SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement.
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant toss.240.14a-11(c) orss.240.14a-12
Bluefly, Inc.
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(Name of Registrant as Specified In Its Charter)
(Name of Person(s) filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
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1) Title of each class of securities to which
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[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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4) Date Filed:
BLUEFLY, INC.
42 West 39th Street
New York, NY 10018
Dear Stockholder:
You are cordially invited to attend the annual meeting of stockholders
of Bluefly, Inc., which will be held on [Monday, November 18], 2002 at [5:00
p.m.], at the company's offices at 42 West 39th Street, 9th Floor, New York, New
York. The formal Notice of Annual Meeting and Proxy Statement, fully describing
the matters to be acted upon at the meeting, appear on the following pages.
The matters scheduled to be considered at the meeting are the election
of directors, the approval of an amendment to our certificate of incorporation
to increase the number of authorized shares of common stock, the approval of an
amendment to our 1997 Stock Option Plan to increase the number of shares
authorized for grant under the plan, the approval of the conversion provisions
of our Series 2002 Convertible Preferred Stock, the approval of the conversion
provisions of our Series C Convertible Preferred Stock and the ratification of
the appointment of our accountants.
The Board of Directors recommends a vote FOR all the proposals being
presented at the meeting as being in the best interest of Bluefly and its
stockholders. We urge you to read the Proxy Statement and give these proposals
your careful attention before completing the enclosed proxy card.
Your vote is important regardless of the number of shares you own.
Please be sure you are represented at the meeting, whether or not you plan to
attend, by signing, dating and mailing the proxy card promptly. A postage-paid
return envelope is enclosed for your convenience.
If you would like additional copies of the proxy material or if you
would like to ask questions about the proposals, you should contact our Investor
Relations Department by telephone at (212) 944-8000.
Sincerely,
E. KENNETH SEIFF
President and Chief Executive Officer
BLUEFLY, INC.
42 West 39th Street
New York, New York 10018
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
[November 18], 2002
----------------------------
NOTICE IS HEREBY GIVEN that the annual meeting of stockholders of
Bluefly, Inc. (the "Corporation") will be held at [5:00 p.m.], local time, on
[Monday, November 18], 2002 at the Corporation's offices at 42 West 39th Street,
9th Floor, New York, New York, for the following purposes:
1. To elect five directors of the Corporation to hold office until the
next annual meeting of stockholders;
2. To approve an amendment to the Corporation's certificate of
incorporation, which would increase the number of shares of common
stock, par value $0.01 per share ("Common Stock"), the Corporation is
authorized to issue from 40,000,000 to 92,000,000;
3. To approve an amendment to the Bluefly, Inc. 1997 Stock Option Plan, as
amended (the "Plan"), which would increase the aggregate number of
shares of Common Stock that may be the subject of options granted
pursuant to the Plan from 5,400,000 shares to 12,200,000 shares;
4. To approve the conversion provisions of the Corporation's Series 2002
Convertible Preferred Stock;
5. To approve the conversion provisions of the Corporation's Series C
Convertible Preferred Stock;
6. To ratify the appointment of PricewaterhouseCoopers LLP as independent
accountants of the Corporation for the fiscal year ending December 31,
2002; and
7. To transact such other business as may properly come before the
meeting.
Only holders of record of the Common Stock and the Corporation's Series
A Convertible Preferred Stock, Series B Convertible Preferred Stock and Series C
Convertible Preferred Stock at the close of business on [October 10], 2002 are
entitled to notice of, and to vote at, the meeting and any adjournment thereof.
Such stockholders may vote in person or by proxy.
WHETHER OR NOT YOU PLAN TO ATTEND, PLEASE FILL IN, SIGN, DATE AND
RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED ENVELOPE IN ORDER TO ASSURE THAT
YOUR SHARES ARE REPRESENTED AT THE MEETING. NO POSTAGE IS REQUIRED IF MAILED IN
THE UNITED STATES.
By Order of the Board of Directors,
E. KENNETH SEIFF
President and Chief Executive Officer
[October 17], 2002
BLUEFLY, INC.
42 West 39th Street
New York, New York 10018
----------------------------
PROXY STATEMENT
This Proxy Statement is furnished in connection with the solicitation
by the board of directors (the "Board of Directors") of Bluefly, Inc., a
Delaware corporation (the "Corporation"), of proxies to be used at the annual
meeting of stockholders of the Corporation to be held at [5:00 p.m.], local
time, on [Monday, November 18], 2002, at the Corporation's offices at 42 West
39th Street, 9th Floor, New York, New York, and at any adjournment thereof. The
purposes of the meeting are:
1. To elect five directors of the Corporation to hold office until the
next annual meeting of stockholders;
2. To approve an amendment to the Corporation's certificate of
incorporation, which would increase the number of shares of common
stock, par value $0.01 per share ("Common Stock"), that the Corporation
is authorized to issue from 40,000,000 to 92,000,000 (the "Charter
Amendment");
3. To approve an amendment to the Bluefly, Inc. 1997 Stock Option Plan, as
amended (the "Plan"), which would increase the aggregate number of
shares of Common Stock that may be the subject of options granted
pursuant to the Plan from 5,400,000 shares to 12,200,000 shares (the
"Plan Amendment");
4. To approve the conversion provisions of the Corporation's Series 2002
Convertible Preferred Stock (the "Series 2002 Conversion Provisions");
5. To approve the conversion provisions of the Corporation's Series C
Convertible Preferred Stock (the "Series C Conversion Provisions");
6. To ratify the appointment of PricewaterhouseCoopers LLP ("PwC") as
independent accountants of the Corporation for the fiscal year ending
December 31, 2002; and
7. To transact such other business as may properly come before the
meeting.
If proxy cards in the accompanying form are properly executed and
returned, the shares of Common Stock, shares of the Corporation's Series A
Convertible Preferred Stock, par value $.01 per share (the "Series A Preferred
Stock"), shares of the Corporation's Series B Convertible Preferred Stock, par
value $.01 per share (the "Series B Preferred Stock"), and shares of the
Corporation's Series C Convertible Preferred Stock, par value $.01 per share
(the "Series C Preferred Stock"), represented thereby will be voted as
instructed on the proxy. If no instructions are given, such shares will be voted
(i) for the election as directors of the nominees of the Board of Directors
named below; (ii) for the approval of the Charter Amendment; (iii) for the
approval of the Plan Amendment; (iv) for the approval of the Series 2002
Conversion Provisions; (v) for the approval of the Series C Conversion
Provisions; (vi) for the ratification of the appointment of PwC as independent
accountants and (vii) in the discretion of the Proxies named in the proxy card
on any other proposals to properly come before the meeting or any adjournment
thereof. Any proxy may be revoked by a stockholder of record prior to its
exercise upon written notice to the Chief Executive Officer of the Corporation,
or by the vote of such stockholder cast in person at the meeting. The
approximate date of mailing of this Proxy Statement and accompanying form of
proxy is [October 17], 2002.
VOTING
Holders of record of Common Stock, Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock as of the close of business on
[October 10, 2002] (the "Record Date") will be entitled to vote at the meeting
or any adjournment thereof. Each share of Common Stock entitles the holder
thereof to one vote on all matters to come before the stockholders at the
meeting, except the election of two members of the Board of Directors, one of
whom was elected by the holders of Series A Preferred Stock voting separately as
a class (the
"Series A Preferred Designee"), and one of whom was elected by the holders of
Series B Preferred Stock voting separately as a class (the "Series B Preferred
Designee" and, together with the Series A Preferred Designee, the "Preferred
Designees"). The Series A Preferred Designee was elected by vote of the holders
of Series A Preferred Stock in August 2002 and the Series B Preferred Designee
was elected by the holders of the Series B Preferred Stock in August 2002. Each
share of Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock entitles the holder thereof to the number of votes equal to the
number of shares of Common Stock (rounded up to the nearest whole number) into
which such share is convertible as of the Record Date. As of that date, each
share of Series A Preferred Stock was convertible into approximately 8.5 shares
of Common Stock, and therefore, entitles the holder thereof to nine votes on all
matters to come before the meeting. As of the Record Date, each share of Series
B Preferred Stock was convertible into 2.5 shares of Common Stock and,
therefore, entitles the holder thereof to three votes on all matters to come
before the meeting. As of the Record Date, each share of Series C Stock was
convertible into 1075.27 shares of Common Stock and, therefore, entitles the
holder thereof to 1076 votes on all matters to come before the meeting other
than the approval of the Series 2002 Conversion Provisions and the Series C
Conversion Provisions, on which matters the holders of Series C Preferred Stock
are not entitled to vote pursuant to the certificate of designations regarding
the Series C Preferred Stock. None of the Common Stock, the Series A Preferred
Stock, the Series B Preferred Stock or the Series C Preferred Stock is entitled
to cumulative voting.
Holders of a majority of the votes entitled to be cast at the meeting
will constitute a quorum for the transaction of business. As of the Record Date,
there were 10,391,904 shares of Common Stock outstanding, each entitled to one
vote, 500,000 shares of Series A Preferred Stock outstanding, each entitled to
nine votes, 8,910,782 shares of Series B Preferred Stock, each entitled to three
votes and 1,000 shares of Series C Preferred Stock, each entitled to 1076 votes.
The total number of votes entitled to be cast at the meeting is, therefore,
42,700,250. Abstentions and so-called "broker non-votes" (instances in which
brokers are prohibited from exercising discretionary authority for beneficial
owners who have not returned a proxy) are counted for purposes of determining
the presence or absence of a quorum for the transaction of business.
The favorable vote of a majority of the votes eligible to be cast by
the holders of the outstanding shares of Common Stock, Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock, voting together as a
class, and the favorable vote of holders of a majority of the outstanding shares
of Common Stock, voting separately as a class, is necessary to approve the
Charter Amendment; the favorable vote of a majority of the votes cast by holders
of shares of Common Stock, Series A Preferred Stock, Series B Preferred Stock
and Series C Preferred Stock present in person or represented by proxy at the
meeting, voting together as a class, is necessary to approve the adoption of the
Plan Amendments and the ratification of the independent accountants; the
favorable vote of a majority of the votes cast by holders of shares of Common
Stock, Series A Preferred Stock and Series B Preferred Stock present in person
or represented by proxy at the meeting, voting together as a class, is necessary
to approve the Series 2002 Conversion Provisions and the Series C Conversion
Provisions; and the favorable vote of a plurality of the votes cast by holders
of shares of Common Stock, Series A Preferred Stock, Series B Preferred Stock
and Series C Preferred Stock present in person or represented by proxy at the
meeting, voting together as a class, is necessary to elect the nominees for the
directors of the Corporation. Abstentions and broker non-votes will not be
counted as votes cast with respect to, and therefore will have no effect on, the
election of directors, the approval of the Plan Amendment, the approval of the
Series 2002 Conversion Provisions, the approval of the Series C Conversion
Provisions or the ratification of the independent accountants and will
effectively act as votes against the Charter Amendment, since such proposal
requires the affirmative vote of a majority of the votes eligible to be cast at
the meeting (as opposed to a majority of the votes actually cast at the
meeting). The Board of Directors recommends a vote FOR each of the proposals set
forth above.
ITEM 1. ELECTION OF DIRECTORS
Five directors are to be elected at the meeting to serve until the next
annual meeting of stockholders. The Board of Directors has recommended the
persons named in the table below as nominees for election as directors. All such
persons are presently directors of the Corporation. Unless otherwise specified
in the accompanying proxy, the shares voted pursuant to it will be voted for the
persons named below as nominees for election as directors. If, for any reason,
at the time of the election, any of the nominees should be unable or unwilling
to accept election, such proxy will be voted for the election, in such nominee's
place, of a substitute nominee recommended by the Board of Directors. However,
the Board of Directors has no reason to believe that any nominee will be unable
or unwilling to serve as a director.
2
Effective as of August 2002, Lorne Weil resigned as a director of the
Corporation. Pursuant to the Corporation's by-laws, in August 2002, the Board of
Directors unanimously elected Alan Kane to fill the vacancy created by Mr.
Weil's resignation.
The following information is supplied with respect to the nominees for
election as directors of the Corporation and the Preferred Designees:
NOMINEES FOR DIRECTOR; PREFERRED DESIGNEES
Name of Director Age Director of the
Corporation Since
E. Kenneth Seiff 38 1991 to present
Josephine Esquivel 47 2001 to present
Alan Kane 60 2002 to present
Martin Miller 71 1991 to present
Robert G. Stevens 49 1996 to present
Neal Moszkowski (Series A Preferred Designee) 36 1999 to present
David Wassong (Series B Preferred Designee) 31 2000 to present
E. Kenneth Seiff, the founder of the Corporation, has served as the
Corporation's Chairman of the Board, Chief Executive Officer and Treasurer since
its inception in April 1991. He became the President of the Corporation in
October 1996.
Josephine Esquivel was appointed as a director of the Corporation in
June 2001. Ms. Equivel was a senior apparel, textiles, footwear and luxury goods
equity analyst with Morgan Stanley Dean Witter from February 1995 until April
2001. From June 1987 to February 1995, Ms. Esquivel was a Senior Vice President
at Lehman Brothers, and from August 1983 to June 1987, she was a Business
Manager for the textile company J.P. Stevens & Co.
Alan Kane was appointed a director of the Corporation in August 2002.
Since September 1997, Mr. Kane has been the professor of retailing at the
Columbia University Graduate School of Business. Before joining the Columbia
Business School, Mr. Kane spent 28 years in the retailing industry.
Martin Miller has served as a director of the Corporation since July
1991. Since October 1997, Mr. Miller has been a partner in the Belvedere Fund,
L.P., a fund of hedge funds. From September 1986 to October 1997, Mr. Miller was
the President and a director of Baxter International, Inc., a New York based
apparel wholesaler. From January 1990 to April 1996, Mr. Miller was the Chairman
of Ocean Apparel, Inc., a Florida based sportswear firm.
Robert G. Stevens has served as a director of the Corporation since
December 1996. From December 1999 to May 2002, Mr. Stevens served as an
Executive Vice President of the Corporation. Since May 2002, Mr. Stevens has
been the President of Growth Insight, Inc. ("Growth Insight"), a consulting firm
that specializes in developing growth strategies. From December 1994 to December
1999, Mr. Stevens was a Vice President of Mercer Management Consulting, Inc.
("Mercer"), a management consulting firm. From November 1992 to December 1994,
Mr. Stevens was a Principal at Mercer.
Neal Moszkowski has served as a director of the Corporation since
August 1999 and is the Series A Preferred Stock Designee. Mr. Moszkowski has
been a partner of Soros Private Equity Partners LLC ("Soros") since August 1998.
Prior to joining Soros, Mr. Moszkowski was an Executive Director of Goldman
Sachs International and a Vice President of Goldman, Sachs & Co., an investment
banking firm, in its Principal Investment
3
Area. He joined Goldman, Sachs & Co. in August 1993. Mr. Moszkowski is also a
director of Integra Life Sciences Holdings, Inc., a medical products company,
WellCare Inc., a Florida-based HMO, and Jet Blue Airways Corporation.
David Wassong was appointed as a director of the Corporation in
February 2001 and is the Series B Preferred Stock Designee. Mr. Wassong has been
a partner of Soros since June 1998. Prior to joining Soros, from July 1997 to
June 1998, Mr. Wassong was Vice President, and previously Associate, at Lauder
Gaspar Ventures, LLC, a media, entertainment and telecommunications-focused
venture capital fund. From September 1995 to June 1997, Mr. Wassong attended the
Wharton School, The University of Pennsylvania, and received his Masters in
Business Management. Mr. Wassong is also a director of NUSIGN Industries, Meteor
Mobile Communications, IntraLinks, Inc., IRSA Telecomunicaciones N.V. and
Europlex Cinemas.
MEETINGS OF THE BOARD
During the fiscal year ended December 31, 2001, the Board of Directors
met, or acted by unanimous written consent, on ten occasions. With the exception
of Lorne Weil, each of the directors attended 75% or more of the aggregate
number of meetings of the Board of Directors and committee(s) on which he or she
served during the 2001 fiscal year.
So long as at least 60% of the shares of Series A Preferred Stock
issued and outstanding as of August 26, 1999 remain issued and outstanding, the
Series A Preferred Designee is entitled to seven votes on any matter to come
before the Board of Directors. So long as 60% of the Series B Preferred Stock
issued and outstanding as of February 5, 2001 remain issued and outstanding, the
Series B Preferred Designee is entitled to seven votes on any matter to come
before the Board of Directors. As of September 16, 2002, such minimum amounts of
Series A Preferred Stock and Series B Preferred Stock remain issued and
outstanding and, therefore, the Preferred Designees are entitled to cast 14 out
of 19 votes to be cast by Board of Directors on any matter to come before the
Board of Directors.
The Board of Directors has established an Audit Committee ("Audit
Committee") comprised of Martin Miller, Josephine Esquivel and Alan Kane. The
Audit Committee is responsible for the appointment of the Corporation's outside
accountants, examining the results of audits, reviewing internal accounting
controls and reviewing related party transactions. The duties of the Audit
Committee are fully set forth in the charter adopted by that committee and
attached hereto as Exhibit A. During the fiscal year ended December 31, 2001,
the Audit Committee, then comprised of Mr. Miller, Ms. Esquivel and Lorne Weil,
met, or acted by unanimous written consent, on two occasions. The Board of
Directors believes that Messrs. Miller and Kane and Ms. Esquivel are
"independent directors" within the meaning of Nasdaq Marketplace Rule
4200(a)(14).
The Board of Directors also has established an Option Plan/Compensation
Committee ("Option Plan/Compensation Committee") consisting of Neal Moszkowski
and Martin Miller. The Option Plan/Compensation Committee administers the Plan
establishes the compensation levels for executive officers and key personnel and
oversees the Corporation's bonus plans. During the fiscal year ended December
31, 2001, the Option Plan/Compensation Committee, then comprised of Messrs.
Moszkowski and Miller, Mark Goldstein (for part of the year) and Lorne Weil (for
the remainder of the year), met, or acted by unanimous written consent, on
twelve occasions.
In October 2001, the Board of Directors established a Technology
Committee (the "Technology Committee") to approve any plan, agreement,
instrument or document it deems necessary, appropriate or desirable to reduce
the Corporation's technology expenses while preserving the reliability and
performance of the Corporation's technology infrastructure. The Technology
Committee consists of Neal Moszkowski and David Wassong. During the fiscal year
ended December 31, 2001, the Technology Committee met, or acted by written
consent, on two occasions.
The Board of Directors has no standing nominating committee.
4
REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
The Audit Committee met and held discussions with management and PwC.
The Audit Committee reviewed and discussed the audited consolidated financial
statements for fiscal 2001 with management and has discussed with the
independent public accountants the matters required to be discussed by Statement
on Auditing Standards No. 61, "Communication with Audit Committees."
The Corporation's independent public accountants also provided to the
Audit Committee certain written communications and the letter required by
Independence Standards Board Standard No. 1, "Independence Discussions with
Audit Committees." The Audit Committee also discussed with the independent
public accountants their independence from the Corporation.
Based on the Audit Committee's review and discussions described above,
the Audit Committee recommended to the Board that the Corporation's audited
consolidated financial statements for fiscal 2001 be included in the
Corporation's Annual Report on Form 10-K for fiscal 2001 filed with the
Securities and Exchange Commission.
AUDIT COMMITTEE
MARTIN MILLER
JOSEPHINE ESQUIVEL
SHARE OWNERSHIP
Common Stock
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock of the Corporation as of [October 10],
2002 for (i) each person who is known by the Corporation to own beneficially
more than 5% of the Common Stock, (ii) each of the Corporation's directors,
(iii) the Named Executives (as defined below), and (iv) all directors and
executive officers of the Corporation as a group.
Number of Shares
Name (1) Beneficially Owned Percentage (2)
-------- ------------------ --------------
E. Kenneth Seiff 1,350,768(3)(4) 12.02%
Josephine Esquivel 3,750(5) *
Alan Kane - -
Martin Miller 23,750(6)(7) *
Neal Moszkowski (8) 11,250(9) *
David Wassong (8) 3,750(10) *
Robert G. Stevens 221,189(11) 2.09%
Patrick C. Barry 526,661(12) 4.83%
Jonathan B. Morris 534,585(13) 4.90%
SFM Domestic Investments LLC 1,137,945(14) 10.00%
Quantum Industrial Partners LDC 34,778,119(15) 87.20%
George Soros 35,916,065(16) 87.93%
All directors and executive officers as a group (9 persons) 2,675,703(17) 21.39%
----------------
*Less than 1%.
5
(1) Except as otherwise indicated, the address of each of the individuals
listed is c/o Bluefly, Inc., 42 West 39th Street, New York, New York
10018.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Common Stock
issuable upon the exercise or conversion of options, warrants or
preferred stock currently exercisable or convertible, or exercisable or
convertible within 60 days of the Record Date, are deemed outstanding
for computing the percentage ownership of the person holding such
options, warrants or preferred stock but are not deemed outstanding for
computing the percentage ownership of any other person.
(3) Includes 3,000 shares of Common Stock held by Nicole Seiff, the wife of
E. Kenneth Seiff, as to which Mr. Seiff disclaims beneficial ownership.
(4) Includes 845,611 shares of Common Stock issuable upon exercise of
options granted under the Plan.
(5) Represent 3,750 shares of Common Stock issuable upon exercise of
options granted under the Plan.
(6) Includes 20,750 shares of Common Stock issuable upon exercise of
options granted under the Plan.
(7) Includes 3,000 shares of Common Stock held by Madge Miller, the wife of
Martin Miller, as to which Mr. Miller disclaims beneficial ownership.
(8) Messrs. Moszkowski's and Wassong's address is c/o Soros Private Equity
Partners LLC, 888 Seventh Avenue, New York, New York 10106. Messrs.
Moszkowski and Wassong are the designees of the holders of the Series A
and B Preferred Stock, respectively. Messrs. Moszkowski and Wassong
disclaim beneficial ownership of the shares of Common Stock
beneficially owned by George Soros and QIP and none of such shares are
included in the table above as being beneficially owned by them.
(9) Represents 11,250 shares of Common Stock issuable upon exercise of
options granted under the Plan.
(10) Represents 3,750 shares of Common Stock issuable upon exercise of
options granted under the Plan.
(11) Includes 188,250 shares of Common Stock issuable upon exercise of
options granted under the Plan.
(12) Includes 521,661 shares of Common Stock issuable upon exercise of
options granted under the Plan.
(13) Includes 521,722 shares of Common Stock issuable upon exercise of
options granted under the Plan.
(14) Represents 124,701 shares of Common Stock issuable upon conversion of
14,590 shares of Series A Preferred Stock; 708,469 shares of Common
Stock issuable upon conversion of 281,571 shares of Series B Preferred
Stock; 34,086 shares of Common Stock issuable upon conversion of 31.7
shares of Series C Preferred Stock; 68,172 shares of Common Stock
issuable upon conversion of 63.4 shares of Series C Preferred Stock
issuable upon conversion of the Convertible Demand Promissory Note
dated as of September 27, 2002 in the aggregate principal amount of
$63,400 issued by the Corporation to the stockholder; 172,995 shares of
Common Stock; 29,523 shares of Common Stock issuable upon exercise of
warrants (the "SFMDI Shares") held in the name of SFM Domestic
Investments LLC ("SFMDI"). SFMDI is a Delaware limited liability
company, and the QIP Shares referenced in Note 14 above. Excludes
warrants issued pursuant to the Soros Standby Agreement, and the
amended Reimbursement Agreement in March 2002. As sole managing member
of SFMDI, George Soros ("Mr. Soros") may also be deemed the beneficial
owner of the SFMDI Shares. The principal address of SFMDI is at 888
Seventh Avenue, 33rd Floor, New York, New York 10106. The foregoing
information was derived, in part, from certain publicly available
reports, statements and schedules filed with the Commission.
(15) Represents: 3,806,923 shares of Common Stock issuable upon conversion
of 445,410 shares Series A Preferred Stock; 21,657,882 shares of Common
Stock issuable upon conversion of 8,607,843 shares of Series B
Preferred Stock; 1,041,183 shares of Common Stock issuable upon
conversion of 968.3 shares of Series C Preferred Stock; 2,082,366
shares of Common Stock issuable upon conversion of 1,936.6 shares of
Series C Preferred Stock issuable upon conversion of the Convertible
Demand Promissory Note dated as of September 27, 2002 in the aggregate
principal amount of $1,936,600 issued by the Corporation to the
stockholder; 5,287,082 shares of Common Stock; 902,121 shares of Common
Stock issuable upon exercise of options and warrants (collectively, the
"QIP Shares") held in the name of Quantum Industrial Partners LDC
("QIP"). QIP is a Cayman Islands limited duration company with its
principal address at Kaya Flamboyan 9, Willemstad, Curacao, Netherlands
Antilles. QIH Management Investor L.P., a Delaware limited partnership
("QIHMI"), is a minority shareholder of QIP and is vested with
investment discretion with respect to portfolio assets held for the
account of QIP. The sole general partner of QIHMI is QIH Management,
Inc., a Delaware corporation ("QIH Management"). George Soros ("Mr.
Soros"), the sole shareholder of QIH Management, has entered into an
agreement with Soros Fund Management LLC, a Delaware limited liability
company ("SFM LLC"), pursuant to which Mr. Soros has agreed to use his
best efforts to cause QIH Management to act at the direction of SFM
LLC. Mr. Soros, as Chairman of SFM
6
LLC, may be deemed to have sole voting power and sole investment power
with respect to the QIP Shares. Accordingly, each of QIP, QIHMI, QIH
Management, SFM LLC and Mr. Soros may be deemed to be the beneficial
owners of the QIP Shares. Each has their principal office at 888
Seventh Avenue, 33rd Floor, New York, New York 10106. The foregoing
information was derived, in part, from certain publicly available
reports, statements and schedules filed with the Commission.
(16) See notes 14 and 15 above.
(17) Includes 2,072,722 shares of Common Stock issuable upon exercise of
options granted under the Plan.
Series A Preferred Stock
The following table sets forth certain information with respect to the
beneficial ownership of the Series A Preferred Stock of the Corporation as of
[October 10], 2002, for (i) each person who is known by the Corporation to own
beneficially more than 5% of the Series A Preferred Stock of the Corporation,
(ii) each of the Corporation's directors, (iii) the Named Executives, and (iv)
all directors and executive officers as a group.
Number of Shares
Name (1) Beneficially Owned Percentage (2)
-------- ------------------ --------------
E. Kenneth Seiff - -
Josephine Esquivel - -
Alan Kane - -
Martin Miller - -
Neal Moszkowski (3) - -
David Wassong (3) - -
Robert G. Stevens - -
Patrick C. Barry - -
Jonathan B. Morris - -
Quantum Industrial Partners LDC 445,410(4) 89.1%
George Soros 460,000(5) 92.0%
All directors and executive officers as a group (9 persons) - -
----------------
*Less than 1%.
(1) Except as otherwise indicated, the address of each of the individuals
listed is c/o Bluefly, Inc., 42 West 39th Street, New York, New York
10018.
(2) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with
respect to securities. Shares of Common Stock issuable upon the
exercise of options or warrants currently exercisable or exercisable
within 60 days are deemed outstanding for computing the percentage
ownership of the person holding such options or warrants but are not
deemed outstanding for computing the percentage ownership of any other
person.
(3) Messrs. Moszkowski's and Wassong's address is c/o Soros Private Equity
Partners LLC, 888 Seventh Avenue, 28th Floor, New York, New York 10106.
Messrs. Moszkowski and Wassong are the designees of the holders of the
Series A and B Preferred Stock. Messrs. Moszkowski and Wassong disclaim
beneficial ownership of the Series A Preferred Stock beneficially owned
by George Soros and QIP and none of such shares are included in the
table above as being beneficially owned by them.
(4) QIP is a Cayman Islands limited duration company with its principal
address at Kaya Flamboyan 9, Willemstad, Curcao, Netherlands Antilles.
QIHMI is a minority shareholder of QIP and is vested with investment
discretion with respect to portfolio assets held for the account of
QIP. The sole general partner of QIHMI is QIH Management. Mr. Soros,
the sole shareholder of QIH Management, has entered into an agreement
with SFM LLC, pursuant to which Mr. Soros has agreed to use his best
efforts to cause QIH Management to act at the direction of SFM LLC. Mr.
Soros, as Chairman of SFM LLC, may be deemed to have sole voting power
and sole investment power with respect to the shares of Series A
Preferred Stock
7
held in the name of QIP (the "QIP A Shares"). Accordingly, each of QIP,
QIHMI, QIH Management, SFM LLC and Mr. Soros may be deemed to be
beneficial owners of the QIP A Shares. Each has their principal office
at 888 Seventh Avenue, 33rd Floor, New York, New York 10106. The
foregoing information was derived, in part, from certain publicly
available reports, statements and schedules filed with the Commission.
(5) Represents both (i) 14,590 shares of Series A Preferred Stock held in
the name of SFMDI (the "SFMDI A Shares") and (ii) the QIP A Shares
referenced in Note 4 above. As sole managing member of SFMDI, Mr. Soros
also may be deemed the beneficial owner of the SFMDI A Shares. The
principal office of SFMDI is at 888 Seventh Avenue, 33rd Floor, New
York, New York 10106.
Series B Preferred Stock
The following table sets forth certain information with respect to the
beneficial ownership of the Series B Preferred Stock of the Corporation as of
[October 10], 2002, for (i) each person who is known by the Corporation to own
beneficially more than 5% of the Series B Preferred Stock of the Corporation,
(ii) each of the Corporation's directors, (iii) the Named Executives, and (iv)
all directors and executive officers as a group.
Number of Shares
Name (1) Beneficially Owned Percentage (2)
-------- ------------------ --------------
E. Kenneth Seiff - -
Josephine Esquivel - -
Alan Kane - -
Martin Miller - -
Neal Moszkowski (3) - -
David Wassong (3) - -
Robert G. Stevens - -
Patrick C. Barry - -
Jonathan B. Morris - -
Quantum Industrial Partners LDC 8,607,843(4) 96.60%
George Soros 8,889,414(5) 99.76%
All directors and executive officers as a group (9 persons) - -
----------------
*Less than 1%.
(1) Except as otherwise indicated, the address of each of the individuals
listed is c/o Bluefly, Inc., 42 West 39th Street, New York, New York
10018.
(2) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with
respect to securities. Shares of Common Stock issuable upon the
exercise of options or warrants currently exercisable or exercisable
within 60 days are deemed outstanding for computing the percentage
ownership of the person holding such options or warrants but are not
deemed outstanding for computing the percentage ownership of any other
person.
(3) Messrs. Moszkowski's and Wassong's address is c/o Soros Private Equity
Partners LLC, 888 Seventh Avenue, 28th Floor, New York, New York 10106.
Messrs. Moszkowski and Wassong are the designees of the holders of the
Series A and B Preferred Stock. Messrs. Moszkowski and Wassong disclaim
beneficial ownership of the shares of Series B Preferred Stock
beneficially owned by George Soros and QIP and none of such shares are
included in the table above as being beneficially owned by them.
(4) QIP is a Cayman Islands limited duration company with its principal
address at Kaya Flamboyan 9, Willemstad, Curcao, Netherlands Antilles.
QIHMI is a minority shareholder of QIP and is vested with investment
discretion with respect to portfolio assets held for the account of
QIP. The sole general partner of QIHMI is QIH Management. Mr. Soros,
the sole shareholder of QIH Management, has entered into an agreement
with SFM LLC, pursuant to which Mr. Soros has agreed to use his best
efforts to cause QIH
8
Management to act at the direction of SFM LLC. Mr. Soros, as Chairman
of SFM LLC, may be deemed to have sole voting power and sole investment
power with respect to the shares of Series B Preferred Stock held in
the name of QIP (the "QIP B Shares"). Accordingly, each of QIP, QIHMI,
QIH Management, SFM LLC and Mr. Soros may be deemed to be beneficial
owners of the QIP B Shares. Each has their principal office at 888
Seventh Avenue, 33rd Floor, New York, New York 10106. The foregoing
information was derived, in part, from certain publicly available
reports, statements and schedules filed with the Commission.
(5) Represents both (i) 281,571 shares of Series B Preferred Stock held in
the name of SFMDI (the "SFMDI B Shares") and (ii) the QIP B Shares
referenced in Note 4 above. As managing member of SFMDI, Mr. Soros also
may be deemed the beneficial owner of the SFMDI B Shares. The principal
office of SFMDI is at 888 Seventh Avenue, 33rd Floor, New York, New
York 10106.
Series C Preferred Stock
The following table sets forth certain information with respect to the
beneficial ownership of the Series C Preferred Stock of the Corporation as of
[October 10], 2002, for (i) each person who is known by the Corporation to own
beneficially more than 5% of the Series C Preferred Stock of the Corporation,
(ii) each of the Corporation's directors, (iii) the Named Executives, and (iv)
all directors and executive officers as a group.
Number of Shares
Name (1) Beneficially Owned Percentage (2)
-------- ------------------ --------------
E. Kenneth Seiff - -
Josephine Esquivel - -
Alan Kane - -
Martin Miller - -
Neal Moszkowski (3) - -
David Wassong (3) - -
Robert G. Stevens - -
Patrick C. Barry - -
Jonathan B. Morris - -
Quantum Industrial Partners LDC 968.3(4) 96.8%
George Soros 1,000.0(5) 100.0%
All directors and executive officers as a group (9 persons) - -
----------------
*Less than 1%.
(1) Except as otherwise indicated, the address of each of the individuals
listed is c/o Bluefly, Inc., 42 West 39th Street, New York, New York
10018.
(2) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with
respect to securities. Shares of Common Stock issuable upon the
exercise of options or warrants currently exercisable or exercisable
within 60 days are deemed outstanding for computing the percentage
ownership of the person holding such options or warrants but are not
deemed outstanding for computing the percentage ownership of any other
person.
(3) Messrs. Moszkowski's and Wassong's address is c/o Soros Private Equity
Partners LLC, 888 Seventh Avenue, 28th Floor, New York, New York 10106.
Messrs. Moszkowski and Wassong are the designees of the holders of the
Series A and B Preferred Stock. Messrs. Moszkowski and Wassong disclaim
beneficial ownership of the shares of Series C Preferred Stock
beneficially owned by George Soros and QIP and none of such shares are
included in the table above as being beneficially owned by them.
(4) QIP is a Cayman Islands limited duration company with its principal
address at Kaya Flamboyan 9, Willemstad, Curcao, Netherlands Antilles.
QIHMI is a minority shareholder of QIP and is vested with investment
discretion with respect to portfolio assets held for the account of
QIP. The sole general partner of QIHMI is QIH Management. Mr. Soros,
the sole shareholder of QIH Management, has entered into an
9
agreement with SFM LLC, pursuant to which Mr. Soros has agreed to use
his best efforts to cause QIH Management to act at the direction of SFM
LLC. Mr. Soros, as Chairman of SFM LLC, may be deemed to have sole
voting power and sole investment power with respect to the shares of
Series C Preferred Stock held in the name of QIP (the "QIP C Shares").
Accordingly, each of QIP, QIHMI, QIH Management, SFM LLC and Mr. Soros
may be deemed to be beneficial owners of the QIP C Shares. Each has
their principal office at 888 Seventh Avenue, 33rd Floor, New York, New
York 10106. The foregoing information was derived, in part, from
certain publicly available reports, statements and schedules filed with
the Commission.
(5) Represents both (i) 31.7 shares of Series C Preferred Stock held in the
name of SFMDI (the "SFMDI C Shares") and (ii) the QIP C Shares
referenced in Note 4 above. As managing member of SFMDI, Mr. Soros also
may be deemed the beneficial owner of the SFMDI C Shares. The principal
office of SFMDI is at 888 Seventh Avenue, 33rd Floor, New York, New
York 10106.
EXECUTIVE OFFICERS OF THE CORPORATION
The following table sets forth the names, ages and all positions and
offices with the Corporation held by the Corporation's present executive
officers.
Name Age Positions and Offices Presently Held
---- --- ------------------------------------
E. Kenneth Seiff 38 Chairman of the Board, Chief Executive
Officer, President and Treasurer
Patrick C. Barry 39 Chief Operating Officer and Chief Financial
Officer
Jonathan B. Morris 35 Executive Vice President and Secretary
----------------
Following is information with respect to the Corporation's executive
officers who are not also directors of the Corporation:
Patrick C. Barry served as an Executive Vice President of the Corporation from
July 1998 to September 2000 and has served as Chief Financial Officer of the
Corporation since August 1998. In September 2000, Mr. Barry assumed the role of
Chief Operating Officer and has served the Corporation in that capacity since
such time. From June 1996 to July 1998, Mr. Barry served as Chief Financial
Officer and Vice President of Operations of Audible, Inc., an Internet commerce
and content provider. From March 1995 to June 1996, Mr. Barry was Chief
Financial Officer of Warner Music Enterprises, a direct marketing subsidiary of
Time Warner, Inc. From July 1993 to March 1995, Mr. Barry served as Controller
of Book-of-the-Month Club, a direct marketing subsidiary of Time Warner, Inc.
Jonathan B. Morris has served as an Executive Vice President and Secretary of
the Corporation since June 1998. From November 1995 to June 1998, Mr. Morris was
an attorney with Brown, Raysmann, Millstein, Felder & Steiner LLP, a New York
based law firm that specializes in Internet and technology law. From September
1993 to November 1995, Mr. Morris was an attorney with Mudge, Rose, Guthrie,
Alexander & Ferdon.
10
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Objective and Philosophy. The Option Plan/Compensation Committee works closely
with management to design an executive compensation program to assist the
Corporation in attracting and retaining outstanding executives and senior
management personnel. The design and implementation of such program continually
evolves as the Corporation grows, but is based primarily on two elements: (i)
providing compensation opportunities that are competitive with competing
companies of similar size and (ii) linking executives' compensation with the
Corporation's financial performance by rewarding the achievement of short-term
and long-term objectives of the Corporation.
Compensation Program Components. Currently, the three principal components of
the Corporation's executive compensation program are: (i) annual base salary,
(ii) short-term incentive compensation in the form of performance bonuses
payable in cash each year, and (iii) long-term incentive compensation in the
form of stock options. These programs are structured in accordance with the
Option Plan/Compensation Committee's objectives and philosophy.
Base Salary. Base salary levels for the Corporation's executives are
designed to be reflective of competitive conditions in the marketplace for
executives of comparable talent and experience and are based on responsibility
and performance. Base salaries for executives are generally recommended by
executive management for the review and approval of the Option Plan/Compensation
Committee and the Board (subject to applicable employment agreements).
Short-Term Incentive Compensation. The short-term incentive
compensation component consists of performance bonuses. The amount of any bonus
is determined, in part, pursuant to the Corporation's management by objective
("MBO") program. Pursuant to the MBO program, individual and corporate goals are
set annually and, in some instances, every six months, and the bonus paid to
each executive is based in part on measuring which of these goals have been
realized.
Long-Term Incentive Compensation. The long-term incentive compensation
component consists of stock option plans under which executives may be granted
stock options exercisable to purchase shares of Common Stock. The exercise price
of stock options represents the fair market value of the Common Stock on the
date of grant, which is the closing sale price of the Common Stock on the Nasdaq
SmallCap Market for the business day preceding the date of grant. Generally, the
stock options become exercisable in equal annual increments over four years and
expire ten years from the date of grant. The deferred vesting provisions of the
stock options are designed to reward long-term contributions and create an
incentive for executives to remain with the Corporation. The Option
Plan/Compensation Committee believes that granting stock options creates an
incentive to promote the long-term interests of the Corporation and aligns the
economic benefit to be derived therefrom by the Corporation's executives with
those of the Corporation's outside shareholders. Stock options are granted by
the Option Plan/Compensation Committee (and approved by the Board) to key
employees based on management's recommendation, and levels of participation in
the plan generally vary based on the employee's position with the Corporation.
CEO Compensation. Mr. Seiff's employment agreement provides for a base salary of
$250,000, subject to increase by the Board of Directors, and an annual bonus to
be determined by the Board of Directors, which may, at the discretion of the
Board of Directors, be paid through the issuance of capital stock of the
Corporation. His compensation is determined annually by the Option
Plan/Compensation Committee based on his compensation in prior years and the
compensation of CEO's of similarly-sized companies in the internet retailing
industry.
Base Salary. During fiscal 2001, Mr. Seiff received an annual base
salary of $267,308.
Short-term Incentive Compensation. Mr. Seiff participated in the
short-term incentive compensation plan discussed above and received a
performance bonus of $69,500 for fiscal 2001.
Long-term Incentive Compensation. During fiscal 2001, no options to
purchase Common Stock were granted to Mr. Seiff.
Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"), generally disallows a tax deduction for compensation over $1.0 million
paid to a Corporation's chief executive officer and certain other highly
11
compensated executive officers. Qualifying performance-based compensation is not
subject to the deduction limit if certain requirements are met. The short-term
incentive compensation plan adopted by the Corporation has been structured to
comply with the requirements under Code Section 162(m) regarding qualifying
performance-based compensation to provide for the deductibility of compensation
payable thereunder. The Option Plan/Compensation Committee does not expect that
the total cash and non-cash compensation received by any executive of the
Corporation in fiscal 2002 will exceed $1.0 million.
OPTION PLAN/COMPENSATION COMMITTEE
NEAL MOSZKOWSKI
MARTIN MILLER
The foregoing report of the Option Plan/Compensation Committee shall
not be deemed incorporated by reference by any general statement incorporating
by reference the Proxy Statement into any filing under the Securities Act of
1933, as amended, or the Exchange Act, and shall not otherwise be deemed filed
under such Acts.
12
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid to the Chief
Executive Officer of the Corporation and to the three other most highly
compensated executive officers of the Corporation for the Corporation's fiscal
years ended December 31, 2001, December 31, 2000 and December 31, 1999 (each
person appearing in the table is referred to as a "Named Executive"). No other
executive officer of the Corporation received total annual compensation from the
Corporation in excess of $100,000 during these years.
Annual Compensation
-------------------
Long Term Compensation
----------------------
Securities
Other Annual Underlying
Name and Principal Position Year Salary Bonus Compensation Options
--------------------------- ---- ------- ----- ------------ -------
E. Kenneth Seiff 2001 $267,308 $69,500 $1,000 --
Chief Executive Officer, 2000 $249,876 $50,000 $1,000 980,000(1)(2)
President and Treasurer 1999 $206,519 $25,491 $1,000 100,000(1)(3)
Patrick C. Barry 2001 $249,039(4) $40,000 $ 590 --
Chief Financial Officer and 2000 $200,433(4) -- $ 590 489,912(5)(2)
Chief Operating Officer 1999 $150,958 $25,491 $ 590 99,900(5)(3)
Jonathan B. Morris 2001 $249,039(4) $40,000(6) $ 330
Executive Vice President 2000 $200,433(4) -- $ 330 490,000(5)(2)
1999 $150,958 $25,491 $ 330 100,000(5)(3)
Robert G. Stevens (8) 2001 $249,039(4) $40,000(6) -- --
Executive Vice President 2000 $168,000 -- -- 490,000(5)(2)
1999 -- -- -- 105,750(5)
(1) Options granted at an exercise price equal to 110% of the fair market
value on the date of grant.
(2) Represents options granted during fiscal year 2000 for services
performed in fiscal 2000
(3) Represents options granted in January 1999 for the 1998 fiscal year and
options granted in December 1999 for the 1999 fiscal year
(4) Includes amounts paid pursuant to retroactive salary adjustments.
(5) Options granted at an exercise price equal to 100% of the fair market
value on the date of grant.
(6) Includes $20,000 not yet paid and payable in cash, shares of Common
Stock, options to purchase Common Stock or in such other form as the
Corporation shall determine..
(7) Mr. Stevens' position as an executive officer of the Corporation
terminated in May 2002.
Option Grants in Last Fiscal Year
During the fiscal year ended December 31, 2001, there were no grants of
stock option to Named Executive Officers under the Plan.
The Corporation does not currently grant stock appreciation rights.
13
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table sets forth information with respect to the Named
Executives concerning the exercise of options during the last fiscal year and
the unexercised options held at December 31, 2001. None of the Named Executives
exercised any outstanding options during the fiscal year ended December 31,
2001.
Securities Underlying Unexercised Value of Unexercised In-the-Money
Options at December 31, 2001 (#) Options at December 31, 2001 ($)(1)
-------------------------------- -----------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
E. Kenneth Seiff 510,924 594,076 $0 $0
Patrick C. Barry 303,424 341,488 $0 $0
Jonathan B. Morris 293,966 351,034 $0 $0
Robert G. Stevens (2) 273,050 330,200 $0 $0
(1) Represents the value of unexercised, in-the-money stock options at
December 31, 2001, using the $1.90 closing price of the Common Stock on
that date.
(2) Mr. Stevens' position as an executive officer of the Corporation
terminated in May 2002.
Employment Agreements
The Corporation has entered into an employment agreement with Mr.
Seiff, which provides for a base salary, subject to increase by the Board of
Directors, and an annual bonus to be determined by the Board of Directors. Mr.
Seiff's employment agreement provides that, at the discretion of the Board of
Directors, all or part of such bonus may be paid through the issuance to Mr.
Seiff of capital stock of the Corporation, provided that at the request of Mr.
Seiff, a portion of such bonus sufficient to pay any income taxes arising from
such bonus will be paid in cash rather than in capital stock of the Corporation.
Mr. Seiff's base salary under his employment agreement is $250,000. Mr. Seiff's
employment agreement expires at the end of December 2002. Mr. Seiff's employment
agreement obligates the Corporation to pay him an amount equal to the greater of
one year's base salary and the total amount due to him during the remaining term
of the contract in connection with a termination of his employment by the
Corporation, other than for cause. Mr. Seiff's employment agreement also
provides for the immediate vesting of any stock options held by him in the event
that certain events classified as a "Change In Control" occur. In addition, the
Corporation maintains a $1.2 million key person life insurance policy on the
life of Mr. Seiff.
The Corporation is currently negotiating or intends to negotiate
employment agreements with Messrs. Barry and Morris to replace recently expired
agreements with both of these executive officers. Of course, there can be no
assurance that the Corporation will be able to negotiate such employment
agreements successfully, or as to the terms that may be contained in any such
employment agreement.
Directors' Compensation
The Corporation's non-employee, independent directors are paid a cash
stipend of $500 for each board or committee meeting attended in person and are
reimbursed for expenses incurred on behalf of the Corporation. Additionally,
each non-employee director receives an option to purchase 3,750 shares of Common
Stock under the Plan at the time that such director is appointed and an annual
grant of an option to purchase 3,750 shares of Common Stock under the Plan.
See also the disclosure regarding Robert G. Stevens, a director of the
Corporation, under the heading "Certain Relationships and Related Transactions".
14
Stock Performance Graph
The following is a comparison of the cumulative total stockholder
return of Common Stock with the cumulative total return of the NASDAQ National
Stock Market Index and the CRSP Total Return Industry for Retail Trade Stocks
for the period from May 16, 1997 (the date of the initial public offering of the
Common Stock) though December 31, 2001. Cumulative total return values were
calculated assuming an investment of $100 on May 16, 1997 and reinvestment of
dividends.
Bluefly, Inc.,
Comparison of Cumulative Total Return
December 31, 2001
[Performance Graph Appears Hear]
NASDAQ NASDAQ
Measurement Date Bluefly, Inc. Market Index Retail Index
---------------- ------------- ------------ ------------
May 15, 1997 100.0 100.0 100.0
December 31, 1997 62.0 118.1 120.8
December 31, 1998 324.0 166.5 147.0
December 31, 1999 330.0 308.7 128.8
December 29, 2000 18.0 185.8 79.0
December 31, 2001 60.8 147.5 109.3
This comparison of shall not be deemed to be incorporated by reference
by any general statement incorporating by reference this Proxy Statement into
any filing of the Corporation pursuant to the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended except to the extent
the Corporation specifically incorporates this comparison by reference therein.
This comparison shall not be deemed soliciting material or otherwise deemed
filed under either such act.
Certain Relationships and Related Transactions
In March 2000, the Corporation obtained a commitment from QIP and, to
the extent applicable, SFMDI (collectively, "Soros") to provide, at the
Corporation's option, up to $15 million of financing at any time during the year
2000 on terms reflecting market rates for such financings at the time such
financing was provided (the "Soros Commitment"). As of December 31, 2000, Soros
had provided the Corporation with the aggregate principal amount of $15 million
in convertible debt financing pursuant to the Soros Commitment, in the form of
notes that bore interest at the rate of 8% per annum and were due in May 2001
(the "Soros Commitment Notes"). In connection with the Soros Commitment and the
Soros Commitment Notes, the Corporation granted Soros warrants to purchase up to
375,000 shares of Common Stock at an exercise price of $2.29 per share,
exercisable at any time during the five years following issuance (the "Soros
Commitment Warrants"). The Soros Commitment Warrants have been valued at
$467,000, using the Black-Scholes option pricing model and, accordingly, the
Corporation recorded a credit to additional paid in capital and a debt discount,
that was amortized over the life of the debt.
In November 2000, the Corporation entered into additional agreements
with Soros (the "Additional Soros Financing"), pursuant to which Soros agreed to
invest up to an additional $15 million in the Corporation, subject to certain
conditions. Under the terms of the Additional Soros Financing, (a) in November
2000, Soros invested an additional $5 million in the form of promissory notes
(the "Additional Soros Notes"), (b) in February 2001, following the receipt of
shareholder approval of certain aspects of the transaction, the Soros Commitment
Notes and the Additional Soros Notes converted into Series B Preferred Stock at
the rate of $2.34 per share and the conversion price of the Series A Preferred
Stock was reduced to $2.34 per share, (c) the Corporation offered to its public
15
shareholders the right to purchase up to an aggregate of $20 million of Common
Stock at a price of $2.34 per share (the "Rights Offering") and (d) Soros agreed
to purchase a total dollar amount of shares of Common Stock equal to the
difference between $20 million and the aggregate total dollar amount of shares
of Common Stock purchased by public shareholders in the Rights Offering, subject
to a maximum $10 million commitment on the part of Soros (the "Standby
Commitment"). The Rights Offering expired in March 2001. Public shareholders
subscribed for 6,921 shares of Common Stock in the Rights Offering for aggregate
proceeds of $16,000, and, in accordance with the Standby Commitment, Soros
purchased an aggregate of 4,273,504 shares of Common Stock for an aggregate of
$10 million in March 2001.
On March 30, 2001, the Corporation entered into an agreement with Soros
(the "Reimbursement Agreement") pursuant to which Soros agreed to issue a
standby letter of credit at closing in the amount of $2.5 million in favor of
Rosenthal & Rosenthal, Inc. ("Rosenthal") to guarantee (the "Soros Guarantee") a
portion of the Corporation's obligations under the agreement (the "Rosenthal
Financing Agreement") pursuant to which Rosenthal provides the Corporation with
certain credit accommodations, including loans and advances, factor-to-factor
guarantees, letters of credit in favor of suppliers and factors and purchases of
payables owed to the Corporation's suppliers (the "Loan Facility"). The
Corporation agreed to reimburse Soros for any amounts it pays to Rosenthal
pursuant to such guarantee and the Corporation granted Soros a subordinated lien
on substantially all of its assets, including its cash balances, in order to
secure its reimbursement obligations. In addition, during the term of the
Rosenthal Financing Agreement, at the Corporation's request, Soros would issue
another standby letter of credit for up to an additional $1.5 million. In
consideration for the Soros Guarantee, the Corporation issued to Soros warrants
to purchase 100,000 shares of Common Stock at an exercise price equal to $0.88,
exercisable at any time prior to September 16, 2011.
On March 22, 2002, the Corporation amended the Reimbursement Agreement
with Soros by reducing the total amount of standby letters of credit that Soros
is obligated to issue to secure the Loan Facility to $1.5 million from $4
million. In exchange for Soros' agreement to maintain the Soros Guarantee until
August 15, 2003, on March 22, 2002, the Corporation issued to Soros warrants to
purchase 60,000 shares of Common Stock at an exercise price of $1.66 per share
at any time until March 30, 2007. In connection with the issuance of this
warrant, Soros agreed that the issuance of this warrant would not trigger the
anti-dilution provision of Section 5.8.6 of the Corporation's certificate of
incorporation.
Subject to certain conditions, if the Corporation defaults on any of
its obligations under the Rosenthal Financing Agreement, Rosenthal has the right
to draw upon the Soros Guarantee to satisfy any such obligations. If and when
Rosenthal draws on the Soros Guarantee, pursuant to the terms of the
Reimbursement Agreement, the Corporation would have the obligation to, among
other things, reimburse Soros for any amounts drawn under such Soros Guarantee
plus interest accrued thereon. In addition, to the extent that Rosenthal draws
on the Soros Guarantee during the continuance of a default under the Rosenthal
Financing Agreement or at any time that the total amount outstanding under the
Loan Facility exceeds 90% of the undrawn amount of the Soros Guarantee, the
Corporation will be required to issue to Soros a warrant (each, a "Contingent
Warrant") to purchase a number of shares of Common Stock equal to the quotient
of (a) any amounts drawn under the Soros Guarantee and (b) 75% of the average of
the closing price of the Common Stock on the ten days preceding the date of
issuance of such warrant. Each Contingent Warrant will be exercisable for ten
years from the date of issuance at an exercise price equal to 75% of the average
closing price of our Common Stock on the ten days preceding ten days after the
date of issuance.
In December 2001, Soros loaned the Corporation an aggregate of $182,000
in order to pay certain legal expenses of its counsel that the Corporation was
required to pay pursuant to its various investment agreements with Soros. The
loan, which is evidenced by promissory notes, bears interest at the rate of 9%
per year and is payable in December 2004.
On March 27, 2002, the Corporation entered into an agreement (the
"Soros Standby Agreement") with Soros, pursuant to which Soros agreed to provide
the Corporation with up to four million dollars ($4,000,000) (the "Standby
Commitment Amount") of additional financing on a standby basis at any time prior
to January 1, 2003, all of which has since been funded as described below. The
Corporation was permitted to draw down on the Standby Commitment Amount only at
such time that the Corporation's total cash balances were less than $1,000,000.
Such financing was permitted to be made in one or more tranches as determined by
the members of the Board of Directors
16
who are not Soros designees, and any and all financings made were required to be
on terms that were consistent with those in the market at the time the draw was
made for similar investments by investors similar to Soros in companies similar
to the Corporation. Subject to certain limitations, the Standby Commitment
Amount was to be reduced on a dollar-for-dollar basis by the gross cash proceeds
received by the Corporation or any of its subsidiaries from the issuance of any
equity or convertible securities after March 27, 2002. In exchange for this
commitment, but not as a substitute for additional consideration that Soros
would receive if and when any financing was made pursuant to the Soros Standby
Agreement, the Corporation issued to Soros a warrant to purchase 100,000 shares
of Common Stock at an exercise price of $1.68 per share at any time until March
27, 2007. In connection with the issuance of this warrant, Soros agreed that the
issuance of this warrant would not trigger the anti-dilution provision of
Section 5.8.6 of the Corporation's certificate of incorporation.
In June 2002, Soros invested $1.9 million in the Corporation, thereby
reducing its standby commitment to $2.1 million. Under the terms of the
transaction, the Corporation issued to Soros 1,186,573 shares of Common Stock at
$1.57 per share, and warrants to purchase 296,644 shares of Common Stock at any
time during the next five years at an exercise price of $1.88 per warrant for a
purchase price of $0.125 per warrant.
The June 2002 Soros investment was negotiated as part of an equity
financing in which third party investors would also participate. In particular,
one third party investor committed to invest approximately $7 million on the
same terms and conditions as those that applied to Soros' investment. However,
this third party investment has not been consummated, and the Corporation does
not know when or if it will be consummated. To date, the only funds that the
Corporation has received from the third party investor is a good faith deposit,
for which the Corporation agreed, for a limited period of time, not to pursue
remedies against the third party investor as a result of its failure to honor
its investment commitment. That period has since expired[, and the Corporation
has commenced an action against the investor]. The Corporation believes that the
third party investor's obligations to consummate the investment are enforceable.
However, litigation is subject to inherent risks and uncertainties. Moreover,
given the substantial costs involved with litigation, there can be no assurance
that the amount that the Corporation would be able to collect with respect to
any judgment rendered in connection with such litigation would exceed the costs
associated with obtaining such judgment.
In connection with the June 2002 financing, the Corporation agreed to
file a registration statement with the Commission within 45 days of closing, in
order to register the Common Stock issued in the financing, as well as the
Common Stock underlying the warrants. However, given the failure to date of the
third party investors to consummate their investment, Soros has agreed with the
Corporation to delay the filing of such registration statement, although the
Corporation expects that it will be required to file such registration statement
at some point in the future.
As a result of the June 2002 financing, the conversion price of the
Series B Preferred Stock, almost all of which is held by Soros, automatically
decreased from $2.34 to $1.57. In accordance with EITF 00-27, this reduction in
the conversion price of the Corporation's Series B Preferred Stock resulted in
the Corporation recording a beneficial conversion feature in the approximate
amount of $10.2 million as part of its second quarter financial results. This
non-cash charge, which is analogous to a dividend, resulted in an adjustment to
the Corporation's computation of (Loss)/Earnings Per Share.
In August 2002, Soros invested an additional $2.1 million in the
Corporation, thereby reducing its standby commitment to zero. Under the terms of
the deal, the Corporation issued to Soros 2,100 shares of newly-designated
Series 2002 Convertible Preferred Stock at a price of $1,000 per share. The
Series 2002 Convertible Preferred Stock has a liquidation preference of $1,000
per share and, subject to shareholder approval as discussed under Item 4 below,
is convertible in whole or in part, at the holder's option, into the type of
equity securities sold by the Corporation in any subsequent round of equity
financing, at the lowest price per share paid by any participant in such
financing and upon such other terms and conditions as such securities are sold
in such financing. The Series 2002 Convertible Preferred Stock does not have any
fixed dividend rate, and does not provide the holders thereof with any voting
rights, other than with respect to transactions or actions that would adversely
affect the rights, preference, powers and privileges of the Series 2002
Convertible Preferred Stock.
In September 2002, the Corporation and Soros entered into an agreement
pursuant to which Soros purchased 1,000 shares of the Series C Preferred Stock
and promissory notes convertible into Series C Preferred
17
Stock ("Series C Notes") in the aggregate principal amount of $2,000,000, all
for the aggregate purchase price of $3,000,000. Each share of Series C Preferred
Stock has a face value of $1,000 and a liquidation preference equal to the
greater of (i) $1,000 plus accrued and unpaid dividends and (ii) the amount the
holder of such share would receive if it were to convert such share into Common
Stock immediately prior to the liquidation of the Corporation. The Series C
Preferred Stock is convertible, subject to shareholder approval as discussed
under Item 5 below, at any time and from time to time at the option of the
holder into Common Stock at the rate of one to 1,075.27, subject to adjustment,
provided that, until such time as the Charter Amendment is approved, the Series
C Preferred Stock is not convertible. The conversion price of the Series C
Preferred Stock is subject to an anti-dilution adjustment, pursuant to which,
subject to certain exceptions, to the extent that the Corporation issues Common
Stock or securities convertible into Common Stock at a price per share less than
the Series C Preferred Stock conversion price in the future, the conversion
price of the Series C Preferred Stock would be decreased so that it would equal
the price at which shares of common stock are sold in the new issuance. However,
to the extent 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, until such time as the Series C Conversion
Provisions are approved, the total number of shares of Common Stock issusable
upon conversion of the Series C Preferred Stock may not exceed 2,077,341 shares
(which represents 19.99% of the Corporation's currently outstanding Common
Stock), regardless of any adjustment to the Series C Preferred Stock conversion
price.
Beginning on November 13, 2002, the Corporation is entitled to redeem
all, but not less than all, of the outstanding Series C Preferred Stock for cash
at the price of, depending upon the date of such redemption, four times, four
and one-half times or five times the market price of the Common Stock on the
date of the initial issuance of the Series C Preferred Stock. Dividends accrue
on the Series C Preferred Stock at an annual rate equal to 8.0% of the face
value and are payable only upon conversion or redemption of the Series C Stock
or upon the liquidation of the Corporation. The Series C Preferred Stock votes
on an as converted basis, except with respect to the approval of the Series 2002
Conversion Provisions and the Series C Conversion Provisions, on which matters
the Series C Preferred Stock is not entitled to vote pursuant to the certificate
of designations regarding the Series C Preferred Stock. Interest on the Series C
Notes accrues at an annual rate equal to 3.0% on a cumulative, compounding basis
and is payable only upon repayment of the principal amount, whether at maturity
or upon a mandatory or optional prepayment. The outstanding principal amount of
the Series C Notes and all accrued and unpaid interest is payable in full no
later than March 26, 2003. The Series C Notes are subject to (i) mandatory
prepayment upon the occurrence of certain bankruptcy events, whether voluntary
or unvoluntary, (ii) prepayment at the option of the holder upon the occurrence
of certain events of default, the sale of all or substantially all of the
Corporation's assets, the merger or consolidation of the Corporation into
another entity or any change of control of the Corporation and (iii) prepayment
at the option of the Corporation, at any time or from time to time, upon five
days notice to the holder. The principal amount of and interest accrued on the
Series C Notes are convertible into Series C Preferred Stock, at the option of
the holder and at any time and from time to time, at the rate of $1,000 per
share. The Corporation's obligations under the Series C Notes are subordinated
to its obligations under the Rosenthal Financing Agreement although such
subordination does not effect Soros's conversion rights with respect to the
Series C Notes.
As a result of the September 2002 financing, the conversion price of
the Series B Preferred Stock, almost all of which is held by Soros,
automatically decreased from $1.57 to $0.93. In accordance with EITF 00-27, this
reduction in the conversion price of the Corporation's Series B Preferred Stock
resulted in the Corporation recording a beneficial conversion feature in the
approximate amount of $5.1 million as part of its third quarter financial
results. This non-cash charge, which is analogous to a dividend, resulted in an
adjustment to the Corporation's computation of (Loss)/Earnings Per Share.
Until May 2002, Robert G. Stevens, a director of the Corporation,
served as an Executive Vice President of the Corporation. In connection with the
termination of his employment, the Corporation agreed to pay to Growth Insight,
a corporation wholly owned by Mr. Stevens, $7,000 per month in consideration of
consulting services to be performed from June 1, 2002 to November 30, 2002.
The Corporation believes that each of the transactions described above
was on terms fair to the Corporation's and its stockholders, and at least as
favorable to the Corporation those available from unaffiliated third parties.
18
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), requires the Corporation's directors and executive officers and persons
who beneficially own more than ten percent of the Common Stock (collectively,
the "Reporting Persons") to file with the Commission initial reports of
beneficial ownership and reports of changes in beneficial ownership of the
Common Stock. Reporting Persons are required to furnish the Corporation with
copies of all such reports. To the Corporation's knowledge, based solely on a
review of copies of such reports furnished to the Corporation and certain
representations of the Reporting Persons, the Corporation believes that during
the 2001 fiscal year all Reporting Persons complied with all applicable Section
16(a) reporting requirements, except that Josephine Esquivel's initial statement
of beneficial ownership on Form 3 upon her appointment as a director of the
Corporation was inadvertently filed late but was filed on July 18, 2001.
ITEM 2. APPROVAL OF THE CHARTER AMENDMENT
The Corporation's Certificate of Incorporation presently authorizes the
issuance by the Corporation of up to 65,000,000 shares of stock, consisting of
40,000,000 shares of Common Stock and 25,000,000 shares of preferred stock, par
value $.01 per share ("Preferred Stock"). As of the Record Date there were
10,391,904 shares of Common Stock issued and outstanding, and an additional
22,502,598 shares of Common Stock reserved for issuance upon conversion of
shares of Preferred Stock or upon the exercise of outstanding warrants or
options issued under the Corporation's stock option plans leaving a balance of
7,105,498 shares of Common Stock authorized and available for issuance.
Furthermore, the Corporation's stock option plans provide for the issuance of
options to purchase up to an additional 3,021,088 shares of Common Stock.
Accordingly, the Corporation could not grant the full amount of options provided
for under its current stock option plans, unless some of the options were to be
granted subject to stockholder approval of an increase in the number of
authorized shares of Common Stock. In addition, until such time as the Charter
Amendment is approved, the holders of Series B Preferred Stock and Series C
Preferred Stock have agreed to certain limitations on their conversion rights in
order to ensure that the number of shares of Common Stock issuable exceed the
number of such shares authorized for issuance.
Because of the limited number of shares of Common Stock available to be
issued, the Board of Directors has unanimously approved, and voted to recommend
that the stockholders approve, the Charter Amendment pursuant to which the
number of shares of Common Stock which the Corporation would be authorized to
issue would be increased from 40,000,000 to 92,000,000 shares. If the Charter
Amendment is approved by the stockholders at the annual meeting, the Corporation
intends to file an amendment to its certificate of incorporation (substantially
in the form attached hereto as Exhibit B) with the Secretary of State of the
State of Delaware as soon as reasonably practicable and it will become effective
upon filing.
The additional shares of Common Stock, when issued, would have the same
rights and privileges as the shares of Common Stock now issued. There are no
pre-emptive rights relating to the Common Stock. Any issuance of additional
shares of Common Stock would increase the number of outstanding shares of Common
Stock and (unless such issuance was pro-rata among existing stockholders) the
percentage ownership of existing stockholders would be diluted accordingly. The
dilutive effect of such an issuance could discourage a change in control of the
Corporation by making it more difficult or costly. The Corporation is not aware
of anyone seeking to accumulate Common Stock or obtain control of the
Corporation, and has no present intention to use the additional authorized
shares to deter a change in control.
Although the Corporation does not presently have any plans, intentions,
agreements, understandings or arrangements regarding the issuance of the
proposed additional shares of Common Stock, the Board of Directors believes that
it will need to do so in the future. The Board of Directors believes that an
increase in the authorized Common Stock would provide the Corporation with
increased flexibility in the future to issue capital stock in connection with
public or private offerings, stock dividends, financing transactions, employee
benefit plans and other proper corporate purposes. Moreover, having such
additional authorized shares of Common Stock available will give the Corporation
the ability to issue stock without the expense and delay of a special meeting of
stockholders, which delay might deprive the Corporation of the flexibility the
Board views as important in facilitating the effective use of the Corporation's
stock. Except as otherwise required by applicable law or stock exchange rules,
authorized but unissued shares of Common Stock may be issued at such time, for
such purpose and
19
for such consideration as the Board of Directors may determine to be
appropriate, without further authorization by stockholders.
The Board of Directors recommends a vote FOR approval of the Charter
Amendment.
ITEM 3. APPROVAL OF THE PLAN AMENDMENT
On March 5, 1997, the Board of Directors adopted, and the stockholders
approved, the Bluefly, Inc. 1997 Stock Option Plan. The Plan originally provided
for the issuance of options (each an "Option") to purchase up to an aggregate of
200,000 shares of Common Stock. At the 1998, 1999 and 2000 annual meetings, the
stockholders approved amendments to the Plan which increased the aggregate
number of shares of Common Stock which may be the subject of Options granted
pursuant to the Plan to 500,000 shares, 1,500,000 shares and 5,400,000 shares,
respectively. These shares are issuable under the Plan pursuant to either
Incentive Stock Options ("ISOs") qualifying under Section 422 of the Code,
granted to officers and key employees of the Corporation, or Non-Qualified Stock
Options ("NQSOs") granted to officers, key employees, consultants and
non-employee directors. The Corporation currently has 62 officers and key
employees, one consultant who has been granted Options under the Plan and six
non-employee directors. The Plan is designed to provide an incentive to
officers, key employees, consultants and non-employee directors of the
Corporation by making available to them an opportunity to acquire a proprietary
interest or to increase their proprietary interest in the growth and performance
of the Corporation. As of September 30, 2002, Options to purchase 3,878,912
shares of Common Stock have been granted and remain outstanding under the Plan.
Proposed Amendments
In August 2002, the Board of Directors approved amendments to the Plan,
subject to stockholder approval, which would increase the aggregate number of
shares of Common Stock which may be the subject of Options granted pursuant to
the Plan from 5,400,000 shares to 12,200,000 shares.
The Board of Directors recommended that the Plan Amendment be presented
to the Corporation's stockholders for approval. The Board of Directors adopted
the Plan Amendment to ensure that the Plan has sufficient shares reserved to
allow for future grants under the Plan necessary for the Corporation to remain
competitive in its recruiting efforts and for the Corporation to retain existing
executives and other key employees. In determining the appropriate size of the
increase, the Board of Directors took into account the size of the option
programs of a number of similar companies as well as the Corporation's future
hiring plans. The Board of Directors also took into account the significant
increase in the total number of shares of Common Stock outstanding over the last
two years.
If the stockholders fail to approve the Plan Amendment, the Corporation
would likely be severely constrained in its ability to attract and retain
executives, other key employees, consultants and directors, and in motivating
and retaining skilled management personnel and directors necessary for the
Corporation's success.
A copy of the Plan as amended by the Plan Amendment is attached hereto
as Exhibit C. The following is a summary of the material provisions of the Plan.
Administration of the Plan. The Option Plan/Compensation Committee
administers the Plan. The Option Plan/Compensation Committee has the full power
and authority, subject to the provisions of the Plan, to designate participants,
grant Options and determine the terms of all Options, except that non-employee
directors are, in addition to discretionary grants, automatically granted
Options both upon becoming members of the Board of Directors and annually
pursuant to the formula described below. The Plan provides that no participant
may be granted Options to purchase more than 1,000,000 shares of Common Stock in
a fiscal year. The Option Plan/Compensation Committee is required to make
adjustments with respect to Options granted under the Plan in order to prevent
dilution or expansion of the rights of any holder. The Plan requires that the
Option Plan/Compensation Committee be composed of at least two directors, each
of whom is an "outside director" as that term is defined for purposes of Section
162(m) of the Code. The Plan also requires that the Option Plan/Compensation
Committee members be "Non-Employee Directors" within the meaning of Rule 16b-3
under the
20
Exchange Act. Each member of the Option Plan/Compensation Committee is an
"outside director" as that term is defined for purposes of Section 162(m) of the
Code and is a "Non-Employee Director" within the meaning of Rule 16b-3 under the
Exchange Act.
Amendment. The Plan may be wholly or partially amended or otherwise
modified, suspended or terminated at any time or from time to time by the Board
of Directors, but no amendment without the approval of the stockholders of the
Corporation shall be made if stockholder approval would be required under
Section 162(m) of the Code, Section 422 of the Code, Rule 16b-3 under the
Exchange Act or any other law or rule of any governmental authority, stock
exchange or other self-regulatory organization to which the Corporation is
subject. Neither the amendment, suspension or termination of the Plan shall,
without the consent of the holder of such Option, alter or impair any rights or
obligations under any Option theretofore granted.
Options Issued Under Stock Option Plan. The terms of specific Options
are determined by the Option Plan/Compensation Committee. The per share exercise
price of the Common Stock subject to an ISO shall not be less than 100% of the
fair market value of the shares of Common Stock on the date of grant. However,
in the case of an ISO granted to a holder of shares representing more than 10%
of the total combined voting power of the Corporation (a "10% stockholder"), the
per share exercise price shall not be less than 110% of the fair market value of
the Common Stock on the date of the grant. The per share exercise price of the
Common Stock subject to a NQSO will be the price determined by the Option
Plan/Compensation Committee. The term of each NQSO will be specified by the
Option Plan/Compensation Committee, which will generally not exceed 10 years
from the date of grant. However, the term of ISOs must not exceed 10 years after
the date of the grant (five years, if granted to a 10% stockholder). In
addition, the fair market value of shares of Common Stock subject to ISOs
(determined as of the date such ISOs are granted) exercisable for the first time
by any individual during any calendar year may in no event exceed $100,000.
Upon the exercise of an Option, the Option holder shall pay the
Corporation the exercise price plus the amount of the required federal and state
withholding taxes, if any. At the Option Plan/Compensation Committee's
discretion, the Plan allows the participant to pay the exercise price (i) in
cash, shares of Common Stock, outstanding Options or other consideration or any
combination thereof or (ii) pursuant to a broker-assisted cashless exercise
program established by the Option Plan/Compensation Committee, provided in each
case that such methods avoid "short-swing" trading profits to the participant
under Section 16(b) of the Exchange Act. To date, the Option Plan/Compensation
Committee has not established a broker-assisted cashless exercise program. The
Plan also allows participants to elect to have shares withheld upon exercise for
the payment of withholding taxes.
The unexercised portion of any Option granted to an officer or key
employee under the Plan generally will be terminated (i) 30 days after the date
on which the optionee's employment is terminated for any reason other than (A)
Cause (as defined in the Plan), (B) retirement or mental or physical disability,
or (C) death; (ii) immediately upon the termination of the optionee's employment
for Cause; (iii) (A) in the case of any ISO, three months after the date on
which the optionee's employment is terminated by reason of retirement or one
year after the optionee's employment is terminated by reason of mental or
physical disability and (B) in the case of any NQSO, three months after the date
on which the optionee's employment is terminated by reason of retirement or
mental or physical disability which period may be extended in the discretion of
the Option Plan/Compensation Committee up to one year after the date on which
the optionee's employment is terminated by reason of retirement or mental or
physical disability; or (iv) (A) 12 months after the date on which the
optionee's employment is terminated by reason of his death or (B) three months
after the date on which the optionee shall die if such death occurs during the
three-month period following the termination of the optionee's employment by
reason of retirement or mental or physical disability. The Option
Plan/Compensation Committee has in the past, and may in the future, extend the
period of time during which an optionee may exercise options following the
termination of his or her employment.
Under the Plan, an Option generally may not be transferred by the
optionee other than by will or by the laws of descent and distribution. During
the lifetime of an optionee, an Option may be exercised only by the optionee or,
in certain instances, by the optionee's guardian or legal representative, if
any.
Directors' Options. The Plan provides that each non-employee director,
who has not previously received a grant of NQSOs, automatically will be granted
a NQSO to purchase 3,750 shares of Common Stock on the date of appointment or
election, subject to the provisions of the Plan. The Plan further provides that
each non-employee
21
director who is serving on the Board of Directors on April 30 of a year during
the term of the Plan automatically will receive a NQSO to purchase 3,750 shares
of Common Stock on May 1 of the following year. The exercise price of the shares
of Common Stock subject to Options granted automatically to each non-employee
director shall be 100% of the fair market value of the shares of Common Stock on
the date of grant. In addition to Options which may be automatically granted to
non-employee directors, the Plan provides that non-employee directors generally
may be granted Options at the discretion of the Option Plan/Compensation
Committee. Options granted to non-employee directors only may be exercised
within ten years of the date of grant. Options granted to non-employee directors
terminate (i) 30 days after termination of the director's service as a director
of the Corporation for any reason other than retirement or mental or physical
disability or death, (ii) three months after the date the director ceases to
serve as a director of the Corporation due to retirement or physical or mental
disability, which period may be extended at the discretion of the Option
Plan/Compensation Committee up to one year after the date on which the director
ceases to serve as a director of the Corporation due to retirement physical or
mental disability or (iii) (A) 12 months after the date the director ceases to
serve as a director due to his death or (B) three months after the death of the
director if such death shall occur during the three-month period following the
date the director ceased to serve as a director of the Corporation due to
physical or mental disability. Except as discussed herein, Options granted to
non-employee directors are on the same terms and conditions as all other NQSOs
granted pursuant to the Plan.
As of September 30, 2002, the following individuals and groups had been
granted, and are currently holding, Options under the Plan to purchase shares in
the amounts indicated: E. Kenneth Seiff (Chairman of the Board, Chief Executive
Officer, President and Treasurer): 1,105,000 shares; Patrick C. Barry (Chief
Operating Officer and Chief Financial Officer): 644,912 shares; Jonathan B.
Morris (Executive Vice President and Secretary): 645,000 shares; Robert G.
Stevens (Director): 188,250 shares (including 175,000 shares granted to Mr.
Stevens as an executive officer of the Corporation); 188,250 shares Josephine
Esquivel (Director): 7,500 shares; Alan Kane (Director): 3,750 shares; Martin
Miller (Director): 24,500 shares; Neal Moszkowski (Director): 15,000 shares;
David Wassong (Director): 7,500; all current executive officers as a group:
2,998,162 shares; all current non-executive officer directors as a group:
246,500 shares (including 175,000 shares granted to Mr. Stevens as an executive
officer of the Corporation); and all employees, including officers other than
executive officers, as a group: 1,240,250 shares. As of September 30, 2002, the
market value of the Common Stock underlying outstanding Options was
approximately $3.3 million.
Interest of Certain Persons in Matters to be Acted Upon
Although the Corporation cannot currently determine the number of
shares subject to Options that may be granted in the future to executive
officers or non-employee directors, each of the executive officers and
non-employee directors of the Corporation has an interest in the approval of the
Plan Amendment in so far as they are likely to be recipients of future Options.
Federal Income Tax Consequences
Set forth below is a description of the federal income tax consequences
under the Code of the grant and exercise of the benefits awarded under the Plan.
There will be no federal income tax consequences to employees,
directors, consultants or the Corporation on the grant of a NQSO. On the
exercise of a NQSO, the employee, director or consultant generally will have
taxable ordinary income, subject, in the case of an employee, to withholding, in
an amount equal to the excess of the fair market value of the shares of Common
Stock received on the exercise date over the option price of the shares. The
Corporation will be entitled to a tax deduction in an amount equal to such
excess, provided the Corporation complies with applicable reporting and/or
withholding rules. Any ordinary income realized by an employee, director or
consultant upon exercise of a NQSO will increase his tax basis in the Common
Stock thereby acquired. Upon the sale of Common Stock acquired by exercise of a
NQSO, employees, directors and consultants will realize capital gain or loss,
which capital gain may be subject to reduced rates of tax if such stock was held
for more than one year prior to the sale.
An employee, director or consultant who surrenders shares of Common
Stock in payment of the exercise price of a NQSO will not recognize gain or loss
on his surrender of such shares, but will recognize ordinary income on the
exercise of the NQSO as described above. Of the shares received in such an
exchange, that number of shares
22
equal to the number of shares surrendered will have the same tax basis and
capital gains holding period as the shares surrendered. The balance of the
shares received will have a tax basis equal to their fair market value on the
date of exercise, and the capital gains holding period will begin on the date of
exercise.
With respect to ISOs, no compensation income is recognized by an
optionee, and no deduction is available to the Corporation upon either the grant
or exercise of an ISO. However, the difference between the exercise price of an
ISO and the market price of the Common Stock acquired on the exercise date will
be included in alternative minimum taxable income of the optionee for the
purposes of the "alternative minimum tax." Generally, if an optionee holds the
shares acquired upon exercise of ISOs until the later of (i) two years from the
grant of the ISOs and (ii) one year from the date of acquisition of the shares
upon exercise of an ISO, any gain recognized by the optionee on a sale of such
shares will be treated as capital gain. The gain recognized upon the sale is the
difference between the Option price and the sale price of the underlying Common
Stock. The net federal income tax effect on the holder of ISOs is to defer,
other than for alternative minimum tax purposes, until the shares are sold,
taxation of any increase in the value of the Common Stock from the time of grant
to the time of exercise. If the optionee sells the shares prior to the
expiration of the holding period set forth above, the optionee will realize
ordinary compensation income in the amount equal to the difference between the
exercise price and the fair market value on the date of exercise. The
compensation income will be added to the optionee's basis for purposes of
determining the gain on the sale of the shares. Such gain will be capital gain
if the shares are held as capital assets. If the application of the
above-described rule would result in a loss to the optionee, the compensation
income required to be recognized thereby would be limited to the excess, if any,
of the amount realized on the sale over the basis of the shares sold. If an
optionee disposes of shares obtained upon exercise of an ISO prior to the
expiration of the holding period described above, the Corporation will be
entitled to a deduction in the amount of the compensation income that the
optionee recognizes as a result of the disposition, subject to the Corporation
satisfying its reporting obligations.
If an optionee is permitted to, and does, make the required payment of
the Option price by delivering shares of Common Stock, the optionee generally
will not recognize any gain as a result of such delivery, but the amount of
gain, if any, which is not so recognized will be excluded from his basis in the
new shares received. However, the use by an optionee of shares previously
acquired pursuant to the exercise of an ISO to exercise an Option will be
treated as a taxable disposition if the transferred shares have not been held by
the optionee for the requisite holding period described above.
If the Corporation delivers cash, in lieu of fractional shares, or
shares of Common Stock to an employee pursuant to a cashless exercise program,
the employee will recognize ordinary income equal to the cash paid and the fair
market value of any shares issued as of the date of exercise. An amount equal to
any such ordinary income will be deductible by the Corporation, provided it
complies with applicable reporting and/or withholding requirements.
If an optionee is permitted to, and does, exercise an ISO later than
three months (one year in the event of the optionee's disability, as defined in
Code Section 22(e)(3)) of the optionee's termination of employment (other than
by reason of death), the optionee will recognize income, and the Corporation
generally will be entitled to a deduction, upon exercise of the Option in
accordance with the rules for NQSOs described above, provided it complies with
applicable reporting and/or withholding requirements.
Section 162(m) of the Code, which generally disallows a tax deduction
for compensation over $1,000,000 paid to the Chief Executive Officer and certain
other highly compensated employees ("covered employees") of publicly held
corporations, provides that "performance-based" compensation will not be subject
to the $1,000,000 deduction limitation. Because an employer is not, except in
the case of a disqualifying disposition, entitled to a deduction upon the grant
or exercise of an ISO in any event, this provision generally does not affect the
Corporation's tax treatment with regard to ISOs. The compensation element of
NQSOs granted by "outside directors" under a plan approved by stockholders with
an exercise price equal to the fair market value of the underlying stock as of
the date of grant is considered performance-based compensation, if certain
requirements are met. The Plan meets such requirements and, accordingly, the
compensation element of NQSOs with an exercise price equal to the fair market
value of the underlying stock as of the date of grant will not be subject to the
deduction limitation of Section 162(m).
23
The Plan is not subject to any provisions of the Employee Retirement
Income Security Act of 1974 and is not required to be qualified under Section
401(a) of the Code.
The Board of Directors recommends a vote FOR approval of the Plan
Amendment.
Equity Compensation Plan Information (as of December 31, 2001)
------------------------------- ---------------------------- ---------------------------- ----------------------------
Plan Category Number of securities to be Weighted-average exercise Number of securities
issued upon exercise of price of outstanding remaining available for
outstanding options, options, warrants and future issuance under
warrants and rights rights equity compensation plans
(excluding securities
reflected in column (a))
(a) (b) (c)
------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity compensation plans
approved by security holders 3,896,203 $4.50 1,503,797
------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity compensation plans not
approved by security holders 447,000 $2.38 1,053,000
------------------------------- ---------------------------- ---------------------------- ----------------------------
Total 4,343,203 $4.28 2,556,797
------------------------------- ---------------------------- ---------------------------- ----------------------------
The following is a summary of the material provisions of the Bluefly,
Inc. 2000 Plan Stock Option Plan (the "2000 Plan"), the only equity compensation
plan of the Corporation not approved by the Corporation's security holders.
Eligibility. Key employees of the Corporation who are not officers or
directors of the Corporation and its affiliates and consultants to the
Corporation are eligible to be granted options.
Administration of the 2000 Plan. The Option Plan/Compensation Committee
administers the 2000 Plan. The Option Plan/Compensation Committee has the full
power and authority, subject to the provisions of the 2000 Plan, to designate
participants, grant options and determine the terms of all options. The 2000
Plan provides that no participant may be granted Options to purchase more than
1,000,000 shares of Common Stock in a fiscal year. The Option Plan/Compensation
Committee is required to make adjustments with respect to Options granted under
the 2000 Plan in order to prevent dilution or expansion of the rights of any
holder. The 2000 Plan requires that the Option Plan/Compensation Committee be
composed of at least two directors.
Amendment. The 2000 Plan may be wholly or partially amended or
otherwise modified, suspended or terminated at any time or from time to time by
the Board of Directors, but no amendment without the approval of the
stockholders of the Corporation shall be made if stockholder approval would be
required under any law or rule of any governmental authority, stock exchange or
other self-regulatory organization to which the Corporation is subject. Neither
the amendment, suspension or termination of the 2000 Plan shall, without the
consent of the holder of an option under the 2000 Plan, alter or impair any
rights or obligations under any option theretofore granted.
Options Issued Under 2000 Plan. The Option Plan/Compensation Committee
determines the term and exercise price of each option under the 2000 Plan and
the time or times at which such option may be exercised in whole or in part, and
the method or methods by which, and the form or forms in which, payment of the
exercise price may be paid.
24
Upon the exercise of an option under the 2000 Plan, the option holder
shall pay the Corporation the exercise price plus the amount of the required
federal and state withholding taxes, if any. The 2000 Plan also allows
participants to elect to have shares withheld upon exercise for the payment of
withholding taxes.
The unexercised portion of any option granted to a key employee under
the 2000 Plan generally will be terminated (i) 30 days after the date on which
the optionee's employment is terminated for any reason other than (A) Cause (as
defined in the 2000 Plan), (B) retirement or mental or physical disability, or
(C) death; (ii) immediately upon the termination of the optionee's employment
for Cause; (iii) three months after the date on which the optionee's employment
is terminated by reason of retirement or mental or physical disability; or (iv)
(A) 12 months after the date on which the optionee's employment is terminated by
reason of his death or (B) three months after the date on which the optionee
shall die if such death occurs during the three-month period following the
termination of the optionee's employment by reason of retirement or mental or
physical disability. The Option Plan/Compensation Committee has in the past, and
may in the future, extend the period of time during which an optionee may
exercise options following the termination of his or her employment.
Under the 2000 Plan, an option generally may not be transferred by the
optionee other than by will or by the laws of descent and distribution. During
the lifetime of an optionee, an option under the 2000 Plan may be exercised only
by the optionee or, in certain instances, by the optionee's guardian or legal
representative, if any.
ITEM 4. SERIES 2002 CONVERSION PROVISIONS
As discussed above under the caption "Certain Relationships and Related
Transactions," on August 9, 2002, the Corporation issued to Soros 2,100 shares
of Series 2002 Preferred Stock in consideration of an aggregate of $2,100,000.
The certificate of designations of the Series 2002 Preferred Stock provides
that, subject to stockholder approval to the extent 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 Series
2002 Preferred Stock is convertible at any time upon the consummation of any
subsequent round of financing into the securities issued in such financing at a
per share rate equal to $1,000 divided by the lowest price per share paid by any
participant in such financing. The holders of Series 2002 Preferred Stock have
waived their conversion rights with respect to the September 2002 issuance of
Series C Preferred Stock.
As a Nasdaq SmallCap Market - listed issuer, the Corporation is subject
to the requirement that it obtain stockholder approval for any issuance of
securities convertible into Common Stock at a price less than the greater of
book or market value which equals 20% of the Common Stock or voting power
outstanding before such issuance. While it is not clear whether or under what
circumstances this rule would apply to the conversion of the Series 2002
Preferred Stock, the Board of Directors has determined that it is advisable to
submit the Series 2002 Conversion Provisions to the approval of the
Corporation's stockholders. Stockholder approval under Nasdaq's rules requires
the vote of a simple majority of the shares present at any meeting and entitled
to vote. Therefore, Soros beneficially owns sufficient shares (even excluding
its shares of Series C Preferred Stock, which is not entitled to vote on this
matter) to determine the outcome of the vote with respect to the Series 2002
Conversion Provisions.
As holder of a majority of the issued and outstanding Common Stock,
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock,
Soros has substantial influence over whether, and the terms upon which, the
Corporation may consummate any subsequent round of financing. Moreover, Soros
has historically provided the Corporation with much of its needed equity
capital. Although there can be no assurance that the Corporation will be able to
raise additional equity capital, the Board of Directors believes that it will be
substantially more difficult to raise additional equity capital, either from
Soros or a third party, in the event that the Series 2002 Conversion Provisions
are not approved.
The Board of Directors recommends a vote FOR approval of the Series
2002 Conversion Provisions.
ITEM 5. SERIES C CONVERSION PROVISIONS
As discussed above under the caption "Certain Relationships and Related
Transactions," on September 27, 2002, the Corporation issued to Soros 1,000
shares of Series C Preferred Stock and Series C Notes in the aggregate
25
principal amount of $2,000,000, all for an aggregate purchase price of
$3,000,000. In connection with this financing, the corporation designated 3,500
shares of Series C Preferred Stock, 1,000 of which were issued as noted above
and 2,000 of which may be issued upon conversion of the Series C Notes.
As noted above under Item 4, as a Nasdaq SmallCap Market - listed
issuer, the Corporation is subject to the requirement that it obtain stockholder
approval for any issuance of securities convertible into Common Stock at a price
less than the greater of book or market value which equals 20% of the Common
Stock or voting power outstanding before such issuance. While the conversion
price of the Series C Preferred Stock was based on the market value of the
Common Stock as of the date of issuance, the Corporation understands that Nasdaq
may take the position that the inclusion of provisions relating to anti-dilution
adjustments to the Series C Preferred Stock conversion price based on future
equity issuances may bring the Series C Preferred Stock within the coverage of
the Nasdaq stockholder approval rules. Accordingly, the Board of Directors has
determined that it is advisable to submit the Series C Conversion Provisions to
the approval of the Corporation's stockholders and the maximum number of shares
that may be issued upon conversion of the Series C Preferred Stock has been set
at 2,077,431 (which represents 19.99% of the currently outstanding Common Stock)
until such time as the Series C Conversion Provisions are so approved.
Stockholder approval under Nasdaq's rules requires the vote of a simple majority
of the shares present at any meeting and entitled to vote. Therefore, Soros
beneficially owns sufficient shares of Common Stock (even excluding its shares
of Series C Preferred Stock, which is not entitled to vote on this matter) to
determine the outcome of the vote with respect to the Series C Conversion
Provisions.
As holder of a majority of the issued and outstanding Common Stock,
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock,
Soros has substantial influence over whether, and the terms upon which, the
Corporation may consummate any subsequent round of financing. Moreover, Soros
has historically provided the Corporation with much of its needed equity
capital. Although there can be no assurance that the Corporation will be able to
raise additional equity capital, the Board of Directors believes that it will be
substantially more difficult to raise additional equity capital, either from
Soros or a third party, in the event that the Series C Conversion Provisions are
not approved.
The Board of Directors recommends a vote FOR approval of the Series C
Conversion Provisions.
ITEM 6. RATIFICATION OF APPOINTMENT OF ACCOUNTANTS
The Audit Committee of the Board of Directors has selected PwC as
independent accountants for the fiscal year ending December 31, 2002. The
Corporation's financial statements for the 2001 fiscal year were examined and
reported upon by PwC. The Audit Committee has directed that the appointment of
PwC as the Corporation's independent accountants for the fiscal year ending
December 31, 2002 be submitted for ratification by the stockholders at the
annual meeting.
In the event that the stockholders do not ratify the appointment of
PwC, the Audit Committee is not obligated to appoint other accountants, but the
Audit Committee will give consideration to such unfavorable vote. Even if the
selection is ratified, the Audit Committee in its discretion may direct the
appointment of a different independent accounting firm at any time during the
year if the Audit Committee determines such a change would be in the best
interest of the Corporation and its stockholders.
A representative of PwC will be present at the meeting, will be
provided the opportunity to make a statement if he or she desires to do so, and
will be available to respond to appropriate questions from stockholders.
Audit Fees
The aggregate fees billed for professional services rendered by PwC for
the audit of the Corporation's consolidated financial statements, including the
reviews of the Corporation's condensed consolidated financial statements
included in its quarterly reports on Form 10-Q, for fiscal 2001 were
approximately $61,000.
Financial Information Systems Design And Implementation Fees
26
PwC did not render any services to the Corporation related to financial
information systems design and implementation during fiscal 2001.
Other Fees
PwC did not bill the Corporation for any other professional services
rendered during fiscal 2001 other than those described in the previous two
paragraphs.
The Board of Directors recommends a vote FOR the ratification of PwC as
the Corporation's independent accountants.
OTHER BUSINESS
The Board of Directors currently knows of no other matters to be
presented at the meeting. However, if any other matters properly come before the
meeting, or any adjournment thereof, it is intended that proxies in the
accompanying form will be voted in accordance with the judgment of the persons
named therein.
STOCKHOLDER PROPOSALS
The Corporation's bylaws provide that a stockholder who intends to
present a proposal for stockholder vote at the Corporation's next annual meeting
must give written notice to the Secretary of the Corporation not less than 90
days prior to the date that is one year from the date of this annual meeting.
Accordingly, any such proposal must be received by the Corporation before
[August 21], 2003. The notice must contain specified information about the
proposed business and the stockholder making the proposal. If a stockholder
gives notice of a proposal after the deadline, the Corporation's proxy holders
will have discretionary authority to vote on this proposal when and if raised at
the next annual meeting. In addition, in order to include a stockholder proposal
in the Corporation's proxy statement and form of proxy for the next annual
meeting, such proposal must be received by the Corporation at its principal
executive offices no later than the close of business on [June 20], 2003 and
must otherwise comply with the rules of the Commission for inclusion in the
proxy materials.
COST OF SOLICITATION
The cost of soliciting proxies in the accompanying form has been or
will be borne by the Corporation. Directors, officers and employees of the
Corporation may solicit proxies personally or by telephone or other means of
communications. Although there is no formal agreement to do so, arrangements may
be made with brokerage houses and other custodians, nominees and fiduciaries to
send proxies and proxy material to their principals, and the Corporation may
reimburse them for any attendant expenses.
INCORPORATION OF FINANCIAL INFORMATION
The following financial statements and other portions of the
Corporation's Annual Report on Form 10-K for the year ended December 31, 2001 as
filed with the Commission on March 27, 2002 (the "Form 10-K"), Quarterly Report
on Form 10-Q for the quarterly periods ended March 31, 2002 and June 30, 2002,
filed with the Commission on April 24, 2002 and August 13, 2002, respectively
(collectively the "Forms 10-Q"), copies of which are being delivered with the
Proxy Statement, are incorporated by reference herein:
o financial statements of the Corporation appearing in Part
II, Item 8 of the Form 10-K and in Part I, Item 1 of the
Forms 10-Q.
All documents filed with the Commission by the Corporation pursuant to
sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934
subsequent to the date of this Proxy Statement and prior to the date of the
meeting are incorporated herein by reference. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Proxy Statement to the
extent that a statement contained in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement.
27
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE SIGN THE ENCLOSED
PROXY AND RETURN IT IN THE ENCLOSED STAMPED AND ADDRESSED ENVELOPE AS PROMPTLY
AS POSSIBLE.
By Order of the Board of Directors,
E. KENNETH SEIFF
President and Chief Executive Officer
Dated: [October 17], 2002
28
[FRONT]
BLUEFLY, INC.
PROXY
Annual Meeting, [November 18,] 2002
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints E. KENNETH SEIFF and JONATHAN MORRIS as
Proxies, each with full power to appoint his substitute, and hereby authorizes
them to appear and vote as designated on the reverse side, all shares of Common
Stock and Series A Preferred Stock of Bluefly, Inc. held on record by the
undersigned on [October 10, 2002], at the Annual Meeting of Stockholders to be
held on [November 18,] 2002, and any adjournments thereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR PROPOSALS 1, 2, 3, 4, 5, 6 and 7.
(Continued and to be signed on the reverse side.)
29
[X] Please mark your
votes as in
this example.
VOTE FOR
all nominees
listed at VOTE WITHHELD
1.ELECTION right except as AUTHORITY FOR AGAINST ABSTAIN
OF DIRECTORS marked to the from all Nominees: 2. PROPOSAL TO [_] [_] [_]
contrary below nominees E. Kenneth Sieff APPROVE THE CHARTER
[_] [_] Josephine Esquivel AMENDMENT TO INCREASE
Alan Kane THE NUMBER OF AUTHORIZED
FOR, Martin Miller SHARES OF COMMON STOCK.
EXCEPT VOTE __________________ Robert G. Stevens
WITHHELD AS TO 3. PROPOSAL TO APPROVE [_] [_] [_]
THE FOLLOWING __________________ THE PLAN AMENDMENT TO
NOMINEES (IF INCREASE THE NUMBER OF
ANY): __________________ SHARES AVAILABLE FOR
GRANT UNDER THE PLAN.
__________________
4. PROPOSAL TO APPROVE [_] [_] [_]
__________________ THE SERIES 2002
CONVERSION PROVISIONS
5. PROPOSAL TO APPROVE [_] [_] [_]
THE SERIES C CONVERSION
PROVISIONS
6. PROPOSAL TO RATIFY THE
APPOINTMENT OF
INDEPENDENT ACCOUNTANTS.
7. IN THEIR DISCRETION, [_] [_] [_]
THE NAMED PROXIES MAY
VOTE ON SUCH OTHER
BUSINESS AS MAY PROPERLY
COME BEFORE THE ANNUAL
MEETING, OR ANY
ADJOURNMENTS OR
POSTPONEMENTS THEREOF.
The undersigned acknowledges receipt of the accompanying Proxy Statement dated
[September 16, 2002].
SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AT THE ANNUAL MEETING IN
ACCORDANCE WITH THE STOCKHOLDER'S SPECIFICATIONS ABOVE. THE PROXY CONFERS
DISCRETIONARY AUTHORITY IN RESPECT TO MATTERS NOT KNOWN OR DETERMINED AT THE
TIME OF THE MAILING OF THE NOTICE OF THE ANNUAL MEETING OF STOCKHOLDERS TO THE
UNDERSIGNED.
___________________________ __________________________
SIGNATURE OF STOCKHOLDER SIGNATURE IF HELD JOINTLY DATE_______________
NOTE: Please mark, date, sign and return this Proxy promptly using the enclosed
envelope. When shares are held by joint tenants, both should sign. If signing as
a attorney, executor, administrator, trustee or guardian, please give full
title. If a corporation or partnership, please sign in corporate or partnership
name by an authorized person.
30
Exhibit A
CHARTER OF THE AUDIT COMMITTEE
OF THE
BOARD OF DIRECTORS
OF
BLUEFLY, INC.
I. AUDIT COMMITTEE PURPOSE
The Audit Committee of the Board of Directors of Bluefly, Inc. (the "Company")
is appointed by the Board of Directors to assist the Board of Directors in
fulfilling its oversight responsibilities. The Audit Committee's primary duties
and responsibilities are to:
o Monitor and review the processes pursuant to which the Company's
financial statements are prepared and audited, the fairness of those
financial statements and monitor and ensure the adequacy of the
Company's systems of internal controls regarding finance, accounting,
and legal compliance.
o Appoint and monitor the independence and performance of the Company's
independent auditors.
o Provide an avenue of communication between the independent auditors,
management and the Board of Directors.
The Audit Committee has the authority to conduct or authorize investigations
into any matter within the scope of its responsibilities, and it shall have
direct access to the independent auditors as well as anyone in the organization.
The Audit Committee has the ability to retain, at the Company's expense, special
legal, accounting, or other financial consultants or experts it deems necessary
in the performance of its duties or to assist in the conduct of any
investigation.
II. AUDIT COMMITTEE COMPOSITION AND MEETINGS
Audit Committee members shall meet the requirements of the National Association
of Securities Dealers. The Audit Committee shall be comprised of three or more
directors as determined by the Board of Directors, each of whom shall be
independent non-executive directors, free from any relationship that would
interfere with the exercise of his or her independent judgment. All members of
the Audit Committee shall have a basic understanding of finance and accounting
and be able to read and understand fundamental financial statements, and at
least one member of the Audit Committee shall have accounting or related
financial management expertise. Members of the Audit Committee
may enhance their familiarity with finance and accounting by participating in
educational programs.
Audit Committee members shall be appointed by the Board of Directors. If an
audit committee Chair is not designated or present, the members of the Audit
Committee may designate a Chair by majority vote of the Audit Committee
membership.
The Audit Committee will have regular meetings at least four times per year
(which should coincide with, and precede, the Company's public announcement of
its quarterly and annual results) or more frequently as circumstances dictate.
The Audit Committee should meet privately and separately, on a regular basis,
with management and with the independent auditors, to discuss any matters that
the Audit Committee or each of these groups believes should be discussed.
III. AUDIT COMMITTEE RESPONSIBILITIES AND DUTIES
Review Procedures
1. Review and reassess the adequacy of this Charter at least annually.
Submit this Charter to the Board of Directors for approval and have it
published in a proxy or information statement at least every three
years in accordance with the Securities and Exchange Commission
regulations.
2. Review the Company's annual audited financial statements and related
footnotes prior to filing or distribution. The review should include
separate discussions with management and with the independent auditors
of significant issues and disagreements regarding accounting
principles, practices and judgments, any significant difficulties
encountered during the course of the audit, including any restrictions
on the scope of work or access to required information and the effect
of using different accounting principles, practices and judgments.
3. Review and discuss with management and with the independent auditors
the Company's quarterly earnings releases and reports prior to public
distribution.
4. Review any reports or other documents filed with the Securities and
Exchange Commission that include public financial disclosures prior to
filing or distribution and discuss with management, if appropriate,
whether the information contained in these documents is consistent with
the information contained in the Company's financial statements.
5. In consultation with management and the independent auditors, consider
the integrity of the Company's financial reporting processes and
adequacy of controls. Discuss significant financial risk exposures and
the steps management has taken to monitor, control and report such
exposures. Review significant findings prepared by the independent
auditors together with management's responses including the status of
previous recommendations.
6. Review written reports and significant findings prepared by the
independent auditors, if any, and if appropriate, discuss the
information contained in the reports with the independent auditors.
Review management's responses, if any, to such reports and findings,
including the status of previous recommendations.
7. Receive copies of reports to management prepared by the independent
auditors and management's responses to any such reports. Obtain
confirmation from the independent auditors that the Company is in
compliance with its financial reporting requirements.
8. Review, annually, the procedures, structure, and qualifications of the
Company's financial reporting personnel. Discuss with the independent
auditors the performance of the financial reporting personnel and any
recommendations the independent auditors may have.
9. Review and approve the partners or managers of the independent auditors
who were engaged on the Company's audit.
10. To the extent that they have not been reviewed by the Compensation
Committee of the Board of Directors or another committee of the Board
of Directors composed of independent directors, review related party
transactions and transactions involving conflicts of interest with
officers and directors, whenever possible in advance of the creation of
such transaction or conflict. Cause to be reviewed compensation,
expenses, perquisites and related party transactions with officers and
directors to verify that they are in accordance with corporate policies
and with any agreements or arrangements approved by the Board of
Directors.
Independent Auditors
11. The independent auditors are ultimately accountable to the Audit
Committee and the Board of Directors, and the Audit Committee has the
ultimate authority and responsibility to select, evaluate and, where
appropriate, replace the independent auditors. The Audit Committee
shall review the independence and performance of the independent
auditors and the experience and qualifications of the senior members of
the independent auditor team. The Audit Committee shall annually
appoint the independent auditors or approve any discharge of the
independent auditors when circumstances warrant.
12. Approve the audit fees and other significant compensation to be paid to
the independent auditors.
13. Approve the retention and related fees of the independent auditors for
any non-audit services and consider whether the provision of these
other services is compatible with maintaining the auditors'
independence consistent with applicable standards.
14. On an annual basis, the Audit Committee should receive from the
independent auditors a formal written statement delineating all
relationships between the
independent auditors and the Company and representing to the Company
the independent auditors' independence consistent with applicable
standards. The Audit Committee should discuss with the independent
auditors the disclosed relationships or services that may impact the
objectivity and independence of the auditors, and take, or recommend
that the Board of Directors take, appropriate action to ensure the
independence of the auditors.
15. Review the independent auditors' audit plan - discuss scope, staffing,
reliance upon management and audit approach.
16. Discuss certain matters required to be communicated to audit committees
in accordance with the American Institute of Certified Public
Accountants: A Statement of Auditing Standards No. 61 including such
matters as (i) the consistency of application of the Company's
accounting policies; (ii) the completeness of information contained in
the financial statements and related disclosures; (iii) the selection
of new or changes to the Company's accounting policies; (iv) estimates,
judgments and uncertainties; (v) unusual transactions and (vi)
accounting policies relating to significant financial statements items,
including the timing of transactions and the period in which they are
recorded.
17. Obtain and consider the independent auditors' judgments about the
quality and appropriateness of the Company's accounting principles as
applied in its financial reporting; the discussion should include such
issues as the degree of aggressiveness or conservatism of the Company's
accounting principles and underlying estimates the clarity of the
Company's financial disclosures and other significant decisions made by
management in preparing the financial disclosures.
Legal Compliance
18. On at least an annual basis, review, with the Company's counsel, any
legal matters that could have a significant impact on the Company's
financial statements, the Company's compliance with applicable laws and
regulations, and inquiries received from regulators or governmental
agencies.
Other Audit Committee Responsibilities
19. Annually prepare a report to shareholders as required by the Securities
and Exchange Commission. The report should be included in the Company's
annual proxy statement.
20. Report Audit Committee actions to the Board of Directors on a regular
basis including any recommendations the Audit Committee deems
appropriate.
21. Perform any other activities consistent with this Charter, the
Company's By-laws and governing law, as the Audit Committee or the
Board of Directors deems necessary or appropriate.
22. Maintain minutes of meetings and periodically report to the Board of
Directors on significant results of the foregoing activities.
25. Review financial and accounting personnel succession planning within
the Company.
Exhibit B
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
BLUEFLY, INC.
--------------------------
It is hereby certified:
FIRST: The name of the corporation is Bluefly, Inc. (the
"Corporation").
SECOND: The Certificate of Incorporation is hereby amended and
by amending and restating Section 4.1 thereof to read in its entirety as
follows:
"The total number of shares of stock that the Corporation shall have
authority to issue is: one hundred seventeen million (117,000,000) of
which ninety-two million (92,000,000) shall be shares of Common Stock
of the par value of $.01 ("Common Stock") and twenty-five million
(25,000,000) shall be shares of Preferred Stock of the par value of
$.01 each ("Preferred Stock")."
THIRD: The amendment herein certified has been duly adopted
and written consent has been given in accordance with the provisions of Section
242 of the General Corporation Law of the State of Delaware.
November [ ], 2002 BLUEFLY, INC.
By:
----------------------------------
Name:
Title:
Exhibit C
BLUEFLY, INC.
1997 STOCK OPTION PLAN
Section 1. Purpose
The purposes of this Bluefly, Inc. 1997 Stock Option Plan (the "Plan")
are to encourage selected employees, consultants and directors of Bluefly, Inc.
(together with any successor thereto, the "Company' ) and its Affiliates (as
defined below) to acquire a proprietary interest in the growth and performance
of the Company, to generate an increased incentive to contribute to the
Company's future success and prosperity, thus enhancing the value of the Company
for the benefit of its shareholders, and to enhance the ability of the Company
and its Affiliates to attract and retain qualified individuals upon whom, in
large measure, the sustained progress, growth, and profitability of the Company
depend.
Section 2. Definitions
As used in the Plan, the following terms shall have the meanings set
forth below:
(a) "Affiliate" shall mean any entity that, directly or through one or
more intermediaries, is controlled by, controls or is under common control with
the Company.
(b) "Board" shall mean the Board of Directors of the Company.
(c) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.
(d) "Committee" shall mean a committee of the Board designated by the
Board to administer the Plan and composed of not less than two directors, each
of whom is both a non-employee director within the meaning of Rule 16b-3 and an
"outside director" as that term is defined for purposes of Section 162(m) of the
Code.
(e) "Consultant" shall mean any Person who contracts to provide
services to the Company as an independent contractor.
(f) "Fair Market Value" shall mean, with respect to Shares or other
securities (i) the closing price per Share of the Shares on the principal
exchange on which the Shares are then trading, if any, on such date, or, if the
Shares were not traded on such date, then on the next preceding trading day
during which a sale occurred; or (ii) if the Shares are not traded on an
exchange but are quoted on NASDAQ or a successor quotation system, (1) the last
sales price (if the Shares are then listed as a National Market Issue under the
NASDAQ National Market System) or (2) the mean between the closing
representative bid and asked prices (in all other cases) for the Shares on such
date as reported by NASDAQ or such successor quotation system; or (iii) if the
Shares are not publicly traded on an exchange and not quoted on NASDAQ or a
successor quotation system, the mean between the closing bid and asked prices
for the Shares on such date as determined in good faith by the Committee; or
(iv) if the provisions of clauses (i), (ii) and (iii) shall not be applicable,
the fair market value established by the Committee acting in good faith.
(g) "Incentive Stock Option" shall mean an option granted under Section
6 of the Plan that meets the requirements of Section 422 of the Code or any
successor provision thereto.
(h) "Key Employee" shall mean any officer, director or other employee
who is a regular full-time employee of the Company or its present and future
Affiliates.
1
(i) "Non-Employee Director" shall mean each member of the Board who is
not an employee of the Company or any Affiliate.
(j) "Non-Qualified Stock Option" shall mean an option granted under the
Plan that is not an Incentive Stock Option.
(k) "Option" shall mean an Incentive Stock Option or a Non-Qualified
Stock Option.
(1) "Option Agreement" shall mean a written agreement, contract, or
other instrument or document evidencing an Option granted under the Plan.
(m) "Participant" shall mean a Key Employee, Consultant or Non-Employee
Director who has been granted an Option under the Plan.
(n) "Person" shall mean any individual, corporation, partnership,
association, joint-stock company, trust, unincorporated organization, or
government or political subdivision thereof.
(o) "Rule 16b-3" shall mean Rule 16b-3 promulgated by the Securities
and Exchange Commission under the Securities Exchange Act of 1934, as amended,
or any successor rule or regulation thereto.
(p) "Shares" shall mean the common stock of the Company, $.01 par
value, and such other securities or property as may become the subject of
Options pursuant to an adjustment made under Section 4(b) of the Plan.
(q) "Ten Percent Shareholder" shall mean a Person, who together with
his or her spouse, children and trusts and custodial accounts for their benefit,
immediately at the time of the grant of an Option and assuming its immediate
exercise, would beneficially own, within the meaning of Section 424(d) of the
Code, Shares possessing more than ten percent (10%) of the total combined voting
power of all of the outstanding capital stock of the Company.
Section 3. Administration
(a) Generally. The Plan shall be administered by the Committee. Unless
otherwise expressly provided in the Plan, all designations, determinations,
interpretations and other decisions under or with respect to the Plan or any
Option shall be within the sole discretion of the Committee, may be made at any
time, and shall be final, conclusive, and binding upon all Persons, including
the Company, any Affiliate, any Participant, any holder or beneficiary of any
Option, any shareholder of the Company or any Affiliate, and any employee of the
Company or of any Affiliate.
(b) Powers. Subject to the terms of the Plan and applicable law and
except as provided in Section 7 hereof, the Committee shall have full power and
authority to: (i) designate Participants; (ii) determine the type or types of
Options to be granted to each Participant under the Plan; (iii) determine the
number of Shares to be covered by Options; (iv) determine the terms and
conditions of any Option; (v) determine whether, to what extent, and under what
circumstances Options may be settled or exercised in cash, Shares, other
Options, or other property, or canceled, forfeited, or suspended, and the method
or methods by which Options may be settled, exercised, canceled, forfeited, or
suspended; (vi) interpret and administer the Plan and any instruments or
agreements relating to, or Options granted under, the Plan; (vii) establish,
amend, suspend, or waive such rules and regulations and appoint such agents as
it shall deem appropriate for the proper administration of the Plan; and (viii)
make any other determination and take any other action that the Committee deems
necessary or desirable for the administration of the Plan.
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(c) Reliance, Indemnification. The Committee may employ attorneys,
consultants, accountants or other persons and the Committee, the Company and its
officers and directors shall be entitled to rely upon the advice, opinions or
valuations of any such persons. No member of the Committee shall be personally
liable for any action, determination or interpretation taken or made in good
faith with respect to the Plan, or Options granted thereunder and all members of
the Committee shall be fully indemnified and protected by the Company in respect
of any such action, determination or interpretation.
Section 4. Shares Available for Options
(a) Shares Available. Subject to adjustment as provided in Section
4(b):
(i) Limitation on Number of Shares. Options issuable under the
Plan are limited such that the maximum aggregate number of Shares which
may issued to Key Employees, Consultants and Non-Employee Directors
pursuant to, or by reason of, Options is 12,200,000. No Participant
shall be granted in any one fiscal year Options to purchase more than
1,000,000 Shares. To the extent that an Option granted to a Participant
ceases to remain outstanding by reason of termination of rights granted
thereunder, forfeiture or otherwise, the Shares subject to such Option
shall again become available for award under the Plan; provided,
however, that in the case of the cancellation or termination of an
Option in the same fiscal year that such Option was granted, both the
canceled Option and the newly granted Option shall be counted in
determining whether the recipient has received the maximum number of
such Options under the Plan for such fiscal year.
(ii) Accounting for Awards. For purposes of this Section 4,
the number of Shares covered by an Option to (A) a Key Employee or
Consultant or (B) a Non-Employee Director shall be counted on the date
of grant of such Option against the aggregate number of Shares
available for granting Options under the Plan to (x) Key Employees and
Consultants or (y) Non-Employee Directors, respectively.
(iii) Sources of Shares Deliverable Under Options. Any Shares
delivered pursuant to an Option may consist, in whole or in part, of
authorized and unissued Shares or of treasury Shares.
(b) Adjustments. In the event that the Committee shall determine that
any (i) subdivision or consolidation of Shares, (ii) dividend or other
distribution (in the form of Shares), (iii) recapitalization or other capital
adjustment of the Company or (iv) merger, consolidation or other reorganization
of the Company or other rights to purchase Shares or other securities of the
Company, or other similar corporate transaction or event (of a type described in
Treasury Regulation Section 1.162-27(e)(2)(iii)(C)), affects the Shares such
that an adjustment is determined by the Committee to be appropriate in order to
prevent dilution or enlargement of the benefits or potential benefits intended
to be made available under the Plan, then the Committee shall, in such manner as
it may deem necessary to prevent dilution or enlargement of the benefits or
potential benefits intended to be made under the Plan, adjust any or all of (x)
the number and type of Shares which thereafter may be made the subject of
Options, (y) the number and type of Shares subject to outstanding Options, and
(z) the grant, purchase, or exercise price with respect to an Option or, if
deemed appropriate, make provision for a cash payment to the holder of an
outstanding Option, provided, however, in each case, that (i) with respect to
Incentive Stock Options no such adjustment shall be authorized to the extent
that such adjustment would cause the Plan to violate Section 422 of the Code or
any successor provision thereto; (ii) each such adjustment shall be made in such
manner as not to constitute a cancellation and reissuance of a Non-Qualified
Stock Option for purposes of Section 162(m) of the Code, or the regulations
promulgated thereunder, to the extent that such reissuance would result in the
grant of such Options in excess of the maximum permitted to be granted to any
Participant in any fiscal year; and (iii) the number of Shares subject to any
Option denominated in Shares shall always be a whole number.
Section 5. Eligibility
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Options may be granted only to Key Employees, Consultants and
Non-Employee Directors; provided, however, that Incentive Stock Options may be
granted only to Key Employees. In determining the Persons to whom Options shall
be granted and the number of Shares to be covered by each Option, the Committee
shall take into account the nature of the Person's duties, such Person's present
and potential contributions to the success of the Company and such other factors
as it shall deem relevant in connection with accomplishing the purposes of the
Plan. A Key Employee or Consultant who has been granted an Option or Options
under the Plan may be granted an additional Option or Options, subject to such
limitations as may be imposed by the Code on the grant of incentive Stock
Options.
Section 6. Option
The Committee is hereby authorized to grant Options to Participants
upon the following terms and the conditions (except to the extent otherwise
provided in Section 7) and with such additional terms and conditions, in either
case not inconsistent with the provisions of the Plan, as the Committee shall
determine:
(a) Exercise Price. The purchase price per Share purchasable
under Incentive Stock Options shall not be less than 100% of the Fair
Market Value of a Share on the date of grant; provided that the
purchase price per Share purchasable under Incentive Stock Options
granted to Ten Percent Shareholders shall be not less than 110% of the
Fair Market Value of a Share on the date of grant. The purchase price
per Share purchasable under Non-Qualified Stock Options shall be the
price determined by the Committee.
(b) Option Term. The term of each Non-Qualified Stock Option
shall be fixed by the Committee. The term of each Incentive Stock
Option shall in no event be more than 10 years from the date of grant,
or in the case of an Incentive Stock Option granted to a Ten Percent
Shareholder, 5 years from the date of grant.
(c) Time and Method of Exercise. The Committee shall determine
the time or times at which an Option may be exercised in whole or in
part, and the method or methods by which, and the form or forms in
which, payment of the option price with respect thereto may be made or
deemed to have been made (including, without limitation, (i) cash,
Shares, outstanding Options or other consideration, or any combination
thereof, having a Fair Market Value on the exercise date equal to the
relevant option price and (ii) a broker-assisted cashless exercise
program established by the Committee), provided in each case that such
methods avoid "short-swing" profits to the Participant under Section
16(b) of the Securities Exchange Act of 1934, as amended. The payment
of the exercise price of an Option may be made in a single payment or
transfer, in installments, or on a deferred basis, in each case in
accordance with rules and procedures established by the Committee.
(d) Early Termination. The unexercised portion of any Option
granted to a Key Employee or Consultant under the Plan will generally
be terminated (i) thirty (30) days after the date on which the Key
Employee's employment is terminated or the period of the Consultant's
services ceases, as the case may be, for any reason other than (A)
Cause (as defined below), (B) retirement or mental or physical
disability, or (C) death; (ii) immediately upon the termination of the
Key Employee's employment for Cause; (iii) in the case of any Incentive
Stock Option, three months after the date on which the Key Employee's
employment is terminated by reason of retirement or one year after the
Key Employee's employment is terminated by reason of mental or physical
disability, or in the case of any Non-Qualified Stock Option, three
months after the date on which the Key Employee's employment is
terminated or the period of the Consultant's services ceases, as the
case may be, by reason of retirement or mental or physical disability,
or in the discretion of the Committee up to one year after the date on
which the Key Employee's employment is terminated or the period of the
Consultant's services ceases, as the case may be, by reason of
retirement or
4
mental or physical disability; or (iv)(A) 12 months after the date on
which the Key Employee's employment is terminated or the period of the
Consultant's services ceases, as the case may be, by reason of the
death of the Key Employee or the Consultant, as the case may be, or (B)
three months after the date on which the Key Employee or the
Consultant, as the case may be, shall die if such death shall occur
during the three-month period following the termination of the Key
Employee's employment or the cessation of the Consultant's services, as
the case may be, by reason of retirement or mental or physical
disability. The term "Cause," as used herein, shall mean (w) the Key
Employee's willful misconduct or fraud in the performance of his duties
under such Key Employee's employment arrangement with the Company, (x)
the continued failure or refusal of the Key Employee (following written
notice thereof) to carry out any reasonable request of the Board for
the provision of services under such Key Employee's employment
arrangement with the Company, (y) the material breach by the Key
Employee of his employment arrangement with the Company or (z) the
entering of a plea of guilty or nolo contendere to or the conviction of
the Key Employee for a felony or any other criminal act involving moral
turpitude, dishonesty, theft or unethical business conduct. For
purposes of this paragraph (d), no act shall be considered willful
unless done or omitted to be done not in good faith and without
reasonable belief that such action or omission was in the best interest
of the Company.
(e) Incentive Stock Options. All terms of any Incentive Stock
Option granted under the Plan shall comply in all respects with the
provisions of Section 422 of the Code, or any successor provision
thereto, and any regulations promulgated thereunder.
(f) No Cash Consideration for Awards. Awards shall be granted
for no cash consideration or such minimal cash consideration as may be
required by applicable law.
(g) Limits on Transfer of Options. Subject to Code Section
422, no Option and no right under any such Option, shall be assignable,
alienable, saleable, or transferable by a Participant otherwise than by
will or by the laws of descent and distribution; provided, however,
that, if so determined by the Committee, a Participant may, in the
manner established by the Committee, designate a beneficiary or
beneficiaries to exercise the rights of the Participant, and to receive
any property distributable, with respect to any Option upon the death
of the Participant. Each Option, and each right under any such Option,
shall be exercisable during the Participant's lifetime, only by the
Participant or, if permissible under applicable law with respect to any
Option that is not an Incentive Stock Option, by the Participant's
guardian or legal representative. No Option and no right under any such
Option, may be pledged, alienated, attached, or otherwise encumbered,
and any purported pledge, alienation, attachment, or encumbrance
thereof shall be void and unenforceable against the Company or any
Affiliate.
(h) Term of Options. Except as set forth in Section 6(b) and
Section 7, the term of each Option shall be for such period as may be
determined by the Committee.
(i) Share Certificates. All certificates for Shares or other
securities of the Company delivered under the Plan pursuant to any
Option or the exercise thereof shall be subject to such stop transfer
orders and other restrictions as the Committee may deem advisable under
the Plan or the rules, regulations, and other restrictions of the
Securities and Exchange Commission, any stock exchange upon which such
Shares or other securities are then listed, and any applicable Federal
or state securities laws, and the Committee may cause a legend or
legends to be put on any such certificates to make appropriate
reference to such restrictions.
Section 7. Options Awarded to Non-Employee Directors
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Each Non-Employee Director who was a member of the Board on the
Effective Date (defined hereafter) shall automatically be granted on such date a
Non-Qualified Stock Option to purchase 5,000 Shares, subject to all of the
provisions of the Plan. Each person who is either elected or appointed a
Non-Employee Director, and who has not previously received a grant of
Non-Qualified Stock Options pursuant to the Plan, shall automatically be granted
a Non-Qualified Stock Option to purchase 3,750 Shares on the date of their
appointment or election, subject to the provisions of the Plan. In addition,
each Non-Employee Director who is a member of the Board on April 30 of a year
during the term of the Plan beginning in calendar year 1998 shall automatically
be granted a Non-Qualified Stock Option to purchase 3,750 Shares on May 1of the
following year. All Options granted to Non-Employee Directors pursuant to the
Plan shall (a) be (in the case of a grant under this Section 7) at an exercise
price per Share equal to 100% of the Fair Market Value of a Share on the date of
the grant; (b) have (in the case of a grant under this Section 7) a term of 10
years; (c) terminate (i) thirty (30) days after termination of a Non-Employee
Director's service as a director of the Company for any reason other than
retirement or mental or physical disability or death, (ii) thirty (30) days
after the date the Non-Employee Director ceases to serve as a director of the
Company due to retirement or physical or mental disability, or in the discretion
of the Committee up to one year after the date the Non-Employee Director ceases
to serve as a director of the Company due to retirement or physical or mental
disability or (iii)(A) 12 months after the date the Non-Employee Director ceases
to serve as a director due to the death of the Non-Employee Director or (B)
three months after the death of the Non-Employee Director if such death shall
occur during the three month period following the date the Non-Employee Director
ceased to serve as a director of the Company due to physical or mental
disability; and (d) be otherwise on the same terms and conditions as all other
Options granted pursuant to the Plan.
Section 8. Amendment and Termination
Except to the extent prohibited by applicable law and unless otherwise
expressly provided in an Option Agreement or in the Plan:
(a) Amendments to the Plan. The Plan may be wholly or partially amended
or otherwise modified, suspended or terminated at any time or from time to time
by the Board, but no amendment without the approval of the shareholders of the
Company shall be made if shareholder approval would be required under Section
162(m) of the Code, Section 422 of the Code, Rule 16b-3 or any other law or rule
of any governmental authority, stock exchange or other self-regulatory
organization to which the Company is subject. Neither the amendment, suspension
or termination of the Plan shall, without the consent of the holder of such
Option, alter or impair any rights or obligations under any Option theretofore
granted.
(b) Adjustments of Options Upon the Occurrence of Certain Unusual or
Nonrecurring Events. The Committee shall be authorized to make adjustments in
the terms and conditions of, and the criteria included in, Options in
recognition of unusual or nonrecurring events (including, without limitation,
the events described in Section 4(b) hereof) affecting the Company, any
Affiliate, or the financial statements of the Company or any Affiliate or of
changes in applicable laws, regulations, or accounting principles, whenever the
Committee determines that such adjustments are appropriate in order to prevent
enlargement of the benefits or potential benefits to be made available under the
Plan.
(c) Correction of Defects, Omissions, and Inconsistencies. The
Committee may correct any defect, supply any omission or reconcile any
inconsistency in the Plan or any Option in the manner and to the extent it shall
deem desirable to carry the Plan into effect.
Section 9. Election to Have Shares Withheld
(a) In combination with or in substitution for cash withholding or any
other legal method of satisfying federal and state withholding tax liability, a
Participant may elect to have Shares withheld by the Company or to
6
have Shares sold in a broker-assisted transaction in order to satisfy federal
and state withholding tax liability (a "share withholding election"), provided
(i) the Committee shall have adopted procedures providing for a withholding
election; and (ii) the share withholding election is made on or prior to the
date on which the amount of withholding tax liability is determined (the "Tax
Date"). If a Participant elects within thirty (30) days of the date of exercise
to be subject to withholding tax on the exercise date pursuant to the provisions
of Section 83(b) of the Code, then the share withholding election may be made
during such thirty (30) day period. Notwithstanding the foregoing, a holder
whose transactions in Common Stock are subject to Section 16(b) of the
Securities Exchange Act of 1934, as amended, may make a share withholding
election only if the following additional conditions are met: (i) the share
withholding election is made no sooner than six (6) months after the date of
grant of the Option, except, however, such six (6) month condition shall not
apply if the Participant's death or disability (as shall be determined by the
Committee) occurs within such six (6) month period; and (ii) the share
withholding election is made (x) at least six (6) months prior to the Tax Date,
or (y) during the period beginning on the third business day following the date
of release of the Company's quarterly or annual financial results and ending on
the twelfth business day following such date.
(b) A share withholding election shall be deemed made when written
notice of such election, signed by the Participant, has been hand delivered or
transmitted by registered or certified mail to the Secretary of the Company at
its then principal office. Delivery of said notice shall constitute an
irrevocable election to have Shares withheld.
(c) If a Participant has made a share withholding election pursuant to
this Section 9, and (i) within thirty (30) days of the date of exercise of the
Option, the Participant elects pursuant to the provisions of Section 83(b) of
the Code to be subject to withholding tax on the date of exercise of the Option,
then such Participant will be unconditionally obligated to immediately tender
back to the Company the number of Shares having an aggregate fair market value
(as determined in good faith by the Committee), equal to the amount of tax
required to be withheld plus cash for any fractional amount, together with
written notice to the Company informing the Company of the Participant's
election pursuant to Section 83(b) of the Code; or (ii) if the Participant has
not made an election pursuant to the provisions of Section 83(b) of the Code,
then on the Tax Date, such Participant will be unconditionally obligated to
tender back to the Company the number of Shares having an aggregate fair market
value (as determined in good faith by the Committee), equal to the amount of tax
required to be withheld plus cash for any fractional amount.
Section 10. Vesting Limitation on Incentive Stock Options
The Fair Market Value of Shares subject to Incentive Stock Options
(determined as of the date such Incentive Stock Options are granted) exercisable
for the first time by any individual during any calendar year shall in no event
exceed $100,000.
Section 11. General Provisions
(a) No Rights to Awards. No Key Employee or Consultant shall have any
claim to be granted any Option under the Plan, and there is no obligation for
uniformity of treatment of Key Employees or Consultants or holders or
beneficiaries of Options under the Plan. The terms and conditions of Options
need not be the same with respect to each recipient.
(b) No Limit on Other Plans. Nothing contained in the Plan shall
prevent the Company or any Affiliate from adopting or continuing in effect other
or additional compensation arrangements and such arrangements may be either
generally applicable or applicable only in specific cases.
7
(c) No Right to Employment. The grant of an Option shall not be
construed as giving a Participant the right to be retained in the employ of the
Company or any Affiliate. Further, the Company or an Affiliate may at any time
dismiss a Participant from employment, free from any liability, or any claim
under the Plan, unless otherwise expressly provided in the Plan or in any Option
Agreement.
(d) Governing Law. The validity, construction, and effect of the Plan
and any rules and regulations relating to the Plan shall be determined in
accordance with the laws of the State of New York and applicable Federal law.
(e) Severability. If any provision of the Plan or any Option is or
becomes or is deemed to be invalid, illegal, or unenforceable in any
jurisdiction, or would disqualify the Plan or any Option under any law deemed
applicable by the Committee, such provision shall be construed or deemed amended
to conform to applicable laws, or if it cannot be construed or deemed amended
without, in the determination of the Committee, materially altering the intent
of the Plan, such provision shall be deemed void, stricken and the remainder of
the Plan and any such Option shall remain in full force and effect.
(f) No Trust or Fund Created. Neither the Plan nor any Option shall
create or be construed to create a trust or separate fund of any kind or a
fiduciary relationship between the Company or any Affiliate and a Participant or
any other Person. To the extent that any Person acquires a right to receive
payments from the Company or any Affiliate pursuant to an Option, such right
shall be no greater than the right of any unsecured general creditor of the
Company or any Affiliate.
(g) No Fractional Shares. No fractional Shares shall be issued or
delivered pursuant to the Plan or any Option, and the Committee shall determine
whether cash, other securities, or other property shall be paid or transferred
in lieu of any fractional Shares or whether such fractional Shares or any rights
thereto shall be canceled, terminated, or otherwise eliminated.
(h) Headings. Headings are given to the Sections and subsections of the
Plan solely as a convenience to facilitate reference. Such headings shall not be
deemed in any way material or relevant to the construction or interpretation of
the Plan or any provision hereof.
Section 12. Deductibility of Compensation
Prior to the end of the "reliance period" as defined in Treasury
Regulation Section 1.162-27(f)(2), the Committee shall take such actions, if
any, that it deems necessary or appropriate so that the compensation element of
Non-Qualified Stock Options will qualify as "qualified performance-based
compensation," within the meaning of Treasury Regulation Section 1.162-27(e).
Section 13. Effective Date of the Plan
The Plan is effective as of the closing of the Company's initial public
offering (the "Effective Date").
Section 14. Term of the Plan
The Plan shall continue until the earlier of (i) the date on which all
Options issuable hereunder have been issued, (ii) the termination of the Plan by
the Board or (iii) March 4, 2007. However, unless otherwise expressly provided
in the Plan or in an applicable Option Agreement, any Option theretofore granted
may extend beyond such date and the authority of the Committee to amend, alter,
adjust, suspend, discontinue, or terminate any such Option or to waive any
conditions or rights under any such Option, and the authority of the Board to
amend the Plan, shall extend beyond such date.
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