BLUEFLY TO GET FRESH CAPITAL

Byline: Valerie Seckler

NEW YORK — Internet off-pricer Bluefly.com is about to get some big bucks.
The e-tailer of designer duds at a discount said Friday it has obtained a nonbinding letter of intent from Soros Private Equity Partners that would bring Bluefly, in its third round of financing, up to $15 million in fresh capital from the investment fund operated by George Soros.
The transaction may also include an investment from Bluefly’s public shareholders that could raise up to $25 million.
The news caps an arduous search begun in February by Bluefly to find a financial or strategic investor in the two-year-old Internet pure play, which has built some brand equity and achieved respectable levels of customer traffic, but nonetheless has continued to bleed red ink and see its cash dwindle. Bluefly had $3.9 million in cash on its balance sheet on June 30, the end of its second quarter, and, according to the most recent data available from Web ratings agency Media Metrix, drew 397,000 people to its Web site in August.
That action lifted Bluefly’s customer count over BananaRepublic.com, for example, which had 366,000 users and activewear pure-play Lucy.com, which was visited by 205,000 people, according Media Metrix data. But, Bluefly was well behind the busiest Web sites mounted by apparel players such as JCPenney.com, which drew 2.9 million customers in August; Gap.com, which pulled in 1.5 million, and OldNavy.com, which lured 1.3 million people.
For the first half, Bluefly’s net losses from continuing operations widened to $11.4 million on sales of $7.9 million, compared with year-earlier losses of $4.2 million on $1 million in revenue.
“The management board and the independent committee charged by the board to evaluate our options believe this is the best option for the company, its management and its shareholders, after an exhaustive seven-month search that has included talks with private equity firms, strategic investors, online and off-line retailers, catalogers and TV shopping businesses,” said Bluefly’s founder and chief executive officer Kenneth Seiff.
“There are no plans to change the management team of the business,” Seiff continued. “George Soros is not taking over the company. At this point, our two primary focuses are to complete this deal and to execute on our business plan. Our plans are to run the business.”
Seiff declined comment Friday on when he expects the consummation of the deal, which still needs the nod of Bluefly’s shareholders as well as regulatory officials, or on the strength of Bluefly’s fall business, citing the “quiet period” commanded by the agreement.
There are two components to the financing, Seiff explained.
The first calls for Soros Private Equity Partners to furnish a $5 million note, following the completion of a definitive deal, which would be converted into preferred stock, pending shareholder approval. After that Soros has the option to convert it into common stock at a rate of $2.34 a share. On Friday, Bluefly closed at $2.97, up 22 cents, or 7.95 percent, in Nasdaq trading. The company’s shares have ranged as high as $16.69 and as low as $1.75 during the past 52 weeks.
The second piece of the funding would be an offer to the company’s public shareholders of up to $20 million in common stock at $2.34 a share. If the public shareholders bought less than the $20 million allotment, the deal calls for the Soros group to make up the difference between the $20 million and what is actually purchased — up to a maximum of $10 million.
Seiff said that if shareholders exercise the full $20 million allotment, Soros would own about 43 percent of Bluefly on a fully diluted basis. “If the public invests nothing,” Seiff added, “Soros’ stake would be as high as 78 percent.”
In addition, following the deal’s closing, $6 million in funds remaining from a $15 million loan made to Bluefly by the Soros group in March would be converted into preferred equity, at $2.34 a share, and the conversion rate on $10 million in preferred stock bought by Soros in August 1999 would be reset at $2.34 a share from its current rate, which Seiff didn’t specify. The preferred stock would provide Soros with veto rights over certain company actions.

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