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Exhibit 99.1
October 12, 2000
E. Kenneth Seiff
Chairman, CEO & President
Bluefly, Inc.
42 West 39th Street
New York, New York 10018
Dear Mr. Seiff:
The purpose of this letter is to confirm the interest of Quantum Industrial
Partners LDC and affiliates ("QIP"), a strategic equity fund advised by Soros
Fund Management LLC and its affiliate Soros Private Equity Partners, along with
any party mutually acceptable to Bluefly, Inc. ("Bluefly" or the "Company") and
QIP (collectively, the "Purchasers"), in making a further strategic investment
in Bluefly for the purpose of significantly improving the financial condition of
the Company and providing it with working capital.
We envision a two-step transaction in which the Purchasers would invest a total
of up to $15,000,000 in the Company. In the first transaction, the Purchasers
will invest $5 million in the form of Senior Convertible Notes (the "New
Notes"), to be funded immediately upon execution of definitive agreements. The
aggregate principal amount of and accrued interest on the New Notes would
automatically convert into shares of the Series B Stock (as defined below) at a
price of $2.34 per share immediately following the Company obtaining shareholder
approval of the transactions described herein. The New Notes would pay interest
at the rate of 11% per annum, payable upon conversion, redemption or liquidation
(including a change of control approved by the Company's Board of Directors).
Other terms applicable to the New Notes are set forth on the attached term
sheet.
In connection with the issuance of the New Notes and the Rights Offering
described below, and subject to shareholder approval: (i) the terms of the
Series A Preferred Stock would be amended to fix the initial conversion price at
$2.34 per share and remove the anti-dilution protection for below conversion
price issuances and to make certain other changes described in the term sheet;
and (ii) the $15 million of notes previously issued pursuant to the Note and
Warrant Purchase Agreement among the Company and certain of the Purchasers dated
March 28, 2000 (the "Existing Notes") would convert into convertible preferred
shares of the Company (the "Series B Stock") at a price of $2.34 a share. The
Series B Stock will have a cumulative compounding dividend of 8% per annum,
payable upon conversion, redemption or liquidation. The conversion price would
initially equal the purchase price. The Note Purchase Agreement will include a
covenant that the Company will not agree to or take any action to approve or
otherwise facilitate
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any merger or consolidation or Change of Control (as defined in the attached
term sheet), unless provision has been made for the holders of Series A Stock
and Series B Stock to receive as a result of and in connection with the
transaction, an amount equal to their respective aggregate liquidation
preference (as described in the attached term sheet) for the shares of Series A
Stock and Series B Stock held by them. The terms of Series B Stock are more
fully set out in the attached term sheet.
As part of the second step of the transaction, we envision an offering (the
"Rights Offering") to be made by the Company to the holders of common stock of
the Company (the "Public Holders") enabling them to buy their pro rata share (as
a class) of up to $20 million of Common Stock at a price of $2.34 per share. In
the event that less than the full $20 million of Common Stock is purchased by
the Public Holders, the Purchasers will purchase, at $2.34 per share, Common
Stock with an aggregate purchase price equal to the lesser of (i) the difference
between $20 million and the amount purchased by the Public Holders and (ii) $10
million. The Purchasers' commitment to participate in the Rights Offering will
be contingent upon the Company obtaining shareholder approval of the
transactions contemplated hereby and migrating the Company to a Delaware
corporation.
We are prepared to negotiate definitive agreements by October 20, 2000. We
request that the Purchasers and their representatives continue to have full
access to the Company's officers, directors, counsel, representatives, auditors,
and books and records, and full opportunity to investigate the Company's title
to property and the nature and condition of its assets, businesses and
liabilities. Final approval and terms of an investment by the Purchasers in the
Company will be subject to approval of the Purchasers, which may be withheld in
their sole discretion.
By accepting this letter, the Company agrees with QIP that neither the Company
nor QIP (or their respective officers, representatives, partners or affiliates)
or management of the Company will publicly disclose the existence of this letter
or make known any facts related to the proposed transaction without the prior
written consent of the other parties, except to its respective advisors or
counsel, or as required by applicable law; provided that the Company may provide
a copy of the letter to (x) the Nasdaq SmallCap Market and/or the Boston Stock
Exchange in connection with any discussion regarding the Company's compliance
with the listing requirements of such exchanges, (y) a source of inventory
financing and (z) prospective equity investors in the Company.
The Company will reimburse all reasonable legal fees and expenses incurred by
the Purchasers in connection with the transaction, up to a total of $200,000,
whether or not this transaction is completed and the expenses of any filings
required under the Hart-Scott-Rodino Act.
This letter agreement shall be construed and governed in accordance with the
laws of the State of New York, without giving effect to the conflicts of laws
principles thereof. The paragraphs relating to non-disclosure and expenses are
the only paragraphs that are binding on the parties.
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We understand that the Board of Directors has established an independent
committee to consider this transaction. We look forward to working with that
committee and the Company to close this transaction, improve the financial
security of the Company and make the Company a success.
If this letter and the indicative, but non-binding term sheet are acceptable,
please sign below.
Respectfully submitted,
/s/ Michael C. Neus
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Michael C. Neus
Attorney-in-Fact
Soros Private Equity Partners
Agreed and accepted:
/s/ E. Kenneth Seiff
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E. Kenneth Seiff
Chairman, CEO & President
Bluefly, Inc.
Date: October 12, 2000
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SUMMARY TERM SHEET
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ISSUER: BLUEFLY, INC. ("BLUEFLY" or the
"Company").
PURCHASERS: Quantum Industrial Partners LDC and
affiliates ("QIP"), a strategic equity
fund advised by Soros Fund Management LLC
and its affiliate Soros Private Equity
Partners ("SPEP"), and any other party
mutually acceptable to the Company and QIP
(collectively, the "Purchasers").
PUBLIC HOLDERS: Holders of Common Stock will be offered
the right to purchase their pro rata share
as a class of up to $20 million of Common
Stock (the "Rights Offering").
SECURITIES OFFERED: 8,673,720 shares of Series B Convertible
Preferred Stock (the "Series B Stock")
plus a number of shares of Series B Stock
equal to the interest accrued and unpaid
on (i) the Existing Notes (as defined
below) from October 1, 2000 through the
date of conversion and (ii) the Notes (as
defined below) from the date of issuance
through the date of conversion. (6,536,967
shares relating to the conversion of $15
million in currently existing debt
("Existing Notes") plus interest through
September 30, 2000, and 2,136,752 shares
relating to the conversion of the
principal amount of the Notes).
Up to 8,547,009 shares of Common Stock.
Senior Convertible Notes in the aggregate
principal amount of $5 million (the
"Notes").
PURCHASE PRICE: $2.34 per share ("Per Share Price") for
the Series B Stock, $20,000,000 in the
aggregate (including $15 million of
currently existing Senior Convertible
Notes to be converted into Series B
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Stock in connection with the transaction).
$2.34 per share for the Common Stock, up
to $20 million in the aggregate.
USES OF PROCEEDS: Working capital and general corporate
purposes.
DESCRIPTION OF THE SERIES B STOCK:
RANKING OF THE SERIES B STOCK: Senior to the Common Stock of the Company
and pari passu with the Series A Stock.
DIVIDENDS: The Series B Stock will bear a cumulative
compounding dividend of 8% per annum
payable upon conversion, at the Company's
option, in cash or Common Stock, or upon
liquidation, payable in cash. In addition,
the Series B Stock will share pari passu
with all other equity holders of the
Company on an as- converted basis in cash
dividends and other distributions, if any,
other than stock splits effected as
dividends. If the Company elects to pay
the dividend in shares of Common Stock,
such dividend will be the number of shares
of Common Stock obtained by dividing the
cash value of the dividend by the average
closing price of the Company's Common
Stock on NASDAQ for the thirty trading
days immediately prior to such conversion.
CONVERSION PRICE: The initial conversion price of the Series
B Stock will be equal to the Per Share
Price (the "Conversion Price"), subject to
anti-dilution protection described below.
OPTIONAL CONVERSION: Each share of the Series B Stock shall be
convertible at any time after the date of
issuance at the option of the holder into
the number of shares of Common Stock
obtained by dividing the Per Share Price
by the Conversion Price.
AUTOMATIC CONVERSION: None for the Series B Stock. The Series A
Stock will be automatically converted as
set forth in the Certificate of Amendment,
except that (i) the trigger price will be
four times the Conversion Price; (ii) the
conversion can only
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occur on or after October 12, 2001; (iii)
the Company can convert only 25% of the
outstanding Series A in any one calendar
quarter; and (iv) the Common Stock into
which the Series A is converted must be
subject to a registration statement.
OPTIONAL REDEMPTION: The Company may redeem for cash all but
not less than all of the Series A Stock
and Series B Stock on not less than 30
days written notice to the holders
thereof, during the periods and at a price
set forth below, in each case, plus
accrued but unpaid dividends; provided
that if it is necessary to redeem shares
of Common Stock held by the Purchasers in
order to ensure that the redemption is not
treated as a dividend treatment under
Section 302(b)(2) of the Internal Revenue
Code for the redemption of the Series A
Stock and Series B Stock, then to avoid
such treatment the Company shall effect
such redemption of Common Stock to the
extent necessary; and provided further
that there shall be a registration
statement in effect for the Common Stock
into which the Series A Stock and Series B
Stock can be converted.
Second anniversary of closing through the
fourth anniversary - 4 times the
Conversion Price;
Fourth anniversary of closing through the
sixth anniversary - 4.5 times the
Conversion Price; After the sixth
anniversary - 5 times the Conversion
Price.
The right of redemption may be exercised
and a determination on how to fund the
redemption may be made only by a vote of
the majority of the directors not
appointed by the Purchasers.
VOTING RIGHTS: The Series B Stock will have the right to
vote on all matters that come before the
common shareholders of the Company on an
as converted basis.
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For so long as at least 60% in the
aggregate of the shares of Series A Stock
or at least 40% of the shares of Series B
Stock, as the case may be, outstanding on
the closing date remain outstanding, the
approval of the holders of a majority of
the shares of Series A Stock or Series B
Stock, as the case may be, will be
required for the Company to take any of
the following actions: (i) merge,
consolidate or liquidate the Company or
acquire another business entity; (ii)
create a joint venture, partnership or one
or more non-wholly owned subsidiaries
requiring an investment in cash or kind of
more than $500,000; (iii) sell Company
assets, which individually or in the
aggregate exceed $2,000,000; (iv) incur
indebtedness in excess of $1,000,000 or
impose a lien against or encumber assets
of the Company in excess of $1,000,000
(other than a financing secured by
inventory); (v) enter into or amend any
contract not contemplated by an approved
budget or in excess of $250,000 in any one
year or $1 million over the life of the
contract in the aggregate; (vi) issue or
sell securities of the Company (excluding
securities issued upon exercise of options
under the stock option or employee
incentive plans existing on October 12,
2000 or contemplated by this term sheet or
as a result of the conversion of the
Series A Stock, any outstanding notes and
warrants, the Series B Stock and the
Notes); (vii) declare dividends,
repurchase or redeem securities of the
Company or debt, except to the extent such
debt is due in accordance with its terms
and except for dividends, repurchases or
redemption set forth in this term sheet or
applicable to the Series A Stock, the
Notes and the Series B Stock; (viii) make
capital expenditures in excess of 110% of
capital expenditures set forth in the
annual budget; (ix) grant registration
rights or register securities under the
Securities Act of 1933, as amended, except
pursuant to the registration rights
agreement currently in effect
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and the registration rights granted
pursuant to the transactions contemplated
hereby or registrations on Form S-8 or
similar forms; (x) enter into any contract
with an Affiliate; (xi) amend the
Company's Certificate of Incorporation or
Bylaws; (xii) increase or decrease the
number of members of the Company's Board
of Directors or the voting rights of the
directors; (xiii) change the Company's
independent public accountants; (xiv)
approve the annual budget, and any changes
to the business plan and five year budget
and any successor thereto; (xv) adopt or
amend employment contracts with Company
officers and senior executive managers
with authority equivalent to that of
Executive Vice Presidents; or (xvi) amend
or alter the transaction documents.
BOARD REPRESENTATION: (a) The Board of Directors will be
composed of seven (7) members
(b) During such time as at least 20% of
the shares of Series A Stock or at least
20% of the shares of Series B Stock as the
case may be, held on the closing date
remains outstanding, the holders of each
such series, by the vote of a majority of
the outstanding shares of each such
series, will designate a director, and
each such director will have one vote on
all matters considered by the Board or any
committee of the Board.
(c) Notwithstanding clause (b), during
such time as at least 60% of the shares of
Series A Stock or 40% of the Series B
Stock, as the case may be, held on the
closing date remains outstanding, the
director designated by the holders of a
majority of the Series A Stock and the
director designed by the holders of a
majority of the Series B Stock will each
be entitled to seven votes on all matters
considered by the Board or any committee
of the Board.
PRE-EMPTIVE RIGHTS: The holders of Series B Stock will have
the same pre-emptive rights as the Series
A Stock.
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LIQUIDATION PREFERENCE: Holders of the Series B Stock will have
priority in liquidation over all holders
of Common Stock. The liquidation
preference per share will equal the
greater of (i) the price that, when
combined with the consideration received
by the Purchasers for their Common stock,
provides for the recovery of the entire
investment made by the Purchasers pursuant
to this Term Sheet (which shall include,
without limitation, the purchase price of
the Notes converted into Series B Stock
and the purchase price for the shares of
common stock purchased pursuant to this
term sheet), plus any accrued but unpaid
dividends thereon; and (ii) the amount
that the holders of the Series B Stock
would receive in a liquidation if they
were to convert the Series B Stock into
Common Stock immediately prior to such
liquidation.
To the extent necessary, the Certificate
of Designation for the Series A Stock
shall be amended to: (w) adjust the $20
referred to in Section 4(a) to take into
account stock splits or similar
adjustments to the number of outstanding
shares of Series A Stock; (x) substitute
"$2.34" for "$10.50" in Section 6(a)(ii)
thereof; (y) provide that, upon a
liquidation as described herein, the
holders of the Series A Stock shall be
entitled to a liquidation preference per
share equal to the greater of (i) the
price that provides for the recovery of
the entire investment made by the holders
thereof in the Series A Stock, plus any
accrued but unpaid dividends thereon; and
(ii) the amount that the holders of the
Series A Stock would receive in a
liquidation if they were to convert the
Series A Stock into Common Stock
immediately prior to such liquidation; and
(z) delete the optional redemption
provision and references to change in
control in Section 7 and Section
3(a)(iii), respectively.
PROTECTIVE PROVISIONS: The affirmative vote of the holders of at
least two-thirds (66%) of the outstanding
shares of Series B Stock will be required
for the Company
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to (i) alter or change the rights,
preferences or privileges of the shares of
Series B Stock so as to affect adversely
such shares or (ii) merge or consolidate
with another Person or enter into a
transaction which results in a Change of
Control. "Change of Control" means any
person or "group" (within the meaning of
Section 13(d)(3) of the Securities
Exchange Act of 1934, as amended (the
"Exchange Act)", becoming the beneficial
owner, directly or indirectly, of
outstanding shares of stock of the Company
entitling such Person or Persons to
exercise 50% of more of the total votes
entitled to be cast at a regular or
special meeting, or by action by written
consent, of the shareholders of the
Company in the election of directors (the
term "beneficial owner" shall be
determined in accordance with Rule 13d-3
of the Exchange Act.
DESCRIPTION OF THE NOTES:
INTEREST: The Notes will bear interest at a rate of
11% per annum, based on a 365- or 366-day
year, as the case may be, and the actual
number of days elapsed. Interest is
payable only upon conversion or repayment
of the principal.
MATURITY DATE: April 1, 2001. The maturity date of the
existing notes will be extended to
April 1, 2001.
MANDATORY PREPAYMENT: The Notes shall be repaid upon the
occurrence of an event of default (as
defined in the Senior Convertible Notes
that are currently outstanding).
The Purchasers will have the right to
require the prepayment of the principal
and all accrued interest on the Notes upon
a Change of Control (other than a Change
of Control as a result of the transactions
contemplated by this Term Sheet).
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OPTIONAL PREPAYMENT: The Company may not prepay the Notes or
the existing notes.
AUTOMATIC CONVERSION: Each Note automatically converts into the
number of shares of Series B Stock
obtained by dividing the outstanding
principal amount of the Note and all
accrued interest by the Conversion Price
immediately upon the Company obtaining
shareholder approval for the transactions
contemplated hereby.
CONVERSION PRICE: $2.34
SUBORDINATION: To $15,000,000 of inventory financing on
terms reasonably acceptable to the
Purchasers.
ADDITIONAL PROVISIONS APPLICABLE
TO THE SERIES B STOCK OR THE NOTES:
ANTI-DILUTION PROTECTION: The Series B Stock and the Notes will
include customary anti-dilution
provisions, in addition to a full ratchet
adjustment to the Conversion Price in the
event the Company issues new equity or
convertible securities at an issue price
or conversion price below the then
applicable Conversion Price. The foregoing
shall not apply to (i) any equity
securities issued pursuant to the
Company's employee option or stock
incentive plan existing on October 10,2000
or as contemplated herein or (ii) in
consideration for services of third
parties, in an aggregate amount not to
exceed 100,000 shares of Common Stock per
year.
REGISTRATION RIGHTS: The holders of Series B Stock and Notes
will have the same piggy-back rights as
the Series A Stock and unlimited shelf
registration demands where the aggregate
anticipated proceeds to the selling
holders would equal or exceed $3,000,000.
DISCLOSURE: The holders of Series B Stock and the
Notes will have the same rights as the
holders of Series A Stock.
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CONDITIONS TO CLOSING: The purchase of the Common Stock and the
conversion of the Notes into shares of
Series B Stock are conditioned on: (i)
approval of the shareholders of the
Company of the issuance of the Series B
and the Common Stock; (ii) receipt of
applicable Governmental approval (or the
expiration of applicable waiting periods);
(iii) conversion of Company into a
Delaware corporation; (iv) the conclusion
of a rights offering of the Common Stock;
and (v) the absence of a material adverse
change in the business, assets,
liabilities, prospects, financial
condition or results of operation of the
Company.
The purchase of the $5 million in Notes is
conditioned on: (i) negotiation and
execution of definitive documentation
governing the transactions contemplated by
the letter of intent and term sheet, in
form and substance satisfactory to the
Company and the Purchasers by November 15,
2000, and (ii) the absence of a material
adverse change in the business, assets,
liabilities, prospects, financial
condition or results of operation of the
Company.
PUBLIC FILINGS: The Purchasers will have the right to
approve all filings made with U.S.
Government agencies and any material
provided to shareholders.
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EMPLOYEE OPTIONS: The Company will set aside 2,519,862
shares of Common Stock to be reserved for
officers, employees and consultants, as
approved by the Board of Directors (the
"New Stock Option Plan"). The New Stock
Option Plan will be subject to shareholder
approval. The options granted to existing
employees of the Company will be priced at
the fair market value on the date of this
term sheet. Options granted under the
existing stock option plans, including
options that were granted subject to
shareholder approval will remain in place.
MISCELLANEOUS: The Note Purchase Agreement will include a
covenant that the Company shall not agree
to or take any action to approve or
otherwise facilitate any merger or
consolidation or Change of Control
(including granting approvals required
under applicable anti-takeover statutes),
unless provision has been made for the
holders of Series A Stock and Series B
Stock to receive as a result of and in
connection with the transaction an amount
equal to their respective aggregate
liquidation preference for the shares of
Series A Stock and Series B Stock held by
them. The covenant will survive the
conversion of the Notes and be enforceable
by specific performance.