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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 Form 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended July 3, 2005
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from            to
 Commission File Number: 0-50387
 RedEnvelope, Inc.
 (Exact Name of Registrant as Specified in Its Charter)
 Delaware(State or Other Jurisdiction of
Incorporation or Organization)
    
    33-0844285(IRS Employer
Identification No.)
 149 New Montgomery Street,
San Francisco, California 94105  (Address of Principal Executive Offices and Zip Code)
 (415) 371-9100  (Registrants Telephone Number, Including Area Code)
 þ o
 o þ




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RedEnvelope, Inc.
REPORT ON FORM 10-Q
For the Quarter Ended July 3, 2005
TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited)Condensed Balance Sheets as of July 3, 2005, April 3, 2005 and June 27, 2004
    
    2Condensed Statements of Operations for the thirteen weeks ended July 3, 2005 and June 27, 2004
    
    3Condensed Statements of Cash Flows for the thirteen weeks ended July 3, 2005 and June 27, 2004
    
    4Notes to Condensed Financial Statements
    
    5Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    8Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    26Item 4.
    
    Controls and Procedures
    
    26PART II. OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    II-1Item 2.
    
    Changes in Securities, Use of Proceeds and Issues or Purchases of Equity Securities
    
    II-1Item 6.
    
    Exhibits
    
    II-1EXHIBIT 10.53EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
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PART I.
FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 RedEnvelope, Inc.
 
 CONDENSED BALANCE SHEETS
 (Unaudited)
 July 3,
    
    April 3,
    
    June 27,2005
    
    2005
    
    2004(In thousands, except per share data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2,172
    
    
    $
    4,807
    
    
    $
    8,061Short-term investments
    
    
    14,471
    
    
    
    14,356
    
    
    
    21,101Accounts receivable, net
    
    
    1,109
    
    
    
    992
    
    
    
    849Inventory
    
    
    11,794
    
    
    
    14,048
    
    
    
    8,275Prepaid catalog costs and other current assets
    
    
    2,243
    
    
    
    3,905
    
    
    
    1,792Total current assets
    
    
    31,789
    
    
    
    38,108
    
    
    
    40,078Property and equipment, net
    
    
    7,423
    
    
    
    7,587
    
    
    
    6,236Other assets
    
    
    538
    
    
    
    573
    
    
    
    471Total assets
    
    $
    39,750
    
    
    $
    46,268
    
    
    $
    46,785LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    4,632
    
    
    $
    10,044
    
    
    $
    7,700Accrued expenses and other current liabilities
    
    
    3,716
    
    
    
    3,454
    
    
    
    3,228Accrued compensation
    
    
    1,148
    
    
    
    993
    
    
    
    1,215Capital lease obligations, current
    
    
    578
    
    
    
    579
    
    
    
    597Total current liabilities
    
    
    10,074
    
    
    
    15,070
    
    
    
    12,740Capital lease obligations, long-term
    
    
    141
    
    
    
    290
    
    
    
    671Deferred rent
    
    
    833
    
    
    
    874
    
    
    
    Total liabilities
    
    
    11,048
    
    
    
    16,234
    
    
    
    13,411Common stock, $0.01 par value; 100 million shares authorized; 9.0 million, 8.9 million, and 8.7
million issued and outstanding as of July 3, 2005, April 3, 2005, and June 27, 2004, respectively
    
    
    90
    
    
    
    90
    
    
    
    88Additional paid-in capital
    
    
    114,232
    
    
    
    113,831
    
    
    
    113,011Deferred compensation
    
    
    (16
    )
    
    
    (43
    )
    
    
    (71
    )Notes receivable from stockholders
    
    
    (44
    )
    
    
    (44
    )
    
    
    (44
    )Accumulated deficit
    
    
    (85,560
    )
    
    
    (83,805
    )
    
    
    (79,604
    )Accumulated other comprehensive income (loss)
    
    
    
    
    
    
    5
    
    
    
    (6
    )Total stockholders equity
    
    
    28,702
    
    
    
    30,034
    
    
    
    33,374Total liabilities and stockholders equity
    
    $
    39,750
    
    
    $
    46,268
    
    
    $
    46,785
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RedEnvelope, Inc.
 
 CONDENSED STATEMENTS OF OPERATIONS
 (Unaudited)
 Thirteen Weeks EndedJuly 3,
    
    June 27,2005
    
    2004(In thousands, except for per share data)Net revenues
    
    $
    24,978
    
    
    $
    21,131Cost of sales
    
    
    11,729
    
    
    
    9,899Gross profit
    
    
    13,249
    
    
    
    11,232Operating expenses:Fulfillment
    
    
    3,405
    
    
    
    3,395Marketing
    
    
    6,863
    
    
    
    4,944General and administrative
    
    
    4,811
    
    
    
    3,841Total operating expenses
    
    
    15,079
    
    
    
    12,180Loss from operations
    
    
    (1,830
    )
    
    
    (948
    )Interest income
    
    
    140
    
    
    
    75Interest expense
    
    
    (62
    )
    
    
    (79
    )Net loss
    
    $
    (1,752
    )
    
    $
    (952
    )Net loss per share  basic and diluted
    
    $
    (0.20
    )
    
    $
    (0.11
    )Weighted average shares outstanding  basic and
diluted
    
    
    8,919
    
    
    
    8,635
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RedEnvelope, Inc.
 
 CONDENSED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Thirteen Weeks EndedJuly 3,
    
    June 27,2005
    
    2004(In thousands)Cash Flows From Operating Activities:Net loss
    
    $
    (1,752
    )
    
    $
    (952
    )Adjustments to reconcile net loss to net cash (used in) provided by operating activities:Depreciation and amortization
    
    
    798
    
    
    
    618Amortization of deferred stock compensation
    
    
    4
    
    
    
    7Other non-cash charges
    
    
    (7
    )
    
    
    59Changes in current assets and liabilities:Accounts receivable
    
    
    (118
    )
    
    
    206Inventory
    
    
    2,255
    
    
    
    1,334Prepaid catalog and other assets
    
    
    1,661
    
    
    
    245Accounts payable
    
    
    (5,412
    )
    
    
    2,161Accrued expenses and other current liabilities
    
    
    414
    
    
    
    115Net cash (used in) provided by operating
activities
    
    
    (2,157
    )
    
    
    3,793Cash Flows From Investing Activities:Maturities of investments
    
    
    1,300
    
    
    
    6,089Purchase of investments
    
    
    (1,420
    )
    
    
    (18,378
    )Purchase of property and equipment
    
    
    (633
    )
    
    
    (2,117
    )Net cash used in investing activities
    
    
    (753
    )
    
    
    (14,406
    )Cash Flows From Financing Activities:Proceeds from exercise of common stock options and warrants
    
    
    424
    
    
    
    410Principal payments on capital lease obligations
    
    
    (149
    )
    
    
    (145
    )Net cash provided by financing activities
    
    
    275
    
    
    
    265Net decrease in cash and cash equivalents
    
    
    (2,635
    )
    
    
    (10,348
    )Cash and cash equivalents at beginning of period
    
    
    4,807
    
    
    
    18,409Cash and cash equivalents at end of period
    
    $
    2,172
    
    
    $
    8,061
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RedEnvelope, Inc.
 
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 (Unaudited)
 1. Financial Statements  Basis of Presentation
     2. Accounting Policies
  Stock
Based Compensation  Accounting for Stock Issued to Employees Accounting for
Stock-Based Compensation
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Thirteen Weeks EndedJuly 3,
    
    June 27,2005
    
    2004(In thousands, except per share data)Net loss  as reported
    
    $
    (1,752
    )
    
    $
    (952
    )Stock-based employee compensation included in reported net loss
    
    
    4
    
    
    
    7Stock-based compensation expense determined under fair
value base method
    
    
    (456
    )
    
    
    (144
    )Pro forma net loss
    
    $
    (2,204
    )
    
    $
    (1,089
    )Basic and diluted loss per share:As reported
    
    $
    (0.20
    )
    
    $
    (0.11
    )Pro forma
    
    $
    (0.25
    )
    
    $
    (0.13
    )
 Loss Per Share 
 Comprehensive Loss 
 New Accounting Pronouncements 
 3. Investments
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June 27, 2004Cash and Cash
    
    Short-termEquivalents
    
    Investments(in thousands)As previously reported
    
    $
    18,667
    
    
    $
    10,495Aucton-rate securities
    
    
    (10,606
    )
    
    
    10,606As adjusted
    
    $
    8,061
    
    
    $
    21,101
    4. Borrowing Arrangements
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5. Legal Proceedings
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Forward-Looking Statements
 This report, together with the documents incorporated herein by reference,
contains forward-looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended. Such
statements are based upon current expectations and involve risks and uncertainties. Any statements
contained in this report that are not purely statements of historical fact may be deemed to be
forward-looking statements. Such forward-looking statements may include but are not limited to
statements regarding our future operations and enhancements, product offerings, business, financial
condition, results of operations and prospects. Additionally, statements concerning possible
changes in applicable rules or legislation are forward-looking statements. Words such as expects,
anticipates, intends, plans, believes, seeks, estimate, may, should, could and
similar expressions or variations of such words are intended to identify forward-looking
statements, but are not the exclusive means of identifying forward-looking statements in this
report. All forward-looking statements in this report are based upon information available to us as
of the date hereof, and we assume no obligation to revise or update any such forward-looking
statements in order to reflect any event or circumstance that may arise after the date of this
report. Actual results and the timing of certain events could differ materially from our current
expectations. Factors that could cause or contribute to such differences include, but are not
limited to, those set forth in this report under Factors That May Affect Future Results, and
elsewhere in this report, and those contained from time to time in our other filings with the SEC.
We caution investors that our business and financial performance are subject to substantial risks
and uncertainties.
 Overview
 www.redenvelope.com
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Critical Accounting Policies
  Revenue recognition.
 Shipping and Handling Costs.
 Inventory.
 Accounting for income taxes.
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Catalog Amortization.
 Valuation of long-lived assets.
 Stock based compensation.
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Results of Operations
  Thirteen WeeksJuly 3,
    
    June 27,2005
    
    2004Statements of Operation Data:Net revenues
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    47.0
    
    
    
    46.8Gross profit
    
    
    53.0
    
    
    
    53.2Operating expenses:Fulfillment
    
    
    13.6
    
    
    
    16.0Marketing
    
    
    27.5
    
    
    
    23.4General and administrative
    
    
    19.2
    
    
    
    18.2Total operating expenses
    
    
    60.3
    
    
    
    57.6Loss from operations
    
    
    (7.3
    )
    
    
    (4.4
    )Interest income
    
    
    0.5
    
    
    
    0.3Interest expense
    
    
    (0.2
    )
    
    
    (0.4
    )Net loss
    
    
    (7.0
    )%
    
    
    (4.5
    )%
 Net Revenues
   Cost of Sales
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Operating Expenses
 Fulfillment.
  Marketing.
  General and Administrative.
  Liquidity and Capital Resources
  Cash Flows From Operating Activities
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Cash Flows From Investing Activities
 Cash Flows From Financing Activities
 Revolving Credit Facility
  Factors That May Affect Future Results
 You should consider carefully the risks and uncertainties relating to our business including
those described below, together with all of the other information included or incorporated by
reference in this Quarterly Report on Form 10-Q . Additional risks and uncertainties not currently
known to us or that we currently do not deem material could also become important factors that may
harm our business. The trading price of our common stock could decline due to any of these risks
and uncertainties, and you could lose all or part of your investment.
 Our limited operating history makes evaluation of our business difficult.
  We have a history of significant losses. If we do not achieve or sustain profitability, our
financial condition and stock price could suffer.
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Because we experience seasonal fluctuations in our net sales, our quarterly results will fluctuate
and our annual performance will depend largely on results from one quarter.
  Our operating results are volatile and difficult to predict and may adversely affect our stock
price.
  Our computer and communications hardware and software systems are vulnerable to damage and
interruption, which could harm our business.
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If we fail to offer a broad selection of innovative merchandise that consumers find attractive,
our revenues could decline or fail to reach anticipated levels and our stock price could be
harmed.
  Failure to successfully manage or expand our fulfillment and distribution operation would have a
material adverse effect on us.
  If we do not manage our inventory levels successfully, our operating results may be adversely
affected.
  We may have difficulty in product sourcing.
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Our operating results could suffer if we fail to offer or sell sufficient quantities of
proprietary products.
  Our facilities and systems are vulnerable to natural disasters or other catastrophic events.
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We have grown quickly and if we fail to manage our growth, our business will suffer.
  We experience intense competition in the rapidly changing retail gift market.
  
    
    other online retailers, such as Amazon.com, Gifts.com, Shopping.com and eBay
    
    major department stores, such as Macys, Bloomingdales, Neiman Marcus and
their online storefronts
    
    physical and online stores and catalog retailers that sell popular gift
items such as Pottery Barn, Brookstone, The Sharper Image, Tiffanys, Harry
& David, J Crew, and 1-800-Flowers
    
    Internet portals and online service providers and other comparison shopping
sites, such as AOL and Yahoo!
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If we do not successfully expand our website and order processing systems or respond to rapid
technological changes, we could lose customers and our net revenues could decline.
   Delivery of our merchandise could be delayed or disrupted by factors beyond our control, and we
could lose customers as a result.
  We rely on seasonal and temporary employees during periods of peak activity and any failure by
such employees to adequately perform their jobs could adversely affect our operations.
  Increased merchandise returns and a failure to accurately predict merchandise returns could harm
our business.
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If we are unable to successfully manage the costs of our catalog operations or our catalogs fail
to produce sales at satisfactory levels it could adversely affect our business.
  
    
    effective management of costs associated with the production and distribution of our catalog
    
    achievement of adequate response rates to our mailings
    
    displaying a mix of merchandise in our catalog that is attractive to our customers
    
    production of aesthetically appealing catalogs
    
    timely delivery of catalog mailings to our customers
  We are dependent on the success of our advertising and marketing efforts which are costly and may
not achieve desired results.
  If we are unable to provide satisfactory customer service, we could lose customers.
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The loss of our senior management or other key personnel could harm our current and future
operations and prospects.
  If the protection of our trademarks and proprietary rights is inadequate, our brand and reputation
could be impaired and we could lose customers.
   Intellectual property claims against us could be costly and could impair our business.
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We face the risk of inventory shrinkage.
  Poor economic conditions may constrain discretionary consumer spending on retail products such
as ours.
  We may need additional financing and may not be able to raise additional financing on
favorable terms or at all, which could increase our costs, limit our ability to grow and
dilute the ownership interests of existing stockholders.
  If we default on any secured loan, all or a portion of our assets could be subject to
forfeiture.
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We may face product liability claims that are costly and create adverse publicity.
  We may incur significant costs or experience delays in product availability due to regulations
applicable to the sale of food products and live plants, which may hurt our business.
  If we fail to comply with the laws regulating the sale of tobacco products it may have a negative
impact on our reputation and make us vulnerable to liability claims.
  Our charter documents, Delaware law and third-party contractual restrictions may make an
acquisition of us more difficult, even if an acquisition would be beneficial to our stockholders.
   Our success is tied in large part to the continued use of the Internet by a large number of
consumers.
  
    
    actual or perceived lack of privacy protection
    
    actual or perceived lack of security of credit card information
    
    possible disruptions or other damage to the Internet or telecommunications infrastructure
    
    increased governmental regulation and taxation
    
    decreased use of personal computers
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Customers may be unwilling to purchase goods on the Internet.
  The security risks of online commerce, including credit card fraud, may discourage customers from
purchasing goods from us.
   If one or more states successfully assert that we should collect sales or other taxes on the sale
of merchandise purchased from our website, our business could be harmed.
  Existing or future government regulation could harm our business.
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Laws or regulations relating to privacy and data protection may adversely affect the growth of our
Internet business or our marketing efforts.
  We may be subject to liability for the content that we publish.
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Our directors, executive officers and significant stockholders hold a substantial portion of our
stock, which may lead to conflicts with other stockholders over corporate transactions and other
corporate matters.
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Interest Rate Risk
   (In thousands)Cash and cash equivalents
    
    $
    2,172Short-term investments
    
    
    14,471Total
    
    $
    16,643
  Foreign Currency Risk
 
 Item 4. Controls and Procedures
 Disclosure Controls and Procedures
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Changes in Internal Control Over Financial Reporting
 
 PART II.
OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 2. Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities
  Item 5. Other Information
  
 Item 6. Exhibits
 10.53
    
    RedEnvelope, Inc. Form of Indemnification Agreement for Executive Officers and Directors (in
use from August 15, 2005)31.1
    
    Certification of Chief Executive Officer required by Exchange Act Rules 13a-14(a) (Section 302)31.2
    
    Certification of Chief Financial Officer required by Exchange Act Rules 13a-14(a) (Section 302)32.1
    
    Certification required by 18 U.S.C.§1350, as adopted pursuant to §906 of the Sarbanes-Oxley
Act of 200232.2
    
    Certification required by 18 U.S.C.§1350, as adopted pursuant to §906 of the Sarbanes-Oxley
Act of 2002
 II - 1




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SIGNATURES
  REDENVELOPE, INC.By:
    
    /s/ Polly BoePolly BoeChief Financial Officer
  II - 2




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EXHIBIT INDEX
 10.53
    
    RedEnvelope, Inc. Form of Indemnification Agreement for Executive Officers and Directors (in use from August 15, 2005)31.1
    
    Certification of Chief Executive Officer required by Exchange Act Rules 13a-14(a) (Section 302)31.2
    
    Certification of Chief Financial Officer required by Exchange Act Rules 13a-14(a) (Section 302)32.1
    
    Certification required by 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of
200232.2
    
    Certification required by 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of
2002