April 21, 2008, 12:00 AM

Troubled e-retailer RedEnvelope files for bankruptcy and finds a buyer

Online and catalog gift retailer Red Envelope will sell itself to Creative Catalogs Corp. if the bankruptcy court approves. Creative Catalogs operates Personal Creations, which, like RedEnvelope, sells gifts online and through catalogs.

RedEnvelope Inc., the online and catalog gift retailer that disclosed recently it was running out of funds, has filed for bankruptcy and announced a deal to sell itself to Creative Catalogs Corp. Creative Catalogs operates Personal Creations, No. 191 in the Internet Retailer Top 500 Guide, which, like RedEnvelope, sells gifts online and through catalogs.

As part of the deal, Creative Catalogs and investment firm Granite Creek Partners will extend $4.5 million in credit to RedEnvelope. RedEnvelope disclosed three weeks ago that no longer had sufficient funds to operate after its main creditor, Wells Fargo Retail Finance LLC, had withdrawn a line of credit.

The deal also calls for Creative Catalogs to purchase the assets of RedEnvelope for $5.7 million, less the amount borrowed through the credit facility. The deal is subject to the approval of the U.S. Bankruptcy Court for the Northern District of California, San Francisco division, where RedEnvelope filed its bankruptcy petition Friday. The court could award RedEnvelope’s assets to a higher bidder, should one emerge.

"We intend to use this filing to take the actions necessary to position RedEnvelope for future success,” says Phil Neri, RedEnvelope`s chief financial officer. “We want to assure our customers, our employees, our vendors and our partners that RedEnvelope is operating business as usual during this transition. We believe the sale will strengthen the company and foster a sustained turnaround for RedEnvelope. We expect to proceed quickly with the sale and the related bidding process and that the business will have a significantly improved balance sheet, greater operating flexibility and a path to profitability."

RedEnvelope, No. 120 in the Internet Retailer Top 500 Guide, reported a net loss of $4.3 million on $45.2 million in sales for its fiscal third quarter ended Dec. 30, compared with net income of $5.3 million on sales of $57 million in the same quarter a year ago. Online sales, which account for about 78% of the company’s business, declined 21% from $44.4 million in Q3 2007 to $35.1 million in the third quarter of the current fiscal year. The company’s interim CEO, John Pound, resigned March 31.

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