Investment Agreement - Bluefly Inc., Quantum Industrial Partners LDC and SFM Domestic Investments LLC
INVESTMENT AGREEMENT
INVESTMENT AGREEMENT (the "Agreement"),dated as of November 13, 2000,
by and among Bluefly, Inc., a New York corporation (the "Company"), Bluefly
Merger Sub, Inc., a Delaware corporation ("NewCo") 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, The Lynch Foundation, Peter
Lynch and Pilot Domestic Trust, each of the Purchasers has invested in shares of
the Company's Series A Convertible Preferred Stock, par value $.01 per share
(the "Series A Stock");
WHEREAS, pursuant to a Note and Warrant Purchase Agreement, dated as of
March 28, 2000, by and among the Company and the Purchasers, the Purchasers
purchased senior convertible notes in the aggregate amount of $3,000,000 (the
"First Round Notes") and warrants exercisable in the aggregate for 175,000
shares of common stock of the Company ("First Round Warrants") and committed
(the "Standby Commitment") to provide to the Company up to an aggregate of
$12,000,000 at any time prior to January 1, 2001;
WHEREAS, in subsequent drawings under the Standby Commitment, the
Purchasers have purchased additional senior convertible notes in the aggregate
principal amount of $12,000,000 (the "Additional Notes" and together with the
First Round Notes, the "Original Notes") and warrants exercisable for 200,000
shares of common stock of the Company (together with the First Round Warrants,
the "Purchasers' Warrants");
WHEREAS, the Company wishes to sell to the Purchasers and the
Purchasers wish to purchase from the Company subordinated convertible notes in
the aggregate principal amount of $5 million (collectively, the "New Notes"),
which will be convertible into a new series of preferred stock of the Company
Series B Convertible Preferred Stock, par value $.01 per share (the "Series B
Stock"), and the Company and the Purchasers wish to amend the Original Notes to
provide for their conversion into shares of Series B Stock and make certain
other changes;
WHEREAS, the Company intends to offer 8,547,009 shares (the "Rights
Shares") of Common Stock (as defined below) to holders of Common Stock (the
"Rights Offering") at a price of $2.34 a share (the "Common Share Price") and
the Purchasers will purchase up to 4,273,504 of the Rights Shares at the Common
Share Price if they are not subscribed for in the Rights Offering;
WHEREAS, as an inducement to the Purchasers to purchase the New Notes
and the Rights Shares, the Company has agreed to amend the terms of the Series A
Stock;
WHEREAS, the Company has determined that it is advisable to merge the
Company with and into NewCo, a wholly-owned subsidiary of the Company, with
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NewCo to be the Surviving Corporation (as defined below) for the purpose of
reincorporating the Company in Delaware;
WHEREAS, a special committee comprised of independent directors of the
Board of Directors of the Company (the "Special Committee") has (i) determined
that the transactions contemplated by this Agreement are fair to, and in the
best interests of, the Company and the shareholders of the Company, and (ii)
resolved to approve and recommend this Agreement and the transactions
contemplated hereby to the Board of Directors, subject to the terms and
conditions hereof.
WHEREAS, the Board of Directors of the Company has (i) determined that
the transactions contemplated by this Agreement are fair to, and in the best
interests of, the Company and the shareholders of the Company, (ii) resolved to
approve and adopt this Agreement and the transactions contemplated hereby
subject to the terms and conditions hereof and (iii) decided to recommend to
shareholders of the Company that they approve all matters in connection with
this Agreement that are required to be approved by the shareholders; and
WHEREAS, the parties to this Agreement desire to set forth their
understanding with respect to matters described herein;
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:
"Action" means any action, complaint, petition, investigation, suit or
other proceeding, whether civil or criminal, in law or in equity, or before any
arbitrator or Governmental Authority.
"Affiliate" shall mean any Person who is an "affiliate" (as defined in
Rule 12b-2 of the General Rules and Regulations under the Exchange Act) of, and
any Person controlling, controlled by, or under common control with, any
Purchaser. For the purposes of this Agreement, "control" includes the ability to
exercise investment discretion through contractual means or by operation of law.
"Agreement" means this Agreement as the same may be amended,
supplemented or modified in accordance with the terms hereof.
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"Annual Reports" means the Company's Annual Reports on Form 10-KSB or
Form 10-K, as the case may be, for the years ended December 31, 1998 and 1999,
each as filed with the SEC and December 31, 2000, to be filed with the SEC
(including, in each case, all amendments thereto filed with the SEC prior to the
Applicable Closing Date, all exhibits and schedules thereto and documents
incorporated by reference therein, but excluding any amendments thereto made
subsequent to the Applicable Closing Date).
"Board of Directors" means the Board of Directors of the Company.
"Business" means the business of the Company and shall be deemed to
include any of the following incidents of such business: income, operations,
condition (financial or other), assets, properties and liabilities.
"Business Day" means any day other than a Saturday, Sunday or other day
on which commercial banks in the State of New York are authorized or required by
law or executive order to close.
"By-Laws" means the amended and restated by-laws of the Company, as the
same may have been amended and as in effect on the date hereof.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations, rights in, or other equivalents (however designated
and whether voting or non-voting) of, such Person's capital stock.
""Certificate of Merger (Delaware)" means the Plan and Agreement of
Merger of the Company with and into NewCo to be filed with the Secretary of
State of the State of Delaware, in the form of Exhibit A.
"Certificate of Merger (New York)" means the Certificate of Merger of
the Company with and into NewCo to be filed with the Secretary of State of the
State of New York, in the form of Exhibit B.
"Change of Control" means any of the following: (i) any person or
"group" (within the meaning of Section 13(d)(3) of the Exchange Act) becoming
the beneficial owner, directly or indirectly, of outstanding shares of Capital
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 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); (ii) a majority of the Board of Directors of
the Company shall consist of Persons other than Continuing Directors; (iii) a
recapitalization, reorganization, merger, consolidation or similar transaction,
in each case with respect to which all or substantially all the Persons who were
the respective beneficial owners, directly or indirectly, of the outstanding
shares of Capital Stock of the Company immediately prior to such
recapitalization, reorganization, merger, consolidation or similar transaction,
will own less than 50% of the combined
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voting power of the then outstanding shares of Capital Stock of the Company
resulting from such recapitalization, reorganization, merger, consolidation or
similar transaction; (iv) the sale or other disposition of all or substantially
all the assets of the Company in one transaction or in a series of related
transactions; (v) any transaction occurs (other than one described in (iv) or
(vi)), the result of which is that the Common Stock is not required to be
registered under Section 12 of the Exchange Act and in which the holders of
Common Stock of the Company do not receive common stock of the Person surviving
such transaction which is required to be registered under Section 12 of the
Exchange Act; or (vi) immediately after any merger, consolidation,
recapitalization or similar transaction, a "group" (within the meaning of
Section 13(d)(3) of the Exchange Act), other than a group that includes
Purchasers and/or their Affiliates, shall be the beneficial owners, directly or
indirectly, of outstanding shares of Capital Stock of the Company (or any Person
surviving such transaction) entitling them collectively to exercise 50% or more
of the total voting power of shares of Capital Stock of the Company (or the
surviving Person in such transaction) and in connection with or as a result of
such transaction, the Company (or such surviving Person) shall have incurred or
issued additional indebtedness such that the total indebtedness so incurred or
issued equals at least 50% of the consideration payable in such transaction.
"Code" means the Internal Revenue Code of 1986, as amended, or any
successor statute thereto.
"Commission" means the Securities and Exchange Commission or any
similar agency then having jurisdiction to enforce the Securities Act.
"Common Stock" means the Common Stock, par value $.01 per share, of the
Company and any other capital stock of the Company into which such stock is
reclassified or reconstituted.
"Condition of the Company" means the assets, business, properties,
liabilities, prospects, results of operations or financial condition of the
Company and the Subsidiaries, taken as a whole.
"Continuing Director" mean any member of the Board of Directors on the
latest Closing Date and any other member of the Board of Directors who shall be
recommended or elected to succeed or become a Continuing Director by a majority
of Continuing Directors who are then members of the Board of Directors
"Contract" means any agreement, arrangement, bond, commitment,
franchise, indemnity, indenture, instrument, lease, license or understanding,
whether or not in writing.
"Contractual Obligations" means as to any Person, any provision of any
security issued by such Person or of any agreement, undertaking, contract,
indenture, mortgage,
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deed of trust or other instrument to which such Person is a party or by which it
or any of its property is bound.
"Delaware Certificate" means the Certificate of Incorporation of NewCo,
to be filed with the Secretary of State of the State of Delaware as an exhibit
to the Certificate of Merger (Delaware), in the form attached hereto as Exhibit
C.
"Encumbrance" means any claim, charge, easement, hypothecation,
assignment, preference, priority, preferential arrangement of any kind or nature
whatsoever (excluding preferred stock and equity-related preferences),
encumbrance, lease, covenant, security interest, lien (statutory or other),
option, pledge, rights of others, restriction (whether on voting, sale,
transfer, disposition or otherwise), whether imposed by agreement,
understanding, law, equity or otherwise, except for any restrictions on transfer
generally arising under any applicable U. S. federal or state securities law.
"Environmental Laws" means federal, state and local laws, principles of
common law, regulations and codes, as well as orders, decrees, judgments or
injunctions issued, promulgated, approved or entered thereunder relating to
pollution, protection of the environment or public health and safety.
"Exchange Act" means the Securities Exchange Act of 1934, as amended
(or any successor statute thereto), and the rules and regulations of the SEC
promulgated thereunder.
"GAAP" means generally accepted accounting principles in effect from
time to time in the United States.
"Governmental Authority" means the government of any domestic or
foreign state, city, locality or other political subdivision thereof, any
agency, bureau, board, commission, count, department, official, tribunal or any
other instrumentality of any such government, any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government, and any corporation or other entity owned or controlled, through
stock or capital ownership or otherwise, by any of the foregoing.
"Knowledge of the Company" means the actual knowledge of the executive
officers of the Company without investigation.
"Law" means any constitutional provision, statute or other law, rule,
regulation, or interpretation of any Governmental Authority and any Order.
"Licenses" means any certificates, permits, licenses, franchises,
consents, approvals, orders, authorizations and clearances from appropriate
Governmental Authorities.
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"Loss" means any action, cost, damage, disbursement, expense,
liability, loss, deficiency, diminution in value, obligation, penalty or
settlement of any kind or nature, whether foreseeable or unforeseeable,
including but not limited to, interest or other carrying costs, penalties,
legal, accounting and other professional fees and expenses incurred in the
investigation, collection, prosecution and defense of claims and amounts paid in
settlement, that may be imposed on or otherwise incurred or suffered by the
specified Person.
"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 materially adversely effects the ability of the Company or
NewCo to consummate the transactions contemplated by this Agreement in any
respect or impairs or delays the ability of the Company to effect the First
Closing, the Second Closing or the Third Closing.
"Merger" means the merger of the Company into NewCo, in accordance with
the Certificate of Merger (Delaware).
"NASDAQ" means the NASDAQ Small Cap Market of the National Association
of Securities Dealers, Inc. Automated Quotation System.
"NewCo" means a corporation to be formed under the laws of the State of
Delaware and wholly-owned by the Company.
"New York Certificate" means the Certificate of Incorporation of the
Company, as the same has been amended and in effect on the date hereof.
"Order" means any decree, injunction, judgment, order, ruling,
assessment or writ of any Governmental Authority.
"Person" means any individual, firm, corporation, partnership, limited
liability company, trust, incorporated or unincorporated association, joint
venture, joint stock company, Governmental Authority or other entity of any
kind, and shall include any successor (by merger or otherwise) of such entity.
"Quarterly Reports" means the Company's Quarterly Reports on Form
10-QSB or Form 10-Q, as the case may be, for the quarters ended September 30,
2000, June 30, 2000, March 31, 2000, September 30, 1999, June 30, 1999 and March
31, 1999, each as filed with the SEC.
"Related Registrable Securities" means, with respect to the Common
Stock issuable upon conversion or exchange of the Series B Stock, any securities
of the Company issued or issuable with respect to such shares of Common Stock by
way of a
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dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization or otherwise.
"Registrable Securities" means each of the following: (a) any shares of
Common Stock owned by a Purchaser issued or issuable upon conversion of shares
of Series B Stock, (b) any shares of Common Stock owned by a Purchaser issued or
issuable upon exercise of the Purchasers' Warrants and (c) Related Registrable
Securities.
"Requirements of Law" means as to any Person, any law, treaty, rule,
regulation, right, privilege, qualification, license or franchise or
determination of an arbitrator or a court or other Governmental Authority or a
stock exchange, in each case applicable or binding upon such Person or any of
its property or to which such Person or any of its property is subject or
pertaining to any or all of the transactions contemplated or referred to herein.
"SEC" means the Securities and Exchange Commission.
"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, 1999
and prior to any Applicable Closing Date 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.
"Securities Act" means the Securities Act of 1933, as amended (or any
successor statute thereto), and the rules and regulations of the SEC promulgated
thereunder.
"Subsidiary" means, as of the relevant date of determination, with
respect to any Person, a corporation or other entity of which 50% or more of the
voting power of the outstanding voting equity securities or 50% or more of the
outstanding economic equity interest is held, directly or indirectly, by such
Person. Unless otherwise qualified, or the context otherwise requires, all
references to a "Subsidiary" or to "Subsidiaries" in this Agreement shall refer
to a Subsidiary or Subsidiaries of the Company.
"Surviving Corporation" means the surviving entity in the Merger, which
shall be a Delaware corporation. From and after the effective time of the
Merger, all references herein to the Company shall mean the Surviving
Corporation.
"Transaction Documents" means collectively, this Agreement (including
the schedules attached hereto), the Certificate of Merger (New York), the
Certificate of Merger (Delaware), the New Notes and the Amended Notes.
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1.2 Additional Definitions. The following terms are defined in the
section set forth opposite such term.
Term Section
Additional Notes Preamble
Agreement Preamble
Amended Notes 2.1(b)
Applicable Closing Date 5
Approved Underwriter 13.2(e)
Audited Financials 3.7
Basic Subscription Right 2.3(b)
Blackout Period 13.2(c)
Common Share Price Preamble
Company Preamble
Company Shareholders Meeting 3.28
Company Underwriter 10.3
Conditional Subscription 2.4
Conversion Stock 11.7(b)
Deferral Notice 13.2(f)
Deferral Period 13.2(f)
Delivery Date 11.7(c)
Demand Notice 13.2(a)
Demand Registration 13.2(a)
Demand Shelf Registration 13.2(a)
ERISA 3.14(a)
Excess Shares 2.3(b)
Expiration Date 2.3(c)
Financials 3.7
First Closing 2.1(a)
First Closing Date 2.1(a)
First Round Notes Preamble
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First Round Warrants Preamble
Holders' Counsel 13.5(a)(ii)
HSR Act 9.4
Inspector 13.5(a)(viii)
Intellectual Property 3.11
Letter 11.7(c)
NASD 13.5(a)(xiii)
New Notes Preamble
Original Notes Preamble
Oversubscription Privilege 2.3(b)
Prospectus 3.28(c)
Proxy Statement 3.28(a)
Public 2.4
Purchasers Preamble
Purchasers' Warrants Preamble
Record Date 2.3(a)
Records 13.5(a)(viii)
Registration Expenses 13.6
Registration Rights Indemnified Party 13.7(c)
Registration Rights Indemnifying Party 13.7(c)
Registration Statement 3.28(b)
Reporting Agreement 11.7(a)
Requesting Holders 13.3
Requisite Company Vote 3.29
Rights Offering Preamble
Rights Shares Preamble
Second Closing 2.2
Second Closing Date 2.2
Series A Stock Preamble
Series B Stock Preamble
Shelf Registration Statement 13.2(a)
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Special Committee Preamble
Standby Commitment Preamble
Stockholder 13.2(a)
Subsequent Shelf Registration 13.2(d)
Tax Returns 11.7(a)
Treasury Regulations 11.7(b)
Unaudited Financials 3.7
Underlying Share 2.3(b)
USRPHC 11.7(b)
Withdrawal Period 13.2(f)
SECTION 2 ISSUANCE OF THE NOTES AND SHARES; RIGHTS OFFERING
2.1 Issuance of Notes.
(a) Subject to the terms and conditions of this Agreement, the
closing of the sale and purchase of the New Notes (the "First Closing") shall
take place at the offices of Paul, Weiss, Rifkind, Wharton & Garrison, 1285
Avenue of the Americas, New York, New York 10019-6064 at 10:00 a.m. on November
__, 2000 or on such other date and at such other time as the Purchasers and the
Company may mutually agree (the "First Closing Date"). On the First Closing
Date, 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, New Notes, in
the form attached as Exhibit D and in the amounts set forth opposite each
Purchaser's name on Schedule 1 hereto, for an aggregate purchase price of
$5,000,000. At the First Closing, the Company shall deliver to each Purchaser a
duly executed New Note, in the aggregate principal amount set forth opposite
such Purchaser's name on Schedule 1 hereto, registered in the name of such
Purchaser or its nominees, with appropriate issue stamps, if any, affixed at the
expense of the Company, against payment by each Purchaser of the purchase price
set forth opposite such Purchaser's name on Schedule 1 hereto by wire transfer
of immediately available funds to an account designated by the Company not less
than two Business Days prior to the First Closing.
(b) At the First Closing, subject to the terms and conditions of
this Agreement, the Company shall issue amended Subordinated Convertible Notes
in the form of Exhibit E (the "Amended Notes") to each Purchaser in an aggregate
principal amount equal to and in exchange for the Original Notes held by such
Purchaser. Schedule 2.1 sets forth a list of Original Notes.
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2.2 Transactions at the Second Closing. The New Notes and the Amended
Notes will automatically be converted into shares of Series B Stock at a closing
(the "Second Closing") to occur (the "Second Closing Date") as soon as
reasonably practicable following the satisfaction or waiver of the conditions
set forth in Articles 5 and 7. The Second Closing shall take place at the
offices of Paul, Weiss, Rifkind, Wharton & Garrison, 1285 Avenue of the
Americas, New York, New York, 10019-6064. At the Second Closing, the Company
shall deliver to each Purchaser duly executed certificates representing the
shares of Series B Stock into which the New Notes and Amended Notes are
converted. Each certificate shall be 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 Encumbrance, and shall be delivered against
delivery by the Purchasers of the New Notes and Amended Notes.
2.3 Third Closing.
(a) Rights Offering
(i) On a date (the "Record Date") to be determined by the
Board of Directors in accordance with the Delaware Certificate and Bylaws of the
Company and the applicable rules of the NASDAQ but which is (x) at least five
days prior to the effective date of the Registration Statement and (y) as soon
as practicable after the consummation of the Merger, the Company shall declare a
dividend (subject to the Registration Statement becoming effective at a future
date) to all holders of Common Stock of record as of the Record Date of
transferable rights (each right to purchase one share of Common Stock is
hereinafter referred to as a "Right") to acquire in the aggregate 8,547,009
shares of Common Stock at a price per share equal to the Common Share Price. As
soon as practicable following the effective date of the Registration Statement,
the Company will distribute such Rights to such holders of Common Stock.
(ii) Each Right shall entitle the holder thereof to acquire
(the "Basic Subscription Privilege") one share of Common Stock (an "Underlying
Share") at the Common Share Price. All holders of Rights who exercise the Basic
Subscription Privilege may also subscribe for additional Underlying Shares that
are not otherwise purchased pursuant to the exercise of Rights ("Excess Shares")
at the Common Share Price, if any (the "Oversubscription Privilege"). If an
insufficient number of Excess Shares are available to satisfy fully all
elections to exercise the Oversubscription Privilege, the available Excess
Shares shall be prorated among holders who exercise their Oversubscription
Privilege. The "Rights Offering" means the offering of Underlying Shares to
holders of Rights pursuant to both the Basic Subscription Privilege and the
Oversubscription Privilege.
(iii)The expiration date of the Rights Offering (the
"Expiration Date") shall be no later than the date which is 45 calendar days
following the date (subject to the Company's right to extend such date for a
period not to exceed 20 days)
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upon which the Prospectus is first sent to holders of record of the Common Stock
as of the Record Date. The Prospectus shall be sent to such holders on or about
the effective date of the Registration Statement.
(iv) Except as otherwise provided by this Agreement, the
terms of the Rights Offering shall be set forth in the Prospectus forming a part
of the Registration Statement which terms shall be reasonably satisfactory to
the Purchasers and the Special Committee.
(v) The Company agrees to support the Rights Offering through
the development and implementation of a timely coordinated "roadshow" to current
stockholders.
(vi) The Purchasers hereby waive their right to purchase
shares in the Rights Offering pursuant to the preemptive rights granted in
Section 8 of the Certificate of Amendment of the Certificate of Incorporation of
the Company, dated July 27, 1999.
(b) Conditional Subscription. Subject to the terms and conditions
contained in this Agreement, if all Underlying Shares are not purchased pursuant
to the Rights Offering (including pursuant to the Oversubscription Privilege),
the Purchasers and the Company hereby agree that, immediately following the
Expiration Date, the Purchasers shall subscribe for at the Common Share Price,
such number of shares of Common Stock (the "Conditional Subscription"), equal to
the lesser of (i) the total number of shares of Common Stock available to be
purchased by holders of Rights (the "Public"), minus the total number of shares
of Common Stock actually purchased by the Public, and (ii) 4,273,504 shares of
Common Stock.
(c) Third Closing. Subject to the terms and conditions of this
Agreement, the closing of the sale and purchase of the Conditional Subscription
(the "Third Closing") shall take place at the offices of Paul, Weiss, Rifkind,
Wharton & Garrison, 1285 Avenue of the Americas, New York, New York 10019-6064
as soon as practicable following the satisfaction or waiver of the conditions
set forth in Articles 5 and 8 with respect to the Third Closing (the "Third
Closing Date").
(d) Transactions at the Third Closing. At the Third Closing, the
Company will sell to and the Purchasers will purchase the shares subject to the
Conditional Subscription, if any, at a price per share equal to the Common Share
Price. At the Third Closing, the Company shall deliver to each Purchaser duly
executed certificates representing the number of shares purchased by it pursuant
to the Conditional Subscription. Each certificate shall be 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 Encumbrance, and
shall be delivered against payment by each Purchaser in an amount equal to the
product of the Common Share Price multiplied by the number of shares of Common
Stock to be purchased by that Purchaser, by wire
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transfer of immediately available funds to an account specified in a notice
delivered by the Company.
SECTION 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND NEWCO
Each of the Company and NewCo, jointly and severally, hereby represents
and warrants to each Purchaser as follows:
3.1 Corporate Existence and Power.
(a) The Company is a corporation duly organized, validly existing
and in good standing under the laws of the State of New York and NewCo is, and
on the Second Closing Date the Surviving Corporation will be, a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. The Company has the corporate power and authority to own, lease and
operate its properties and to conduct its business as currently conducted and as
contemplated to be conducted. The Company is duly qualified to transact business
as a foreign corporation and is in good standing in each jurisdiction in which
the conduct of its business or its ownership, leasing or operation of property
requires such qualification, other than any failure to be so qualified or in
good standing as would not singly or in the aggregate with all such other
failures reasonably be expected to have a Material Adverse Effect.
(b) True, correct and complete copies of the New York Certificate
and the By-Laws as in effect on the date hereof have been provided by the
Company to the Purchasers.
(c) NewCo is a newly-formed entity that has heretofore conducted
no business, owns no properties or assets and is subject to no liabilities other
than its obligations under this Agreement.
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3.2 Power and Authority.
(a) Each of the Company and NewCo 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
each of the Company and NewCo of this Agreement and each of the Transaction
Documents to which it is a party and the consummation by each of them of the
transactions contemplated hereby and thereby have been duly authorized and
approved by the Board of Directors of each of them and no further corporate
action on the part of either the Company or NewCo is necessary to authorize the
execution, delivery and performance by the Company and NewCo of this Agreement
or the consummation by each of them of the transactions contemplated hereby
(assuming the Requisite Company Vote is obtained). This Agreement has been duly
executed and delivered by the Company and NewCo and is a valid and binding
obligation of each of them, enforceable against the Company and NewCo 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) As of the Second Closing Date, the Board of Directors of the
Company will have duly adopted the Certificate of Merger (New York) and the
Board of Directors of NewCo will have duly adopted the Certificate of Merger
(Delaware). No further corporate action (including any shareholder approvals) on
the part of the Company will be necessary as of the Second Closing Date to
authorize the amendment of the terms of the Series A Stock, issuance of the
Series B Stock or the Merger, other than filing the Certificate of Merger (New
York) with the Secretary of State of the State of New York and Certificate of
Merger (Delaware) with the Secretary of State of the State of Delaware.
3.3 No Contravention, Conflict, Breach, Etc. The execution, delivery
and performance of this Agreement and each Transaction Document to which it is a
party by the Company and NewCo 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 NewCo or
cause the Company or any of its Subsidiaries or NewCo to be required to redeem,
repurchase or offer to repurchase any of their respective indebtedness under (i)
the charter documents or by-laws of the Company or any of its Subsidiaries or
NewCo, (ii) any material Law of any Governmental Authority having jurisdiction
over the Company or any of its Subsidiaries or NewCo 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,
<PAGE>
permit, license or other agreement or instrument to which the Company or any of
its Subsidiaries or NewCo is a party or by which the Company or any of its
Subsidiaries or NewCo is bound or to which any of the assets, properties or
operations of the Company or any of its Subsidiaries or NewCo is subject.
3.4 Consents. Except as set forth on Schedule 3.4, no consent,
approval, authorization, order, registration, filing or qualification 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 or NewCo for the execution, delivery and performance
by the Company or NewCo of this Agreement and each Transaction Document to which
it is a party and the consummation of the transactions contemplated hereby and
thereby, except consents which are not material to the business or operations of
the Company and its Subsidiaries, taken as a whole.
3.5 Subsidiaries. Schedule 3.5 sets forth a complete and accurate list
of all of the Subsidiaries of the Company together with their respective
jurisdictions of incorporation or organization. Except for its Subsidiaries, the
Company holds no equity, partnership, joint venture or other interest in any
Person. True and complete copies of the certificate of incorporation, by-laws
and other organizational documents of the Subsidiaries as in effect on the date
hereof have been provided by the Company to the Purchasers. Each Subsidiary of
the Company has been duly incorporated or organized and is validly existing as a
corporation or other legal entity in good standing under the laws of the
jurisdiction of its incorporation or organization, has the corporate or other
organizational power and authority to own, lease and operate its properties and
to conduct its business as currently conducted and is duly qualified to transact
business as a foreign corporation or other legal entity and is in good standing
in each jurisdiction in which the conduct of its business or its ownership,
leasing or operation of property requires such qualification, other than any
failure to be so qualified or in good standing as would not singly or in the
aggregate with all such other failures reasonably be expected to have a Material
Adverse Effect. All of the outstanding Capital Stock of each Subsidiary of the
Company has been duly authorized and validly issued, is fully paid and
nonassessable and is owned by the Company, directly or through other
Subsidiaries of the Company, free and clear of any Encumbrance, and there are no
rights granted to or in favor of any third party (whether acting in an
individual, fiduciary or other capacity), other than the Company or any
Subsidiary of the Company, to acquire any such Capital Stock, any additional
capital stock or any other securities of any such Subsidiary. There exists no
restriction, other than those pursuant to applicable law or regulation, on the
payment of cash dividends by any Subsidiary.
<PAGE>
3.6 SEC Documents.
(a) The Company has made available to the Purchasers true and
complete copies of all SEC Documents.
(b) As of its filing date, each SEC Document filed pursuant to the
Exchange Act (i) complied in all material respects with the applicable
requirements of the Exchange Act and (ii) did not contain any untrue statement
of a material fact or omit to state any material fact necessary in order to make
the statements made therein, in the light of the circumstances under which they
were made, not misleading
(c) Each final registration statement filed with the SEC, as
amended or supplemented prior to the Applicable Closing Date, pursuant to the
Securities Act, as of the date such statement or amendment became or will become
effective (i) complied or will comply in all material respects with the
applicable requirements of the Securities Act and (ii) did not or will not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading (in the case of any prospectus, in light of the circumstances
under which they were made).
3.7 Financial Statements. The audited financial statements and notes
included in the SEC Documents (the "Audited Financials") comply in all material
respects with the requirements of the Exchange Act and the rules and regulations
of the SEC thereunder, were prepared in accordance with GAAP consistently
applied throughout the period involved except as noted therein, and fairly
present in all material respects the financial condition, results of operations,
cash flows and changes in shareholders' equity of the Company and its
Subsidiaries at the dates and for the periods presented. Since December 31,
1999, except as disclosed in the SEC Documents filed prior to the date hereof or
as previously disclosed to the Purchasers in writing, the Company has not
incurred any material liabilities other than in the ordinary course of business
of the Company, and there has been no change, and no development or event
involving a prospective change, which has had or could reasonably be expected to
have, a Material Adverse Effect. The unaudited quarterly consolidated financial
statements and the related notes included in the SEC Documents, previously
delivered by the Company to the Purchasers (the "Unaudited Financials" and
together with the Audited Financials, the "Financials"), fairly present in all
material respects the financial condition, results of operations and cash flows
of the Company and its Subsidiaries at the dates and for the periods to which
they relate, subject to normal year-end adjustments, and have been prepared in
accordance with GAAP applied on a consistent basis except as otherwise stated
therein and have been prepared on a basis consistent with that of the audited
financial statements referred to above subject to normal year-end adjustments
except as otherwise stated therein.
<PAGE>
3.8 No Existing Violation, Default, Etc. The Company is not in
violation (i) of any provision of the New York Certificate as of the First
Closing Date or the Delaware Certificate as of the Second Closing Date and Third
Closing Date, its By-Laws or other organizational documents or (ii) of any
applicable Law or regulation, which violation has or would reasonably be
expected to have a Material Adverse Effect. No breach, event of default or event
that, but for the giving of notice or the lapse of time or both, would
constitute an event of default exists under any indenture, mortgage, loan
agreement, note or other agreement or instrument for borrowed money, any
guarantee of any agreement or instrument for borrowed money or any lease,
permit, license or other agreement to which the Company is a party or by which
the Company is bound or to which any of the properties, assets or operations of
the Company is subject, which breach, event of default, or event that, but for
the giving of notice or the lapse of time or both, would constitute an event of
default, has or would reasonably be expected to have a Material Adverse Effect.
3.9 Licenses and Permits. The Company and its Subsidiaries have such
Licenses as are necessary to own, lease or operate their properties and to
conduct their businesses in the manner described in the SEC Documents and as
currently owned or leased and conducted and all such Licenses are valid and in
full force and effect except such Licenses that the failure to have or to be in
full force and effect individually or in the aggregate have not had, and would
not reasonably be expected to have, a Material Adverse Effect. None of the
Company or any of its Subsidiaries has received any written notice that any
violations are being or have been alleged in respect of any such License and no
proceeding is pending or, to the Knowledge of the Company, threatened, to
suspend, revoke or limit any such License the effect of which would reasonably
be expected to have a Material Adverse Effect. The Company and its Subsidiaries
are in compliance with their respective obligations under such Licenses, with
such exceptions as individually or in the aggregate have not had, and would not
reasonably be expected to have, a Material Adverse Effect, and no event has
occurred that allows, or after notice or lapse of time would allow, revocation,
suspension, limitation or termination of such Licenses, except such events as
have not had, or would not reasonably be expected to have, a Material Adverse
Effect.
3.10 Title to Properties. The Company and its Subsidiaries have
sufficient title to all material properties (real and personal) owned by the
Company and any such Subsidiary that are necessary for the conduct of the
business of the Company and any such Subsidiary as currently conducted, free and
clear of any Encumbrance that may materially interfere with the conduct of its
business, and all material properties held under lease by the Company and the
Subsidiaries are held under valid, subsisting and enforceable leases.
3.11 Intellectual Property. There are no intellectual property rights
or other intangible property rights (other than standard license agreements and
other related rights acquired by the Company or under which the Company is the
licensee in connection with the Company's use of administrative, ministerial,
accounting and financial office automation software and related products)
including, without limitation, (i) trademarks,
<PAGE>
service marks, fictitious or assumed names, trade dress, trade names, brand
names, Internet domain names, designs, logos, or corporate names, whether
registered or unregistered, and all registrations and applications for
registration thereof; (ii) copyrights, including all renewals and extensions
thereof, copyright registrations and applications for registration thereof, and
non-registered copyrights; (iii) trade secrets, concepts, ideas, designs,
research, processes, procedures, techniques, methods, know-how, data, mask
works, discoveries, inventions, modifications, extensions, improvements,
formulae and other proprietary rights (whether or not patentable or subject to
copyright, mask work, or trade secret protection); and (iv) computer software
programs, including, without limitation, all source code, object code, and
documentation related thereto, patents, patent applications, and other patent
rights (including any divisions, continuations, continuations-in-part,
substitutions, or reissues thereof, whether or not patents are issued on any
such applications and whether or not any such applications are modified or
resubmitted) owned or licensed by the Company or any of its Subsidiaries
("Intellectual Property") other than as previously disclosed in writing to the
Purchasers or as disclosed in Schedule 3.11. Except as disclosed in Schedule
3.11 or as previously disclosed to the Purchasers in writing: (i) the Company
owns or possesses sufficient legal rights to all Intellectual Property necessary
for its business as presently conducted without any conflict or infringement of
rights of others; (ii) other than those contracts, agreements, and instruments
required to be filed as an exhibit to the Company's annual report on Form 10-KSB
for the year ended December 31, 1999, there are no material outstanding options,
licenses, or agreements of any kind relating to the Intellectual Property nor is
the Company bound by or a party to any material options, licenses, or agreements
of any kind with respect to the intellectual property of any other person or
entity; (iii) to the Knowledge of the Company, the Company has not infringed
upon or otherwise violated the intellectual property rights of any third party;
(iv) other than as previously disclosed to the Purchasers in writing or as set
forth on Schedule 3.11, the Company has not received any claim, charge, demand,
notice or other communication alleging that the Company has violated or, by
conducting its business as proposed, would violate any intellectual property
rights of any other person or entity; (v) other than as previously disclosed to
the Purchasers in writing or as set forth on Schedule 3.11, the Company is
unaware of any facts that would form a reasonable basis for an action or claim
by others alleging infringement by the Company of Intellectual Property of
others; and (vi) all of the Company's Intellectual Property is owned by the
Company, free and clear of all liens and encumbrances and held in the Company's
name. None of the execution or delivery of any Transaction Documents, or the
carrying on of the Company's business by the employees of the Company, will
conflict with or result in a breach of the terms, conditions, or provisions of,
or constitute a default under, any contract, covenant or instrument related to
the Company's Intellectual Property. The Company has taken all action reasonably
necessary and desirable to maintain and protect each item of Intellectual
Property owned by the Company. Each employee, officer and director of the
Company has executed an agreement regarding inventions and confidentiality
substantially in the form or forms delivered to the Purchasers. The Company is
unaware of uncited prior art that is more pertinent than the art already of
record in the U.S. Patent
<PAGE>
and Trademark Office in connection with the patents and patent applications of
the Company's Intellectual Property.
3.12 Environmental Matters. To the Company's Knowledge, the Company and
its Subsidiaries and their operations and properties are and have been in
compliance in all material respects with all applicable Environmental Laws, and
no material expenditures are or, to the Company's Knowledge, will be required in
order to comply with any applicable Environmental Laws. There is no civil,
criminal or administrative judgment, action, suit, demand, claim, hearing,
notice of violation, investigation, proceeding, notice or demand letter pending
or to the Company's Knowledge, threatened against the Company or any of its
Subsidiaries pursuant to Environmental Laws which could reasonably be expected
to result in a material fine, penalty or other obligation, cost or expense.
There are no past or present events, conditions, circumstances, activities,
practices, incidents, agreements, actions or plans which may prevent compliance
by the Company or any of its Subsidiaries with, or which have given rise to, or,
to the Company's Knowledge, will give rise to, material liability to the Company
or any of its Subsidiaries under Environmental Laws.
3.13 Capitalization.
(a) As of the date hereof, the authorized capital stock of the
Company consists of 15,000,000 shares of Common Stock and 2,000,000 shares of
Preferred Stock, $.01 par value, of which 500,000 shares have been designated
Series A Stock. 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 Stock. All such shares of Capital Stock of the Company have been
duly authorized and are fully paid and non-assessable.
(b) As of the Second Closing Date, immediately following the
consummation of the Merger, the authorized capital stock of the Surviving
Corporation will consist of 40,000,000 shares of Common Stock and 25,000,000
shares of Preferred Stock, $.01 par value, of which 500,000 shares will have
been designated Series A Stock and 9,000,000 shares will have been designated
Series B Stock. As of the Second Closing Date, the issued and outstanding
capital stock of the Surviving Corporation will consist of 4,924,906 shares of
Common Stock (excluding shares that may be issued after the date hereof upon
exercise of stock options identified on Schedule 3.13), 500,000 shares of Series
A Stock and 8,547,009 shares of Series B Stock (excluding shares of Series B
Stock issued upon conversion of New Notes and Amended Notes as a result of the
accrued and unpaid interest on the Notes). All such shares of Capital Stock of
the Surviving Corporation will be duly authorized and upon conversion of the
Amended Notes and the New Notes, each as contemplated by the Transaction
Documents, all such shares shall be fully paid and non-assessable. Immediately
prior to the Second Closing Date, the 500,000 shares of Series A Stock will be
convertible into 952,380 shares of Common Stock and each share of Series B Stock
will be converted into one share of
<PAGE>
Common Stock, in each case subject to antidilution provisions set forth in the
Delaware Certificate.
(c) As of the Third Closing Date, the Surviving Corporation shall
have the same authorized capital stock as it had on the Second Closing Date, but
the issued and outstanding capital stock will consist of a minimum of 9,198,410
and a maximum of 13,471,915 shares of Common Stock (excluding shares that may be
issued after the date hereof upon exercise of stock options identified on
Schedule 3.13), after giving effect to the Rights Offering.
(d) Except as set forth in Schedule 3.13 and except as
contemplated by this Agreement, there are no shares of Capital Stock of the
Company reserved for issuance. The shares of Common Stock issuable upon
conversion of the Series A Stock and upon exercise of the Purchasers' Warrants
and payment of the exercise price set forth in the Purchasers' Warrants are, and
on the First Closing Date will be, duly authorized and, when so issued, will be
fully paid and non-assessable. The shares of Common Stock issuable upon
conversion of the Series B Stock, when issued, will be duly authorized and, when
issued on conversion of the New Notes and the Amended Notes in accordance with
their terms, will be fully paid and non-assessable. At the Third Closing, the
shares of Common Stock purchased by the Purchasers, upon payment of the purchase
price for such shares, will be fully paid and non-assessable. At the (1) First
Closing, except for (i) the Purchasers' Warrants, (ii) the Amended Notes, (iii)
the New Notes, (iv) the Series A Stock and the Series B Stock and (v) as set
forth in Schedule 3.13, and (2) at the Second Closing and Third Closing, except
for (i) the Purchasers' Warrants, (ii) the Series A Stock, (iii) the Series B
Stock and (iv) as set forth on Schedule 3.13, 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
exchangeable for shares of Capital Stock or other securities of the Company or
any of its Subsidiaries, nor, except as required by the Transaction Documents or
as set forth in Schedule 3.13, is the Company or any Subsidiary 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 the Purchaser's ability to transfer shares of Capital
Stock of the Company.
<PAGE>
3.14 Employee Benefits.
(a) Except for the plans described in the SEC Documents and those
listed in Schedule 3.14 (the "Benefit Plans"), there are no employee benefit
plans or arrangements of any type (including, without limitation, plans
described in Section 3(3) of the Employee Retirement Income Security Act of
1974, as amended and the regulations thereunder ("ERISA") under which the
Company has or in the future could have directly, or indirectly through a
Commonly Controlled Entity (within the meaning of Sections 414(b), (c), (m) and
(o) of the Code), any material liability with respect to any current or former
employee of the Company or any Commonly Controlled Entity. No such Benefit Plan
is a "multiemployer plan" (within the meaning of ERISA Section 4001(a)(3)) or
subject to Title IV of ERISA and, the Company has never contributed to, or had
any obligation to contribute to, any such multiemployer plan or any plan subject
to Title IV of ERISA.
(b) With respect to each Benefit Plan: (i) such Benefit Plan has
been maintained and administered at all times in material compliance with its
terms and applicable law and regulation; (ii) no event has occurred and to the
Knowledge of the Company, there exists no circumstance under which the Company
could directly, or indirectly through a Commonly Controlled Entity, incur any
material liability under ERISA, the Code or otherwise; (iii) there are no
actions, suits or claims pending or, to the Knowledge of the Company,
threatened, with respect to any Benefit Plan or against the assets of any
Benefit Plan with respect to which suits management of the Company reasonably
believes the Company could incur any material liability; (iv) all contributions
and premiums due and owing to any Benefit Plan have been made or paid on a
timely basis and no "accumulated funding deficiency," as defined in Code Section
412, has been incurred, whether or not waived; and (v) if such Benefit Plan is
intended to be qualified under Section 401(a) of the Code, such Benefit Plan has
been determined to be so qualified and each trust created under such Benefit
Plan has been determined to be exempt from tax under Section 501(a) of the Code
and to the Knowledge of the Company, no event has occurred since the date of
such determinations, including effective changes in laws or regulations or
modifications to the Benefit Plans, that would adversely affect such
qualification or tax exempt status.
(c) The Company has no Postretirement Benefit Obligation (as
defined in Statement of Financial Accounting Standards No. 106) in respect of
post-retirement health and medical benefits for current and former employees of
the Company. No condition exists that would prevent the Company from amending or
terminating any plan providing health or medical benefits in respect of current
or former employees of the Company.
(d) No employee or former employee of the Company will become
entitled to any bonus, retirement, severance, job security or similar benefit or
enhanced
<PAGE>
such benefit (including acceleration of vesting or exercise of an incentive
award, stock option or restricted security) as a result of the transactions
contemplated hereby.
(e) All persons classified by the Company as independent
contractors satisfy the requirements of applicable law to be so classified and
the Company has no obligation to provide benefits to any such person under any
Benefit Plan.
3.15 Taxes. The Company and its Subsidiaries have filed or caused to be
filed, or have properly filed extensions for, all material Tax returns that are
required to be filed and have paid or caused to be paid all material Taxes as
shown on said returns and on all material assessments received by it to the
extent that such Taxes have become due, except Taxes the validity or amount of
which is being contested in good faith by appropriate proceedings and with
respect to which adequate reserves, in accordance with GAAP, have been set
aside. The Company and its Subsidiaries have paid or caused to be paid, or have
established reserves that the Company or such Subsidiaries reasonably believe to
be adequate in all material respects, for all Tax liabilities applicable to the
Company and its Subsidiaries for all fiscal years that have not been examined
and reported on by the taxing authorities (or closed by applicable statutes).
Schedule 3.15 sets forth the tax year through which United States Federal income
tax returns of the Company and its Subsidiaries have been examined and closed.
For purposes of this Section 3.15, "Tax" or "Taxes" means any federal, state,
county, local, foreign and other taxes (including, without limitation, income,
profits, premium, estimated, excise, sales, use, occupancy, gross receipts,
franchise, ad valorem, severance, capital levy, production, transfer,
withholding, employment, unemployment compensation, payroll and property taxes,
import duties and other governmental charges and assessments), whether or not
measured in whole or in part by net income, and including deficiencies,
interest, additions to tax or interest, and penalties with respect thereto, and
including expenses associated with contesting any proposed adjustments related
to any of the foregoing.
3.16 Litigation. Except as previously disclosed to the Purchasers in
writing or in SEC Documents filed with the SEC prior to the date of this
Agreement, there are no pending actions, suits, proceedings, arbitrations or
investigations, royalty or other audits, complaints, against or affecting the
Company or any of its Subsidiaries or any of their respective properties, assets
or operations, or with respect to which the Company or any such Subsidiary is
responsible by way of indemnity or otherwise (together "Litigation Claims"),
that are required under the Exchange Act to be described in such SEC Documents
or that could singly, or in the aggregate, with all such other Litigation
Claims, reasonably be expected to have a Material Adverse Effect and, to the
Knowledge of the Company, no such Litigation Claims are threatened.
3.17 Labor Relations. Neither the Company nor any of its Subsidiaries
is engaged in any unfair labor practice. Except as disclosed in the SEC
Documents filed with the SEC prior to the date of this Agreement or as set forth
on Schedule 3.17, (a) no grievance or arbitration proceeding arising out of or
under collective bargaining agreements is pending or, to the Knowledge of the
Company, threatened against the
<PAGE>
Company or any of its Subsidiaries; (b) no strike, material labor dispute,
slowdown or stoppage has occurred within the past 36 months or is pending or, to
the Knowledge of the Company, threatened against the Company, any of its
Subsidiaries or any material supplier of the Company; (c) neither the Company
nor any of its Subsidiaries is a party to any collective bargaining agreement or
contract; and (d) no union organizing activities are taking place that affect
the employees of the Company or any Subsidiary.
3.18 Inventory, Etc. The inventory of the Company and its Subsidiaries
is in good and merchantable condition, and suitable and usable or salable in the
ordinary course of business for the purposes for which intended, subject to a
reasonable reserve for obsolescence and out-of-date inventory, and is recorded
in the Financials in accordance with GAAP and consistent with past practice. The
Company has in place reasonable procedures to ensure that it does not purchase
counterfeit articles and, to the Knowledge of the Company, the inventory does
not contain any counterfeit articles. The Company had, as of June 30, 2000, good
and valid title to all of the inventory and other personal property reflected on
the balance sheet included in the Unaudited Financials dated as of June 30, 2000
will have good and valid title to all inventory or personal property reflected
on the balance sheet included in any SEC Document filed after the date hereof.
Except as set forth on Schedule 3.18, neither the Company nor any of its
Subsidiaries knows of any existing fact or circumstance which would be
reasonably likely to adversely affect the supply of materials available to the
Company or any of its Subsidiaries.
3.19 Receivables. All accounts and notes receivable reflected on the
balance sheet included in the Unaudited Financials as of June 30, 2000, and all
accounts and notes receivable arising subsequent to June 30, 2000, (i) have
arisen in the ordinary course of business of the Company or its Subsidiaries and
(ii) subject only to a reserve for bad debts and normal returns, credits,
adjustments and warranty coverage, in each case reflected in the Unaudited
Financials as of June 30, 2000 in accordance with GAAP and consistent with past
practice, have been collected or, subject to the occurrence of unforeseen events
occurring after the date hereof, are collectible in the ordinary course of
business of the Company and its Subsidiaries in the aggregate recorded amounts
thereof in accordance with their terms.
3.20 Investment Company. Neither the Company nor any Person controlling
the Company is, and no such Person after giving effect to the transactions
contemplated hereby will be, an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
3.21 Insurance. The Company has in full force and effect (i) general
liability, (ii) directors and officers, and (iii) media insurance policies, in
each case, with financially sound and responsible insurance companies, with
extended coverage, sufficient in amount (subject to reasonable deductions) in
respect of its properties that might be damaged or destroyed.
<PAGE>
3.22 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 New Notes, the issuance of the Series B
Stock upon conversion of the New Notes and the Amended Notes and the issuance of
Common Stock upon conversion of the Series B Stock will be exempt from the
registration requirements of the Securities Act. Neither the Company nor any
Person acting on its behalf has, in connection with the offering of the New
Notes, the Amended Notes, the Series A Stock or the Series B Stock 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 Securities Act), (ii) any
action involving a public offering within the meaning of Section 4(2) of the
Securities Act, or (iii) any action that would require the registration under
the Securities Act of the offering and sale of any such securities pursuant to
this Agreement or that would violate applicable state securities or "blue sky"
laws. The Rights Offering will not result in the failure of the New Notes to be
entitled to exemption from the registration requirements of the Securities Act.
3.23 Contracts. True and complete copies of all material contracts of
the Company required to be filed since August 1, 1999 as exhibits to SEC
Documents have been made available to the Purchasers by the Company. Neither the
Company nor any of its Subsidiaries nor, to the Knowledge of the Company, any
other party is in breach of or in default under any such contract except for
such breaches and defaults as in the aggregate have not had, and would not
reasonably be expected to, have a Material Adverse Effect. Except as set forth
on Schedule 3.23, the transactions contemplated by this Agreement will not
constitute a change of control under, require the consent of or giving of notice
to, any third party pursuant to, or accelerate vesting or lapse of repurchase
rights under, any material contract to which the Company or any of its
Subsidiaries is a party. There are no amounts that will be payable to any
officers or other employees of the Company as a result of the transactions
contemplated by this Agreement.
<PAGE>
3.24 No Material Adverse Change. Since June 30, 2000, except as
disclosed on Schedule 3.24, (a) the Company and its Subsidiaries have not
incurred any material liability or obligation (indirect, direct or contingent),
or entered into any material oral or written agreement or other transaction,
that is not in the ordinary course of business or that would reasonably be
expected to result in a Material Adverse Effect; (b) the Company and its
Subsidiaries have not sustained any loss or interference with its business or
properties from fire, flood, windstorm, accident or other calamity (whether or
not covered by insurance) that has had or that would reasonably be expected to
have a Material Adverse Effect; (c) there has been no material change in the
indebtedness of the Company and its Subsidiaries; (d) there has been no dividend
or distribution of any kind declared, paid or made by the Company or any of its
Subsidiaries on any class of its capital stock; (e) neither the Company nor any
of its Subsidiaries has made (nor does it propose to make) (i) any material
change in its accounting methods or practices or (ii) any material change in the
depreciation or amortization policies or rates adopted by it, in either case,
except as may be required by law or applicable accounting standards; and (f)
there has been no event causing a Material Adverse Effect, nor any development
that would, singly or in the aggregate, reasonably be expected to result in a
Material Adverse Effect.
3.25 Trade Relations. Except as set forth in Schedule 3.25 or as
previously disclosed in writing to the Purchasers, there exists no actual or, to
the Company's Knowledge, threatened termination, cancellation or limitation of,
or any adverse modification or change in, the business relationship of the
Company or any of its Subsidiaries with, any customer or any group of customers
whose purchases are individually or in the aggregate material to the business of
the Company or any of its Subsidiaries, or with any material supplier, and, to
the Company's Knowledge, there exists no present condition or state of fact or
circumstances that would materially adversely affect the Condition of the
Company or, to the Company's Knowledge, prevent the Company from conducting its
business after the consummation of the transactions contemplated by this
Agreement and each of the other Transaction Documents, in substantially the same
manner in which such business has heretofore been conducted and described in the
SEC Documents.
3.26 Broker's, Finder's or Similar Fees. Except as set forth on
Schedule 3.26, 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.
<PAGE>
3.27 Disclosure; Agreement and Other Documents. The Transaction
Documents and each of the instruments furnished to the Purchasers by the Company
(i) at or prior to the First Closing in connection with the purchase and sale of
the New Notes and Amended Notes, (ii) at or prior to the Second Closing in
connection with the purchase and sale of the Series B Stock, and (iii) at or
prior to the Third Closing in connection with the sale and purchase of shares of
Common Stock pursuant to the Conditional Subscription, 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.
3.28 Proxy Statement/Registration Statement/Prospectus.
(a) The proxy statement (as amended or supplemented, the "Proxy
Statement") to be sent to the Company shareholders in connection with the
special meeting called for the purpose of voting on the Merger, the amendment of
the terms of the Series A Stock and the authorization and issuance of the Series
B Stock (the "Company Shareholders Meeting"), will comply in all material
respects with the requirements of the Exchange Act and the rules and regulations
thereunder, and will not (i) on the date the Proxy Statement is first mailed to
the Company shareholders, and (ii) at the time of the Company Shareholders
Meeting, contain any statement which, at such time and in light of the
circumstances under which it shall be made, is false or misleading with respect
to any material fact, or shall omit to state any material fact necessary in
order to make the statements made therein not false or misleading, or omit to
state any material fact necessary to correct any statement in any earlier
communication with respect to the solicitation of proxies for the Company
Shareholders Meeting which has become false or misleading.
(b) The registration statement (as amended or supplemented, the
"Registration Statement") filed with the SEC in connection with the Rights
Offering will comply in all material respects with the requirements of the
Securities Act and with the rules and regulations thereunder and will not, at
the time the Registration Statement is declared effective by the SEC or on the
Third Closing Date, contain any statement which, at such time and in light of
the circumstances under which it shall be made, is false or misleading with
respect to any material fact, or shall omit to state any material fact necessary
in order to make the statements made therein not false or misleading, or omit to
state any material fact necessary to correct any statement in any earlier
communication with respect to the registration of the Rights Shares which has
become false or misleading. The Rights Offering will be completed under an
effective Registration Statement.
(c) Each preliminary prospectus and the final prospectus to be sent to
the Company stockholders in connection with the Rights Offering (each a
"Prospectus"), will comply in all material respects with the requirements of the
Securities Act and with the rules and regulations thereunder and will not (i) on
the date the Prospectus is first delivered to the Company stockholders, and (ii)
at any time prior to the conclusion of the
<PAGE>
Rights Offering, contain any statement which, at such time and in light of the
circumstances under which it shall be made, is false or misleading with respect
to any material fact, or shall omit to state any material fact necessary in
order to make the statements made therein not false or misleading, or omit to
state any material fact necessary to correct any statement in any earlier
communication with respect to the sale of the Rights Shares which has become
false or misleading.
(d) If at any time prior to the Company Shareholders Meeting or the
conclusion of the Rights Offering, as the case may be, any event relating to the
Company or its Subsidiaries or any of their respective affiliates, officers or
directors should be discovered by the Company which should be set forth in an
amendment or a supplement to the Proxy Statement, Prospectus or Registration
Statement, as the case may be, the Company shall reasonably promptly inform the
Purchasers and shall take such steps as shall be necessary or, in the judgment
of the Purchasers desirable, to correct promptly and file with the SEC such
amendment or supplement (and to the extent appropriate, disseminate it to all
holders of Common Stock). Notwithstanding any other representation made in this
Section 3.28, the Company makes no representation or warranty with respect to
any written information supplied by the Purchasers expressly for the purpose of
being contained in any of the foregoing documents referred to in this Section
3.28.
3.29 Vote Required. The affirmative vote by Company stockholders
representing (a) a majority of the Common Stock and Series A Stock voting
together as a single class (or in the case of the vote on the issuance of
securities to the Purchasers and the change of control effected thereby, a
majority of the shares voted, so long as a quorum is present) and (b) a majority
of the Series A Stock voting as a single class (clauses (a) and (b) being the
"Requisite Company Vote") are the only votes of the holders of any class or
series of the Company's Capital Stock necessary under the New York Certificate,
the rules of NASDAQ, the New York Business Corporation Law or the Delaware
General Corporation Law to approve the Merger, the amendment of the terms of the
Series A, the issuance of the Series B Stock, the issuance of shares of Common
Stock upon conversion of the Series A Stock and the Series B Stock by the
holders thereof and the consummation of the transactions contemplated hereby.
3.30 Privacy of Customer Information. The Company (a) does not use any
of the customer information it receives through its website or otherwise in an
unlawful manner, or in a manner which violates the Company's privacy policy or
the privacy rights of its customers; (b) has not collected any customer
information through its website in an unlawful manner or in violation of its
privacy policy and (c) has adequate security measures in place to protect the
customer information it receives through its website and which it stores in its
computer systems from illegal use by third parties or use by third parties in a
manner which violates the rights of privacy of its customers, except in the case
of clauses (a) and (b) for Company actions that singly or in the aggregate would
not have a Material Adverse Effect. The Company makes representations to its
customers as to the nature of its security measures with respect to customer
information it receives
<PAGE>
through its website, as set forth in the privacy policy on the Company's website
and as described on Schedule 3.30, and abides by the terms of such privacy
policy.
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 and NewCo as follows:
4.1 Existence and Power. Such Purchaser (a) is duly organized and
validly existing under the laws of the jurisdiction of its formation and (b) has
the requisite power and authority to execute, deliver and perform its
obligations under this Agreement.
4.2 Authorization; No Contravention. The execution, delivery and
performance by such Purchaser of this Agreement and the transactions
contemplated hereby, including the purchase of the New Notes and shares of
Common Stock pursuant to the Conditional Subscription, (a) have been duly
authorized by all necessary action, (b) do not contravene the terms of such
Purchaser's organizational documents, or any amendment thereof, and (c) do not
violate, conflict with or result in any breach or contravention of or the
creation of any Encumbrance under, any Contractual Obligation of such Purchaser,
or any Requirement of Law.
4.3 Governmental Authorization; Third Party Consents. No approval,
consent, compliance, exemption, authorization, or other action by, or notice to,
or filing with, any Governmental Authority or any other Person, and no lapse of
a waiting period under a Requirement of Law, is necessary or required in
connection with the execution, delivery or performance (including the purchase
of the New Notes and shares of Common Stock pursuant to the Conditional
Subscription) by, or enforcement against, such Purchaser of this Agreement and
the transactions contemplated hereby.
4.4 Binding Effect. This Agreement has been duly executed and delivered
by such Purchaser and constitutes the legal, valid and binding obligations of
such Purchaser, enforceable against it 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).
4.5 Purchase for Own Account. The New Notes to be acquired by such
Purchaser pursuant to this Agreement and the shares of Series B Stock issuable
upon conversion of the Original Notes and New Notes are being or will be
acquired for its own account and with no intention of distributing or reselling
the New Notes or shares of Series B Stock or any part thereof in any transaction
that would be in violation of the securities laws of the United States of
America, or any state, without prejudice, however,
<PAGE>
to the rights of such Purchaser at all times to sell or otherwise dispose of all
or any part of the New Notes and the shares Series B Stock under an effective
registration statement under the Act, or under an exemption from such
registration available under the Act, and subject, nevertheless, to the
disposition of such Purchaser's property being at all times within its control.
If such Purchaser should in the future decide to dispose of any of the New Notes
or shares of Series B Stock, such Purchaser understands and agrees that it may
do so only in compliance with the Act and applicable state securities laws, as
then in effect. Such Purchaser agrees to the imprinting, so long as required by
law, of a legend on certificates representing the New Notes and shares of Series
B Stock substantially to the following effect:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "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 ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN
APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE ACT."
4.6 Accreditation; Sophistication; Other Securities Laws Matters. Each
Purchaser (a) is an "accredited investor" within the meaning of Rule 501 under
the Securities Act; (b) has sufficient knowledge and experience in investing in
companies similar to the Company so as to be able to evaluate the risks and
merits of its investment in the Company and is able financially to bear the
risks thereof; (c) has had an opportunity to review the SEC Documents and
exhibits thereto and discuss the Company's business, management and financial
affairs with the Company's management; and (d) is a resident of the jurisdiction
listed next to its name on Schedule 1 hereto for purposes of state "blue sky"
securities law purposes.
4.7 Broker's, Finder's or Similar Fees. There are no brokerage
commissions, finder's fees or similar fees or commissions payable by the
Purchasers or any of them, in connection with the transactions contemplated
hereby based on any agreement, arrangement or understanding with such Purchaser
or any action taken by such Purchaser.
4.8 Financial Resources. Each of the Purchasers has adequate financial
resources to meet its payment obligations at the First Closing and the Third
Closing.
<PAGE>
SECTION 5 CONDITIONS TO THE OBLIGATION OF THE PURCHASERS TO CLOSE AT EACH
CLOSING
The (a) obligation of the Purchasers to purchase the New Notes and
shares of Common Stock under the Conditional Subscription, and to perform any
obligations hereunder related to the purchase of the New Notes and Conditional
Subscription and (b) the automatic conversion of the New Notes and Amended Notes
into shares of Series B Stock shall be subject to the satisfaction as determined
by, or waiver by, the Purchasers of the following conditions on or before the
applicable date of Closing (each an "Applicable Closing Date").
5.1 Representations and Warranties. The representations and warranties
of the Company and NewCo contained in Section 3 hereof shall be true and correct
in all material respects at and on the Applicable Closing Date, as if made at
and on such date, except (i) 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 (ii) for any activities or
transactions which may have taken place after the date hereof which are
contemplated by this Agreement.
5.2 Compliance with this Agreement. Each of the Company and NewCo shall
have performed and complied in all material respects with all of the agreements
and conditions set forth herein that are required to be performed or complied
with by the Company or NewCo on or before the Applicable Closing Date.
5.3 Secretary's Certificate. The Purchasers shall have received a
certificate from the Company and NewCo, in form and substance satisfactory to
the Purchasers, dated the Applicable Closing Date and signed by a secretary or
an assistant secretary of the Company, certifying (a) that the attached copies
of the charter documents of such Person as in effect on such date and
resolutions of the Board of Directors of such Person approving this Agreement,
the other Transaction Documents to which it is a party and the transactions
contemplated hereby and thereby, are all true, complete and correct and remain
unamended and in full force and effect, and (b) as to the incumbency and
specimen signature of each officer of such Person executing this Agreement, each
of the other Transaction Documents to which it is a party and any other document
delivered in connection herewith on behalf of the Company or NewCo.
5.4 Officers' Certificate. The Purchasers shall have received a
certificate from the Company and NewCo, in form and substance satisfactory to
the Purchasers, dated the Applicable Closing Date and signed by such Person's
chief executive officer and its treasurer, certifying that (a) the
representations and warranties of such Person contained in Section 3 hereof are
true and correct in all material respects on the Applicable Closing Date, except
those which speak as of a particular date, which shall be true and correct as of
such date, and (b) such Person has performed and complied in all material
respects with all of the agreements and conditions set forth or contemplated
<PAGE>
herein that are required to be performed or complied with by such Person on or
before the Applicable Closing Date.
5.5 Documents. The Purchasers shall have received true, complete and
correct copies of such documents as they may reasonably request in connection
with or relating to the transactions to be contemplated on such Applicable
Closing Date, all in form and substance reasonably satisfactory to the
Purchasers.
5.6 Opinion of Counsel. The Purchasers shall have received an opinion
of counsel to the Company, dated the Applicable Closing Date, relating to the
transactions contemplated hereby or referred to herein, substantially in the
form attached hereto as Exhibit F-1, F-2 and F-3, respectively.
5.7 Approval of Counsel to the Purchasers. All actions and proceedings
hereunder and all documents required to be delivered by the Company or NewCo
hereunder or in connection with the consummation of the transactions
contemplated hereby, and all other related matters, shall have been acceptable
to Paul, Weiss, Rifkind, Wharton & Garrison, counsel to the Purchasers, in their
reasonable judgment as to their form and substance.
5.8 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, without
limitation, the Merger, the amendment of the terms of the Series A Stock,
issuance of the New Notes, Amended Notes, the Series B Stock and shares of
Common Stock) by, or enforcement against, the Company of this Agreement and each
of the other Transaction Documents shall have been obtained and be in full force
and effect on the Applicable Closing Date, except for consents, exceptions,
authorizations or other actions which would not have a Material Adverse Effect,
and each of the Purchasers shall have been furnished with appropriate evidence
thereof.
5.9 No Litigation. No action, suit, proceeding, claim or dispute shall
have been brought or otherwise arisen on or before the Applicable Closing Date,
at law, in equity, in arbitration or before any Governmental Authority against
the Company or any of its Subsidiaries or NewCo which is reasonably likely to
have a Material Adverse Effect.
5.10 No Material Judgment or Order. There shall not be on the
Applicable Closing Date any Order of a court of competent jurisdiction or any
ruling of any Governmental Authority or any condition imposed under any
Requirement of Law which would, in the reasonable judgment of the Purchasers,
(a) prohibit or restrict (i) the purchase of the New Notes or the Conditional
Subscription, (ii) the issuance of the Amended Notes or shares of the Series B
Stock, (iii) the Merger, (iv) the Rights Offering,
<PAGE>
(v) the amendment of the terms of the Series A Stock, (vi) the issuance of
shares of Common Stock upon conversion of the Series A Stock or Series B Stock
or (vii) consummation of the transactions contemplated by this Agreement, (b)
subject the Purchasers to any material penalty or other onerous condition under
or pursuant to any Requirement of Law if the New Notes or shares of Common Stock
under the Conditional Subscription were to be purchased hereunder or the Amended
Notes and shares of Series B Stock were to be issued hereunder or any shares of
Series A Stock or Series B Stock were converted into shares of Common Stock or
(c) restrict the operation of the business of the Company or any of the
Subsidiaries as conducted on the date hereof in a manner that would have a
material adverse effect on the Condition of the Company.
5.11 No Material Adverse Change. From the date hereof until the
Applicable Closing Date, there shall have been no material adverse change in the
Condition of the Company.
SECTION 6 CONDITIONS TO THE OBLIGATION OF THE PURCHASERS ON THE FIRST CLOSING
In addition to the conditions contained in Section 5, the obligations
of the Purchasers to purchase the New Notes and exchange the Original Notes for
the Amended Notes, shall be subject to the satisfaction as determined by, or
waiver by, the Purchasers of the following conditions on or before the First
Closing Date:
6.1 Securities. At the First Closing, the Company shall have delivered
to each of the Purchasers a New Note in definitive form in the principal amount
set forth opposite such Purchaser's name on Schedule 1, registered in the name
of such Purchaser and the Amended Notes.
SECTION 7 CONDITIONS TO THE OBLIGATION OF THE PURCHASERS ON THE SECOND CLOSING
In addition to the conditions contained in Section 5, the conversion of
the New Notes and Amended Notes into shares of Series B Stock, shall be subject
to the satisfaction as determined by, or waiver by, the Purchasers of the
following conditions on or before the Second Closing Date:
7.1 Charter Documents. As of the Second Closing Date, the Certificate
of Merger shall have been duly filed by the Company with the Secretary of State
of the State of New York and the Certificate of Ownership and Merger shall have
been duly filed by NewCo with the Secretary of State of the State of Delaware.
The Merger shall be completed in accordance with its terms and the Surviving
Corporation shall have assumed all the obligations of the Company under this
Agreement.
<PAGE>
7.2 Securities. At the Second Closing, the Company shall have delivered
to each of the Purchasers stock certificates in definitive form representing the
shares of Series B Stock issuable upon conversion of the New Notes and the
Amended Notes.
7.3 Shareholder Approval. Prior to the Second Closing Date, the
Purchasers shall have received evidence reasonably satisfactory to them that the
Requisite Company Vote shall have been obtained.
SECTION 8 CONDITIONS TO THE OBLIGATION OF THE PURCHASERS ON THE THIRD CLOSING
In addition to the conditions contained in Section 5, the obligations
of the Purchasers to purchase the shares under the Conditional Subscription
shall be subject to the satisfaction as determined by, or waiver by, the
Purchasers of the following conditions on or before the Third Closing Date:
8.1 Rights Offering and Merger. Prior to the Third Closing Date, the
Rights Offering shall have concluded.
8.2 Securities. At the Third Closing, the Company shall have delivered
to each of the Purchasers stock certificates in definitive form representing
that number of shares of Common Stock to be purchased by such Purchaser.
SECTION 9 CONDITIONS TO THE OBLIGATION OF THE COMPANY TO CLOSE
The obligations of the Company to perform its obligations hereunder on
any Applicable Closing Date shall be subject to the satisfaction as determined
by, or waiver by, the Company of the following conditions on or before the
Applicable Closing Date:
9.1 Representations and Warranties. The representations and warranties
of the Purchasers contained in Section 4 hereof shall be true and correct at and
on the Applicable 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 except for any activities or transactions which may have taken
place after the date hereof which are contemplated by this Agreement.
9.2 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 Applicable Closing Date.
<PAGE>
9.3 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, without
limitation, the purchase of the New Notes and the Conditional Subscription) 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.
9.4 Hart-Scott-Rodino. Prior to the Second Closing Date, any Person
required in connection with the transactions contemplated under this Agreement
to file a notification and report form in compliance with the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, and the rules and regulations promulgated
thereunder (the "HSR Act"), shall have filed such form and the waiting period
specified in the HSR Act, including any extensions thereof, shall have expired.
9.5 Shareholder Approval. Prior to the Second Closing Date, the Company
shall hae obtained the Requisite Company Vote.
9.6 Payment of Purchase Price. At the First Closing, the Company shall
have received the Original Notes and the applicable purchase price for the New
Notes. At the Second Closing, the Company shall have received the New Notes and
Amended Notes for conversion into shares of Series B Stock. At the Third
Closing, the Company shall have received payment for the Conditional
Subscription.
9.7 No Material Judgment or Order. There shall not be on the Applicable
Closing Date any Order of a court of competent jurisdiction or any ruling of any
Governmental Authority or any condition imposed under any Requirement of Law
which would, in the reasonable judgment of the Purchasers, (a) prohibit or
restrict (i) the purchase of the New Notes or the Conditional Subscription, (ii)
the issuance of the Amended Notes or shares of the Series B Stock, (iii) the
Merger, (iv) the Rights Offering, (v) the amendment of the terms of the Series
A, (vi) the issuance of shares of Common Stock upon conversion of the Series A
Stock or Series B Stock, or (vii) consummation of the transactions contemplated
by this Agreement, (b) subject the Company to any material penalty or other
onerous condition under or pursuant to any Requirement of Law if the New Notes
or shares of Common Stock under the Conditional Subscription were to be
purchased hereunder or the Amended Notes or shares of Series B Stock were to be
issued hereunder or any shares of Series A Stock or Series B Stock were
converted into shares of Common Stock or (c) restrict the operation of the
business of the Company or any of the Subsidiaries as conducted on the date
hereof in a manner that would have a material adverse effect on the Condition of
the Company.
<PAGE>
SECTION 10 COVENANTS REGARDING THE RIGHTS OFFERING, SHAREHOLDERS MEETING AND THE
MERGER
10.1 Registration Statement. As soon as reasonably practicable, the
Company shall file with the SEC the Registration Statement in connection with
the Rights Offering and with respect to the Rights and the Underlying Shares and
shall use its best efforts to effect the registration of the Rights and the
Underlying Shares. The Company shall provide the Purchasers and their respective
counsel with drafts of the Registration Statement and a copy of any written
comments or telephonic notification of any oral comments the Company may receive
from the SEC or its staff with respect to the Registration Statement promptly
after the receipt thereof. The Company will address in good faith any comments
the Purchasers may make with respect to the Registration Statement. The Company
shall provide the Purchasers and their respective counsel with a reasonable
opportunity to participate in all communications with the SEC and its staff,
including any meetings and telephone conferences, relating to the issuance of
the Rights or the Underlying Shares.
10.2 Proxy Statement.
(a) Concurrent with the preparation and filing with the SEC of the
Registration Statement, the Company will prepare and file with the SEC, and the
Purchasers will cooperate with the Company in such preparation and filing, a
preliminary Proxy Statement relating to the Company Shareholders Meeting and use
its best efforts to furnish the information required to be included by the SEC
in a proxy statement, and, after consultation with the Purchasers, to respond
promptly to any comments made by the SEC with respect to the preliminary proxy
statement and shall use its best efforts to cause a definitive Proxy Statement
to be mailed to its shareholders as soon as reasonably practicable. The Company
shall provide the Purchasers and their respective counsel with a copy of any
written comments or telephonic notification of any oral comments the Company may
receive from the SEC or its staff with respect to the Proxy Statement promptly
after the receipt thereof. The Company shall provide the Purchasers and their
respective counsel with a reasonable opportunity to participate in all
communications with the SEC and its staff, including any meetings and telephone
conferences, relating to the Information Statement.
10.3 Shareholders' Meeting. The Company shall call and hold the Company
Shareholders Meeting as promptly as practicable. The Company shall recommend,
and use its best efforts (through its agents or otherwise) to solicit from its
shareholders proxies in favor of, the adoption of this Agreement, and shall take
all other action necessary or, in the judgment or the Purchasers, advisable to
secure the Requisite Company Vote.
10.4 The Merger. Immediately upon receipt of the Requisite Company
Vote, the Company shall file the Certificate of Merger with the Secretary of
State of the State
<PAGE>
of New York and a Certificate of Ownership and Merger with the Secretary of
State of the State of Delaware.
SECTION 11 AFFIRMATIVE COVENANTS
The Company hereby covenants and agrees with the Purchasers with
respect to this Section 11, so long as the Purchasers hold any New Notes, any
Amended Notes, any shares of Series B Stock or any shares of Common Stock issued
on the conversion thereof, except to the extent that a particular section of
this Section 11 provides for an earlier termination, as follows:
11.1 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-Q and 10-K
(or any successor forms), (ii) all current reports required to be filed with the
SEC on Form 8-K (or any successor forms) and (iii) any other information
required to be filed with the SEC.
11.2 Reservation of Shares. The Company shall at all times reserve and
keep available out of its authorized shares of Series B Stock, solely for the
purpose of issue or delivery upon conversion of the New Notes and the Amended
Notes, as provided in the New Notes and Amended Notes, as the case may be, the
number of shares of Series B Stock that may be issuable or deliverable upon such
conversion. The Company shall issue such shares of Series B Stock in accordance
with the terms of this Agreement, the New Notes, the Amended Notes, and the
Delaware Certificate and otherwise comply with the terms hereof and thereof. The
Company shall at all times reserve and keep available out of its authorized
shares of Common Stock, solely for the purpose of issue or delivery upon
conversion of the Series B Stock, as provided in the Delaware Certificate, the
number of shares of Common Stock that may be issuable or deliverable upon such
conversion. The Company shall issue such shares of Common Stock in accordance
with the terms of this Agreement, the Delaware Certificate and otherwise comply
with the terms hereof and thereof.
11.3 Registration and Listing. If any shares of Common Stock required
to be reserved for purposes of conversion of the Series B Stock, as provided in
the Delaware Certificate, require registration with or approval of any
Governmental Authority under any Federal or state or other applicable law before
such shares of Common Stock may be issued or delivered upon conversion, the
Company will in good faith and as expeditiously as possible cause such shares of
Common 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
<PAGE>
or exchange, upon official notice of issuance, all shares of Common Stock
issuable or deliverable upon conversion of the Series A Stock and Series B
Stock.
11.4 Director and Officer Liability Insurance. For so long as the
Purchasers own either 20% of the shares of Series A Stock issued on the Issue
Date (as defined in the Delaware Certificate) or 20% of the Series B Stock
issued on the Issue Date, the Company will maintain director and officer
liability insurance reasonably satisfactory to the Purchasers.
11.5 Change of Control Provision. For so long as there are any shares
of Series A Stock or Series B Stock outstanding, the Company will 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 from the acquiror or any
other Person (other than the Company) as a result of and in connection with the
transaction an amount in cash equal to their respective aggregate liquidation
preference for the shares of Series A Stock and Series B Stock held by them, as
set forth in the Delaware Certificate. The other parties hereto agree that
irreparable damage would occur in the event that the provisions of this Section
11.5 were not performed in accordance with their terms and that the Purchasers
shall be entitled to specific performance of the terms of this Section 11.5 in
addition to any other remedies at law or in equity.
11.6 Board of Directors. For so long as the Purchasers own either 20%
of the shares of Series A Stock issued on the Issue Date or 20% of the Series B
Stock issued on the Issue Date, the Board of Directors shall be comprised of
seven members.
11.7 Tax Matters.
(a) The parties hereto agree and acknowledge that unless otherwise
required in the opinion of outside counsel to the relevant party, to comply with
its obligations under the Code, to comply with its obligations under the Code,
(x) as a result of a change in Law, (y) as a result of any dividends paid in
Common Stock pursuant to the Delaware Certificate as may be required by Section
305(b)(2) of the Code or (z) as a result of distributions on the Common Stock
that are also made on the Series B Stock as a result of the Series B
participation rights, (i) no party hereto will take the position that any amount
will be includable in income with respect to the Series B Stock under Section
305 of the Code and that all parties shall file all income, franchise and other
material tax returns, reports, forms and other such documents ("Tax Returns")
accordingly (the "Reporting Agreement") and (ii) no party hereto shall take any
position inconsistent with the Reporting Agreement upon examination of any Tax
Return, in any refund claim, in any litigation or otherwise.
(b) The Company covenants that it will not become a "United States
real property holding corporation" (a "USRPHC") as that term is defined in
Section
<PAGE>
897(c)(2) of the Code and the Treasury Regulations promulgated thereunder
("Treasury Regulations") at any time while any Purchaser owns any of the Series
B Stock (or any Common Stock of the Company obtained upon a conversion of the
Series B Stock (the "Conversion Stock")).
(c) In the event that a Purchaser desires to sell or dispose of
any of the Series B Stock or Conversion Stock, and upon demand by such
Purchaser, the Company agrees to deliver to such Purchaser a letter (the
"Letter") which complies with Sections 1.1445-2(c)(3) and 1.897-2(h) of the
Treasury Regulations, addressed to such Purchaser, stating that the Company is
not, and has not been, a USRPHC during the period equal to the lesser of (i) the
period beginning five years prior to the date of the Letter through the date of
the Letter and (ii) the period from the date of this Agreement through the date
of the Letter. The Letter shall be delivered to the Purchaser one business day
prior to the close of any sale or disposition of the Stock or Conversion Stock
by the Purchaser (the "Delivery Date"). The Letter shall be dated as of the
Delivery Date and signed by a corporate officer who must verify under penalties
of perjury that the statement is correct to his knowledge and belief pursuant to
Section 1.897-2(h) of the Treasury Regulations.
SECTION 12 INDEMNIFICATION.
(a) Except as otherwise provided in this Section 12, the Company
and NewCo 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 representation,
warranty, covenant or agreement of the Company or NewCo contained in any
Transaction Document.
(b) Except as otherwise provided in this Section 12, 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
representation, warranty, covenant or agreement of the Purchasers contained in
this Agreement. Notwithstanding the foregoing, each Purchaser's liability
pursuant to this Section 8 shall in no event exceed the amount of such
Purchaser's investment under this Agreement.
<PAGE>
SECTION 13 REGISTRATION RIGHTS.
The Company hereby agrees to provide registration rights with respect
to the Registrable Securities as set forth below.
13.1 Securities Subject to this Agreement.
(a) Registrable Securities. For the purposes of this Section 13,
Registrable Securities will cease to be Registrable Securities when such
Registrable Securities are sold and otherwise transferred pursuant to Rule 144
under the Securities Act or a registration statement covering such Registrable
Securities has been declared effective under the Securities Act by the SEC and
such Registrable Securities have been disposed of pursuant to such effective
registration statement.
(b) Holders of Registrable Securities. A Person is deemed to be a
holder of Registrable Securities whenever such Person owns of record Registrable
Securities, or holds a warrant to purchase, or a security convertible into or
exercisable or exchangeable for, Registrable Securities whether or not such
acquisition or conversion has actually been effected and disregarding any legal
restrictions upon the exercise of such rights. If the Company receives
conflicting instructions, notices or elections from two or more persons with
respect to the same Registrable Securities, the Company may act upon the basis
of the instructions, notice or election received from the registered owner of
such Registrable Securities. Registrable Securities issuable upon exercise of an
option or upon conversion of another security shall be deemed outstanding for
the purposes of this Section 13.
<PAGE>
13.2 Demand Registration.
(a) Request for Demand Registration. At any time after the date
hereof, the holders of 25.0% of the outstanding Registrable Securities
(determined on an as-converted basis) (the "Stockholders") may make a written
request (the "Demand Notice") for registration of Registrable Securities under
the Act, and under the securities or blue sky laws of any jurisdiction
designated by such holder or holders (a "Demand Registration"); provided, that
the Company will not be required to effect any Demand Registration pursuant to
this Section 13.2(a) in which the aggregate anticipated proceeds to the holders
requesting such registration is less than $3,000,000 but will be required to
effect an unlimited number of Demand Registrations in which the anticipated
aggregate proceeds to the selling holders equal or exceed $3,000,000; provided,
further, that the Company will not be required to effect more than one
registration pursuant to this section in any six-month period. Upon a request
for a Demand Registration, the Company shall use its best efforts to prepare and
file with the SEC, as soon as reasonably practicable, a registration statement
for an offering to be made on a continuous basis pursuant to Rule 415 of the
Securities Act (or any successor rule or similar provision then in effect) (a
"Shelf Registration Statement") registering the resale from time to time by the
Stockholders thereof of their Registrable Securities (the "Demand Shelf
Registration"). Within fifteen (15) days after the receipt of the Demand Notice,
the Company shall give written notice thereof to all holders holding Registrable
Securities and include in such registration all Registrable Securities held by a
holder thereof with respect to which the Company has received written requests
for inclusion therein at least ten (10) days prior to the filing of the Demand
Shelf Registration. The Company represents and warrants that, except as set
forth on Schedule 13.2, no Person (other than the holders of Series A Stock)
currently is, and covenants that no Person shall ever be, entitled to piggy-back
registration rights on any Demand Registration under this Section 13.2.
(b) Effective Demand Registration. A registration shall not
constitute a Demand Registration until it has become effective under the
Securities Act and remains effective until the earlier of the (i) completion of
any offering of securities thereunder and (ii) the date nine months (plus any
Blackout Period, as defined below) after the date on which it first became
effective under the Securities Act (unless withdrawn upon the written request of
the holders). The Company shall use its best efforts to cause any registration
statement filed pursuant to Section 13.2(a) to be declared effective under the
Securities Act as soon as practicable (and shall promptly notify the
Stockholders in writing once any such registration statement has been declared
effective).
(c) Blackout Periods. If the Demand Shelf Registration (or any
Subsequent Shelf Registration, as defined below) is interfered with by any stop
order, injunction or other order or requirement of the SEC or any other
Governmental Authority, the Company shall use its best efforts to obtain the
prompt withdrawal of any order suspending the effectiveness thereof (including,
without limitation, amend the registration statement concerned in a manner
reasonably expected to obtain the
<PAGE>
withdrawal of the order suspending the effectiveness thereof), and such Demand
Shelf Registration (or any Subsequent Shelf Registration) will be deemed not to
have been effective during the period of such interference until the offering of
Registrable Securities pursuant to such Shelf Registration Statement (or
Subsequent Shelf Registration Statement) may legally resume (the "Blackout
Period").
(d) Subsequent Shelf Registration. Notwithstanding the foregoing
paragraph, if prior to the date nine months (plus any Blackout Period) after the
date the Demand Shelf Registration covering the Registrable Securities has been
declared effective under the Act, the Company has failed to obtain the
withdrawal of any stop order, injunction or other order suspending the
effectiveness within 60 days of such cessation of effectiveness, the Company
shall file an additional Shelf Registration covering the Registrable Securities
(a "Subsequent Shelf Registration"). If a Subsequent Shelf Registration is
filed, the Company shall use its best efforts to cause the Subsequent Shelf
Registration to be declared effective as soon as practicable after such filing
and to keep such Registration Statement continuously effective until the earlier
of the (i) completion of any offering of securities thereunder; (ii) expiration
of the nine month anniversary (plus any Blackout Period, as defined below) from
date on which it first became effective under the Act (unless withdrawn upon the
written request of the holders); and (iii) date another Subsequent Shelf
Registration covering the Registrable Securities has been declared effective
under the Securities Act. If the registration required under this Section 13 is
deemed not to have been effected then the Company shall continue to be obligated
to effect a registration statement pursuant to this Section 13.
(e) Underwriting Procedures. If holders of a majority of the
Registrable Securities included in the Demand Registration so elect, the
offering of such Registrable Securities pursuant to such Demand Registration
shall be in the form of a firm commitment underwritten offering and the managing
underwriter or underwriters selected for such offering shall be a nationally
recognized investment banking firm selected by the Company with the consent of
such holders, which consent will not be unreasonably delayed or withheld (an
"Approved Underwriter"). In such event, if the Approved Underwriter advises the
Company in writing that in its opinion the aggregate amount of such securities
requested to be included in such offering is sufficiently large to have a
material adverse effect on the success of such offering, the Company shall
include in such registration only the aggregate amount of securities that in the
opinion of the Approved Underwriter may be sold without any such material
adverse effect and shall first reduce (to zero, if necessary) the amount of
securities sought to be included therein by each holder who wishes to
participate in the Demand Registration through the exercise of piggy-back
registration rights as contemplated by Section 13.3 as a group, if any, and
then, if such reduction is not sufficient, as to the Stockholders as a group,
pro rata within each group (including other holders of Common Stock who may have
registration rights which are pari passu with the Registrable Securities) based
on the number of Registrable Securities included in the request for Demand
Registration, the amount of Registrable Securities to be included by each
Stockholder in such registration. To the extent more
<PAGE>
than 10.0% of the Registrable Securities so requested to be registered are
excluded from the offering, then the holders of such Registrable Securities
shall have the right to one additional Demand Registration under this Section
13.2 with respect to such Registrable Securities.
(f) Deferral of Registration. Notwithstanding the foregoing, if,
at any time prior to the effective date of the registration statement with
respect to a Demand Registration, the Company is: (i) pursuing an underwritten
offering of shares of its Capital Stock for its own account, or engaged in or
proposes to engage in (A) a financing, (B) an acquisition of the capital stock
or substantially all the assets of any other person (other than in the ordinary
course of business) or (C) any disposition of material assets (other than in the
ordinary course of business), any tender offer or any merger, consolidation,
corporate reorganization or restructuring or other similar transaction; and (ii)
the Board of Directors, using good faith, determines that it would be seriously
detrimental to the Company for a registration statement to be filed at such
time, the Company may defer the filing of a registration statement with respect
to any Demand Registration required by this Section 13.2 until a date not later
than 120 days from the date of the Deferral Notice (as defined below) (the
"Deferral Period"). If the Board of Directors of the Company makes such
determination, the Company shall give written notice (the "Deferral Notice") of
such determination to the holders of Registrable Securities; provided, that, the
Company may exercise its right to delay a Demand Registration hereunder only
once in any twelve-month period. The Company shall notify the holders of the
expiration of the Deferral Period and shall cause the registration statement
with respect to the Demand Registration to be filed on the fifth Business Day
following the expiration of the Deferral Period (the "Withdrawal Period") (or,
if registration on such date is not practicable, as promptly as possible
thereafter) unless, prior to the expiration of the Withdrawal Period, the
holders holding a majority of Registrable Securities to be included in any such
Demand Registration, by written notice to the Company, withdraw the request made
under this Section 13.2, in which case, such request shall not count as one of
the Demand Registrations permitted hereunder and the Company shall pay all
Registration Expenses in connection with such registration.
13.3 Piggy-Back Registration. If the Company proposes to file a
registration statement under the Securities Act with respect to an offering by
the Company for its own account or for the account of a Stockholder pursuant to
Section 13.2 of any class of security (other than a registration statement on
Form S-4 or S-8 or any successor forms thereto), then the Company shall give
written notice of such proposed filing to each of the holders of Registrable
Securities (other than any Stockholders), and such notice shall describe in
detail the proposed registration and distribution and shall offer such holders
(other than any Stockholders) the opportunity to register the number of
Registrable Securities as each such holder may request. The Company shall, and
shall use commercially reasonable efforts (within ten (10) days of the notice
provided for in the preceding sentence) to cause the managing underwriter or
underwriters of a proposed underwritten offering (the "Company Underwriter") to,
permit the holders of Registrable Securities who have requested in writing
(within ten (10) days of the giving of the notice
<PAGE>
of the proposed filing by the Company) to participate in the registration for
such offering (the "Requesting Holders") to include such Registrable Securities
in such offering on the same terms and conditions as the securities of the
Company included therein. In connection with any offering under this Section
13.3 involving an underwriting, the Company shall not be required to include any
Registrable Securities in such underwriting unless the holders thereof accept
the terms of the underwriting as agreed upon between the Company and the
underwriters selected by it. If, in the opinion of the Company Underwriter, the
registration of all, or part, of the Registrable Securities which the Requesting
Holders have requested to be included would materially and adversely affect such
public offering, then the Company shall be required to include in the
underwriting only that number of Registrable Securities, if any, which the
Company Underwriter believes may be sold without causing such adverse effect,
and the amount of securities to be offered in the underwriting shall be
allocated first, to the Company based on the number of shares it desires to sell
in the underwritten offering for its own account; and thereafter pro rata among
the Stockholders based on the number of shares otherwise proposed to be included
therein by the Stockholders. If the number of Registrable Securities to be
included in the underwriting in accordance with the foregoing is less than the
total number of shares which the Requesting Holders of Registrable Securities
have requested to be included, then such Requesting Holders shall participate in
the underwriting pro rata based upon their total ownership of the Registrable
Securities and such other shares of Common Stock as are requested to be included
by other holders of shares of Common Stock which have registration rights. If
any Requesting Holder would thus be entitled to include more shares than such
holder requested to be registered, the excess shall be allocated among other
Requesting Holders pro rata based upon their total ownership of Registrable
Securities and such other shares of Common Stock.
13.4 Holdback Agreements.
(a) Restrictions on Public Sale by Holders of Registrable
Securities. To the extent not inconsistent with applicable law, the Purchasers
agree that in connection with a registered public offering of the Company's
equity securities, they will not effect any public sale or distribution of any
Registrable Securities or of any securities convertible into or exchangeable or
exercisable for such Registrable Securities, including a sale pursuant to Rule
144 under the Securities Act, during the 10 days prior to, and during the 90
days beginning on, the effective date of the Company's registration statement
(except as part of such registration), if and to the extent reasonably requested
by the Company in writing in the case of a non-underwritten public offering or
to the extent reasonably requested by the Underwriter in writing in the case of
an underwritten public offering.
(b) Restrictions on Public Sale by the Company. The Company agrees
not to effect any public sale or distribution of any of its equity securities,
or any securities convertible into or exchangeable or exercisable for such
equity securities (except pursuant to registrations on Forms S-4 or S-8 of the
Securities Act or any successor or other forms not available for registering
equity securities for sale to the public) during the
<PAGE>
ten Business Days prior to, and during the 30 day period beginning on the
effective date of any registration statement in which the holders of Registrable
Securities are participating unless such registration statement also relates to
securities being offered by the Company.
13.5 Registration Procedures.
(a) Obligations of the Company. Whenever registration of
Registrable Securities has been requested pursuant to Section 13.2 of this
Agreement, the Company shall use reasonable efforts to effect the registration
and sale of such Registrable Securities in accordance with the intended method
of distribution thereof, and in connection with any such request, the Company
shall, as soon as reasonably practicable:
(i) prepare and file with the SEC (in any event not later
than sixty (60) days, subject to Section 13.2(f), after receipt of a
request to file a registration statement with respect to Registrable
Securities) a registration statement, and use its best efforts to cause
such registration statement to become effective under the Securities
Act; provided, however, that before filing a registration statement or
prospectus or any amendments or supplements thereto, the Company shall
(A) provide counsel selected by the holders of a majority of the
Registrable Securities being registered in such registration ("Holders'
Counsel") with an opportunity to participate in the preparation of such
registration statement and each prospectus included therein (and each
amendment or supplement thereto) to be filed with the SEC, which
documents shall be subject to the review of Holders' Counsel, and (B)
notify the Holders' Counsel and each seller of Registrable Securities
of any stop order issued or threatened by the SEC and take all
reasonable action required to prevent the entry of such stop order or
to remove it if entered;
(ii) prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective for a period which will terminate when all
Registrable Securities covered by such registration statement have been
sold (but not before the expiration of the ninety (90) day period
referred to in Section 4(3) of the Securities Act and Rule 174
thereunder, if applicable), and comply with the provisions of the
Securities Act with respect to the disposition of all securities
covered by such registration statement during such period in accordance
with the intended methods of disposition by the sellers thereof set
forth in such registration statement;
(iii) furnish to each seller of Registrable Securities, prior
to filing a registration statement, copies of such registration
statement as is proposed to be filed, and thereafter such number of
copies of such registration statement, each amendment and supplement
thereto (in each case including all exhibits thereto), the prospectus
included in such registration statement (including each preliminary
prospectus) and such other documents as each such seller may
<PAGE>
reasonably request in order to facilitate the disposition of the
Registrable Securities owned by such seller;
(iv) use reasonable efforts to register or qualify such
Registrable Securities under such other securities or blue sky laws of
such jurisdictions as any seller of Registrable Securities requests,
and to continue such qualification in effect in such jurisdiction for
as long as is permissible pursuant to the laws of such jurisdiction, or
for as long as any such seller requests or until all of such
Registrable Securities are sold, whichever is shortest, and do any and
all other acts and things which may be reasonably necessary or
advisable to enable any such seller to consummate the disposition in
such jurisdictions of the Registrable Securities owned by such seller;
provided, however, that the Company shall not be required to (A)
qualify generally to do business in any jurisdiction where it would not
otherwise be required to qualify but for this Section 13.5(a)(iv), (B)
subject itself to taxation in any such jurisdiction or (C) consent to
general service of process in any such jurisdiction;
(v) use reasonable efforts to cause the Registrable
Securities covered by such registration statement to be registered with
or approved by such other governmental agencies or authorities as may
be necessary by virtue of the business and operations of the Company to
enable the seller or sellers of Registrable Securities to consummate
the disposition of such Registrable Securities;
(vi) notify each seller of Registrable Securities at any time
when a prospectus relating thereto is required to be delivered under
the Act, upon discovery that, or upon the happening of any event as a
result of which, the prospectus included in such registration statement
contains an untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances under
which they were made, and the Company shall promptly prepare a
supplement or amendment to such prospectus and furnish to each seller a
reasonable number of copies of a supplement to or an amendment of such
prospectus as may be necessary so that, after delivery to the
purchasers of such Registrable Securities, such prospectus shall not
contain an untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances under
which they were made;
(vii) enter into and perform customary agreements (including
an underwriting agreement in customary form with the Approved
Underwriter, if any, selected as provided in Section 13.2) and take
such other actions as are reasonably required in order to facilitate
the disposition of such Registrable Securities;
<PAGE>
(viii) make available for inspection by any seller of
Registrable Securities, any managing underwriter participating in any
disposition pursuant to such registration statement, Holders' Counsel
and any attorney, accountant or other agent retained by any such seller
or any managing underwriter (each, an "Inspector" and collectively, the
"Inspectors"), during regular business hours and upon reasonable
advance notice, all financial and other records, pertinent corporate
documents and properties of the Company (collectively, the "Records")
as shall be reasonably necessary to enable them to exercise their due
diligence responsibility, and cause the Company's officers, directors
and employees, and the independent public accountants of the Company,
to supply all information reasonably requested by any such Inspector in
connection with such registration statement;
(ix) if such sale is pursuant to an underwritten offering,
obtain a "cold comfort" letter from the Company's independent public
accountants in customary form and covering such matters of the type
customarily covered by "cold comfort" letters as Holders' Counsel or
the managing underwriter reasonably requests;
(x) furnish, at the request of any seller of Registrable
Securities on the date such securities are delivered to the
underwriters for sale pursuant to such registration or, if such
securities are not being sold through underwriters, on the date the
registration statement with respect to such securities becomes
effective, an opinion, dated such date, of counsel representing the
Company for the purposes of such registration, addressed to the
underwriters, if any, and to the seller making such request, covering
such legal matters with respect to the registration in respect of which
such opinion is being given as such seller may reasonably request and
are customarily included in such opinions;
(xi) otherwise use reasonable efforts to comply with all
applicable rules and regulations of the SEC, and make available to its
security holders, as soon as reasonably practicable but no later than
fifteen (15) months after the effective date of the registration
statement, an earnings statement covering a period of twelve (12)
months beginning after the effective date of the registration
statement, in a manner which satisfies the provisions of Section 11(a)
of the Securities Act;
(xii) cause all such Registrable Securities to be listed on
each securities exchange on which similar securities issued by the
Company are then listed (including NASDAQ), provided, that the
applicable listing requirements are satisfied;
(xiii) cooperate with each seller of Registrable Securities
and each underwriter participating in the disposition of such
Registrable Securities and their respective counsel in connection with
any filings
<PAGE>
required to be made with the National Association of Securities
Dealers, Inc. (the "NASD"); and
(xiv) use reasonable efforts to take all other steps
necessary to effect the registration of the Registrable Securities
contemplated hereby.
(b) Notice to Discontinue. Each holder of Registrable Securities
agrees that, upon receipt of any written notice from the Company of the
happening of any event of the kind described in Section 13.5(a)(vi), such holder
shall forthwith discontinue disposition of Registrable Securities pursuant to
the registration statement covering such Registrable Securities until such
holder's receipt of the copies of the supplemented or amended prospectus
contemplated by Section 13.5(a)(vi) and, if so directed by the Company, such
holder shall deliver to the Company (at the Company's expense) all copies, other
than permanent file copies then in such holder's possession, of the prospectus
covering such Registrable Securities which is current at the time of receipt of
such notice. If the Company shall give any such notice, the Company shall extend
the period during which such registration statement shall be maintained
effective pursuant to this Agreement (including without limitation the period
referred to in Section 13.5(a)(ii)) by the number of days during the period from
and including the date of the giving of such notice pursuant to Section
13.5(a)(vi) to and including the date when the holder shall have received the
copies of the supplemented or amended prospectus contemplated by and meeting the
requirements of Section 13.5(a)(vi).
13.6 Registration Expenses. The Company shall pay all expenses (other
than underwriting discounts and commissions) arising from or incident to the
Company's performance of, or compliance with, Section 13 of this Agreement,
including without limitation, (i) SEC, stock exchange, NASDAQ and NASD
registration and filing fees, (ii) all fees and expenses incurred by Company in
complying with securities or blue sky laws (including reasonable fees, charges
and disbursements of counsel in connection with blue sky qualifications of the
Registrable Securities), (iii) all printing, messenger and delivery expenses,
and (iv) the fees, charges and disbursements of counsel to the Company and of
its independent public accountants and any other accounting and legal fees,
charges and expenses incurred by the Company (including without limitation any
expenses arising from any special audits incident to or required by any
registration or qualification) in connection with any Demand Registration
pursuant to the terms of this Agreement, regardless of whether such registration
statement is declared effective. All of the expenses described in this Section
13.6 are referred to herein as "Registration Expenses."
<PAGE>
13.7 Indemnification; Contribution.
(a) Indemnification by the Company. The Company agrees to
indemnify, to the fullest extent permitted by law, each holder of Registrable
Securities, its officers, directors, partners, employees, advisors and agents
and each Person who controls (within the meaning of the Securities Act or the
Exchange Act) such holder from and against any and all losses, claims, damages,
liabilities and expenses (including reasonable costs of investigation) arising
out of or based upon any untrue, or alleged untrue, statement of a material fact
contained in any registration statement, prospectus or preliminary prospectus or
notification or offering circular (as amended or supplemented if the Company
shall have furnished any amendments or supplements thereto) or arising out of or
based upon any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, except insofar as the same are caused by or contained in any
information furnished in writing to the Company by such holder expressly for use
therein or a failure by such holder to deliver an updated prospectus that has
been filed with the SEC and made available to such person for delivery to a
purchaser. The Company shall also indemnify any underwriters of the Registrable
Securities, their officers, directors and employees and each Person who controls
such underwriters (within the meaning of the Securities Act and the Exchange
Act) to the same extent as provided above with respect to the indemnification of
the holders of Registrable Securities.
(b) Indemnification by Holders. In connection with any
registration statement in which a holder of Registrable Securities is
participating pursuant to Section 13.2 or 13.3 hereof, each such holder shall
furnish to the Company in writing such information with respect to such holder
as the Company may reasonably request in writing or as may be required by law
for use in connection with any such registration statement or prospectus and
each holder, by its participation in such registration, agrees to indemnify, to
the extent permitted by law, the Company, any underwriter retained by the
Company and their respective directors, officers, employees and each Person who
controls the Company or such underwriter (within the meaning of the Securities
Act and the Exchange Act) to the same extent as the foregoing indemnity from the
Company to the holders of Registrable Securities, but solely with respect to any
such information furnished in writing by or on behalf of such holder.
(c) Conduct of Indemnification Proceedings. Any Person entitled to
indemnification hereunder (the "Registration Rights Indemnified Party") agrees
to give prompt written notice to the indemnifying party (the "Registration
Rights Indemnifying Party") after the receipt by the Registration Rights
Indemnified Party of any written notice of the commencement of any action, suit,
proceeding or investigation or threat thereof made in writing for which the
Registration Rights Indemnified Party intends to claim indemnification or
contribution pursuant to this Agreement; provided, that the failure so to notify
the Registration Rights Indemnifying Party shall not relieve the Registration
Rights Indemnifying Party of any liability that it may have to the
<PAGE>
Registration Rights Indemnified Party hereunder unless, and only to the extent
that, such failure results in the Registration Rights Indemnifying Party's
forfeiture of substantial rights or defenses. If notice of commencement of any
such action is given to the Registration Rights Indemnifying Party as above
provided, the Registration Rights Indemnifying Party shall be entitled to
participate in and, to the extent it may wish, jointly with any other
Registration Rights Indemnifying Party similarly notified, to assume the defense
of such action at its own expense, with counsel chosen by it and reasonably
satisfactory to such Registration Rights Indemnified Party. The Registration
Rights Indemnified Party shall have the right to employ separate counsel in any
such action and participate in the defense thereof, but the fees and expenses of
such counsel (other than reasonable costs of investigation) shall be paid by the
Registration Rights Indemnified Party unless (i) the Registration Rights
Indemnifying Party agrees to pay the same, (ii) the Registration Rights
Indemnifying Party fails to assume the defense of such action with counsel
satisfactory to the Registration Rights Indemnified Party in its reasonable
judgment, (iii) the named parties to any such action (including any impleaded
parties) have been advised by such counsel that either (A) representation of
such Registration Rights Indemnified Party and the Registration Rights
Indemnifying Party by the same counsel would be inappropriate under applicable
standards of professional conduct or (B) there may be one or more legal defenses
available to the Registration Rights Indemnified Party which are different from
or additional to those available to the Registration Rights Indemnifying Party.
No Registration Rights Indemnifying Party shall, without the prior written
consent of each Registration Rights Indemnified Party, settle, compromise or
consent to the entry of any judgment unless such settlement, compromise or
consent includes an unconditional release of the Registration Rights Indemnified
Party from all liability relating thereto. In either of such cases the
Registration Rights Indemnifying Party shall not have the right to assume the
defense of such action on behalf of such Registration Rights Indemnified Party.
No Registration Rights Indemnifying Party shall be liable for any settlement
entered into without its written consent, which consent shall not be
unreasonably withheld, conditioned or delayed.
(d) Contribution. If the indemnification provided for in this
Section 13.7 from the Registration Rights Indemnifying Party is applicable by
its terms but unavailable to a Registration Rights Indemnified Party hereunder
in respect of any losses, claims, damages, liabilities or expenses referred to
therein, then the Registration Rights Indemnifying Party, in lieu of
indemnifying such Registration Rights Indemnified Party, shall contribute to the
amount paid or payable by such Registration Rights Indemnified Party as a result
of such losses, claims, damages, liabilities or expenses in such proportion as
is appropriate to reflect the relative fault of the Registration Rights
Indemnifying Party and Registration Rights Indemnified Party in connection with
the actions which resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The relative
faults of such Registration Rights Indemnifying Party and Registration Rights
Indemnified Party shall be determined by reference to, among other things,
whether any action in question, including any untrue or alleged untrue statement
of a material fact or omission or alleged omission to state a
<PAGE>
material fact, has been made by, or relates to information supplied by, such
Registration Rights Indemnifying Party or Registration Rights Indemnified Party,
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such action. The amount paid or payable by a
party as a result of the losses, claims, damages, liabilities and expenses
referred to above shall be deemed to include, subject to the limitations set
forth in Sections 13.7(a), 13.7(b) and 13.7(c), any legal or other fees, charges
or expenses reasonably incurred by such party in connection with any
investigation or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 13.7(d) were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in the immediately preceding paragraph.
No person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person.
13.8 Rule 144. The Company covenants that for so long as it is a public
company subject to the rules and regulations of the Exchange Act, it shall take
such action as each holder of Registrable Securities may reasonably request
(including providing any information necessary to comply with Rules 144 under
the Securities Act), all to the extent required from time to time to enable such
holder to sell Registrable Securities without registration under the Securities
Act within the limitation of the exemptions provided by (a) Rule 144 under the
Securities Act, as such rules may be amended from time to time, or (b) any
similar rules or regulations hereafter adopted by the SEC. The Company shall,
upon the request of any holder of Registrable Securities, deliver to such holder
a written statement as to whether the Company has complied with such
requirements.
SECTION 14 TERMINATION OF AGREEMENT
14.1 Termination. This Agreement may be terminated as follows:
(a) at any time, by mutual written consent of the Company and the
Purchasers; or
(b) at the election of the Company or the Purchasers by written
notice to the other parties hereto after 5:00 p.m., New York City time on
November 15, 2000, if the First Closing shall not have been consummated pursuant
hereto, unless such date is extended by the mutual written consent of the
Company and the Purchasers; provided, however, that any party that breaches its
obligations under this Agreement shall not be permitted to terminate this
Agreement pursuant to this Subparagraph 14.1(b); or
(c) at the election of the Company, if any one or more of the
conditions to its obligation to close set forth in Section 9 has not been
satisfied or waived
<PAGE>
and cannot be satisfied, other than as a result of a breach by the Company, with
respect to the Second Closing on or prior to May 1, 2001, and with respect to
the Third Closing on or prior to August 1, 2001; or
(d) at the election of the Purchasers, if any one or more of the
conditions to its obligation to close set forth in Section 5, 6, 7 or 8 has not
been satisfied or waived and cannot be satisfied or waived, other than as a
result of a breach by the Purchasers, with respect to the Second Closing on or
prior to March 15, 2001; and with respect to the Third Closing on or prior to
May 1, 2001; or
(e) at the election of the Company if there has been a material
breach of any representation, warranty, covenant or agreement of the Purchasers
contained in this Agreement, which breach is incurable or has not been cured by
the Purchasers within ten days after written notice from the Company; or
(f) at the election of the Purchasers if there has been a material
breach of any representation, warranty, covenant or agreement of the Company
contained in this Agreement, which breach is incurable or has not been cured by
the Company within ten days after written notice from the Purchasers.
14.2 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 parties hereto shall have any liability in respect
of a termination of this Agreement pursuant to Section 14.1(a) or Section
14.1(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. Notwithstanding the foregoing, if this Agreement is
terminated following the Second Closing but prior to the Third Closing, the
provisions of Sections 11.2, 11.3, 11.4, 11.5 and 11.6, Articles 12, 13 and 15
shall survive such termination and remain in effect so long as the Purchasers
hold any of the share of Series B Stock issued upon conversion of the New Notes
and the Amended Notes.
SECTION 15 MISCELLANEOUS
15.1 Survival of Representations, Warranties and Covenants. The
representations and warranties contained herein shall survive for a period of
eighteen months following the date of the latest closing hereunder. All
covenants and agreements made by the Company in this Agreement shall survive the
execution and delivery of this Agreement and the issuance of the New Notes, the
Amended Notes, the Conditional Subscription and the shares of Series B Stock
issuable upon conversion of the New Notes and Amended Notes and the Common Stock
issuable upon conversion of the Series B Stock.
<PAGE>
15.2 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, telecopier, courier
service, overnight mail or personal delivery:
(i) if to Quantum Industrial Partners LDC.:
Kaya Flamboyan 9,
Villemstad
Curacao
Netherlands-Antilles
with a copy to:
Soros Fund Management LLC
888 Seventh Avenue
New York, NY 10106
Telecopy: (212) 664-0544
Attn: Michael Neus, Esq.
and a copy to:
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019-6064
Telecopy: (212) 757-3990
Attention: James Dubin, Esq. and
Paul D. Ginsberg, Esq.
(ii) if to SFM Domestic Investments LLC:
Soros Fund Management LLC
888 Seventh Avenue
New York, NY 10106
Telecopy: (212) 664-0544
Attn: Michael Neus, Esq.
and a copy to:
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019-6064
Telecopy: (212) 757-3990
Attention: James Dubin, Esq. and
<PAGE>
Paul D. Ginsberg, Esq.
(iii) if to the Company:
Bluefly, Inc.
42 West 39th Street, 9th Floor
New York, New York 10018
Telecopy: (212) 354-3400
Attention: Jon Morris
with a copy to:
Swidler Berlin Shereff Friedman, LLP
405 Lexington Avenue
New York, New York 10174
Telecopy: (212) 891-9598
Attention: Richard A. Goldberg, Esq.
All such notices and communications shall be deemed to have been duly
given when delivered by hand, if personally delivered; when delivered by courier
or overnight mail, if delivered by commercial courier service or overnight mail;
five (5) Business Days after being deposited in the mail, postage prepaid, if
mailed; and when receipt is mechanically acknowledged, if telecopied.
15.3 Successors and Assigns. This Agreement shall inure to the benefit
of and be binding upon the successors and permitted assigns of the parties
hereto and, in the case of the Company, shall be binding upon NewCo upon
consummation of the Merger. 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, except to a successor-in-interest to the Company, without the written
consent of all of the Purchasers.
15.4 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
<PAGE>
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 entitle the Company to any other or further notice or demand
in similar or other circumstances.
15.5 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.
15.6 Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
15.7 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.
15.8 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.
15.9 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.
15.10 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.
15.11 Fees. At the First Closing and from time to time thereafter, the
Company shall promptly 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
$200,000 in the aggregate.
<PAGE>
15.12 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 the parties hereto shall issue a publicity release or public
announcement or otherwise make any disclosure concerning this Agreement, the
transactions contemplated hereby or the business and financial affairs of the
Company, 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 under this clause
(iii) 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 Company 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 Series A Stock, Series B Stock or Common Stock.
(b) Unless substantially in the form previously disclosed, the
Purchasers shall have the opportunity to review and reasonably modify any
provision of any public 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.
15.13 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.
15.14 Schedules. Anything disclosed on any schedule attached hereto or
otherwise disclosed in writing to the Purchasers shall be deemed disclosed on
all schedules attached hereto.
<PAGE>
15.15 Waiver of Liquidation Payment. The Company and the Purchasers agree that
under Section 5.4.2(i) of the Delaware Certificate the amount of the Series B
Liquidation Payment is determined by a formula that is based, in part, on the
sum of (a) the amount invested by the Purchasers in shares of Common Stock
pursuant to the Conditional Subscription obligation under Section 2.3(b)
of this Agreement less the Purchasers' cost of the shares of Common Stock
theretofore sold and (b) the aggregate Series B Face Value, plus accrued and
unpaid dividends thereon, of the shares of Series B Stock received by the
Purchasers upon conversion of the New Notes and Amended Notes. In the event that
the Series B Liquidation Payment is determined under Section 5.4.2(i) of the
Delaware Certificate (and not under Section 5.4.2(ii) of the Delaware
Certificate), the Purchasers hereby waive their entitlement to proceeds, if any,
payable on Liquidation to holders of Common Stock with respect to the shares of
Common Stock, if any, purchased by the Purchasers pursuant to the Conditional
Subscription obligation under Section 2.3(b) of this Agreement that are still
held by the Purchasers or their Affiliates at the time of Liquidation in an
amount up to the Common Stock Investment Amount. The terms "Series B Liquidation
Payment," "Liquidation," "Series B Face Value" and "Common Stock Investment
Amount" shall have the meanings ascribed to such terms in the Delaware
Certificate.
[Remainder of page intentionally left blank.]
<PAGE>
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: /s/ Jonathan P. Freedman
-----------------------------------
Name: Jonathan P. Freedman
Title: VP of Corporate Development
QUANTUM INDUSTRIAL PARTNERS LDC
By: /s/ Michael C. Neus
-----------------------------------
Name: Michael C. Neus
By: Attorney-In-Fact
SFM DOMESTIC INVESTMENTS LLC
By: /s/ Michael C. Neus
-----------------------------------
Name: Michael C. Neus
By: Attorney-In-Fact
<PAGE>
Schedule 1
SHARES AND PURCHASE PRICE
Applicable
Principal Percentage of
Amount of Conditional
Purchaser New Notes Subscription
--------- --------- ------------
Quantum Industrial Partners LDC $4,841,500 96.83%
(principal place of business: Curacao)
SFM Domestic Investments LLC $158,500 3.17%
(principal place of business: New York)
<PAGE>
SCHEDULE 3.4
CONSENTS
1. The Company will be required to file an application to list the shares of
common stock sold in the Rights Offering and the shares of common stock issuable
upon exercise of the Series A Stock and the Series B Stock with the Nasdaq
SmallCap Market and the Boston Stock Exchange.
2. The consummation of the transactions contemplated by the Agreement and the
Transaction Documents are subject to the approval of the Company's shareholders.
3. The consummation of the transactions contemplated by the Agreement and the
Transaction Documents may require the Company and/or the Purchasers to make a
filing under the Hart-Scott-Rodino Act and to obtain government approval or
await the expiration of the applicable waiting period.
<PAGE>
SCHEDULE 3.5
SUBSIDIARIES
1. Clothesline Corporation, a New York corporation.
2. Bluefly Merger Sub, Inc., a Delaware corporation.
<PAGE>
SCHEDULE 3.11
INTELLECTUAL PROPERTY
1. Service mark applications have been made for the following marks: Bluefly;
The Outlet Store In Your Home; MyCatalog; Please.com Again; Fly Buys; Flypaper
and Fabulous Fashion. Fierce Prices. The applications for Bluefly, The Outlet
Store In Your Home and Please.com Again have been granted. The other
applications are pending.
2. The Company has the following domain names: bluefly.com, blue-fly.com,
blue-fly.net, bluefly.net, blueflyorg, 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 possesses a number of other intellectual property rights,
including copyright protection for information contained on its Web Site,
miscellaneous trade secrets and know-how and other similar intellectual
property.
<PAGE>
SCHEDULE 3.13
CAPITALIZATION
1. 4,337,018 shares of common stock (including 2,837,018 shares that are subject
to shareholder approval) are reserved for issuance under the Company's 1997
stock option plan, of which options to purchase 4,265,643 shares of common stock
(including 2,837,018 shares of common stock that are subject to shareholder
approval) were outstanding as of October 15, 2000 and options to purchase 88,269
shares of common stock had been exercised.
2. 514,700 shares of common stock are reserved for issuance under the Company's
2000 stock option plan, all of which were outstanding as of October 15, 2000.
3. 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.
4. 50,000 shares of common stock are reserved for issuance upon the exercise of
warrants issued to a supplier of the Company.
5. 375,000 shares of common stock are reserved for issuance upon the exercise of
the Purchasers' Warrants.
<PAGE>
SCHEDULE 3.14
EMPLOYEE BENEFITS
1. The Company has adopted a 1997 Stock Option Plan pursuant to which 4,337,018
shares of common stock have been reserved for issuance pursuant to options
granted thereunder, of which 2,837,018 shares are subject to shareholder
approval. Shareholder approval for those shares that have not yet been approved
will be sought at the next annual meeting of shareholders.
2. The Company has adopted a 2000 Stock Option Plan pursuant to which 514,700
shares of common stock have been reserved for issuance pursuant to options
granted thereunder.
3. The Company has adopted a vacation, sick leave and personal leave policy.
4. The Company has entered into employment agreements with each of Ken Seiff,
Patrick Barry, Jonathan Morris, Bob Stevens, Jonathan Freedman, Andreas
Turanski, and Martin Keane. Each such employment agreement includes severance
arrangements.
5. The Company provides health, disability and dental insurance coverage for its
employees and eligible family members.
6. The Company has adopted a 401(k) program.
7. The Company has adopted a subsidized gym membership program.
<PAGE>
SCHEDULE 3.15
TAXES
The Company's federal income tax returns for 1998 and 1999 have been filed.
<PAGE>
SCHEDULE 3.17
LABOR RELATIONS
None.
<PAGE>
SCHEDULE 3.18
INVENTORY, ETC.
Due to the Company's limited working capital, a number of its suppliers
have limited the Company's payment terms and, in some cases, have required the
Company to pay for merchandise in advance of delivery.
<PAGE>
SCHEDULE 3.23
CONTRACTS
The following contracts contain change of control and/or non-assignment clauses
that require the Company to obtain consents and/or waiver in connection with the
transactions contemplated by the Agreement:
1. Directors & Officers Insurance Policy, underwritten by National Union Fire
Insurance Company (excess by Chubb)
2. Commercial Excess Liability (Umbrella) Insurance Policy, underwritten by
Travelers Indemnity Company.
3. Workers Compensation and Employers Liability Policy, underwritten by
Travelers Indemnity Company.
4. Commercial Inland Marine Policy, underwritten by Travelers Indemnity Company.
5. Commercial General Liability Policy, underwritten by Travelers Indemnity
Company.
6. Internet Professional Liability Policy, underwritten by American
International Specialty Lines Insurance Company.
7. Employment Agreement, dated as of December 22, 1999, by and between the
Company and E. Kenneth Seiff.
8. Software License Agreement, dated as of February 22, 2000, by and between the
Company and Quest Software, Inc.
9. Services Agreement, dated as of July 27, 2000, by and between the Company and
Distribution Associates, Inc.
10. Agreement, dated as of December 3, 1999, by and between the Company and
Hearst Communications, Inc.
11. Customer Agreement, by and between the Company and EMC Corporation.
12. Service Order Form, dated July 2, 1998, by and between the Company and DIGEX
Incorporated.
<PAGE>
13. Standard Agreement for Consulting Services, dated as of October 1, 1999, by
and between the Company and Cintra Software & Services, Inc.
14. Master Services Agreement, by and between the Company and Akamai
Technologies, Inc.
15. Passport Wallet Service Agreement, dated as of October 4, 1999, by and
between the Company and Microsoft Corporation.
16. Merchant Agreement, dated as of September 17, 1999, by and between the
Company and Inktomi Corporation.
17. Shopping Channel Promotional Agreement, dated as of August 7, 2000, by and
between the Company and America Online, Inc.
<PAGE>
SCHEDULE 3.25
TRADE RELATIONS
Due to the Company's limited working capital, a number of its suppliers have
limited the Company's payment terms and, in some cases, have required the
Company to pay for merchandise in advance of delivery.
<PAGE>
SCHEDULE 3.26
BROKER'S, FINDER'S OR SIMILAR FEES
An investment banking fee of $250,000 is due to Credit Suisse First Boston in
connection with the execution of the Agreement.
<PAGE>
SCHEDULE 13.2
PIGGYBACK REGISTRATION RIGHTS
1. Holders of the Company's Underwriter Purchase Options ("UPO's") hold certain
piggyback registration rights with respect to the UPO's and the underlying
securities.
2. A supplier who holds a warrant to purchase 50,000 shares of the Common Stock
holds certain piggyback registration rights with respect thereof.
<PAGE>
Exhibit A to Investment Agreement
AGREEMENT AND PLAN OF MERGER
OF
BLUEFLY, INC.
(a New York corporation)
AND
BLUEFLY MERGER SUB, INC.
(a Delaware corporation)
Agreement and Plan of Merger entered into on November __, 2000 by
Bluefly, Inc., a New York corporation, and Bluefly Merger Sub, Inc., a Delaware
Corporation.
WHEREAS Bluefly, Inc. is a business corporation of the State of New
York with its principal office therein located in City of New York, County of
New York; and
WHEREAS the total number of shares of stock which Bluefly, Inc. has
authority to issue is _________ of which __________ shares are Common Stock, par
value of $.01 each, and ________is Preferred Stock.
WHEREAS Bluefly Merger Sub, Inc. is a business corporation of the
State of Delaware with its registered office therein located at ,
City of , County of ; and
WHEREAS the total number of shares of stock which Bluefly Merger Sub,
Inc. has authority to issue is [_____] shares of common stock, par value $[____]
per share; and
WHEREAS, all of the outstanding shares of stock of Bluefly Merger Sub,
Inc. are held by Bluefly, Inc.; and
WHEREAS the New York Business Corporation Law permits a merger of a
business corporation of the State of New York with and into a business
corporation of another jurisdiction; and
<PAGE>
WHEREAS the Delaware General Corporation Law permits the merger of a
business corporation of another jurisdiction with and into a business
corporation of the State of Delaware; and
WHEREAS Bluefly, Inc. and Bluefly Merger Sub, Inc. and their respective
Boards of Directors thereof deem it advisable and to the advantage, welfare, and
best interests of the corporations and their respective stockholders to merge
Bluefly, Inc. with and into Bluefly Merger Sub, Inc., pursuant to the provisions
of the New York Business Corporation law and the Delaware General Corporation
Law upon the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and of the mutual
agreement of the parties hereto, being thereunto duly entered into by Bluefly,
Inc. and approved by a resolution adopted by its Board of Directors and being
thereunto duly entered into by Bluefly Merger Sub, Inc. and approved by a
resolution adopted by its Board of Directors, the Agreement of Merger and the
terms and conditions thereof and the mode of carrying the same into effect,
together with any provisions required or permitted to be set forth therein, are
hereby determined and agreed upon as hereinafter set forth.
1. Bluefly, Inc. shall, pursuant to the provisions of the New York
Business Corporation Law and the provisions of the Delaware General Corporation
Law, be merged with and into Bluefly Merger Sub, Inc., which shall be the
surviving corporation from and after the effective time of the merger, and which
is sometimes hereinafter referred to as the "surviving corporation". The
separate existence of Bluefly, Inc., which is sometimes hereinafter referred to
as the "terminating corporation", shall cease at the effective time of the
merger in accordance with the provisions of the New York Business Corporation
Law.
2. At the effective time of the merger, the name of the surviving
corporation shall be changed to Bluefly, Inc. and the Certificate of
Incorporation of the surviving corporation shall be amended to read in its
entirety as set forth in Exhibit A hereto.
3. The present by-laws of the surviving corporation will be the by-laws
of the surviving corporation and will continue in full force and effect until
changed, altered or amended as therein provided and in the manner prescribed by
the provisions of the Delaware General Corporation Law.
4. The directors and officers in office of the surviving corporation at
the effective time of the merger will be the members of the first Board of
Directors and the first officers of the surviving corporation, all of whom shall
remain in office and shall hold their directorships and offices until the
election and qualification of their respective successors or until their tenure
is otherwise terminated in accordance with the Certificate of Incorporation and
by-laws of the surviving corporation.
<PAGE>
5. At the effective time of the merger, each issued share of Common
Stock of the terminating corporation shall be converted into one share of Common
Stock of the surviving corporation and each share of preferred stock of the
terminating corporation shall be converted into one share of Preferred Stock of
the surviving corporation. The issued shares of the surviving corporation
outstanding immediately prior to the effective time of the merger shall be
canceled and cease to exist without being converted into any stock or other
consideration whatsoever.
6. In the event that this Agreement and Plan of Merger shall have been
duly approved and adopted on behalf of the terminating corporation in accordance
with the provisions of the New York Business Corporation Law and on behalf of
the surviving corporation in accordance with the provisions of the Delaware
General Corporation Law, the corporations agree that they will cause to be
executed and filed and recorded any document or documents prescribed by the laws
of the State of New York and by the laws of the State of Delaware, and that they
will cause to be performed all necessary acts within the State of New York and
the State of Delaware and elsewhere to effectuate the merger herein provided
for.
7. The Board of Directors and the proper officers of the terminating
corporation and of the surviving corporation are hereby authorized, empowered,
and directed to do any and all acts and things, and to make, execute, deliver,
file, and record any and all instruments, papers, and documents which shall be
or become necessary, proper, or convenient to carry out or put into effect any
of the provisions of this Agreement and Plan of Merger or of the merger herein
provided for.
<PAGE>
IN WITNESS WHEREOF, this Agreement and Plan of Merger is hereby
executed on behalf of each of the constituent corporations parties by a duly
authorized officer thereof.
Executed on this __ day of November, 2000.
BLUEFLY MERGER SUB, INC.
By:
--------------------------------------
Name:
Title:
BLUEFLY, INC.
By:
--------------------------------------
Name:
Title:
<PAGE>
EXHIBIT B to the
Investment Agreement
CERTIFICATE OF MERGER
OF
BLUEFLY, INC.
INTO
BLUEFLY MERGER SUB, INC.
(Pursuant to Section 907 of the Business Corporation Law)
It is hereby certified, upon behalf of each of the constituent
corporations herein named, as follows:
FIRST: The Board of Directors of each of BLUEFLY, INC. and BLUEFLY
MERGER SUB, INC. has duly adopted a plan of merger setting forth the terms and
conditions of the merger of said corporation.
SECOND: The name of the foreign constituent corporation, which is to be
the surviving corporation, and which is hereinafter sometimes referred to as the
"surviving constituent corporation", is BLUEFLY MERGER SUB, INC. The
jurisdiction of its incorporation is Delaware; and the date of its incorporation
therein is October 31, 2000.
The Application for Authority in the State of New York of the surviving
constituent corporation to transact business as a foreign corporation therein
was filed by the Department of State of the State of New York on , 19 .
THIRD: The name of the domestic constituent corporation, which is being
merged into the surviving constituent corporation, and which is hereinafter
sometimes referred to as the "merged constituent corporation", is BLUEFLY, INC.
and the name under which it was formed is Pivot Corporation. The date upon which
its certificate of incorporation was filed with the Department of State is April
8, 1991.
FOURTH: As to each of the constituent corporations, the plan of merger
sets forth the designation and number of outstanding shares of each class and
series, the specification of the classes and series entitled to vote on the plan
of merger, and the specification of each class and series entitled to vote as a
class on the plan of merger, as follows:
<PAGE>
BLUEFLY MERGER SUB, INC.
Designation of Number of Designation Classes and
each outstanding outstanding of class and series entitled
class and series shares of series enti- to vote as a
of shares each class tled to vote class
Common
Series A Convertible
Preferred Stock
Series B Convertible
Preferred Stock
BLUEFLY INC.
Designation of Number of Designation Classes and
each outstanding outstanding of class and series entitled
class and series shares of series enti- to vote as a
of shares each class tled to vote class
Common
Series A Convertible
Preferred Stock
Series B Convertible
Preferred Stock
FIFTH: The merger herein certified was authorized in respect of the
merged constituent corporation by the vote of at least two-thirds of all
outstanding shares of the corporation entitled to vote on the plan of merger
under the Certificate of Incorporation and by the class vote of the holders of
at least a majority of the holders of Series A Convertible Preferred Stock.
SIXTH: All fees and taxes (including penalties and interest)
administered by the Department of Taxation and Finance of the State of New York
which are now due and payable by the constituent domestic corporation have been
paid and a cessation franchise tax report (estimated or final) through the
anticipated date of merger has been filed by the constituent domestic
corporation. The said report, if estimated, is subject to amendment. The
surviving foreign corporation agrees that it will within 30 days after the
filing of the certificate of merger file the cessation tax report, if an
estimated report was previously filed, and promptly pay to the Department of
Taxation and Finance of the State of New York all fees and taxes (including
penalties and interest), if any, due to the Department of Taxation and Finance
by the constituent domestic corporation.
SEVENTH: The merger herein certified is permitted by the laws of the
jurisdiction of incorporation of the surviving constituent corporation and is in
compliance with said laws.
<PAGE>
EIGHTH: The surviving constituent corporation agrees that it may be
served with process in the State of New York in any action or special proceeding
for the enforcement of any liability or obligation of the merged constituent
corporation, for the enforcement of any liability or obligation of the surviving
constituent corporation for which the surviving constituent corporation is
previously amenable to suit in the State of New York, and for the enforcement,
as provided in the Business Corporation Law of the State of New York, of the
right of shareholders of the merged constituent corporation to receive payment
for their shares against the surviving constituent corporation.
NINTH: The surviving constituent corporation agrees that, subject to
the provisions of section 623 of the Business Corporation Law of the State of
New York, it will promptly pay to the shareholders of the merged constituent
corporation the amount, if any, to which they shall be entitled under the
provisions of the Business Corporation Law of the State of New York relating to
the rights of shareholders to receive payment for their shares.
TENTH: The surviving constituent corporation hereby designates the
Secretary of State of the State of New York as its agent upon whom process
against it may be served in the manner set forth in paragraph (b) of section 306
of the Business Corporation Law of the State of New York in any action or
special proceeding. The post office address within the State of New York to
which the said Secretary of State shall mail a copy of any process against the
surviving corporation served upon him is: 42 W. 39th Street, 9th floor, New
York, N.Y. 10018.
IN WITNESS WHEREOF, I have subscribed this document on the date set
forth below and do hereby affirm, under the penalties of perjury, that the
statements contained therein have been examined by me and are true and correct.
Executed on this 13th day November, 2000.
BLUEFLY, INC.
By:
---------------------------------
Ken Seiff, President
<PAGE>
Exhibit C to the
Investment Agreement
CERTIFICATE OF INCORPORATION
OF
BLUEFLY, INC.
1. Name. The name of the corporation is BLUEFLY, INC. (the
"Corporation").
2. Address; Registered Office and Agent. The address of the
Corporation's registered office is ______________________, City of
_____________, County of _________________, State of Delaware; and its
registered agent at such address is _______________________________.
3. Purposes. The purpose of the Corporation is to engage in any lawful
act or activity for which corporations may be organized under the General
Corporation Law.
4. Number of Shares
4.1 The total number of shares of stock that the Corporation shall
have authority to issue is: sixty-five million (65,000,000) of which forty
million (40,000,000) shall be shares of Common Stock of the par value of $.01
("Common Stock") and twenty-five million (25,000,000) shall be shares of
Preferred Stock of the par value of $.01 each ("Preferred Stock").
4.2 The designation, relative rights, preferences and limitations
of the shares of each class are as follows:
4.2.1 Other than the shares of the series of Preferred Stock,
the terms of which are specified in this Certificate, the shares of Preferred
Stock may be issued from time to time in one or more series having such number
and such distinctive serial designations, as shall hereafter be stated and
expressed in the resolution or resolutions providing for the issue of such
shares of Preferred Stock from time to time adopted by the Board pursuant to
authority so to do which is hereby vested in the Board. Each series of shares of
Preferred Stock (a) may have such voting powers, full or limited, or may be
without voting powers; (b) may be subject to redemption at such time or times
and at such prices; (c) may be entitled to receive dividends (which may be
cumulative or non-cumulative) at such rate or rates, on such conditions and at
such times, and payable
<PAGE>
in preference to, or in such relation to, the dividends payable on any other
class or classes or series of stock; (d) may have such rights upon the
dissolution of, or upon any distribution of the assets of, the Corporation; (e)
may be made convertible into or exchangeable for, shares of any other class or
classes or of any other series of the same or any other class or classes of
shares of the Corporation at such price or prices or at such rates of exchange
and with such adjustments; (f) may be entitled to the benefit of a sinking fund
to be applied to the purchase or redemption of shares of such series in such
amount or amounts; (g) may be entitled to the benefit of conditions and
restrictions upon the creation of indebtedness of the Corporation or any
subsidiary, upon the issue of any additional shares (including additional shares
of such series or of any other series) and upon the payment of dividends or the
making of other distributions on, and the purchase, redemption or other
acquisition by the Corporation or any subsidiary of, any outstanding shares of
the Corporation and (h) may have such other relative, participating, optional or
other special rights, qualifications, limitations or restrictions thereof; all
as shall be stated in said resolution or resolutions providing for the issue of
such shares of Preferred Stock.
4.2.2 Except as otherwise provided by law, elsewhere in this
Certificate or by the resolution or resolutions providing for the issue of any
series of shares of Preferred Stock, the holders of outstanding shares of Common
Stock shall exclusively possess voting power for the election of directors and
for all other purposes, each holder of record of shares of Common Stock being
entitled to one vote for each share of Common Stock standing in its, his or her
name on the books of the Corporation. Except as otherwise provided elsewhere in
this Certificate or by the resolution or resolutions providing for the issue of
any series of shares of Preferred Stock, the holders of shares of Common Stock
shall be entitled, to the exclusion of the holders of shares of Preferred Stock
of any and all series, to receive such dividends as from time to time may be
declared by the Board. Except as otherwise provided elsewhere in this
Certificate or by the resolution or resolutions providing for the issue of any
series of shares of Preferred Stock, in the event of any liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
after payment shall have been made to the holders of shares of Preferred Stock
of the full amount to which they shall be entitled as provided elsewhere in this
Certificate or pursuant to the resolution or resolutions providing for the issue
of any series of shares of Preferred Stock, the holders of shares of Common
Stock shall be entitled, to the exclusion of the holders of shares of Preferred
Stock of any and all series, to share, ratably according to the number of shares
of Common Stock held by them, in all remaining assets of the Corporation
available for distribution to its stockholders.
4.2.3 Subject to the provisions of this Certificate of
Incorporation and except as otherwise provided by law, the stock of the
Corporation, regardless of class, may be issued for such consideration and for
such corporate purposes as the Board may from time to time determine.
<PAGE>
5. Preferred Stock
5.1 Designation/Ranking. There shall be two series of Preferred
Stock which shall be designated, respectively, as "Series A Convertible
Preferred Stock" (referred to herein as the "Series A Convertible Preferred
Stock") and "Series B Convertible Preferred Stock" (referred to herein as
"Series B Convertible Preferred Stock" and together with the Series A
Convertible Preferred Stock, the "Convertible Preferred Stock"). The Series A
Convertible Preferred Stock and Series B Convertible Preferred Stock shall rank
pari passu with each other and senior to the Corporation's Common Stock and all
other Preferred Stock of the Corporation ranking junior to the Convertible
Preferred Stock, with respect to the payment of distributions on liquidation,
dissolution or winding up of the Corporation and with respect to the payment of
dividends.
5.2 The number of shares constituting the Series A Convertible
Preferred Stock shall be 500,000 shares. The number of shares constituting the
Series B Convertible Preferred Stock shall be 9,000,000.
5.3 Dividends.
5.3.1 The holders of Convertible Preferred Stock shall be
entitled to receive, out of funds legally available for such purpose, dividends
which shall accrue at the rate of 8% per annum of the Face Value of such stock
and shall compound annually, payable only upon: (i) the conversion of the
Convertible Preferred Stock pursuant to Section 5.8; (ii) Liquidation (as
defined in Section 5.4) of the Corporation under Section 5.4 or (iii) a
redemption of the Convertible Preferred Stock under Section 5.9. Except in
connection with a Liquidation Payment made under Section 5.4 or a redemption
payment made under Section 5.9 (which in each case shall require payment in
cash), the Corporation, in its sole discretion, may elect to pay such dividends
in shares of Common Stock, in which case such Common Stock dividends shall be
equal to the number of shares of Common Stock obtained by dividing the cash
value of such dividend by the Current Market Price (as defined in Section
5.8.5(iv)) on the business day prior to the date of payment.
5.3.2 Dividends on each share of Convertible Preferred Stock
shall be cumulative and shall accrue from the date of issuance of such share of
Convertible Preferred Stock. The date on which the Corporation initially issues
any share of Convertible Preferred Stock shall be deemed to be its "Issue Date,"
regardless of the number of times transfer of such shares is made on the stock
records maintained by or for the Corporation and regardless of the number of
certificates that may be issued to evidence such share.
<PAGE>
5.3.3 In addition to the right to receive dividends pursuant
to Section 5.3.1 above, each holder of a share of Convertible Preferred Stock
shall have the right, at any time after the Issue Date, if the Board of
Directors of the Corporation shall declare a dividend or make any other
distribution (including, without limitation, in cash or other property or
assets, but excluding any stock split effected as a stock dividend), to holders
of shares of Common Stock, to receive, out of funds legally available therefor,
a dividend or distribution in an amount equal to the amount of such dividend or
distribution receivable by a holder of the number of shares of Common Stock into
which such share of Convertible Preferred Stock is convertible on the record
date for such dividend or distribution. Any such amount shall be paid to the
holders of shares of Convertible Preferred Stock at the same time such dividend
or distribution is made to the holders of Common Stock.
5.4 Liquidation
5.4.1 Series A. Upon any liquidation, dissolution or winding
up of the Corporation, whether voluntary or involuntary (a "Liquidation"), each
holder shall be paid for each share of Series A Convertible Preferred Stock held
by it, before any distribution or payment is made upon any stock ranking junior
to the Series A Convertible Preferred Stock, an amount equal to the greater of
(i) $20 per share (the "Series A Face Value") plus, in the case of each share,
an amount equal to all accrued but unpaid dividends thereon, through the date
payment thereof is made, and (ii) the amount that the holder of such share of
the Series A Convertible Preferred Stock would receive if it were to convert
such share of Series A Convertible Preferred Stock into share(s) of Common Stock
immediately prior to such Liquidation. The holders of Series A Convertible
Preferred Stock shall not be entitled to any further payment (such amount
payable with respect to one share of Series A Convertible Preferred Stock being
sometimes referred to as the "Series A Liquidation Payment" and with respect to
all shares of Series A Convertible Preferred Stock being sometimes referred to
as the "Series A Liquidation Payments").
5.4.2 Series B Convertible Preferred Stock. Upon any
Liquidation, each holder shall be paid for each share of Series B Convertible
Preferred Stock held by it, before any distribution or payment is made upon any
stock ranking junior to the Series B Convertible Preferred Stock, an amount
equal to the greater of: (i) the sum of (x) the Series B Face Value plus (y) in
the case of each such share, an amount equal to all accrued and unpaid
dividends thereon through the date payment therefore is made plus (z) the
Per Share Common Stock Investment Amount and (ii) the amount that the holder
of such share of the Series B Convertible Preferred Stock would receive if
it were to convert such share of Series B Convertible Preferred Stock into
shares of Common Stock immediately prior to such Liquidation (such amount
payable with respect to one share of Series B Convertible Preferred Stock being
sometimes referred to as the "Series B Liquidation Payment" and together with
the Series A Liquidation Payment, the "Liquidation Payment" and with respect to
all shares of Series B Convertible Preferred Stock being sometimes referred to
as the
<PAGE>
"Series B Liquidation Payments" and together with the Series A Liquidation
Payments, the "Liquidation Payments").
For the purpose of this Section 5.4.2, the following terms shall have
the following definitions:
"Common Stock Investment Amount" means the dollar amount, which amount
shall not be less than zero, equal to the difference of (i) the aggregate amount
invested by Quantum Industrial Partners LDC and SFM Domestic Investments LLC or
their affiliates (the "Purchasers") in the Common Stock of the Corporation
pursuant to the conditional subscription obligation under Section 2.3(b) of the
Investment Agreement, dated as of November 13, 2000, among the Corporation,
Bluefly Merger Sub, Inc. and the Purchasers (the "New Investment Agreement")
minus (ii) an amount equal to the product of (A) the aggregate number of shares
of Common Stock purchased pursuant to the Conditional Subscription (as defined
in the New Investment Agreement), which are sold by the Purchasers at any time
prior to the date of measurement and (B) $2.34 (as adjusted to reflect
combinations and splits and the like with respect to the Common Stock).
"Per Share Common Stock Investment Amount" means the quotient obtained
by dividing (i) the Common Stock Investment Amount by (ii) number of shares of
Series B Convertible Preferred Stock outstanding at the time of measurement.
"Series B Face Value" means an amount equal to $2.34 per share of Series B
Convertible Preferred Stock.
5.4.3 If upon such Liquidation, the assets to be distributed
among the holders of Convertible Preferred Stock shall be insufficient to permit
payment to the holders of Convertible Preferred Stock of the Liquidation
Payments, then the entire assets of the Corporation to be so distributed shall
be distributed ratably among the holders of Convertible Preferred Stock. Upon
any such Liquidation after the holders of Convertible Preferred Stock shall have
been paid in full the Liquidation Payments to which they shall be entitled, the
remaining net assets of the Corporation may be distributed to the holders of
securities ranking junior to the Convertible Preferred Stock.
5.4.4 Written notice of such Liquidation stating a payment
date, the amount of the Liquidation Payments and the place where said
Liquidation Payments shall be payable, shall be delivered in person, mailed by
certified or registered mail, return receipt requested, or sent by telecopier or
telex, not less than 10 days prior to the payment date stated therein, to the
holders of record of Convertible Preferred Stock, such notice to be addressed to
each such holder at its address as shown by the records of the Corporation.
<PAGE>
5.4.5 The Convertible Preferred Stock shall, with respect to
distribution of assets and rights upon Liquidation rank senior to each class or
series of capital stock of the Corporation hereafter created which does not
expressly provide that it ranks on a parity with or is senior to the Convertible
Preferred Stock with respect to distribution of assets and rights upon the
liquidation, dissolution or winding up of the Corporation.
5.5 Voting Rights of the Series A Convertible Preferred Stock.
5.5.1 In addition to any other vote required by law or this
Certificate, so long as at least 60% of the shares of Series A Convertible
Preferred Stock outstanding on August 26, 1999 (the "Series A Issue Date")
remain outstanding, the Corporation may take the following actions only with the
approval of the holders of a majority of the shares of Series A Convertible
Preferred Stock voting separately as a class:
(i) liquidate the Corporation 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 Corporation 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 Corporation in excess of
$1,000,000 (other than a financing secured by inventory or a financing required
in connection with the optional redemption of the Convertible Preferred Stock in
accordance with Section 7);
(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 Corporation
(excluding securities issuable upon exercise of options under the stock option
or employee incentive plans existing on October 12, 2000 or as a result of the
conversion of the Convertible
<PAGE>
Preferred Stock or any notes and warrants of the Corporation outstanding as of
the effective date of this Certificate);
(vii) declare dividends, repurchase or redeem securities
of the Corporation or debt, except to the extent such debt is due in accordance
with its terms and except for dividends, repurchases or redemption applicable to
the Convertible Preferred Stock or any notes of the Corporation outstanding as
of the effective date of this Certificate;
(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 any
registration rights agreement of the Corporation outstanding as of the effective
date of this Certificate or registrations on Form S-8 or similar forms;
(x) enter into any contract with an affiliate;
(xi) amend the Corporation's Certificate of
Incorporation or Bylaws;
(xii) increase or decrease the number of members of the
Corporation's Board of Directors or the voting rights of the directors;
(xiii) change the Corporation'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
Corporation officers and senior executive managers with authority equivalent to
that of Executive Vice Presidents; or
(xvi) amend or alter the New Investment Agreement.
5.5.2 For so long as at least 20% of the shares of Series A
Convertible Preferred Stock outstanding on the Series A Issue Date remain
outstanding, the holders of the Series A Convertible Preferred Stock voting
separately as a class, shall be entitled to elect one (1) director to the Board
of Directors (hereafter referred to as the "Class A Director") upon a vote of a
majority of the outstanding shares of Series A
<PAGE>
Convertible Preferred Stock. For so long as at least 60% of the shares of the
Series A Convertible Preferred Stock outstanding on the Series A Issue Date
remain outstanding, the Class A Director shall be entitled to seven votes on any
action taken by the Board of Directors.
5.5.3 Notwithstanding anything set forth herein, with the
exception of any action duly approved by the holders of Series A Convertible
Preferred Stock pursuant to Section 5.5.1 above, at any time when any shares of
Series A Convertible Preferred Stock are outstanding, except where the vote or
written consent of the holders of a greater number of shares of the Corporation
is required by law or by this Certificate, and in addition to any other vote
required by law or the Corporation's Certificate of Incorporation, without the
approval of the holders of at least two-thirds (66 2/3%) of the then outstanding
shares of Series A Convertible Preferred Stock, given in writing or by vote at a
meeting, consenting or voting (as the case may be) separately as a series, the
Corporation will not (i) effect any transaction or other action that would
adversely affect the rights, preferences, powers (including voting powers) and
privileges of the Series A Convertible Preferred Stock or (ii) merge or
consolidate with another Person, sell all or substantially all of the assets of
the corporation or enter into a transaction which results in or take any action
which facilitates 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")), other than any group that includes
holders of Convertible Preferred Stock and/or their Affiliates, becoming the
beneficial owner, directly or indirectly, of outstanding shares of stock of the
Corporation 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 shareholders of the Corporation in the election of
directors (the term "beneficial owner" shall be determined in accordance with
Rule 13d-3 of the Exchange Act).
5.6 Voting Rights of Series B Convertible Preferred Stock
5.6.1 In addition to any other vote required by law or this
Certificate, so long as at least 40% of the shares of Series B Convertible
Preferred Stock issued on the Issue Date remain outstanding the Corporation may
take the following actions only with the approval of the holders of a majority
of the shares of Series B Convertible Preferred Stock voting separately as a
class:
(i) liquidate the Corporation 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;
<PAGE>
(iii) sell Corporation 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 Corporation in excess of $1,000,000
(other than a financing secured by inventory or a financing required in
connection with the optional redemption of the Convertible Preferred Stock in
accordance with Section 5.9);
(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 Corporation (excluding
securities issuable upon exercise of options under the stock option or employee
incentive plans existing on October 12, 2000 or as a result of the conversion of
the Convertible Preferred Stock or any notes and warrants of the Corporation
outstanding as of the effective date of this Certificate);
(vii) declare dividends, repurchase or redeem securities of
the Corporation or debt, except to the extent such debt is due in accordance
with its terms and except for dividends, repurchases or redemption applicable to
the Convertible Preferred Stock or any notes of the Corporation outstanding as
of the effective date of this Certificate;
(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 any registration
rights agreement of the Corporation outstanding as of the effective date of this
Certificate or registrations on Form S-8 or similar forms;
(x) enter into any contract with an affiliate;
(xi) amend the Corporation's Certificate of Incorporation or
Bylaws;
(xii) increase or decrease the number of members of the
Corporation's Board of Directors or the voting rights of the directors;
<PAGE>
(xiii) change the Corporation'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 Corporation
officers and senior executive managers with authority equivalent to that of
Executive Vice Presidents; or
(xvi) amend or alter the New Investment Agreement.
5.6.2 For so long as at least 20% of the shares of Series B
Convertible Preferred Stock outstanding on the Issue Date remain outstanding,
the holders of the Series B Convertible Preferred Stock voting separately as a
class, shall be entitled to elect one (1) director to the Board of Directors
(hereafter referred to as the "Class B Director") upon a vote of a majority of
the outstanding shares of Series B Convertible Preferred Stock. For so long as
at least 40% of the shares of the Series B Convertible Preferred Stock issued on
the Issue Date remain outstanding, the Class B Director shall be entitled to
seven votes on any action taken by the Board of Directors.
5.6.3 Notwithstanding anything set forth herein, with the
exception of any action duly approved by the holders of Series B Convertible
Preferred Stock pursuant to Section 5.6.1 above, at any time when any shares of
Series B Convertible Preferred Stock are outstanding, except where the vote or
written consent of the holders of a greater number of shares of the Corporation
is required by law or by this Certificate, and in addition to any other vote
required by law or this Certificate, without the approval of the holders of at
least two-thirds (66 2/3%) of the then outstanding shares of Series B
Convertible Preferred Stock, given in writing or by vote at a meeting,
consenting or voting (as the case may be) separately as a series, the
Corporation will not (i) effect any transaction or other action that would
adversely affect the rights, preferences, powers (including voting powers) and
privileges of the Series B Convertible Preferred Stock or (ii) merge or
consolidate with another Person, sell all or substantially all of the assets of
the corporation or enter into a transaction which results in or take any action
which facilitates a Change of Control.
5.7 Voting Rights Generally
5.7.1 Holders of Convertible Preferred Stock shall be
entitled to notice of any stockholders' meeting. Except as otherwise required by
law, at any annual or special meeting of the Corporation's stockholders, or in
connection with
<PAGE>
any written consent in lieu of any such meeting, the holders of each outstanding
share of Convertible Preferred Stock shall be entitled to cast, in respect of
such share, the number of votes equal to the number of full shares of Common
Stock into which such share of Convertible Preferred Stock is then convertible
(calculated by rounding any fractional share up to the nearest whole number) on
the date for determination of stockholders entitled to vote at the meeting.
Except as set forth herein or otherwise required by law, the Convertible
Preferred Stock and the Common Stock shall vote together as a single class on
each matter submitted to the stockholders, and not by separate class or series.
5.7.2 A vacancy in any directorship elected by the holders of
the Series A Convertible Preferred Stock or Series B Convertible Preferred
Stock, as the case may be, shall be filled only by vote or written consent in
lieu of a meeting of the holders of the Series A Convertible Preferred Stock or
Series B Convertible Preferred Stock, as the case may be. Except as otherwise
required by applicable law, any member of the Board of Directors elected by the
holders of the Series A Convertible Preferred Stock or Series B Convertible
Preferred Stock, as the case may be, may only be removed by the vote of the
holders of not less than a majority of the Series A Convertible Preferred Stock
or Series B Convertible Preferred Stock, as the case may be, voting thereon.
5.7.3 Notwithstanding anything set forth herein, the Class A
Director and Class B Director shall not be entitled to vote on the question of
whether the Corporation exercises its right of redemption in Section 5.9 or the
incurrence of any debt or issuance of any equity to finance such optional
redemption.
5.8 Conversions. The holders of shares of Convertible Preferred
Stock shall have the following conversion rights:
5.8.1 Right to Convert. Subject to the terms and conditions
of this Section 5.8.1, the holder of any share or shares of Convertible
Preferred Stock shall have the right, at its option at any time and from time to
time, to convert any such shares (or fractions thereof) of Convertible Preferred
Stock (except that upon any Liquidation, the right of conversion shall terminate
at the close of business on the business day immediately preceding the date
fixed for payment of the amount distributable on the Convertible Preferred
Stock) into such number of fully paid and nonassessable shares of Common Stock
as is obtained
(i) in the case of the Series A Convertible Preferred Stock,
by (x) multiplying the number of shares of Series A Convertible Preferred Stock
to be so converted by the Series A Face Value and (y) dividing the result by the
Series A Conversion Price (as defined below) applicable to such share,
determined as provided below, in effect on the date the certificate is
surrendered for conversion and
<PAGE>
(ii) in the case of the Series B Convertible Preferred Stock,
by (x) dividing the Series B Face Value by (y) the Series B Conversion Price
applicable to such share, determined as provided below, in effect on the date
the certificate is surrendered for conversion;
plus, in either case, at the Company's option, either a number of
shares of Common Stock (valued at their Current Market Price on the Business Day
prior to the date of payment), or an amount in cash, as the case may be, equal
to any accrued but unpaid dividends on the shares of Convertible Preferred Stock
so converted.
The initial Series A Conversion Price per share for shares of
Convertible Preferred Stock shall be $2.34 per share, as adjusted pursuant to
the further provisions of this Section 5.8 (each such price, or such price as
last adjusted, being referred to as the "Series A Conversion Price" or "Series B
Conversion Price" as applicable). Such rights of conversion shall be exercised
by the holder thereof by giving written notice that the holder elects to convert
a stated number of shares of Convertible Preferred Stock into Common Stock and
by surrender of a certificate or certificates for the shares to be so converted
to the Corporation at its principal office (or such other office or agency of
the Corporation as the Corporation may designate by notice in writing to the
holders of the Convertible Preferred Stock) at any time during its usual
business hours on the date set forth in such notice, together with a statement
of the name or names (with address) in which the certificate or certificates for
shares of Common Stock shall be issued.
5.8.2 Automatic Conversion of Series A Convertible Preferred
Stock. (a) One-quarter of the shares of Series A Convertible Preferred Stock
outstanding on the Issue Date shall automatically be converted, with no further
action on the part of the Corporation or the holder thereof, into such number of
fully paid and non-assessable shares of Common Stock and such other
consideration as is determined under Section 5.8.1 on the date, if any, after
November 1, 2001, on which the last sale price of the Common Stock on the NASDAQ
Small Cap Market or, if not quoted on the NASDAQ Small Cap Market, on any other
national securities exchange, has reached at least four times the Conversion
Price (the "Price Trigger") for 30 consecutive trading days during the prior 90
days. Following the 90th day after such date and every 90 days thereafter until
no shares of Series A Convertible Preferred Stock are outstanding, an additional
one-quarter of the shares of Series A Convertible Preferred Stock initially
outstanding shall automatically be converted on the date on which the Price
Trigger has been reached for 30 consecutive trading days during the 90-day
period; provided, that such automatic conversion shall occur (i) no more than
once during any 90-day period and (ii) only if at such time there exists an
effective registration statement filed by the Corporation under the Securities
Act of 1933 (the "Act") registering the resale of the shares of Common Stock to
be received upon conversion and the Corporation is obligated to maintain the
effectiveness thereof for at least 120 days after such conversion. The
<PAGE>
automatic conversion shall be effected on a pro rata basis among holders of
Series A Convertible Preferred Stock.
(b) Immediately prior to the closing of a merger, sale of all or
substantially all of the Corporation's assets, or any combination thereof in
which the Corporation or its shareholders are to receive cash or marketable
securities with an aggregate value per share of Series A Convertible Preferred
Stock of at least three times the Conversion Price, each outstanding share of
Series A Convertible Preferred Stock shall automatically, with no further action
required to be taken by the Corporation or the holder thereof, be converted into
such number of fully paid and nonassessable shares of Common Stock and such
other consideration as is determined under Section 5.8.1.
(c) Immediately after the conversion in Section 5.8.2(a) or (b), each
holder of shares of Series A Convertible Preferred Stock so converted shall be
deemed to be the holder of record of the Common Stock issuable upon conversion
of such holder's shares notwithstanding that the share register of the
Corporation shall then be closed or that certificates representing such Common
Stock shall not then be actually delivered to such person. Upon notice from the
Corporation, each holder of shares of Series A Convertible Preferred Stock so
converted shall promptly surrender to the Corporation, at any place where the
Corporation shall maintain a transfer agent for its Series A Convertible
Preferred Stock and Common Stock, certificates representing the shares so
converted, duly endorsed in blank or accompanied by proper instruments of
transfer. On the date of such automatic conversion, all rights with respect to
the shares of Series A Convertible Preferred Stock so converted, including the
rights, if any, to receive notices and to vote, will terminate, except only the
rights of holders thereof to (i) receive certificates for the number of shares
of Common Stock into which such shares of Series A Convertible Preferred Stock
have been converted, (ii) the payment of any accrued but unpaid dividends
thereon as provided herein and (iii) exercise the rights to which they are
entitled as holders of Common Stock.
5.8.3 Issuance of Certificates; Time Conversion Effected.
Promptly after the surrender of the certificate or certificates for the shares
of Convertible Preferred Stock to be converted as set forth above, the
Corporation shall issue and deliver, or cause to be issued and delivered, to the
holders, registered in such name or names as such holders may direct, a
certificate or certificates for the number of whole shares of Common Stock
issuable upon the conversion of such shares of Convertible Preferred Stock.
5.8.4 Fractional Shares; Partial Conversion. No fractional
shares of Common Stock shall be issued upon conversion of Convertible Preferred
Stock into Common Stock. If any fractional share of Common Stock would, except
for the provisions of the first sentence of this Subparagraph 6(d), be delivered
<PAGE>
upon such conversion, the Corporation, in lieu of delivering such fractional
share, shall pay to the holder surrendering the Convertible Preferred Stock for
conversion an amount in cash equal to the current market price of such
fractional share as determined in good faith by the Board of Directors of the
Corporation.
5.8.5 Antidilution Adjustments. The Series A Conversion Price
and the Series B Conversion Price shall be subject to adjustment as follows if
any of the events listed below occur after the effective date of this
Certificate (regardless of whether any shares of such series of Convertible
Preferred Stock are outstanding) but, with respect to a share of Convertible
Preferred Stock, prior to the conversion of such share of Convertible Preferred
Stock into Common Stock.
(i) In case the Corporation shall (x) pay a dividend or make
a distribution on its Common Stock in shares of its Common Stock, (y) subdivide
or reclassify its outstanding Common Stock into a greater number of shares, or
(z) combine or reclassify its outstanding Common Stock into a smaller number of
shares, the applicable Conversion Price in effect immediately prior to such
event shall be adjusted so that the holder of any share of the Convertible
Preferred Stock thereafter surrendered for conversion shall be entitled to
receive the number of shares of Common Stock which it would have owned or have
been entitled to receive after the happening of such event had the share of such
Convertible Preferred Stock been converted immediately prior to the happening of
such event. An adjustment made pursuant to this paragraph shall become effective
immediately after the record date in the case of a dividend or distribution and
shall become effective on the effective date in the case of subdivision,
combination or reclassification. If any dividend or distribution is not paid or
made, the applicable Conversion Price then in effect shall be appropriately
readjusted.
(ii) In case the Corporation shall pay, issue or distribute
to its holders of capital stock any shares of capital stock of the Corporation
or evidences of indebtedness or cash or other assets (excluding (w) regular cash
dividends payable out of earnings in the ordinary course and distributed ratably
to the holders of Convertible Preferred Stock, (x) distributions paid from
retained earnings of the Corporation and distributed ratably to the holders of
Convertible Preferred Stock, (y) dividends or distributions referred to in
clause (i) above and (z) dividends or distributions paid or made to holders of
shares of Convertible Preferred Stock in the manner provided in Section 5.3
above) or rights, options or warrants to subscribe for or purchase any of its
securities then, in each such case, the applicable Conversion Price shall be
adjusted so that it shall equal the price determined by multiplying the
applicable Conversion Price in effect immediately prior to the date of the
distribution by a fraction the numerator of which shall be the applicable
Conversion Price less the then fair market value (as determined by the Board of
Directors, whose determination, if made in good faith, shall be conclusive) of
the portion of the capital stock, cash or assets or evidences of
<PAGE>
indebtedness so distributed, or of the subscription rights, options or warrants
so distributed or of such convertible or exchangeable securities, with respect
to one share of Common Stock, and the denominator of which shall be the
applicable Conversion Price in effect immediately prior to the date of the
distribution. Such adjustment shall be made whenever any such distribution is
made, and shall become effective retroactive to the record date for the
determination of stockholders entitled to receive such distribution. If any such
distribution is not made or if any or all of such rights, options or warrants
expire or terminate without having been exercised, the applicable Conversion
Price then in effect shall be appropriately readjusted.
(iii) Whenever the applicable Conversion Price is adjusted as
herein provided or as provided in Section 5.8.6(a), the Corporation shall
promptly file with the conversion agent (or, if there is no conversion agent,
the secretary of the Corporation) an officer's certificate setting forth such
Conversion Price after the adjustment and setting forth a brief statement of the
facts requiring the adjustment, which certificate shall be conclusive evidence
of the correctness of the adjustment. Promptly after delivery of the
certificate, the Corporation shall prepare a notice of the adjustment of such
Conversion Price setting forth such Conversion Price and the date on which the
adjustment becomes effective and shall mail the notice of such adjustment of the
applicable Conversion Price (together with a copy of the officer's certificate
setting forth the facts requiring such adjustment) to the holder of each share
of the Convertible Preferred Stock at such holder's last address as shown on the
stock books of the Corporation.
(iv) For the purpose of any computation under any provision
relating to the Convertible Preferred Stock, the "Current Market Price" per
share of Common Stock on any date shall be deemed to be the average of the daily
closing prices per share of Common Stock for the 30 consecutive trading days
immediately preceding such date. If on any such date the shares of Common Stock
are not listed or admitted for trading on any national securities exchange or
quoted by NASDAQ or a similar service, the Current Market Price for the Common
Stock shall be the fair market value of the Common Stock on such date as
determined in good faith by the Board of Directors of the Corporation.
<PAGE>
5.8.6 Series B Adjustment.
(a) In case the Corporation shall (i) sell or issue
shares of its Common Stock, (ii) issue rights, options or warrants to subscribe
for or purchase shares of Common Stock or (iii) issue or sell other rights for
the purchase of shares of Common Stock or securities convertible into or
exchangeable into shares of Common Stock, in the case of one or more of the
events described in the immediately preceding clauses (i), (ii) and (iii)
(excluding those issuances referred to in Section 5.8.6(b) (collectively, the
"Securities"), at a price per share (the "New Issue Price") less than the Series
B Conversion Price, then in each such case the Series B Conversion Price in
effect immediately prior to the issuance of such Securities shall be adjusted to
equal the New Issue Price. The adjustment provided for in this Subparagraph 6(f)
shall be made successively whenever any Securities are issued (provided,
however, that no further adjustments in the Series B Conversion Price shall be
made upon the subsequent exercise, conversion or exchange, as applicable of such
Securities pursuant to the original terms of such Securities) and shall become
effective immediately after such issuance. In determining whether any Securities
entitle the holders of the Common Stock to subscribe for or purchase shares of
Common Stock at less than the Series B Conversion Price, and in determining the
New Issue Price of the shares of Common Stock so offered, there shall be taken
into account any consideration received by the Corporation for such Securities,
any consideration required to be paid upon the exercise, conversion or exchange,
as applicable, of such Securities and the value of all such consideration (if
other than cash) shall be determined in good faith by the Board of Directors of
the Corporation.
(b) Notwithstanding the foregoing, the provisions of
this paragraph shall not apply to the issuance of: (x) any equity securities
issued at then fair market value pursuant to the Corporation's employee option
or stock incentive plan approved by the Board of Directors of the Corporation on
or prior to October 12, 2000, or (y) any equity securities issued at then fair
market value as consideration for services of non-employee third parties
provided to the Corporation (in an aggregate amount not to exceed 100,000 shares
of Common Stock in any fiscal year (as such number may be adjusted to reflect
stock splits, combinations and the like)).
5.8.7 Reorganization, Recapitalization or Reclassification.
If any capital reorganization, recapitalization or reclassification of the
capital stock of the Corporation (other than a merger or consolidation of the
Corporation in which the Corporation is the surviving corporation and which does
not result in a reclassification or change of outstanding shares of Common
Stock) or a merger or consolidation shall be effected in such a way that holders
of Common Stock shall be entitled to receive stock, securities or assets (other
than cash dividends payable out of earnings or surplus in the ordinary course of
business) with respect to or in exchange for Common Stock, then, as a condition
of such reorganization, recapitalization or
<PAGE>
reclassification, lawful and adequate provisions shall be made whereby each
holder of a share or shares of Convertible Preferred Stock shall thereupon have
the right to receive upon conversion of such share or shares of Convertible
Preferred Stock, upon the basis and upon the terms and conditions specified
herein and in lieu of the shares of Common Stock immediately theretofore
receivable upon the conversion of such share or shares of Convertible Preferred
Stock, such shares of stock, securities or assets as may be issued or payable
with respect to or in exchange for a number of outstanding shares of such Common
Stock equal to the number of shares of such Common Stock immediately theretofore
receivable upon such conversion had such reorganization or reclassification not
taken place, and in any such case appropriate provisions shall be made with
respect to the rights and interests of such holder to the end that the
provisions hereof (including without limitation provisions for adjustments of
the Conversion Price) shall thereafter be applicable, as nearly as may be, in
relation to any shares of stock, securities or assets thereafter deliverable
upon the exercise of such conversion rights.
5.8.8 Other Notice. In case at any time:
(i) the Corporation shall declare any dividend upon its
Common Stock payable in cash or stock or make any other distribution to the
holders of its Common Stock;
(ii) the Corporation shall offer for subscription pro
rata to the holders of its Common Stock any additional shares of stock of any
class or other rights;
(iii) there shall be any capital reorganization or
reclassification of the capital stock of the Corporation, or a consolidation or
merger of the Corporation with or into another entity or entities, or a sale,
lease, abandonment, transfer or other disposition of all or substantially all
its assets; or
(iv) there shall be a voluntary or involuntary
dissolution or winding up of the Corporation;
then, in any one or more of said cases, the Corporation shall
give, by delivery in person, certified or registered mail, return receipt
requested, telecopier or telex, addressed to each holder of any shares of
Convertible Preferred Stock at the address of such holder as shown on the books
of the Corporation, (i) at least 10 days' prior written notice of the date on
which the books of the Corporation shall close or a record shall be taken for
such dividend, distribution or subscription rights or for determining rights to
vote in respect of any such reorganization, reclassification, consolidation,
merger, disposition, dissolution or
<PAGE>
winding up and (ii) in the case of any such reorganization, reclassification,
consolidation, merger, disposition, dissolution or winding up, at least 10 days'
prior written notice of the date when the same shall take place. Such notice in
accordance with the foregoing clause (i) shall also specify, in the case of any
such dividend, distribution or subscription rights, the date on which the
holders of Common Stock shall be entitled thereto and such notice in accordance
with the foregoing clause (ii) shall also specify the date on which the holders
of Common Stock shall be entitled to exchange their Common Stock for securities
or other property deliverable upon such reorganization, reclassification,
consolidation, merger, disposition, dissolution or winding up, as the case may
be.
5.8.9 Stock to be Reserved. The Corporation will at all times
reserve and keep available out of its authorized shares of Common Stock, solely
for the purpose of issuance upon the conversion of the Convertible Preferred
Stock as herein provided, such number of shares of Common Stock as shall then be
issuable upon the conversion of all outstanding shares of Convertible Preferred
Stock. The Corporation covenants that all shares of Common Stock which shall be
so issued shall be duly authorized, validly issued, fully paid and nonassessable
by the Corporation and free from all taxes, liens and charges with respect to
the issue thereof, and, without limiting the generality of the foregoing, the
Corporation covenants that it will from time to time take all such action as may
be requisite to assure that the par value per share of the Common Stock is at
all times equal to or less than the Conversion Price in effect at the time. The
Corporation will take all such action as may be necessary to assure that all
such shares of Common Stock may be so issued without violation of any applicable
law or regulation, or of any requirement of any national securities exchange or
quotation system upon which the Common Stock may be listed. The Corporation will
not take any action which results in any adjustment of the Conversion Price if
the total number of shares of Common Stock issued and issuable after such action
upon conversion of the Convertible Preferred Stock would exceed the total number
of shares of Common Stock then authorized by the Corporation's Certificate of
Incorporation.
5.8.10 Reissuance of Preferred Stock. Shares of Convertible
Preferred Stock that have been issued and reacquired in any manner, including
shares purchased or redeemed or exchanged or converted, shall not be reissued as
shares of Convertible Preferred Stock and shall (upon compliance with any
applicable provisions of the General Corporation Law of the State of Delaware)
have the status of authorized but unissued shares of Preferred Stock of the
Corporation undesignated as to series and may be designated or redesignated and
issued or reissued, as the case may be, as part of any series of Preferred Stock
of the Corporation other than Convertible Preferred Stock.
5.8.11 Issue Tax. The issuance of certificates for shares of
Common Stock upon conversion of Convertible Preferred Stock shall be made
without charge to the holders thereof for any issuance tax in respect thereof,
provided that the
<PAGE>
Corporation shall not be required to pay any tax which may be payable in respect
of any transfer involved in the issuance and delivery of any certificate in a
name other than that of the holder of the Convertible Preferred Stock which is
being converted.
5.8.12 Closing of Books. The Corporation will at no time
close its transfer books against the transfer of any Convertible Preferred Stock
or of any shares of Common Stock issued or issuable upon the conversion of any
shares of Convertible Preferred Stock in any manner which interferes with the
timely conversion of such Convertible Preferred Stock, except as may otherwise
be required to comply with applicable laws.
5.8.13 Minimum Adjustment. No reduction of the Conversion
Price shall be made if the amount of any such reduction would be an amount less
than $.025, but any such amount shall be carried forward and reduction with
respect thereof shall be made at the time of and together with any subsequent
reduction which, together with such amount and any other amount or amounts so
carried forward, shall aggregate $.025 or more.
5.9 Optional Redemption. The Corporation may redeem for cash all
but not less than all of the Convertible Preferred Stock on not less than 30
days written notice to the holders thereof, during the periods and at the prices
set forth below, plus all accrued but unpaid dividends thereon; provided that no
such redemption shall be permitted unless (x) at such time there exists an
effective registration statement filed by the Corporation under the Act
registering the resale of the shares of Common Stock to be received upon
conversion of the Convertible Preferred Stock and the Corporation is obligated
to maintain the effectiveness thereof for at least 120 days after the proposed
date or redemption and (y) if the redemption of Convertible Preferred Stock does
not meet the requirements of either Section 302(b)(2) or 302(b)(3) of the
Internal Revenue Code of 1986, as amended, then to avoid such treatment, the
Corporation shall offer to effect a redemption of Common Stock from the holders
of Convertible Preferred Stock or their designees, to the extent necessary to
meet the requirements of either one of such Sections, at a purchase price equal
to the Current Market Price on the date notice of redemption is given pursuant
to this Section 5.9.
--------------------------------------------------------------------------------
Time Period Multiple of the Conversion Price
--------------------------------------------------------------------------------
November 13, 2002 through November 12, 2004 4x
--------------------------------------------------------------------------------
November 13, 2004 through November 12, 2006 4.5x
--------------------------------------------------------------------------------
On or after November 13, 2006 5x
--------------------------------------------------------------------------------
<PAGE>
5.10 Adjustment of Face Value. In case the Corporation shall
subdivide or reclassify its outstanding Convertible Preferred Stock into a
greater number of shares or combine or reclassify its outstanding Convertible
Preferred Stock into a smaller number of shares, the Series A Face Value or
Series B Face Value, as the case may be, in effect immediately prior to such
event shall be adjusted to reflect such increase or decrease. An adjustment made
pursuant to this paragraph shall become effective on the effective date of
subdivision, combination or reclassification.
5.11 Future Issuance of Shares; Preemptive Rights.
5.11.1 Offering Notice..11.1 Offering Notice. Except for (i)
capital stock or options to purchase capital stock of the Corporation which may
be issued to employees, consultants or directors of the Corporation pursuant to
a stock incentive plan or other employee benefit arrangement approved by the
Board of Directors, (ii) a subdivision of the outstanding shares of Common Stock
into a larger number of shares of Common Stock, (iii) capital stock issued as
full or partial consideration for a merger, acquisition, joint venture,
strategic alliance, license agreement or other similar non-financing
transaction, (iv) capital stock issued as full or partial consideration for
services (v) capital stock issued in connection with a publicly registered
offering, (vi) capital stock issued upon exercise, conversion or exchange of any
Preferred Stock, options or warrants, or (vii) capital stock purchased by any
Purchaser in the public market or from the Corporation, if the Corporation
wishes to issue any shares of capital stock or any other securities convertible
into or exchangeable for capital stock of the Corporation (collectively, "New
Securities") to any Person (the "Subject Purchaser"), then the Corporation shall
send written notice (the "New Issuance Notice") to the holders of the
Convertible Preferred Stock, which New Issuance Notice shall state (x) the
number of New Securities proposed to be issued and (y) the proposed purchase
price per share of the New Securities that the Corporation is willing to accept
(the "Proposed Price").
<PAGE>
5.11.2 Preemptive Rights; Exercise..11.2 Preemptive Rights;
Exercise.
(i) For a period of ten (10) days after the giving of
the New Issuance Notice as provided in Section 5.11.1, each initial holder of
the Convertible Preferred Stock or, as the case may be, their permitted
assignees pursuant to Section 11.3 of the Investment Agreement, dated as of July
27, 1999, amont the Company, the Purchasers, The Lynch Foundation, Peter Lynch
and Pilot Domestic Trust and Section 12.3 of the New Investment Agreement (each,
a "Preemptive Rightholder") shall have the right to purchase up to its
Proportionate Percentage (as hereinafter defined) of the New Securities at a
purchase price equal to the Proposed Price and upon the terms and conditions set
forth in the New Issuance Notice. Each Preemptive Rightholder shall have the
right to purchase up to that percentage of the New Securities determined by
dividing (a) a number equal to the number of shares of Common Stock into which
the shares of Convertible Preferred Stock then owned by such Preemptive
Rightholder are convertible by (b) the total of (x) the number of shares of
Common Stock then outstanding and (y) the number of shares of Common Stock into
which all outstanding shares of Preferred Stock are convertible (the
"Proportionate Percentage").
(ii) The right of each Preemptive Rightholder to
purchase the New Securities under subsection (i) above shall be exercisable by
delivering written notice of its exercise, prior to the expiration of the 10-day
period referred to in subsection (i) above, to the Corporation, which notice
shall state the amount of New Securities that the Preemptive Rightholder elects
to purchase as provided in Section 5.11.2(i). The failure of a Preemptive
Rightholder to respond within the 10-day period shall be deemed to be a waiver
of the Preemptive Rightholder's rights under Section 5.11.2(i); provided that
each Preemptive Rightholder may waive its, his or her rights under Section
5.11.2(i) prior to the expiration of the 10-day period by giving written notice
to the Corporation.
(iii) If, following the expiration of the 10-day period
referred to above, not all of the New Securities have been subscribed for by the
Subject Purchasers, each Preemptive Rightholder shall have the option to
increase that number of New Securities it has elected to purchase pursuant to
Section 5.11.2(i) by a proportionate amount.
5.11.3 Closing..11.3 Closing. The closing of the purchase of
New Securities subscribed for by the Preemptive Rightholders under Section
5.11.2 shall be held at the same time and place as the closing of the New
Securities subscribed for by the Subject Purchasers (the "Closing"). At the
Closing, the Corporation shall deliver certificates representing the New
Securities, and the New Securities shall be issued free and clear of all liens
and the Corporation shall so represent and warrant, and further represent and
warrant that the New Securities shall be, upon
<PAGE>
issuance of the New Securities to the Preemptive Rightholders and after payment
for the New Securities, duly authorized, validly issued, fully paid and
nonassessable by the Corporation. At the Closing, the Preemptive Rightholders
purchasing the New Securities shall deliver payment in full in immediately
available funds for the New Securities purchased by it, him or her. At the
Closing, all of the parties to the transaction shall execute any additional
documents that are otherwise necessary or appropriate.
5.11.4 Sale to Subject Purchaser. The Corporation may sell to
the Subject Purchaser all of the New Securities not purchased by the Preemptive
Rightholders on terms and conditions that are no more favorable to the Subject
Purchaser than those set forth in the New Issuance Notice; provided, however,
that the sale is bona fide and made pursuant to a contract entered into within
four (4) months of the earlier to occur of (i) the waiver by the Preemptive
Rightholders of their option to purchase the New Securities as provided in
Section 5.11.2 and (ii) the expiration of the 10-day period referred to in
Section 5.11.2. If such sale is not consummated within such four (4) month
period for any reason, then the restrictions provided for in this Section 5.11
shall again become effective, and no issuance and sale of New Securities may be
made thereafter by the Corporation without again offering the New Securities in
accordance with this Section 5.11. The closing of any issue and purchase
contemplated by this Section 5.11.4 shall be held at the time and place as the
parties to the transaction may agree.
5.11.5 Election of Directors. Members of the Board of
Directors of the Corporation (the "Board") may be elected either by written
ballot or by voice vote.
5.11.6 Limitation of Liability. No director of the
Corporation shall be personally liable to the Corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director, provided that
this provision shall not eliminate or limit the liability of a director (a) for
any breach of such person's duty of loyalty to the Corporation or its
stockholders, (b) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (c) under section 174 of
the General Corporation Law or (d) for any transaction from which the director
derived any improper personal benefits.
Any repeal or modification of the foregoing provision shall not
adversely affect any right or protection of a director of the Corporation
existing at the time of such repeal or modification.
5.12 Transactions5.12 Transactions. In case of any merger or
consolidation of the Corporation or any capital reorganization, reclassification
or other change of outstanding shares of Common Stock (other than a change in
par value, or from par value to no par value, or from no par value to par value)
(each, a "Transaction"), the Corporation shall execute and deliver to each
holder of Convertible Preferred Stock at
<PAGE>
least twenty (20) Business Days prior to effecting such Transaction a
certificate stating that the holder of each share of Series A Convertible
Preferred Stock and Series B Convertible Preferred Stock shall have the right to
receive in such Transaction, in exchange for each share of Series A Convertible
Preferred Stock or Series B Convertible Preferred Stock, as the case may be, a
security identical to (and not less favorable than) the Series A Convertible
Preferred Stock or Series B Preferred Stock, as the case may be, and provision
shall be made therefor in the agreement, if any, relating to such Transaction.
Any certificate delivered pursuant to this Section 5.12 shall provide for
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in Section 5.8 hereof. The provisions of this Section
5.12 and any equivalent thereof in any such certificate similarly shall apply to
successive transactions.
6. Indemnification.
6.1 To the extent not prohibited by law, the Corporation shall
indemnify any person who is or was made, or threatened to be made, a party to
any threatened, pending or completed action, suit or proceeding (a
"Proceeding"), whether civil, criminal, administrative or investigative,
including, without limitation, an action by or in the right of the Corporation
to procure a judgment in its favor, by reason of the fact that such person, or a
person of whom such person is the legal representative, is or was a director or
officer of the Corporation, or, at the request of the Corporation, is or was
serving as a director or officer of any other corporation or in a capacity with
comparable authority or responsibilities for any partnership, joint venture,
trust, employee benefit plan or other enterprise (an "Other Entity"), against
any judgments, fines, penalties, excise taxes, amounts paid in settlement and
costs, charges and expenses (including attorneys' fees, disbursements and other
charges). Persons who are not directors or officers of the Corporation (or
otherwise entitled to indemnification pursuant to the preceding sentence) may be
similarly indemnified in respect of service to the Corporation or to an Other
Entity at the request of the Corporation to the extent the Board at any time
specifies that such persons are entitled to the benefits of this Section 6.
6.2 The Corporation shall, from time to time, reimburse or advance
to any director or officer or other person entitled to indemnification hereunder
the funds necessary for payment of expenses, including attorneys' fees and
disbursements, incurred in connection with any Proceeding, in advance of the
final disposition of such Proceeding; provided, however, that, if required by
the General Corporation Law, such expenses incurred by or on behalf of any
director or officer or other person may be paid in advance of the final
disposition of a Proceeding only upon receipt by the Corporation of an
undertaking, by or on behalf of such director or officer (or other person
indemnified hereunder), to repay any such amount so advanced if it shall
ultimately be determined by final judicial decision from which there is no
further right of
<PAGE>
appeal that such director, officer or other person is not entitled to be
indemnified for such expenses.
6.3 The rights to indemnification and reimbursement or advancement
of expenses provided by, or granted pursuant to, this Section 6 shall not be
deemed exclusive of any other rights to which a person seeking indemnification
or reimbursement or advancement of expenses may have or hereafter be entitled
under any statute, this Certificate of Incorporation, the By-laws of the
Corporation (the "By-laws"), any agreement, any vote of stockholders or
disinterested directors or otherwise, both as to action in his or her official
capacity and as to action in another capacity while holding such office.
6.4 The rights to indemnification and reimbursement or advancement
of expenses provided by, or granted pursuant to, this Section 6 shall continue
as to a person who has ceased to be a director or officer (or other person
indemnified hereunder) and shall inure to the benefit of the executors,
administrators, legatees and distributees of such person.
6.5 The Corporation shall have power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of an Other Entity, against any
liability asserted against such person and incurred by such person in any such
capacity, or arising out of such person's status as such, whether or not the
Corporation would have the power to indemnify such person against such liability
under the provisions of this Section 6, the By-laws or under section 145 of the
General Corporation Law or any other provision of law.
6.6 The provisions of this Section 6 shall be a contract between
the Corporation, on the one hand, and each director and officer who serves in
such capacity at any time while this Section 6 is in effect and any other person
entitled to indemnification hereunder, on the other hand, pursuant to which the
Corporation and each such director, officer, or other person intend to be, and
shall be, legally bound. No repeal or modification of this Section 6 shall
affect any rights or obligations with respect to any state of facts then or
theretofore existing or thereafter arising or any proceeding theretofore or
thereafter brought or threatened based in whole or in part upon any such state
of facts.
6.7 The rights to indemnification and reimbursement or advancement
of expenses provided by, or granted pursuant to, this Section 6 shall be
enforceable by any person entitled to such indemnification or reimbursement or
advancement of expenses in any court of competent jurisdiction. The burden of
proving that such indemnification or reimbursement or advancement of expenses is
not
<PAGE>
appropriate shall be on the Corporation. Neither the failure of the Corporation
(including its Board, its independent legal counsel and its stockholders) to
have made a determination prior to the commencement of such action that such
indemnification or reimbursement or advancement of expenses is proper in the
circumstances nor an actual determination by the Corporation (including its
Board, its independent legal counsel and its stockholders) that such person is
not entitled to such indemnification or reimbursement or advancement of expenses
shall constitute a defense to the action or create a presumption that such
person is not so entitled. Such a person shall also be indemnified for any
expenses incurred in connection with successfully establishing his or her right
to such indemnification or reimbursement or advancement of expenses, in whole or
in part, in any such proceeding.
6.8 Any director or officer of the Corporation serving in any
capacity with (a) another corporation of which a majority of the shares entitled
to vote in the election of its directors is held, directly or indirectly, by the
Corporation or (b) any employee benefit plan of the Corporation or any
corporation referred to in clause (a) shall be deemed to be doing so at the
request of the Corporation.
6.9 Any person entitled to be indemnified or to reimbursement or
advancement of expenses as a matter of right pursuant to this Section 6 may
elect to have the right to indemnification or reimbursement or advancement of
expenses interpreted on the basis of the applicable law in effect at the time of
the occurrence of the event or events giving rise to the applicable Proceeding,
to the extent permitted by law, or on the basis of the applicable law in effect
at the time such indemnification or reimbursement or advancement of expenses is
sought. Such election shall be made by a notice in writing to the Corporation,
at the time indemnification or reimbursement or advancement of expenses is
sought; provided, however, that if no such notice is given, the right to
indemnification or reimbursement or advancement of expenses shall be determined
by the law in effect at the time indemnification or reimbursement or advancement
of expenses is sought.
<PAGE>
7. Adoption, Amendment and/or Repeal of By-Laws. Subject to such vote
of stockholders as may be required by Section 5 of this Certificate of
Incorporation, the Board may from time to time adopt, amend or repeal the
By-laws of the Corporation; provided, however, that any By-laws adopted or
amended by the Board may be amended or repealed, and any By-laws may be adopted,
by the stockholders of the Corporation by such vote as may be required by
Section 5 of this Certificate of Incorporation plus the vote of the holders of a
majority of the shares of stock of the Corporation entitled to vote in the
election of directors of the Corporation.
8. Documents. A copy of any document referred to herein will be
furnished to any stockholder of record upon written request to the Corporation's
secretary.
IN WITNESS WHEREOF, the undersigned have executed this Certificate as
of the 13th date of November, 2000.
----------------------------
E. Kenneth Seiff, President
<PAGE>
EXHIBIT D TO
INVESTMENT 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.
SUBORDINATED CONVERTIBLE NOTE
$
-------------------
New York, New York November 13, 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. Investment Agreement. This Subordinated Convertible Note is one of
the Subordinated Convertible Notes issued pursuant to the Investment Agreement,
dated as of November 13, 2000, among the Payor, Bluefly Merger Sub, Inc., the
Payee and ____________ (the "Investment Agreement"). The Payee is entitled to
the benefits of (and subject to the obligations expressly contained in) this
Subordinated Convertible Note and the Investment 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 Investment Agreement.
2. Interest Rate; Payment.
<PAGE>
(a) The outstanding principal balance of this Subordinated Convertible
Note shall bear interest at an annual rate equal to 11% 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
(i) upon repayment of the principal on any Repayment Date (as defined below) in
cash or (ii) upon conversion pursuant to Section 4 either in cash or, at the
Company's option, in shares of Series B Stock.
(b) The outstanding balance of any amount owed under this Subordinated
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 Subordinated 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 on May 1, 2001 (the "Maturity Date"), unless repaid earlier
pursuant to the provisions of Section 3, or unless this Subordinated Convertible
Note is earlier converted in accordance with Section 4 (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 (under Section 6
(d) or (e), the outstanding principal of and all accrued interest on this
Subordinated 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 Subordinated Convertible Note upon the occurrence of any of the
following events: (1) an Event of Default under Section 6(a), (b), (c), (f), (g)
or (h), (2) 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, (3) the Company entering into an agreement (other than
the Investment Agreement) to effectuate any consolidation or merger into another
entity, or (4) any sale (other than the sale contemplated by the Investment
Agreement) of a majority of the outstanding equity of the Company (or any other
event that constitutes a Change of Control (as defined below) 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), (2) or (3) above, or
immediately upon obtaining knowledge that any person has entered into an
agreement to effectuate, the event set forth in clause (4) above, the Payor
shall give written notice of such event
<PAGE>
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 Payee and its Affiliates or
any group that includes Payee and/or its Affiliates, 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.
(b) No Optional Prepayment. The Payor may not prepay this Subordinated
Convertible Note.
4. Mandatory Conversion.
(a) This Subordinated Convertible Note (plus interest accrued and
unpaid thereon) shall be automatically converted on the Second Closing Date (as
defined in the Investment Agreement) into that number of fully paid and
non-assessable shares of Series B Stock which is equal to the quotient obtained
by dividing the principal amount of this Subordinated Convertible Note (plus
interest accrued and unpaid thereon to the date of conversion) by the Conversion
Price (as defined below).
(b) At the Second Closing (as defined in the Investment Agreement), the
Company shall deliver or cause to be delivered to the holder of this
Subordinated Convertible Note a certificate or certificates representing the
number of fully paid and non-assessable shares of Series B Stock into which this
Subordinated Convertible Note may be converted. Such conversion shall be deemed
to have been made simultaneously with the Second Closing so that the rights of
the holder as a holder of this Subordinated Convertible Note shall cease with
respect to this Subordinated Convertible Note at such time (including, without
limitation, the right to receive the principal of this Subordinated Convertible
Note other than in the form of shares of Series B Stock), interest shall cease
to accrue hereon and the person or persons entitled to receive the shares of
Series B Stock deliverable upon conversion of this Subordinated Convertible Note
shall be treated for all purposes as having become the record holders of such
shares of Series B Stock 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 Series B Stock (at such time as such Series B
Stock is authorized) solely for the purpose of issue or delivery upon conversion
of this Subordinated Convertible Note as herein provided, such number of shares
of Series B Stock as shall then be issuable or deliverable upon the conversion
of this Subordinated Convertible Note. The Company covenants that all shares of
Series B Stock which shall be so issuable or deliverable shall, when issued or
delivered, be duly and validly issued and fully paid and non-assessable.
<PAGE>
(d) No fractional shares of Series B Stock shall be issued upon
conversion of this Note and the Corporation shall, in lieu of issuing any
fractional share, pay cash equal to the product of such fraction multiplied by
the Current Market Price (as defined in the Certificate of Incorporation of
Bluefly, Inc., a Delaware corporation, attached as Exhibit C to the Investment
Agreement) of the number of shares of Common Stock into which one share of
Series B Stock is converted on the applicable date of conversion of this
Subordinated Convertible Note.
5. Conversion Price; Antidilution Adjustments.
(a) Conversion Price. The initial Conversion Price shall be $2.34
("Conversion Price"), subject to adjustment as set forth in subsection (b)
below.
(b) Antidilution Adjustments. In case the Company shall (x) pay a
dividend or make a distribution on any of its securities in shares of Series B
Stock, (y) subdivide or reclassify its outstanding Series B Stock into a greater
number of shares, or (z) combine or reclassify its outstanding Series B Stock
into a smaller number of shares, the applicable Conversion Price in effect
immediately prior to such event shall be adjusted so that the Payee shall be
entitled to receive the number of shares of Series B Stock which it would have
owned or have been entitled to receive after the happening of such event had
this Subordinated Convertible Note been converted immediately prior to the
happening of such event. An adjustment made pursuant to this paragraph shall
become effective immediately after the record date in the case of a dividend or
distribution and shall become effective on the effective date in the case of
subdivision, combination or reclassification. If any dividend or distribution is
not paid or made, the applicable Conversion Price then in effect shall be
appropriately readjusted.
(c) Certificate as to Adjustments. Upon any increase or decrease in the
Conversion Price, the Payor shall within a reasonable period (not to exceed ten
(10) days) following any of the foregoing transactions deliver to the holder of
the Subordinated Convertible Note a certificate, signed by (i) the Chief
Executive Officer of the Payor and (ii) the Chief Financial Officer of the
Payor, setting forth in reasonable detail the event requiring the adjustment and
the method by which such adjustment was calculated and specifying the increased
or decreased Conversion Price then in effect following such adjustment.
(d) Reorganization, Reclassification. In case of any merger of the
Payor or any capital reorganization, reclassification or other change of
outstanding shares of Common Stock (other than a change in par value, or from
par value to no par value, or from no par value to par value) (each, a
"Transaction"), the Payor shall execute and deliver to the holder at least ten
(10) Business Days prior to effecting such Transaction a certificate stating
that the holder of this Subordinated Convertible Note shall have the right to
receive in such Transaction, in exchange for this Subordinated Convertible Note,
a security identical to (and not less favorable than) this Subordinated
Convertible Note, and provision shall be made therefor in the agreement, if any,
relating to such Transaction. Such replacement note shall provide for
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Section 5. The
<PAGE>
provisions of this Section 5(d) and any equivalent thereof in any such new note
similarly shall apply to successive transactions.
6. 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 Subordinated 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 Subordinated Convertible Note or the Investment
Agreement 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 Subordinated Convertible Note or the
Investment 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;
<PAGE>
(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 Indebtedness or obligation shall be
declared due and payable prior to the stated maturity thereof;
(h) the Payor shall incur any indebtedness for borrowed money
other than up to $15,000,000 of secured inventory financing on terms reasonably
acceptable to Payee (the "Inventory Financing"); or
(i) any material provisions of this Subordinated Convertible Note
or the Investment Agreement shall terminate or become void or unenforceable or
the Payor shall so assert in writing.
7. Subordination.
(a) Agreement of Subordination. The Payor covenants and agrees,
and the Payee likewise covenants and agrees, that (i) to the extent and in the
manner hereinafter set forth in this Section 7, the obligations of the Company
to pay the principal of and accrued interest on this Subordinated Convertible
Note (the "Obligations") are hereby expressly made subordinate and junior in
right of payment to the prior payment in full of up to $15,000,000 in principal
amount of and interest on the Inventory Financing whether outstanding at the
date hereof or hereinafter incurred (such Indebtedness not in excess of
$15,000,000 being hereinafter referred to as the "Senior Indebtedness"); (ii)
the subordination is solely for the benefit of any holders of Senior
Indebtedness; and (iii) each holder of Senior Indebtedness whether now
outstanding or hereinafter created, incurred, assumed or guaranteed shall be
deemed to have extended or acquired such Senior Indebtedness in reliance upon
the covenants and provisions contained herein. Notwithstanding the foregoing,
nothing in this Section 7 shall prevent the conversion of this Subordinated
Convertible Note into shares of Series B Stock in accordance with the terms
hereof.
(b) Subordination Upon Certain Events. Upon the occurrence of any
Event of Default under Sections 6(d) or (e) of this Note:
(i) Upon any payment or distribution of assets of the Payor
to creditors of the Company, holders of Senior Indebtedness shall be entitled to
receive indefeasible payment in full of all obligations with respect to the
Senior Indebtedness before the holder of this Note shall be entitled to receive
any payment in respect of the Obligations.
(ii) Until all Senior Indebtedness is paid in full, any
distribution to which the Payee would be entitled but for this Section 7 shall
be made to holders of Senior Indebtedness, as their interests may appear, except
that the Payee may receive securities that are subordinate to the Senior
Indebtedness to at least the same extent as this Subordinated Convertible Note.
<PAGE>
(iii) For purposes of this Section 7, a distribution may
consist of cash, securities or other property, by set-off or otherwise.
(iv) Notwithstanding the foregoing provisions of this Section
7(b), if payment or delivery by the Company of cash, securities or other
property to the Payee is authorized by an order or decree giving effect, and
stating in such order or decree that effect is given, to the subordination of
this Subordinated Convertible Note to the Senior Indebtedness, and made by a
court of competent jurisdiction in a proceeding under any applicable bankruptcy
or reorganization law, payment or delivery by the Company of such cash,
securities or other property shall be made to the Payee in accordance with such
order or decree.
(c) Limitation on Payment.
(i) Upon receipt by the Company and the Payee of a Blockage
Notice (as defined below), then unless and until (A) all defaults in the payment
of any Senior Indebtedness (the "Senior Defaults") that gave rise to the
Blockage Notice shall have been remedied or effectively waived or shall have
ceased to exist or (B) the Senior Indebtedness in respect of which such Senior
Defaults shall have occurred shall have been paid in full or (C) a notice of
acceleration of the maturity of such Senior Indebtedness shall have been
transmitted to the Company in respect of such Senior Defaults, no direct or
indirect payment (in cash, property, securities or by set-off or otherwise) of
or on account of the principal of or interest on this Subordinated Convertible
Note or in respect of any redemption, retirement, purchase or other acquisition
of this Subordinated Convertible Note shall be made during any period prior to
the expiration of the Blockage Period (as defined below).
(ii) For purposes of this Section 7, a "Blockage Notice" is a
notice of a Senior Default that in fact has occurred and is continuing, given to
the Company and the Payee by any holders of Senior Indebtedness then outstanding
(or their authorized agent); provided, however, that no such notice shall be
effective as a Blockage Notice if an effective Blockage Notice shall have been
given within 360 days prior thereto.
(iii) For purposes of this Section 7, a "Blockage Period"
with respect to a Blockage Notice is the period commencing upon the Company's
receipt of such Blockage Notice and having the duration set forth in the
particular agreement establishing the Senior Indebtedness to which the Company
is a party; provided, that, such Blockage Period is no more than 90 days.
Notwithstanding the foregoing, the Blockage Period shall be
inapplicable or cease to be effective if an Event of Default pursuant to Section
6(d) or (e) shall have occurred. In addition, any Blockage Period shall cease to
be effective if at any time during such period (i) substantial assets of the
Company are sold or otherwise disposed of outside of the ordinary course of
business for less than fair value or (ii) payment or any distribution of any
character, whether in cash, securities or other property of the Company shall be
made to or received by any creditor on any indebtedness which is on the same
level of priority with or junior and subordinate in right of payment to this
Subordinated Convertible Note.
<PAGE>
Upon the expiration or termination of any Blockage Period, the Payee
shall be entitled to exercise any of its rights with respect to this
Subordinated Convertible Note other than any right to accelerate the maturity
date of this Subordinated Convertible Note based upon the occurrence of any
Event of Default in respect thereto which has been cured or otherwise remedied
during the Blockage Period.
(d) Payments and Distributions Received. If the Payee shall have
received any payment from or distribution of assets of the Company in respect of
Obligations in contravention of the terms of this Section 7 before all Senior
Indebtedness is paid in full, then and in such event such payment or
distribution shall be received and held in trust for and shall be paid over or
delivered to the holders of Senior Indebtedness to the extent necessary to pay
all such Senior Indebtedness in full.
(e) Proofs of Claim. If, while any Senior Indebtedness is
outstanding, any Event of Default under Section 6(d) or (e) of this Subordinated
Convertible Note occurs, the Payee shall duly and promptly take such action as
any holder of Senior Indebtedness may reasonably request to collect any payment
with respect to this Subordinated Convertible Note for the account of the
holders of the Senior Indebtedness and to file appropriate claims or proofs of
claim in respect of this Subordinated Convertible Note. Upon the failure of the
Payee to take any such action, each holder of Senior Indebtedness is hereby
irrevocably authorized and empowered (in its own name or otherwise), but shall
have no obligation, to demand, sue for, collect and receive every payment or
distribution referred to in respect of this Subordinated Convertible Note and to
file claims and proofs of claim and take such other action as it may deem
necessary or advisable for the exercise or enforcement of any of the rights or
interests of the Holder with respect to this Note.
(f) Subrogation. After all amounts payable under or in respect of
Senior Indebtedness are paid in full in cash, the Payee shall be subrogated to
the rights of holders of Senior Indebtedness to receive payments or
distributions applicable to Senior Indebtedness to the extent that distributions
otherwise payable to the Payee have been applied to the payment of Senior
Indebtedness. A distribution made under this Section 7 to a holder of Senior
Indebtedness which otherwise would have been made to the Payee is not, as
between the Company and the Payee, a payment by the Company on Senior
Indebtedness.
(g) Relative Rights. This Section 7 defines the relative rights of
the Payee and the holders of Senior Indebtedness. Nothing in this Section 7
shall (i) impair, as between the Company and the Payee, the obligation of the
Company, which is absolute and unconditional, to pay principal of and interest
(including default interest) on this Subordinated Convertible Note in accordance
with its terms; (ii) effect the relative rights of the Payee and creditors of
the Company other than holders of Senior Indebtedness; or (iii) prevent the
Payee from exercising its available remedies upon an Event of Default, subject
to the rights, if any, under this Section 7 of holders of Senior Indebtedness.
(h) Subordination May Not Be Impaired by the Company. No right of
any holder of any Senior Indebtedness to enforce the subordination of the
Obligations evidenced by this Subordinated Convertible Note shall be impaired by
any failure by the Company or such holder of Senior Indebtedness to act
<PAGE>
or by the failure of the Company or such holder to comply with this Subordinated
Convertible Note. The provisions of this Section 7 shall continue to be
effective or be reinstated, as the case may be, if at any time any payment of
any of the Senior Indebtedness is rescinded or must otherwise be returned by any
holder of Senior Indebtedness as a result of the insolvency, bankruptcy or
reorganization of the Company or otherwise, all as though such payment had not
been made.
(i) Payments. A payment with respect to principal of or interest
on the Obligations shall include, without limitation, payment of principal of
and interest on this Note, and any payment on account of mandatory prepayment
provisions.
(j) Section Not to Prevent Events of Default. The failure to make
a payment on account of principal of or interest on or other amounts
constituting the Obligations by reason of any provision of this Section 7 shall
not be construed as preventing the occurrence of an Event of Default under
Section 6.
8. Suits for Enforcement.
(a) Upon the occurrence of any one or more Events of Default, the
holder of this Subordinated 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 Investment Agreement or in aid of the exercise of any power granted in this
Subordinated Convertible Note, or may proceed to enforce the payment of this
Subordinated Convertible Note, or to enforce any other legal or equitable right
it may have as a holder of this Subordinated Convertible Note.
(b) The holder of this Subordinated 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, the Payor will pay to the
holder of this Subordinated 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.
9. 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 Investment Agreement.
10. Successors and Assigns. This Subordinated 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
Subordinated Convertible Note without the prior written consent of Payee. The
Payee may assign all or a portion of their rights or obligations under this
Subordinated Convertible Note to an Affiliate without the prior written consent
of the Payor.
<PAGE>
11. 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 Subordinated Convertible Note, any waiver of any provision of
this Subordinated Convertible Note and any consent to any departure by the Payor
from the terms of any provision of this Subordinated 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.
12. Headings. The headings in this Subordinated Convertible Note are
for convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
13. GOVERNING LAW. THIS SUBORDINATED 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.
14. 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 settlement of this Subordinated Convertible Note or the indebtedness
arising hereunder.
15. 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 Subordinated Convertible Note or any instrument or document
delivered pursuant to this Subordinated 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.
16. 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 relating to this Subordinated Convertible Note or any document
or instrument delivered pursuant to this Agreement.
<PAGE>
17. 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.
18. Entire Agreement. This Subordinated Convertible Note and the
Investment 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 Subordinated Convertible Note
supersedes all prior agreements and understandings between the parties with
respect to such subject matter.
19. 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 Subordinated Convertible Note.
BLUEFLY, INC.
By:
--------------------------------
Name:
Title:
<PAGE>
EXHIBIT E TO
INVESTMENT 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.
SUBORDINATED CONVERTIBLE NOTE
$
-------------------
New York, New York November 13, 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.
20. Securities Purchase Agreement. This Subordinated Convertible Note
is one of the Subordinated Convertible Notes issued pursuant to the Note and
Warrant Purchase Agreement, dated as of November 13, 2000, among the Payor, the
Payee and ____________ (the "Securities Purchase Agreement") and amended
pursuant to the Investment Agreement, dated as of November 13, 2000 among the
Payor, the Payee, Bluefly Merger Sub, Inc., a Delaware corporation and
______(the "Investment Agreement" and together with the Securities Purchase
Agreement, the "Agreements"). The Payee is entitled to the benefits of (and
subject to the obligations expressly contained in) this Subordinated 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 Investment Agreement.
21. Interest Rate; Payment.
<PAGE>
(a) The outstanding principal balance of this Subordinated
Convertible Note shall bear interest at an annual rate equal to 8% per annum,
with interest accruing, from and including _________(1), 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 (i) upon repayment of the principal on any Repayment Date (as
defined below) in cash or (ii) upon conversion pursuant to Section 4 either in
cash, or at the Company's option, in shares of Series B Stock.
(b) The outstanding balance of any amount owed under this
Subordinated 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 Subordinated 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 May 1, 2001 (the "Maturity Date"), unless
repaid earlier pursuant to the provisions of Section 3 or unless this
Subordinated Convertible Note is earlier converted in accordance with Section 4
(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.
22. Prepayment.
(a) Mandatory Prepayment.
(i) Upon the occurrence of an Event of Default (under Section
6(d) or (e)), the outstanding principal of and all accrued interest on this
Subordinated 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 Subordinated Convertible Note upon the occurrence of any of the
following events: (1) an Event of Default under Section 6(a), (b), (c), (f), (g)
or (h), (2) the Company 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, (3) the Company entering into an agreement
(other than the Investment Agreement) to effectuate any consolidation or merger
into another entity, or (4) any sale (other than a sale contemplated by the
Investment Agreement) of a majority of the outstanding equity of the Company (or
any other event that constitutes a Change of Control (as defined below) of the
Company), in one
--------------
(1) To be filled in with respective date of issue.
<PAGE>
transaction or in a series of transactions. Immediately upon the occurrence of
either of the events set forth in clauses (1), (2) or (3) above, or immediately
upon obtaining knowledge that any person has entered into an agreement to
effectuate, the event set forth in clause (4) above, the Company 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 Securities Exchange Act
of 1934, as amended (the "Exchange Act") other than Payee and its Affiliates or
any group that includes Payee and/or its Affiliates, 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.
(b) No Optional Prepayment. The Payor may not prepay this
Subordinated Convertible Note.
23. Mandatory Conversion.
(a) This Subordinated Convertible Note (plus interest accrued and
unpaid thereon) shall be automatically converted on the Second Closing Date (as
defined in the Investment Agreement) into that number of fully paid and
non-assessable shares of Series B Stock which is equal to the quotient obtained
by dividing the then outstanding principal amount of this Subordinated
Convertible Note (plus interest accrued and unpaid thereon) to the date of
conversion by the Conversion Price (as defined below).
(b) At the Second Closing (as defined in the Investment
Agreement), the Company shall deliver or cause to be delivered to the holder of
this Subordinated Convertible Note a certificate or certificates representing
the number of fully paid and non-assessable shares of Series B Stock into which
this Subordinated Convertible Note may be converted. Such conversion shall be
deemed to have been made simultaneously with the Second Closing, so that the
rights of the holder as a holder of this Subordinated Convertible Note shall
cease with respect to this Subordinated Convertible Note at such time
(including, without limitation, the right to receive the principal of this
Subordinated Convertible Note other than in the form of shares of Series B
Stock), interest shall cease to accrue hereon and the person or persons entitled
to receive the shares of Series B Stock deliverable upon conversion of this
Subordinated Convertible Note shall be treated for all purposes as having become
the record holders of such shares of Series B Stock 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 Series B Stock (at such time as such Series
B Stock is authorized) solely for the purpose of issue or delivery upon
conversion of this Subordinated Convertible Note as herein provided, such number
of shares of Series B Stock as shall then be issuable or deliverable upon the
conversion of this Subordinated Convertible
<PAGE>
Note. The Company covenants that all shares of Series B Stock which shall be so
issuable or deliverable shall, when issued or delivered, be duly and validly
issued and fully paid and non-assessable.
(d) No fractional shares of Series B Stock shall be issued upon
conversion of this Note and the Corporation shall, in lieu of issuing any
fractional share, pay cash equal to the product of such fraction multiplied by
the Current Market Price (as defined in the Certificate of Incorporation of
Bluefly, Inc., a Delaware corporation, attached as Exhibit C to the Investment
Agreement) of the number of shares of Common Stock into which one share of
Series B Stock is converted on the applicable date of conversion of this
Subordinated Convertible Note.
24. Conversion Price; Antidilution Adjustments.
(a) Conversion Price. The initial Conversion Price shall be $2.34
("Conversion Price"), subject to adjustment as set forth in subsection (b)
below.
(b) Antidilution Adjustments. In case the Company shall (x) pay a
dividend or make a distribution on any of its securities in shares of Series B
Stock, (y) subdivide or reclassify its outstanding Series B Stock into a greater
number of shares, or (z) combine or reclassify its outstanding Series B Stock
into a smaller number of shares, the applicable Conversion Price in effect
immediately prior to such event shall be adjusted so that the Payee shall be
entitled to receive the number of shares of Series B Stock which it would have
owned or have been entitled to receive after the happening of such event had
this Subordinated Convertible Note been converted immediately prior to the
happening of such event. An adjustment made pursuant to this paragraph shall
become effective immediately after the record date in the case of a dividend or
distribution and shall become effective on the effective date in the case of
subdivision, combination or reclassification. If any dividend or distribution is
not paid or made, the applicable Conversion Price then in effect shall be
appropriately readjusted.
(c) Certificate as to Adjustments. Upon any increase or decrease
in the Conversion Price, the Payor shall within a reasonable period (not to
exceed ten (10) days) following any of the foregoing transactions deliver to the
holder of the Subordinated Convertible Note a certificate, signed by (i) the
Chief Executive Officer of the Payor and (ii) the Chief Financial Officer of the
Payor, setting forth in reasonable detail the event requiring the adjustment and
the method by which such adjustment was calculated and specifying the increased
or decreased Conversion Price then in effect following such adjustment.
(d) Reorganization, Reclassification. In case of any merger of the
Payor or any capital reorganization, reclassification or other change of
outstanding shares of Common Stock (other than a change in par value, or from
par value to no par value, or from no par value to par value) (each, a
"Transaction"), the Payor shall execute and deliver to the holder at least ten
(10) Business Days prior to effecting such Transaction a certificate stating
that the holder of this Subordinated Convertible Note shall have the right to
receive in such Transaction, in exchange for this Subordinated Convertible Note,
a security identical to (and not less favorable than) this Subordinated
Convertible Note, and provision shall be made therefor in the
<PAGE>
agreement, if any, relating to such Transaction. Such replacement note shall
provide for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Section 5. The provisions of
this Section 5(d) and any equivalent thereof in any such new note similarly
shall apply to successive transactions.
25. 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 Subordinated 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 Subordinated Convertible Note, Agreements 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 Subordinated 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;
<PAGE>
(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 Indebtedness or obligation shall be
declared due and payable prior to the stated maturity thereof;
(h) the Payor shall incur any indebtedness for borrowed money
other than up to $15 million of secured inventory financing on terms reasonably
acceptable to Payee (the "Inventory Financing"); or
(i) any material provisions of this Subordinated Convertible Note,
the Agreements or the Warrants shall terminate or become void or unenforceable
or the Payor shall so assert in writing.
26. Subordination.
(a) Agreement of Subordination. The Payor covenants and agrees,
and the Payee likewise covenants and agrees, that (i) to the extent and in the
manner hereinafter set forth in this Section 7, the obligations of the Company
to pay the principal of and accrued interest on this Subordinated Convertible
Note (the "Obligations") are hereby expressly made subordinate and junior in
right of payment to the prior payment in full of up to $15,000,000 in principal
amount of and interest on the Inventory Financing whether outstanding at the
date hereof or hereinafter incurred (such Indebtedness not in excess of
$15,000,000 being hereinafter referred to as the "Senior Indebtedness"); (ii)
the subordination is solely for the benefit of any holders of Senior
Indebtedness; and (iii) each holder of Senior Indebtedness whether now
outstanding or hereinafter created, incurred, assumed or guaranteed shall be
deemed to have extended or acquired such Senior Indebtedness in reliance upon
the covenants and provisions contained herein. Notwithstanding the foregoing,
nothing in this Section 7 shall prevent the conversion of this Subordinated
Convertible Note into shares of Series B Stock in accordance with the terms
hereof.
(b) Subordination Upon Certain Events. Upon the occurrence of any
Event of Default under Sections 6(d) or (e) of this Note:
(i) Upon any payment or distribution of assets of the Payor
to creditors of the Company, holders of Senior Indebtedness shall be entitled to
receive indefeasible payment in full of all obligations with respect to the
Senior Indebtedness before the holder of this Note shall be entitled to receive
any payment in respect of the Obligations.
<PAGE>
(ii) Until all Senior Indebtedness is paid in full, any
distribution to which the Payee would be entitled but for this Section 7 shall
be made to holders of Senior Indebtedness, as their interests may appear, except
that the Payee may receive securities that are subordinate to the Senior
Indebtedness to at least the same extent as this Subordinated Convertible Note.
(iii) For purposes of this Section 7, a distribution may
consist of cash, securities or other property, by set-off or otherwise.
(iv) Notwithstanding the foregoing provisions of this Section
7(b), if payment or delivery by the Company of cash, securities or other
property to the Payee is authorized by an order or decree giving effect, and
stating in such order or decree that effect is given, to the subordination of
this Subordinated Convertible Note to the Senior Indebtedness, and made by a
court of competent jurisdiction in a proceeding under any applicable bankruptcy
or reorganization law, payment or delivery by the Company of such cash,
securities or other property shall be made to the Payee in accordance with such
order or decree.
(c) Limitation on Payment.
(i) Upon receipt by the Company and the Payee of a Blockage
Notice (as defined below), then unless and until (A) all defaults in the payment
of any Senior Indebtedness (the "Senior Defaults") that gave rise to the
Blockage Notice shall have been remedied or effectively waived or shall have
ceased to exist or (B) the Senior Indebtedness in respect of which such Senior
Defaults shall have occurred shall have been paid in full or (C) a notice of
acceleration of the maturity of such Senior Indebtedness shall have been
transmitted to the Company in respect of such Senior Defaults, no direct or
indirect payment (in cash, property, securities or by set-off or otherwise) of
or on account of the principal of or interest on this Subordinated Convertible
Note or in respect of any redemption, retirement, purchase or other acquisition
of this Subordinated Convertible Note shall be made during any period prior to
the expiration of the Blockage Period (as defined below).
(ii) For purposes of this Section 7, a "Blockage Notice" is a
notice of a Senior Default that in fact has occurred and is continuing, given to
the Company and the Payee by any holders of Senior Indebtedness then outstanding
(or their authorized agent); provided, however, that no such notice shall be
effective as a Blockage Notice if an effective Blockage Notice shall have been
given within 360 days prior thereto.
(iii) For purposes of this Section 7, a "Blockage Period"
with respect to a Blockage Notice is the period commencing upon the Company's
receipt of such Blockage Notice and having the duration set forth in the
particular agreement establishing the Senior Indebtedness to which the Company
is a party; provided, that, such Blockage Period is no more than 90 days.
Notwithstanding the foregoing, the Blockage Period shall be
inapplicable or cease to be effective if an Event of Default pursuant to Section
6(d) or (e) shall have occurred. In addition, any Blockage Period
<PAGE>
shall cease to be effective if at any time during such period (i) substantial
assets of the Company are sold or otherwise disposed of outside of the ordinary
course of business for less than fair value or (ii) payment or any distribution
of any character, whether in cash, securities or other property of the Company
shall be made to or received by any creditor on any indebtedness which is on the
same level of priority with or junior and subordinate in right of payment to
this Subordinated Convertible Note.
Upon the expiration or termination of any Blockage Period, the Payee
shall be entitled to exercise any of its rights with respect to this
Subordinated Convertible Note other than any right to accelerate the maturity
date of this Subordinated Convertible Note based upon the occurrence of any
Event of Default in respect thereto which has been cured or otherwise remedied
during the Blockage Period.
(d) Payments and Distributions Received. If the Payee shall have
received any payment from or distribution of assets of the Company in respect of
Obligations in contravention of the terms of this Section 7 before all Senior
Indebtedness is paid in full, then and in such event such payment or
distribution shall be received and held in trust for and shall be paid over or
delivered to the holders of Senior Indebtedness to the extent necessary to pay
all such Senior Indebtedness in full.
(e) Proofs of Claim. If, while any Senior Indebtedness is
outstanding, any Event of Default under Section 6(d) or (e) of this Subordinated
Convertible Note occurs, the Payee shall duly and promptly take such action as
any holder of Senior Indebtedness may reasonably request to collect any payment
with respect to this Subordinated Convertible Note for the account of the
holders of the Senior Indebtedness and to file appropriate claims or proofs of
claim in respect of this Subordinated Convertible Note. Upon the failure of the
Payee to take any such action, each holder of Senior Indebtedness is hereby
irrevocably authorized and empowered (in its own name or otherwise), but shall
have no obligation, to demand, sue for, collect and receive every payment or
distribution referred to in respect of this Subordinated Convertible Note and to
file claims and proofs of claim and take such other action as it may deem
necessary or advisable for the exercise or enforcement of any of the rights or
interests of the Holder with respect to this Note.
(f) Subrogation. After all amounts payable under or in respect of
Senior Indebtedness are paid in full in cash, the Payee shall be subrogated to
the rights of holders of Senior Indebtedness to receive payments or
distributions applicable to Senior Indebtedness to the extent that distributions
otherwise payable to the Payee have been applied to the payment of Senior
Indebtedness. A distribution made under this Section 7 to a holder of Senior
Indebtedness which otherwise would have been made to the Payee is not, as
between the Company and the Payee, a payment by the Company on Senior
Indebtedness.
(g) Relative Rights. This Section 7 defines the relative rights of
the Payee and the holders of Senior Indebtedness. Nothing in this Section 7
shall (i) impair, as between the Company and the Payee, the obligation of the
Company, which is absolute and unconditional, to pay principal of and interest
(including default interest) on this Subordinated Convertible Note in accordance
with its terms; (ii) effect the relative rights of the Payee and creditors of
the Company other than holders of Senior Indebtedness; or (iii)
<PAGE>
prevent the Payee from exercising its available remedies upon an Event of
Default, subject to the rights, if any, under this Section 7 of holders of
Senior Indebtedness.
(h) Subordination May Not Be Impaired by the Company. No right of
any holder of any Senior Indebtedness to enforce the subordination of the
Obligations evidenced by this Subordinated Convertible Note shall be impaired by
any failure by the Company or such holder of Senior Indebtedness to act or by
the failure of the Company or such holder to comply with this Subordinated
Convertible Note. The provisions of this Section 7 shall continue to be
effective or be reinstated, as the case may be, if at any time any payment of
any of the Senior Indebtedness is rescinded or must otherwise be returned by any
holder of Senior Indebtedness as a result of the insolvency, bankruptcy or
reorganization of the Company or otherwise, all as though such payment had not
been made.
(i) Payments. A payment with respect to principal of or interest
on the Obligations shall include, without limitation, payment of principal of
and interest on this Note, and any payment on account of mandatory prepayment
provisions.
(j) Section Not to Prevent Events of Default. The failure to make
a payment on account of principal of or interest on or other amounts
constituting the Obligations by reason of any provision of this Section 7 shall
not be construed as preventing the occurrence of an Event of Default under
Section 6.
27. Suits for Enforcement.
(a) Upon the occurrence of any one or more Events of Default, the
holder of this Subordinated 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 Subordinated Convertible Note, or may proceed to enforce the payment of
this Subordinated Convertible Note, or to enforce any other legal or equitable
right it may have as a holder of this Subordinated Convertible Note.
(b) The holder of this Subordinated 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, the Payor will pay to the
holder of this Subordinated 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.
28. 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.
<PAGE>
29. Successors and Assigns. This Subordinated 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
Subordinated Convertible Note without the prior written consent of Payee. The
Payee may assign all or a portion of their rights or obligations under this
Subordinated Convertible Note to an Affiliate without the prior written consent
of the Payor.
30. 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 Subordinated Convertible Note, any waiver of any provision of
this Subordinated Convertible Note and any consent to any departure by the Payor
from the terms of any provision of this Subordinated 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.
31. Headings. The headings in this Subordinated Convertible Note are
for convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
32. GOVERNING LAW. THIS SUBORDINATED 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.
33. 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 settlement of this Subordinated Convertible Note or the indebtedness
arising hereunder.
34. 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 Subordinated Convertible Note or any instrument or document
delivered pursuant to this Subordinated 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-
<PAGE>
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.
35. 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 relating to this Subordinated Convertible Note or any document
or instrument delivered pursuant to this Agreement.
36. 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.
37. Entire Agreement. This Subordinated Convertible Note, the
Agreements and the Warrants 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 hereof. There are no restrictions, promises, warranties or undertakings,
other than those set forth or referred to herein. This Subordinated Convertible
Note supersedes all prior agreements and understandings between the parties with
respect to such subject matter.
<PAGE>
38. 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 Subordinated Convertible Note.
BLUEFLY, INC.
By:
-----------------------------
Name:
Title:
<PAGE>
Exhibit F-1
SWIDLER BERLIN SHEREFF FRIEDMAN, LLP
THE CHRYSLER BUILDING
405 LEXINGTON AVENUE
NEW YORK, NY 10174
TELEPHONE (212) 973-0111
FACSIMILE (212) 891-9598 WWW.SWIDLAW.COM
THE WASHINGTON OFFICE
THE WASHINGTON HARBOUR
3000 K STREET, NW, SUITE 300
WASHINGTON, DC 20007-5116
(202) 424-7500 FAX (202) 424-7647
November 2, 2000
The several Purchasers listed on
Schedule 1 to the Investment
Agreement (as hereafter defined)
Gentlemen:
We have acted as counsel to Bluefly, Inc., a New York corporation (the
"Company"), and Bluefly Merger Sub, Inc., a Delaware corporation ("NewCo"), in
connection with the execution and delivery of the Investment Agreement of even
date herewith among the Company, NewCo and you, as Purchasers (the "Investment
Agreement"), pursuant to which the Company will sell to you, as Purchasers,
subordinated convertible notes in the aggregate principal amount of $5,000,000
(the "New Notes") and issue to you amended subordinated convertible notes in the
aggregate principal amount of $[_________](2) (the "Amended Notes" and, together
with the New Notes, the "Notes"). This opinion is being delivered to you
pursuant to Section 5.6 of the Investment Agreement. Capitalized terms used but
not otherwise defined herein shall have the meanings set forth in the Investment
Agreement.
We note that we are not general counsel to the Company and would not
ordinarily be familiar with or aware of matters relating to the Company unless
they are brought to our attention by representatives of the Company with respect
to matters upon which we have been specifically requested to function by the
Company. Accordingly, our examination in connection herewith has
--------------
(2) Amount equal to First Round Notes and Additional Notes, together with
accrued and unpaid interest.
<PAGE>
been limited to the documents identified to us by the Company as relevant to the
transactions contemplated by the Investment Agreement.
In connection with this opinion, we have examined originals or copies,
certified or otherwise identified to our satisfaction to be genuine, of the
Investment Agreement, the New Notes and the Amended Notes (collectively, the
"Transaction Documents"), and we have examined originals or copies, certified or
otherwise identified to our satisfaction, of such corporate records and other
documents and instruments of the Company and NewCo, certificates or comparable
documents of public officials and of officers and representatives of the Company
and NewCo and have made such inquiries of such officers and representatives, and
considered such questions of law, as we deemed relevant and necessary as the
basis for the opinions hereinafter set forth.
In making such examinations, we have assumed the legal capacity of each
natural person signing the Transaction Documents, the genuineness of signatures,
the authenticity of documents submitted to us as originals, the conformity to
authentic original documents of documents submitted to us as certified,
photostatic or telecopied copies and the accuracy and completeness of all
corporate records and other information made available to us by the Company and
NewCo. We have further assumed that the Investment Agreement has been duly
authorized, executed and delivered by, and is the legal, valid and binding
obligation of, the Purchasers.
As to questions of fact material to this opinion, we have relied solely
upon the accuracy of the representations and warranties of the parties in the
Investment Agreement and of the certificates and other comparable documents of
officers and representatives of the Company and NewCo, upon statements made to
us in discussions with the management of the Company and NewCo and upon
certificates of public officials. The phrase "to our knowledge" as used in this
opinion means actual knowledge of attorneys currently within this firm based
upon work performed on substantive aspects of the transactions that are the
subject of the Transaction Documents or other matters with respect to which such
attorneys have performed substantive work in the course of their representation
of the Company and NewCo, certificates of certain representatives of the
Company, and our examination of documents in connection with the issuance of
this opinion, and does not include matters as to which such attorneys could be
deemed to have constructive knowledge. Except as expressly set forth herein, we
have not undertaken any independent investigation, examination or inquiry to
determine the existence or absence of any facts (and have not caused the review
of any court file, dockets or indices) and no inference as to our knowledge
concerning any facts should be drawn as a result of the limited representation
undertaken by us.
Based upon the foregoing, and subject to the qualifications,
limitations and
<PAGE>
November 10, 2000
assumptions stated herein, we are of the opinion that:
The Company is a corporation duly organized, validly existing and in good
standing under the laws of the State of New York.
NewCo is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware.
NewCo was incorporated on October 31, 2000.
Each of the Company and NewCo has all requisite corporate power to own and hold
its properties, to carry on its business as, to our knowledge, it is currently
conducted and to execute, deliver and perform its obligations under the
Transaction Documents.
The execution, delivery and performance by the Company of the Transaction
Documents have been duly authorized by all requisite corporate action on the
part of the Company.
The execution, delivery and performance by NewCo of the Investment Agreement
have been duly authorized by all requisite corporate action on the part of
NewCo.
Each of the Transaction Documents has been duly executed and delivered by the
Company and constitutes the legal, valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms.
The Investment Agreement has been duly executed and delivered by NewCo and
constitutes the legal, valid and binding obligation of NewCo, enforceable
against NewCo in accordance with its terms.
The execution and delivery by the Company and NewCo of the Transaction Documents
to which it is a party, the performance by the Company and NewCo of its
obligations thereunder and the issuance, sale and delivery of the Notes do not:
(a) contravene the terms of the New York Certificate or by-laws of the Company
or the Delaware Certificate or by-laws of NewCo or any organizational documents,
or any amendment thereof, of any Subsidiary of the Company; (b) violate,
conflict with or result in a breach or contravention of, or the creation of any
Lien under, any material contract or any New York or federal law or regulation
which, in our experience, is normally applicable to transactions of the type
contemplated by the Investment Agreement, except for those which would not have
a material adverse effect on the Company and its Subsidiaries, taken as a whole
(a "Material Adverse Effect"); and (c) violate any Orders known to us of any
Governmental Authority against, or binding upon, the Company, NewCo or any
Subsidiary of the Company except for those Orders the violation of which would
not have a Material Adverse Effect. In rendering the opinion expressed in this
paragraph with respect to subparagraph (b) above, we have been advised by the
Company and have
<PAGE>
November 10, 2000
assumed, for purposes of our opinion, that the only material contracts are those
that are filed as exhibits or described in the Company's SEC Documents. In
rendering the opinion expressed in this paragraph with respect to performance by
the Company of its obligations under the Investment Agreement, we have assumed
compliance by the Company with the Securities Act and the Exchange Act, and the
applicable rules and regulations thereunder and with applicable state securities
laws and the applicable regulations thereunder.
Except as set forth on Schedule 3.4 to the Investment Agreement, no consent,
approval, authorization, order, registration, filing or qualification of or with
any (i) Governmental Authority, (ii) stock exchange on which the securities of
the Company are traded or (iii), to our knowledge, any 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 or NewCo for the execution,
delivery and performance by the Company or NewCo of the Investment Agreement and
each Transaction Document to which it is a party and the consummation of the
transactions contemplated thereby, except consents, approvals, authorizations,
orders, registrations, filings or qualifications that have already been obtained
or are not material to the business or operations of the Company and its
Subsidiaries, taken as a whole. In rendering the opinion expressed in this
paragraph, we have assumed the accuracy of the representations and warranties of
the Purchasers set forth in Section 4 of the Investment Agreement. In rendering
the opinion expressed in this paragraph with respect to the performance by the
Company and NewCo of their respective obligations under the Investment
Agreement, we have also assumed compliance by the Company and NewCo at such time
with the Securities Act, the Exchange Act and the applicable rules and
regulations thereunder and with applicable state securities laws and the
applicable regulations thereunder.
As of the date hereof, the authorized capital stock of the Company consists of
15,000,000 shares of Common Stock and 2,000,000 shares of Preferred Stock, $.01
par value, of which 500,000 shares have been designated as Series A Stock.
To our knowledge, there is no action, suit, investigation or proceeding pending
or threatened against the Company or any of its properties or assets by or
before any court, arbitrator or governmental body, department, commission,
board, bureau, agency or instrumentality, which questions the validity of the
Investment Agreement or any action taken or to be taken pursuant thereto.
The opinions set forth above are subject to the following qualifications and
limitations:
Our opinions in paragraphs 1 and 11 as to the due incorporation, valid existence
and good standing and authorized capital stock of the Company are based solely
on our review of
<PAGE>
November 10, 2000
recently issued certified copy of the New York Certificate and a recently issued
certificate of good standing obtained from the Secretary of State of the State
of New York;
Our opinion in paragraph 2 and 3 as to the due incorporation, valid existence
and good standing of NewCo is based solely on our review of a recently issued
certified copy of the certificate of incorporation of NewCo and a recently
issued certificate of good standing obtained from the Secretary of State of the
State of Delaware.
We express no opinion as to the effect of the application of equitable
principles (whether considered in a proceeding at law or in equity) or of
bankruptcy, insolvency, reorganization, moratorium and other laws now or
hereafter in effect affecting the enforcement of creditors' rights and remedies
(including those relating to fraudulent conveyances and transfers);
We express no opinion as to the enforceability of any choice of law provision in
any Transaction Document;
We express no opinion as to the enforceability under certain circumstances,
under state or federal law or court decisions, of provisions that purport to
establish (or many be construed to establish) evidentiary standards;
We express no opinion as to the enforceability under certain circumstances,
under state or federal law or court decisions, of provisions expressly or by
implication waiving broadly or vaguely stated rights, unknown future rights,
defenses to obligations or rights granted by law or statute, where such waivers
are against public policy or prohibited by law;
We express no opinion as to the enforceability under certain circumstances,
under state or federal law or court decisions, of provisions to the effect that
rights or remedies are not exclusive, that every right or remedy is cumulative
and may be exercised in addition to or with any other right or remedy, that
election of a particular remedy or remedies does not preclude recourse to one or
more other remedies, that election of a particular remedy or remedies may be
exercised without notice or upon a stated period of notice, or that failure to
exercise or delay in exercising rights or remedies will not operate as a waiver
of any such right or remedy;
We express no opinion as to limitations on the right to exercise rights and
remedies under the Transaction Documents or to impose penalties for any default
thereunder if it is determined in substance by a court of competent jurisdiction
that the default is not material, the penalties bear no reasonable relation to
the damage suffered as a result of the defaults, or it cannot be demonstrated
that enforcement of the restrictions or burdens is reasonably necessary for the
protection of the party purporting to exercise such rights;
We express no opinion as to the validity or enforceability of the
indemnification and contribution provisions of the Investment Agreement;
<PAGE>
November 10, 2000
We express no opinion as to the tax consequences of the transactions
contemplated by the Investment Agreement; and
We express no opinion concerning the laws of any jurisdiction other than the law
of the State of New York (including but not limited to the Business Corporation
Law of the State of New York), the federal law of the United States of America,
and, to the extent provided in the succeeding sentence, the Delaware General
Corporation Law. With respect to any matters concerning Delaware corporate law
involved in the opinions set forth below, any such opinions are based upon our
reasonable familiarity with the Delaware General Corporation Law as a result of
our reading of standard published compilations of such laws. We express no
opinion concerning any state securities or "blue sky" laws. We also express no
opinion on the effect of the consummation of the transactions contemplated by
the Transaction Documents on the Company's compliance with the rules of any
stock exchange.
The opinions rendered herein are as of the date hereof. We assume no
obligation to update or supplement those opinions to reflect any fact which may
hereafter come to our attention or any changes in law which may hereafter occur.
This letter is furnished by us, as counsel to the Company and NewCo, in
connection with the consummation of the transactions contemplated by the
Investment Agreement and is solely for your benefit. This opinion may not be
relied upon by you for any other purposes, or relied upon by any other person,
firm, corporation or other entity for any purpose, or quoted in whole or in part
or otherwise referred to, without our prior written consent.
Very truly yours,
SWIDLER BERLIN SHEREFF FRIEDMAN, LLP
SBSF:RAG:JSH:AMF
<PAGE>
November 10, 2000
EXHIBIT F-2
[ ]
The several Purchasers listed on
Schedule 1 to the Investment
Agreement (as hereafter defined)
Gentlemen:
We have acted as counsel to Bluefly, Inc., a Delaware corporation
formerly known as Bluefly Merger Sub, Inc. (the "Company"), and Bluefly, Inc., a
New York corporation (the "Merging Company"), in connection with the execution
and delivery of the Investment Agreement, dated as of November __, 2000, among
the Company, the Merging Company and you, as Purchasers (the "Investment
Agreement"), pursuant to which the Company will issue to you shares of the
Company's Series B Convertible Preferred Stock (the "Series B Shares") upon the
conversion of the New Notes and the Amended Notes and amend the terms of the
Company's Series A Convertible Preferred Stock (the "Series A Shares"). This
opinion is being delivered to you pursuant to Section 5.6 of the Investment
Agreement. Capitalized terms used but not otherwise defined herein shall have
the meanings set forth in the Investment Agreement.
We note that we are not general counsel to the Company or the Merging
Company and would not ordinarily be familiar with or aware of matters relating
to the Company or the Merging Company unless they are brought to our attention
by representatives of the Company or the Merging Company with respect to matters
upon which we have been specifically requested to function by the Company.
Accordingly, our examination in connection herewith has been limited to the
documents identified to us by the Company or the Merging Company as relevant to
the transactions contemplated by the Investment Agreement.
In connection with this opinion, we have examined originals or copies,
certified or otherwise identified to our satisfaction to be genuine, of the
Investment Agreement, the Delaware Certificate, the Certificate of Merger (New
York) and the Certificate of Merger (Delaware) (collectively, the "Transaction
Documents"), and we have examined originals or copies, certified or otherwise
identified to our satisfaction, of such corporate records and other documents
and instruments of the Company and the Merging Company, certificates or
comparable documents of public officials and of officers and representatives of
the Company and the Merging Company and have made such inquiries of such
officers and representatives, and considered such questions of law, as we deemed
relevant and necessary as the basis for the opinions hereinafter set forth.
<PAGE>
November 10, 2000
In making such examinations, we have assumed the legal capacity of each
natural person signing the Transaction Documents, the genuineness of signatures,
the authenticity of documents submitted to us as originals, the conformity to
authentic original documents of documents submitted to us as certified,
photostatic or telecopied copies and the accuracy and completeness of all
corporate records and other information made available to us by the Company and
the Merging Company. We have further assumed that the Investment Agreement has
been duly authorized, executed and delivered by, and is the legal, valid and
binding obligation of, the Purchasers.
As to questions of fact material to this opinion, we have relied solely
upon the accuracy of the representations and warranties of the parties in the
Investment Agreement and of the certificates and other comparable documents of
officers and representatives of the Company and the Merging Company, upon
statements made to us in discussions with the management of the Company and the
Merging Company and upon certificates of public officials. The phrase "to our
knowledge" as used in this opinion means actual knowledge of attorneys currently
within this firm based upon work performed on substantive aspects of the
transactions that are the subject of the Transaction Documents or other matters
with respect to which such attorneys have performed substantive work in the
course of their representation of the Company, certificates of certain
representatives of the Company and the Merging Company, and our examination of
documents in connection with the issuance of this opinion, and does not include
matters as to which such attorneys could be deemed to have constructive
knowledge. Except as expressly set forth herein, we have not undertaken any
independent investigation, examination or inquiry to determine the existence or
absence of any facts (and have not caused the review of any court file, dockets
or indices) and no inference as to our knowledge concerning any facts should be
drawn as a result of the limited representation undertaken by us.
Based upon the foregoing, and subject to the qualifications,
limitations and assumptions stated herein, we are of the opinion that:
The Merger has been duly effected in accordance with the provisions of
Section 252 of the General Corporation Law of the State of Delaware and Section
907 of the Business Corporation Law of the State of New York.
The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware and is duly qualified to
transact business as a foreign corporation and is in good standing in the State
of New York.
The execution and delivery by the Company of the Certificate of Merger
(New York) and Certificate of Merger (Delaware) (together, the "Merger
Documents"), the performance by the Company of its obligations thereunder, the
issuance and delivery of the Series B Shares upon the conversion of the New
Notes and the Amended Notes and the
<PAGE>
amendment of the terms of the Series A Shares do not: (a) contravene the terms
of the Delaware Certificate or by-laws of the Company or any organizational
documents, or any amendment thereof, of any Subsidiary of the Company; (b)
violate, conflict with or result in a breach or contravention of, or the
creation of any Lien under, any material contract or any New York or federal law
or regulation which, in our experience, is normally applicable to transactions
of the type contemplated by the Investment Agreement, except for those contracts
or laws, the violation of which would not have a material adverse effect on the
Company and its Subsidiaries, taken as a whole (a "Material Adverse Effect");
and (c) violate any Orders known to us of any Governmental Authority against, or
binding upon, the Company or any Subsidiary of the Company, except for those
Orders, the violation of which would not have a Material Adverse Effect. In
rendering the opinion expressed in this paragraph with respect to subparagraph
(b) above, we have been advised by the Company and, for purposes of our opinion,
have assumed that the only material contracts are those that are filed as
exhibits or described in the Company's SEC Documents. In rendering the opinion
expressed in this paragraph with respect to the issuance by the Company of the
Series A Shares and the Series B Shares, we have assumed compliance by the
Company with the Securities Act, the Exchange Act and the applicable rules and
regulations thereunder and with applicable state securities laws and the
applicable regulations thereunder.
Except as set forth on Schedule 3.4 to the Investment Agreement, no
consent, approval, authorization, order, registration, filing or qualification
of or with any (i) Governmental Authority, (ii) stock exchange on which the
securities of the Company are traded or (iii) to our knowledge, any other Person
(whether acting in an individual, fiduciary or other capacity) is required to be
made or obtained by the Company or the Merging Company for (A) the execution,
delivery and performance by the Company of the Merger Documents and the
consummation of the transactions contemplated thereby, (B) the amendment of the
terms of the Series A Shares, and (C) the issuance and delivery of the Series B
Shares, except consents, approvals, authorizations, orders, registrations,
filings or qualifications that have already been obtained or are not material to
the business or operations of the Company and its Subsidiaries, taken as a
whole. In rendering the opinion expressed in this paragraph, we have assumed the
accuracy of the representations and warranties of the Purchasers set forth in
Section 4 of the Investment Agreement. In rendering the opinion expressed in
this paragraph with respect to the performance by the Company of its obligations
under the Investment Agreement, we have also assumed compliance by the Company
at such time with the Securities Act, the Exchange Act and the applicable rules
and regulations thereunder and with applicable state securities laws and the
applicable regulations thereunder.
As of the date hereof, the authorized capital stock of the Company
consists of [40,000,000] shares of Common Stock and [25,000,000] shares of
Preferred Stock, $.01 par value, of which 500,000 shares have been designated as
Series A Stock and [9,000,000] shares
<PAGE>
have been designated as Series B Stock. To our knowledge, as of the date hereof
the issued and outstanding stock of the Company consists of _______ shares of
Common Stock, 500,000 shares of Series A Stock and ________ shares of Series B
Stock. All such shares of Capital Stock of the Company have been duly authorized
and are fully paid and non-assessable.
To our knowledge, there is no action, suit, investigation or proceeding
pending or threatened against the Company or any of its properties or assets by
or before any court, arbitrator or governmental body, department, commission,
board, bureau, agency or instrumentality, which questions the validity of the
Investment Agreement or the Merger Documents or any action taken or to be taken
pursuant thereto.
The Series B Shares have been duly authorized by all requisite
corporate action on the part of the Company. The shares of Common Stock issuable
upon conversion of the Series B Shares have been duly reserved for issuance upon
conversion of the Series B Shares and, when so issued in accordance with the
terms of the Series B Shares, such shares of Common Stock will be validly
issued, fully paid and nonassessable by the Company and the issuance thereof
will not trigger any statutory preemptive rights of any Person.
The Proxy Statement sent to the Company shareholders in connection with
the Company Shareholders Meeting complied in form in all material respects with
the requirements of the Exchange Act and the rules and regulations thereunder.
The opinions set forth above are subject to the following
qualifications and limitations:
Our opinion in paragraph 1 is based solely on our review of a certified
copy of the Certificate of Merger (New York) and a certified copy of
the Certificate of Merger (Delaware);
Our opinions in paragraphs 2 and 5 as to the due incorporation, valid
existence and good standing and authorized capital stock of the Company
are based solely on our review of a recently issued certified copy of
the Delaware Certificate, a recently issued certificate of good
standing obtained from the Secretary of State of the State of Delaware
and on a recently issued certificate of existence obtained from the
Secretary of State of the State of New York;
Our opinion in paragraph 5 as to the issued and outstanding Capital
Stock of the Company is based solely on our review of the minutes of
the Company and on a certificate of an officer of the Company; and
<PAGE>
We express no opinion concerning the laws of any jurisdiction other
than the law of the State of New York (including but not limited to the
Business Corporation Law of the State of New York), the law of the
State of Delaware relating to corporations and the federal law of the
United States of America and, to the extent provided in the succeeding
sentence, the Delaware General Corporation Law. With respect to any
matters concerning Delaware corporate law involved in the opinions set
forth below, any such opinions are based upon our reasonable
familiarity with the Delaware General Corporation Law as a result of
our reading of standard published compilations of such laws. We express
no opinion concerning any state securities or "blue sky" laws. We also
express no opinion on the effect of the consummation of the
transactions contemplated by the Transaction Documents on the Company's
compliance with the rules of any stock exchange.
The opinions rendered herein are as of the date hereof. We assume no
obligation to update or supplement those opinions to reflect any fact which may
hereafter come to our attention or any changes in law which may hereafter occur.
This letter is furnished by us, as counsel to the Company, in
connection with the consummation of those transactions contemplated by the
Investment Agreement to occur at the Second Closing and is solely for your
benefit. This opinion may not be relied upon by you for any other purposes, or
relied upon by any other person, firm, corporation or other entity for any
purpose, or quoted in whole or in part or otherwise referred to, without our
prior written consent.
Very truly yours,
SWIDLER BERLIN SHEREFF FRIEDMAN, LLP
SBSF:
<PAGE>
EXHIBIT F-3
[ ]
The several Purchasers listed on
Schedule 1 to the Investment
Agreement (as hereafter defined)
Gentlemen:
We have acted as counsel to Bluefly, Inc., a Delaware corporation
formerly known as Bluefly Merger Sub, Inc. (the "Company"), in connection with
the execution and delivery of the Investment Agreement dated as of November __,
2000 among the Company, Bluefly, Inc., a New York corporation, and you, as
Purchasers (the "Investment Agreement"), pursuant to which the Company will sell
to you shares of the Company's Common Stock (the "Shares"). This opinion is
being delivered to you pursuant to Section 5.6 of the Investment Agreement.
Capitalized terms used but not otherwise defined herein shall have the meanings
set forth in the Investment Agreement.
We note that we are not general counsel to the Company and would not
ordinarily be familiar with or aware of matters relating to the Company unless
they are brought to our attention by representatives of the Company with respect
to matters upon which we have been specifically requested to function by the
Company. Accordingly, our examination in connection herewith has been limited to
the documents identified to us by the Company as relevant to the transactions
contemplated by the Investment Agreement.
In connection with this opinion, we have examined originals or copies,
certified or otherwise identified to our satisfaction to be genuine, of the
Investment Agreement, and we have examined originals or copies, certified or
otherwise identified to our satisfaction, of such corporate records and other
documents and instruments of the Company, certificates or comparable documents
of public officials and of officers and representatives of the Company and have
made such inquiries of such officers and representatives, and considered such
questions of law, as we deemed relevant and necessary as the basis for the
opinions hereinafter set forth.
In making such examinations, we have assumed the legal capacity of each
natural person signing the Investment Agreement, the genuineness of signatures,
the authenticity of documents submitted to us as originals, the conformity to
authentic original documents of documents submitted to us as certified,
photostatic or telecopied copies and the accuracy and completeness of all
corporate records and other information made available to us by the
<PAGE>
Company. We have further assumed that the Investment Agreement has been duly
authorized, executed and delivered by, and is the legal, valid and binding
obligation of, the Purchasers.
As to questions of fact material to this opinion, we have relied solely
upon the accuracy of the representations and warranties of the parties in the
Investment Agreement and of the certificates and other comparable documents of
officers and representatives of the Company, upon statements made to us in
discussions with the management of the Company and upon certificates of public
officials. The phrase "to our knowledge" as used in this opinion means actual
knowledge of attorneys currently within this firm based upon work performed on
substantive aspects of the transactions that are the subject of the Investment
Agreement or other matters with respect to which such attorneys have performed
substantive work in the course of their representation of the Company,
certificates of certain representatives of the Company, and our examination of
documents in connection with the issuance of this opinion, and does not include
matters as to which such attorneys could be deemed to have constructive
knowledge. Except as expressly set forth herein, we have not undertaken any
independent investigation, examination or inquiry to determine the existence or
absence of any facts (and have not caused the review of any court file, dockets
or indices) and no inference as to our knowledge concerning any facts should be
drawn as a result of the limited representation undertaken by us.
Based upon the foregoing, and subject to the qualifications,
limitations and assumptions stated herein, we are of the opinion that:
The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware and is duly qualified to
transact business as a foreign corporation and is in good standing in the State
of New York.
The issuance and delivery of the Shares do not: (a) contravene the
terms of the Delaware Certificate or by-laws of the Company; (b) violate,
conflict with or result in a breach or contravention of, or the creation of any
Lien under, any material contract or any New York or federal law or regulation
which, in our experience, is normally applicable to transactions of the type
contemplated by the Investment Agreement, except for those which would not have
a material adverse effect on the Company and its Subsidiaries, taken as a whole
(a "Material Adverse Effect"); and (c) violate any Orders known to us of any
Governmental Authority against, or binding upon, the Company, except for those
Orders the violation of which would not have a Material Adverse Effect. In
rendering the opinion expressed in this paragraph with respect to subparagraph
(b) above, we have been advised by the Company and have assumed, for the
purposes of our opinion that the only material contracts are those that are
filed as exhibits or described in the Company's SEC Documents. In rendering the
opinion expressed in this paragraph with respect to the issuance by the Company
of its obligations under the Investment Agreement, we have assumed compliance by
the Company with the Securities Act, the Exchange Act and the applicable rules
and regulations thereunder and with applicable state securities laws and
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the applicable regulations thereunder.
Except as set forth on Schedule 3.4 to the Investment Agreement, no
consent, approval, authorization, order, registration, filing or qualification
of or with any (i) Governmental Authority, (ii) stock exchange on which the
securities of the Company are traded or (iii) to our knowledge, any other Person
(whether acting in an individual, fiduciary or other capacity) is required to be
made or obtained by the Company for the issuance and delivery of the Shares,
except consents, approvals, authorizations, orders, registrations, filings or
qualifications that have already been obtained or are not material to the
business or operations of the Company and its Subsidiaries, taken as a whole. In
rendering the opinion expressed in this paragraph, we have assumed the accuracy
of the representations and warranties of the Purchasers set forth in Section 4
of the Investment Agreement. In rendering the opinion expressed in this
paragraph with respect to the performance by the Company of its obligations
under the Investment Agreement, we have also assumed compliance by the Company
at such time with the Securities Act, the Exchange Act and the applicable rules
and regulations thereunder and with applicable state securities laws and the
applicable regulations thereunder.
To our knowledge, there is no action, suit, investigation or proceeding
pending or threatened against the Company or any of its properties or assets by
or before any court, arbitrator or governmental body, department, commission,
board, bureau, agency or instrumentality, which questions the validity of the
Investment Agreement or any action taken or to be taken pursuant thereto.
As of the date hereof, the authorized capital stock of the Company
consists of 40,000,000 shares of Common Stock and 25,000,000 shares of Preferred
Stock, $.01 par value, of which 500,000 shares have been designated as Series A
Stock and [9,000,000] shares have been designated as Series B Stock. To our
knowledge, as of the date hereof the issued and outstanding stock of the Company
consists of _______ shares of Common Stock, 500,000 shares of Series A Stock and
________ shares of Series B Stock. All such shares of Capital Stock of the
Company have been duly authorized and are fully paid and non-assessable.
The Shares have been duly authorized by all requisite corporate action
on the part of the Company and, upon issuance, such shares of Common Stock will
be validly issued, fully paid and nonassessable by the Company and the issuance
thereof will not trigger any statutory preemptive rights of any Person.
The Registration Statement filed with the SEC in connection with the
Rights Offering and the Prospectus contained therein complied in form in all
material respects with the requirements of the Securities Act and with the rules
and regulations thereunder. The Registration Statement was declared effective on
______________ and, to our
<PAGE>
knowledge, no stop order suspending the effectiveness of the Registration
Statement has been issued and the Company has not been notified that any
procedures for that purpose have been instituted or were pending under the
Securities Act at the time of the completion of the Rights Offering.
The opinions set forth above are subject to the following
qualifications and limitations:
Our opinions in paragraphs 1 and 5 as to the due incorporation, valid
existence, good standing and qualification to do transact business as a foreign
corporation and as to the authorized capital stock of the Company are based
solely on our review of a recently issued certified copy of the Delaware
Certificate, a recently issued certificate of good standing obtained from the
Secretary of State of the State of Delaware and a recently issued certificate of
existence obtained from the Secretary of State of the State of New York;
Our opinion in paragraph 5 as to the issued and outstanding Capital
Stock of the Company is based solely on our review of the minutes of the Company
and on a certificate of an officer of the Company;
Our opinion in paragraph 7 as to the effectiveness of the Registration
Statement is based solely on oral advice received from the Staff of the SEC on
__________; and
We express no opinion concerning the laws of any jurisdiction other
than the law of the State of New York (including but not limited to the Business
Corporation Law of the State of New York), the federal law of the United States
of America, and, to the extent provided in the succeeding sentence, the Delaware
General Corporation Law. With respect to any matters concerning Delaware
corporate law involved in the opinions set forth below, any such opinions are
based upon our reasonable familiarity with the Delaware General Corporation Law
as a result of our reading of standard published compilations of such laws. We
express no opinion concerning any state securities or "blue sky" laws. We also
express no opinion on the effect of the consummation of the transactions
contemplated by the Transaction Documents on the Company's compliance with the
rules of any stock exchange.
<PAGE>
The opinions rendered herein are as of the date hereof. We assume no
obligation to update or supplement those opinions to reflect any fact which may
hereafter come to our attention or any changes in law which may hereafter occur.
This letter is furnished by us, as counsel to the Company, in
connection with the consummation of the transactions contemplated by the
Investment Agreement and is solely for your benefit. This opinion may not be
relied upon by you for any other purposes, or relied upon by any other person,
firm, corporation or other entity for any purpose, or quoted in whole or in part
or otherwise referred to, without our prior written consent.
Very truly yours,
SWIDLER BERLIN SHEREFF FRIEDMAN, LLP
SBSF: