-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IPw7sV6wV1d8fpw6OVjZJJPOGZm1RaVQTMC1sr1ygRiLP2B0mrkxJqnfK7a6IGhE q8pb1MibS7rNW//iEdQAeg== 0000921530-03-000194.txt : 20030317 0000921530-03-000194.hdr.sgml : 20030317 20030314180441 ACCESSION NUMBER: 0000921530-03-000194 CONFORMED SUBMISSION TYPE: SC 13D/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 20030317 GROUP MEMBERS: GEORGE SOROS GROUP MEMBERS: QIH MANAGEMENT INVESTOR, L.P. GROUP MEMBERS: QIH MANAGEMENT LLC GROUP MEMBERS: QUANTUM INDUSTRIAL PARTNERS LDS GROUP MEMBERS: SFM DOMESTIC INVESTMENTS LLC GROUP MEMBERS: SOROS FUND MANAGEMENT LLC SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: BLUEFLY INC CENTRAL INDEX KEY: 0001030896 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 133612110 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D/A SEC ACT: 1934 Act SEC FILE NUMBER: 005-52401 FILM NUMBER: 03604907 BUSINESS ADDRESS: STREET 1: 42 WEST 39TH ST CITY: NEW YORK STATE: NY ZIP: 10018 BUSINESS PHONE: 2129448000 MAIL ADDRESS: STREET 1: 42 WEST 39TH ST CITY: NEW YORK STATE: NY ZIP: 10018 FORMER COMPANY: FORMER CONFORMED NAME: PIVOT RULES INC DATE OF NAME CHANGE: 19970305 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: SOROS FUND MANAGEMENT LLC CENTRAL INDEX KEY: 0001029160 IRS NUMBER: 133914976 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D/A BUSINESS ADDRESS: STREET 1: 888 SEVENTH AVENUE 33RD FLOOR CITY: NEW YORK STATE: NY ZIP: 10106 BUSINESS PHONE: 2128721054 MAIL ADDRESS: STREET 1: C/O AKIN, GUMP, STRAUSS,HAUER,FELD, STREET 2: 399 PARK AVENUE CITY: NEW YORK STATE: NY ZIP: 10022 SC 13D/A 1 sch13da17_031203.txt AMENDMENT 17 3/12/03 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 SCHEDULE 13D Under the Securities Exchange Act of 1934 (Amendment No. 17)* BLUEFLY, INC. ------------- (Name of Issuer) Common Stock, Par Value $0.01 Per Share --------------------------------------- (Title of Class of Securities) 096227103 --------- (CUSIP Number) Stephen M. Vine, Esq. Akin Gump Strauss Hauer & Feld LLP 590 Madison Avenue New York, New York 10022 (212) 872-1000 ---------------------------------------------- (Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications) March 12, 2003 -------------------------- (Date of Event which Requires Filing of this Statement) If the filing person has previously filed a statement on Schedule 13G to report the acquisition that is the subject of this Schedule 13D, and is filing this schedule because of ss.ss.240.13d-1(e), 240.13d-1(f) or 240.13d-1(g), check the following box . Note: Schedules filed in paper format shall include a signed original and five copies of the schedule, including all exhibits. See ss.240.13d-7 for other parties to whom copies are to be sent. * The remainder of this cover page shall be filled out for a reporting person's initial filing on this form with respect to the subject class of securities, and for any subsequent amendment containing information which would alter disclosures provided in a prior cover page. The information required on the remainder of this cover page shall not be deemed to be "filed" for the purpose of Section 18 of the Securities Exchange Act of 1934 ("Act") or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes). Continued on following pages Page 1 of 51 Pages Exhibit Index: Page 17 SCHEDULE 13D CUSIP No. 096227103 Page 2 of 51 Pages 1 Names of Reporting Persons I.R.S. Identification Nos. of above persons (entities only). QUANTUM INDUSTRIAL PARTNERS LDC 2 Check the Appropriate Box if a Member of a Group (See Instructions) a. [ ] b. [X] 3 SEC Use Only 4 Source of Funds (See Instructions) Not Applicable 5 Check if Disclosure of Legal Proceedings Is Required Pursuant to Items 2(d) or 2(e) 6 Citizenship or Place of Organization Cayman Islands 7 Sole Voting Power Number of 46,890,033 Shares Beneficially 8 Shared Voting Power Owned By 0 Each Reporting 9 Sole Dispositive Power Person 46,890,033 With 10 Shared Dispositive Power 0 11 Aggregate Amount Beneficially Owned by Each Reporting Person 46,890,033 12 Check if the Aggregate Amount in Row (11) Excludes Certain Shares (See Instructions) [X] 13 Percent of Class Represented By Amount in Row (11) 90.2% 14 Type of Reporting Person (See Instructions) OO; IV SCHEDULE 13D CUSIP No. 096227103 Page 3 of 51 Pages 1 Names of Reporting Persons I.R.S. Identification Nos. of above persons (entities only). QIH MANAGEMENT INVESTOR, L.P. 2 Check the Appropriate Box if a Member of a Group (See Instructions) a. [ ] b. [X] 3 SEC Use Only 4 Source of Funds (See Instructions) Not Applicable 5 Check if Disclosure of Legal Proceedings Is Required Pursuant to Items 2(d) or 2(e) [ ] 6 Citizenship or Place of Organization Delaware 7 Sole Voting Power Number of 46,890,033 Shares Beneficially 8 Shared Voting Power Owned By 0 Each Reporting 9 Sole Dispositive Power Person 46,890,033 With 10 Shared Dispositive Power 0 11 Aggregate Amount Beneficially Owned by Each Reporting Person 46,890,033 12 Check if the Aggregate Amount in Row (11) Excludes Certain Shares (See Instructions) [X] 13 Percent of Class Represented By Amount in Row (11) 90.2% 14 Type of Reporting Person (See Instructions) PN; IA SCHEDULE 13D CUSIP No. 096227103 Page 4 of 51 Pages 1 Names of Reporting Persons I.R.S. Identification Nos. of above persons (entities only). QIH MANAGEMENT LLC 2 Check the Appropriate Box if a Member of a Group (See Instructions) a. [ ] b. [X] 3 SEC Use Only 4 Source of Funds (See Instructions) Not Applicable 5 Check if Disclosure of Legal Proceedings Is Required Pursuant to Items 2(d) or 2(e) [ ] 6 Citizenship or Place of Organization Delaware 7 Sole Voting Power Number of 46,890,033 Shares Beneficially 8 Shared Voting Power Owned By 0 Each Reporting 9 Sole Dispositive Power Person 46,890,033 With 10 Shared Dispositive Power 0 11 Aggregate Amount Beneficially Owned by Each Reporting Person 46,890,033 12 Check if the Aggregate Amount in Row (11) Excludes Certain Shares (See Instructions) [X] 13 Percent of Class Represented By Amount in Row (11) 90.2% 14 Type of Reporting Person (See Instructions) OO SCHEDULE 13D CUSIP No. 096227103 Page 5 of 51 Pages 1 Names of Reporting Persons I.R.S. Identification Nos. of above persons (entities only). SOROS FUND MANAGEMENT LLC 2 Check the Appropriate Box if a Member of a Group (See Instructions) a. [ ] b. [X] 3 SEC Use Only 4 Source of Funds (See Instructions) Not Applicable 5 Check if Disclosure of Legal Proceedings Is Required Pursuant to Items 2(d) or 2(e) [ ] 6 Citizenship or Place of Organization Delaware 7 Sole Voting Power Number of 46,890,033 Shares Beneficially 8 Shared Voting Power Owned By 0 Each Reporting 9 Sole Dispositive Power Person 46,890,033 With 10 Shared Dispositive Power 0 11 Aggregate Amount Beneficially Owned by Each Reporting Person 46,890,033 12 Check if the Aggregate Amount in Row (11) Excludes Certain Shares (See Instructions) [ X ] 13 Percent of Class Represented By Amount in Row (11) 90.2% 14 Type of Reporting Person (See Instructions) OO; IA SCHEDULE 13D CUSIP No. 096227103 Page 6 of 51 Pages 1 Names of Reporting Persons I.R.S. Identification Nos. of above persons (entities only). SFM DOMESTIC INVESTMENTS LLC 2 Check the Appropriate Box if a Member of a Group (See Instructions) a. [ ] b. [X] 3 SEC Use Only 4 Source of Funds (See Instructions) Not Applicable 5 Check if Disclosure of Legal Proceedings Is Required Pursuant to Items 2(d) or 2(e) [ ] 6 Citizenship or Place of Organization Delaware 7 Sole Voting Power Number of 1,534,332 Shares Beneficially 8 Shared Voting Power Owned By 0 Each Reporting 9 Sole Dispositive Power Person 1,534,332 With 10 Shared Dispositive Power 0 11 Aggregate Amount Beneficially Owned by Each Reporting Person 1,534,332 12 Check if the Aggregate Amount in Row (11) Excludes Certain Shares (See Instructions) [ X ] 13 Percent of Class Represented By Amount in Row (11) 13.1% 14 Type of Reporting Person (See Instructions) OO SCHEDULE 13D CUSIP No. 096227103 Page 7 of 51 Pages 1 Names of Reporting Persons I.R.S. Identification Nos. of above persons (entities only). GEORGE SOROS (in the capacity described herein) 2 Check the Appropriate Box if a Member of a Group (See Instructions) a. [ ] b. [X] 3 SEC Use Only 4 Source of Funds (See Instructions) Not Applicable 5 Check if Disclosure of Legal Proceedings Is Required Pursuant to Items 2(d) or 2(e) [ ] 6 Citizenship or Place of Organization United States 7 Sole Voting Power Number of 48,424,365 Shares Beneficially 8 Shared Voting Power Owned By 0 Each Reporting 9 Sole Dispositive Power Person 48,424,365 With 10 Shared Dispositive Power 0 11 Aggregate Amount Beneficially Owned by Each Reporting Person 48,424,365 12 Check if the Aggregate Amount in Row (11) Excludes Certain Shares (See Instructions) [ ] 13 Percent of Class Represented By Amount in Row (11) 90.8% 14 Type of Reporting Person (See Instructions) IA Page 8 of 51 Pages This Amendment No. 17 to Schedule 13D relates to shares of Common Stock, $0.01 par value per share (the "Shares"), of Bluefly, Inc. (the "Issuer"). This Amendment No. 17 supplementally amends the initial statement on Schedule 13D, dated August 6, 1999, and all amendments thereto (collectively, the "Initial Statement"), filed by the Reporting Persons (as defined herein). This Amendment No. 17 is being filed by the Reporting Persons to report that QIP (as defined herein) and SFM Domestic Investments (as defined herein) have entered into an agreement with the Issuer as described herein, whereby QIP and SFM Domestic Investments each: A) purchased from the Issuer shares of preferred stock convertible into Shares; B) agreed to convert the shares of the Series 2002 Convertible Preferred Stock, par value $.01 per share (the "Series 2002 Preferred Stock") held for the accounts of QIP and SFM Domestic Investments into shares of preferred stock convertible into Shares, and C) agreed to convert certain convertible demand promissory notes held for the accounts of QIP and SFM Domestic Investments into shares of preferred stock convertible into Shares. Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Initial Statement. The Initial Statement is supplementally amended as follows. Item 2. Identity and Background This Statement is being filed on behalf of each of the following persons (collectively, the "Reporting Persons"): (i) Quantum Industrial Partners LDC ("QIP"); (ii) QIH Management Investor, L.P. ("QIHMI"); (iii) QIH Management LLC ("QIH Management"); (iv) Soros Fund Management LLC ("SFM LLC"); (v) SFM Domestic Investments LLC ("SFM Domestic Investments"); and (vi) Mr. George Soros ("Mr. Soros"). This Statement relates to the Shares held for the accounts of QIP and SFM Domestic Investments. Effective December 31, 2002, QIH Management, Inc. was converted into QIH Management LLC. On such date, Mr. Soros, the sole owner of QIH Management LLC, contributed his interest in QIH Management LLC to Soros Private Funds Management LLC, a Delaware limited liability company ("SPFM"), an entity wholly-owned by Mr. Soros. SPFM is the sole managing member of QIH Management LLC. Neither SPFM nor QIH Management LLC have executive officers or directors. As a result, that portion of Annex A of the Initial Statement listing the directors and officers of QIH Management, Inc., is hereby deleted. Page 9 of 51 Pages Item 3. Source and Amount of Funds or Other Consideration The information set forth in Item 6 hereof is hereby incorporated by reference into this Item 3. QIP expended $4,867,763 of its working capital to purchase the securities reported herein as having been acquired since January 13, 2003 (60 days prior to the date hereof). Of this amount, $3,899,463 was expended to purchase shares of Series D Preferred Stock (as defined herein) pursuant to the Purchase Agreement (as defined herein). In addition, as more fully set forth in Item 6 herein, pursuant to the Purchase Agreement, QIP acquired additional shares of Series D Preferred Stock upon conversion of the shares of Series 2002 Preferred Stock and the QIP 2003 Note (as defined herein) held for QIP's account. Finally, QIP expended $968,300 of its working capital on January 28, 2003 to purchase a warrant to purchase 24,208 shares ("Warrant No. 19"). SFM Domestic Investments expended $159,360 of its working capital to purchase the securities reported herein as having been acquired since January 13, 2003 (60 days prior to the date hereof). Of this amount, $127,660 was expended to purchase shares of Series D Convertible Preferred Stock reported herein as being acquired pursuant to the Purchase Agreement. In addition, as more fully set forth in Item 6 herein, pursuant to the Purchase Agreement, SFM Domestic Investments acquired additional shares of Series D Preferred Stock upon conversion of the shares of Series 2002 Preferred Stock and the SFM 2003 Note (as defined herein) held for SFM Domestic Investments' Account. Finally, SFM Domestic Investments expended $31,700 of its working capital on January 28, 2003 to purchase a warrant to purchase 792 shares ("Warrant No. 20"). Item 4. Purpose of Transaction The information set forth in Item 6 hereof is hereby incorporated by reference into this Item 4. The Reporting Persons reserve the right to acquire, or cause to be acquired, additional securities of the Issuer, to dispose of, or cause to be disposed, such securities at any time or to formulate other purposes, plans or proposals regarding the Issuer or any of its securities, to the extent deemed advisable in light of general investment and trading policies of the Reporting Persons, market conditions or other factors. Item 5. Interest in Securities of the Issuer The information set forth in Item 6 hereof is hereby incorporated by reference into this Item 5. (a) (i) Each of QIP, QIHMI, QIH Management and SFM LLC may be deemed the beneficial owner of 46,890,033 Shares (approximately 90.2% of the total number of Shares outstanding assuming the exercise and conversion of all of the securities held for the account of QIP). This number consists of A) 5,287,082 Shares, B) 3,806,923 Shares issuable upon the conversion of 445,410 shares of Series A Preferred Stock, C) 26,503,096 Shares issuable upon the conversion of 8,607,843 shares of Series B Preferred Stock, D) 363,113 Shares issuable upon the exercise of warrants held for the account of QIP, E) 96,830 Shares issuable upon the exercise of Warrant No. 11 held for the account of QIP, F) 58,098 Shares issuable upon the exercise of Warrant No. 13 held for the account of QIP, G) 96,830 Shares issuable upon the exercise of Warrant No. 15 held for the account of QIP, H) 287,250 Shares issuable upon the exercise of Warrant No. 17 held for the account of QIP, I) 1,274,078 Shares currently issuable upon the conversion of 968.3 shares of Series C Preferred Stock held for the account of QIP, J) 9,092,525 Shares currently issuable upon the conversion of the 6,910.319 shares of Series D Preferred Stock held for the account of QIP; and K) 24,208 shares issuable upon the exercise of Warrant No. 19 held for the account of QIP. (ii) SFM Domestic Investments may be deemed the beneficial owner of 1,534,332 Shares (approximately 13.1% of the total number of Shares outstanding assuming the exercise and conversion of all the securities held for its account). This number consists of A) 172,995 Shares, B) 124,701 Shares issuable upon the conversion of 14,590 shares of Series A Preferred Stock held for its account, C) 866,942 Shares Page 10 of 51 Pages issuable upon the conversion of 281,571 shares of Series B Preferred Stock held for its account, D) 11,887 Shares issuable upon the exercise of warrants held for its account, E) 3,170 Shares issuable upon the exercise of Warrant No. 12 held for its account, F) 1,902 Shares issuable upon the exercise of Warrant No. 14 held for its account, G) 3,170 Shares issuable upon the exercise of Warrant No. 16 held for its account, H) 9,394 Shares issuable upon the exercise of Warrant No. 18 held for its account, I) 41,710 Shares currently issuable upon the conversion of 31.7 shares of Series C Preferred Stock held for its account, J) 297,669 Shares issuable upon the conversion of 226.229 the shares of Series D Preferred Stock; and K) 792 Shares issuable upon the exercise of Warrant No. 20 held for its account. (iii) Mr. Soros may be deemed the beneficial owner of 48,424,365 Shares (approximately 90.8% of the total number of Shares outstanding assuming the exercise and conversion of all of the securities held for the accounts of QIP and SFM Domestic Investments). This number consists of A) 46,890,033 Shares which may be deemed to be beneficially owned by QIP as described above, and B) 1,534,332 Shares which may be deemed to be beneficially owned by SFM Domestic Investments as described above. Mr. Soros disclaims beneficial ownership of any securities not held directly for his account. (b) (i) Each of QIP, QIHMI, QIH Management and SFM LLC (by virtue of the QIP contract) may be deemed to have the sole power to direct the voting and disposition of the 46,890,033 Shares which may be deemed to be beneficially owned by QIP as described above. (ii) SFM Domestic Investments may be deemed to have the sole power to direct the voting and disposition of the 1,534,332 Shares which may be deemed to be beneficially owned by SFM Domestic Investments as described above. (iii) Mr. Soros (as a result of his position with SFM LLC and in his capacity as the sole managing member of SFM Domestic Investments) may be deemed to have the sole power to direct the voting and disposition of the 48,424,365 Shares which may be deemed to be beneficially owned by QIP and SFM Domestic Investments as described above. (c) Except for (a) the transactions described in Item 6 below, and (b) certain transactions listed in Annex A hereto, all of which were effected in privately negotiated transactions, there have been no transactions effected with respect to the Shares since January 13, 2003 (60 days prior to the date hereof) by any of the Reporting Persons. (d) (i) The shareholders of QIP, including Quantum Industrial Holdings, Ltd., a British Virgin Islands international business company, have the right to participate in the receipt of dividends from, or proceeds from the sales of, the securities held for the account of QIP in accordance with their ownership interests in QIP. (ii) Certain members of SFM Domestic Investments have the right to participate in the receipt of dividends from, or proceeds from the sale of, the securities held for the account of SFM Domestic Investments. (e) Not applicable. Page 11 of 51 Pages Item 6. Contracts, Arrangements, Understandings or Relationships with Respect to Securities of the Issuer. Series D Preferred Stock Purchase Agreement - ------------------------------------------- On March 12, 2003, the Issuer entered into a Series D Preferred Stock Purchase Agreement (the "Purchase Agreement") with QIP and SFM Domestic Investments. Pursuant to the terms of the Purchase Agreement, QIP purchased 3,899.463 shares of the Issuer's Series D Convertible Preferred Stock, $.01 par value per share (the "Series D Preferred Stock") for an aggregate purchase price of $3,899,463, and SFM Domestic Investments purchased 127.660 shares of Series D Preferred Stock for an aggregate purchase price of $127,660. In addition, pursuant to the terms of the Purchase Agreement, QIP acquired an aggregate of 3,010.856 shares of Series D Preferred Stock upon conversion of 2,033.43 shares of Series 2002 Preferred Stock and the convertible demand promissory note, dated January 28, 2003 (the "QIP 2003 Note"), with an aggregate amount of principal and accrued and unpaid interest of $977,426, and SFM Domestic Investments acquired an aggregate of 98.569 shares of Series D Preferred Stock upon conversion of 66.57 shares of Series 2002 Preferred Stock and the convertible demand promissory note, dated January 28, 2003 (the "SFM 2003 Note"), with an aggregate amount of principal and accrued and unpaid interest of $31,999. Pursuant to the Purchase Agreement, the Issuer elected to prepay the aggregate principal amount of the convertible demand promissory note, dated September 27, 2002, issued by the Issuer to QIP, in the aggregate principal amount of $1,936,600 and the convertible demand promissory note, dated September 27, 2002, issued by the Issuer to SFM Domestic Investments, in the aggregate principal amount of $63,400 (the "Series C Convertible Notes") (forms of which were previously filed as Exhibits JJJ and KKK, respectively, to Schedule 13D Amendment No. 15 and are incorporated herein by reference in response to this Item 6), together with interest accrued thereon. The foregoing description of the Series C Convertible Notes does not purport to be complete and is qualified in its entirety by the terms of the Series C Convertible Notes. So long as any shares of Series D Preferred Stock are owned by QIP, SFM Domestic Investments or their respective affiliates, the Issuer has agreed not to take any action to approve or otherwise facilitate certain change of control transactions, including, but not limited to, a merger or consolidation of the Issuer resulting in a change of control or a sale of substantially all the assets of the Issuer, unless provision has been made for the holders of the shares of Series D Preferred Stock to receive in connection with such transaction an amount in cash equal to the greater of (i) $1,000 per share of Series D Preferred Stock plus any accrued and unpaid dividends on such share and (ii) the amount that the holder of such share of Series D Preferred Stock would receive if it were to convert such share (without regard to any limitation on conversion and without actually requiring to be so converted) into Shares (the "Series D Liquidation Preference"). The Issuer, QIP and SFM Domestic Investments amended the definition of "Registrable Securities" under the Investment Agreement (the "Investment Agreement"), dated November 13, 2000 (a copy of which was previously filed as Exhibit LL to Schedule 13D Amendment No. 7 and is incorporated herein by reference in response to this Item 6) in order that certain securities related to the Series D Preferred Stock were covered by the registration rights set forth in the Investment Agreement. The Page 12 of 51 Pages amended definition of "Registrable Securities" includes, along with any other securities already included in such definition, the Shares issuable upon conversion of the Series D Preferred Stock. The foregoing description of the Investment Agreement does not purport to be complete and is qualified in its entirety by the terms of the Investment Agreement. QIP and SFM Domestic Investments agreed to provide the Issuer with additional financing up to an aggregate of $1,000,000 on a standby basis which, subject to certain terms and conditions, the Issuer may draw upon at any time prior to January 1, 2004. Any draws against the standby commitment amount will be affected through the purchase of shares of Series E Preferred Stock having rights substantially identical to the Series D Preferred Stock except as set forth in the Purchase Agreement. The Issuer has agreed to put forth proposals seeking stockholder approval of the conversion rights of the Series D Preferred Stock and the Issuer's Series E Convertible Preferred Stock, $.01 par value per share (the "Series E Preferred Stock") at the Company's next annual or special meeting of stockholders. The Issuer has agreed to take all reasonable action to convene a meeting of the Issuer's stockholders on or before December 31, 2003. The foregoing description of the Purchase Agreement does not purport to be complete and is qualified in its entirety by the terms of the Purchase Agreement, which is attached in Exhibit OOO and is incorporated herein by reference in response to this Item 6. Certificate of Powers, Designations, Preferences and Rights of Series D Convertible Preferred Stock - -------------------------------------------------------------------------------- Pursuant to the terms of the Certificate of Powers, Designations, Preferences and Rights of Series D Convertible Preferred Stock (the "Series D Preferred Certificate of Designations") filed by the Issuer with the Delaware Secretary of the State on March 12, 2003, the shares of Series D Preferred Stock are entitled to cumulative dividends at a rate of 12% per annum, compounding annually. The dividends are payable only upon a conversion of the shares of Series D Preferred Stock into Shares, a liquidation, dissolution or winding up of the Issuer or a redemption of the shares of Series D Preferred Stock. The holders of shares of Series D Preferred Stock are entitled to a preference on a liquidation, dissolution or winding up of the Issuer in an amount per share equal to the Series D Liquidation Preference. The holders of shares of Series D Preferred Stock are entitled to vote on all matters submitted to a vote of the Issuer's stockholders, voting as a single class with the holders of the Shares, on an as-converted basis. Notwithstanding the foregoing, (i) the holders of shares of Series D Preferred Stock are not entitled to vote with respect to the approval of the conversion rights of the Series D Preferred Stock or any equity securities issued in connection with the funding of the standby commitment amount under the Purchase Agreement and (ii) until the Issuer's stockholders approve the conversion rights of the Series D Preferred Stock (to the extent such approval is required by the rules of the Nasdaq SmallCap Market or any other national securities exchange or quotation system upon which the Shares may be listed from time to time), the total number of votes cast with respect to the then outstanding shares of Series D Preferred Stock may not exceed 2,204,803 (subject to adjustment to reflect any stock split, stock dividend, reclassification or similar transaction). So long as at least 40% of the shares of Series D Preferred Stock remain outstanding, the Issuer may take the actions enumerated in Section 5.1 of the Series D Preferred Certificate of Page 13 of 51 Pages Designations only with the approval of a majority of the shares of Series D Preferred Stock, voting separately as a class. In addition, so long as any shares of Series D Preferred Stock are outstanding, the approval of the holders of at least 66-2/3% of such shares, voting separately as a class, must be obtained (i) to effect any transaction that would adversely affect the rights, preferences, powers and privileges of the shares of Series D Preferred Stock or (ii) to merge or consolidate with another entity, sell all or substantially all of the Issuer's assets or enter into a transaction resulting in, or facilitating, a change of control. Each share of Series D Preferred Stock is convertible, at the option of the holder thereof, into a number of fully paid and nonassessable Shares obtained by dividing (i) $1,000 by (ii) $0.76 (as adjusted, the "Series D Conversion Price"). The Series D Conversion Price may be adjusted upon the occurrence of certain events described in the Series D Preferred Certificate of Designations, including, but not limited to, the issuance by the Issuer of securities at a price per share (the "New Issue Price") less than the Series D Conversion Price in which case the Series D Conversion Price will be adjusted to equal the New Issue Price. Upon conversion, the accrued and unpaid dividends on each share of Series D Preferred Stock are paid, at the option of the Issuer, in cash or in Shares. Notwithstanding the foregoing, (i) until the Issuer's stockholders approve the conversion rights of the Series D Preferred Stock (to the extent such approval is required by the rules of the Nasdaq SmallCap Market or any other national securities exchange or quotation system upon which the Shares may be listed from time to time), no share of Series D Preferred Stock may be converted into Shares to the extent that, after giving effect to such conversion, the total number of Shares issued from and after March 12, 2003 as a result of the conversion of shares of Series D Preferred Stock would exceed 2,204,803 (subject to adjustment to reflect any stock split, stock dividend, reclassification or similar transaction). The holders of shares of Series D Preferred Stock are entitled to certain preemptive rights in instances where the Issuer issues any Shares or securities convertible or exchangeable into Shares, subject to certain excluded issuances. Subject to the fulfillment of certain requirements, the Issuer may redeem for cash all the shares of Series D Preferred Stock at redemption prices equal to multiples of the Series D Conversion Price, as set forth in Section 7 of the Series D Preferred Certificate of Designations. The foregoing description of the Series D Preferred Certificate of Designations does not purport to be complete and is qualified in its entirety by the terms of the Series D Preferred Certificate of Designations, which is attached in Exhibit PPP, and is incorporated herein by reference in response to this Item 6. Waiver and Consent of the Holders of Series A Convertible Preferred Stock, - --------------------------------------------------------------------------- Series B Convertible Preferred Stock, Series C Convertible Preferred Stock and - ------------------------------------------------------------------------------- Series 2002 Convertible Preferred Stock - ---------------------------------------- On March 12, 2003, QIP and SFM Domestic Investments executed the Waiver and Consent of the Holders of Series A Convertible Preferred Stock, Series B Convertible Preferred Stock, Series C Convertible Preferred Stock and Series 2002 Convertible Preferred Stock (the "Waiver and Consent"). Pursuant to the Waiver and Consent, (i) the holders of Series A Preferred Stock, Series B Preferred Stock Page 14 of 51 Pages and Series C Preferred Stock waived their preemptive rights with respect to the issuance of the shares of Series D Preferred Stock, and (ii) the holders of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series 2002 Preferred Stock consented to the issuance of the shares of Series D Preferred Stock and the prepayment of the Series C Convertible Notes. The foregoing description of the Waiver and Consent does not purport to be complete and is qualified in its entirety by the terms of the Waiver and Consent, which is attached in Exhibit QQQ, and is incorporated herein by reference in response to this Item 6. Conversion Price of Series B Convertible Preferred Stock and Series C - ---------------------------------------------------------------------- Convertible Preferred Stock - ----------------------------- In connection with the issuance of the shares of Series D Preferred Stock, the conversion price of the Series B Preferred Stock was reduced to $0.76 per share pursuant to Section 5.8.6 of the Issuer's Certificate of Incorporation (a copy of which was previously filed as Exhibit RR to Schedule 13D Amendment No. 8 and is incorporated herein by reference in response to this Item 6), and the conversion price of the Series C Preferred Stock was reduced to $0.76 per share pursuant to Section 6.5 of the Certificate of Powers, Designations, Preferences and Rights of Series C Convertible Preferred Stock (the "Series C Preferred Certificate of Designations") (a copy of which was previously filed as Exhibit LLL to Schedule 13D Amendment No. 15 and is incorporated herein by reference in response to this Item 6) filed by the Issuer with the Delaware Secretary of the State on September 27, 2002. The foregoing descriptions of the Certificate of Incorporation and the Series C Preferred Certificate of Designations do not purport to be complete and are qualified in their entirety by the terms of the Certificate of Incorporation and the Series C Preferred Certificate of Designations. Except as set forth herein, the Reporting Persons do no have any contracts, arrangements, understandings or relationships with respect to any securities of the Issuer. Item 7. Material to be Filed as Exhibits The Exhibit Index is incorporated herein by reference. Page 15 of 51 Pages SIGNATURES After reasonable inquiry and to the best of my knowledge and belief, the undersigned certifies that the information set forth in this Statement is true, complete and correct. Date: March 14, 2003 QUANTUM INDUSTRIAL PARTNERS LDC By: /s/ John F. Brown ----------------------------------- John F. Brown Attorney-in-Fact QIH MANAGEMENT INVESTOR, L.P. By: QIH Management LLC, its General Partner By: Soros Private Funds Management LLC, its Managing Member By: George Soros, its Sole Member By: /s/ John F. Brown ----------------------------------- John F. Brown Attorney-in-Fact QIH MANAGEMENT LLC By: Soros Private Funds Management LLC, its Managing Member By: George Soros, its Sole Member By: /s/ John F. Brown ----------------------------------- John F. Brown Attorney-in-Fact SOROS FUND MANAGEMENT LLC By: /s/ John F. Brown ----------------------------------- John F. Brown Assistant Counsel SFM DOMESTIC INVESTMENTS LLC By: George Soros Its Managing Member By: /s/ John F. Brown ----------------------------------- John F. Brown Attorney-in-Fact GEORGE SOROS By: /s/ John F. Brown ----------------------------------- John F. Brown Attorney-in-Fact Page 16 of 51 Pages ANNEX A RECENT TRANSACTIONS IN THE SECURITIES OF BLUEFLY, INC. For the Date of Nature of Number of Account of Transaction Transaction Securities Price - ---------- ----------- ----------- ---------- ----- QIP 1/28/03 Purchase 24,208 (1) Warrants SFM Domestic 1/28/03 Purchase 792 (2) Investments Warrants - ---------------------------- (1) Issued to QIP as additional consideration in connection with the purchase of certain convertible demand promissory notes from the Issuer. (2) Issued to SFM Domestic Investments as additional consideration in connection with the purchase of certain convertible demand promissory notes from the Issuer. Page 17 of 51 Pages EXHIBIT INDEX OOO. Form of the Series D Preferred Stock Purchase Agreement, dated as of March 12, 2003, by and between Bluefly, Inc. and the investors listed on Schedule I thereto........................................ 18 PPP. Form of Certificate of Powers, Designations, Preferences and Rights of Series D Convertible Preferred Stock of Bluefly, Inc........................... 34 QQQ. Form of Waiver and Consent of the Holders of Series A Convertible Preferred Stock, Series B Convertible Preferred Stock, Series C Convertible Preferred Stock and Series 2002 Convertible Preferred Stock of Bluefly, Inc........................................... 48 EX-99 3 bluefly13da17_exhooo.txt EXHIBIT OOO FORM OF SERIES D PREFERRED STOCK Page 18 of 51 Pages EXHIBIT OOO SERIES D PREFERRED STOCK PURCHASE AGREEMENT THIS SERIES D PREFERRED STOCK PURCHASE AGREEMENT, dated as of March 12, 2003 (this "Agreement"), is entered into by and between BLUEFLY, INC., a Delaware corporation (the "Company"), and the investors listed on Schedule 1 hereto (each, an "Investor" and, collectively, the "Investors"). RECITALS WHEREAS, the Investors desire to purchase from the Company, and the Company desires to issue and sell to the Investors, 4,027.123 shares (the "Purchased Shares") of Series D Convertible Preferred Stock, par value $.01 per share (the "Series D Preferred Stock"), of the Company on the terms, and subject to the conditions, contained herein; WHEREAS, the Investors currently own, among other things, (a) an aggregate of two thousand, one hundred (2,100) shares of the Company's Series 2002 Convertible Preferred Stock, par value $.01 per share (the "Series 2002 Preferred Stock"), (b) convertible demand promissory notes, dated September 27, 2002, issued by the Company in the aggregate principal amount of two million dollars ($2,000,000), and with accrued and unpaid interest thereon, as of the date hereof, in the aggregate amount of $27,123 (the "2002 Notes") and (c) convertible demand promissory notes, dated January 28, 2003, issued by the Company in the aggregate principal amount of one million dollars ($1,000,000), and with accrued and unpaid interest thereon, as of the date hereof, in the aggregate amount of $9,425 (the "2003 Notes"); WHEREAS, the 2002 Notes are prepayable at the Company's option, and the Company desires to use a portion of the proceeds of the sale of the Purchased Shares to prepay all outstanding principal and interest on the 2002 Notes; and WHEREAS, the Series 2002 Preferred Stock and the 2003 Notes are convertible, at the holder's option, into the equity securities sold by the Company in any round of financing consummated after the date of their issuance, and the Investors desire, pursuant to the conversion provisions of the Series 2002 Preferred Stock and the 2003 Notes, to convert their Series 2002 Preferred Stock and 2003 Notes into an aggregate of 3,109.425 shares of Series D Preferred Stock (the "Conversion Shares," and, together with the Purchased Shares, the "Shares"). AGREEMENT NOW, THEREFORE, in consideration for the mutual covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows: Page 19 of 51 Pages ARTICLE I PURCHASE AND SALE OF SHARES ---------------------------- SECTION 1.1 Purchased Shares; Prepayment of 2002 Notes. Subject to the terms and conditions hereof: (a) the Company hereby issues and sells to the Investors, and each Investor hereby purchases from the Company, the number of Purchased Shares set forth opposite such Investor's name in Schedule 1, for a purchase price of one thousand dollars ($1,000) per share, resulting in an aggregate purchase price for all Purchased Shares sold pursuant to the terms hereof of $4,027,123 (the "Purchase Price"); (b) the Company hereby exercises its right to prepay each 2002 Note in full pursuant to Section 2(b) thereof, and directs that the portion of the Purchase Price set forth opposite each Investor's name in Schedule 1 (the "Retained Amount") be retained by such Investor as payment in full of all outstanding principal and interest under such Investor's 2002 Note (the aggregate of such Retained Amounts equaling $2,027,123); and (c) each Investor hereby waives any right to notice of prepayment required under Section 2(b) of such Investor's 2002 Note, and accepts the relevant Retained Amount as payment in full of all outstanding principal and interest under such Investor's 2002 Notes. Simultaneously with the execution of this Agreement, in order to further evidence the transactions described in clauses (b) and (c) above, each Investor is returning its 2002 Note to the Company for cancellation. SECTION 1.2 Conversion Shares. Subject to the terms and conditions hereof, each Investor hereby: (a) converts all outstanding principal and interest under its 2003 Note (the aggregate amount of which is set forth opposite such Investor's name on Schedule 1) into the number of shares of Series D Preferred Stock set forth opposite such Investor's name on Schedule 1; (b) converts all of its shares of Series 2002 Preferred Stock (the aggregate number of shares of which is set forth on Schedule 1) into the number of shares of Series D Preferred Stock set forth opposite such Investor's name on Schedule 1; and (c) waives any right to notice of the issuance of the Purchased Shares pursuant to Section 5(a) of each 2003 Note and Section 5 of the Certificate of Powers, Designations, Preferences and Rights of the Series 2002 Preferred Stock. Simultaneously with the execution of this Agreement, in order to further evidence the transactions described in clauses (a) and (b) above, each Investor is returning its 2003 Note and its shares of Series 2002 Preferred Stock to the Company for cancellation. ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to the Investors as follows: SECTION 2.1 Organization, etc. The Company and its Subsidiary (as defined in Section 2.4(b)) have each been duly formed, and are each validly existing as a corporation in good standing under the laws of their respective States of incorporation, and are each qualified to do business as a foreign corporation in each jurisdiction in which the failure to be so qualified could reasonably be expected to have a material adverse effect on the assets, liabilities, condition (financial or other), business or results of operations of the Company and its Subsidiary taken as a whole (a "Material Adverse Effect"). The Company and its Subsidiary each have the requisite corporate power and Page 20 of 51 Pages authority to own, lease and operate their respective properties and to conduct their respective businesses as presently conducted. The Company has the requisite corporate power and authority to enter into, execute, deliver and perform all of its duties and obligations under this Agreement and to consummate the transactions contemplated hereby. SECTION 2.2 Authorization. The execution, delivery and performance of this Agreement, the issuance of the Shares and the prepayment of the 2002 Notes have been duly authorized by all necessary corporate action on the part of the Company, including, without limitation, the due authorization by the affirmative votes of a majority of the disinterested directors of the Company's Board of Directors. SECTION 2.3 Validity; Enforceability. This Agreement 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, except as such enforceability may be limited by, or subject to, any bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and subject to general principles of equity. SECTION 2.4 Capitalization. (a) As of the date hereof, the authorized capital stock of the Company consists of 92,000,000 shares of common stock, $0.01 par value per share (the "Common Stock"), and 25,000,000 shares of preferred stock, $0.01 par value per share, of which 500,000 shares have been designated Series A Convertible Preferred Stock, 9,000,000 shares have been designated Series B Convertible Preferred Stock, 2,100 shares have been designated Series 2002 Convertible Preferred Stock, 3,500 shares have been designated Series C Convertible Preferred Stock and 7,150 shares have been designated Series D Convertible Preferred Stock. Without giving effect to the transactions contemplated by this Agreement, the issued and outstanding capital stock of the Company consists of (i) 11,024,568 shares of Common Stock, (ii) 460,000 shares of Series A Convertible Preferred Stock, (iii) 8,889,414 shares of Series B Convertible Preferred Stock, (iv) 2,100 shares of Series 2002 Convertible Preferred Stock and (v) 1,000 shares of Series C Convertible Preferred Stock. All such shares of the Company have been duly authorized and are fully paid and non-assessable. Except as set forth on Schedule 2.4 hereto or as otherwise contemplated by this Agreement, there are no outstanding options, warrants or other equity securities that are convertible into, or exercisable for, shares of the Company's capital stock. (b) The only Subsidiary of the Company is Clothesline Corporation. The Company owns all of the issued and outstanding capital stock of its Subsidiary, free and clear of all liens and encumbrances. All of such shares of capital stock are duly authorized, validly issued, fully paid and non-assessable, and were issued in compliance with the registration and qualification requirements of all applicable federal, state and foreign securities laws. There are no options, warrants, conversion privileges, subscription or purchase rights or other rights presently outstanding to purchase or otherwise acquire any authorized but unissued, unauthorized or treasury shares of capital stock or other securities of, or any proprietary interest in, the Company's Subsidiary, and there is no outstanding security of any kind convertible into or exchangeable for Page 21 of 51 Pages such shares or proprietary interest. "Subsidiary" means, with respect to the Company, 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 the Company. SECTION 2.5 Governmental Consents. The execution and delivery by the Company of this Agreement, and the performance by the Company of the transactions contemplated hereby, do not and will not require the Company to effectuate or obtain any registration with, consent or approval of, or notice to any federal, state or other governmental authority or regulatory body, other than periodic and other filings under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and listing applications and/or notifications to The Nasdaq SmallCap Market and The Boston Stock Exchange with respect to the issuance of the Shares and/or the shares of Common Stock issuable upon conversion of the Shares. The parties hereto agree and acknowledge that, in making the representations and warranties in the foregoing sentence of this Section 2.5, the Company is relying on the representations and warranties made by the Investors in Section 3.4. SECTION 2.6 No Violation. The execution and delivery of this Agreement and the performance by the Company of the transactions contemplated hereby will not (i) conflict with or result in a breach of any provision of the articles of incorporation or by-laws of the Company, (ii) result in a default or breach of, or, except for the approval of the holders of the Company's Series A Convertible Preferred Stock, the Series B Convertible Preferred Stock, the Series 2002 Convertible Preferred Stock and the Series C Convertible Preferred Stock, require any consent, approval, authorization or permit of, or filing or notification to, any person, company or entity under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, loan, factoring arrangement, license, agreement, lease or other instrument or obligation to which the Company or its Subsidiary is a party or by which the Company or its Subsidiary or any of their respective assets may be bound or (iii) violate any law, judgment, order, writ, injunction, decree, statute, rule or regulation of any court, administrative agency, bureau, board, commission, office, authority, department or other governmental entity applicable to the Company or its Subsidiary, except, in the case of clause (ii) or (iii) above, any such event that could not reasonably be expected to have a Material Adverse Effect or materially impair the transactions contemplated hereby. SECTION 2.7 Issuance of Shares. The Shares have been validly issued, and, upon payment therefor, will be fully paid and non-assessable. The offering, issuance, sale and delivery of the Shares as contemplated by this Agreement are exempt from the registration and prospectus delivery requirements of the Securities Act of 1933, as amended (the "Securities Act"), are being made in compliance with all applicable federal and (except for any violation or non-compliance that could not reasonably be expected to have a Material Adverse Effect) state laws and regulations concerning the offer, issuance and sale of securities, and are not being issued in violation of any preemptive or other rights of any stockholder of the Company. The parties hereto agree and acknowledge that, in making the representations and warranties in the foregoing sentence of this Section 2.7, the Company is relying on the representations and warranties made by the Investors in Section 3.4. Page 22 of 51 Pages SECTION 2.8 Absence of Certain Developments. Since December 31, 2001, there has not been any: (i) material adverse change in the condition, financial or otherwise, of the Company and its Subsidiary (taken as a whole) or in the assets, liabilities, properties or business of the Company and its Subsidiary (taken as a whole); (ii) declaration, setting aside or payment of any dividend or other distribution with respect to, or any direct or indirect redemption or acquisition of, any capital stock of the Company; (iii) waiver of any valuable right of the Company or its Subsidiary or cancellation of any material debt or claim held by the Company or its Subsidiary; (iv) material loss, destruction or damage to any property of the Company or its Subsidiary, whether or not insured; (v) acquisition or disposition of any material assets (or any contract or arrangement therefor) or any other material transaction by the Company or its Subsidiary otherwise than for fair value in the ordinary course of business consistent with past practice; or (vi) other agreement or understanding, whether in writing or otherwise, for the Company or its Subsidiary to take any action of the type, or any action that would result in an event of the type, specified in clauses (i) through (v). SECTION 2.9 Commission Filings. The Company has filed all required forms, reports and other documents with the Securities and Exchange Commission (the "Commission") for periods from and after January 1, 2001 (collectively, the "Commission Filings"), each of which has complied in all material respects with all applicable requirements of the Securities Act and/or the Exchange Act (as applicable). The Company has heretofore made available to the Investors all of the Commission Filings, including the Company's Annual Report on Form 10-K for the year ended December 31, 2001 and the Company's Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2002, June 30, 2002 and September 30, 2002. As of their respective dates, the Commission Filings did not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading. The audited consolidated financial statements and unaudited interim consolidated financial statements of the Company included or incorporated by reference in such Commission Filings have been prepared in accordance with generally accepted accounting principles, consistently applied ("GAAP") (except as may be indicated in the notes thereto or, in the case of the unaudited consolidated statements, as permitted by Form 10-Q), complied as of their respective dates in all material respects with applicable accounting requirements and the published rules and regulations of the Commission with respect thereto, and fairly present, in all material respects, the consolidated financial position of the Company and its Subsidiary as of the dates thereof and the results of operations for the periods then ended (subject, in the case of any unaudited consolidated interim financial statements, to the absence of footnotes required by GAAP and normal year-end adjustments). SECTION 2.10 Brokers. Neither the Company, nor any of its officers, directors or employees, has employed any broker or finder, or incurred any liability for any brokerage fees, commissions, finder's or other similar fees or expenses in connection with the transactions contemplated hereby. Page 23 of 51 Pages ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE INVESTORS Each Investor represents and warrants to the Company, severally but not jointly, as follows: SECTION 3.1 Organization, etc. Such Investor has been duly formed and is validly existing and in good standing under the laws of its jurisdiction of organization. Such Investor has the requisite organizational power and authority to enter into, execute, deliver and perform all of its duties and obligations under this Agreement and to consummate the transactions contemplated hereby. SECTION 3.2 Authority. The execution, delivery and performance of this Agreement have been duly authorized by all necessary organizational or other action on the part of such Investor. SECTION 3.3 Validity; Enforceability. This Agreement has been duly executed and delivered by such Investor, and constitutes the legal, valid and binding obligation of such Investor, enforceable against such Investor in accordance with its terms, except as such enforceability may be limited by, or subject to, any bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and subject to general principles of equity. SECTION 3.4 Investment Representations. (a) Such Investor acknowledges that the offer and sale of the Shares to such Investor have not been registered under the Securities Act, or the securities laws of any state or regulatory body, are being offered and sold in reliance upon exemptions from the registration requirements of the Securities Act and such laws and may not be transferred or resold without registration under such laws unless an exemption is available. The certificates representing the Shares will be imprinted with a legend in substantially the following form: "THE OFFER AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND SUCH SECURITIES MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, HYPOTHECATED, OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO A REGISTRATION STATEMENT WITH RESPECT TO SUCH SECURITIES WHICH IS EFFECTIVE UNDER SUCH ACT AND UNDER ANY APPLICABLE STATE SECURITIES LAWS UNLESS, IN THE OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY, AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND STATE SECURITIES LAWS IS AVAILABLE." (b) Such Investor is acquiring the Shares for investment, and not with a view to the resale or distribution thereof, and is acquiring such Shares for its own account. Page 24 of 51 Pages (c) Such Investor is an "accredited investor" (as that term is defined in Rule 501 of Regulation D promulgated under the Securities Act), is sophisticated in financial matters and is familiar with the business of the Company so that it is capable of evaluating the merits and risks of its investment in the Company and has the capacity to protect its own interests. Such Investor has had the opportunity to investigate on its own the Company's business, management and financial affairs and has had the opportunity to review the Company's operations and facilities and to ask questions and obtain whatever other information concerning the Company as such Investor has deemed relevant in making its investment decision. (d) Such Investor is in compliance with the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001. Neither such Investor, nor any of its principal owners, partners, members, directors or officers is included on: (i) the Office of Foreign Assets Control list of foreign nations, organizations and individuals subject to economic and trade sanctions, based on U.S. foreign policy and national security goals; (ii) Executive Order 13224, which sets forth a list of individuals and groups with whom U.S. persons are prohibited from doing business because such persons have been identified as terrorists or persons who support terrorism or (iii) any other watch list issued by any governmental authority, including the Commission. (e) No representations or warranties have been made to such Investor by the Company or any director, officer, employee, agent or affiliate of the Company, other than the representations and warranties of the Company set forth herein, and the decision of such Investor to purchase the Shares is based on the information contained herein, the Commission Filings and such Investor's own independent investigation of the Company. SECTION 3.5 Governmental Consents. The execution and delivery by such Investor of this Agreement, and the performance by such Investor of the transactions contemplated hereby, do not and will not require such Investor to effectuate or obtain any registration with, consent or approval of, or notice to any federal state or other governmental authority or regulatory body, except for the filing with the Commission of a Form 4 and an amendment to such Investor's Schedule 13D under the Exchange Act with respect to its acquisition of the Shares. SECTION 3.6 No Violation. The execution and delivery of this Agreement and the performance by such Investor of the transactions contemplated hereby, will not (i) conflict with or result in a breach of any provision of the articles of incorporation, by-laws or similar organizational documents of such Investor or (ii) violate any law, judgment, order, writ, injunction, decree, statute, rule or regulation of any court, administrative agency, bureau, board, commission, office, authority, department or other governmental entity applicable to such Investor, except, in the case of clause (ii) above, any such violation that could not reasonably be expected to materially impair the transactions contemplated hereby. SECTION 3.7 Brokers. Neither such Investor, nor any of its officers, directors or employees, has employed any broker or finder, or incurred any liability for any brokerage fees, Page 25 of 51 Pages commissions, finder's or other similar fees or expenses in connection with the transactions contemplated hereby. ARTICLE IV SURVIVAL; INDEMNIFICATION SECTION 4.1 Survival. The representations and warranties contained in Articles II and III hereof shall survive until the first anniversary of the date hereof. SECTION 4.2 Indemnification. Each party (including its officers, directors, employees, affiliates, agents, successors and assigns (each an "Indemnified Party")) shall be indemnified and held harmless by the other parties hereto (each an "Indemnifying Party") for any and all liabilities, losses, damages, claims, costs and expenses, interest, awards, judgments and penalties (including, without limitation, reasonable attorneys' fees and expenses) actually suffered or incurred by them (collectively, "Losses"), arising out of or resulting from the breach of any representation or warranty made by an Indemnifying Party contained in this Agreement. Notwithstanding the foregoing, the aggregate liability of any Investor under this Article IV shall in no event exceed fifty percent (50%) of the purchase price paid by such Investor for the Shares purchased by it and the aggregate liability of the Company under this Article IV shall in no event exceed fifty percent (50%) of the purchase price paid by the Investors for the Shares, except that the Company's liability for a violation of any of the representations and warranties contained in the first two sentences of Section 2.7 may exceed such limitation, but shall in no event exceed one hundred percent (100%) of the purchase price paid by the Investors for the Shares. SECTION 4.3 Indemnification Procedure. The obligations and liabilities of the Indemnifying Party under this Article IV with respect to Losses arising from claims of any third party that are subject to the indemnification provided for in this Article IV ("Third Party Claims") shall be governed by and contingent upon the following additional terms and conditions: if an Indemnified Party shall receive notice of any Third Party Claim, the Indemnified Party shall give the Indemnifying Party notice of such Third Party Claim promptly after the receipt by the Indemnified Party of such notice (which notice shall include the amount of the Loss, if known, and method of computation thereof, and containing a reference to the provisions of this Agreement in respect of which such right of indemnification is claimed or arises); provided, however, that the failure to provide such notice shall not release the Indemnifying Party from any of its obligations under this Article IV except to the extent the Indemnifying Party is materially prejudiced by such failure and shall not relieve the Indemnifying Party from any other obligation or liability that it may have to any Indemnified Party otherwise than under this Article IV. Upon written notice to the Indemnified Party within five (5) days of the receipt of such notice, the Indemnifying Party shall be entitled to assume and control the defense of such Third Party Claim at its or his expense and through counsel of its or his choice (which counsel shall be reasonably satisfactory to the Indemnified Party); provided, however, that, if there exists or is reasonably likely to exist a conflict of interest that would make it inappropriate in the reasonable judgment of counsel to the Indemnified Party for the same counsel to represent both the Indemnified Party and the Indemnifying Party, then the Indemnified Party shall be entitled to retain its or his own counsel in Page 26 of 51 Pages each jurisdiction for which the Indemnified Party reasonably determines counsel is required, at the expense of the Indemnifying Party. In the event the Indemnifying Party exercises the right to undertake any such defense against any such Third Party Claim as provided above, the Indemnified Party shall cooperate with the Indemnifying Party in such defense and make available to such Indemnifying Party, at the Indemnifying Party's expense, all witnesses, pertinent records, materials and information in the Indemnified Party's possession or under the Indemnified Party's control relating thereto as is reasonably required by the Indemnifying Party. Similarly, in the event the Indemnified Party is, directly or indirectly, conducting the defense against any such Third Party Claim, the Indemnifying Party shall cooperate with the Indemnified Party in such defense and make available to the Indemnified Party, at the Indemnifying Party's expense, all such witnesses (including himself), records, materials and information in the Indemnifying Party's possession or under the Indemnifying Party's control relating thereto as is reasonably required by the Indemnified Party. No such Third Party Claim may be settled by the Indemnifying Party on behalf of the Indemnified Party without the prior written consent of the Indemnified Party (which consent shall not be unreasonably withheld); provided, however, in the event that the Indemnified Party does not consent to any such settlement that would provide it with a full release from indemnified Loss and would not require it to take, or refrain from taking, any action, the Indemnifying Party's liability for indemnification shall not exceed the amount of such proposed settlement. The Indemnified Party will refrain from any act or omission that is inconsistent with the position taken by the Indemnifying Party in the defense of a Third Party Claim unless the Indemnified Party determines that such act or omission is reasonably necessary to protect its own interest. ARTICLE V MISCELLANEOUS SECTION 5.1 Change of Control Provision. For so long as any of the Shares are owned by the Investors or their affiliates, 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 the Shares to receive from the acquiror or any other person or entity (other than the Company) as a result of and in connection with the transaction an amount in cash equal to the aggregate liquidation preference for the Shares held by them, as set forth in the Certificate of Powers, Designations, Preferences and Rights of the Series D Preferred Stock. The parties hereto agree that irreparable damage would occur in the event that the provisions of this Section 5.1 were not performed in accordance with their terms and the Investors shall be entitled to specific performance of the terms of this Section 5.1 in addition to any other remedies at law or in equity. For purposes of this Section 5.1: a "Change of Control" shall mean 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, Page 27 of 51 Pages consolidation or similar transaction, in each case with respect to which all or substantially all the Persons who are 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 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 (v))), 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 the Investors 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; "Capital Stock" shall mean, with respect to the Company, any and all shares, interests, participations, rights in, or other equivalents (however designated and whether voting or non-voting) of, the Company's capital stock; and "Person" shall mean 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; and "Continuing Directors" shall mean any member of the Board of Directors on the date hereof 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 the Continuing Directors who are then members of the Board of Directors. SECTION 5.2 Registrable Securities. The shares of Common Stock issuable upon the conversion of the Shares (the "New Registrable Securities") shall be deemed "Registrable Securities" under the terms of the Investment Agreement by and among the Company, the Company's predecessor and the Investors, dated November 13, 2000 (the "Series B Investment Agreement") (subject to the provisions of Section 13.1(a) of the Series B Investment Agreement), and the parties hereto (who also constitute all of the parties to the Series B Investment Agreement) hereby amend the definition of "Registrable Securities" contained in the Series B Investment Agreement so that such definition includes the New Registrable Securities, along with any other securities already included within the definition thereof. SECTION 5.3 Standby Commitment. The Investors hereby irrevocably agree, severally but not jointly, that they shall provide the Company up to an aggregate of one million dollars ($1,000,000) (the "Commitment Amount"). The Commitment Amount may be drawn by the Company, at its option (as determined by the disinterested members of the Board of Directors of Page 28 of 51 Pages the Company) at any time prior to January 1, 2004 in one or more tranches; provided, however, that the Company may draw from the Commitment Amount only at such time as its total cash balances are less than one million dollars ($1,000,000); and provided, further, that the Commitment Amount shall be reduced by the gross cash proceeds received by the Company or any of its subsidiaries from the issuance after the date hereof of any equity or convertible securities, excluding the issuance of equity or convertible securities in connection with: (1) financing provided by the Investors pursuant to this Agreement, (2) any trade payables and other financing arrangements entered into in the ordinary course of business and (3) any financing or credit accommodations received by the Company pursuant to the Financing Agreement, dated March 30, 2001, between the Company and Rosenthal & Rosenthal, Inc., as the same may be amended or supplemented from time to time. Any and all draws against the Commitment Amount shall be effected through the purchase of newly-designated shares of Series E Convertible Preferred Stock ("Series E Preferred Stock") on terms and conditions substantially identical to those set forth herein, with the Series E Preferred Stock having rights substantially identical to the Series D Preferred Stock except that: (a) the conversion price of the Series E Preferred Stock shall be the lower of (i) the conversion price of the Series D Preferred Stock and (ii) the average closing price of the Common Stock on the Nasdaq SmallCap Market for the ten (10) trading days preceding the issuance of the Series E Preferred Stock; and (b) the Series E Preferred Stock shall not be convertible into Common Stock (and shall not be entitled to vote with the Common Stock on matters submitted to a vote of the holders of the Common Stock) until such time as the Company's stockholders approve the conversion rights of the Series E Preferred Stock to the extent such approval is required by the rules of the Nasdaq SmallCap Market or any other national securities exchange or quotation system upon which the Common Stock may be listed from time to time. The Company shall notify the Investors in writing within two (2) business days of the receipt of any funds that would reduce the Commitment Amount; provided that the Commitment Amount shall automatically be reduced whether or not the Company provides such notice. The obligation of Quantum Industrial Partners LDC in respect of the Commitment Amount shall be limited to 96.83% of the entire Commitment Amount, and the obligation of SFM Domestic Investments LLC shall be limited to 3.17% of the entire Commitment Amount. SECTION 5.4 Stockholder Approval. The Company shall put forth proposals at its next annual or special meeting of stockholders seeking approval of the conversion rights of the Series D Preferred Stock and the Series E Preferred Stock. The Company shall take all reasonable action to convene a meeting of stockholders of the Company to be held on or before December 31, 2003 to approve the foregoing matters. SECTION 5.5 Publicity. Except as may be required by applicable law or the rules of any securities exchange or market on which securities of the Company are traded, no party hereto shall issue a press release or public announcement or otherwise make any disclosure concerning this Agreement and the transactions contemplated hereby, without prior approval of the others; provided, however, that nothing in this Agreement shall restrict the Company or any Investor from disclosing such information (a) that is already publicly available, (b) that may be required or appropriate in response to any summons or subpoena (provided that the disclosing party will use commercially reasonable efforts to notify the other parties in advance of such disclosure under this Page 29 of 51 Pages clause (b) so as to permit the non-disclosing parties to seek a protective order or otherwise contest such disclosure, and the disclosing party will use commercially reasonable efforts to cooperate, at the expense of the non-disclosing parties, in pursuing any such protective order) or (c) in connection with any litigation involving disputes as to the parties' respective rights and obligations hereunder. SECTION 5.6 Entire Agreement. This Agreement and any other agreement or instrument to be delivered expressly pursuant to the terms hereof constitute the entire Agreement between the parties hereto with respect to the subject matter hereof and supersede all previous negotiations, commitments and writings with respect to such subject matter. SECTION 5.7 Assignments; Parties in Interest. Neither this Agreement nor any of the rights, interests or obligations hereunder may be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties. This Agreement shall be binding upon and inure solely to the benefit of each party hereto, and nothing herein, express or implied, is intended to or shall confer upon any person not a party hereto any right, benefit or remedy of any nature whatsoever under or by reason hereof, except as otherwise provided herein. SECTION 5.8 Amendments. This Agreement may not be amended or modified except by an instrument in writing signed by, or on behalf of, the parties against whom such amendment or modification is sought to be enforced. SECTION 5.9 Descriptive Headings. The descriptive headings of this Agreement are inserted for convenience of reference only and do not constitute a part of and shall not be utilized in interpreting this Agreement. SECTION 5.10 Notices and Addresses. Any notice, demand, request, waiver, or other communication under this Agreement shall be in writing and shall be deemed to have been duly given on the date of service, if personally served or sent by facsimile; on the business day after notice is delivered to a courier or mailed by express mail, if sent by courier delivery service or express mail for next day delivery; and on the fifth business day after mailing, if mailed to the party to whom notice is to be given, by first class mail, registered, return receipt requested, postage prepaid and addressed as follows: To Company: Bluefly, Inc. 42 West 39th Street, 9th Floor New York, New York 10018 Fax: (212) 840-1903 Attn: Jonathan B. Morris With a copy to: Swidler Berlin Shereff Friedman, LLP Page 30 of 51 Pages 405 Lexington Avenue New York, New York 10174 Fax: (212) 891-9598 Attn: Richard A. Goldberg, Esq. To the Investors: To the address set forth on Schedule 1. SECTION 5.11 Severability. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, void or unenforceable, the remainder of this Agreement will continue in full force and effect and the application of such provision to other persons or circumstances will be interpreted so as reasonably to effect the intent of the parties hereto. The parties further agree to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision that will achieve, to the extent possible, the economic, business and other purposes of such void or unenforceable provision. SECTION 5.12 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 conflicts of law principles. The parties agree that the federal and state courts located in New York, New York shall have exclusive jurisdiction over any dispute involving this Agreement or the transactions contemplated hereby, and each party hereby irrevocably submits to the jurisdiction of, and waives any objection to the laying of venue in, such courts. SECTION 5.13 Counterparts; Facsimile Signatures. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other parties, it being understood that all parties need not sign the same counterpart. This Agreement may be executed by facsimile, and a facsimile signature shall have the same force and effect as an original signature on this Agreement. SECTION 5.14 Expenses. The Company shall reimburse the Investors for their reasonable legal fees and expenses incurred in connection with the negotiation of this Agreement and the transactions contemplated hereby. Except as provided above, all costs and expenses, including, without limitation, fees and disbursements of counsel, incurred in connection with the negotiation, execution and delivery of this Agreement and its related documents shall be paid by the party incurring such costs and expenses, whether or not the closing shall have occurred. Page 31 of 51 Pages IN WITNESS WHEREOF, this Agreement has been duly executed on the date first set forth above. BLUEFLY, INC. By: ------------------------------- Name: Title: QUANTUM INDUSTRIAL PARTNERS LDC By: ------------------------------- Name: Title: SFM DOMESTIC INVESTMENTS LLC By: ------------------------------- Name: Title: Page 32 of 51 Pages
SCHEDULE 1 INVESTORS AND SHARE ALLOCATIONS ------------------------------- Shares Aggregate Issued Principal Shares Upon Aggregate and Issues Shares of Conver- Purchase Interest Upon 2002 sion of Price for Outstanding Conversion Preferred 2002 Total Name and Address Shares Shares Retained Under of Stock Preferred Shares Total of Investor Purchased Purchased Amount 2003 Note 2003 Note Converted Stock Issued Funded - ---------------- --------- --------- -------- ----------- --------- -------- ------- ------ ------ - ------------------------------------------------------------------------------------------------------------------------------------ Quantum Industrial 3,899.463 $3,899,463 $1,962,863 $977,426 977.426 2,033.43 2,033.43 6,910.319 $1,936,600 Partners LDC Kaya Flamboyan 9 Villemstad Curacao Netherlands-Antilles with a copy to: Soros Fund Management LLC 888 Fifth Avenue New York, New York 10106 Facsimile: (212) 664-0544 Attn: John F. Brown, Esq. - ------------------------------------------------------------------------------------------------------------------------------------ SFM Domestic Investments LLC 127.660 $127,660 $64,260 $31,999 31.999 66.57 66.57 226.229 $63,400 c/o Soros Fund Management LLC 888 Fifth Avenue New York, New York 10106 Facsimile: (212) 664-0544 Attn: John F. Brown, Esq. - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL 4,027.123 $4,027,123 $2,027,123 $1,009,425 1,099.425 2,100 2,100 7,136.548 $2,000,000 - ------------------------------------------------------------------------------------------------------------------------------------
Page 33 of 51 Pages SCHEDULE 2.4 CAPITALIZATION As of the date hereof, but without giving effect to the transactions contemplated by this Agreement, the following equity securities are outstanding and convertible into, or exercisable for shares of Common Stock: 1. 460,000 shares of Series A Convertible Preferred Stock (the "Series A Stock") are issued and outstanding. The Series A Stock is convertible into 3,931,624 shares of Common Stock. 2. 8,889,414 shares of Series B Convertible Preferred Stock (the "Series B Stock") are issued and outstanding. The Series B Stock is convertible into 22,336,913 shares of Common Stock. 3. Warrants to purchase an aggregate of 1,094,144 shares of Common Stock are issued and outstanding. 4. Options issued to purchase 9,525,412 shares of Common Stock are issued and outstanding under the Company's 1997 Stock Option Plan, as amended, and 2000 Stock Option Plan, as amended. 5. 2,100 shares of Series 2002 Preferred Stock are issued and outstanding. The Series 2002 Preferred Stock is convertible into Subsequent Round Securities (as defined in the Certificate of Designations relating to the Series 2002 Stock), and such Subsequent Round Securities may include Common Stock or securities convertible into Common Stock. 6. 1,000 shares of Series C Convertible Preferred Stock (the "Series C Stock") are issued and outstanding. The Series C Stock is convertible into 1,075,270 shares of Common Stock. 7. 2002 Notes in the aggregate principal amount of $2,000,000 are issued and outstanding. The 2002 Notes, without regard to interest accumulated thereon, are convertible into 2,000 shares of Series C Stock, which are convertible into 2,150,540 shares of Common Stock. 8. 2003 Notes in the aggregate principal amount of $1,000,000 are issued and outstanding. The 2003 Notes are convertible into Subsequent Round Securities (as defined in the 2003 Notes), and such Subsequent Round Securities may include Common Stock or securities convertible into Common Stock. EX-99 4 bluefly13da17_exhppp.txt EXHIBIT PPP FORM OF CERT OF POWERS, ETC. Page 34 of 51 Pages EXHIBIT PPP CERTIFICATE OF POWERS, DESIGNATIONS, PREFERENCES AND RIGHTS OF SERIES D CONVERTIBLE PREFERRED STOCK OF BLUEFLY, INC. BLUEFLY, INC., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), DOES HEREBY CERTIFY THAT: Pursuant to authority conferred upon the Board of Directors of the Corporation (the "Board") by the Certificate of Incorporation of the Corporation (the "Certificate of Incorporation"), and pursuant to the provisions of ss. 151 of the Delaware General Corporation Law (the "DGCL"), the Board, at a meeting held on March 5, 2003, duly adopted the following resolution providing for the voting powers, designations, preferences and rights, and the qualifications, limitations and restrictions, of the Series D Convertible Preferred Stock. WHEREAS, the Certificate of Incorporation provides for two classes of shares known as common stock, $0.01 par value per share (the "Common Stock"), and preferred stock, $0.01 par value per share (the "Preferred Stock"); and WHEREAS, the Board is authorized by the Certificate of Incorporation to provide for the issuance of the shares of Preferred Stock in one or more series, and by filing a certificate pursuant to the DGCL, to establish from time to time the number of shares to be included in any such series and to fix the voting powers, designations, preferences and rights of the shares of any such series, and the qualifications, limitations and restrictions thereof. NOW, THEREFORE, BE IT RESOLVED, that the Board deems it advisable to, and hereby does, designate a Series D Convertible Preferred Stock and fixes and determines the voting powers, designations, preferences and rights, and the qualifications, limitations and restrictions relating to the Series D Convertible Preferred Stock as follows: 1. Designation/Ranking. There shall hereby be created and established a series of Preferred Stock, and the shares of such series of Preferred Stock shall be designated "Series D Convertible Preferred Stock" (referred to herein as the "Series D Convertible Preferred Stock"). The Series D Convertible Preferred Stock shall rank pari passu with the Corporation's Series A Convertible Preferred Stock, $.01 par value per share (the "Series A Convertible Preferred Stock"), the Corporation's Series B Convertible Preferred Stock, $.01 par value per share (the "Series B Convertible Preferred Stock"), the Corporation's Series C Convertible Preferred Stock, $.01 per value per share (the "Series C Convertible Preferred Stock"), and the Corporation's Series 2002 Convertible Preferred Stock, $.01 par value per share (the "Series 2002 Convertible Preferred Stock," and, together with the Series A Convertible Preferred Stock, the Series B Convertible Preferred Stock and the Series C Convertible Preferred Stock, the "Convertible Preferred Stock") 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. Page 35 of 51 Pages 2. Authorized Number. The number of shares constituting the Series D Convertible Preferred Stock shall be seven thousand, one hundred and fifty (7,150) shares. 3. Dividends. 3.1 The holders of the Series D Convertible Preferred Stock shall be entitled to receive, out of funds legally available for such purpose, dividends which shall accrue at the rate of twelve percent (12%) per annum of the Series D Face Value (as defined in Section 4.1 hereof) of such stock and shall compound annually, payable only upon: (i) the conversion of the Series D Convertible Preferred Stock pursuant to Section 6 hereof; (ii) Liquidation (as defined in Section 4.1 hereof) of the Corporation under Section 4 hereof; or (iii) a redemption of the Series D Convertible Preferred Stock under Section 7 hereof. Except in connection with a Series D Liquidation Payment (as defined in Section 4.1 hereof) made under Section 4 hereof or a redemption payment made under Section 7 hereof (which in each case shall require payment in cash), the Corporation, in its sole discretion (as determined by a vote of the uninterested directors of the Corporation), 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 Series D Conversion Price. 3.2 Dividends on each share of Series D Convertible Preferred Stock shall be cumulative and shall accrue from the date of issuance of such share of Series D Convertible Preferred Stock. The date on which the Corporation initially issues any share of Series D Convertible Preferred Stock shall 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. 3.3 In addition to the right to receive dividends pursuant to Section 3.1 above, each holder of a share of Series D 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 Series D 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 Series D Convertible Preferred Stock at the same time such dividend or distribution is made to the holders of Common Stock. 4. Liquidation 4.1 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 D Convertible Preferred Stock held by it, before any distribution or payment is made upon any stock ranking junior to the Series D Convertible Preferred Stock, an amount equal to the greater of: (i) $1,000 per share (the "Series D 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 Series D Convertible Preferred Stock would receive if it were to convert (without regard to any limitation or restriction on conversion and without actually requiring such share to be so converted) such share of Series D Convertible Preferred Stock into share(s) of Common Stock immediately prior to such Page 36 of 51 Pages Liquidation. The holders of Series D Convertible Preferred Stock shall not be entitled to any further payment. The amount payable pursuant to the first sentence of this Section 4.1 with respect to one share of Series D Convertible Preferred Stock is sometimes referred to as the "Series D Liquidation Payment" (and, together with the Series A Liquidation Payment (as defined in the Certificate of Incorporation), the Series B Liquidation Payment (as defined in the Certificate of Incorporation), any amounts payable upon a Liquidation with respect to one share of Series C Convertible Preferred Stock and any amounts payable upon a Liquidation with respect to one share of Series 2002 Convertible Preferred Stock, the "Liquidation Payment"), and the amounts so payable with respect to all shares of Series D Convertible Preferred Stock are sometimes referred to as the "Series D Liquidation Payments" (and, together with the Series A Liquidation Payments (as defined in the Certificate of Incorporation), the Series B Liquidation Payments (as defined in the Certificate of Incorporation), the amounts so payable with respect to all shares of Series C Convertible Preferred Stock and the amounts so payable with respect to all shares of Series 2002 Convertible Preferred Stock, the "Liquidation Payments"). 4.2 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. 4.3 Written notice of such Liquidation stating a payment date, the amount of the Series D Liquidation Payments and the place where said Series D 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 Series D Convertible Preferred Stock, such notice to be addressed to each such holder at its address as shown by the records of the Corporation. 4.4 The Series D 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 parity with or is senior to the Series D Convertible Preferred Stock with respect to distribution of assets and rights upon the liquidation, dissolution or winding up of the Corporation. 5. Voting Rights. 5.1 In addition to any other vote required by law, this Certificate or the Certificate of Incorporation, so long as at least 40% of the shares of Series D 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 D 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 37 of 51 Pages (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 Series D Convertible Preferred Stock in accordance with Section 7 hereof); (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 authorized for issuance under the stock option or employee incentive plans existing on the date of the filing of this Certificate with the Secretary of State of the State of Delaware or as a result of the conversion of the Convertible Preferred Stock or any notes and warrants of the Corporation outstanding as of the date of the filing of this Certificate with the Secretary of State of the State of Delaware); (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 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; Page 38 of 51 Pages (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 Series D Preferred Stock Purchase Agreement, dated as of the date hereof, by and among the Corporation and the initial holders of the Series D Convertible Preferred Stock (the "Series D Purchase Agreement"). 5.2 Notwithstanding anything set forth herein, with the exception of any action duly approved by the holders of Series D Convertible Preferred Stock pursuant to Section 5.1 above, at any time when any shares of Series D 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, this Certificate or the Certificate of Incorporation, and in addition to any other vote required by law, this Certificate or the Certificate of Incorporation, without the approval of the holders of at least two-thirds (66 2/3%) of the then outstanding shares of Series D 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 D Convertible Preferred Stock or (ii) merge or consolidate with another person or entity, 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 (as defined in the Certificate of Incorporation). 5.3 Holders of Series D 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 any written consent in lieu of any such meeting, the holders of each outstanding share of Series D 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 Series D 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. Notwithstanding the foregoing, (a) holders of the Series D Convertible Preferred Stock shall not be entitled to cast, in respect of such shares, any votes with respect to the approval of the conversion rights of the Series D Convertible Preferred Stock or any equity securities issued in connection with the funding of the Commitment Amount (as defined in the Series D Purchase Agreement) and (b) until such time as the Corporation's stockholders approve the conversion rights of the Series D Convertible Preferred Stock, to the extent such approval is required by the rules of the Nasdaq SmallCap Market or any other national securities exchange or quotation system upon which the Common Stock may be listed from time to time, the total number of votes cast with respect to the then outstanding shares of Series D Convertible Preferred Stock shall in no event exceed 2,204,803 (as such number may be adjusted to reflect any stock split, stock dividend, reclassification or similar transaction affecting the Common Stock), and to the extent that the total number of votes to which the then outstanding shares of Series D Convertible Preferred Stock would otherwise be entitled to cast is limited by the provisions of this clause (b), the number of votes to which each share of Series D Convertible Preferred Stock shall be entitled to cast shall be determined on a pro rata basis. Except as set forth herein or otherwise required by law, the Series D 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. Page 39 of 51 Pages 6. Conversions. The holders of shares of Series D Convertible Preferred Stock shall have the following conversion rights. 6.1 Right to Convert. Subject to the terms and conditions of this Section 6.1, the holder of any share or shares of Series D 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 Series D 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 Series D Convertible Preferred Stock) into such number of fully paid and nonassessable shares of Common Stock as is obtained by (x) multiplying the number of shares of Series D Convertible Preferred Stock to be so converted by the Series D Face Value and (y) dividing the result by the Series D Conversion Price (as defined below) applicable to such share, determined as provided below, in effect on the date the certificate is surrendered for conversion; plus, at the Company's option (as determined by a vote of the uninterested directors of the Corporation), either a number of shares of Common Stock (valued at the Series D Conversion Price), or an amount in cash, as the case may be, equal to any accrued but unpaid dividends on the shares of Series D Convertible Preferred Stock so converted. The initial Series D Conversion Price per share for shares of Series D Convertible Preferred Stock shall be $0.76 per share, as adjusted pursuant to the further provisions of this Section 6 (such price as last adjusted, being referred to as the "Series D Conversion Price"). 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 Series D 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 Series D 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. 6.2 Issuance of Certificates; Time Conversion Effected. Promptly after the surrender of the certificate or certificates for the shares of Series D 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 Series D Convertible Preferred Stock. 6.3 Fractional Shares; Partial Conversion. No fractional shares of Common Stock shall be issued upon conversion of Series D Convertible Preferred Stock into Common Stock. If any fractional share of Common Stock would, except for the provisions of the first sentence of this Section 6.3, be delivered upon such conversion, the Corporation, in lieu of delivering such fractional share, shall pay to the holder surrendering the Series D 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. 6.4 Anti-Dilution Adjustments. The Series D Conversion Price shall be subject to adjustment as follows if any of the events listed below occur after the Issue Date but, with respect to a share of Series D Convertible Preferred Stock, prior to the conversion of such share of Series D Convertible Preferred Stock into Common Stock. Page 40 of 51 Pages (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 Series D Conversion Price in effect immediately prior to such event shall be adjusted so that the holder of any share of the Series D 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 Series D 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 Series D 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 3 above) or rights, options or warrants to subscribe for or purchase any --------- of its securities then, in each such case, the Series D Conversion Price shall be adjusted so that it shall equal the price determined by multiplying the Series D Conversion Price in effect immediately prior to the date of the distribution by a fraction the numerator of which shall be the Series D 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 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 Series D 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 Series D Conversion Price then in effect shall be appropriately readjusted. (iii) Whenever the Series D Conversion Price is adjusted as herein provided or as provided in Section 6.5(a), the Corporation shall promptly file with the Page 41 of 51 Pages conversion agent (or, if there is no conversion agent, the secretary of the Corporation) an officer's certificate setting forth such Series D 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 Series D Conversion Price setting forth such Series D Conversion Price and the date on which the adjustment becomes effective and shall mail the notice of such adjustment of the Series D 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 Series D 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 Series D 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. 6.5 Additional 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 6.5(b) hereof (collectively, the "Securities"), at a price per share (the "New Issue Price") less than the Series D Conversion Price, then in each such case the Series D 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 Section 6.5(a) shall be made successively whenever any Securities are issued (provided, however, that no further adjustments in the Series D 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 D 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 Section 6.5(a) shall not apply to the issuance of: (x) any equity securities issued at then fair market value pursuant to the Corporation's Page 42 of 51 Pages employee option or stock incentive plans approved by the Board of Directors of the Corporation on or prior to the date of the filing of this Certificate with the Secretary of State of the State of Delaware, (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)) or (z) any equity securities issued in connection with the funding of the Commitment Amount (as defined in the Series D Purchase Agreement). 6.6 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 reclassification, lawful and adequate provisions shall be made whereby each holder of a share or shares of Series D Convertible Preferred Stock shall thereupon have the right to receive upon conversion of such share or shares of Series D 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 Series D 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 Series D 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. 6.7 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 Page 43 of 51 Pages shares of Series D 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 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. 6.8 Limitation on Conversion Rights Pending Stockholder Approval; Stock to be Reserved. Notwithstanding anything in this Certificate to the contrary, no share of Series D Convertible Preferred Stock may be converted into Common Stock to the extent that, after giving effect to such conversion, the total number of shares of Common Stock issued from and after the date of this Certificate as a result of the conversion of shares of Series D Convertible Preferred Stock would exceed 2,204,803 (as may be adjusted to reflect any stock split, stock dividend, reclassification or other similar transaction), until such time as the Corporation's stockholders approve the conversion rights contained in this Section 6 to the extent such approval is required by the rules of the Nasdaq SmallCap Market or any other national securities exchange or quotation system upon which the Common Stock may be listed from time to time. 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 Series D 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 Series D Convertible Preferred Stock (the number of shares to be so reserved to be measured without giving effect to the first sentence of this Section 6.8). 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 Series D 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 Series D Conversion Price if the total number of shares of Common Stock issued and issuable after such action upon conversion of the Series D Convertible Preferred Stock would exceed the total number of shares of Common Stock then authorized by the Certificate of Incorporation. 6.9 Reissuance of Preferred Stock. Shares of Series D 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 Series D 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 Page 44 of 51 Pages 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 Series D Convertible Preferred Stock. 6.10 Issue Tax. The issuance of certificates for shares of Common Stock upon conversion of Series D Convertible Preferred Stock shall be made without charge to the holders thereof for any issuance tax in respect thereof, provided that the 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 Series D Convertible Preferred Stock which is being converted. 6.11 Closing of Books. The Corporation will at no time close its transfer books against the transfer of any Series D Convertible Preferred Stock or of any shares of Common Stock issued or issuable upon the conversion of any shares of Series D Convertible Preferred Stock in any manner which interferes with the timely conversion of such Series D Convertible Preferred Stock, except as may otherwise be required to comply with applicable laws. 6.12 Minimum Adjustment. No reduction of the Series D 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. 7. Redemption. The Corporation may (as determined by a vote of the uninterested directors of the Corporation) redeem (and shall redeem simultaneously with a redemption of all of the Series A Convertible Preferred Stock and the Series B Preferred Stock pursuant to Section 5.9 of the Certificate of Incorporation) for cash all but not less than all of the Series D 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 Securities Act of 1933, as amended, registering the resale of the shares of Common Stock to be received upon conversion of the Series D 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 Series D 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 Series D 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 7. Time Period Multiple of Conversion Price ----------- ---------------------------- Prior to November 13, 2004 4x November 13, 2004 through November 13, 2006 4.5x On or after November 13, 2006 5x Page 45 of 51 Pages 8. Adjustment of Face Value. In case the Corporation shall subdivide or reclassify its outstanding Series D Convertible Preferred Stock into a greater number of shares or combine or reclassify its outstanding Series D Convertible Preferred Stock into a smaller number of shares, the Series D Face Value in effect immediately prior to such event shall be adjusted to reflect such increase or decrease. An adjustment made pursuant to this Section 8 shall become effective on the effective date of subdivision, combination or reclassification. 9. Future Issuance of Shares; Preemptive Rights. 9.1 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 Quantum Industrial Partners LDC and SFM Domestic Investments LLC or their affiliates 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 Series D 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"). 9.2 Preemptive Rights; Exercise. (a) For a period of ten (10) days after the giving of the New Issuance Notice as provided in Section 9.1, each initial holder of the Series D Convertible Preferred Stock or their permitted assigns pursuant to the Series D Purchase 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 Series D 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"). (b) The right of each Preemptive Rightholder to purchase the New Securities under subsection (a) above shall be exercisable by delivering written notice of its exercise, prior to the expiration of the 10-day period referred to in subsection (a) above, to the Corporation, which notice shall state the amount of New Securities that the Preemptive Rightholder elects to purchase as provided in Section 9.2(a). 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 9.2(a); provided that each Page 46 of 51 Pages Preemptive Rightholder may waive its, his or her rights under Section 9.2(a) prior to the expiration of the 10-day period by giving written notice to the Corporation. (c) If, following the expiration of the 10-day period referred to above, not all of the New Securities have been subscribed for by the Preemptive Rightholders, each Preemptive Rightholder shall have the option to increase that number of New Securities it has elected to purchase pursuant to Section 9.2(a) by a proportionate amount. 9.3 Closing. The closing of the purchase of New Securities subscribed for by the Preemptive Rightholders under this Section 9 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 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. 9.4 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 9.2 and (ii) the expiration of the 10-day period referred to in Section 9.2. If such sale is not consummated within such four (4) month period for any reason, then the restrictions provided for in this Section 9 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 9. The closing of any issue and purchase contemplated by this Section 9.4 shall be held at the time and place as the parties to the transaction may agree. 10. 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 Series D Convertible Preferred Stock at least twenty (20) business days prior to effecting such Transaction a certificate stating that the holder of each share of Series D Convertible Preferred Stock shall have the right to receive in such Transaction, in exchange for each share of Series D Convertible Preferred Stock, a security identical to (and not less favorable than) the Series D Convertible Preferred Stock, and provision shall be made therefor in the agreement, if any, relating to such Transaction. Any certificate delivered pursuant to this Section 10 shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in Section 6 hereof. The provisions of this Section 10 and any equivalent thereof in any such certificate similarly shall apply to successive transactions. [Remainder of page intentionally left blank.] Page 47 of 51 Pages IN WITNESS WHEREOF, the undersigned has executed this Certificate of Designations this 12th day of March, 2003. BLUEFLY, INC. By:____________________________ Name: Title: EX-99 5 bluefly13da17_exhqqq.txt EXHIBIT QQQ FORM OF WAIVER Page 48 of 51 Pages EXHIBIT QQQ WAIVER AND CONSENT OF THE HOLDERS OF SERIES A CONVERTIBLE PREFERRED STOCK, SERIES B CONVERTIBLE PREFERRED STOCK, SERIES C CONVERTIBLE PREFERRED STOCK AND SERIES 2002 CONVERTIBLE PREFERRED STOCK OF BLUEFLY, INC. The undersigned, constituting the holders of all of the issued and outstanding shares of the Series A Convertible Preferred Stock (the "Series A Preferred Stock"), the Series B Convertible Preferred Stock (the "Series B Preferred Stock"), the Series C Convertible Preferred Stock (the "Series C Preferred Stock") and the Series 2002 Convertible Preferred Stock (the "Series 2002 Preferred Stock") of Bluefly, Inc., a Delaware corporation (the "Corporation"), hereby covenant and agree as follows and adopt the following resolutions pursuant to Section 228 of the General Corporation Law of the State of Delaware in lieu of holding meetings of the holders of Series A Preferred Stock (the "Series A Preferred Stockholders"), the holders of Series B Preferred Stock (the "Series B Preferred Stockholders"), the holders of Series C Preferred Stock (the "Series C Preferred Stockholders") and the holders of the Series 2002 Preferred Stock (the "Series 2002 Preferred Stockholders"), and direct that this waiver and consent be filed with the minutes of the Corporation: WHEREAS, the Corporation desires to issue and sell to Quantum Industrial Partners LDC and SFM Domestic Investments LLC (collectively, the "Investors"), pursuant to a Series D Preferred Stock Purchase Agreement substantially in the form attached hereto as Exhibit A (the "Series D Preferred Stock Purchase Agreement") for an aggregate purchase price of $4,027,123, an aggregate of 4,027.123 shares (the "Purchased Shares") of newly-designated Series D Convertible Preferred Stock, par value $0.01 per share (the "Series D Preferred Stock"), having the rights and preferences set forth in the Certificate of Designations of Series D Preferred Stock attached hereto as Exhibit B; WHEREAS, the Investors currently own, among other things, (a) an aggregate of two thousand, one hundred (2,100) shares of the Series 2002 Preferred Stock and (b) convertible demand promissory notes, dated January 28, 2003, issued by the Corporation in the aggregate principal amount of one million dollars ($1,000,000), and with accrued and unpaid interest thereon, as of the date hereof, in the aggregate amount of $9,425 (the "2003 Notes"); WHEREAS, the Series 2002 Preferred Stock and the 2003 Notes are convertible, at the holder's option, into the equity securities sold by the Corporation in any round of financing consummated after the date of their issuance, and the Investors desire, pursuant to the conversion provisions of the Series 2002 Preferred Stock and the 2003 Notes, to convert their Series 2002 Preferred Stock and 2003 Notes into an aggregate of 3,109.425 shares of Series D Preferred Stock (the "Conversion Shares," and, together with the Purchased Shares, the "Shares"); Page 49 of 51 Pages WHEREAS, under the terms of the Series D Preferred Stock Purchase Agreement, the Investors will provide the Corporation with a standby commitment to make an additional investment in the Corporation in the amount of the Commitment Amount (as defined in the Series D Preferred Stock Purchase Agreement), and the conversion price of the equity securities issued in connection with a funding of the Commitment Amount ("Standby Commitment Securities") may be less than the conversion price of the Series B Preferred Stock and the Series C Preferred Stock; WHEREAS, Sections 5.5.1 and 5.6.1 of the Corporation's certificate of incorporation (the "Certificate of Incorporation") provide that, without the approval of the holders of a majority of each of the Series A Preferred Stock and Series B Preferred Stock, voting separately as a class, the Corporation shall not, among other things, issue or sell securities of the Corporation, repurchase or redeem debt or incur indebtedness in excess of $1,000,000; WHEREAS, Section 5.1 of the Certificate of Designations relating to the Series C Preferred Stock (the "Series C Certificate of Designations") provides that, without the approval of the holders of a majority of the Series C Preferred Stock, voting separately as a class, the Corporation shall not, among other things, issue or sell securities of the Corporation, repurchase or redeem debt or incur indebtedness in excess of $1,000,000; WHEREAS, Section 5.11 of the Certificate of Incorporation provides certain preemptive rights to the Series A Preferred Stockholders and Series B Preferred Stockholders with respect to certain proposed issuances of securities of the Corporation; WHEREAS, Section 9 of the Series C Certificate of Designations provides certain preemptive rights to the Series C Preferred Stockholders with respect to certain proposed issuances of securities of the Corporation; WHEREAS, Section 7 of the Certificate of Designations relating to the Series 2002 Preferred Stock (the "Series 2002 Certificate of Designations") provides that, without the prior approval of the holders of a majority of the shares of the Series 2002 Preferred Stock, the Corporation shall not designate or issue any shares of capital stock of the Corporation, or any rights, warrants or options exchangeable for or convertible into capital stock of the Corporation, ranking pari passu with or senior to the Series 2002 Preferred Stock in the event of a liquidation, dissolution or winding up of the Corporation, and the Series D Preferred Stock would rank pari passu with the Series 2002 Preferred Stock with respect to such matters; and WHEREAS, Section 5.8.6 of the Certificate of Incorporation provides for the Series B Conversion Price (as defined in the Certificate of Incorporation) to be adjusted in the event that the Corporation issues Securities (as defined in the Certificate of Incorporation) at a price per share less than the Series B Conversion Price (the "Series B Anti-Dilution Provision"), and Section 6.5 of the Series C Certificate of Designations provides for the Series C Conversion Price (as defined in the Series C Certificate of Designations) to be adjusted in the event that the Corporation issues Securities (as defined Page 50 of 51 Pages in the Series C Certificate of Designations) at a price per share less than the Series C Conversion Price (the "Series C Anti-Dilution Provision," and, together with the Series B Anti-Dilution Provision, the "Anti-Dilution Provisions"). NOW, THEREFORE, BE IT: RESOLVED, that (1) the designation of the Series D Preferred Stock, (2) the issuance and sale to the Investors, pursuant to the Series D Preferred Stock Purchase Agreement, of the Shares, (3) the issuance of shares of Common Stock upon the conversion of the Shares and (4) the prepayment of the Series 2002 Notes (as defined in the Series D Preferred Stock Purchase Agreement) are each hereby approved in all respects; and it is further RESOLVED, that the preemptive rights granted to the Series A Preferred Stockholders and Series B Preferred Stockholders pursuant to Section 5.11 of the Certificate of Incorporation, and the preemptive rights granted to the Series C Preferred Stockholders pursuant to Section 9 of the Series C Certificate of Designations are hereby waived with respect to (1) the issuance and sale of the Shares to the Investors pursuant to the Series D Preferred Stock Purchase Agreement and (2) the issuance of shares of Common Stock upon the conversion of the Shares; and it is further RESOLVED, that any adjustment that would otherwise be made to the Series B Conversion Price or the Series C Conversion Price pursuant to the Anti-Dilution Provisions as a result of the issuance of Standby Commitment Securities (or any equity securities issuable upon the conversion, exchange or exercise of Standby Commitment Securities) is hereby waived; and it is further RESOLVED, that this waiver and consent may be executed in one or more counterparts, each of which shall be deemed an original and all of which, when taken together, shall be deemed one and the same instrument. Page 51 of 51 Pages IN WITNESS WHEREOF, the undersigned have caused this waiver and consent to be executed as of this 12th day of March, 2003. QUANTUM INDUSTRIAL PARTNERS LDC By: ------------------------------------ Name: Title: SFM DOMESTIC INVESTMENTS LLC By: ------------------------------------ Name: Title: -----END PRIVACY-ENHANCED MESSAGE-----