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UPDATE: Buy.com Founder to Buy Back Online Retailer

17 Aug, 2001 By: Joan Villa

Struggling against Nasdaq delisting, shareholder lawsuits and decliningrevenues for the year, Internet retailer Buy.com has agreed to sell all of its stock to company founder Scott Blum and go private.

Blum’s wholly owned SB Acquisition Inc. will pay 17 cents per share — thestock’s closing price on Aug. 10 — in a reverse merger unanimously approved by the boards of both companies, according to an Aug. 13 filingwith the Securities and Exchange Commission. SB Acquisition will alsoprovide Buy.com interim financing of up to $9 million as part of the deal, which is expected to close before Nov. 30.

At the 17 cents per share price, the agreement values Buy.com at about $23 million. The company’s stock, down from a high of $35 since goingpublic in February 2000, was in the process of being delisted from the Nasdaq.

Buy.com acquired Reel.com’s customers last year after that site, acquired by Hollywood Video, stopped selling videos and wentcontent-only. Although Buy.com went on to capture close to 12% of the online VHS and DVD sales market by year-end, according to Alexander & Associates’ 2000 Holiday Market Snapshot, the company has never showna profit.

The same day Aliso Viejo, Calif.-based Buy.com announced the reverse merger, the company cut about 40% of its staff — 50 full-timejobs — second quarter financial reports say.

For the second quarter ended June 30, Buy.com reported $94.9 million in revenues, less than half the $193.2 million it reported in the second quarter of 2000. Although a financial statement says that 70% ofbusiness was repeat orders, those loyal customers were not enough to prevent a $5.7 million (4 cents per share) loss, though the drainappeared to be slowing from the $33.6 million (26 cents per share) that Buy.com lost in the second quarter 2000.

In the first quarter ended March 31, net losses grew when Buy.com reversed its previous low-price strategy, causing sales to decline andrevenues to drop 40% from the same period last year to $125million. Buy.com credited those same “selective price increases,” however, for growing gross profits 62% to $14.4 million in the first quarter.

Nonetheless, the company warned that revenue growth had stalled and projected net revenue for 2001 would be “significantly less” than the previous year. “We cannot be certain that we will ever become profitable,” the first quarter earnings statement said.

In February, Buy.com tried to stem the losses by cutting 125 jobs, streamlining operations, and juggling management positions that included the resignations of c.e.o. and chairman Gregory Hawkins and c.f.o. MitchHill.

Class action lawsuits are also pending against the retailer for alleged stock trading improprieties.

Valley Media, a secondary Buy.com distributor, sees the buy-back as a “positive” development that makes financial sense and should not hurt the e-tailer’s market share position, says c.e.o. Peter Berger. Valleyalso recently weathered the threat of delisting by narrowly meeting the SEC’s share price and company valuation measures.

“At a couple bucks a share, the public equity market doesn’t afford the opportunity for future financing for companies that have single-digit stock, so why would a Buy.com be a public entity?” observes Berger. By going private, Buy.com will also save $200,000 to $300,000 per year on public reporting requirements, he says.

But analyst Dennis McAlpine with New York brokerage Auerbach, Pollak andRichardson contends that the lack of financial reporting could hurt Buy.com’s dealings with suppliers if they can’t easily obtain information.“Being private as opposed to public, particularly in the Internet sector will raise some questions about your financial position, whether rightly or wrongly,” McAlpine says. “If you’re private they don’t know what they’re dealing with.”

Berger, however, argues that the Nasdaq’s market capitalization measure is a “poor indication” of how much a company is worth and how much credit should be extended as a result. Since the equity markets “sometimes defy good business analysis,” he says. Valley prefers toevaluate a company’s cash position and revenues. “They have weathered the storm and are not spending a king’s ransom on being first to market, and now they can execute their business model,” predicts Berger.

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