paid in the Next Round Financing.
(b) Promptly after the Triggering Event the Company shall deliver or
cause to be delivered to the holder of this Senior Convertible Note a
certificate or certificates representing the number of fully paid and
non-assessable shares of Next Round Securities into which this Senior
Convertible Note may be converted. Such conversion shall be deemed to have been
made simultaneously with the conclusion of the Next Round Financing, so that the
rights of the holder as a holder of this Senior Convertible Note shall cease
with respect to this Senior Convertible Note at such time (including, without
limitation, the right to receive the principal of this Senior Convertible Note
other than in the form of Next Round Securities), interest shall cease to accrue
hereon and the person or persons entitled to receive the Next Round Securities
deliverable upon conversion of this Senior Convertible Note shall be treated for
all purposes as having become the record holders of such Next Round Securities
at such time, and such conversion shall be at the conversion rate in effect at
such time.
(c) The Company covenants that it will at all times reserve and keep
available out of its authorized Next Round Securities (at such time as such
Securities are authorized) solely for the purpose of issue or delivery upon
conversion of this Senior Convertible Note as herein provided, such number of
Next Round Securities as shall then be issuable or deliverable upon the
conversion of this Senior Convertible Note. The Company covenants that all Next
Round Securities which shall be so issuable or deliverable shall, when issued or
delivered, be duly and validly issued and fully paid and non-assessable.
<PAGE>
5. Events of Default. An "Event of Default" shall occur if:
(a) the Payor shall default in the payment of the principal of or
interest payable on this Senior Convertible Note, when and as the same shall
become due and payable, whether at maturity or at a date fixed for prepayment or
by acceleration or otherwise and such default with respect to the payment of
interest shall continue unremedied for two days;
(b) the Payor shall fail to observe or perform any covenant or
agreement contained in this Senior Convertible Note, the Securities Purchase
Agreement or the Warrants and such failure shall continue for five business days
after Payor receives notice of such failure;
(c) any representation, warranty, certification or statement made by
or on behalf of the Payor in this Senior Convertible Note or the Securities
Purchase Agreement or in any certificate, writing or other document delivered
pursuant hereto shall prove to have been incorrect in any material respect when
made;
(d) an involuntary proceeding shall be commenced or an involuntary
petition shall be filed in a court of competent jurisdiction seeking (A) relief
in respect of Payor or of a substantial part of Payor's respective property or
assets, under Title 11 of the United States Code, as now constituted or
hereafter amended, or any other Federal or state bankruptcy, insolvency,
receivership or similar law (any such law, a "Bankruptcy Law"), (B) the
appointment of a receiver, trustee, custodian, sequestrator, conservator or
similar official for a substantial part of the property or assets of any Payor,
(C) the winding up or liquidation of any Payor; and such proceeding or petition
shall continue undismissed for 60 days, or an order or decree approving or
ordering any of the foregoing shall be entered;
(e) the Payor shall (A) voluntarily commence any proceeding or file
any petition seeking relief under a Bankruptcy Law, (B) consent to the
institution of or the entry of an order for relief against it, or fail to
contest in a timely and appropriate manner, any proceeding or the filing of any
petition described in clause d, (C) apply for or consent to the appointment of a
receiver, trustee, custodian, sequestrator, conservator or similar official for
a substantial part of the property or assets of the Payor, (D) file an answer
admitting the material allegations of a petition filed against it in any such
proceeding, (E) make a general assignment for the benefit of creditors, (F)
become unable, admit in writing its inability or fail generally to pay its debts
as they become due or (G) take any action for the purpose of effecting any of
the foregoing;
(f) one or more judgments or orders for the payment of money in
excess of $250,000 in the aggregate shall be rendered against the Payor and such
judgment(s) or order(s) shall continue unsatisfied and unstayed for a period of
30 days;
(g) the Payor shall default in the payment of any principal,
interest or premium, or any observance or performance of any covenants or
agreements, with respect to indebtedness (excluding trade payables and other
indebtedness entered
<PAGE>
into in the ordinary course of business) in excess of $50,000 in the aggregate
for borrowed money or any obligation which is the substantive equivalent thereof
and such default shall continue for more than the period of grace, if any, or of
any such Indebtedness or obligation shall be declared due and payable prior to
the stated maturity thereof;
(h) the Payor shall incur any indebtedness senior to this Senior
Convertible Note; or
(i) any material provisions of this Senior Convertible Note, the
Securities Purchase Agreement, or the Warrants shall terminate or become void or
unenforceable or the Payor shall so assert in writing.
6. Senior Status. The indebtedness evidenced by this Senior Convertible
Note is senior in right of payment to all other indebtedness of the Payor and
Payor agrees not to incur any indebtedness, which by its terms is senior in
right of payment to this Senior Convertible Note.
7. Suits for Enforcement.
(a) Upon the occurrence of any one or more Events of Default, the
holder of this Senior Convertible Note may proceed to protect and enforce its
rights by suit in equity, action at law or by other appropriate proceeding,
whether for the specific performance of any covenant or agreement contained in
the Securities Purchase Agreement or in aid of the exercise of any power granted
in this Senior Convertible Note, or may proceed to enforce the payment of this
Senior Convertible Note, or to enforce any other legal or equitable right it may
have as a holder of this Senior Convertible Note.
(b) The holder of this Senior Convertible Note may direct the time,
method and place of conducting any proceeding for any remedy available to
itself.
(c) In case of any Event of Default under the Securities Purchase
Agreement, the Payor will pay to the holder of this Senior Convertible Note such
amounts as shall be sufficient to cover the reasonable costs and expenses of
such holder due to such Event of Default, including without limitation, costs of
collection and reasonable fees, disbursements and other charges of counsel
incurred in connection with any action in which the holder prevails.
8. Notices. All notices, demands and other communications
provided for or permitted hereunder shall be made in the manner and to the
addresses set forth in Section 11.2 of the Securities Purchase Agreement.
9. Successors and Assigns. This Senior Convertible Note shall
inure to the benefit of and be binding upon the successors and permitted assigns
of the parties hereto. The Payor may not assign any of its rights under this
Senior Convertible Note without the prior written consent of Payee. The Payee
may assign all or a portion of their rights or obligations under this Senior
Convertible Note to an Affiliate without the prior written consent of the Payor.
<PAGE>
10. Amendment and Waiver.
(a) No failure or delay on the part of the Payor or Payee in
exercising any right, power or remedy hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any such right, power or
remedy preclude any other or further exercise thereof or the exercise of any
other right, power or remedy. The remedies provided for herein are cumulative
and are not exclusive of any remedies that may be available to the Payor or
Payee at law, in equity or otherwise.
(b) Any amendment, supplement or modification of or to any provision
of this Senior Convertible Note, any waiver of any provision of this Senior
Convertible Note and any consent to any departure by the Payor from the terms of
any provision of this Senior Convertible Note, shall be effective (i) only if it
is made or given in writing and signed by the Payor and the Payee and (ii) only
in the specific instance and for the specific purpose for which made or given.
11. Headings. The headings in this Senior Convertible Note are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
12. GOVERNING LAW. THIS SENIOR CONVERTIBLE NOTE SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT
REGARD TO THE CONFLICTS OF LAW PRINCIPLES THEREOF.
13. Costs and Expenses. The Payor hereby agrees to pay on demand all
reasonable out-of-pocket costs, fees, expenses, disbursements and other charges
(including but not limited to the fees, expenses, disbursements and other
charges of Paul, Weiss, Rifkind, Wharton & Garrison, special counsel to the
Payee) of the Payee arising in connection with any consent or waiver granted or
requested hereunder or in connection herewith, and any renegotiation, amendment,
work-out or settlements of this Senior Convertible Note or the indebtedness
arising hereunder.
14. Waiver of Jury Trial and Setoff. The Payor hereby waives trial by
jury in any litigation in any court with respect to, in connection with, or
arising out of this Senior Convertible Note or any instrument or document
delivered pursuant to this Senior Convertible Note, or the validity, protection,
interpretation, collection or enforcement thereof, or any other claim or dispute
howsoever arising, between any Payor and the Payee; and the Payor hereby waives
the right to interpose any setoff or counterclaim or cross-claim in connection
with any such litigation, irrespective of the nature of such setoff,
counterclaim or cross-claim except to the extent that the failure so to assert
any such setoff, counterclaim or cross-claim would permanently preclude the
prosecution of the same.
15. Consent to Jurisdiction. The Payor hereby irrevocably consents to
the nonexclusive jurisdiction of the courts of the State of New York and of any
federal court located in such State in connection with any action or proceeding
arising out of or
<PAGE>
relating to this Senior Convertible Note or any document or instrument delivered
pursuant to this Agreement.
16. Severability. If any one or more of the provisions contained
herein, or the application thereof in any circumstance, is held invalid, illegal
or unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provisions hereof shall not be in any way impaired,
unless the provisions held invalid, illegal or unenforceable shall substantially
impair the benefits of the remaining provisions hereof.
17. Entire Agreement. This Senior Convertible Note, the Warrants and
the Securities Purchase Agreement is intended by the parties as a final
expression of their agreement and intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter hereof. There are no restrictions, promises, warranties or
undertakings, other than those set forth or referred to herein. This Senior
Convertible Note supersedes all prior agreements and understandings between the
parties with respect to such subject matter.
18. Further Assurances. The Payor shall execute such documents and
perform such further acts (including, without limitation, obtaining any
consents, exemptions, authorizations or other actions by, or giving any notices
to, or making any filings with, any governmental authority or any other Person)
as may be reasonably required or desirable to carry out or to perform the
provisions of this Senior Convertible Note.
BLUEFLY, INC.
By:
----------------------------
Name:
Title:
<PAGE>
Exhibit 10.1
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT dated as of December 29, 1999, by and between
Bluefly, Inc., a New York corporation (the "Company") and E. Kenneth Seiff
("Seiff").
RECITALS
1. The Company has heretofore employed Seiff as its Chief Executive Officer
and Chairman of the Board of Directors of the Company under an employment
agreement dated as of May 27, 1997 which expires on December 31, 1999.
2. The Company desires to continue the services of Seiff as the Chief
Executive Officer and Chairman of the Board of Directors of the Company in
accordance with the terms and conditions of this Agreement.
3. Seiff desires to continue to serve the Company as its Chief Executive
Officer and Chairman of the Board of Directors in accordance with the terms and
conditions of this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants contained in this
Agreement, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and Seiff agree as
follows:
1. TERM
The Company hereby agrees to employ Seiff as the Chief Executive Officer
and Chairman of the Board of Directors of the Company, and Seiff hereby agrees
to serve in such capacity, for a term beginning on January 1, 2000 and ending
December 31, 2002 (the "Term"), upon the terms and subject to the conditions
contained in this Agreement. The Term may, at the option of the Company and with
the approval of Seiff, be extended from time to time in a written memorandum
signed by the Company and Seiff, after approval by the Board of Directors.
2. DUTIES
As Chief Executive Officer and Chairman of the Board of Directors of the
Company, Seiff shall have such responsibilities, duties and authority as are
generally associated with the positions of Chief Executive Officer and Chairman
of the Board of Directors and as may from time to time be assigned to him by the
Board of Directors that are consistent with such responsibilities, duties and
authority. Seiff shall report directly to the Board of Directors of the Company.
The principal location of Seiff's employment shall be in New York City,
although Seiff
<PAGE>
understands and agrees that he may be required to travel from time to time for
business reasons. Seiff shall devote his full business time to his duties as the
Chief Executive Officer and Chairman of the Board of Directors of the Company
during the Term. Seiff shall not, directly or indirectly, render services to any
other person or entity, without the consent of the Board of Directors, which
would interfere significantly with the faithful performance of his duties under
this Agreement.
3. COMPENSATION
For services rendered by Seiff to the Company during the Term, the Company
shall pay him a base salary of $250,000 per year (the "Base Salary"), payable in
accordance with the standard payroll practices of the Company. The Base Salary
may be increased annually at the discretion of the Company's Board of Directors,
taking into account merit, corporate and individual performance and general
business conditions, including changes in the cost of living index.
4. BONUS
For each fiscal year during the Term, Seiff shall be eligible to receive a
bonus set by the Board of Directors at its discretion, based on the operating
performance of the Company as compared to the projections presented to the Board
at the beginning of such fiscal year and such other factors as the Board deems
appropriate; provided, however that the amount of such bonus in any fiscal year
shall not exceed one hundred percent (100%) of the Base Salary for such fiscal
year, provided further, however, that the value of any stock options issued to
Seiff in any fiscal year shall not be included in calculating such one hundred
percent (100%) maximum. At the discretion of the Board of Directors, all or part
of such bonus may be paid through the issuance to Seiff of capital stock of the
Company, the fair market value of which is equal to the cash payment that Seiff
would otherwise be entitled to receive as all or part of such bonus; provided,
however, that Seiff shall be entitled to demand that an amount of such bonus
sufficient to pay any income taxes arising from such bonus be paid in cash
rather than in capital stock of the Company. All bonuses to be paid to Seiff
pursuant to this paragraph 4 shall be paid within thirty (30) days following
completion of the audit of the annual financial statements of the Company for
the fiscal year in question.
5. EXPENSE, REIMBURSEMENT AND PERQUISITES
1. During the term of this Agreement, Seiff shall be entitled to
reimbursement of all reasonable and actual out-of-pocket expenses incurred by
him in the performance of his services to the Company, provided that the
expenses are properly accounted for.
2. During each calendar year of the term of this Agreement, Seiff shall
be entitled to reasonable vacation with full pay; provided, however, that Seiff
shall schedule such vacations in the interest of the Company.
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<PAGE>
3. The Company shall provide a life insurance policy on the life of
Seiff, for the benefit of Seiff 's beneficiaries, in the amount of at least
$1,000,000. All premiums on such policy shall be paid by the Company.
4. Seiff shall be entitled to participate in all medical and dental
insurance and disability and hospitalization plans and other employee benefit
plans instituted by the Company from time to time on the same terms and
conditions as other employees of the Company, to the extent permitted by law.
6. NON-COMPETITION; NON-SOLICITATION
1. During the Non-Competition Period (as defined in paragraph 6(c)
below), Seiff, without the prior written permission of the Company, shall not,
anywhere in the world, directly or indirectly, (i) enter into the employ of or
render any services to any person, firm or corporation engaged in any business
which is directly or indirectly in competition with the Company ("Competitive
Business"); (ii) engage in any Competitive Business for his own account; (iii)
become associated with or interested in any Competitive Business as an
individual, partner, shareholder, creditor, director, officer, principal, agent,
employee, trustee, consultant, advisor or in any other relationship or capacity;
(iv) employ or retain, or have or cause any other person or entity to employ or
retain, any person who was employed or retained by the Company while Seiff was
employed by the Company (other than Nicole Kule, Dean Seiff, James Hilford and
Andrew Hilford); or (v) solicit, interfere with, or endeavor to entice away from
the Company, for the benefit of a Competitive Business, any of its customers or
other persons with whom the Company has a contractual relationship. However,
nothing in this Agreement shall preclude Seiff from investing his personal
assets in the securities of any corporation or other business entity which is
engaged in a Competitive Business if such securities are traded on a national
stock exchange or in the over-the-counter market and if such investment does not
result in his beneficially owning, at any time, more than three percent (3%) of
the publicly-traded equity securities of such Competitive Business.
2. Seiff and the Company agree that the covenants of non-competition
and non-solicitation contained in this paragraph 6 are reasonable covenants
under the circumstances, and further agree that if, in the opinion of any court
of competent jurisdiction, such covenants are not reasonable in any respect,
such court shall have the right, power and authority to excise or modify such
provision or provisions of these covenants as to the court shall appear not
reasonable and to enforce the remainder of these covenants as so amended. Seiff
agrees that any breach of the covenants contained in this paragraph 6 would
irreparably injure the Company. Accordingly, Seiff agrees that the Company, in
addition to pursuing any other remedies it may have in law or in equity, may
obtain an injunction against Seiff from any court having jurisdiction over the
matter, restraining any further violation of this paragraph 6.
3. The "Non-Competition Period" shall extend throughout the Term and
for a period of two (2) years following the end of the Term; provided, however
that, in the event that the Agreement is terminated during the Term by the
Company without cause, or by Seiff pursuant to a Constructive Termination, the
Non-Competition Period shall expire at the end of
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<PAGE>
the Term; provided further, however that in the event that Seiff takes any
action during the two (2) year period following a termination without cause by
the Company or a Constructive Termination that would have constituted a
violation of the covenants contained in this paragraph 6 had it still been in
effect, the Company shall be entitled to discontinue Severance Payments payable
under paragraph 7(b)(i).
7. TERMINATION
1. This Agreement, the employment of Seiff, and Seiff 's position as an
officer and director of the Company shall terminate upon the first to occur of:
(1) his death;
(2) his "permanent disability", as defined in Section 7.1 of the
Shareholders' Agreement;
(3) a "Constructive Termination" by the Company, which, for
purposes of this Agreement, shall be deemed to have occurred
upon (A) the removal of Seiff from his position as Chief
Executive Officer of the Company and Chairman of its Board of
Directors, (B) any material diminution in the nature or scope
of the authorities, powers, functions, duties or
responsibilities attached to such positions, or (C) the
material breach by the Company of this Agreement; provided,
however that no such removal, diminution or breach shall be
considered a Constructive Termination unless Seiff has
provided the Company with at least sixty (60) days' prior
written notice of such removal, diminution or breach and the
Company has failed to cure such removal, diminution or breach
within such sixty (60) day period;
(4) the termination of this Agreement without cause by the
Company, which shall occur not less than sixty (60) days after
the Company has provided Seiff prior written notice of such
termination;
(5) non-renewal of this Agreement by the Company and/or the Board
of Directors; or
(6) the termination of this Agreement for cause, which, for
purposes of this Agreement, shall mean that Seiff has (1) been
convicted of a felony or any serious crime involving moral
turpitude, (2) engaged in materially fraudulent or materially
dishonest actions in connection with the performance of his
duties hereunder or (3) willfully and materially failed to
perform his duties hereunder; provided, however that, prior to
a termination for cause pursuant to subparagraph (3) hereof,
the Company shall provide Seiff with at least thirty (30)
days' prior written notice of
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<PAGE>
such cause and shall not terminate the Agreement under this
paragraph 7(a)(vi) if Seiff cures such cause within such
thirty (30) day period;
2. In the event that this Agreement is terminated without cause by the
Company pursuant to paragraph 7(a)(iv) or though a Constructive Termination
pursuant to paragraph 7(a)(iii):
(1) the Company shall pay Seiff severance and non-competition
payments (the "Severance Payments") equal to the Base Salary
in effect as of the date of such termination multiplied by the
number of full or partial fiscal years remaining in the term
of this Agreement as of the date of such termination;
provided, however, that the total amount of the Severance
Payments shall in no event be less than the Base Salary as of
the date of such termination. The Severance Payments shall be
payable in periodic installments in accordance with the
Company's standard payroll practices;
(2) the Company shall maintain in effect, or reimburse Seiff for
the cost of maintaining, the medical and dental insurance and
disability and hospitalization plans of the Company in which
Seiff participates as of the date of such termination for a
period equal to the period remaining in the term of this
Agreement as of the date of such termination; and
(3) any option to purchase shares of the capital stock of the
Company which has been issued to Seiff and is outstanding as
of the date of such termination shall be deemed fully vested
as of that date.
8. CHANGE OF CONTROL
In the event that a Change of Control (as defined below) occurs during the
Term, any option to purchase shares of the capital stock of the Company which
has been issued to Seiff and is outstanding as of the date of that Change in
Control shall be deemed to be fully vested as of the that date. For purposes of
this Agreement, "Change of Control" shall mean a change of the majority of the
members of the Board of Directors of the Company which is the result of either:
a. The merger or consolidation of the Company with or into any other
corporation or entity; or
b. The acquisition by any "person" or "group" of "beneficial ownership"
(as these terms are defined for the purposes of Section 13(d) of the Securities
and Exchange Act of 1934, as amended as of the date hereof ) of thirty percent
(30%) or more of the common stock of the Company outstanding as of the date of
such acquisition.
9. CONFIDENTIALITY
a. Seiff recognizes that the services to be performed by him are
special,
5
<PAGE>
unique and extraordinary in that, by reason of his employment under this
Agreement, he may acquire or has acquired Confidential Information (as defined
below) and trade secrets concerning the operation of the Company, its
predecessors, and/or its affiliates, the use or disclosure of which could cause
the Company, or its affiliates substantial loss and damages which could not be
readily calculated and for which no remedy at law would be adequate.
Accordingly, Seiff covenants and agrees with the Company that he will not at any
time during the Term or thereafter, except in the performance of his obligations
to the Company or with the prior written consent of the Board of Directors or as
otherwise required by court order, subpoena or other government process,
directly or indirectly disclose any secret or Confidential Information that he
may learn or has learned by reason of his association with the Company, or any
predecessor. If Seiff shall be required to make such disclosure pursuant to
court order, subpoena or other government process, he shall notify the Company
of the same, by personal delivery or electronic means, confirmed by mail, within
twenty-four (24) hours of learning of such court order, subpoena or other
government process and, at the Company's expense, shall (i) take all reasonably
necessary and lawful steps required by the Company to defend against the
enforcement of such subpoena, court order or government process, and (ii) permit
the Company to intervene and participate with counsel of its choice in any
proceeding relating to the enforcement thereof. For purposes of this Agreement,
the term "Confidential Information" shall mean information not in the public
domain and not previously disclosed to the public or to the trade by the
Company's management with respect to the Company's or its affiliates'
businesses, facilities and methods, trade secrets and other intellectual
property, designs, manuals, confidential reports, customer names, financial
information or business plans. Seiff understands and agrees that the rights and
obligations set forth in this paragraph 9(a) shall survive the termination or
expiration of this Agreement.
b. Seiff confirms that all Confidential Information is and shall remain
the exclusive property of the Company. All business records, papers and
documents kept or made by Seiff relating to the business of the Company shall be
and will remain the property of the Company. Upon the termination of his
employment with the Company, Seiff shall promptly deliver to the Company, and
shall not, without the consent of the Company, which shall not be unreasonably
withheld, retain copies of any written materials prepared by or for the Company
not previously made available to the public or records and documents made by
Seiff or coming into his possession and not in the public domain concerning the
business or affairs of the Company or any predecessors to its business, or any
of its affiliates or subsidiaries. Seiff understands and agrees that the rights
and obligations set forth in this paragraph 9(b) shall survive the termination
or expiration of this Agreement.
c. Seiff will promptly disclose to the Company all Intellectual
Property (as defined below) and hereby acknowledges that all Intellectual
Property shall at all times and for all purposes be the sole property of the
Company. Seiff hereby assigns and agrees to assign to the Company any rights he
may have or acquire in any Intellectual Property. For purposes of this
Agreement, the term "Intellectual Property" shall mean any Confidential
Information, whether or not registrable under copyright, trademark, patent or
other intellectual property or similar laws, made or conceived or reduced to
practice or learned by Seiff, either alone or jointly with others,
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<PAGE>
during the period of his employment that (i) at the time of conception or
reduction to practice is related to the actual or demonstrably anticipated
business of the Company, (ii) results from tasks performed by Seiff for the
Company or (iii) is developed on any amount of the Company's time or result from
the use of premises or property (including computer systems) owned, leased, or
contracted for by the Company. Seiff understands and agrees that his obligations
set forth in this paragraph 9(c) shall survive the termination or expiration of
this Agreement.
10. GOVERNING LAW
This Agreement shall be deemed a contract made under, and for all purposes
shall be construed in accordance with the laws of the State of New York, without
giving effect to the principles of conflict of laws thereof.
11. ENTIRE AGREEMENT
This Agreement contains all of the understandings between Seiff and the
Company pertaining to Seiff 's employment with the Company, and it supersedes
all undertakings and agreements, whether oral or in writing, previously entered
into between them.
12. AMENDMENT OR MODIFICATION, WAIVER
No provision of this Agreement may be amended or modified unless such
amendment or modification is agreed to in writing, signed by Seiff and by an
officer of the Company duly authorized to do so. Except as otherwise
specifically provided in this Agreement, no waiver by either party of any breach
by the other party of any condition or provision of this Agreement to be
performed by such other party shall be deemed a waiver of a similar or
dissimilar provision or condition at the same or any prior or subsequent time.
13. DUTY TO MITIGATE
Seiff shall not be obligated to seek other employment by way of mitigation
of the amounts payable to him under any provision of this Agreement.
14. NOTICES
Any notice to be given hereunder shall be in writing and delivered
personally or sent by certified mail, postage prepaid, return receipt requested,
addressed to the party concerned at the address indicated below or to such other
address as such party may subsequently designate by like notice:
If to the Company, to:
Bluefly, Inc.
42 West 39th Street
New York, NY 10018
Attn: General Counsel
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<PAGE>
With a copy to:
Swidler Berlin Shereff Friedman, LLP
405 Lexington Avenue
New York, New York 10174
Attn: Richard A. Goldberg, Esq.
If to Seiff, to:
E. Kenneth Seiff
52 East 72nd Street
New York, NY 10021
15. SEVERABILITY
In the event that any provision or portion of this Agreement shall be
determined to be invalid or unenforceable for any reason, the remaining
provisions or portions of this Agreement shall be unaffected thereby and shall
remain in full force and effect to the fullest extent permitted by law.
16. TITLES
Titles of the Sections of this Agreement are intended solely for
convenience of reference and no provision of this Agreement is to be construed
by reference to the title of any Section.
8
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement
on the date first above written.
BLUEFLY, INC.
By:/s/ Neal Moszkowski
-----------------------------
Name:
Title:
/s/ E. Kenneth Seiff
-----------------------------
E. Kenneth Seiff
9
<PAGE>
Exhibit 10.11
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT is entered into as of November 3, 1999, by and
between Bluefly, Inc., a New York corporation (the "Company"), and Robert
Stevens ("Stevens").
RECITALS
1. The Company desires to retain the services of Stevens as an Executive
Vice President of the Company in accordance with the terms and conditions of
this Agreement.
2. Stevens will serve the Company as an Executive Vice President in
accordance with the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants contained in this
Agreement, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and Stevens agree as
follows:
1. TERM
The Company hereby agrees to employ Stevens as an Executive Vice President
of the Company, and Stevens hereby agrees to serve in such capacity, for a term
commencing no later than January 1, 2000 and ending on January 1, 2004 (the
"Employment Term"), upon the terms and subject to the conditions contained in
this Agreement. The Company and Stevens further agree that, for a term
commencing as of the date hereof and ending upon the commencement of the
Employment Term (the "Consulting Term," and, together with the Employment Term,
the "Term"), Stevens shall serve as a consultant to the Company performing such
duties as may be agreed by the Company and Stevens.
2. DUTIES
During the Employment Term, Stevens shall serve as an Executive Vice
President of the Company, and shall be responsible for the duties attendant to
such office and such other managerial duties and responsibilities with the
Company as may be assigned from time to time by the Chief Executive Officer
and/or the Board of Directors of the Company.
The principal location of Stevens' employment shall be in the New York City
vicinity, although Stevens understands and agrees that he will be required to
travel frequently for business reasons. Stevens shall diligently and faithfully
perform his obligations under the Agreement and shall devote his full
professional and business time and best efforts to the performance of his
<PAGE>
duties as an Executive Vice President of the Company during the Employment Term.
Stevens shall not, directly or indirectly, render business services to any other
person or entity, without the consent of the Company's Board of Directors.
3. BASE SALARY
For services rendered by Stevens to the Company during the Employment Term,
the Company shall pay him a base salary of $175,000 per year, payable in
accordance with the standard payroll practices of the Company, subject to annual
increases in the sole discretion of the Chief Executive Officer and the
Company's Board of Directors, taking into account the financial and operating
performance of the Company's business and divisions and a qualitative assessment
of Stevens' performance during such year. Stevens shall not receive any salary
or fees for services rendered during the Consulting Term, other than the
granting of the Options.
4. BONUS/OPTIONS
a. During the Employment Term, Stevens shall be eligible to receive a
bonus set by the Board of Directors in its sole discretion and based on such
factors as the Board of Directors deems appropriate.
b. The Company hereby agrees to cause the issuance to Stevens of
options ("Options") to purchase 100,000 shares of the Company's common stock,
$.01 par value ("Common Stock"). The Options shall be issued pursuant to, and in
accordance with, the Company's 1997 Stock Option Plan (the "Plan"). The Options
shall be Non-Qualified Stock Options (as defined in the Plan), and shall be
exercisable at a price equal to the Fair Market Value (as defined in the Plan)
of the Common Stock on the date hereof. The Options shall vest over a
forty-eight (48) month period as follows: (i) 12.50% of the Options shall vest
on the six month anniversary of the date of grant and (ii) 2.083% of the Options
shall vest each month thereafter until all such Options shall have vested, but
subject to shareholder approval to the extent there are then insufficient shares
available for grant provided that if shareholder approval is not obtained, the
Company shall use its best efforts to adopt a stock appreciation rights plan
(the "SAR Plan") and provide Stevens with rights under the SAR Plan that mirror
in all material respects the terms and conditions of the Options had the Options
not been declared null and void by virtue of the failure to obtain such
shareholder approval, except that the aggregate amount payable by the Company to
Stevens pursuant to any such rights granted under the SAR Plan shall not exceed
$100,000. The Term of each Option shall be 10 years from the date of grant. In
the event of the termination of Stevens's employment for any reason, he shall
have 30 days within which to exercise any vested Options and any unvested
Options shall be forfeited. During the Term of this Agreement, Stevens shall be
eligible to participate in the Company's future stock option grants as
determined appropriate by the Committee in its sole discretion.
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<PAGE>
5. EXPENSE REIMBURSEMENT AND PERQUISITES
a. During the Term of this Agreement, Stevens shall be entitled to
reimbursement of all reasonable and actual out-of-pocket expenses incurred by
him in the performance of his services to the Company consistent with corporate
policies, if any, provided that the expenses are properly accounted for.
b. During each calendar year of the Employment Term, Stevens shall be
entitled to reasonable vacation with full pay in accordance with they Company's
then-current vacation policies; provided, however, that Stevens shall schedule
such vacations at times convenient to the Company.
c. During the Employment Term, the Company shall provide Stevens with
$500,000 worth of term life insurance and disability insurance purchased for
annual premiums of up to $5,000 per year, both subject to availability on
commercially reasonable terms, major medical insurance coverage as determined by
the Company in its sole discretion, and Stevens shall be entitled to participate
in all dental insurance and other employee benefit plans instituted by the
Company from time to time on the same terms and conditions as other similarly
situated employees of the Company, to the extent permitted by law. In addition,
Stevens shall be a covered officer under the Company's now existing and any
future Directors and Officers liability policy.
6. NON-COMPETITION; NON-SOLICITATION
a. In consideration of the offer of employment, severance benefits and
Options to be granted to Stevens hereunder, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
during the Term of this Agreement and for a period equal to two years
thereafter, Stevens shall not, without the prior written consent of the Company,
anywhere in the world, directly or indirectly, (i) enter into the employ of or
render any services to any Competitive Business; (ii) engage in any Competitive
Business for his own account; (iii) become associated with or interested in any
Competitive Business as an individual, partner, shareholder, creditor, director,
officer, principal, agent, employee, trustee, consultant, advisor or in any
other relationship or capacity; (iv) employ or retain, or have or cause any
other person or entity to employ or retain, any person who was employed or
retained by the Company while Stevens was employed by the Company; or (v)
solicit, interfere with, or endeavor to entice away from the Company, for the
benefit of a Competitive Business, any of its customers or other persons with
whom the Company has a contractual relationship. For purposes of this Agreement,
a "Competitive Business" shall mean any person, corporation, partnership, firm
or other entity which sells or has plans to sell apparel, fashion accessories,
or home furnishings via the Internet or otherwise engages in any business which
now or at the time has material operations which are competitive (directly or
indirectly) with the business of the
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<PAGE>
Company (including any line of business for which the Company has undertaken any
substantial amount of planning) as of the time Stevens employment with the
Company terminates, provided that activities in the energy or gaming industries
shall in no event be considered to be competitive (directly or indirectly) with
the business of the Company. However, nothing in this Agreement shall preclude
Stevens from (i) investing his personal assets in the securities of any
corporation or other business entity which is engaged in a Competitive Business
if such securities are traded on a national stock exchange or in the
over-the-counter market and if such investment does not result in his
beneficially owning, at any time, more than three percent (3%) of the
publicly-traded equity securities of such Competitive Business; or (ii) working
for or becoming a principal of any consulting firm that provides consulting
services to a Competitive Business, so long as Stevens does not directly
participate in the provision of such services.
b. Stevens and the Company agree that the covenants of non-competition
and non-solicitation contained in this paragraph 6 are reasonable covenants
under the circumstances, and further agree that if, in the opinion of any court
of competent jurisdiction, such covenants are not reasonable in any respect,
such court shall have the right, power and authority to excise or modify such
provision or provisions of these covenants as to the court shall appear not
reasonable and to enforce the remainder of these covenants as so amended.
Stevens agrees that any breach of the covenants contained in this paragraph 6
would irreparably injure the Company. Accordingly, Stevens agrees that the
Company, in addition to pursuing any other remedies it may have in law or in
equity, may obtain an injunction against Stevens from any court having
jurisdiction over the matter, restraining any further violation of this
paragraph 6.
7. TERMINATION
a. This Agreement, the employment of Stevens, and Stevens' position as
an Executive Vice President of the Company shall terminate upon the first to
occur of:
(i) his death;
(ii) his "permanent disability," due to injury or sickness for a
continuous period of four (4) months, or a total of eight
months in a twenty-four month period (vacation time excluded),
during which time Stevens is unable in substantial part to
attend to his ordinary and regular duties, provided that the
Company shall give Stevens thirty (30) days' written notice
prior to any such termination;
(iii) a "Constructive Termination" by the Company during the
Employment Term, which, for purposes of this Agreement, shall
be deemed to have occurred upon (A) the removal of Stevens
without his consent from his position as an Executive Vice
President of the Company, or (B) the material breach by the
Company of this Agreement; provided that no such
4
<PAGE>
breach shall be considered a Constructive Termination unless
Stevens has provided the Company with at least thirty (30)
days' prior written notice of such breach and the Company has
failed to cure such breach within such thirty (30) day period;
(iv) the termination of this Agreement at any time without cause by
the Company;
(v) the termination of this Agreement for cause, which, for
purposes of this Agreement, shall mean that (1) Stevens has
been convicted of a felony or any serious crime involving
moral turpitude, or engaged in materially fraudulent or
materially dishonest actions in connection with the
performance of his duties hereunder, or (2) Stevens has
willfully and materially failed to perform his duties
hereunder, or (3) Stevens has willfully or negligently
breached the terms and provisions of this Agreement in any
material respect, or (4) Stevens has failed to comply in any
material respect with the Company's policies of conduct
including with respect to trading in securities, provided that
the Company shall provide Stevens with at least five (5)
business days' prior written notice of any such failure to
comply and an opportunity to cure such failure, to the extent
curable; or
(vi) the termination of this Agreement by Stevens, which shall
occur on not less than 60 days prior written notice from
Stevens.
b. In the event that this Agreement is terminated during the Employment
Term pursuant to paragraphs 7(a)(i), 7(a)(ii), 7(a)(v) or 7(a)(vi), the Company
shall pay Stevens his base salary only through the date of termination. In the
event that this Agreement is terminated during the Employment Term pursuant to
paragraphs 7(a)(iii) or 7(a)(iv), the Company shall pay Stevens, in lieu of all
salary, compensation payments and perquisites set forth in paragraphs 3, 4 and 5
(including bonus payments and unvested option grants, but excluding vested
option grants), severance payments (the "Severance Payments") as follows:
(i) the then-current base salary for a period of ninety (90) days,
if Stevens is terminated during the first year of the Term of
this Agreement;
(ii) the then-current base salary for a period of one-hundred
twenty (120) days, if Stevens is terminated during the second
year of the Term of this Agreement; or
5
<PAGE>
(iii) the then-current base salary for a period of one-hundred fifty
(150) days, if Stevens is terminated during the third year of
the Term of this Agreement or any time during the Term of this
Agreement thereafter.
The Severance Payments shall be payable in periodic installments in accordance
with the Company's standard payroll practices.
8. CONFIDENTIALITY
a. Stevens recognizes that the services to be performed by him are
special, unique and extraordinary in that, by reason of his employment and
provision of consulting services under this Agreement, he may acquire or has
acquired confidential information and trade secrets concerning the operation of
the Company, its predecessors, and/or its affiliates, the use or disclosure of
which could cause the Company, or its affiliates substantial loss and damages
which could not be readily calculated and for which no remedy at law would be
adequate. Accordingly, Stevens covenants and agrees with the Company that he
will not at any time during the Term of this Agreement or thereafter, except in
the performance of his obligations to the Company or with the prior written
consent of the Board of Directors or as otherwise required by court order,
subpoena or other government process, directly or indirectly, disclose any
secret or confidential information that he may learn or has learned by reason of
his association with the Company. If Stevens shall be required to make such
disclosure pursuant to court order, subpoena or other government process, he
shall notify the Company of the same, by personal delivery or electronic means,
confirmed by mail, within twenty-four (24) hours of learning of such court
order, subpoena or other government process and, at the Company's expense (such
expenses to be advanced by the Company as reasonably required by Stevens), shall
(i) take all necessary and lawful steps reasonably required by the Company to
defend against the enforcement of such subpoena, court order or government
process, and (ii) permit the Company to intervene and participate with counsel
of its choice in any proceeding relating to the enforcement thereof. The term
"confidential information" includes, without limitation, information not in the
public domain and not previously disclosed to the public or to the trade by the
Company's management with respect to the Company's or its affiliates' facilities
and methods, trade secrets and other intellectual property, designs, manuals,
confidential reports, supplier names and pricing, customer names and prices
paid, financial information or business plans.
b. Stevens confirms that all confidential information is and shall
remain the exclusive property of the Company. All memoranda, notes, reports,
software, sketches, photographs, drawings, plans, business records, papers or
other documents or computer-stored or disk-stored information kept or made by
Stevens relating to the business of the Company shall be and will remain the
sole and exclusive property of the Company and all such materials containing
confidential information shall be promptly delivered and returned to the Company
immediately upon the termination of his employment with the Company.
6
<PAGE>
c. Stevens shall make full and prompt disclosure to the Company of all
inventions, improvements, ideas, concepts, discoveries, methods, developments,
software and works of authorship, whether or not copyrightable, trademarkable or
licensable, which are created, made, conceived or reduced to practice by Stevens
during his services with the Company, whether or not during normal working hours
or on the premises of the Company and which relate in any manner to the business
of the Company (all of which are collectively referred to in this Agreement as
"Developments"). All Developments shall be the sole property of the Company, and
Stevens hereby assigns to the Company, without further compensation, all of his
rights, title and interests in and to the Developments and any and all related
patents, patent applications, copyrights, copyright applications, trademarks and
trade names in the United States and elsewhere.
d. Stevens shall assist the Company in obtaining, maintaining and
enforcing patent, copyright and other forms of legal protection for intellectual
property in any country. Upon the request of the Company, Stevens shall sign all
applications, assignments, instruments and papers and perform all acts necessary
or desired by the Company in order to protect its rights and interests in any
Developments.
e. Stevens agrees that any breach of this paragraph 8 will cause
irreparable damage to the Company and that, in the event of such breach, the
Company will have, in addition to any and all remedies of law, including rights
which the Company may have to damages, the right to equitable relief including,
as appropriate, all injunctive relief or specific performance or other equitable
relief. Stevens understands and agrees that the rights and obligations set forth
in paragraph 8 shall survive the termination or expiration of this Agreement.
9. REPRESENTATIONS AND WARRANTIES
a. Stevens represents and warrants to the Company that he was advised
to consult with an attorney of Stevens' own choosing concerning this Agreement.
b. Stevens represents and warrants to the Company that, to the best of
his knowledge, the execution, delivery and performance of this Agreement by
Stevens complies with all laws applicable to Stevens or to which his properties
are subject and does not violate, breach or conflict with any agreement by which
he or his assets are bound or affected.
10. INDEMNIFICATION
The Company shall indemnify and hold Stevens harmless to the fullest extent
permitted by law from and against any and all claims, losses, liabilities,
damages and expenses including, but not limited to, reasonable attorneys' fees
incurred by, imposed upon or asserted against Stevens as a result of or arising
out of any acts or omission by Stevens in his capacity as an officer, director,
employee or consultant of the Company.
7
<PAGE>
11. MEDIATION
(a) The Company and Stevens hereby state their mutual desire for any
dispute concerning a legally cognizable claim arising out of this Agreement or
in connection with the employment of Stevens by the Company (other than a claim
for injunctive relief in connection with an alleged violation of Stevens'
obligations under Sections 6 and 8 hereunder), including, but not limited to,
claims of breach of contract, unlawful termination, discrimination, harassment,
workers' compensation retaliation, defamation, tortious infliction of emotional
distress, fraud and conversion ( "Legal Dispute"), be resolved amicably, if
possible, and without the need for litigation.
(b) Based on this mutual desire, in the event a Legal Dispute arises,
the parties agree that before instituting an action in a court of law, the
parties shall first submit the Legal Dispute to mediation under the auspices of
the American Arbitration Association (the "AAA") or such other mediation
provider as shall be mutually agreed upon by the parties pursuant to the
mediation rules and procedures promulgated by the AAA or another agreed
mediation provider at such time the Legal Dispute is submitted for resolution.
The parties further agree to make a good faith effort to resolve the Legal
Dispute through such mediation.
12. GOVERNING LAW
This Agreement shall be deemed a contract made under, and for all purposes
shall be construed in accordance with, the laws of the State of New York,
without giving effect to its conflict of law provisions.
13. ENTIRE AGREEMENT
This Agreement contains all of the understandings between Stevens and the
Company pertaining to Stevens' employment with the Company, and it supersedes
all undertakings and agreements, whether oral or in writing, previously entered
into between them.
14. AMENDMENT OR MODIFICATION; WAIVER
No provision of this Agreement may be amended or modified unless such
amendment or modification is agreed to in writing, signed by Stevens and by an
officer of the Company duly authorized to do so. Except as otherwise
specifically provided in this Agreement, no waiver by either party of any breach
by the other party of any condition or provision of this Agreement to be
performed by such other party shall be deemed a waiver of a similar or
dissimilar provision or condition at the same or any prior or subsequent time.
8
<PAGE>
15. NOTICES
Any notice to be given hereunder shall be in writing and delivered
personally or sent by certified mail, postage prepaid, return receipt requested,
addressed to the party concerned at the address indicated below or to such other
address as such party may subsequently designate by like notice:
If to the Company, to:
Bluefly, Inc.
42 West 39th Street
New York, NY 10018
Attn: E. Kenneth Seiff
If to Stevens, to:
Robert Stevens
c/o Michel Lee
Harvey Pennington Cabot Griffith & Renneison, LLC
144 East 44th Street
New York, New York 10017
Any such notice shall be deemed given upon receipt.
16. SEVERABILITY
In the event that any provision or portion of this Agreement shall be
determined to be invalid or unenforceable for any reason, the remaining
provisions or portions of this Agreement shall be unaffected thereby and shall
remain in full force and effect to the fullest extent permitted by law.
17. TITLES
Titles of the paragraphs of this Agreement are intended solely for
convenience of reference and no provision of this Agreement is to be construed
by reference to the title of any paragraphs.
9
<PAGE>
18. COUNTERPARTS
This Agreement may be executed in counterparts, each of which shall be
deemed an original, and all of which together shall constitute one and the same
instrument.
10
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
date first above written.
BLUEFLY, INC.
By: /s/ E. Kenneth Seiff
-----------------------------
E. Kenneth Seiff
Chief Executive Officer
EMPLOYEE
/s/ Robert Stevens
-----------------------------
Robert Stevens
11
<PAGE>
Exhibit 10.13
NOTE AND WARRANT PURCHASE AGREEMENT
among
BLUEFLY, INC.,
QUANTUM INDUSTRIAL PARTNERS LDC
and
SFM DOMESTIC INVESTMENTS LLC
Dated: March 28, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Section 1. DEFINITIONS............................................................................3
1.1 Definitions............................................................................3
1.2 Investment Agreement...................................................................4
1.3 Other Definitions......................................................................4
Section 2. PURCHASE AND SALE OF THE SECURITIES....................................................5
2.1 Closing................................................................................5
2.2 Transactions at the Closing............................................................5
2.3 Standby Commitment.....................................................................5
Section 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY..........................................6
3.1 Representations and Warranties.........................................................6
3.2 Compliance with Terms and Conditions of Investment Agreement...........................7
3.3 Representations and Warranties in Connection with the Transactions
Contemplated Herein....................................................................7
Section 4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS.......................................9
Section 5. CONDITIONS TO THE OBLIGATION OF THE PURCHASERS TO CLOSE...............................10
5.1 Representations and Warranties........................................................10
5.2 Compliance with this Agreement........................................................10
5.3 Securities............................................................................10
5.4 Consents and Approvals................................................................11
Section 6. CONDITIONS TO THE OBLIGATION OF THE COMPANY TO CLOSE..................................11
6.1 Representations and Warranties........................................................11
6.2 Compliance with this Agreement........................................................11
6.3 Consents and Approvals................................................................11
6.4 Payment of Purchase Price.............................................................12
Section 7. COVENANTS.............................................................................12
7.1 Covenants of the Company..............................................................12
7.2 Mutual Covenants. ....................................................................12
<PAGE>
Section 8. INDEMNIFICATION.......................................................................13
Section 9. REGISTRATION RIGHTS...................................................................13
Section 10. TERMINATION OF AGREEMENT..............................................................13
10.1 Termination...........................................................................13
10.2 Survival..............................................................................14
Section 11. MISCELLANEOUS.........................................................................14
11.1 Survival of Representations, Warranties and Covenants.................................14
11.2 Notices...............................................................................14
11.3 Successors and Assigns................................................................14
11.4 Amendment and Waiver..................................................................14
11.5 Counterparts..........................................................................15
11.6 Headings..............................................................................15
11.7 GOVERNING LAW.........................................................................15
11.8 Severability..........................................................................15
11.9 Rules of Construction.................................................................15
11.10 Entire Agreement......................................................................15
11.11 Fees..................................................................................15
11.12 Publicity; Confidentiality............................................................15
11.13 Further Assurances....................................................................16
</TABLE>
EXHIBITS
- --------
A-1 Form of Warrant
A-2 Form of Senior Convertible Note
SCHEDULES
- ---------
2.2 Shares and Purchase Price
3.4 Capitalization
3.11 Intellectual Property
3.14 Employee Benefits
3.15 Taxes
<PAGE>
3
NOTE AND WARRANT PURCHASE AGREEMENT
NOTE AND WARRANT PURCHASE AGREEMENT (the "Agreement"), dated
as of March 28, 2000, by and among Bluefly, Inc., a New York corporation (the
"Company"), and the purchasers listed on Schedule 1 hereto (the "Purchasers").
WHEREAS, pursuant to an Investment Agreement dated as of July
27, 1999, by and among the Company, the Purchasers and Pilot Capital Corp. (the
"Investment Agreement"), each of the Purchasers has invested in shares of the
Company's Series A Preferred Stock;
WHEREAS, the Company anticipates concluding during 2000 a Next
Round Financing (as defined below);
WHEREAS, prior to the Next Round Financing the Company wishes
to sell to each Purchaser, and each Purchaser wishes to purchase from the
Company: (i) a senior convertible promissory note, in the aggregate principal
amount set forth opposite such Purchaser's name on Schedule 2.2 hereto, having
the terms and conditions set forth in the form of Note attached hereto as
Exhibit A-1 (the "Senior Convertible Notes") and (ii) a warrant (the "Warrants"
and, together with the Senior Convertible Notes, the "Securities") having the
terms and conditions set forth in the form of Warrant attached hereto as Exhibit
A-2; and
WHEREAS, the Purchasers are willing to commit to provide the
Company with additional financing at the option of the Company.
NOW, THEREFORE, in consideration of the mutual terms and
conditions herein contained, and for good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties hereto,
intending to be legally bound, hereby agree as follows:
SECTION 1. DEFINITIONS
1.1 Definitions. As used in this Agreement, the following
definitions shall apply:
"By-Laws" means the amended and restated By-Laws of the
Company, as in effect on the date hereof and on the Closing Date.
"Certificate of Incorporation" means the Certificate of
Incorporation of the Company, as the same was amended pursuant to Section 5.6 of
the Investment Agreement and as in effect on the Closing Date.
<PAGE>
4
"Financials" means the Audited Financials and the Unaudited
Financials.
"Material Adverse Effect" means a circumstance, fact, change,
development or effect (i) that could or could reasonably be expected to have a
materially adverse effect on the properties, results of operations, business,
domestic prospects or condition (financial or otherwise) of the Company taken as
a whole, or (ii) that adversely effects the ability of the Company to consummate
the transactions contemplated by this Agreement in any material respect or
impairs or delays the ability of the Company to effect the Closing.
"Next Round Financing" means the closing of a private
placement of Next Round Securities which results in gross proceeds to the
Company of $10 million in one or more tranches.
"Next Round Securities" means the Company's Common Stock or
securities convertible into or exercisable for the Company's Common Stock in the
Next Round Financing.
"Quarterly Reports" means the Company's Quarterly Reports on
Form 10-QSB for the quarters ended September 30, 1999, June 30, 1999, March 31,
1999, and September 30, 1998, each as filed with the SEC.
"SEC Documents" means the Annual Reports, the Quarterly
Reports and all other documents filed by the Company with the SEC on or after
January 1, 1998 and prior to the date hereof pursuant to Section 13 or 15(d) of
the Exchange Act (including all exhibits and schedules thereto and documents
incorporated by reference therein), but shall not include any portion of any
document which is not deemed to be filed under applicable SEC rules and
regulations.
"Transaction Documents" means collectively, this Agreement
(including the schedules attached hereto), the Senior Convertible Notes and the
Warrants.
"Unaudited Financials" means the unaudited quarterly
consolidated financial statements and the related notes included in the SEC
Documents, and the unaudited financial statements and notes for the year ended
December 31, 1999, all of which have previously been delivered by the Company to
the Purchasers.
1.2 Investment Agreement. Capitalized terms not otherwise
defined herein shall have the meanings set forth for such terms in the
Investment Agreement.
1.3 Other Definitions. The following terms are defined in the
section referred to opposite such term.
<PAGE>
5
Term Section
- ------------------ -------
Agreement Recitals
Closing 2.1
Closing Date 2.1
Investment Agreement Recitals
Purchase Price 2.2
Purchasers Recitals
Securities Recitals
Senior Convertible Notes Recitals
Standby Commitment 2.3
Warrants Recitals
SECTION 2. PURCHASE AND SALE OF THE SECURITIES
2.1 Closing. Subject to the terms and conditions of this Agreement,
the closing of the sale and purchase of the Securities (the "Closing") shall
take place at the offices of Paul, Weiss, Rifkind, Wharton & Garrison, 1285
Avenue of the Americas, New York, New York 10019-6064 on the date hereof or on
such other date and time as the Purchasers and the Company may mutually agree
(the "Closing Date").
2.2 Transactions at the Closing. At the Closing, subject to the terms
and conditions of this Agreement, each of the Purchasers severally (and not
jointly) shall purchase and acquire from the Company, and the Company shall
issue and sell to the Purchasers, Senior Convertible Notes and Warrants for an
aggregate purchase price of $3,000,000 (the "Purchase Price"). At the Closing,
the Company shall deliver to each Purchaser a duly executed Senior Convertible
Note, in the aggregate principal amount set forth opposite such Purchaser's name
on Schedule 2.2 hereto, and a duly executed Warrant to purchase the amount of
shares of Next Round Securities as set forth in the Warrant, each registered in
the name of such Purchaser or its nominees, with appropriate issue stamps, if
any, affixed at the expense of the Company, free and clear of any Lien, against
payment by each Purchaser of the portion of the Purchase Price payable in
respect thereof as set forth opposite such Purchaser's name on Schedule 2.2
hereto by wire transfer of immediately available funds to an account designated
by the Company.
2.3 Standby Commitment.
(a) The Purchasers hereby commit, jointly but not severally, (the
"Standby Commitment") that, in addition to the payment of the Purchase Price,
they shall provide the Company (on a pro rata basis based on the allocation of
the Purchase Price as set forth in Section 2.2 hereof), at the Company's option
up to an aggregate of $12 million (the "Commitment Amount") at any time prior to
January 1, 2001 in one or more tranches as requested by the Company; provided,
however, that the Commitment Amount shall be reduced by the gross proceeds
received by the Company or any of its Subsidiaries from the issuance after the
date hereof of any equity or convertible securities,
<PAGE>
6
(excluding financing provided by the Purchasers pursuant to this Agreement and
any trade payables and other financing arrangements entered into in the ordinary
course of business, but including, for purposes of clarification, the Next
Round). The Standby Commitment shall be provided on terms that are consistent
with those in the market at the time the Standby Commitment is drawn for similar
investments by investors similar to the Purchasers in companies similar to the
Company.
(b) The Company shall notify the Purchasers in writing within two
Business Days of the receipt of any funds that would reduce the Commitment
Amount; provided that the Commitment Amount shall automatically be reduced
whether or not the Company provides such notice.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to each Purchaser as
follows:
3.1 Representations and Warranties. The representations and
warranties of the Company contained in Section 3 of the Investment Agreement
(including, except as otherwise noted below, the schedules referenced in such
representations and warranties and any updates attached hereto), except for
Sections 3.2, 3.3, 3.4, 3.13 and 3.27, are true and correct in all material
respects as of the date hereof and as of the Closing Date as if made at and on
such dates, except that in reaffirming any such representation or warranty that:
(a) refers to the term "Material Adverse Effect", the Company
reaffirms such representation or warranty as if such term were defined pursuant
to Section 2.1 hereof;
(b) refers to the term "SEC Documents" the Company reaffirms such
representation or warranty as if the term "SEC Documents" were defined pursuant
to Section 2.1 hereof;
(c) references SEC Documents or other statements or documents
filed with the SEC as of a certain date, the Company reaffirms such
representation or warranty as if any such references referred to filings through
the date hereof;
(d) refers to the term "Financials" or "Unaudited Financials" the
Company reaffirms such representation or warranty as if such terms were defined
pursuant to Section 2.1 hereof; and
(e) refers to the term "Certificate of Incorporation" or
"By-Laws", the Company reaffirms such representation or warranty as if such
terms were defined pursuant to Section 2.1 hereof.
<PAGE>
7
3.2 Compliance with Terms and Conditions of Investment Agreement. The
Company has performed and complied in all material respects with all of its
agreements and conditions set forth in the Investment Agreement and the other
Transaction Documents (as such term was defined in the Investment Agreement).
3.3 Representations and Warranties in Connection with the
Transactions Contemplated Herein.
(a) Power and Authority. The Company has all requisite corporate
power and authority to execute and deliver this Agreement and to perform its
obligations under this Agreement. The execution, delivery and performance by the
Company of this Agreement and each of the other Transaction Documents and the
consummation by the Company of the transactions contemplated hereby have been
duly authorized and approved by the Board of Directors and no further corporate
action on the part of the Company (including, but not limited to, any
shareholder approvals, but excluding corporate actions necessary to authorize
any amendment of the Certificate of Incorporation necessary to create and
establish the terms of the Next Round Securities and shareholder approvals
necessary to issue the Next Round Securities) is necessary to authorize the
execution, delivery and performance by the Company of this Agreement or the
consummation by the Company of the transactions contemplated hereby. This
Agreement has been duly executed and delivered by the Company and is a valid and
binding obligation of the Company, enforceable against the Company in accordance
with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, fraudulent conveyance or transfer,
moratorium or similar laws affecting the enforcement of creditors' rights
generally or by equitable principles relating to enforceability (regardless of
whether considered in a proceeding at law or in equity).
(b) No Contravention, Conflict, Breach, Etc. The execution,
delivery and performance of this Agreement and each Transaction Document by the
Company and the consummation of the transactions contemplated hereby and thereby
will not conflict with, contravene or result in a breach or violation of any of
the terms and provisions of, or constitute a default under, or result in the
creation or imposition of any Encumbrance upon any assets or properties of the
Company or any of its Subsidiaries or cause the Company or any of its
Subsidiaries to be required to redeem, repurchase or offer to repurchase any of
their respective indebtedness under (i) the Certificate of Incorporation, the
By-Laws, or any other organizational document of the Company or the certificate
of incorporation, the by-laws or other organizational document of any of its
Subsidiaries, (ii) any material Law of any Governmental Authority having
jurisdiction over the Company or any of its Subsidiaries or any of their
respective assets, properties or operations or (iii) any indenture, mortgage,
loan agreement, note or other material agreement or instrument for borrowed
money, any guarantee of any agreement or instrument for borrowed money or any
material lease, permit, license or other agreement or instrument to which the
Company or any of its Subsidiaries is a party or by which the Company or any of
its Subsidiaries is bound or to which any of the assets, properties or
operations of the Company or any of its Subsidiaries is subject.
<PAGE>
8
(c) Consents. No consent, approval, authorization, order,
registration, filing or qualification ("Consents") of or with any (i)
Governmental Authority, (ii) stock exchange on which the securities of the
Company are traded or (iii) other Person (whether acting in an individual,
fiduciary or other capacity) is required to be made or obtained by the Company
or any of its Subsidiaries for the execution, delivery and performance by the
Company of this Agreement and each of the other Transaction Documents and the
consummation of the transactions contemplated hereby (other than the Next Round
Financing or the drawdown of the Standby Commitment), except Consents which are
not material to the business or operations of the Company and its Subsidiaries,
taken as a whole, or to the consummation of the transactions contemplated by
this Agreement or Consents required for the listing of the shares of Common
Stock underlying the Warrants on the NASDAQ and the Boston Stock Exchange.
(d) Capitalization. As of the date hereof, the issued and
outstanding capital stock of the Company consists of 4,924,906 shares of Common
Stock and 500,000 shares of Series A Preferred Stock. As of the Closing Date,
the authorized capital stock of the Company will consist of 15,000,000 shares of
Common Stock (of which 175,000 shares shall have been reserved for the
Purchasers in connection with the transactions contemplated hereby) and
2,000,000 shares of Preferred Stock, $.01 par value, of which 500,000 shares
shall have been designated Series A Preferred Stock. As of the first closing of
the Next Round, sufficient numbers of shares of Next Round Securities and, as
appropriate, of shares of Common Stock into which such shares of Next Round
Securities are convertible or for which they are exercisable, shall be
authorized and reserved as required by the documents to be negotiated in
connection with the Next Round and as necessary to permit conversion of the
maximum amount then potentially payable by the Company under the Senior
Convertible Notes into Next Round Securities.
All such shares of Capital Stock of the Company are or shall have
been duly authorized and: (a) in the case of shares of Common Stock or Next
Round Securities issued upon conversion of the Senior Convertible Notes or
exercise of the Warrants, shall be fully paid and non-assessable upon such
conversion, and (b) in the case of shares of Common Stock issued upon
conversion, exchange, and/or exercise of such Next Round Securities, shall be
fully paid and non-assessable upon the conversion, exchange, or payment of the
exercise price contemplated by the Next Round Securities.
Except as set forth in Schedule 3.4 of this Agreement, as
contemplated by the Investment Agreement, or as contemplated by this Agreement,
there are no shares of capital stock of the Company reserved for issuance.
Except for: (a) the Warrants, (b) the Senior Convertible Notes, (c) the Next
Round Securities (including those into which the Senior Convertible Notes are
convertible), (d) the Series A Preferred, and (e) as set forth in Schedule 3.4
of this Agreement, there are no options, warrants or other rights to purchase
shares of Capital Stock or other securities of the Company or any of its
Subsidiaries, or securities convertible into or exercisable for shares of
Capital Stock or other securities of the Company or any of its Subsidiaries.
Except as set forth in Schedule
<PAGE>
9
3.4 to this Agreement, as required by the Transaction Documents (as such term is
defined in the Investment Agreement), or as required by the Transaction
Documents (as such term is defined in this Agreement), neither the Company nor
any Subsidiary is obligated in any manner to issue shares of its Capital Stock
or other securities. Except as contemplated hereby and for relevant state and
federal securities laws, there are no restrictions on each Purchaser's ability
to transfer shares of Capital Stock of the Company.
(e) Exemption from Registration; Restrictions on Offer and Sale
of Same or Similar Securities. Assuming the representations and warranties of
the Purchasers set forth in Section 4 hereof are true and correct in all
material respects, the offer and sale of the Securities made pursuant to this
Agreement will be exempt from the registration requirements of the Act. Neither
the Company nor any Person acting on its behalf has, in connection with the
offering of the Securities, engaged in (i) any form of general solicitation or
general advertising (as those terms are used within the meaning of Rule 502(c)
under the Act), (ii) any action involving a public offering within the meaning
of Section 4(2) of the Act, or (iii) any action that would require the
registration under the Act of the offering and sale of the Securities pursuant
to this Agreement or that would violate applicable state securities or "blue
sky" laws. The Company has not made, any offer or sale of shares of its Capital
Stock, if as a result the offer and sale of the securities contemplated hereby,
or any of them, could fail to be entitled to exemption from the registration
requirements of the Act. As used herein, the terms "offer" and "sale" have the
meanings specified in Section 2(3) of the Act.
(f) Broker's, Finder's or Similar Fees. There are no brokerage
commissions, finder's fees or similar fees or commissions payable by the Company
in connection with the transactions contemplated hereby based on any agreement,
arrangement or understanding with the Company or any of its Subsidiaries or any
action taken by any such entity other than fees that may be due to Credit Suisse
First Boston in connection with the Next Round Financing, as placement agent for
such financing.
(g) Disclosure; Agreement and Other Documents. This Agreement
(including, but not limited to, the provisions incorporating language contained
in the Investment Agreement), the other Transaction Documents and each of the
certificates furnished to the Purchasers by the Company in connection with the
purchase and sale of the Securities, taken as a whole, do not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements contained herein or therein, in the light of the
circumstances under which they were made, not misleading.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS
Each of the Purchasers hereby represents and warrants (severally as
to itself and not jointly) to the Company that the representations and
warranties of such Purchaser contained in Section 4 of the Investment Agreement
are true and correct in all material respects as of the date hereof and as of
the Closing Date as if made at and on
<PAGE>
10
such dates, except that in reaffirming any representation or warranty of the
Company contained in Section 4 of the Investment Agreement that refers to:
(a) the term "this Agreement" or the "other Transaction
Documents" each Purchaser reaffirms such representation or warranty as if such
terms were defined pursuant to Section 2.1 hereof;
(b) transactions contemplated by "this Agreement" or the
"Transaction Documents", each Purchaser reaffirms such representation or
warranty as if such terms were deferred pursuant to Section 2.1 hereof;
(c) "SEC Documents," each Purchaser reaffirms such representation
or warranty as if the term "SEC Documents" were defined pursuant to Section 2.1
hereof;
(d) to the term "First Shares," each Purchaser reaffirms such
representation or warranty as if it referred to the term "Securities;" and
(e) to the terms "First Closing" or "Second Closing," each
Purchaser reaffirms such representation or warranty as if they referred to the
"Closing," or as such terms are defined pursuant to Section 2.1. hereof.
SECTION 5. CONDITIONS TO THE OBLIGATION OF THE PURCHASERS TO CLOSE
The obligation of the Purchasers to purchase the Securities and to
pay the Purchase Price, and to perform any obligations hereunder shall be
subject to the satisfaction as determined by, or waiver by, the Purchasers of
the following conditions on or before the Closing Date:
5.1 Representations and Warranties. The representations and
warranties of the Company contained in Section 3 hereof shall be true and
correct in all material respects at and on the Closing Date as if made at and on
such date, except to the extent that any representation and warranty expressly
speaks as of an earlier date, in which case such representation and warranty is
true and correct as of such date and any variance in such representation and
warranty following such date may only be the result of activities or
transactions which have taken place after the date hereof and which are
contemplated by this Agreement.
5.2 Compliance with this Agreement. The Company shall have performed
and complied in all material respects with all of its agreements and conditions
set forth herein that are required to be performed or complied with by the
Company as of the Closing Date.
5.3 Securities. At the Closing, the Company shall have delivered to
each of the Purchasers a Senior Convertible Note and a Warrant pursuant to
Section 2.2 hereof.
<PAGE>
11
5.4 Consents and Approvals. All consents, exemptions, authorizations,
or other actions by, or notices to, or filings with Governmental Authorities and
other Persons in respect of all Requirements of Law and with respect to those
Contractual Obligations of the Company which are necessary or required in
connection with the execution, delivery or performance (including the issuance
of the Senior Convertible Notes, and any Shares of Common Stock issuable upon
exercise of the Warrants) by, or enforcement against, the Company of this
Agreement (other than the Next Round Financing or the drawdown of the Standby
Commitment) and each of the other Transaction Documents shall have been obtained
and be in full force and effect, except for consents, exceptions, authorizations
or other actions which would not have a Material Adverse Effect and would not
prevent the consummation of the transactions contemplated by this Agreement, and
each of the Purchasers shall have been furnished with appropriate evidence
thereof.
SECTION 6. CONDITIONS TO THE OBLIGATION OF THE COMPANY TO CLOSE
The obligations of the Company to issue and sell the Senior
Convertible Notes and the Warrants and to perform its other obligations
hereunder, shall be subject to the satisfaction as determined by, or waiver by,
the Company of the following conditions on or before the Closing Date:
6.1 Representations and Warranties. The representations and
warranties of the Purchasers contained in Section 4 hereof shall be true and
correct at and on the Closing Date as if made at and on such date, except to the
extent that any representation and warranty expressly speaks as of an earlier
date, in which case such representation and warranty is true and correct as of
such date and any variance in such representation and warranty following such
date may only be the result of activities or transactions which have taken place
after the date hereof and which are contemplated by this Agreement.
6.2 Compliance with this Agreement. The Purchasers shall have
performed and complied in all material respects with all of their agreements and
conditions set forth herein that are required to be performed or complied with
by the Purchasers on or before the Closing Date.
6.3 Consents and Approvals. All consents, exemptions, authorizations,
or other actions by, or notices to, or filings with, Governmental Authorities
and other Persons in respect of all Requirements of Law and with respect to
those Contractual Obligations of the Purchasers which are necessary or required
in connection with the execution, delivery or performance (including the
purchase of the Senior Convertible Notes and the Warrants, but excluding the
conversion of the Senior Convertible Notes, the exercise of the Warrants, and
the conversion or exercise of the Next Round Securities) by, or enforcement
against, the Purchasers of this Agreement shall have been obtained and be in
full force and effect, and the Company shall have been furnished with
appropriate evidence thereof.
<PAGE>
12
6.4 Payment of Purchase Price. The Company shall have received the
Purchase Price.
SECTION 7. COVENANTS
7.1 Covenants of the Company. The Company hereby covenants and agrees
with the Purchasers with respect to this Section 7, so long as they hold any
capital stock of the Company -- except to the extent that a particular section
of this Section 7 provides for an earlier termination, as follows:
(a) SEC Filings. From and after the date of this Agreement, the
Company agrees that it will use commercially reasonable efforts to file with the
SEC, within the time periods specified in the SEC's rules and regulations for as
long as they are applicable to the Company, (i) all quarterly and annual
financial information required to be filed with the SEC on Forms 10-QSB and
10-KSB, (ii) all current reports required to be filed with the SEC on Form 8-K
and (iii) any other information required to be filed with the SEC.
(b) Reservation of Securities. The Company shall at all times
reserve and keep available out of its authorized shares of Capital Stock, solely
for the purpose of issue or delivery upon conversion or exercise of the
Securities and of the conversion or exercise of shares of Capital Stock issued
upon such conversion or exercise, the number of shares of each class of Capital
Stock that are required to be issued upon such conversion or exercise. The
Company shall issue such shares of Capital Stock in accordance with the terms of
this Agreement, the other Transaction Documents and the Certificate of
Incorporation, and otherwise comply with the terms hereof and thereof.
(c) Registration and Listing. To the extent the reservation of
any shares of Capital Stock required to be reserved pursuant to Section 7.2 of
this Agreement requires registration with or approval of any Governmental
Authority under any Federal or state or other applicable law before such shares
of Capital Stock may be issued or delivered upon conversion or exercise, the
Company will in good faith and as expeditiously as possible cause such shares of
Capital Stock to be duly registered or approved, as the case may be. So long as
the shares of Common Stock are quoted on the NASDAQ or listed on any national
securities exchange, the Company will, if permitted by the rules of such system
or exchange, quote or list and keep quoted or listed on such system or exchange,
upon official notice of issuance, all shares of Common Stock issuable or
deliverable upon exercise of the Warrants or the conversion or exchange of Next
Round Securities into which the Senior Convertible Notes are convertible.
7.2 Mutual Covenants. The parties agree that the anti-dilution
provision of Section 6(e)(ii) of the Certificate of Amendment of the Certificate
of Incorporation shall not apply as a result of the issuance of the Warrants.
<PAGE>
13
SECTION 8. INDEMNIFICATION.
(a) Except as otherwise provided in this Section 8, the Company
agrees to indemnify, defend and hold harmless each Purchaser and its Affiliates
and their respective officers, directors, agents, employees, subsidiaries,
partners, members and controlling persons to the fullest extent permitted by law
from and against any and all claims, losses, liabilities, damages, deficiencies,
judgements, assessments, fines, settlements, costs or expenses (including
interest, penalties and reasonable fees, disbursements and other charges of
counsel) (collectively, "Losses") based upon, arising out of or otherwise in
respect of any inaccuracy in or any breach of any surviving representation,
warranty, covenant or agreement of the Company contained in any Transaction
Document. Notwithstanding the foregoing, the Company's liability pursuant to
this Section 8 shall in no event exceed $15,000,000.
(b) Except as otherwise provided in this Section 8, the
Purchasers, severally and not jointly, agree to indemnify, defend and hold
harmless the Company and its respective officers, directors, agents, employees,
subsidiaries, partners, members and controlling persons to the fullest extent
permitted by law from and against any and all Losses based upon, arising out of
or otherwise in respect of any inaccuracy in or any breach of any surviving
representation, warranty, covenant or agreement (excluding the Standby
Commitment) of the Purchasers contained in any Transaction Document.
Notwithstanding the foregoing, the Purchasers' liability pursuant to this
Section 8 shall in no event exceed $3,000,000.
SECTION 9. REGISTRATION RIGHTS.
(a) The Company and each of the Purchasers hereby agree and
acknowledge that the shares of Common Stock for which the Warrants are
exercisable and any Common Stock issuable upon the conversion or exchange of the
Next Round Securities are Registrable Securities, as such term is defined in the
Investment Agreement, and that, until the closing of the Next Round, the
provisions of Section 9 of the Investment Agreement shall apply to all Persons
of record holding the Senior Convertible Notes or the Warrants (or any shares of
Registrable Securities issued, directly or indirectly, as a result of a
conversion under a Senior Convertible Note or as a result of an exercise of a
Warrant).
(b) Upon completion of the Next Round, the Purchasers shall have
the option to decide whether the registration rights and related provisions set
forth in Section 9 of the Investment Agreement shall apply to the Warrants or
whether the registration rights and related provisions agreed to in the final
documentation negotiated in connection with the Next Round Financing shall
apply.
SECTION 10. TERMINATION OF AGREEMENT
10.1 Termination. For purposes of clarification: (1) the Company
shall have no obligation to issue securities pursuant to the Standby Commitment
and (2) the
<PAGE>
14
Purchasers shall have no obligations to fund the Standby Commitment after the
earlier of (i) that date on which the Company has received financing proceeds
aggregating $15 million and (ii) December 31, 2000.
10.2 Survival. If this Agreement is terminated and the transactions
contemplated hereby are not consummated as described above, this Agreement shall
become void and of no further force and effect; provided, however, that (i) a
breaching party shall be liable to the non-breaching party for damages caused by
such breach; (ii) none of the non-breaching parties hereto shall have any
liability in respect of a termination of this Agreement pursuant to Section
10.1(a) or Section 10.1(b); and provided further, that none of the parties
hereto shall have any liability for speculative or unforeseeable damages
resulting from a termination of this Agreement.
SECTION 11. MISCELLANEOUS
11.1 Survival of Representations, Warranties and Covenants. The
representations and warranties, covenants and agreements contained herein shall
survive for a period of eighteen months following the Closing Date.
11.2 Notices. All notices, demands and other communications provided
for or permitted hereunder shall be made in the manner set forth in the
Investment Agreement.
11.3 Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors and permitted assigns of the
parties hereto. Subject to applicable securities laws, each of the Purchasers
may assign any of its rights under this Agreement to any of its Affiliates but
any such assignment shall not relieve any Purchaser from its obligations
hereunder. The Company may not assign any of its rights under this Agreement and
each of the other Transaction Documents, except to a successor-in-interest to
the Company, without the written consent of all of the Purchasers.
11.4 Amendment and Waiver.
(a) No failure or delay on the part of the Company or the
Purchasers in exercising any right, power or remedy hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any such right,
power or remedy preclude any other or further exercise thereof or the exercise
of any other right, power or remedy.
(b) Any amendment, supplement or modification of or to any
provision of this Agreement, any waiver of any provision of this Agreement, and
any consent to any departure by the Company or the Purchasers from the terms of
any provision of this Agreement, shall be effective (i) only if it is made or
given in writing and signed by the Company and the Purchasers, and (ii) only in
the specific instance and for the specific purpose for which made or given.
Except where notice is specifically required by this Agreement, no notice to or
demand on the Company in any case shall
<PAGE>
15
entitle the Company to any other or further notice or demand in similar or other
circumstances.
11.5 Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
11.6 Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
11.7 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO
THE PRINCIPLES OF CONFLICTS OF LAW THEREOF.
11.8 Severability. If any one or more of the provisions contained
herein, or the application thereof in any circumstance, is held invalid, illegal
or unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions hereof shall not be in any way impaired, unless the provisions held
invalid, illegal or unenforceable shall substantially impair the benefits of the
remaining provisions hereof.
11.9 Rules of Construction. Unless the context otherwise requires,
"or" is not exclusive, and references to sections or subsections refer to
sections or subsections of this Agreement.
11.10 Entire Agreement. This Agreement, together with the exhibits
and schedules hereto, and the other Transaction Documents, are intended by the
parties as a final expression of their agreement and intended to be a complete
and exclusive statement of the agreement and understanding of the parties hereto
in respect of the subject matter contained herein and therein. There are no
restrictions, promises, warranties or undertakings, other than those set forth
or referred to herein or therein, except those set forth in the Transaction
Documents (as such term is defined in the Investment Agreement).
11.11 Fees. Upon the Closing, the Company shall reimburse the
Purchasers for their reasonable out-of-pocket expenses (including attorney's
fees, disbursements and other charges) incurred in connection with the
transactions contemplated by this Agreement; provided, however, that the Company
shall not be obligated to reimburse the Purchasers for any reasonable
out-of-pocket expenses in excess of $25,000 in the aggregate.
11.12 Publicity; Confidentiality.
(a) Except as may be required by applicable law or the rules of
any securities exchange or market on which shares of Common Stock are traded,
none of
<PAGE>
16
the parties hereto shall issue a publicity release or public announcement or
otherwise make any disclosure concerning this Agreement, the transactions
contemplated hereby without prior approval by the other parties hereto;
provided, however, that nothing in this Agreement shall restrict any Purchaser
or the Company from disclosing information (i) that is already publicly
available, (ii) that was known to such Purchaser or the Company on a
non-confidential basis prior to its disclosure by the Company or such Purchaser,
as the case may be, (iii) that may be required or appropriate in response to any
summons or subpoena or in connection with any litigation, provided that such
Purchaser or the Company, as the case may be, will use reasonable efforts to
notify the Company or the Purchaser, as the case may be, in advance of such
disclosure so as to permit the Company or the Purchaser, as the case may be, to
seek a protective order or otherwise contest such disclosure, and such Purchaser
or the Company, as the case may be, will use reasonable efforts to cooperate, at
the expense of the Company, with the Company or the Purchaser, as the case may
be, in pursuing any such protective order, (iv) to the extent that such
Purchaser or the Company as the case may be reasonably believes it appropriate
in order to protect its investment in the Shares in order to comply with any
Requirement of Law, (v) to such Purchaser's or the Company's, as the case may
be, officers, directors, agents, employees, members, partners, controlling
persons, auditors or counsel, (vi) to Persons who are parties to similar
confidentiality agreements or (vii) to the prospective transferee who executes a
confidentiality agreement in connection with any contemplated transfer of any of
the Shares. If any announcement is required by law or the rules of any
securities exchange or market on which shares of Common Stock are traded to be
made by any party hereto, prior to making such announcement such party will, to
the extent practicable, deliver a draft of such announcement to the other
parties and shall give the other parties reasonable opportunity to comment
thereon.
(b) Unless substantially in the form previously disclosed, the
Purchasers shall have the opportunity to review and reasonably modify any
provision of any publicly release or public announcement or document which is to
be released to the public or filed with the SEC, which provision mentions the
Purchasers or any of their Affiliates, prior to the release of such document to
the public or the filing of such document with the SEC.
11.13 Further Assurances. Each of the parties shall execute such
documents and perform such further acts (including, without limitation,
obtaining any consents, exemptions, authorizations or other actions by, or
giving any notices to, or making any filings with, any Governmental Authority or
any other Person) as may be reasonably required or desirable to carry out or to
perform the provisions of this Agreement.
<PAGE>
17
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed and delivered by their respective officers hereunto duly authorized
on the date first above written.
BLUEFLY, INC.
By:
------------------------------------
Name:
Title:
QUANTUM INDUSTRIAL PARTNERS LDC
By:
------------------------------------
Name:
Title:
SFM DOMESTIC INVESTMENTS LLC
By:
------------------------------------
Name:
Title:
<PAGE>
EXHIBIT A-1 to
NOTE AND WARRANT
PURCHASE AGREEMENT
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED,
QUALIFIED, APPROVED OR DISAPPROVED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD
OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS OR AN APPLICABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS UNDER SUCH ACT OR LAWS AND NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER FEDERAL OR STATE REGULATORY
AUTHORITY HAS PASSED ON OR ENDORSED THE MERITS OF THESE SECURITIES.
WARRANT NO. [__]
WARRANT
TO PURCHASE SHARES OF COMMON STOCK
OF
BLUEFLY, INC.
THIS IS TO CERTIFY THAT ____________ or its registered assigns (the
"Holder"), is the owner of the right to subscribe for and to purchase from
BLUEFLY, INC., a New York corporation (the "Company"), [____________] (the
"Number Issuable"), fully paid, duly authorized and nonassessable shares of
Common Stock at a price equal to the price at which the Next Round Securities
are convertible into or exchangeable for shares of Common Stock (the "Exercise
Price"), at any time, in whole or in part, from and after the closing of the
Next Round Financing and prior to 5:00 PM New York City time, on March 28, 2005
(the "Expiration Date") all on the terms and subject to the conditions
hereinafter set forth (the "Warrants"); provided that the Number Issuable shall
increase to (i) [___________________________] if the Next Round Financing does
not close by April 26, 2000; (ii) [____________] if the Next Round Financing
does not close by May 26, 2000; and (iii) [____________] if the Next Round
Financing does not close by June 25, 2000; and provided further that (i) if the
Company draws any funds pursuant to the Standby Commitment, the Number Issuable
shall increase immediately to an aggregate of [____________], and (ii) if the
Next Round Financing includes less than Ten Million Dollars ($10,000,000) of
financing provided by parties other than the Purchasers, the Number Issuable
shall increase immediately to an aggregate of ___________. For the avoidance of
doubt, the maximum Number Issuable is [____________]. For purposes of the
Warrants represented by this Certificate only, if the Next Round Financing is
structured to close in more than one tranche as a result of
<PAGE>
2
any regulatory requirement (including, without limitation, any shareholder vote
required by NASDAQ rules or any filing required by the Hart-Scott-Rodino Act),
the Next Round Financing shall be considered "closed" upon the funding of the
first such tranche.
The Number Issuable is subject to further adjustment from time to
time pursuant to the provisions of Section 2 of this Warrant Certificate.
Capitalized terms used herein but not otherwise defined shall have
the meanings given to them in Section 12 hereof.
Section 1. Exercise of Warrants.
(a) Subject to the last paragraph of this Section 1, the Warrants
evidenced hereby may be exercised, in whole or in part, by the Holder hereof at
any time or from time to time, on or after the date hereof and prior to the
Expiration Date upon delivery to the Company at the principal executive office
of the Company in the United States of America, of (A) this Warrant Certificate,
(B) a written notice stating that such Holder elects to exercise the Warrants
evidenced hereby in accordance with the provisions of this Section 1 and
specifying the number of Warrants being exercised and the name or names in which
the Holder wishes the certificate or certificates for shares of Common Stock to
be issued and (C) payment of the Exercise Price for such Warrants, which shall
be payable by any one or any combination of the following: (i) cash; (ii)
certified or official bank check payable to the order of the Company; (iii) by
the surrender (which surrender shall be evidenced by cancellation of the number
of Warrants represented by any Warrant Certificate presented in connection with
a Cashless Exercise (as defined below)) of a Warrant or Warrants (represented by
one or more relevant Warrant Certificates), and without the payment of the
Exercise Price in cash, in return for the delivery to the surrendering Holder of
such number of shares of Common Stock equal to the number of shares of the
Common Stock for which such Warrant is exercisable as of the date of exercise
(if the Exercise Price were being paid in cash or certified or official bank
check) reduced by that number of shares of Common Stock equal to the quotient
obtained by dividing (x) the aggregate Exercise Price (assuming no Cashless
Exercise) to be paid by (y) the Market Price of one Share of Common Stock on the
Business Day which immediately precedes the day of exercise of the Warrant; or
(iv) by the delivery of shares of the Common Stock having a value (as defined by
the next sentence) equal to the aggregate Exercise Price to be paid, that are
either held by the Holder or are acquired in connection with such exercise, and
without payment of the Exercise Price in cash. Any share of Common Stock
delivered as payment for the Exercise Price in connection with an In-Kind
Exercise (as defined below) shall be deemed to have a value equal to the Market
Price of one Share of Common Stock on the Business Day which immediately
precedes the day of exercise of the Warrants. An exercise of a Warrant in
accordance with clause (iii) is herein referred to as a "Cashless Exercise" and
an exercise of a Warrant in accordance with clause (iv) is herein referred to as
an "In-Kind Exercise." The documentation and consideration, if any, delivered in
accordance with subsections (A), (B) and (C) are collectively referred to herein
as the "Warrant Exercise Documentation."
<PAGE>
3
(b) As promptly as practicable, and in any event within five (5)
Business Days after receipt of the Warrant Exercise Documentation, the Company
shall deliver or cause to be delivered (A) certificates representing the number
of validly issued, fully paid and nonassessable shares of Common Stock specified
in the Warrant Exercise Documentation, (B) if applicable, cash in lieu of any
fraction of a share, as hereinafter provided, and (C) if less than the full
number of Warrants evidenced hereby are being exercised or used in a Cashless
Exercise, a new Warrant Certificate or Certificates, of like tenor, for the
number of Warrants evidenced by this Warrant Certificate, less the number of
Warrants then being exercised and/or used in a Cashless Exercise. Such exercise
shall be deemed to have been made at the close of business on the date of
delivery of the Warrant Exercise Documentation so that the Person entitled to
receive shares of Common Stock upon such exercise shall be treated for all
purposes as having become the record holder of such shares of Common Stock at
such time.
(c) The Company shall pay all expenses incurred by the Company in
connection with and taxes and other governmental charges (other than income
taxes of the Holder) that may be imposed in respect of, the issue or delivery of
any shares of Common Stock issuable upon the exercise of the Warrants evidenced
hereby. The Company shall not be required, however, to pay any tax or other
charge imposed in connection with any transfer involved in the issue of any
certificate for shares of Common Stock, as the case may be, in any name other
than that of the registered holder of the Warrant evidenced hereby.
(d) In connection with the exercise of any Warrants evidenced
hereby, no fractions of shares of Common Stock shall be issued, but in lieu
thereof the Company shall pay a cash adjustment in respect of such fractional
interest in an amount equal to such fractional interest multiplied by the Market
Price for one Share of Common Stock on the Business Day which immediately
precedes the day of exercise. If more than one (1) such Warrant shall be
exercised by the holder thereof at the same time, the number of full shares of
Common Stock issuable on such exercise shall be computed on the basis of the
total number of Warrants so exercised.
Section 2. Certain Adjustments.
(a) The number of shares of Common Stock purchasable upon the
exercise of this Warrant and the Exercise Price shall be subject to adjustment
as follows:
(i) Stock Dividends, Subdivision, Combination or
Reclassification of Common Stock. If at any time after the date of the issuance
of this Warrant the Company shall (i) pay a dividend on Common Stock in shares
of its capital stock, (ii) combine its outstanding shares of Common Stock into a
smaller number of shares, (iii) subdivide its outstanding shares of Common Stock
as the case may be, or (iv) issue by reclassification of its shares of Common
Stock any shares of capital stock of the Company, then, on the record date for
such dividend or the effective date of such subdivision or split-up, combination
or reclassification, as the case may be, the number
<PAGE>
4
and kind of shares to be delivered upon exercise of this Warrant will be
adjusted so that the Holder will be entitled to receive the number and kind of
shares of capital stock that such Holder would have owned or been entitled to
receive upon or by reason of such event had this Warrant been exercised
immediately prior thereto, and the Exercise Price will be adjusted as provided
below in paragraph 2(a)(v).
(ii) Extraordinary Distributions. If at any time after the
date of issuance of this Warrant, the Company shall distribute to all holders of
Common Stock (including any such distribution made in connection with a
consolidation or merger in which the Company is the continuing or surviving
corporation and Common Stock is not changed or exchanged) cash, evidences of
indebtedness, securities or other assets (excluding (i) ordinary course cash
dividends to the extent such dividends do not exceed the Company's retained
earnings and (ii) dividends payable in shares of capital stock for which
adjustment is made under Section 2(a)(i) or rights, options or warrants to
subscribe for or purchase securities of the Company), then in each such case the
number of shares of Common Stock to be delivered to such Holder upon exercise of
this Warrant shall be increased so that the Holder thereafter shall be entitled
to receive the number of shares of Common Stock determined by multiplying the
number of shares such Holder would have been entitled to receive immediately
before such record date by a fraction, the denominator of which shall be the
Exercise Price on such record date minus the then fair market value (as
reasonably determined by the Board of Directors of the Company in good faith) of
the portion of the cash, evidences of indebtedness, securities or other assets
so distributed or of such rights or warrants applicable to one share of the
Common Stock (provided that such denominator shall in no event be less than
$.01) and the numerator of which shall be the Exercise Price.
(iii) Reorganization, etc. If at any time after the date of
issuance of this Warrant any consolidation of the Company with or merger of the
Company with or into any other Person (other than a merger or consolidation in
which the Company is the surviving or continuing corporation and which does not
result in any reclassification of, or change (other than a change in par value
or from par value to no par value or from no par value to par value, or as a
result of a subdivision or combination) in, outstanding shares of either Common
Stock) or any sale, lease or other transfer of all or substantially all of the
assets of the Company to any other person (each, a "Reorganization Event"),
shall be effected in such a way that the holders of the Common Stock shall be
entitled to receive cash, stock, other securities or assets (whether such cash,
stock, other securities or assets are issued or distributed by the Company or
another Person) with respect to or in exchange for the Common Stock, then, upon
exercise of this Warrant, the Holder shall have the right to receive the kind
and amount of cash, stock, other securities or assets receivable upon such
Reorganization Event by a holder of the number of shares of the Common Stock
that such holder would have been entitled to receive upon exercise of this
Warrant had this Warrant been exercised immediately before such Reorganization
Event, subject to adjustments that shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Section 2(a). The Company
shall not enter into any of the transactions referred to in this Section
2(a)(iii)
<PAGE>
5
unless effective provision shall be made so as to give effect to the provisions
set forth in this Section 2(a)(iii).
(iv) Carryover. Notwithstanding any other provision of this
Section 2(a), no adjustment shall be made to the number of shares of either
Common Stock to be delivered to the Holder (or to the Exercise Price) if such
adjustment represents less than .05% of the number of shares to be so delivered,
but any lesser adjustment shall be carried forward and shall be made at the time
and together with the next subsequent adjustment that together with any
adjustments so carried forward shall amount to .05% or more of the number of
shares to be so delivered.
(v) Exercise Price Adjustment.
(i) Whenever the Number Issuable upon the exercise of
the Warrant is adjusted as provided pursuant to this Section 2(a), the Exercise
Price per share payable upon the exercise of this Warrant shall be adjusted by
multiplying such Exercise Price immediately prior to such adjustment by a
fraction, of which the numerator shall be the Number Issuable upon the exercise
of the Warrant immediately prior to such adjustment, and of which the
denominator shall be the Number Issuable immediately thereafter; provided,
however, that the Exercise Price for each Share of the Common Stock shall in no
event be less than the par value of a share of such Common Stock.
(ii) If the price at which the Next Round Securities are
convertible into shares of Common Stock is adjusted pursuant to documents that
create and define the Next Round Securities, then the Exercise Price of the
Warrants shall be adjusted accordingly provided that there should be no
duplication of adjustments.
(b) Notice of Adjustment. Whenever the Number Issuable or the
Exercise Price is adjusted, as herein provided, the Company shall promptly mail
by first class mail, postage prepaid, to the Holder, notice of such adjustment
or adjustments setting forth the Number Issuable and the Exercise Price after
such adjustment, setting forth a brief statement of the facts requiring such
adjustment and setting forth the computation by which such adjustment was made.
Section 3. No Redemption. The Company shall not have any right to
redeem any of the Warrants evidenced hereby.
Section 4. Notice of Certain Events. In case at any time or from time
to time (i) the Company shall declare any dividend or any other distribution to
the holders of Common Stock, (ii) the Company shall authorize the granting to
the holders of Common Stock of rights or warrants to subscribe for or purchase
any additional shares of stock of any class or any other right, (iii) the
Company shall authorize the issuance or sale of any other shares or rights which
would result in an adjustment to the Number Issuable pursuant to Section
2(a)(i), (ii), or (iii), or (iv) there shall be any capital reorganization or
<PAGE>
6
reclassification of Common Stock of the Company or consolidation or merger of
the Company with or into another Person, or any sale or other disposition of all
or substantially all the assets of the Company, or (v) there shall be a
voluntary or involuntary dissolution, liquidation or winding up of the Company,
then, in any one or more of such cases the Company shall mail to the Holder at
such Holder's address as it appears on the transfer books of the Company, as
promptly as practicable but in any event at least 10 days prior to the date on
which the transactions contemplated in Section 2(a)(i), (ii), or (iii), a notice
stating (a) the date on which a record is to be taken for the purpose of such
dividend, distribution, rights or warrants or, if a record is not to be taken,
the date as of which the holders of record of either Common Stock to be entitled
to such dividend, distribution, rights or warrants are to be determined, or (b)
the date on which such reclassification, consolidation, merger, sale,
conveyance, dissolution, liquidation or winding up is expected to become
effective. Such notice also shall specify the date as of which it is expected
that the holders of record of the Common Stock shall be entitled to exchange the
Common Stock for shares of stock or other securities or property or cash
deliverable upon such reorganization, reclassification, consolidation, merger,
sale, conveyance, dissolution, liquidation or winding up.
Section 5. Certain Covenants. The Company covenants and agrees that
all shares of Capital Stock of the Company which may be issued upon the exercise
of the Warrants evidenced hereby will be duly authorized, validly issued and
fully paid and nonassessable. The Company shall at all times reserve and keep
available for issuance upon the exercise of the Warrants, such number of its
authorized but unissued shares of Common Stock as will from time to time be
sufficient to permit the exercise of all outstanding Warrants, and shall take
all action required to increase the authorized number of shares of Common Stock
if at any time there shall be insufficient authorized but unissued shares of
Common Stock to permit such reservation or to permit the exercise of all
outstanding Warrants.
Section 6. Registered Holder. The persons in whose names this Warrant
Certificate is registered shall be deemed the owner hereof and of the Warrants
evidenced hereby for all purposes. The registered Holder of this Warrant
Certificate, in their capacity as such, shall not be entitled to any rights
whatsoever as a stockholder of the Company, except as herein provided.
Section 7. Transfer of Warrants. Any transfer of the rights
represented by this Warrant Certificate shall be effected by the surrender of
this Warrant Certificate, along with the form of assignment attached hereto,
properly completed and executed by the registered Holder hereof, at the
principal executive office of the Company in the United States of America,
together with an appropriate investment letter and opinion of counsel, if deemed
reasonably necessary by counsel to the Company to assure compliance with
applicable securities laws. Thereupon, the Company shall issue in the name or
names specified by the registered Holder hereof and, in the event of a partial
transfer, in the name of the registered Holder hereof, a new Warrant Certificate
or Certificates evidencing the right to purchase such number of shares of Common
Stock as shall be equal to the number of shares of Common Stock then purchasable
hereunder.
<PAGE>
7
Section 8. Denominations. The Company covenants that it will, at its
expense, promptly upon surrender of this Warrant Certificate at the principal
executive office of the Company in the United States of America, execute and
deliver to the registered Holder hereof a new Warrant Certificate or
Certificates in denominations specified by such Holder for an aggregate number
of Warrants equal to the number of Warrants evidenced by this Warrant
Certificate.
Section 9. Replacement of Warrants. Upon receipt of evidence
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant Certificate and, in the case of loss, theft or destruction, upon
delivery of an indemnity reasonably satisfactory to the Company (in the case of
an insurance company or other institutional investor, its own unsecured
indemnity agreement shall be deemed to be reasonably satisfactory), or, in the
case of mutilation, upon surrender and cancellation thereof, the Company will
issue a new Warrant Certificate of like tenor for a number of Warrants equal to
the number of Warrants evidenced by this Warrant Certificate.
Section 10. Governing Law. THIS WARRANT CERTIFICATE SHALL BE
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL
BE GOVERNED BY, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE
AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE.
Section 11. Rights Inure to Registered Holder. The Warrants evidenced
by this Warrant Certificate will inure to the benefit of and be binding upon the
registered Holder thereof and the Company and their respective successors and
permitted assigns. Nothing in this Warrant Certificate shall be construed to
give to any Person other than the Company and the registered Holder thereof any
legal or equitable right, remedy or claim under this Warrant Certificate, and
this Warrant Certificate shall be for the sole and exclusive benefit of the
Company and such registered Holder. Nothing in this Warrant Certificate shall be
construed to give the registered Holder hereof any rights as a Holder of shares
of either Common Stock until such time, if any, as the Warrants evidenced by
this Warrant Certificate are exercised in accordance with the provisions hereof.
Section 12. Definitions. For the purposes of this Warrant
Certificate, the following terms shall have the meanings indicated below:
"Business Day" means any day other than a Saturday, Sunday or other
day on which commercial banks in the City of New York, New York are authorized
or required by law or executive order to close.
"Capital Stock" of any Person means any and all shares, interests,
participations or other equivalents (however designated) of such Person's
capital stock (or equivalent ownership interests in a Person not a corporation)
whether now outstanding or hereafter issued, including, without limitation, all
Next Round Securities or Series A Preferred Shares and any rights, warrants or
options to purchase such Person's capital stock.
<PAGE>
8
"Common Stock" shall mean the common stock of the Company.
"Market Price" shall mean, per share of Common Stock, on any date
specified herein: (a) if the Common Stock is not then listed or admitted to
trading on any national securities exchange but is designated as a national
market system security, the average of the closing bid and ask price of the
Common Stock on such date; or (b) if there shall have been no trading on such
date or if the Common Stock is not so designated, the average of the reported
closing bid and asked price of the Common Stock, on such date as shown by NASDAQ
and reported by any member firm of the NYSE selected by the Company; or (c) if
neither (a) nor (b) is applicable, the Fair Market Value per share determined in
good faith by the Board of Directors of the Company which shall be deemed to be
Fair Market Value unless holders of at least 15% of Common Stock issued or
issuable upon exercise of the Warrants request that the Company obtain an
opinion of a nationally recognized investment banking firm chosen by the Company
(who shall bear the expense) and reasonably acceptable to such requesting
holders of the Warrants, in which event the Fair Market Value shall be as
determined by such investment banking firm.
"Next Round Financing" shall have the meaning given it in the Note
and Warrant Purchase Agreement.
"Next Round Securities" shall have the meaning given it in the Note
and Warrant Purchase Agreement.
"Note and Warrant Purchase Agreement" shall mean that certain note
and warrant purchase agreement between the Company, the Holder and ___________
dated March 28, 2000 as the same may be amended from time to time in accordance
with its terms.
"NYSE" shall mean the New York Stock Exchange, Inc.
"Person" shall mean any individual, corporation, limited liability
company, partnership, trust, incorporated or unincorporated association, joint
venture, joint stock company, government (or an agency or political subdivision
thereof) or other entity of any kind.
Section 10. Notices. All notices, demands and other communications
provided for or permitted hereunder shall be made in writing and shall be by
registered or certified first-class mail, return receipt requested, courier
services or personal delivery, (a) if to the Holder of a Warrant, at such
Holder's last known address appearing on the books of the Company; and (b) if to
the Company, at its principal executive office in the United States located at
the address designated for notices in the Note and Warrant Purchase Agreement,
or such other address as shall have been furnished to the party given or making
such notice, demand or other communication. All such notices and communications
shall be deemed to have been duly given: (i) when delivered by hand, if
personally delivered; (ii) when delivered to a courier if delivered by
commercial
<PAGE>
9
overnight courier service; and (iii) five (5) Business Days after being
deposited in the mail, postage prepaid, if mailed.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate
to be duly executed as of the Issue Date.
BLUEFLY, INC.
By:
------------------------------------
Name:
Title:
<PAGE>
10
[Form of Assignment Form]
[To be executed upon assignment of Warrants]
The undersigned hereby assigns and transfers this Warrant Certificate
to ___________________ whose Social Security Number or Tax ID Number is
_________________ and whose record address is _________________________________,
and irrevocably appoints ________________ as agent to transfer this security on
the books of the Company. Such agent may substitute another to act for such
agent.
Signature:
-------------------------------
Signature Guarantee:
--------------------------------
Date:
----------------------------
<PAGE>
EXHIBIT A-2 to
NOTE AND WARRANT
PURCHASE AGREEMENT
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE. THE SECURITIES MAY NOT BE
TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH
ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS.
BLUEFLY, INC.
SENIOR CONVERTIBLE NOTE
$
----------------
New York, New York March 28, 2000
FOR VALUE RECEIVED, the undersigned, BLUEFLY, INC., a New York
corporation (the "Payor" or the "Company"), promises to pay to the order of
_________ or its registered assign (the "Payee"), the principal sum of _________
DOLLARS ($_________) and interest on the outstanding principal balance as set
forth herein.
1. Securities Purchase Agreement. This Senior Convertible Note is the
Senior Convertible Note issued pursuant to the Note and Warrant Purchase
Agreement, dated as of March 28, 2000, among the Payor, the Payee and _________
(the "Securities Purchase Agreement"). The Payee is entitled to the benefits of
(and subject to the obligations expressly contained in) this Senior Convertible
Note and the Securities Purchase Agreement and may enforce the agreements of the
Payor contained herein and therein and exercise the remedies provided for hereby
and thereby or otherwise available in respect hereto and thereto. Capitalized
terms used herein without definition shall have the meaning ascribed to such
terms in the Securities Purchase Agreement.
2. Interest Rate; Payment.
(a) The outstanding principal balance of this Senior Convertible
Note shall bear interest at an annual rate equal to 8% per annum, with interest
accruing, from and including the date hereof, on a cumulative, compounding
basis. Interest shall be computed on the basis of a 365- or 366-day year, as the
case may be, and the actual number of days elapsed, and shall be payable only
upon repayment of the principal on any Repayment Date (as defined below).
(b) The outstanding balance of any amount owed under this Senior
Convertible Note which is not paid when due shall bear interest at the rate of
2%
<PAGE>
2
per annum (the "Default Interest") above the rate that would otherwise be in
effect under this Senior Convertible Note with the Default Interest accruing,
from and including such due date, on a cumulative, compounding basis.
(c) The outstanding principal and all accrued and unpaid interest
shall be paid in full no later than January 2, 2002 (the "Maturity Date"),
unless repaid earlier pursuant to the provisions of Section 3 (the date of any
payment pursuant to Section 3 and the Maturity Date, collectively referred to as
a "Repayment Date"). On a Repayment Date, the Payor shall pay the applicable
amount of principal and interest in lawful money of the United States of America
by wire or bank transfer of immediately available funds to an account designated
by the Payee in writing from time to time.
(3) Prepayment.
(a) Mandatory Prepayment.
(i) Upon the occurrence of an Event of Default (as defined
in Section 5), the outstanding principal of and all accrued interest on this
Senior Convertible Note shall be accelerated and shall automatically become
immediately due and payable, without presentment, demand, protest or notice of
any kind, all of which are expressly waived by the Payor, notwithstanding
anything contained herein to the contrary.
(ii) The Payee shall, at its sole option, have the right to
require the Payor to pay the outstanding principal of and all accrued interest
on this Senior Convertible Note upon the occurrence of any of the following
events: (1) Payor entering into an agreement to effectuate any sale or other
disposition of all or substantially all of its assets, in one transaction or in
a series of transactions, (2) the Company entering into an agreement to
effectuate any consolidation or merger into another entity, or (3) any sale of a
majority of the outstanding equity of the Company (or any other event that
constitutes a Change of Control of the Payor), in one transaction or in a series
of transactions. Immediately upon the occurrence of either of the events set
forth in clauses (1) or (2) above, or immediately upon obtaining knowledge that
any person has entered into an agreement to effectuate, the event set forth in
clause (3) above, the Payor shall give written notice of such event to the
Payee. Change of Control means any Person or "group" (within the meaning of
Section 13(d)(3) of the Exchange Act) other than a Principal Shareholder,
becoming the beneficial owner, directly or indirectly, of outstanding shares of
stock of the Company entitling such Person or Persons to exercise 50% or more of
the total votes entitled to be cast at a regular or special meeting, or by
action by written consent, of the stockholders 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).
(iii) Any mandatory prepayment under this Section 3(a) shall
include payment of reasonable costs and expenses, if any, associated with such
prepayment.
<PAGE>
3
(b) Optional Prepayment. The Payor may prepay all or any portion
of this Senior Convertible Note, at any time, by paying an amount equal to the
outstanding principal amount of this Senior Convertible Note, or the portion of
this Senior Convertible Note called for prepayment, together with interest
accrued and unpaid thereon to the date of prepayment and any other amounts due
under this Senior Convertible Note and the Securities Purchase Agreement,
without penalty or premium.
4. Mandatory Conversion.
(a) This Senior Convertible Note plus interest accrued and unpaid
thereon shall be automatically converted simultaneously with the Next Round
Financing (the "Triggering Event') into that number of fully paid and
non-assessable Next Round Securities which is equal to the quotient obtained by
dividing the then outstanding principal amount of this Senior Convertible Note
plus interest accrued and unpaid thereon to the date of conversion by the price
per Next Round Security paid in the Next Round Financing.
(b) Promptly after the Triggering Event the Company shall deliver
or cause to be delivered to the holder of this Senior Convertible Note a
certificate or certificates representing the number of fully paid and
non-assessable shares of Next Round Securities into which this Senior
Convertible Note may be converted. Such conversion shall be deemed to have been
made simultaneously with the conclusion of the Next Round Financing, so that the
rights of the holder as a holder of this Senior Convertible Note shall cease
with respect to this Senior Convertible Note at such time (including, without
limitation, the right to receive the principal of this Senior Convertible Note
other than in the form of Next Round Securities), interest shall cease to accrue
hereon and the person or persons entitled to receive the Next Round Securities
deliverable upon conversion of this Senior Convertible Note shall be treated for
all purposes as having become the record holders of such Next Round Securities
at such time, and such conversion shall be at the conversion rate in effect at
such time.
(c) The Company covenants that it will at all times reserve and
keep available out of its authorized Next Round Securities (at such time as such
Securities are authorized) solely for the purpose of issue or delivery upon
conversion of this Senior Convertible Note as herein provided, such number of
Next Round Securities as shall then be issuable or deliverable upon the
conversion of this Senior Convertible Note. The Company covenants that all Next
Round Securities which shall be so issuable or deliverable shall, when issued or
delivered, be duly and validly issued and fully paid and non-assessable.
5. Events of Default. An "Event of Default" shall occur if:
(a) the Payor shall default in the payment of the principal of or
interest payable on this Senior Convertible Note, when and as the same shall
become due and payable, whether at maturity or at a date fixed for prepayment or
by acceleration or
<PAGE>
4
otherwise and such default with respect to the payment of interest shall
continue unremedied for two days;
(b) the Payor shall fail to observe or perform any covenant or
agreement contained in this Senior Convertible Note, the Securities Purchase
Agreement or the Warrants and such failure shall continue for five business days
after Payor receives notice of such failure;
(c) any representation, warranty, certification or statement made
by or on behalf of the Payor in this Senior Convertible Note or the Securities
Purchase Agreement or in any certificate, writing or other document delivered
pursuant hereto shall prove to have been incorrect in any material respect when
made;
(d) an involuntary proceeding shall be commenced or an
involuntary petition shall be filed in a court of competent jurisdiction seeking
(A) relief in respect of Payor or of a substantial part of Payor's respective
property or assets, under Title 11 of the United States Code, as now constituted
or hereafter amended, or any other Federal or state bankruptcy, insolvency,
receivership or similar law (any such law, a "Bankruptcy Law"), (B) the
appointment of a receiver, trustee, custodian, sequestrator, conservator or
similar official for a substantial part of the property or assets of any Payor,
(C) the winding up or liquidation of any Payor; and such proceeding or petition
shall continue undismissed for 60 days, or an order or decree approving or
ordering any of the foregoing shall be entered;
(e) the Payor shall (A) voluntarily commence any proceeding or
file any petition seeking relief under a Bankruptcy Law, (B) consent to the
institution of or the entry of an order for relief against it, or fail to
contest in a timely and appropriate manner, any proceeding or the filing of any
petition described in clause d, (C) apply for or consent to the appointment of a
receiver, trustee, custodian, sequestrator, conservator or similar official for
a substantial part of the property or assets of the Payor, (D) file an answer
admitting the material allegations of a petition filed against it in any such
proceeding, (E) make a general assignment for the benefit of creditors, (F)
become unable, admit in writing its inability or fail generally to pay its debts
as they become due or (G) take any action for the purpose of effecting any of
the foregoing;
(f) one or more judgments or orders for the payment of money in
excess of $250,000 in the aggregate shall be rendered against the Payor and such
judgment(s) or order(s) shall continue unsatisfied and unstayed for a period of
30 days;
(g) the Payor shall default in the payment of any principal,
interest or premium, or any observance or performance of any covenants or
agreements, with respect to indebtedness (excluding trade payables and other
indebtedness entered into in the ordinary course of business) in excess of
$50,000 in the aggregate for borrowed money or any obligation which is the
substantive equivalent thereof and such default shall continue for more than the
period of grace, if any, or of any such
<PAGE>
5
Indebtedness or obligation shall be declared due and payable prior to the stated
maturity thereof;
(h) the Payor shall incur any indebtedness senior to this Senior
Convertible Note; or
(i) any material provisions of this Senior Convertible Note, the
Securities Purchase Agreement, or the Warrants shall terminate or become void or
unenforceable or the Payor shall so assert in writing.
6. Senior Status. The indebtedness evidenced by this Senior
Convertible Note is senior in right of payment to all other indebtedness of the
Payor and Payor agrees not to incur any indebtedness, which by its terms is
senior in right of payment to this Senior Convertible Note.
7. Suits for Enforcement.
(a) Upon the occurrence of any one or more Events of Default, the
holder of this Senior Convertible Note may proceed to protect and enforce its
rights by suit in equity, action at law or by other appropriate proceeding,
whether for the specific performance of any covenant or agreement contained in
the Securities Purchase Agreement or in aid of the exercise of any power granted
in this Senior Convertible Note, or may proceed to enforce the payment of this
Senior Convertible Note, or to enforce any other legal or equitable right it may
have as a holder of this Senior Convertible Note.
(b) The holder of this Senior Convertible Note may direct the
time, method and place of conducting any proceeding for any remedy available to
itself.
(c) In case of any Event of Default under the Securities Purchase
Agreement, the Payor will pay to the holder of this Senior Convertible Note such
amounts as shall be sufficient to cover the reasonable costs and expenses of
such holder due to such Event of Default, including without limitation, costs of
collection and reasonable fees, disbursements and other charges of counsel
incurred in connection with any action in which the holder prevails.
8. Notices. All notices, demands and other communications provided
for or permitted hereunder shall be made in the manner and to the addresses set
forth in Section 11.2 of the Securities Purchase Agreement.
9. Successors and Assigns. This Senior Convertible Note shall inure
to the benefit of and be binding upon the successors and permitted assigns of
the parties hereto. The Payor may not assign any of its rights under this Senior
Convertible Note without the prior written consent of Payee. The Payee may
assign all or a portion of their rights or obligations under this Senior
Convertible Note to an Affiliate without the prior written consent of the Payor.
<PAGE>
6
10. Amendment and Waiver.
(a) No failure or delay on the part of the Payor or Payee in
exercising any right, power or remedy hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any such right, power or
remedy preclude any other or further exercise thereof or the exercise of any
other right, power or remedy. The remedies provided for herein are cumulative
and are not exclusive of any remedies that may be available to the Payor or
Payee at law, in equity or otherwise.
(b) Any amendment, supplement or modification of or to any
provision of this Senior Convertible Note, any waiver of any provision of this
Senior Convertible Note and any consent to any departure by the Payor from the
terms of any provision of this Senior Convertible Note, shall be effective (i)
only if it is made or given in writing and signed by the Payor and the Payee and
(ii) only in the specific instance and for the specific purpose for which made
or given.
11. Headings. The headings in this Senior Convertible Note are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
12. GOVERNING LAW. THIS SENIOR CONVERTIBLE NOTE SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT
REGARD TO THE CONFLICTS OF LAW PRINCIPLES THEREOF.
13. Costs and Expenses. The Payor hereby agrees to pay on demand all
reasonable out-of-pocket costs, fees, expenses, disbursements and other charges
(including but not limited to the fees, expenses, disbursements and other
charges of Paul, Weiss, Rifkind, Wharton & Garrison, special counsel to the
Payee) of the Payee arising in connection with any consent or waiver granted or
requested hereunder or in connection herewith, and any renegotiation, amendment,
work-out or settlements of this Senior Convertible Note or the indebtedness
arising hereunder.
14. Waiver of Jury Trial and Setoff. The Payor hereby waives trial by
jury in any litigation in any court with respect to, in connection with, or
arising out of this Senior Convertible Note or any instrument or document
delivered pursuant to this Senior Convertible Note, or the validity, protection,
interpretation, collection or enforcement thereof, or any other claim or dispute
howsoever arising, between any Payor and the Payee; and the Payor hereby waives
the right to interpose any setoff or counterclaim or cross-claim in connection
with any such litigation, irrespective of the nature of such setoff,
counterclaim or cross-claim except to the extent that the failure so to assert
any such setoff, counterclaim or cross-claim would permanently preclude the
prosecution of the same.
15. Consent to Jurisdiction. The Payor hereby irrevocably consents to
the nonexclusive jurisdiction of the courts of the State of New York and of any
federal court located in such State in connection with any action or proceeding
arising out of or
<PAGE>
7
relating to this Senior Convertible Note or any document or instrument delivered
pursuant to this Agreement.
16. Severability. If any one or more of the provisions contained
herein, or the application thereof in any circumstance, is held invalid, illegal
or unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provisions hereof shall not be in any way impaired,
unless the provisions held invalid, illegal or unenforceable shall substantially
impair the benefits of the remaining provisions hereof.
17. Entire Agreement. This Senior Convertible Note, the Warrants and
the Securities Purchase Agreement is intended by the parties as a final
expression of their agreement and intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter hereof. There are no restrictions, promises, warranties or
undertakings, other than those set forth or referred to herein. This Senior
Convertible Note supersedes all prior agreements and understandings between the
parties with respect to such subject matter.
18. Further Assurances. The Payor shall execute such documents and
perform such further acts (including, without limitation, obtaining any
consents, exemptions, authorizations or other actions by, or giving any notices
to, or making any filings with, any governmental authority or any other Person)
as may be reasonably required or desirable to carry out or to perform the
provisions of this Senior Convertible Note.
BLUEFLY, INC.
By:
----------------------------------
Name:
Title:
<PAGE>
SHARES AND PURCHASE PRICE
Purchase Price and
Aggregate Principal
Amount of Senior
Purchaser Convertible Note
- ---------------------------------- -------------------
Quantum Industrial Partners LDC $ 2,809,800
SFM Domestic Investments LLC $ 190,200
TOTAL $3,000,000.00
<PAGE>
AMENDED AND RESTATED SCHEDULE 3.11 TO INVESTMENT AGREEMENT
INTELLECTUAL PROPERTY
1. Service mark applications have been made for the following marks: "Bluefly";
"The Outlet Store In Your Home"; "MyCatalog"; and "Please.com Again." In
addition, the Company is in the process of filing service mark applications for
the following marks: "Flypaper"; "Fly Buys"; and "Fabulous Fashion.
Fierce Prices".
2. The Company has registered the following domain names: bluefly.com,
blue-fly.com, blue-fly.net, bluefly.org, blufly.com, blufly.net, begolf.com,
teenfly.com, blu-fly.com, blu-fly.net, bluelfy.com,
saveupto75percenton350designerbrands.com, brandoutlet.com,
350designerbrandsatoutletstoreprices.com, bestoff.com, best-off.com,
madisonavenuedesignerbrandsathugesavings.com, red-fly.com, green-fly.com,
orangefly.com, orange-fly.com.
3. The Company is exploring the possibility of filing a business process patent
application for its MyCatalog feature, as well as certain other features
relating thereto.
<PAGE>
AMENDED AND RESTATED SCHEDULE 3.14 TO THE INVESTMENT AGREEMENT
EMPLOYEE BENEFITS
1. The Company has adopted Stock Option Plan pursuant to which 1,500,000 shares
of common stock have been reserved for issuance pursuant to options granted
thereunder.
2. The Company has adopted a vacation, sick leave and personal leave policy.
3. The Company has entered into employment agreements with each of Ken Seiff,
Patrick Barry, Jonathan Morris, Robert Stevens and Andreas Turanski, and Martin
Keane. Each such employment agreement includes severance arrangements.
4. The Company provides health insurance coverage for its employees and eligible
family members.
5. The Company has adopted a 401(k) Plan.
<PAGE>
AMENDED AND RESTATED SCHEDULE 3.15 TO INVESTMENT AGREEMENT
TAXES
The Company's federal income tax returns for 1998 have been examined and closed.
The Company has been granted an extension for the filing of its 1999 federal
income tax returns.
<PAGE>
SCHEDULE 3.4 TO NOTE AND WARRANT PURCHASE AGREEMENT
CAPITALIZATION
1. 1,500,000 shares of common stock are reserved for issuance under the
Company's stock option plan, of which options to purchase 1,134,450 shares of
common stock were outstanding as of February 29, 2000.
2. 11,500 shares of common stock are reserved for issuance upon the exercise of
Underwriters Purchase Options and an additional 13,850 shares of common stock
are reserved for issuance upon the exercise of warrants underlying the
Underwriters Purchase Options.
<PAGE>
Exhibit 10.2
BLUEFLY, INC.
1997 STOCK OPTION PLAN
SECTION 1. PURPOSE
The purposes of this Bluefly, Inc. 1997 Stock Option Plan (the "Plan")
are to encourage selected employees, consultants and directors of Bluefly, Inc.
(together with any successor thereto, the "Company' ) and its Affiliates (as
defined below) to acquire a proprietary interest in the growth and performance
of the Company, to generate an increased incentive to contribute to the
Company's future success and prosperity, thus enhancing the value of the Company
for the benefit of its shareholders, and to enhance the ability of the Company
and its Affiliates to attract and retain qualified individuals upon whom, in
large measure, the sustained progress, growth, and profitability of the Company
depend.
SECTION 2. DEFINITIONS
As used in the Plan, the following terms shall have the meanings set
forth below:
(a) "Affiliate" shall mean any entity that, directly or through one or
more intermediaries, is controlled by, controls or is under common control with
the Company.
(b) "Board" shall mean the Board of Directors of the Company.
(c) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.
(d) "Committee" shall mean a committee of the Board designated by the
Board to administer the Plan and composed of not less than two directors, each
of whom is both a non-employee director within the meaning of Rule 16b-3 and an
"outside director" as that term is defined for purposes of Section 162(m) of the
Code.
(e) "Consultant" shall mean any Person who contracts to provide
services to the Company as an independent contractor.
(f) "Fair Market Value" shall mean, with respect to Shares or other
securities (i) the closing price per Share of the Shares on the principal
exchange on which the Shares are then trading, if any, on such date, or, if the
Shares were not traded on such date, then on the next preceding trading day
during which a sale occurred; or (ii) if the Shares are not traded on an
exchange but are quoted on NASDAQ or a successor quotation system, (1) the last
sales price (if the Shares are then listed as a National Market Issue under the
NASDAQ National Market System) or (2) the mean between the closing
representative bid and asked prices (in all other cases) for the Shares on such
date as reported by NASDAQ or such successor quotation system; or (iii) if the
Shares are not publicly traded on an exchange and not quoted on NASDAQ or a
successor quotation system, the mean between the closing bid and asked prices
for the Shares on such date as determined in good faith by the Committee; or
(iv) if the provisions of clauses (i), (ii) and (iii) shall not be applicable,
the fair market value established by the Committee acting in good faith.
(g) "Incentive Stock Option" shall mean an option granted under Section
6 of the Plan that meets the requirements of Section 422 of the Code or any
successor provision thereto.
(h) "Key Employee" shall mean any officer, director or other employee
who is a regular full-time employee of the Company or its present and future
Affiliates.
1
<PAGE>
Exhibit 10.2
(i) "Non-Employee Director" shall mean each member of the Board who is
not an employee of the Company or any Affiliate.
(j) "Non-Qualified Stock Option" shall mean an option granted under the
Plan that is not an Incentive Stock Option.
(k) "Option" shall mean an Incentive Stock Option or a Non-Qualified
Stock Option.
(1) "Option Agreement" shall mean a written agreement, contract, or
other instrument or document evidencing an Option granted under the Plan.
(m) "Participant" shall mean a Key Employee, Consultant or Non-Employee
Director who has been granted an Option under the Plan.
(n) "Person" shall mean any individual, corporation, partnership,
association, joint-stock company, trust, unincorporated organization, or
government or political subdivision thereof.
(o) "Rule 16b-3" shall mean Rule 16b-3 promulgated by the Securities
and Exchange Commission under the Securities Exchange Act of 1934, as amended,
or any successor rule or regulation thereto.
(p) "Shares" shall mean the common stock of the Company, $.01 par
value, and such other securities or property as may become the subject of
Options pursuant to an adjustment made under Section 4(b) of the Plan.
(q) "Ten Percent Shareholder" shall mean a Person, who together with
his or her spouse, children and trusts and custodial accounts for their benefit,
immediately at the time of the grant of an Option and assuming its immediate
exercise, would beneficially own, within the meaning of Section 424(d) of the
Code, Shares possessing more than ten percent (10%) of the total combined voting
power of all of the outstanding capital stock of the Company.
SECTION 3. ADMINISTRATION
(a) Generally. The Plan shall be administered by the Committee. Unless
otherwise expressly provided in the Plan, all designations, determinations,
interpretations and other decisions under or with respect to the Plan or any
Option shall be within the sole discretion of the Committee, may be made at any
time, and shall be final, conclusive, and binding upon all Persons, including
the Company, any Affiliate, any Participant, any holder or beneficiary of any
Option, any shareholder of the Company or any Affiliate, and any employee of the
Company or of any Affiliate.
(b) Powers. Subject to the terms of the Plan and applicable law and
except as provided in Section 7 hereof, the Committee shall have full power and
authority to: (i) designate Participants; (ii) determine the type or types of
Options to be granted to each Participant under the Plan; (iii) determine the
number of Shares to be covered by Options; (iv) determine the terms and
conditions of any Option; (v) determine whether, to what extent, and under what
circumstances Options may be settled or exercised in cash, Shares, other
Options, or other property, or canceled, forfeited, or suspended, and the method
or methods by which Options may be settled, exercised, canceled, forfeited, or
suspended; (vi) interpret and administer the Plan and any instruments or
agreements relating to, or Options granted under, the Plan; (vii) establish,
amend, suspend, or waive such rules and regulations and appoint such agents as
it shall deem appropriate for the proper administration of the Plan; and (viii)
make any other determination and take any other action that the Committee deems
necessary or desirable for the administration of the Plan.
(c) Reliance, Indemnification. The Committee may employ attorneys,
consultants, accountants or other persons and the Committee, the Company and its
officers and directors shall be entitled to rely upon the advice,
2
<PAGE>
Exhibit 10.2
opinions or valuations of any such persons. No member of the Committee shall be
personally liable for any action, determination or interpretation taken or made
in good faith with respect to the Plan, or Options granted thereunder and all
members of the Committee shall be fully indemnified and protected by the Company
in respect of any such action, determination or interpretation.
SECTION 4. SHARES AVAILABLE FOR OPTIONS
(a) Shares Available. Subject to adjustment as provided in Section
4(b):
(i) Limitation on Number of Shares. Options issuable under the
Plan are limited such that the maximum aggregate number of Shares which
may issued to Key Employees, Consultants and Non-Employee Directors
pursuant to, or by reason of, Options is 1,500,000. No Participant
shall be granted in any one fiscal year Options to purchase more than
100,000 Shares. To the extent that an Option granted to a Participant
ceases to remain outstanding by reason of termination of rights granted
thereunder, forfeiture or otherwise, the Shares subject to such Option
shall again become available for award under the Plan; provided,
however, that in the case of the cancellation or termination of an
Option in the same fiscal year that such Option was granted, both the
canceled Option and the newly granted Option shall be counted in
determining whether the recipient has received the maximum number of
such Options under the Plan for such fiscal year.
(ii) Accounting for Awards. For purposes of this Section 4,
the number of Shares covered by an Option to (A) a Key Employee or
Consultant or (B) a Non-Employee Director shall be counted on the date
of grant of such Option against the aggregate number of Shares
available for granting Options under the Plan to (x) Key Employees and
Consultants or (y) Non-Employee Directors, respectively.
(iii) Sources of Shares Deliverable Under Options. Any Shares
delivered pursuant to an Option may consist, in whole or in part, of
authorized and unissued Shares or of treasury Shares.
(b) Adjustments. In the event that the Committee shall determine that
any (i) subdivision or consolidation of Shares, (ii) dividend or other
distribution (in the form of Shares), (iii) recapitalization or other capital
adjustment of the Company or (iv) merger, consolidation or other reorganization
of the Company or other rights to purchase Shares or other securities of the
Company, or other similar corporate transaction or event (of a type described in
Treasury Regulation Section 1.162- 27(e)(2)(iii)(C)), affects the Shares such
that an adjustment is determined by the Committee to be appropriate in order to
prevent dilution or enlargement of the benefits or potential benefits intended
to be made available under the Plan, then the Committee shall, in such manner as
it may deem necessary to prevent dilution or enlargement of the benefits or
potential benefits intended to be made under the Plan, adjust any or all of (x)
the number and type of Shares which thereafter may be made the subject of
Options, (y) the number and type of Shares subject to outstanding Options, and
(z) the grant, purchase, or exercise price with respect to an Option or, if
deemed appropriate, make provision for a cash payment to the holder of an
outstanding Option, provided, however, in each case, that (i) with respect to
Incentive Stock Options no such adjustment shall be authorized to the extent
that such adjustment would cause the Plan to violate Section 422 of the Code or
any successor provision thereto; (ii) each such adjustment shall be made in such
manner as not to constitute a cancellation and reissuance of a Non-Qualified
Stock Option for purposes of Section 162(m) of the Code, or the regulations
promulgated thereunder, to the extent that such reissuance would result in the
grant of such Options in excess of the maximum permitted to be granted to any
Participant in any fiscal year; and (iii) the number of Shares subject to any
Option denominated in Shares shall always be a whole number.
SECTION 5. ELIGIBILITY
Options may be granted only to Key Employees, Consultants and
Non-Employee Directors; provided, however, that Incentive Stock Options may be
granted only to Key Employees. In determining the Persons to whom
3
<PAGE>
Exhibit 10.2
Options shall be granted and the number of Shares to be covered by each Option,
the Committee shall take into account the nature of the Person's duties, such
Person's present and potential contributions to the success of the Company and
such other factors as it shall deem relevant in connection with accomplishing
the purposes of the Plan. A Key Employee or Consultant who has been granted an
Option or Options under the Plan may be granted an additional Option or Options,
subject to such limitations as may be imposed by the Code on the grant of
incentive Stock Options.
SECTION 6. OPTION
The Committee is hereby authorized to grant Options to Participants
upon the following terms and the conditions (except to the extent otherwise
provided in Section 7) and with such additional terms and conditions, in either
case not inconsistent with the provisions of the Plan, as the Committee shall
determine:
(a) Exercise Price. The purchase price per Share purchasable
under Incentive Stock Options shall not be less than 100% of the Fair
Market Value of a Share on the date of grant; provided that the
purchase price per Share purchasable under Incentive Stock Options
granted to Ten Percent Shareholders shall be not less than 110% of the
Fair Market Value of a Share on the date of grant. The purchase price
per Share purchasable under Non-Qualified Stock Options shall be the
price determined by the Committee.
(b) Option Term. The term of each Non-Qualified Stock Option
shall be fixed by the Committee. The term of each Incentive Stock
Option shall in no event be more than 10 years from the date of grant,
or in the case of an Incentive Stock Option granted to a Ten Percent
Shareholder, 5 years from the date of grant.
(c) Time and Method of Exercise. The Committee shall determine
the time or times at which an 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 option price with respect thereto may be made or
deemed to have been made (including, without limitation, (i) cash,
Shares, outstanding Options or other consideration, or any combination
thereof, having a Fair Market Value on the exercise date equal to the
relevant option price and (ii) a broker-assisted cashless exercise
program established by the Committee), provided in each case that such
methods avoid "short-swing" profits to the Participant under Section
16(b) of the Securities Exchange Act of 1934, as amended. The payment
of the exercise price of an Option may be made in a single payment or
transfer, in installments, or on a deferred basis, in each case in
accordance with rules and procedures established by the Committee.
(d) Early Termination. The unexercised portion of any Option
granted to a Key Employee or Consultant under the Plan will generally
be terminated (i) thirty (30) days after the date on which the Key
Employee's employment is terminated or the period of the Consultant's
services ceases, as the case may be, for any reason other than (A)
Cause (as defined below), (B) retirement or mental or physical
disability, or (C) death; (ii) immediately upon the termination of the
Key Employee's employment for Cause; (iii) in the case of any Incentive
Stock Option, three months after the date on which the Key Employee's
employment is terminated by reason of retirement or one year after the
Key Employee's employment is terminated by reason of mental or physical
disability, or in the case of any Non-Qualified Stock Option, three
months after the date on which the Key Employee's employment is
terminated or the period of the Consultant's services ceases, as the
case may be, by reason of retirement or mental or physical disability,
or in the discretion of the Committee up to one year after the date on
which the Key Employee's employment is terminated or the period of the
Consultant's services ceases, as the case may be, by reason of
retirement or mental or physical disability; or (iv)(A) 12 months after
the date on which the Key Employee's employment is terminated or the
period of the Consultant's services ceases, as the case may be, by
reason of the death of the Key Employee or the Consultant, as the case
may be, or (B) three months after the date on which the Key Employee or
the Consultant, as the case may be, shall die if such death shall occur
during the three-month
4
<PAGE>
Exhibit 10.2
period following the termination of the Key Employee's employment or
the cessation of the Consultant's services, as the case may be, by
reason of retirement or mental or physical disability. The term
"Cause," as used herein, shall mean (w) the Key Employee's willful
misconduct or fraud in the performance of his duties under such Key
Employee's employment arrangement with the Company, (x) the continued
failure or refusal of the Key Employee (following written notice
thereof) to carry out any reasonable request of the Board for the
provision of services under such Key Employee's employment arrangement
with the Company, (y) the material breach by the Key Employee of his
employment arrangement with the Company or (z) the entering of a plea
of guilty or nolo contendere to or the conviction of the Key Employee
for a felony or any other criminal act involving moral turpitude,
dishonesty, theft or unethical business conduct. For purposes of this
paragraph (d), no act shall be considered willful unless done or
omitted to be done not in good faith and without reasonable belief that
such action or omission was in the best interest of the Company.
(e) Incentive Stock Options. All terms of any Incentive Stock
Option granted under the Plan shall comply in all respects with the
provisions of Section 422 of the Code, or any successor provision
thereto, and any regulations promulgated thereunder.
(f) No Cash Consideration for Awards. Awards shall be granted
for no cash consideration or such minimal cash consideration as may be
required by applicable law.
(g) Limits on Transfer of Options. Subject to Code Section
422, no Option and no right under any such Option, shall be assignable,
alienable, saleable, or transferable by a Participant otherwise than by
will or by the laws of descent and distribution; provided, however,
that, if so determined by the Committee, a Participant may, in the
manner established by the Committee, designate a beneficiary or
beneficiaries to exercise the rights of the Participant, and to receive
any property distributable, with respect to any Option upon the death
of the Participant. Each Option, and each right under any such Option,
shall be exercisable during the Participant's lifetime, only by the
Participant or, if permissible under applicable law with respect to any
Option that is not an Incentive Stock Option, by the Participant's
guardian or legal representative. No Option and no right under any such
Option, may be pledged, alienated, attached, or otherwise encumbered,
and any purported pledge, alienation, attachment, or encumbrance
thereof shall be void and unenforceable against the Company or any
Affiliate.
(h) Term of Options. Except as set forth in Section 6(b) and
Section 7, the term of each Option shall be for such period as may be
determined by the Committee.
(i) Share Certificates. All certificates for Shares or other
securities of the Company delivered under the Plan pursuant to any
Option or the exercise thereof shall be subject to such stop transfer
orders and other restrictions as the Committee may deem advisable under
the Plan or the rules, regulations, and other restrictions of the
Securities and Exchange Commission, any stock exchange upon which such
Shares or other securities are then listed, and any applicable Federal
or state securities laws, and the Committee may cause a legend or
legends to be put on any such certificates to make appropriate
reference to such restrictions.
SECTION 7. OPTIONS AWARDED TO NON-EMPLOYEE DIRECTORS
Each Non-Employee Director who was a member of the Board on the
Effective Date (defined hereafter) shall automatically be granted on such date a
Non-Qualified Stock Option to purchase 5,000 Shares, subject to all of the
provisions of the Plan. Each person who is either elected or appointed a
Non-Employee Director, and who has not previously received a grant of
Non-Qualified Stock Options pursuant to the Plan, shall automatically be granted
a Non-Qualified Stock Option to purchase 3,750 Shares on the date of their
appointment or election, subject to the provisions of the Plan. In addition,
each Non-Employee Director who is a member of the Board on April 30 of a year
during the term of the Plan beginning in calendar year 1998 shall automatically
be granted a Non-Qualified
5
<PAGE>
Exhibit 10.2
Stock Option to purchase 3,750 Shares on May 1of the following year. All Options
granted to Non-Employee Directors pursuant to the Plan shall (a) be (in the case
of a grant under this Section 7) at an exercise price per Share equal to 100% of
the Fair Market Value of a Share on the date of the grant; (b) have (in the case
of a grant under this Section 7) a term of 10 years; (c) terminate (i) thirty
(30) days after termination of a Non-Employee Director's service as a director
of the Company for any reason other than retirement or mental or physical
disability or death, (ii) thirty (30) days after the date the Non-Employee
Director ceases to serve as a director of the Company due to retirement or
physical or mental disability, or in the discretion of the Committee up to one
year after the date the Non-Employee Director ceases to serve as a director of
the Company due to retirement or physical or mental disability or (iii)(A) 12
months after the date the Non-Employee Director ceases to serve as a director
due to the death of the Non-Employee Director or (B) three months after the
death of the Non-Employee Director if such death shall occur during the three
month period following the date the Non-Employee Director ceased to serve as a
director of the Company due to physical or mental disability; and (d) be
otherwise on the same terms and conditions as all other Options granted pursuant
to the Plan.
SECTION 8. AMENDMENT AND TERMINATION
Except to the extent prohibited by applicable law and unless otherwise
expressly provided in an Option Agreement or in the Plan:
(a) Amendments to the Plan. The Plan may be wholly or partially amended
or otherwise modified, suspended or terminated at any time or from time to time
by the Board, but no amendment without the approval of the shareholders of the
Company shall be made if shareholder approval would be required under Section
162(m) of the Code, Section 422 of the Code, Rule 16b-3 or any other law or rule
of any governmental authority, stock exchange or other self-regulatory
organization to which the Company is subject. Neither the amendment, suspension
or termination of the Plan shall, without the consent of the holder of such
Option, alter or impair any rights or obligations under any Option theretofore
granted.
(b) Adjustments of Options Upon the Occurrence of Certain Unusual or
Nonrecurring Events. The Committee shall be authorized to make adjustments in
the terms and conditions of, and the criteria included in, Options in
recognition of unusual or nonrecurring events (including, without limitation,
the events described in Section 4(b) hereof) affecting the Company, any
Affiliate, or the financial statements of the Company or any Affiliate or of
changes in applicable laws, regulations, or accounting principles, whenever the
Committee determines that such adjustments are appropriate in order to prevent
enlargement of the benefits or potential benefits to be made available under the
Plan.
(c) Correction of Defects, Omissions, and Inconsistencies. The
Committee may correct any defect, supply any omission or reconcile any
inconsistency in the Plan or any Option in the manner and to the extent it shall
deem desirable to carry the Plan into effect.
SECTION 9. ELECTION TO HAVE SHARES WITHHELD
(a) In combination with or in substitution for cash withholding or any
other legal method of satisfying federal and state withholding tax liability, a
Participant may elect to have Shares withheld by the Company or to have Shares
sold in a broker-assisted transaction in order to satisfy federal and state
withholding tax liability (a "share withholding election"), provided (i) the
Committee shall have adopted procedures providing for a withholding election;
and (ii) the share withholding election is made on or prior to the date on which
the amount of withholding tax liability is determined (the "Tax Date"). If a
Participant elects within thirty (30) days of the date of exercise to be subject
to withholding tax on the exercise date pursuant to the provisions of Section
83(b) of the Code, then the share withholding election may be made during such
thirty (30) day period. Notwithstanding the foregoing, a holder whose
transactions in Common Stock are subject to Section 16(b) of the Securities
Exchange Act of 1934, as amended, may make a share withholding election only if
the following additional conditions are met: (i) the share withholding
6
<PAGE>
Exhibit 10.2
election is made no sooner than six (6) months after the date of grant of the
Option, except, however, such six (6) month condition shall not apply if the
Participant's death or disability (as shall be determined by the Committee)
occurs within such six (6) month period; and (ii) the share withholding election
is made (x) at least six (6) months prior to the Tax Date, or (y) during the
period beginning on the third business day following the date of release of the
Company's quarterly or annual financial results and ending on the twelfth
business day following such date.
(b) A share withholding election shall be deemed made when written
notice of such election, signed by the Participant, has been hand delivered or
transmitted by registered or certified mail to the Secretary of the Company at
its then principal office. Delivery of said notice shall constitute an
irrevocable election to have Shares withheld.
(c) If a Participant has made a share withholding election pursuant to
this Section 9, and (i) within thirty (30) days of the date of exercise of the
Option, the Participant elects pursuant to the provisions of Section 83(b) of
the Code to be subject to withholding tax on the date of exercise of the Option,
then such Participant will be unconditionally obligated to immediately tender
back to the Company the number of Shares having an aggregate fair market value
(as determined in good faith by the Committee), equal to the amount of tax
required to be withheld plus cash for any fractional amount, together with
written notice to the Company informing the Company of the Participant's
election pursuant to Section 83(b) of the Code; or (ii) if the Participant has
not made an election pursuant to the provisions of Section 83(b) of the Code,
then on the Tax Date, such Participant will be unconditionally obligated to
tender back to the Company the number of Shares having an aggregate fair market
value (as determined in good faith by the Committee), equal to the amount of tax
required to be withheld plus cash for any fractional amount.
SECTION 10. VESTING LIMITATION ON INCENTIVE STOCK OPTIONS
The Fair Market Value of Shares subject to Incentive Stock Options
(determined as of the date such Incentive Stock Options are granted) exercisable
for the first time by any individual during any calendar year shall in no event
exceed $100,000.
SECTION 11. GENERAL PROVISIONS
(a) No Rights to Awards. No Key Employee or Consultant shall have any
claim to be granted any Option under the Plan, and there is no obligation for
uniformity of treatment of Key Employees or Consultants or holders or
beneficiaries of Options under the Plan. The terms and conditions of Options
need not be the same with respect to each recipient.
(b) No Limit on Other Plans. Nothing contained in the Plan shall
prevent the Company or any Affiliate from adopting or continuing in effect other
or additional compensation arrangements and such arrangements may be either
generally applicable or applicable only in specific cases.
(c) No Right to Employment. The grant of an Option shall not be
construed as giving a Participant the right to be retained in the employ of the
Company or any Affiliate. Further, the Company or an Affiliate may at any time
dismiss a Participant from employment, free from any liability, or any claim
under the Plan, unless otherwise expressly provided in the Plan or in any Option
Agreement.
(d) Governing Law. The validity, construction, and effect of the Plan
and any rules and regulations relating to the Plan shall be determined in
accordance with the laws of the State of New York and applicable Federal law.
(e) Severability. If any provision of the Plan or any Option is or
becomes or is deemed to be invalid, illegal, or unenforceable in any
jurisdiction, or would disqualify the Plan or any Option under any law deemed
7
<PAGE>
Exhibit 10.2
applicable by the Committee, such provision shall be construed or deemed amended
to conform to applicable laws, or if it cannot be construed or deemed amended
without, in the determination of the Committee, materially altering the intent
of the Plan, such provision shall be deemed void, stricken and the remainder of
the Plan and any such Option shall remain in full force and effect.
(f) No Trust or Fund Created. Neither the Plan nor any Option shall
create or be construed to create a trust or separate fund of any kind or a
fiduciary relationship between the Company or any Affiliate and a Participant or
any other Person. To the extent that any Person acquires a right to receive
payments from the Company or any Affiliate pursuant to an Option, such right
shall be no greater than the right of any unsecured general creditor of the
Company or any Affiliate.
(g) No Fractional Shares. No fractional Shares shall be issued or
delivered pursuant to the Plan or any Option, and the Committee shall determine
whether cash, other securities, or other property shall be paid or transferred
in lieu of any fractional Shares or whether such fractional Shares or any rights
thereto shall be canceled, terminated, or otherwise eliminated.
(h) Headings. Headings are given to the Sections and subsections of the
Plan solely as a convenience to facilitate reference. Such headings shall not be
deemed in any way material or relevant to the construction or interpretation of
the Plan or any provision hereof.
SECTION 12. DEDUCTIBILITY OF COMPENSATION
Prior to the end of the "reliance period" as defined in Treasury
Regulation Section 1.162-27(f)(2), the Committee shall take such actions, if
any, that it deems necessary or appropriate so that the compensation element of
Non-Qualified Stock Options will qualify as "qualified performance-based
compensation," within the meaning of Treasury Regulation Section 1.162-27(e).
SECTION 13. EFFECTIVE DATE OF THE PLAN
The Plan is effective as of the closing of the Company's initial public
offering (the "Effective Date").
SECTION 14. TERM OF THE PLAN
The Plan shall continue until the earlier of (i) the date on which all
Options issuable hereunder have been issued, (ii) the termination of the Plan by
the Board or (iii) March 4, 2007. However, unless otherwise expressly provided
in the Plan or in an applicable Option Agreement, any Option theretofore granted
may extend beyond such date and the authority of the Committee to amend, alter,
adjust, suspend, discontinue, or terminate any such Option or to waive any
conditions or rights under any such Option, and the authority of the Board to
amend the Plan, shall extend beyond such date.
8
<PAGE>
Exhibit 21.1
Subsidiaries of Registrant
Clothesline Corporation
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 7,934,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 7,020,000
<CURRENT-ASSETS> 1,080,000
<PP&E> 1,267,000
<DEPRECIATION> 230,000
<TOTAL-ASSETS> 17,109,000
<CURRENT-LIABILITIES> 6,523,000
<BONDS> 0
0
5,000
<COMMON> 49,000
<OTHER-SE> 10,532,000
<TOTAL-LIABILITY-AND-EQUITY> 17,109,000
<SALES> 4,951,000
<TOTAL-REVENUES> 4,951,000
<CGS> 3,766,000
<TOTAL-COSTS> 14,884,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (13,259,000)
<INCOME-TAX> 2,000
<INCOME-CONTINUING> (13,257,000)
<DISCONTINUED> 63,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,194,000)
<EPS-BASIC> (2.82)
<EPS-DILUTED> (2.82)
</TABLE>
