Red Envelope Files Chapter 11, Finds a Buyer

Less than two weeks after MULTICHANNEL MERCHANT reported that Red Envelope was in talks with two potential buyers, the San Francisco-based gifts cataloger has filed for Chapter 11 bankruptcy protection.

Red Envelope filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court for the Northern District of California on April 17. The court assumed jurisdiction over the assets of the company as of the date of the filing of the bankruptcy petition.

According to the filing, Red Envelope owes $8.76 million to creditors. That includes $708,356.33 to gift box manufacturer Design Packaging of Scottsdale, AZ; $224,338.62 to catalog printer Arandell Corp.; $563,844.29 to Google; and $1.56 million to United Parcel Service.

The company remains in possession of its assets, and continues to manage and operate its business and properties, as debtor-in-possession, subject to the provisions of the Bankruptcy Code and the supervision and orders of the Bankruptcy Court.

Creative Catalogs Corp. has agreed to purchase Red Envelope’s assets and assume some of the company’s liabilities for $5.7 million. Red Envelope has also received a $4.5 million debtor-in-possession credit facility and loan from Creative Catalogs and Granite Creek FlexCap so that the business does not have to shut down during the transition process.

The sale of Red Envelope must be completed by May 30, according to the filing, during which time the company can solicit other bids.

“We intend to use this filing to take the actions necessary to position Red Envelope for future success,” Phil Neri, Red Envelope’s chief financial officer, said in a release. “We want to assure our customers, our employees, our vendors, and our partners that Red Envelope is operating business as usual during this transition.”

The company, which was founded in 1997 as 911 Gifts and changed its name to Red Envelope in 1999, has had its share of ups and downs. After a March 31 regulatory filing — in which it revealed that former CEO John Pound resigned abruptly on March 30, and Wells Fargo Retail Finance had withdrawn its credit line — company officials announced they had inadequate funds to continue operations.

According to New York-based media brokerage services firm ParadyszMatera, Red Envelope had a universe of just under 882,000 names in the fourth quarter, and an average sale of $92.

Creative Catalogs Corp. was the stalking horse bidder in the recent sale of Lillian Vernon, but lost out to Current USA. Lillian Vernon officials were granted permission to hold an auction to gauge buying interest in the company, and Current USA came through with a better offer. Creative Catalogs Corp. reported nearly $43 million in sales for 2007, according to Hoover’s business directory.

Stuart Rose, managing director with Wellesley, MA-based investment firm Tully & Holland, says Creative Catalogs “has certainly been busy,” and sees similarities with Red Envelope. “I assume there are fulfillment and list synergies between the two companies,” he says.

“There is a break-up fee here, so if Creative loses, they still make a small sum,” Rose notes. “If they are successful, it would catapult Creative Catalogs’ volume. The owner there is very astute and would likely make Red Envelope a success.”

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