UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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| (Mark One) | | |
þ | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | | For the fiscal year ended May 31, 2007 |
OR |
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:000-50973
CELEBRATE EXPRESS, INC.
(Exact name of registrant as specified in its charter)
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Washington | | 91-1644428 |
(State or other jurisdiction of
incorporation or organization) | | (I.R.S. Employer
Identification No.) |
11232 — 120th Avenue NE, Kirkland, Washington 98033
(Address of principal executive offices)
Registrant’s telephone number, including area code:
(425) 250-1061
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class | | Name of Each Exchange on Which Registered |
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| Common Stock, $0.001 par value | | The Nasdaq Stock Market, Inc. |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES o NO þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES o NO þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period than the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to thisForm 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b(2) of the Exchange Act.
Large accelerated filer o Accelerated filer o Non-accelerated filer þ
Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). YES o NO þ
The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $52,654,859 as of November 30, 2006, based upon the closing sale price of $12.90 on the Nasdaq Global Market reported for such date. 3,747,151 shares of common stock held by each officer and director and by each person who owns 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
There were 7,959,105 shares of the registrant’s common stock issued and outstanding as of August 1, 2007.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the definitive proxy statement for the 2007 Annual Meeting of Shareholders.
CELEBRATE EXPRESS, INC.
ANNUAL REPORT ONFORM 10-K
FOR THE FISCAL YEAR ENDED MAY 31, 2007
TABLE OF CONTENTS
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PART I
This report contains forward-looking statements that involve many risks and uncertainties. These statements relate to future events and our future performance that are based on current expectations, estimates, forecasts and projections about the industry in which we operate and the beliefs and assumptions of our management. In some cases, you can identify forward-looking statements by terms such as “would,” “could,” “may,” “will,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “targets,” “seek,” or “continue,” the negative of these terms or other variations of such terms. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our business and other characterizations of future events or circumstances, are forward-looking statements. These statements are only predictions based upon assumptions made that are believed to be reasonable at the time, and are subject to risk and uncertainties. Therefore, actual events or results may differ materially and adversely from those expressed in any forward-looking statement. In evaluating these statements, you should specifically consider the risks described under Item 1A “Risk Factors” and elsewhere in this report. These factors may cause our actual results to differ materially from any forward-looking statements. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
Celebrate Express is a leading provider of celebration products serving families with young children, via the Internet and catalogs. We currently operate two brands, Birthday Express and Costume Express, which respectively offer high-quality children’s party products and children’s costumes and accessories. In the beginning of fiscal 2007, we started the process of winding down the operations of our Storybook Heirlooms brand, which offered girls’ special occasion and specialty apparel. This wind down was completed in the fourth quarter of fiscal 2007. Our marketing strategy utilizes our branded website, complemented by our catalogs, to offer products as completely coordinated assortments. We support our customer’s purchasing experience with detailed product information, knowledgeable event planning advice and responsive customer service. Our goal is to help busy parents celebrate the special moments in their children’s lives.
Our brands were built around the concept of offering a complete accessorized product assortment for the celebration needs of families with young children. We began with our Birthday Express brand, which offers customers over 150 children’s party themes. Each party theme encompasses the products and information necessary to help busy parents create a memorable birthday celebration. Our Costume Express brand offers an assortment of high-quality children’s costumes for Halloween and a variety ofdress-up occasions. Offering multiple brands has allowed us to leverage our product development expertise, sourcing capabilities, inventory management skills and customer database to increase our revenue.
Our business model offers proprietary products, which serve to differentiate us from competitors, and in some cases, provide a margin advantage relative to our other products, as well as third-party products, which allow us to capitalize on market trends. We offer a broad assortment of products in one convenient location, eliminating time-consuming steps required to purchase products at multiple store locations. Our centralized inventory management maximizes product availability and allows us to customize product packages. Additionally, our ability to design, manufacture or directly source many of our products allows us to develop creative proprietary products and quickly react to consumer trends. We believe that the combination of these factors creates a more appealing shopping experience than traditional retail stores.
In fiscal 2007, we generated $85.2 million in net sales, a decrease of 2.0% from $87.0 million in fiscal 2006. This decline in net sales was due primarily to the wind-down of our Storybook Heirlooms brand, which had a net sales decrease of $6.9 million from fiscal 2006 to fiscal 2007. In fiscal 2007, our Birthday Express brand accounted for approximately 82% of our revenue and our website represented our fastest growing sales channel comprising approximately 76% of net sales. In the same period, our net sales per order was $77.87 and more than 45% of our sales came from repeat customers.
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Celebrate Express, Inc. was incorporated in Washington in June 1994 under the name “Birthday Express, Inc.” and changed its name to “Birthday Express.com, Inc.” in July 1999 and then to “Celebrate Express.com, Inc.” in January 2000. We completed our initial public offering in October 2004, and our common stock is listed on the Nasdaq Global Market System under the symbol “BDAY.”
Our Approach
We believe our direct-to-consumer model, utilizing the Internet and catalogs, offers a more compelling shopping experience by providing a comprehensive assortment of products and accessories, supported by helpful information and advice. We also believe our model allows us to offer a more efficient and complete experience, leading to increased customer loyalty and repeat purchases.
In recent years, we have added brands and product categories to augment our business where we feel we can improve a customer’s overall experience and capture an increasing share of their discretionary spending. Key attributes of our approach include:
Broad Merchandising Assortment
We offer a broad mix of proprietary and third-party products. Our proprietary products are internally designed and are either manufactured by us, or manufactured exclusively for us. These proprietary products serve to differentiate us from competitors, create product continuity from year to year and provide an opportunity for increased margins relative to our other products. In addition, we purchase products from third-party suppliers in order to add popular products and styles to our offerings. For example, we believe that our Birthday Express party assortment is larger and more diverse than those typically found in a traditional retail store. We offer more than 150 themes, over 50 of which are exclusive or proprietary designs. Each of our proprietary and third-party themes has an extensive selection of as many as 40 coordinated party products. We have implemented a similar merchandising strategy in our Costume Express brand by offering customers complete proprietary and third-party ensembles. Our Costume Express brand offers a broad assortment of over 500 quality costumes, most of which are available with coordinated accessories. For example, customers shopping for a pirate costume can also purchase an earring, eye patch, three-corner hat, hook, sword, stuffed parrot and telescope.
Comprehensive Product Information
We offer extensive product information and support to provide a more personalized and informed purchasing experience.
Detailed Online Information. Our branded website offers extensive product information and advice. For example, each themed Birthday Express product web page presents a variety of products and suggestions for additional theme-related items such as personalized banners, party activities and favors. Each web page also includes a custom party-planning guide offering theme-specific tips, such as games, recipes, themed cake suggestions, as well as product reviews from customers.
Knowledgeable Online and Phone Sales Staff. We conduct extensive training, monitoring and evaluation to ensure that our customer support team exhibits a consistently high level of product knowledge and professionalism across all our brands. Our customer support team for Birthday Express consists of trained party planners who are available to process orders, help with age-appropriate theme and activity selection and offer party planning ideas and advice. We offer an online chat feature on every product web page that allows customers to access real-time answers from trained planners. Our Costume Express brand is supported by the same customer support representatives who are able to offer customers detailed accessory, sizing, fabric content and care information.
We believe that the information and advice provided by our website and customer support team not only saves our customers time, but also gives them confidence in their purchases and in the planning of their celebration. We also believe that this contributes to increased customer loyalty and repeat purchases over time.
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Convenient Shopping Environment
By offering a broad selection of products, advice and information in one convenient location, we seek to reduce our customers’ shopping time and stress. We believe consumers cannot find as extensive a selection of coordinating products at traditional retailers. We believe that in order to create a celebration with the same level of accessorization, the customer would have to travel to multiple locations and spend a considerable amount of time shopping for items, as well as researching the celebratory event details. In addition to one-stop-shopping, our website and catalogs provide an opportunity for children to browse our products and participate in the selection process, saving parents the inconvenience of taking their children to multiple stores. Our online store is open 24 hours a day, seven days a week.
Product Availability and Customization
We are not limited by the same shelf space and store layout constraints as a traditional retailer, and as a result, we are able to offer a greater variety of products. We manage our inventory from a single centralized location. We believe our centralized inventory enables us to provide a large number of products and related accessories while maintaining higher product in-stock rates, thereby improving a customer’s shopping experience.
For example, in our Birthday Express brand we currently offer over 150 themes, with as many as 40 accessories per theme. We offer our products individually and in themed party packages from “Classic” to “Ultimate,” and we customize each package. We believe that giving customers the freedom to customize orders saves the customer money, reduces waste and contributes to a more satisfying shopping experience.
Rapid Time to Market
We believe our ability to quickly respond to changing consumer demand with new products, allows us to improve our customers’ overall shopping experience. We carefully analyze our customers’ buying patterns and we use these results to guide our merchandising strategy. Our online sales channel allows us the flexibility to bring products to market rapidly and to continually refine our merchandising assortment based on demand.
For example, in our Birthday Express brand, we can go from concept to launch of a new theme in less than eight weeks or replenish existing paper goods in as little as 48 hours. Our internal design, product development, manufacturing and sourcing capabilities allow us to produce small quantities of new products, test them and, if appropriate, quickly expand the product assortment to better meet the needs of our customers.
Our Growth Strategy
Our goal is to become the leading multi-brand destination for celebration products, merchandised as complete solutions, serving families with young children. Key elements of our strategy include:
Build Brand Awareness and Expand Our Customer Base
We plan to continue to use a variety of online and print marketing strategies to target families with young children. We drive traffic to our website and customer support center primarily through the use of catalogs, outbound email, search marketing and web-based affiliate programs. By increasing consumer awareness, we are making our branded website a popular destination on the Internet. We also believe that word of mouth advertising is an important source of new customer acquisition and that many of our customers were introduced to our brands while attending celebrations featuring our products. Our direct marketing model utilizing our website and branded catalogs allows us to cost-effectively build our brand awareness and expand our customer database. In our fiscal year ended May 31, 2007, we added approximately 574,000 new customers to our database, an increase of 3% over the 560,000 new customers added during our fiscal year ended May 31, 2006. As of May 31, 2007, our customer database totaled over 3.4 million customers.
Continue to Add New Brands
We continuously evaluate the potential to develop or acquire new brands in attractive product categories in an effort to better serve our customers. During fiscal 2004, we added the Costume Express brand via internal
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development. The addition of this brand has allowed us to use our customer database to generate sales and increase order frequency. For our fiscal year ended May 31, 2007, our Costume Express brand accounted for approximately 16% of our net sales.
Increase Sales Per Customer
We plan to increase our sales per customer by increasing the frequency of purchase. We believe establishing a long-term relationship with our customer is key to driving frequent purchases. By offering new brands, such as Costume Express, we have increased the number of occasions for which our customers can purchase our products. We also employ a number of strategies focused on net sales per order, including offering an expanded assortment of products and accessories.
Expand Our Product Offerings
We plan to continue to expand our proprietary and third-party offerings within each of our brands. Our product design team is continually creating and sourcing new themes and products to respond to changes in customer tastes. The online nature of our business allows us to cost-efficiently add new products to our overall assortment.
Our Brands and Product Offerings
We offer our celebration products through the following brands:
Birthday Express
We launched our Birthday Express brand to provide children’s party solutions utilizing a catalog in June 1994 and a website in April 1996. We currently offer over 150 birthday party themes that include a mix of third-party and proprietary products. Our third-party properties include popular themes such as Disney Princesses, Cars and Thomas the Tank Engine. Our proprietary themes are based on either licenses, such as The DOG, Tony Hawk and LEGO, or internally developed children’s themes such as fire trucks, construction equipment, and horses.
Within each theme we offer as many as 40 high-quality, theme-coordinated party products. In addition to the usual paper products for parties, such as plates, cups, napkins, tablecloths and invitations, we provide a broad assortment of proprietary accessories such as piñatas, party hats, activity kits and crafts, costumes, banners and distinctive favor-filled boxes. Our products can be bought individually or in cost-saving “Basic,” “Deluxe” and “Ultimate” packages ranging in price from approximately $21 to $200.
Costume Express
We tested Costume Express as a separate brand through a website and catalog in Fall 2003 and based on its performance, we rolled out this brand in Fall 2004. Costume Express grew organically out of our costume offerings in our Birthday Express and Storybook Heirlooms brands and now includes over 500 costumes for Halloween and other year-rounddress-up occasions. We also offer a variety of add-on accessories that enhance the total costume and allow the customer to choose the completeness of the look. While we carry third-party costumes such as Harry Potter, Pirates of the Caribbean and Spiderman to capture current trends, we also generate roughly 35% of our revenues in Costume Express from our own proprietary designs. Costumes with timeless, broad appeal such as princesses, divas, hippies, witches and mermaids, provide us with a stable product assortment that we can market year after year. Our proprietary costumes use high-quality fabric, design and construction, which distinguishes us from mass merchandisers. Our costumes range in price from approximately $20 for a basic costume to more than $150 for a completely accessorized costume.
Storybook Heirlooms
We acquired the Storybook Heirlooms brand in April 2001. Due to various challenges with the brand and the girls’ apparel market, we decided to begin an orderly wind-down of our Storybook brand at the beginning of fiscal 2007. The Company continued to operate the brand in fiscal 2007 through sale efforts to sell through the existing inventory, and completed the wind down in the fourth quarter of the current fiscal year. We have re-focused Company resources on our core Birthday Express brand and faster-growing Costume Express brand.
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Product Development and Sourcing
Proprietary products are the focus of our merchandising assortment for each of our brands, producing a majority of our corporate revenue. These products allow us to differentiate our offerings from those of our competition and respond quickly to market trends. They also have typically provided us with better margins and often have more longevity than third-party products and themes.
Proprietary products are designed and developed by our in-house staff, including individuals who specialize in graphic art, sculpture, production and sourcing. Additionally, we utilize freelance design resources as needed. Our proprietary products are either manufactured by us or manufactured exclusively for us. We obtain our costumes and non-paper products directly from a diverse network of over 250 manufacturers and distributors throughout North America, Europe and Asia. We believe sourcing our products directly from manufacturers allows us to eliminate traditional supply chain intermediaries and thus more effectively reduce costs, monitor product quality and coordinate selections to match our themed packages. Third-party products are also key to each of our brands because they allow customers to purchase products based on current trends. Our merchandisers gain insight into market trends through their relationships with key suppliers and by traveling to tradeshows to find new products. We are often able to purchase popular products from third-party suppliers at discounts based on our volumes and reorder, as needed, to meet our customers’ demand. In our Birthday Express and Costume Express brands, this strategy allows us to offer current products such as Darth Vader and Dora the Explorer, without incurring the significant financial investment and risk that comes from pursuing such large and visible licenses. In our fiscal year ended May 31, 2007, products supplied by our ten largest suppliers represented 43.0% of our inventory purchases.
Marketing and Customer Acquisition
Our marketing strategy utilizes both online and print marketing programs to acquire and retain customers. Our integrated in-house team of web developers, graphic artists and copywriters make use of our digital studio to design and create our website and catalogs. By designing and creating our marketing materials in-house, we are able to maintain quality control and shorten production lead-times. Our website and catalogs use photographic themes and detailed product descriptions, and prominently feature our most popular products. Our marketing and merchandising departments work together to determine the placement and presentation of merchandise on our website and in our catalogs.
We intend to continue growing our customer base through targeted marketing programs. We continually evaluate our marketing strategies to maximize their effectiveness and return on investment.
Online Marketing and Promotion. We utilize numerous online marketing methods to reach our current and potential customers and generate traffic on our website. The most significant programs include:
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| | • | Email Marketing |
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| | • | Search Marketing |
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| | • | Affiliates Program |
Offline Marketing and Promotion. Our catalogs remain our primary advertising and marketing vehicle. Our branded catalogs showcase our best-selling party products and costumes and help to generate interest in our broader online offerings. We also occasionally market our products through direct marketing insert programs.
Customer Support
Offering a high level of customer support is a key part of our strategy. We provide online information resources along with knowledgeable, highly trained support staff in order to retain and expand our customer base.
Online Customer Support. Our website organizes our products into easy-to-navigate departments. A customer can shop through two convenient methods: traditional online shopping or via an electronic order form which allows a customer to order specific products that they may have discovered while browsing through our catalog. We offer online help through our “live chat” function on every web page, so customers can easily receive immediate interactive assistance from our trained customer support representatives. Our shopping cart features an
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easy two-step checkout process. Online support continues after an order is placed, with an email confirmation sent within minutes, and shipment confirmation that enables customers to track their order status.
Customer Support Center. Our customer support staff receives extensive training across each brand’s product offering upon joining the organization, followed by monthly hands-on training. This knowledge base allows them to work confidently with the customer to build a complete party package or accessorized outfit. We regularly monitor calls to ensure consistent service levels, and our mentoring program is designed to improve sales skills. We continue to invest in training and technology to ensure that our customer support staff has the necessary tools and knowledge to provide a positive customer shopping experience. Call center staffing is managed with the help of workforce software that allows us to answer over 75% of customer calls on the first ring. When we receive unexpectedly high call volume, customers holding longer than one minute are offered an automatic call-back option in which the system accurately quotes an estimated number of minutes until the return phone call, holds the customer’s place in line and serves the return call to the next available customer support representative. We have also implemented an incoming call recognition system to automatically populate customer information onto the order entry screen, which saves time and increases order accuracy.
Each customer support staff member has real-time access to extensive product information via our internal customer support website. This serves to increase efficiency and improve the customer shopping experience. Our customer support representatives are available for online and phone support weekdays from 9:00 a.m. to 9:00 p.m., and weekends from 9:00 a.m. to 9:00 p.m., Eastern time.
Fulfillment and Shipping
We believe that order fulfillment procedures, distribution center location and customized software to manage the pick, pack and ship order process are key elements of our strategy. In order to improve our inventory turnover and reduce overhead, we consolidated our fulfillment operations into our Greensboro, North Carolina fulfillment and distribution center in July 2003. Our customized fulfillment software enables us to pick, pack and ship orders in packages and sets, which under our Birthday Express brand involves an average of 14 picks consisting of over 100 individual components. We are now utilizing pick-to-light technology to pick the Birthday Express orders, and intend to make additional investments to further automate and enhance functionality in our replenishment and packaging operations. We experienced difficulties in our distribution center and incurred higher than anticipated costs related to the transition to the pick-to-light technology in fiscal 2006. The additional costs were primarily increases in labor, overtime and temporary labor costs incurred to ship customer orders. By the end of fiscal 2007, we had corrected the significant issues with the pick-to-light transition and started to see our costs improve from the prior year. Our distribution center is located close to key third-party shipping distribution hubs. This has enabled us to lower our shipping costs and provide faster delivery time to customers. We offer our customers overnight,two-day,three-day and ground delivery and utilize third-party shippers including United Parcel Service of America, Inc., United States Postal Service and Federal Express Corporation.
Technology Systems
Our order processing, fulfillment, customer support, inventory, merchandising and financial reporting systems utilize a combination of proprietary and licensed software. We concentrate our software development efforts on creating and enhancing the features and functionality of our website and order processing and fulfillment systems to deliver a high-quality customer experience.
Our website includes Endeca search technology, customized web pages and several customer shopping cart and checkout alternatives. Our website uses secure encryption technology to send, receive and store customer information, including credit card information. We utilize licensed software and internally developed customer support enhancement features to manage our ordering processes.
Our website is available 24 hours a day, seven days a week with minimal downtime required for maintenance. Our website is maintained in our secure data center in Kirkland, Washington. Our data center is also equipped with redundant network connections, emergency power backup systems and firewall software. We utilize tape backup systems for all our servers and software. We currently store our customer database on concurrently running servers.
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Competition
We operate in highly competitive markets including party goods and children’s costumes. Our primary competition comes from traditional retailers that offer a variety of products in the party products and apparel spaces. Competitors can enter our market with little difficulty and can launch new websites or catalogs at relatively low cost.
We believe our primary competition in party goods and costumes is from mass merchandisers such as Target and Wal-Mart, party goods superstores such as Party City and Party America, and online retailers such as Oriental Trading and Buy Costumes. We also compete with a variety of other companies including: traditional card and gift specialty retailers; supermarkets and drugstores; and catalog retailers of novelty items.
We believe the principal competitive factors in our markets are brand recognition, product selection, availability and quality, convenience, customer support and price as well as accurate and timely order fulfillment and delivery. Many of our current and potential competitors may have the ability to devote substantially more resources to marketing, customer support, product development and order fulfillment operations than we can. Some of our suppliers also may choose to compete directly with us and may in the future not supply product to us. In addition, larger and more well-financed entities may acquire, invest in or form joint ventures with our competitors. Some of our competitors may be able to secure products from suppliers on more favorable terms, fulfill orders more efficiently and adopt more aggressive pricing policies than we can.
Intellectual Property
We regard our copyrights, service marks, trademarks, trade secrets and similar intellectual property as critical to our success. We rely on trademark and copyright laws, trade secret protection and confidentiality or license agreements with our employees, customers, partners and others to protect our proprietary rights. Birthday Express and BirthdayExpress.com are registered with the United States Patent and Trademark office, and we have filed federal trademark applications for Costume Express and Celebrate Express. Our outstanding trademark applications may not be allowed. Even if these applications are allowed, they may not provide us a competitive advantage. Furthermore, the relationship between regulations governing domain names and laws protecting trademarks and similar proprietary rights is unclear. Therefore, we may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon or otherwise decrease the value of our trademarks and other proprietary rights.
Third parties have asserted, and may in the future assert, that our business or brands, or the products we make or use infringe upon their rights. We believe that our product and service offerings do not infringe upon the intellectual property rights of any third party. However, we cannot assure you that we will prevail in any intellectual property dispute.
We also rely on technologies and designs developed and licensed from third parties. These licenses may not continue to be available to us on commercially reasonable terms in the future. Our design licenses, which include licensed trademarks and copyrights, are limited in scope, generally have two- or three-year terms and do not provide automatic renewal rights. Moreover, most of these licenses may be terminated immediately if we breach their terms. The loss of existing technology licenses could harm the performance of our existing services until equivalent technology can be identified, obtained and integrated. Failure to obtain new technology licenses may result in delays or reductions in the introduction of new features, functions or services, which could harm our business. Further, third parties may claim infringement by us with respect to our use of current or future technologies, whether developed by us or licensed from third parties. Although there are currently no material pending claims of infringement against us and we are not aware of any material claims that may be brought against us, third parties may in the future claim that the sale of one or more of our product offerings infringes their intellectual property rights. We expect that the continued growth of the Internet will result in an increasing number of infringement claims as legal standards related to our market continue to evolve. Any such claim, with or without merit, could be time consuming, result in costly litigation, cause service upgrade delays, cause us to discontinue the availability of a particular product offering or discontinue use of a particular technology, require us to pay damages or enter into royalty or licensing agreements. Such royalty or licensing agreements might not be available on terms acceptable to
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us or at all. As a result, any such claim of infringement against us could have a material adverse effect on our business, operating results and financial condition.
Government Regulation
We are not currently subject to direct federal, state or local regulation other than regulations applicable to businesses generally or directly applicable to retailing or online commerce. However, as the Internet becomes increasingly popular, it is possible that a number of laws and regulations may be adopted with respect to the Internet. These laws may cover issues such as user privacy, freedom of expression, pricing, content and quality of products and services, taxation, advertising, intellectual property rights and information security.
Further, the growth and development of online commerce may prompt calls for more stringent consumer protection laws, both in the U.S. and abroad. Regulations imposed by the Federal Trade Commission, or FTC, may adversely affect the growth of our business or our marketing efforts. The FTC has adopted regulations regarding the collection, maintenance, dissemination and use of personal identifying information obtained from individuals when accessing websites. These regulations include requirements that we establish procedures to disclose and notify users of privacy and security policies, obtain consent from users for collection and use of information and provide users with the ability to access, correct and delete personal information stored by us. They also contain specific parental consent provisions with respect to collecting information from children. These regulations also include enforcement and redress provisions. In addition, the FTC has conducted investigations into the privacy practices of companies that collect information on the Internet. We may become subject to the FTC’s regulatory and enforcement efforts with respect to current regulations or future regulations, or those of other governmental bodies, which may adversely affect our ability to collect demographic and personal information from users and our ability to email users, which could adversely affect our marketing efforts. We also may be subject to regulation not specifically related to the Internet, including laws affecting direct marketers and advertisers. The adoption of or modification of laws applicable to Internet advertising, marketing or data collection could affect our ability to market our products, decrease the demand for our products, increase our costs or otherwise adversely affect our business.
We are not certain how our business may be affected by the application of existing laws governing issues such as property ownership, copyrights, encryption and other intellectual property issues, taxation, libel, obscenity, qualification to do business and export or import matters. Most of these laws were adopted prior to the advent of the Internet. As a result, they do not contemplate or address the unique issues of the Internet and related technologies. Changes in laws intended to address these issues could create uncertainty for those conducting online commerce. This uncertainty could reduce demand for our products and services or increase the cost of doing business as a result of litigation costs or increased fulfillment costs.
In addition, because our products and services are available over the Internet in multiple states, certain states may claim that we are required to qualify to do business and collect sales tax from our customers located in those states. Currently, we are qualified to do business only in Washington and North Carolina. Our failure to qualify to do business in a jurisdiction where we are required to do so could subject us to taxes and penalties. It could also hamper our ability to enforce contracts in these jurisdictions. Additionally, we do not currently collect or have imposed upon us sales, use or other taxes related to the products we sell, except for certain corporate-level taxes and sales taxes with respect to purchases by customers located in the states of North Carolina and Washington. However, one or more states may seek to impose sales, use and other tax collection obligations on us in the future. A successful assertion by one or more states that we should be collecting sales, use or other taxes on the sale of our products could result in substantial tax liabilities and penalties in connection with past sales. The application of laws or regulations from jurisdictions whose laws do not currently apply to our business could harm our business and results of operations.
Employees
As of May 31, 2007, we had 332 full and part-time employees, including 108 in customer support, 38 in marketing and merchandising, 15 in technology and information systems, 155 in distribution and manufacturing and 16 in administration. None of our employees are represented by a labor union. We have not experienced any work stoppages and consider our employee relations to be good.
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Factors That May Affect Future Operating Results
You should carefully consider the risks described below together with all of the other information included in this report. If any of the following risks actually occurs, our business, financial condition or results of operations could suffer. In that case, the trading price of our common stock could decline and you may lose all or part of your investment.
Failure to successfully manage our fulfillment and distribution operations could cause us to incur increased costs or lose customers.
Our fulfillment and distribution operations are located in Greensboro, North Carolina. These operations are critical to the cost-effective and efficient fulfillment and shipment of customer orders. We are making modifications to our distribution center to accommodate more streamlined distribution procedures. We have incurred higher than anticipated costs in implementing these procedures, as well as higher fulfillment costs related to our transition to a more automated order picking process. As a result, fulfillment costs were 13.5% of net sales in fiscal 2007 and 13.4% of net sales in fiscal 2006. These increased costs contributed significantly to our net losses in the first and third quarters of fiscal 2007, and in the third and fourth quarters of fiscal 2006. We have also observed some erosion in the repeat buying rates of our customers, which we attribute partially to the distribution center problems we have experienced over the past year. If we are unable to successfully manage our fulfillment operations, including further process improvements planned in fiscal 2008, we may experience higher than anticipated costs, hurt our reputation and discourage repeat sales.
We have incurred net losses in recent quarters and may not be able to return to or sustain profitability in the future.
In the three months periods ended May 31, 2007, February 28, 2007, August 31, 2006, May 31, 2006 and February 28, 2006 we had net losses of $62,000, $137,000, $326,000, $324,000 and $398,000, respectively. Though we were profitable in the twelve-month period ended May 31, 2007, we have had a history of losses. We may incur losses again in future fiscal years, especially if we introduce new brands or products, make investments in our systems or infrastructure, or continue to have difficulties in our distribution center. We expect our operating expenses to increase in the future, as we, among other things:
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| | • | expand into new product categories; |
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| | • | continue with our marketing efforts to build our brand names; |
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| | • | expand our customer base; |
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| | • | upgrade our operational and financial systems, procedures and controls; |
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| | • | invest in and upgrade our distribution center; and |
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| | • | retain existing personnel and hire additional personnel, including senior management. |
We may not be able to generate the required sales from our current or new product categories or reduce fulfillment and other operating expenses sufficiently to sustain or increase profitability. If we have a shortfall in sales without a corresponding reduction to our expenses, our operating results will suffer. It is possible that results of operations may be below the expectations of public market analysts and investors, which could cause the trading price of our common stock to fall.
If we do not successfully expand sales into other product categories beyond party goods, we may not be able to achieve our desired revenue growth.
We were incorporated and began selling party products through our direct marketing catalog in June 1994 and on our www.BirthdayExpress.com website in April 1996. In September 2003, we launched our www.Costumeexpress.com website and catalog for Costume Express, a provider of children’s and family costumes. We have historically derived more than 75% of our annual revenues from the sale of party products and accessories to families with young children
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under our Birthday Express brand. In order to achieve the desired growth in our sales and business, we will need to expand into new product categories. Challenges that may affect our ability to expand into new product categories include our ability to:
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| | • | improve the efficiency of our distribution center; |
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| | • | successfully design, produce and market new products; |
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| | • | identify and introduce new product categories; |
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| | • | maintain our gross margins with respect to new product categories; |
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| | • | provide a satisfactory mix of merchandise that is responsive to the needs of our customers; |
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| | • | broaden consumer awareness of our existing and future brands; |
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| | • | manage our selling, marketing and fulfillment costs; and |
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| | • | manage our dual-channel direct marketing model. |
Furthermore, we have not demonstrated the ability to expand into other product categories through acquisitions. In April 2001, we acquired certain assets of Storybook Inc., a direct marketer of girls’ specialty and special occasion apparel. In February 2002, we re-launched the Storybook Heirlooms brand and the website www.Storybook.com. Revenue growth from the Storybook Heirlooms brand, however, did not meet management expectations, which was a significant factor in our decision in June 2006 to wind-down the brand.
In addition, we may experience a higher degree of seasonality in our business as we expand our brands or expand into new brands or product categories that have seasonal significance. If we are unsuccessful in addressing these risks and uncertainties, our business, financial condition and results of operations may be harmed.
The loss of our senior management or other key personnel could harm our current and future operations and prospects.
Our performance is substantially dependent on the services of our senior management and other key personnel, particularly, Kevin Green, our president and chief executive officer and Darin White, our vice president finance. Several of our former officers terminated their employment with Celebrate Express in the recent past. These departures had an adverse impact on our operations and financial results. In fiscal 2007 we hired a vice president of merchandising, vice president of marketing, vice president of operations and vice president of information technology. However, we cannot assure you that these new senior executives will successfully integrate with the company or that the prior or continuing absence of senior management will not adversely impact our business, financial condition and results of operations.
Our performance also depends on our ability to retain and motivate our officers and key employees. We do not have employment agreements with our senior executives or other key personnel except Messrs. Green and White. The loss of the services of Messrs. Green or White or any of our other senior executives or key employees for any reason could harm our business, financial condition and operating results. Our future success also depends on our ability to identify, attract, hire, train, retain, and motivate senior management and other technical, managerial, editorial, merchandising, marketing, and customer support personnel. Competition for such personnel is intense and we cannot assure you that we will be able to successfully attract, assimilate or retain sufficiently qualified personnel.
We must compete with other party goods and costume retailers and mass merchandisers on the selection, quality and price of our products, and failure to do so successfully could negatively affect our stock price.
In order to meet our strategic goals, we must successfully offer, on a continuous basis, a broad selection of appealing products to families with young children. To successfully compete against other party goods retailers, costume retailers and mass merchandisers, our product offerings must be affordable, high-quality, innovative and attractive to a wide range of consumers whose preferences may change from time to time. We cannot predict with certainty that we will be successful in offering products that meet these requirements. If consumers do not find our products attractive or our products otherwise become less popular with consumers, we may see increased
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merchandise returns, inventory write-downs and increased costs. Any shortcomings in our merchandise strategy could adversely affect our operating results and cash flows.
Children’s tastes change and are often difficult to predict, and any failure by us to correctly identify and react appropriately to these changing preferences could hurt our sales and gross margins and render a portion of our inventory obsolete.
Our failure to anticipate, identify or react appropriately to changes in consumer demand could lead to excess inventories and significant markdowns or a shortage of products and lost sales. Our strategy, relations with our customers and margins are dependent, in part, on our identification and regular introduction of new designs that are appealing to our customers, especially children. We cannot assure you that we will be able to identify, obtain or license popular third-party designs or that our design personnel will be able to timely identify and introduce appealing designs in sufficient volume to support our strategy and operations.
We must also anticipate changes in the tastes and preferences of consumers in order to compete for their business successfully. In particular, our ability to anticipate changes in the tastes and preferences of children, which change often and quickly, is crucial to our success, and we could misinterpret or fail to identify trends on a timely basis. Further, product orders must be placed with suppliers before we receive orders from our customers, and the demand for specific products can change between the time the products are ordered by us and the date we receive them. If we underestimate consumer demand, we may disappoint customers and lose potential sales to our competitors. If we overestimate consumer acceptance of our products, we may be required to take significant inventory markdowns or sell our products at discounted prices, which could reduce our sales and gross margins.
If we fail to promote and maintain our brands effectively, we may not be able to compete successfully with better-known competitors.
Building and maintaining recognition of our brands by families with young children is critical to expanding our customer base and competing successfully against other party goods retailers and mass merchandisers with greater brand recognition. In order to continue building consumer recognition of our brands, we will need to increase our financial commitment to creating and maintaining brand awareness in a manner targeted at families with young children. We cannot be certain that our marketing efforts will attract new customers, enable us to retain existing customers, or encourage repeat purchases. If these efforts are not successful, our sales may not grow to desired levels, or could even decline.
If we do not successfully maintain and expand our customer and prospect databases our sales volume could suffer and our marketing costs could increase.
We depend on our proprietary customer and prospect databases to facilitate repeat sales and attract new customers. If we fail to keep these databases current, or if the information in these databases is damaged or destroyed, our sales could stagnate or even decline. If we do not expand our databases of customers and prospects, or if we fail to enhance and refine our techniques for segmenting this information to maximize its usefulness, our sales volume could suffer and our marketing costs could increase. In addition, if federal or state governments enact privacy legislation resulting in the increased regulation of mailing lists, we could experience increased costs in complying with new regulations concerning the solicitation of consents or be unable to achieve the desired database and sales volume growth.
Our operating results could suffer if we are unable to successfully manage the costs of our catalog operations or if our catalogs fail to produce sales at satisfactory levels.
Our catalogs have been an important tool for the acquisition and retention of customers. We believe that the success of our catalogs as a cost-effective marketing tool depends on the following factors:
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| | • | effective management of costs associated with the production and distribution of our catalogs; |
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| | • | achievement of adequate response rates to our mailings; |
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| | • | displaying a mix of merchandise in our catalogs that is attractive to our customers; and |
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| | • | timely delivery of catalog mailings to our customers. |
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Catalog production and mailings entail substantial paper, printing, postage and labor costs. Increases in the costs of producing and distributing our catalogs, including increases in postage rates, or paper, photography or printing costs, may reduce the margin on sales derived from our catalogs. As we incur nearly all of the costs associated with our catalogs prior to mailing, we are unable to adjust the costs incurred in connection with a particular mailing to reflect the actual performance of the catalog. In addition, response rates to our mailings and, as a result, sales generated by each mailing are affected by factors such as consumer preferences, economic conditions, the timing and mix of our catalog mailings, the timely delivery of these mailings by the postal system, and changes in our merchandise assortment, some of which are outside of our control. A significant increase in the costs associated with producing or distributing our catalogs, or failure of our catalogs to produce sales at satisfactory levels, could have a negative effect on our operating results.
Increased product returns, or a failure by us to accurately predict the level of product returns, could harm our business.
As part of our customer support commitment, we maintain a product return policy that allows recipients to return most items received from us with which they are dissatisfied. We make allowances for product returns in our financial statements based on historical return rates. We cannot assure you that actual product returns will not significantly exceed our allowances for returns. In addition, because our allowances are based on historical return rates, we cannot assure you that the introduction of new merchandise within existing or new product categories, increased sales over the Internet, changes in the habits of our customers or other factors will not cause actual returns to exceed return allowances, perhaps significantly. Any increase in product returns above our allowances could have a negative impact on our financial results and may, in turn, cause our stock price to decline.
We may not be able to compete successfully against current and future competitors.
We operate in several competitive markets including party goods and children’s and family costumes. Our primary competition comes from traditional retailers that offer a variety of products in the party goods and children’s and family costume markets. We believe our primary competition in party goods and costumes is from mass merchandisers such as Target and Wal-Mart, and party goods superstores such as Party City and Party America. We also compete in these markets with a variety of other companies including: online retailers of party goods; online retailers of costumes; traditional card and gift specialty retailers; supermarkets and drugstores; and catalog retailers of novelty items.
Competitors can enter our market with little difficulty and can launch new websites or catalogs at a relatively low cost. Many of these current and potential competitors may have the ability to devote substantially more resources to marketing, customer support, product development and order fulfillment operations than we can. Some of our suppliers also may choose to compete with us directly and may in the future choose not to supply products to us. In addition, larger or more well-financed entities have acquired and may in the future acquire, invest in or form joint ventures with our competitors. Some of our competitors may be able to secure products from suppliers on more favorable terms, fulfill orders more efficiently or adopt more aggressive pricing than we can. If we are unable to compete effectively in our markets, our business, financial condition and operating results may suffer.
We depend on search engines to attract customers to our website, and losing these customers would adversely affect our revenues and financial results.
Many consumers access our website by clicking through search results displayed by Internet search engines. Internet search engines typically provide two types of search results, algorithmic listings and purchased listings. Algorithmic listings cannot be purchased, and instead are determined and displayed solely by a set of formulas utilized by the search engine. Purchased listings can be bought by advertisers in order to attract users to their websites. We rely on both algorithmic and purchased listings to attract and direct consumers to our website. Search engines revise their algorithms from time to time in an attempt to optimize their search results. If one or more of the search engines on which we rely for algorithmic listings were to modify its algorithms, resulting in fewer consumers clicking through to our website, we would need to increase our marketing expenditures, which would adversely affect our financial results. In addition, the rates for purchased listings have significantly increased. If one or more of the search engines on which we rely for purchased listings modifies or terminates its relationship with us or if the
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rates for purchased listings continues to rise, our online marketing expenses as a percentage of revenue could rise, we could lose customers, we could be forced to look for other advertising avenues and traffic to our website could decrease.
Because we do not have long-term contracts for third-party products, we may not have continued access to popular products.
Our business depends significantly on the use of third-party proprietary products and our future success is contingent upon the continued availability of these products. We do not have long-term arrangements with any vendor or distributor that would guarantee the availability of third-party proprietary products and, as a result, we do not have a predictable or guaranteed supply of these products. We cannot assure you we will have access to any third-party products in sufficient quantities. If we are unable to provide our customers with continued access to popular or exclusive third-party products, our sales could decline.
If we are unable to maintain or acquire licenses to intellectual property, we may have fewer proprietary products and our sales may decline.
Many of our proprietary products are based on or incorporate intellectual property and other character or story rights licensed from third parties. These license agreements are limited in scope, typically have a two- or three-year term and lack renewal rights. We may not be able to renew key licenses when they expire or include new products in existing licenses. Moreover, most of these licenses may be terminated immediately if we breach their terms. If we are unable to maintain these licenses and obtain additional licenses with significant commercial value, or maintain them at reasonable costs, we will be unable to increase our revenue in the future unless we offset the loss of the products that depend on these licenses with an increase in sales of our independently created proprietary products.
Because we do not have long-term contracts with our suppliers, we may not have continued access to necessary materials and our sales may suffer.
Our financial performance depends on our ability to purchase our products in sufficient quantities at competitive prices. We purchase our products from over 250 foreign and domestic manufacturers and distributors. We have no long-term purchase contracts with any of these suppliers, and therefore, have no contractual assurances of continued supply, access to products or favorable pricing. Any vendor could increase prices or discontinue selling to us at any time. The lack of long-term contracts also exposes us to increased risks associated with changes in local economic conditions, trade issues and foreign currency fluctuations. In the year ended May 31, 2007, products supplied by our ten largest suppliers represented approximately 43.0% of inventory purchases, with our largest supplier representing 14.6%. If we are unable to maintain these supplier relationships, our ability to offer high-quality, favorably-priced products to our customers may be impaired, and our sales and gross margins could decline.
Our reliance on smaller or independent vendors and suppliers and manufacturers located abroad exposes us to various risks including disruption in product supply.
Some of our smaller vendors have limited resources, production capacities and operating histories, which means that they may not be able to timely produce sufficient quantities of certain products demanded by our customers. In addition, our relationships with independent foreign suppliers and manufacturers are also subject to a number of risks, including:
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| | • | work stoppages; |
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| | • | transportation delays and interruptions; |
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| | • | political instability; |
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| | • | foreign currency fluctuations; |
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| | • | changing economic conditions; |
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| | • | an increased likelihood of counterfeit, knock-off or gray market goods; |
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| | • | product liability claims; |
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| | • | expropriation, nationalization, imposition of tariffs, import and export controls and other non-tariff barriers, including quotas and restrictions on the transfer of funds; |
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| | • | environmental regulation; and |
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| | • | other changes in governmental policies. |
Because of these factors, we may be subject to liability claims or may not be able to acquire desired products in sufficient quantities on terms acceptable to us. Any inability to acquire suitable products, the loss of one or more key vendors, or the settlement or outcome of a product liability suit could have a negative effect on our sales and operating results. We may not be able to develop relationships with new vendors, and products from alternative sources, if any, may be of lesser quality or more expensive than those we currently purchase. We cannot be certain that such factors will not prevent us from procuring manufactured products in a cost-effective or timely manner.
We may face product liability claims that are costly and create adverse publicity.
If any of the products that we sell causes harm or damages to any of our customers or other individuals, we could be vulnerable to product liability claims. We have in the past recalled, and may in the future recall, products that we sold. Although we maintain insurance against product liability claims, our coverage may be inadequate to cover any liabilities we may incur. We work with experts to test some of our products for safety compliance, but our tests may not identify all potential product defects before products are sold. Even if we successfully defend ourselves against product liability claims, we could be forced to spend a substantial amount of money in litigation expenses, our management could be required to spend valuable time in the defense against these claims, we could be required to remove products from inventory, and we could suffer adverse publicity about the safety and fitness of our products, any of which could harm our business.
Failure of third parties to deliver our products efficiently and in a timely manner could cause us to lose customers.
We rely upon other parties for product shipments to and from our Greensboro, North Carolina fulfillment and distribution center. It is possible that events beyond our control, such as strikes, trucking shortages, the imposition of tariffs, rail disruption, or other disruption, could affect the ability of these parties to deliver inventory items to our facilities or merchandise to our customers. The failure of these parties to deliver goods to or from our facilities could result in delays in fulfillment of customer orders. Because our customer orders are often time-sensitive, delays by our third-party shipment providers could hurt our reputation and our ability to obtain repeat orders.
Fluctuations in commodity prices may increase our operating costs and make our expenses difficult to predict.
We are vulnerable to fluctuations in commodity prices, particularly the price of paper stock. Paper goods comprise a significant portion of our total inventory. In addition, a portion of our marketing expenditures are related to our direct marketing efforts which include our paper catalogs. If the price of paper increases significantly, we may be unable to pass the additional costs on to our customers, which could hurt our profitability. In addition, fluctuations in commodity prices could make it difficult for us to accurately forecast our expenses.
We may consider acquisitions as part of our growth strategy, and failure to adequately evaluate or integrate any acquisitions could harm our business.
We have limited experience in acquiring other businesses. In April 2001, we acquired the assets of Storybook Inc. Integration expenses were higher than anticipated and despite considerable effort and time spent, revenue growth from the Storybook brand did not meet management expectations. In June of 2006, we announced the wind-down of the Storybook brand. We may consider opportunities to acquire other products and businesses that could enhance or complement our current products and services or expand the breadth of our product categories or customer base. Potential and completed acquisitions involve numerous risks, including unanticipated costs associated with the acquisition and risks associated with entering product categories in which we have no or limited prior experience. If we fail to properly evaluate and execute future acquisitions, our management team may be distracted from our day-to-day operations, our business may be disrupted, and our operating results may suffer.
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Our business involves the extensive use of intellectual property, and related claims against us could be costly or force us to abandon popular products.
Third parties have asserted, and may in the future assert, that our business or the products we make or use infringe upon their rights. We cannot predict whether third parties will assert claims of infringement against us, or whether any past or future assertions or prosecutions of infringement will harm our business. If we are forced to defend against any such claims, whether they are with or without merit and even if they are determined in our favor, we may face costly litigation, diversion of the attention of our technical and management personnel and product shipment delays. As a result of any infringement dispute, we may have to develop non-infringing products or enter into royalty or licensing agreements, which may be on unfavorable terms. If there is a successful claim of infringement against us, and we are unable to develop non-infringing products or license the infringed or similar product on a timely basis or at all, we will need to drop the infringed product from our offerings and our sales could suffer.
If the protection of our trademarks and proprietary rights is inadequate, our brands and reputation could be impaired and we could lose customers.
The steps we take to protect our proprietary rights may be inadequate. We regard our copyrights, service marks, trademarks, trade dress, trade secrets and similar intellectual property as critical to our success. We rely on trademark and copyright law, trade secret protection and confidentiality or license agreements with our employees, customers, partners and others to protect our proprietary rights. Birthday Express and BirthdayExpress.com are registered with the United States Patent and Trademark office, and we have filed federal trademark applications for Costume Express and Celebrate Express. We cannot be certain we will be able to obtain registration for our filed trademarks or for trademarks we submit applications for in the future. Effective trademark, service mark, copyright and trade secret protection may not be available in every country in which we will sell our products and services. Furthermore, the relationship between regulations governing domain names and laws protecting trademarks and similar proprietary rights is unclear. Therefore, we may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon or otherwise decrease the value of our trademarks and other proprietary rights and our brands and reputation could be impaired and we could lose customers.
If we cannot maintain and protect our existing domain names or acquire suitable new domain names as needed, we may not be able to successfully build our brands.
We may be unable to acquire or maintain Internet domain names relating to our brands in the United States and other countries in which we may conduct business. As a result, we may be unable to prevent third parties from acquiring and using domain names relating to our brands. Such use could damage our brands and reputation and divert customers away from our website. We currently hold various relevant domain names, including www.BirthdayExpress.com, www.CelebrateExpress.com, and www.CostumeExpress.com. The acquisition and maintenance of domain names generally is regulated by governmental agencies. Governing bodies may establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names, any of which may affect our ability to maintain the domain names we need for our business. If we cannot prevent others from using similar domain names we may be unable to successfully build our brands.
Capacity constraints, systems failures or security breaches could prevent access to our website, which could lower our sales and harm our reputation.
Our service goals of performance, reliability and availability require that we have adequate capacity in our computer systems to cope with the volume of customers on our website. As our operations grow in size and scope, we will need to improve and upgrade our systems and infrastructure to maintain or improve the efficiency of our operations as well as to offer customers enhanced services, capacity, features and functionality. The expansionand/or upgrade of our systems and infrastructure will require us to commit substantial financial, operational and technical resources before the volume of our business increases and with no assurance of a corresponding increase in sales. If we cannot expandand/or upgrade our systems in a timely or efficient manner, we could experience increased costs, disruptions in service, slower response times, lower customer satisfaction and delays in the introduction of new products and services. Any of these problems could impair our reputation, damage our brands and cause our sales to decline.
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Our ability to provide high-quality service depends on the efficient and uninterrupted operation of our computer and communications systems. Our systems and operations are vulnerable to damage or interruption from human error, natural disasters, power loss, telecommunication failures, break-ins, sabotage, computer viruses, design defects, vandalism, denial-of-service attacks and similar events. Our website has experienced system interruptions from time to time and could experience periodic system interruptions in the future. We do not have a formal disaster recovery plan or alternate providers of web hosting services, and a power outage at our data center could mean the temporary loss of the use of our website. Our business interruption insurance may not adequately compensate us for the associated losses. Any system failure or security breach that causes an interruption in service or decreases the responsiveness of our customer support center or website could impair our reputation, damage our brands and cause a decrease in sales.
If we are unable to provide satisfactory telephone-based customer support, we could lose customers.
Our ability to provide satisfactory levels of customer support also depends, to a large degree, on the efficient and uninterrupted operation of our customer support centers. Any material disruption or slowdown in our telephone order processing systems resulting from capacity constraints, labor disputes, telephone or Internet failures, power or service outages, natural disasters or other events could make it difficult or impossible to provide adequate telephone-based customer support. Further, we may be unable to attract and retain an adequate number of competent customer support representatives, which is essential in creating a favorable customer experience. If we are unable to continually provide adequate staffing for our customer support operations, our reputation could be seriously harmed. In addition, we cannot assure you that call volumes will not exceed our present system capacities. If this occurs, we could experience delays in accepting orders, responding to customer inquiries and addressing customer concerns. Also, we may be required to expand our customer support centers in the near future. We cannot assure you that we will be able to find additional suitable facilities on acceptable terms or at all, which could seriously hinder our ability to provide satisfactory levels of customer support. Because our success depends in large part on keeping our customers satisfied, any failure to provide satisfactory levels of customer support would likely impair our reputation and we could lose customers.
Temporary or permanent disruption at our fulfillment facility could prevent timely shipment of customer orders and hurt our sales.
We assemble, package, and ship our orders, and process all product returns, at our Greensboro, North Carolina fulfillment and distribution facility. In the future, we may be unable to fulfill our customers’ orders at this facility in a timely manner, or at all, due to a number of factors, including:
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| | • | a failure to maintain or renew our existing lease agreement; |
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| | • | a power, telecommunications or other systems failure; |
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| | • | an employee strike or other labor stoppage; |
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| | • | terrorist attacks, acts of war or break-ins; |
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| | • | a disruption in the transportation infrastructure including air traffic and roads; or |
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| | • | fire, flood, hurricane or other disaster. |
In the event that we are temporarily unable to timely fulfill our customers’ orders through our Greensboro facility, we will either upgrade the shipping or attempt to re-ship the orders from another source. However, we cannot guarantee that we will be able to fulfill all orders or that we will be able to deliver the affected orders in a timely manner. This could result in increased fulfillment costs or a decrease in sales, as well as the potential loss of repeat orders from affected customers. In addition, if operations at our Greensboro facility become permanently disrupted due to any of the above or other factors, we may not be able to secure a replacement fulfillment and distribution facility on terms acceptable to us or at all. We do not currently maintainback-up power systems at our Greensboro facility, nor do we have a formal disaster recovery plan and our business interruption insurance may be insufficient to compensate us for losses that occur in the event operations at our fulfillment and distribution center are interrupted.
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We may incur significant costs or experience product availability delays in complying with regulations applicable to the sale of our manufactured products.
We use a variety of water-based inks, paper and coatings in the manufacture of our paper party products. We are required to maintain our manufacturing operations in compliance with United States federal, state and local laws and regulations, including but not limited to rules and regulations associated with consumer protection and safety, the Comprehensive Environmental Response, Compensation, and Liability Act, or CERCLA, the Food and Drug Administration and the Occupational Safety and Health Administration, or OSHA. Changes in laws and regulations applicable to our business could significantly increase our costs of goods sold and we may not be able to pass these increases on to our customers. If we fail to comply with current laws and regulations applicable to our business, or to pass annual inspections of our facilities by regulatory bodies, we could be subject to fines and penalties or even interruptions of our operations. In addition, failure to comply with applicable laws and regulations could subject us to the risk of private lawsuits and damages.
If use of the Internet, particularly with respect to online commerce, does not continue to increase as rapidly as we anticipate, our sales may not grow to desired levels.
For the year ended May 31, 2007, our online sales represented approximately 76% of our total sales. Our future sales and profits are substantially dependent upon the continued use of the Internet as an effective medium of business and communication by our customers. Internet use may not continue to develop at historical rates and consumers may not continue to use the Internet and other online services as a medium for commerce. Highly-publicized failures of some online retailers in meeting consumer demands could result in consumer reluctance to adopt the Internet as a means for commerce, and thereby damage our reputation and brands and reduce our revenues and results of operations.
In addition, the Internet may not be accepted as a viable long-term commercial marketplace for a number of reasons, including:
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| | • | actual or perceived lack of security of information or privacy protection; |
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| | • | possible disruptions, computer viruses or other damage to the Internet servers or to users’ computers; and |
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| | • | excessive governmental regulation. |
If the Internet fails to continue growing as a commercial marketplace, our sales may not increase as much as desired by our shareholders, or at all.
Risks related to the Internet, including security and reliability issues, are largely outside our control and may hurt our reputation or sales.
Our online business is subject to numerous risks, many of which are outside our control. In addition to changing consumer preferences and buying trends relating to Internet usage, we are vulnerable to additional risks and uncertainties associated with the Internet. These risks include changes in required technology interfaces, website downtime or slowdowns and other technical failures or human errors, changes in applicable federal and state regulation, security breaches, and consumer privacy concerns. Our failure to respond successfully to these risks and uncertainties might adversely affect the sales through our online business, as well as damage our reputation and increase our selling and marketing and general and administrative expenses. In addition, our success will depend, in large part, upon third parties maintaining the Internet infrastructure to provide a reliable network backbone with the speed, data capacity, security and hardware necessary for reliable Internet access and services. Our business, which relies on a graphically-rich website that requires the transmission of substantial data, is also significantly dependent upon the availability and adoption of broadband Internet access and other high-speed Internet connectivity technologies. Any significant reliability, data capacity or connectivity problems experienced by the Internet or its users could harm our sales and profitability.
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Government regulation of database use in direct marketing and Internet and online commerce is evolving. Unfavorable changes in these regulations could substantially harm our business and results of operations.
We are subject to general business regulations and laws, as well as regulations and laws that specifically govern database use in direct marketing and Internet and online commerce. Existing and future regulations and laws may impede the growth of database direct marketing, Internet or other online services. These regulations and laws may cover taxation, restrictions on imports and exports, customs, tariffs, user privacy, data protection, pricing, content, copyrights, distribution, electronic contracts and other communications, consumer protection, email restrictions, the provision of online payment services, broadband residential Internet access and the characteristics and quality of products and services. It is not clear how existing laws and regulations governing issues such as property ownership, sales and other taxes, libel and personal privacy apply to database direct marketing, the Internet and online commerce. Unfavorable resolution of these issues may slow the growth of database direct marketing, online commerce and, in turn, our business.
Our failure to protect confidential information of our customers and our network against security breaches could damage our reputation and brands and subject us to legal liability.
A significant barrier to online commerce and communications is the secure transmission of confidential information over public networks. Currently, a majority of our sales are billed to our customers’ credit card accounts directly. We rely on encryption and authentication technology licensed from third parties to effect secure transmission of confidential information, including credit card numbers. Advances in computer capabilities, new discoveries in the field of cryptography or other developments may result in a compromise or breach of the technology we use to protect customer transaction data. Any compromise of our security could damage our reputation and brands and expose us to a risk of lost sales, or litigation and possible legal liability. In addition, anyone who is able to circumvent our security measures could misappropriate proprietary information or cause interruptions in our operations. We may need to expend significant resources to protect against security breaches or to address problems caused by breaches.
Our failure to address risks associated with credit card fraud and bad debt could damage our reputation, brands and results of operations.
Under current credit card practices, we are liable for fraudulent credit card transactions because we do not obtain a cardholder’s signature. We do not currently carry insurance against this risk. To date, we have experienced minimal losses from credit card fraud, but we face the risk of significant losses from this type of fraud as our net sales increase. We have also instituted a promotional offer which allows customers to purchase products from us with the associated billing to their credit card occurring on a predetermined date in the future, generally within 90 days of the purchase date. We are currently assuming the credit risk associated with the delayed collection of funds for this customer offer. Losses incurred from fraudulent transactions or bad debt associated with the extension of credit to our customers could impair our results of operations. In addition, any failure to adequately control fraudulent credit card transactions could damage our reputation and brands, and reduce our sales.
Our sales may decrease if we are required to collect taxes on purchases.
We do not collect or have imposed upon us sales, use or other taxes related to the products we sell, except for certain corporate-level taxes and sales taxes with respect to purchases by customers located in the states of North Carolina and Washington. However, one or more states may seek to impose sales, use or other tax collection obligations on us in the future. A successful assertion by one or more states that we should be collecting sales, use or other taxes on the sale of our products could result in substantial tax liabilities and penalties in connection with past sales. In addition, if we are required to collect these taxes we will lose one of our current cost advantages, which may decrease our ability to compete with traditional retailers and substantially harm our sales.
We have based our policies for sales and use tax collection on our interpretation of certain decisions of the U.S. Supreme Court that restrict the imposition of obligations to collect state and local sales and use taxes with respect to sales made through catalogs or over the Internet. However, implementation of the restrictions imposed by
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these Supreme Court decisions is subject to interpretation by state and local taxing authorities. While we believe that these Supreme Court decisions currently restrict state and local taxing authorities outside the states of North Carolina and Washington from requiring us to collect sales and use taxes from purchasers located within their jurisdictions, taxing authorities outside of North Carolina and Washington could disagree with our interpretation of these decisions. Moreover, a number of states, as well as the U.S. Congress, have been considering various initiatives that could limit or supersede the Supreme Court’s position regarding sales and use taxes on Internet sales. If any state or local taxing jurisdiction were to disagree with our interpretation of the Supreme Court’s current position regarding state and local taxation of Internet sales, or if any of these initiatives were to address the Supreme Court’s constitutional concerns and result in a reversal of its current position, we could be required to collect sales and use taxes from purchasers located in states other than North Carolina and Washington. The imposition of additional tax obligations on our business by state and local governments could create significant administration burdens for us, decrease our future sales and harm our cash flow and operating results.
Failure to rapidly respond to technological change could result in our services or systems becoming obsolete.
As the Internet and online commerce industries evolve, we may be required to license emerging technologies useful to our business, enhance our existing services, develop new services and technologies that address the increasingly sophisticated and varied needs of our prospective customers and respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. We may not be able to successfully implement these new services and technologies or adapt our website, telephone and transaction-processing systems to customer requirements or emerging industry standards. Some of our computer systems use antiquated software that is no longer supported by the vendor. If we were to encounter problems with these systems it could be costly and time consuming to correct, and may disrupt operations. If we fail to respond to these issues in a timely manner, we may lose existing customers and be unable to attract sufficient numbers of new customers.
Future sales of our common stock may depress our stock price.
If our shareholders sell substantial amounts of common stock in the public market, or if the market perceives that these sales may occur, the market price of our common stock may decline. We have registered all shares of common stock that we may issue under our employee benefits plans. As a result, these shares can be freely sold in the public market upon issuance, subject to restrictions under the securities laws. The holders of a significant portion of our common stock have rights, subject to some conditions, to require us to file registration statements covering the resale of their shares or to include their shares in registration statements that we may file for ourselves or other shareholders. These registration rights of our shareholders could impair our ability to raise capital by depressing the price at which we could sell our common stock.
Our directors, executive officers and significant shareholders hold a substantial portion of our stock, which may lead to conflicts with other shareholders over corporate transactions and other corporate matters.
Our directors and current beneficial holders of 5% or more of our outstanding common stock own a significant portion of our stock. These individuals, acting together, are able to control or influence significantly all matters requiring shareholder approval, including the election of directors and significant corporate transactions such as mergers or other business combinations. This control may delay, deter or prevent a third-party from acquiring or merging with us and limit the ability of smaller shareholders to influence corporate matters.
We will need to implement additional finance and accounting systems, procedures and controls as we grow our business and organization and to satisfy new reporting requirements.
As a public reporting company, we are required to comply with the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC, including expanded disclosures and accelerated reporting requirements and more complex accounting rules. Compliance with Section 404 of the Sarbanes-Oxley Act of 2002 and other requirements will increase our costs and require additional management time and resources. We may need to continue to implement additional finance and accounting systems, procedures and controls to satisfy new reporting requirements. If our internal controls over financial reporting are determined to be ineffective, investors could lose confidence in the reliability of our internal controls over financial reporting, which could adversely affect our stock price.
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| Item 1B. | Unresolved Staff Comments. |
None.
Our corporate offices and production facility are located in Kirkland, Washington, where we lease an aggregate of approximately 42,000 square feet under a lease that expires in December 2008. In addition, we lease an aggregate of 86,400 square feet in Greensboro, North Carolina for our fulfillment, distribution and additional production facility, under a lease that expires in December 2009, with an option to renew the facility lease for an additional three years.
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| Item 3. | Legal Proceedings. |
We are not aware of any pending legal proceedings (other than routine litigation that is incidental to the business).
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| Item 4. | Submission of Matters to a Vote of Security Holders. |
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended May 31, 2007.
PART II
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| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Market for Registrant’s Common Equity
Our Common Stock is quoted on The Nasdaq Stock Market’s Global Market under the symbol “BDAY.” The closing price of our common stock on August 1, 2007 was $9.93. As of August 1, 2007, we had approximately 112 shareholders based on the number of record holders.
The following table sets forth, for the periods indicated, the high and low sales prices of our common stock, as reported by the Nasdaq Global Market.
| | | | | | | | | |
| | | High | | | Low | |
| |
| Fiscal Year 2007: | | | | | | | | |
| First Quarter | | $ | 13.65 | | | $ | 10.10 | |
| Second Quarter | | $ | 13.25 | | | $ | 12.08 | |
| Third Quarter | | $ | 13.00 | | | $ | 9.25 | |
| Fourth Quarter | | $ | 10.88 | | | $ | 8.16 | |
| Fiscal Year 2006: | | | | | | | | |
| First Quarter | | $ | 15.20 | | | $ | 11.50 | |
| Second Quarter | | $ | 14.50 | | | $ | 12.19 | |
| Third Quarter | | $ | 15.39 | | | $ | 11.00 | |
| Fourth Quarter | | $ | 13.80 | | | $ | 11.43 | |
On March 9, 2007 our Board of Directors declared a special dividend of $1.25 per share of common stock, payable to shareholders of record as of April 12, 2007. The aggregate dividend of $9.9 million was paid on April 26, 2007 from existing cash resources. No cash dividends were declared or paid in fiscal year 2006. The declaration and payment of future dividends remains subject to the discretion of the Board, and will depend on, among other things, the Company’s financial condition, results of operations, capital and cash requirements, future prospects and other factors deemed relevant by the Board. We currently expect to retain future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying any additional cash dividends in the foreseeable future.
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Performance Graph
The following line graph compares, for the period commencing on October 20, 2004, the date our shares began trading, through the last trading day of fiscal 2007, the annual percentage change in our cumulative total shareholder return on our common stock with the Nasdaq U.S. Index and the Nasdaq Retail Trade Index. The graph assumes that $100 in cash was invested in our common stock, the Nasdaq U.S. Index, and the Nasdaq Retail Trade Index on October 20, 2004 (the date our common stock began to trade publicly) and assumes reinvestment of any dividends. The comparisons in the graph are required by the Securities and Exchange Commission and are not intended to forecast or be indicative of possible future performance on our common stock.
Securities Authorized for Issuance Under Equity Compensation Plans
For information concerning securities authorized for issuance under our equity compensation plans see Note 7 of the Notes to Financial Statements included in thisForm 10-K under Item 8.
Use of Proceeds
On October 19, 2004, the Company’s registration statement onForm S-1 (RegistrationNo. 333-117459) was declared effective for the Company’s initial public offering, pursuant to which the Company registered 3,200,000 shares of common stock to be sold by us (2,057,081 shares) and certain of the Company’s shareholders (1,142,919 shares). The stock was offered at $15.50 per share or an aggregate of $31.9 million for the Company and $17.7 million for the selling shareholders. The Company’s common stock commenced trading on October 20, 2004. The offering closed on October 25, 2004, and, as a result, the Company received net proceeds of approximately $29.7 million (after underwriters’ discounts of $2.2 million). In November 2004, the underwriter’s over-allotment option was exercised whereby 480,000 shares of the Company’s common stock were sold at an offering price of $15.50 per share. Of the 480,000 shares sold, 408,570 were sold by the Company and an aggregate of 71,430 shares were sold by selling shareholders. The over-allotment closed on November 2, 2004, and, as a result, the Company received net proceeds of approximately $5.9 million (after underwriters’ discounts of $443,000). The underwriters of the offering were SG Cowen & Co., LLC, CIBC World Markets Corp. and Pacific Crest Securities, Inc. The Company incurred additional, estimated related expenses of approximately $1.5 million, which together with the underwriters’ discount, totaled $4.2 million in estimated expenses related to the offering. Net proceeds after all estimated expenses approximated $34.0 million. None of the Company’s net offering proceeds were paid, directly or indirectly, to: (i) directors or officers of the Company, or their associates; (ii) persons owning ten percent or more of any class of equity securities of the Company; or (iii) affiliates of the Company.
From the effective date of the registration statement through May 31, 2007, the Company has used a portion of the net proceeds from the offering for repayment of the Company’s $5.0 million term loan. On April 26, 2007 approximately $9.9 million was paid to shareholders in the form of a one time special dividend. The remaining proceeds from the offering are invested in commercial paper and money market securities.
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| Item 6. | Selected Financial Data. |
The selected consolidated financial and operating data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this Annual Report onForm 10-K.
The selected statement of operations data for fiscal 2007, 2006, and 2005, and the selected balance sheet data as of May 31, 2007 and 2006 are derived from the audited financial statements, which are included elsewhere in this Annual Report onForm 10-K. The selected statement of operations data for fiscal 2004 and 2003 and the selected balance sheet data as of May 31, 2005, 2004, and 2003 are derived from the audited financial statements which are not included in this Annual Report onForm 10-K.
| | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended May 31, | |
| | | 2007 | | | 2006 | | | 2005 | | | 2004 | | | 2003 | |
| | | (In thousands, except share and per share data) | |
| |
Statement of Operations Data: | | | | | | | | | | | | | | | | | | | | |
| Net sales | | $ | 85,243 | | | $ | 87,016 | | | $ | 69,138 | | | $ | 51,939 | | | $ | 37,811 | |
| Cost of sales | | | 40,821 | | | | 44,244 | | | | 33,987 | | | | 26,574 | | | | 19,483 | |
| | | | | | | | | | | | | | | | | | | | | |
| Gross margin | | | 44,422 | | | | 42,772 | | | | 35,151 | | | | 25,365 | | | | 18,328 | |
| Operating expenses | | | | | | | | | | | | | | | | | | | | |
| Fulfillment | | | 11,501 | | | | 11,617 | | | | 8,039 | | | | 6,627 | | | | 5,371 | |
| Selling and marketing | | | 23,640 | | | | 22,076 | | | | 16,787 | | | | 12,834 | | | | 9,913 | |
| General and administrative | | | 10,715 | | | | 8,476 | | | | 6,482 | | | | 4,636 | | | | 4,112 | |
| Severance and related costs(2) | | | — | | | | 1,179 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | |
| Total operating expenses | | | 45,856 | | | | 43,348 | | | | 31,308 | | | | 24,097 | | | | 19,396 | |
| | | | | | | | | | | | | | | | | | | | | |
| Income (loss) from operations | | | (1,434 | ) | | | (576 | ) | | | 3,843 | | | | 1,268 | | | | (1,068 | ) |
| Other income (expense), net | | | 1,561 | | | | 1,231 | | | | 131 | | | | (788 | ) | | | (521 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) before income taxes | | | 127 | | | | 655 | | | | 3,974 | | | | 480 | | | | (1,589 | ) |
| Income tax benefit (expense)(1) | | | (84 | ) | | | (250 | ) | | | (1,489 | ) | | | 9,013 | | | | — | |
| | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) | | | 43 | | | | 405 | | | | 2,485 | | | | 9,493 | | | | (1,589 | ) |
| Accretion to preferred stock redemption value | | | — | | | | — | | | | (102 | ) | | | (266 | ) | | | (265 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) available for common shareholders | | $ | 43 | | | $ | 405 | | | $ | 2,383 | | | $ | 9,227 | | | $ | (1,854 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) per share: | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.01 | | | $ | 0.05 | | | $ | 0.46 | | | $ | 6.39 | | | $ | (1.34 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Diluted | | $ | 0.01 | | | $ | 0.05 | | | $ | 0.35 | | | $ | 1.85 | | | $ | (1.34 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Cash Dividends Declared Per Share: | | $ | 1.25 | | | | — | | | | — | | | | — | | | | — | |
| | |
| (1) | | In our fiscal year ended May 31, 2004, we recorded a net income tax benefit of $9,013 primarily as a result of the reversal of a valuation allowance on our deferred tax assets. |
| |
| (2) | | In our fiscal year ended May 31, 2006, we recorded severance and related costs of $1,179 related to the termination of certain officers of the corporation in July 2005. |
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| | | | | | | | | | | | | | | | | | | | | |
| | | May 31, | |
| | | 2007 | | | 2006 | | | 2005 | | | 2004 | | | 2003 | |
| | | (In thousands) | |
| |
Balance Sheet Data: | | | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 21,224 | | | $ | 31,327 | | | $ | 30,769 | | | $ | 2,243 | | | $ | 1,672 | |
| Working capital | | | 29,394 | | | | 37,373 | | | | 38,076 | | | | 6,041 | | | | 2,733 | |
| Total assets | | | 48,120 | | | | 57,200 | | | | 53,057 | | | | 20,482 | | | | 8,988 | |
| Long-term debt, less current portion | | | — | | | | — | | | | — | | | | 4,953 | | | | 2,807 | |
| Mandatorily redeemable convertible preferred stock | | | — | | | | — | | | | — | | | | 28,044 | | | | 27,212 | |
| Mandatorily redeemable convertible preferred stock warrants | | | — | | | | — | | | | — | | | | 1,056 | | | | 1,622 | |
| Total shareholders’ equity (deficit) | | | 41,720 | | | | 50,077 | | | | 48,000 | | | | (18,084 | ) | | | (27,515 | ) |
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| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
The following discussion should be read in conjunction with our financial statements and the related notes contained elsewhere in this annual report onForm 10-K. All statements in the following discussion that are not reports of historical information or descriptions of current accounting policy are forward-looking statements. Except as required by law, we undertake no obligation to publicly update any forward-looking statements. Readers are urged to carefully review and consider the various disclosures made by us which attempt to advise interested parties of the factors which affect our business, including without limitation those risk factors set forth under Item 1A of thisForm 10-K, and the audited financial statements and the notes included herein.
Overview
Celebrate Express is a leading provider of celebration products serving families with young children via the Internet and catalogs. We offer a broad assortment of proprietary and third party children’s party products and children’s costumes complemented by a wide variety of accessories. Our centralized inventory management system maximizes product availability and allows us to customize our product assortment to meet specific customer needs. We have designed our business infrastructure to share distribution, customer support, marketing and technology resources across all of our brands, while the predictable demand for our celebration products and the diversity of our brand portfolio have also served to minimize the seasonality of our business. Our goal is to help families celebrate the special moments in their lives.
We were incorporated as Birthday Express, Inc., launched our direct marketing catalog and began offering products for sale in June 1994. In April 1996, we launched our branded website, www.BirthdayExpress.com. Late in 1997, we began the process of bringing production in-house, including the acquisition of production equipment and the expansion of our proprietary designs, and in December 1998, we began producing products in our Kirkland, Washington facility. In January 2000, we opened a fulfillment center in Greensboro, North Carolina to expand our distribution capacity and reduce shipping expenses. In April 2001, we acquired certain assets of Storybook Inc., a direct marketer of young girls’ special occasion apparel, however, in June 2006 we began an orderly wind-down of the operations of this brand, which was completed as of the end of fiscal 2007. In September 2003, we started our Costume Express website and catalog providing Halloween anddress-up clothing for families with young children. In February 2007, we transitioned all of the traffic from our various websites to one centralized, customer facing website at Celebrateexpress.com. We utilize various tabs on this website to highlight our multiple product categories and increase cross selling of our products to our customers and prospects.
We review our operations based on our financial results and various non-financial measures. We focus on several financial factors including net sales per order, gross margin, growth in net sales and the percentage of our sales generated by repeat customers. We plan to market our brands to our customer database to increase sales from repeat customers. We also plan to increase the number of proprietary products that we offer with the goal of maintaining high gross margins over time while differentiating us from our competitors. Among the key non-financial measures upon which we focus in reviewing performance are the frequency of purchase by our customers and the number of new customers added to our database. We believe that expansion of our product and brand offerings will increase the frequency of purchase by our customers and provide an additional opportunity to capture new customers.
To date, we have derived our revenue primarily from the sale of party related products from our Birthday Express website and catalog. For the fiscal year ended May 31, 2007, we generated $85.2 million in net sales, a decrease of 2.0% from $87.0 million in the fiscal year ended May 31, 2006. In fiscal 2007, our Birthday Express brand accounted for approximately 82% of our net sales. Our website represented our fastest growing sales channel comprising approximately 76% of our net sales in fiscal 2007, compared with 69% of net sales in fiscal 2006. In the fiscal year just ended, our net sales per order was $77.87 and more than 45% of our sales came from repeat customers.
Fiscal Year
Our fiscal year ends on May 31. References to fiscal 2007, for example, refer to our fiscal year ended May 31, 2007.
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Results of Operations
The following table sets forth our results of operations expressed as a percentage of net sales:
| | | | | | | | | | | | | |
| | | Fiscal Year Ended May 31, | |
| | | 2007 | | | 2006 | | | 2005 | |
| |
Statement of Operations Data: | | | | | | | | | | | | |
| Net sales | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
| Cost of sales | | | 47.9 | | | | 50.9 | | | | 49.2 | |
| | | | | | | | | | | | | |
| Gross margin | | | 52.1 | | | | 49.1 | | | | 50.8 | |
| Operating expenses | | | | | | | | | | | | |
| Fulfillment | | | 13.5 | | | | 13.3 | | | | 11.6 | |
| Selling and marketing | | | 27.7 | | | | 25.4 | | | | 24.3 | |
| General and administrative | | | 12.6 | | | | 9.7 | | | | 9.4 | |
| Severance and related expenses | | | — | | | | 1.4 | | | | — | |
| | | | | | | | | | | | | |
| Total operating expenses | | | 53.8 | | | | 49.8 | | | | 45.3 | |
| Income from operations | | | (1.7 | ) | | | (0.6 | ) | | | 5.5 | |
| Other income (expense), net | | | 1.8 | | | | 1.4 | | | | 0.2 | |
| | | | | | | | | | | | | |
| Net income (loss) before income taxes | | | 0.1 | | | | 0.8 | | | | 5.7 | |
| Income tax benefit (expense) | | | (0.1 | ) | | | (0.3 | ) | | | (2.1 | ) |
| | | | | | | | | | | | | |
| Net income | | | 0.0 | % | | | 0.5 | % | | | 3.6 | % |
| | | | | | | | | | | | | |
Additional Operating Data
The following table sets forth certain non-financial measures and operating data:
| | | | | | | | | | | | | |
| | | Fiscal Year Ended May 31, | |
| | | 2007 | | | 2006 | | | 2005 | |
| | | (In thousands, except net sales per order data) | |
| |
Additional Operating Data: | | | | | | | | | | | | |
| Total number of customers in our database | | | 3,416 | | | | 2,841 | | | | 2,280 | |
| Percentage of sales from repeat customers | | | 45 | % | | | 46 | % | | | 51 | % |
| Number of orders shipped | | | 1,087 | | | | 1,060 | | | | 851 | |
| Net sales per order | | $ | 77.87 | | | $ | 82.12 | | | $ | 81.27 | |
Comparison of Fiscal Years Ended May 31, 2007 and May 31, 2006
Net Sales
Our net sales are comprised of product sales and shipping revenue. Net sales decreased 2.0% to $85.2 million in fiscal 2007 from $87.0 million in fiscal 2006. The decrease in net sales is due primarily to the wind-down of the Storybook Heirlooms brand. Storybook Heirlooms net sales decreased $6.9 million year-over-year to $2.2 million in fiscal 2007, a decrease of 76%. Birthday Express net sales increased to $69.2 million in fiscal 2007 from $68.4 million in fiscal 2006, an increase of $869,000, or approximately 1%. Costume Express net sales increased to $13.3 million in fiscal 2007 from $9.6 million in fiscal 2006, an increase of $3.7 million or approximately 38% due primarily to an increase in direct marketing expense. During fiscal 2007 total expense for both online and offline marketing efforts was $19.8 million, compared with $18.2 million in fiscal 2006, an increase of 9.0%. The change in net sales in fiscal 2007 over the same period in 2006 reflects an increase of approximately 3% in the number of orders shipped, which grew to approximately 1,087,000 orders in fiscal 2007 from approximately 1,060,000 orders in fiscal 2006. Net sales per order for fiscal 2007 was $77.87, compared with net sales per order of $82.12 for fiscal 2006, a decrease of 5.2%. The decrease in net sales per order was due in part to a decrease in the net sales per order
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for our Storybook Heirlooms brand, which decreased from $100.45 in fiscal 2006 to $77.87 in fiscal 2007 as we wound down the operations of the brand and liquidated the remaining inventory. We added approximately 574,000 new customers to our database during fiscal 2007, compared with approximately 560,000 new customers added in fiscal 2006, an increase of approximately 3%. Revenue from our repeat customers represented approximately 45% of revenue during fiscal 2007 compared with approximately 46% during fiscal 2006.
Gross Margin
Our gross margin consists of net sales less cost of sales. Our cost of sales consists primarily of product costs, costs associated with our in-house production facility, including wages and depreciation, design and production costs for our apparel and costume brands, inbound and outbound shipping costs, and packaging materials for outbound shipments. Gross margin increased 3.9% to $44.4 million in fiscal 2007 from $42.8 million in fiscal 2006. Our gross margin percentage increased to 52.1% of net sales in fiscal 2007 from 49.1% in fiscal 2006. Several factors contributed to this change. Merchandise margins in both the Birthday Express and Costume Express brands increased in fiscal 2007 from fiscal 2006 due to the efforts of our purchasing and merchandising groups. The Company also benefited from a shift in product mix away from the lower margin Storybook Heirlooms brand, which represented only 2.6% of net sales during fiscal 2007, compared with 10.4% of net sales during the prior year. Shipping margins improved from the prior year as we shifted deliveries back toward ground shipments rather than expedited methods. In the prior year the Company had higher order backlogs, causing more shipments to be sent air-freight at the Company’s expense to meet customer delivery expectations. Improvements in distribution center processes enabled the Company to meet or exceed customer expectations using ground delivery methods during fiscal 2007. We also recorded $560,000 of advertising revenue during fiscal 2007 generated from web advertising sources with no corresponding cost of goods sold, while no advertising revenue was recorded during fiscal 2006. Our gross margin includes the cost of shipping packages to our customers. We have seen increases in these outbound shipping costs as a result of increases in fuel surcharges and rates charged by our third party carriers. Further increases in these costs will have an impact on our gross margin. Our gross margin may fluctuate from quarter to quarter due to the mix of products sold, as well as the potential introduction of new brands.
Fulfillment
Our fulfillment expenses consist primarily of labor and other operating costs associated with our customer support center in Kirkland, Washington and our distribution center and customer support operations in Greensboro, North Carolina. Our fulfillment expenses decreased 1.0% to $11.5 million in fiscal 2007 from $11.6 million in fiscal 2006. As a percentage of net sales, these expenses remained relatively consistent at 13.5% in fiscal 2007 and 13.4% in fiscal 2006. In the first two quarters of fiscal 2007, we continued to incur higher than anticipated costs related to the Company’s transition to a more automated picking process that was implemented in fiscal 2006, including increases in labor, overtime and temporary labor costs incurred to ship customer orders. In the last two quarters of fiscal 2007, however, fulfillment costs as a percentage of net sales were lower than in the comparable periods in fiscal 2006 as our operations were stabilized and error rates and on-time shipments returned to historical levels. In April 2007 the Company announced the closure of its customer service and print manufacturing operations in Kirkland, Washington. With that closure now complete, all of the Company’s customer service, distribution and print manufacturing operations are now located in Greensboro, North Carolina. Our distribution costs can fluctuate from quarter to quarter based upon the mix of products sold. Orders from our Birthday Express brand are generally more time intensive in the distribution center due to more items being sold, on average, on each order.
Selling and Marketing
Our selling and marketing expenses consist primarily of advertising costs, wages and related payroll benefits for our internal marketing and merchandising staff. Advertising costs include online marketing efforts, print advertising and other direct marketing strategies. Online advertising costs are generally expensed as incurred. Prepaid direct marketing expenses consist of third-party costs including paper, printing and mailing costs and are capitalized and amortized over their expected period of future benefit, which is generally from 90 to 120 days. Selling and marketing costs increased 7.1% to $23.6 million in fiscal 2007 from $22.1 million in fiscal 2006 due primarily to increases in online advertising and direct marketing circulation costs of $1.6 million. As a percentage of
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net sales, selling and marketing expenses were 27.7% in fiscal 2007, compared with 25.4% in fiscal 2006. The increase in marketing costs as a percentage of net sales is due primarily to reductions in catalog response rates and net sales per order from the prior year. We have experienced increases, and are potentially subject to further increases, in our online paid search costs, paper prices and postage rates. The United States Postal Service announced an increase in postage rates which we anticipate will increase our outbound postage costs for catalog deliveries by approximately 20%. The Company was first impacted by this increase in June 2007.
General and Administrative
Our general and administrative expenses consist primarily of wages and related payroll benefits for our administrative and technology employees. These expenses also include credit card fees, legal and accounting professional fees, insurance, network fees, systems depreciation, bad debt expense, and other general corporate expenses. General and administrative expenses increased $2.1 million to $10.7 million in fiscal 2007 from $8.5 million in fiscal 2006. The change in general and administrative expenses is due primarily to increases in wages and benefits for our administrative and technology employees of $1.1 million, and stock compensation expense due to the adoption of FAS 123R of $948,000. As a percentage of net sales, our general and administrative expenses increased to 12.6% in fiscal 2007 from 9.7% in fiscal 2006. Also included in general and administrative expenses in the current fiscal year is approximately $188,000 associated with the Company’s April 2007 announcement of its plans to consolidate its customer service and print manufacturing operations into its Greensboro, North Carolina facility. These costs include severance costs, expenses related to the transportation of products and equipment to Greensboro, and other related costs. We expect general and administrative expenses to increase in absolute dollars in future periods primarily as a result of the recent hiring of additional executives, costs related to Sarbanes-Oxley compliance and other accounting and legal costs, and the continued recording of stock-based compensation expense under SFAS 123R.
Severance and Related Costs
Severance and related costs incurred during fiscal 2006 relate to employee terminations that took place on July 22, 2005. Included in the $1.2 million severance and related cost balance is approximately $985,000 in cash severance payments and related payroll taxes. The remainder of the balance is composed of legal fees incurred by the company relating to the severance negotiations and the terminated employees’ legal complaint for wrongful termination. The expense related to these terminations was taken in the second quarter of fiscal 2006, at which time we agreed to settlement of all claims including claims of wrongful termination by these former employees. There were no significant severance and related costs in fiscal 2007.
Other Income (Expense), Net
The improvement in other income to $1.6 million in fiscal 2007, compared with other income of $1.2 million in fiscal 2006, is due primarily to increased interest rates earned on our cash and cash equivalents. On March 9, 2007, our Board of Directors declared a one-time dividend of $1.25 per share, which totaled approximately $9.9 million. As this special dividend represented approximately one-third of our cash and cash equivalents, this dividend will materially reduce our interest income in future periods.
Income Taxes
In fiscal 2007, we recognized income tax expense of $84,000 on income before taxes of $127,000. In fiscal 2006, we recognized income tax expense of $249,000 on income before taxes of $655,000. Our effective tax rate for fiscal 2007 was approximately 66.0%, compared with an effective tax rate of 38.1% in fiscal 2006. The high effective tax rate for fiscal 2007 is driven by the effect of non-deductible expenses on our relatively low level of pretax income.
As of May 31, 2007, the Company had net operating loss carryforwards for federal income tax purposes of $21.1 million that are scheduled to expire between 2020 and 2026 if unused. Pursuant to Internal Revenue Code Section 382, the Company continually evaluates whether ownership changes have occurred resulting in annual limitations to the utilization of the deferred tax asset associated with its net operating losses. During fiscal 2006, the
29
Company experienced an ownership change resulting in a limitation event. We have considered this limitation as well as future taxable income in assessing the need for a valuation allowance against our deferred tax assets. We believe that all net deferred tax assets shown on our balance sheet as of May 31, 2007, are more likely than not to be realized in the future and no valuation allowance is necessary. In the event that actual results differ from those estimates or we adjust those estimates in future periods, we may need to record a valuation allowance, which would reduce deferred tax assets and the results of operations in the period the change is made.
Comparison of Fiscal Years Ended May 31, 2006 and May 31, 2005
Net Sales
Net sales increased 25.9% to $87.0 million in fiscal 2006 from $69.1 million in fiscal 2005. The increase in net sales was due primarily to expanded direct marketing efforts. During fiscal 2006 total expense for both online and offline marketing efforts was $18.2 million, compared with $13.7 million in fiscal 2005, an increase of 32.6%. The increase in net sales in fiscal 2006 over the same period in 2005 reflects an increase of approximately 25% in the number of orders shipped, which grew to approximately 1,060,000 orders in fiscal 2006 from approximately 851,000 orders in fiscal 2005. Net sales per order for fiscal 2006 was $82.12, compared with net sales per order of $81.27 for fiscal 2005, an increase of 1.0%. We added approximately 560,000 new customers to our database during fiscal 2006, compared with approximately 415,000 new customers added in fiscal 2005, an increase of approximately 35%. Revenue from our repeat customers represented approximately 46% of revenue during fiscal 2006 compared with approximately 51% during fiscal 2005. Birthday Express net sales increased to $68.4 million in fiscal 2006 from $54.9 million in fiscal 2005, an increase of $13.5 million, or 25%. Storybook Heirlooms net sales remained flat at $9.0 million in both fiscal 2006 and 2005. Costume Express net sales increased to $9.6 million in fiscal 2006 from $5.2 million in fiscal 2005, an increase of $4.4 million or 83% due primarily to the increase in direct marketing spending.
Gross Margin
Gross margin increased 21.7% to $42.8 million in fiscal 2006 from $35.2 million in fiscal 2005. Our gross margin percentage declined to 49.1% of net sales in fiscal 2006 from 50.8% in fiscal 2005. The primary factors contributing to this change were increases in outbound shipping costs and lower gross margins in our Storybook brand. The increases in outbound shipping charges are due primarily to the Company upgrading orders at its expense to ensure that packages timely arrived at the customers’ homes, as well as increased fuel surcharges and third-party carrier rates.
Fulfillment
Our fulfillment expenses increased 44.5% to $11.6 million in fiscal 2006 from $8.0 million in fiscal 2005. As a percentage of net sales, these expenses increased to 13.4% in fiscal 2006 from 11.6% in fiscal 2005. This increase is due primarily to higher than anticipated costs related to the Company’s transition to a more automated picking process. The additional costs are primarily increases in labor, overtime and temporary labor costs incurred to ship customer orders.
Selling and Marketing
Selling and marketing costs increased 31.5% to $22.1 million in fiscal 2006 from $16.8 million in fiscal 2005 due primarily to increases in online advertising and direct marketing circulation costs of $4.5 million. As a percentage of net sales, selling and marketing expenses were 25.4% in fiscal 2006 compared with 24.3% in fiscal 2005. The increase in marketing costs as a percentage of revenue is due primarily to a reduction in catalog response rates and price increases in paper and postage costs related to our catalog mailings.
30
General and Administrative
General and administrative expenses increased 30.8% to $8.5 million in fiscal 2006 from $6.5 million in fiscal 2005. Professional fees, insurance premiums and other related costs increased $937,000 in fiscal 2006 over fiscal 2005 primarily as a result of increases in Sarbanes-Oxley and other consulting fees, legal and accounting fees, and recruiting fees. Credit card fees increased by $420,000 in fiscal 2006 as compared to fiscal 2005 due to the increase in net sales. As a percentage of net sales, our general and administrative expenses increased to 9.7% in fiscal 2006 from 9.4% in fiscal 2005.
Other Income (Expense), Net
The improvement in other income to $1.2 million in fiscal 2006, compared with other income of $131,000 in fiscal 2005, is due primarily to the full year impact of interest earned from the proceeds from our initial public offering and the repayment of our $5.0 million term loan in fiscal 2005.
Income Taxes
In fiscal 2006, we recognized income tax expense of $249,000 on income before taxes of 655,000. Our effective tax rate for fiscal 2006 was approximately 38.1%. In fiscal 2005 we recognized income tax expense of $1.5 million on income before taxes of $4.0 million. Our effective tax rate for fiscal 2005 was approximately 37.5%.
Liquidity and Capital Resources
As of May 31, 2007 we had working capital of $29.4 million. We believe that our current cash and cash equivalents, as well as cash flows from operations, will be sufficient to continue our operations and meet our capital needs for the foreseeable future.
Net cash provided by operating activities was $697,000 and $3.7 million for fiscal 2007 and fiscal 2006, respectively. Net cash provided by operating activities in fiscal 2007 can be attributed primarily to depreciation and amortization of $1.6 million and stock compensation of $1.3 million. These increases were partially offset by an increase in accounts receivable of $1.2 million during 2007, which was driven primarily by the introduction of our deferred billing program. Net cash provided by operating activities in fiscal 2007 was used for purchases of fixed assets.
Net cash used in investing activities was $1.4 million and $3.6 million for fiscal 2007 and fiscal 2006, respectively. Cash used in investing activities in fiscal 2007 and 2006 was used for capital expenditures.
Net cash used in financing activities was $9.4 million for fiscal 2007. Net cash provided by financing activities was $456,000 in fiscal 2006. Cash used in financing activities in fiscal 2007 was primarily due to the payment of a one-time special dividend on April 26, 2007, which was slightly offset by proceeds from the exercise of stock options. Cash provided by financing activities in fiscal 2006 was primarily due to proceeds from the exercise of stock options.
As of May 31, 2007, we are not involved in any off-balance sheet arrangements.
The following table summarizes our contractual obligations as of May 31, 2007 and the effect these obligations are expected to have on our liquidity and cash flows in future periods.
| | | | | | | | | | | | | | | | | |
| | | Payments Due by Period | |
| | | Total | | | Less Than 1 Year | | | 1-3 Years | | | 3-5 Years | |
| | | (In thousands) | |
| |
Description of Contractual Obligations: | | | | | | | | | | | | | | | | |
| Operating lease obligations | | $ | 1,718 | | | $ | 814 | | | $ | 894 | | | $ | 10 | |
| | | | | | | | | | | | | | | | | |
| Total | | $ | 1,718 | | | $ | 814 | | | $ | 894 | | | $ | 10 | |
| | | | | | | | | | | | | | | | | |
31
Critical Accounting Policies
Certain of our accounting policies require the application of management judgment in making estimates and assumptions that affect the amounts reported in the consolidated financial statements and disclosures made in the accompanying notes. Those estimates and assumptions are based on historical experience and various other factors deemed to be applicable and reasonable under the circumstances. The use of judgment in determining such estimates and assumptions is, by nature, subject to a degree of uncertainty. Accordingly, actual results could differ from the estimates made. The following are the critical accounting policies that we believe require significant estimation and management judgment.
Revenue Recognition
We recognize revenue and the related cost of sales on the date on which we estimate that the customer has received the product. We require payment for the goods prior to shipment, which is recorded as deferred revenue until the estimated date the customer has received the shipment. We utilize our third-party freight carrier information to estimate when delivery has been made. We estimate potential future product returns related to current period revenue by analyzing historical customer returns. Actual returns may differ materially from our estimated reserve. As a result, our operating results and financial condition could be adversely affected.
Income Taxes
We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized by applying statutory rates in effect in the years in which the differences between the financial reporting and tax filing bases of existing assets and liabilities are expected to reverse. We have incurred significant losses in years prior to fiscal 2004 for which no income tax benefit had been recognized. Significant judgment related to future taxable income is required in estimating the likelihood of recoverability of tax benefits related to those net operating losses. We have considered future taxable income in assessing the need for a valuation allowance against our deferred tax assets. We believe that all net deferred tax assets shown on our balance sheet as of May 31, 2007, are more likely than not to be realized in the future and no valuation allowance is necessary. In the event that actual results differ from those estimates or we adjust those estimates in future periods, we may need to record a valuation allowance, which would reduce deferred tax assets and the results of operations in the period the change is made.
Stock-based compensation
Effective June 1, 2006, we adopted the fair value recognition provisions of FAS 123R using the modified-prospective-transition method, which requires measurement of compensation cost for all stock-based awards at fair value on the date of grant and recognition of compensation over the service period for awards expected to vest. Under the modified-prospective-transition method, compensation cost recognized includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of June 1, 2006, which is based on the grant date fair value estimated in accordance with the original provisions of FAS 123R, recognized over the vesting period of the underlying options using the single-option approach, (b) compensation cost for all share-based payments granted on or subsequent to June 1, 2006, which is based on the grant-date fair value estimated in accordance with the provisions of FAS 123R, recognized over the requisite service period of the award on a straight-line basis, and (c) compensation cost for shares issued under the ESPP, which is based on the fair value estimated in accordance with the provisions of FAS 123R and is not considered material to our overall consolidated financial statements.
We calculate the fair value of our stock options granted to employees using the Black-Scholes option pricing model using the single-option approach. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. Our computation of expected volatility is based on our historical volatility. Our computation of expected life is determined using the simplified method outlined by SEC Staff Accounting Bulletin No. 107,Share-Based Payment, or SAB 107. Under this method, our expected term is equal to the sum of the weighted average vesting term plus the original contractual term divided by two. We base the risk-free interest rate on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term. A dividend yield of 0% was considered appropriate due to the lack of historical
32
dividends paid. Although a dividend was paid to shareholders in April 2007, this is considered a special one-time dividend that is not indicative of future dividend activity. When estimating forfeitures, we considered historical termination behavior, in addition to analyzing actual option forfeitures. Our forfeiture rate is based on the weighted average termination behavior of our employees and board members, which is approximately 10.9%. Prior to the adoption of FAS 123R, we recognized the impact of forfeitures when they occurred. See Note 8 of our financial statements,Stock Based Compensation,included in Part II, Item 8 of this annual report.
Inventories
We value our inventory at the lower of weighted average cost or market. We write down inventory for estimated obsolescence or damage for the excess cost of the inventory over estimated market value based upon assumptions about future demand and market conditions. If the actual market conditions or demand for our products are less favorable than projected by management, additional inventory write-downs may be required.
New Accounting Pronouncements
In July 2006, the FASB issued Interpretation No. 48,Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109(“FIN 48”). This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109,Accounting for Income Taxes. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 will be effective as of June 1, 2007. We do not expect that the adoption of this statement will have a material impact on our consolidated results of operations or financial condition.
In June 2006, the FASB ratified the consensus reached on Emerging Issues Task Force (EITF) IssueNo. 06-03,How Sales Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (that is, Gross Versus Net Presentation).The EITF reached a consensus that the presentation of taxes on either a gross or net basis is an accounting policy decision that requires disclosure.EITF 06-03 is effective for the first interim or annual reporting period beginning after December 15, 2006. The Company adopted this issue for the quarter ended May 31, 2007. The Company collects amounts from customers, which under common trade practices are referred to as sales taxes, and records these amounts on a net basis. The Company has not modified this accounting policy; therefore, the adoption ofEITF 06-03 did not have any effect on the Company’s financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157,Fair Value Measurements(“FAS 157”). FAS 157 establishes a common definition for fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. FAS 157 is effective for fiscal years beginning after November 15, 2007. We will apply this guidance beginning June 1, 2008. We do not expect that the adoption of this statement will have a material impact on our results of operations or financial condition.
In February 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 159,The Fair Value Option for Financial Assets and Financial Liabilities, (“FAS 159”). FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. FAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. FAS 159 is effective for fiscal years beginning after November 15, 2007. We will apply this guidance beginning June 1, 2008. We do not expect that the adoption of this statement will have a material impact on our results of operations or financial condition.
Also see Note 1 of our financial statements, “Organization of Business and Summary of Significant Accounting Policies,” included in Part II, Item 8 of this annual report
33
| |
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk. |
Interest Rate Risk
The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we invest in highly rated securities. As of May 31, 2007 we held short-term investments that had maturity dates of three months or less at the time of purchase, and consist primarily of money market accounts and commercial paper. Because of the short-term nature of our investments, we believe that our exposure to market rate fluctuations on those investments is minimal. On May 31, 2007, we had no long-term or short-term bank debt outstanding.
Foreign Currency Risk
Our revenue, expense and capital expenditures are transacted in U.S. dollars. We do source a portion of our product inventories from foreign vendors, primarily manufacturers in China. If the value of the U.S. dollar declines relative to the Chinese yuan, these foreign currency fluctuations could result in an increase in the cost of merchandise sourced from China through price increases. As a result of such fluctuations, we may experience fluctuations in our operating results on an annual or quarterly basis.
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| |
| Item 8. | Financial Statements and Supplementary Data. |
CELEBRATE EXPRESS, INC.
Index to Financial Statements
35
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Celebrate Express, Inc.
We have audited the accompanying balance sheets of Celebrate Express, Inc. (the “Company”) as of May 31, 2007 and 2006 and the related statements of operations, shareholders’ equity (deficit), and cash flows for each of the three years in the period ended May 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Celebrate Express, Inc. as of May 31, 2007 and 2006, and the results of its operations and its cash flows for each of the three years in the period ended May 31, 2007, in conformity with accounting principles generally accepted in the United States of America.
As described in Note 1 to the financial statements, the Company adopted the fair value recognition provisions of FASB Statement No. 123(R),Share-based Payments, using the modified-prospective-transition method effective June 1, 2006.
As discussed in Note 1 to the financial statements, the Company recorded a cumulative effect adjustment as of June 1, 2006, in connection with the adoption of SEC Staff Accounting Bulletin No. 108,Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.
Seattle, Washington
August 10, 2007
36
CELEBRATE EXPRESS, INC.
| | | | | | | | | |
| | | May 31,
| | | May 31,
| |
| | | 2007 | | | 2006 | |
| |
| ASSETS |
| Current assets: | | | | | | | | |
| Cash and cash equivalents | | $ | 21,224,178 | | | $ | 31,326,804 | |
| Accounts receivable, net | | | 1,490,383 | | | | 338,772 | |
| Inventories | | | 9,039,029 | | | | 8,333,503 | |
| Prepaid expenses | | | 3,692,573 | | | | 4,097,548 | |
| Deferred income taxes | | | 347,019 | | | | 399,627 | |
| | | | | | | | | |
| Total current assets | | | 35,793,182 | | | | 44,496,254 | |
| Fixed assets, net | | | 4,453,476 | | | | 4,662,439 | |
| Deferred income taxes | | | 7,771,657 | | | | 7,939,639 | |
| Other assets, net | | | 101,186 | | | | 101,892 | |
| | | | | | | | | |
| Total assets | | $ | 48,119,501 | | | $ | 57,200,224 | |
| | | | | | | | | |
| |
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
| Current liabilities: | | | | | | | | |
| Accounts payable | | $ | 2,751,155 | | | $ | 3,151,082 | |
| Accrued liabilities | | | 3,648,457 | | | | 3,971,903 | |
| | | | | | | | | |
| Total current liabilities | | | 6,399,612 | | | | 7,122,985 | |
| Commitments and contingencies | | | — | | | | — | |
| Shareholders’ equity: | | | | | | | | |
| Common stock, $0.001 par value and additional paid-in capital — authorized, 10,000,000 shares; issued and outstanding, 7,953,724 shares at May 31, 2007; 7,785,899 shares at May 31, 2006 | | | 67,122,392 | | | | 65,495,253 | |
| Unearned stock-based compensation | | | — | | | | (213,206 | ) |
| Accumulated deficit | | | (25,402,503 | ) | | | (15,204,808 | ) |
| | | | | | | | | |
| Total shareholders’ equity | | | 41,719,889 | | | | 50,077,239 | |
| | | | | | | | | |
| Total liabilities and shareholders’ equity | | $ | 48,119,501 | | | $ | 57,200,224 | |
| | | | | | | | | |
See notes to financial statements.
37
CELEBRATE EXPRESS, INC.
Years Ended May 31, 2007, 2006 and 2005
| | | | | | | | | | | | | |
| | | 2007 | | | 2006 | | | 2005 | |
| |
| Net sales | | $ | 85,243,093 | | | $ | 87,016,029 | | | $ | 69,138,081 | |
| Cost of sales(1) | | | 40,820,671 | | | | 44,243,944 | | | | 33,987,083 | |
| | | | | | | | | | | | | |
| Gross margin | | | 44,422,422 | | | | 42,772,085 | | | | 35,150,998 | |
| Operating expenses: | | | | | | | | | | | | |
| Fulfillment(1) | | | 11,501,109 | | | | 11,617,406 | | | | 8,039,145 | |
| Selling and marketing(1) | | | 23,639,950 | | | | 22,075,784 | | | | 16,787,231 | |
| General and administrative(1) | | | 10,715,276 | | | | 8,476,068 | | | | 6,481,551 | |
| Severance and related expenses | | | — | | | | 1,178,978 | | | | — | |
| | | | | | | | | | | | | |
| Total operating expenses | | | 45,856,335 | | | | 43,348,236 | | | | 31,307,927 | |
| | | | | | | | | | | | | |
| Income (loss) from operations | | | (1,433,913 | ) | | | (576,151 | ) | | | 3,843,071 | |
| Other income (expense), net; | | | | | | | | | | | | |
| Interest income (expense), net | | | 1,560,807 | | | | 1,230,755 | | | | 131,036 | |
| | | | | | | | | | | | | |
| Net income before income taxes | | | 126,894 | | | | 654,604 | | | | 3,974,107 | |
| Income tax (expense) benefit | | | (83,789 | ) | | | (249,378 | ) | | | (1,489,259 | ) |
| | | | | | | | | | | | | |
| Net income | | | 43,105 | | | | 405,226 | | | | 2,484,848 | |
| Accretion to preferred stock redemption value | | | — | | | | — | | | | (102,271 | ) |
| | | | | | | | | | | | | |
| Net income available for common shareholders’ | | $ | 43,105 | | | $ | 405,226 | | | $ | 2,382,577 | |
| | | | | | | | | | | | | |
| Net income per share: | | | | | | | | | | | | |
| Basic | | $ | 0.01 | | | $ | 0.05 | | | $ | 0.46 | |
| | | | | | | | | | | | | |
| Diluted | | $ | 0.01 | | | $ | 0.05 | | | $ | 0.35 | |
| | | | | | | | | | | | | |
| Weighted average shares outstanding: | | | | | | | | | | | | |
| Basic | | | 7,849,842 | | | | 7,671,733 | | | | 5,152,155 | |
| Diluted | | | 7,954,523 | | | | 7,939,638 | | | | 7,027,002 | |
| |
| (1) | Stock-based compensation is included in the expense line items above in the following amounts: |
| | | | | | | | | | | | | |
| Cost of Sales | | $ | 28,272 | | | $ | 20,973 | | | $ | 20,112 | |
| Fulfillment | | | 57,539 | | | | 21,854 | | | | 19,608 | |
| Selling and marketing | | | 198,307 | | | | 62,458 | | | | 183,868 | |
| General and administrative | | | 1,021,213 | | | | 73,413 | | | | 71,822 | |
| | | | | | | | | | | | | |
| | | $ | 1,305,331 | | | $ | 178,698 | | | $ | 295,410 | |
| | | | | | | | | | | | | |
See notes to financial statements.
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CELEBRATE EXPRESS, INC.
Years Ended May 31, 2007, 2006 and 2005
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Contributed
| | | | | | | | | | |
| | | | | | | | | Capital-Common
| | | | | | | | | Total
| |
| | | Common Stock and Additional Paid-in-Capital | | | Stock
| | | Unearned
| | | Accumulated
| | | Shareholders
| |
| | | Shares | | | Amount | | | Warrants | | | Compensation | | | Deficit | | | Equity (Deficit) | |
| |
| BALANCE — May 31, 2004 | | | 1,635,365 | | | $ | 878,539 | | | $ | 66,803 | | | $ | (934,350 | ) | | $ | (18,094,882 | ) | | $ | (18,083,890 | ) |
| Exercise of common stock options | | | 120,102 | | | | 81,511 | | | | | | | | | | | | | | | | 81,511 | |
| Accretion of preferred stock discount | | | | | | | (102,271 | ) | | | | | | | | | | | | | | | (102,271 | ) |
| Issuance of common stock in connection with employee stock purchase plan | | | 7,945 | | | | 104,715 | | | | | | | | | | | | | | | | 104,715 | |
| Conversion of mandatorily redeemable convertible preferred stock | | | 3,138,175 | | | | 28,146,053 | | | | | | | | | | | | | | | | 28,146,053 | |
| Conversion of mandatorily redeemable convertible preferred stock warrants | | | | | | | | | | | 199,439 | | | | | | | | | | | | 199,439 | |
| Proceeds from issuance of common stock, net of offering costs | | | 2,465,651 | | | | 34,011,674 | | | | | | | | | | | | | | | | 34,011,674 | |
| Exercise of preferred stock warrants | | | 146,766 | | | | 856,905 | | | | | | | | | | | | | | | | 856,905 | |
| Exercise of common stock warrants | | | 8,708 | | | | 272,234 | | | | (266,242 | ) | | | | | | | | | | | 5,992 | |
| Unearned stock-based compensation | | | | | | | 191,822 | | | | | | | | (191,822 | ) | | | | | | | — | |
| Cancellation of stock options | | | | | | | (104,556 | ) | | | | | | | 104,556 | | | | | | | | — | |
| Amortization of stock-based compensation | | | | | | | | | | | | | | | 295,410 | | | | | | | | 295,410 | |
| Net Income | | | | | | | | | | | | | | | | | | | 2,484,848 | | | | 2,484,848 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| BALANCE — May 31, 2005 | | | 7,522,712 | | | $ | 64,336,626 | | | | — | | | $ | (726,206 | ) | | $ | (15,610,034 | ) | | $ | 48,000,386 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Exercise of common stock options | | | 255,678 | | | | 386,988 | | | | | | | | | | | | | | | | 386,988 | |
| Issuance of common stock in connection with employee stock purchase plan | | | 7,509 | | | | 85,809 | | | | | | | | | | | | | | | | 85,809 | |
| Cancellation of stock options | | | | | | | (354,668 | ) | | | | | | | 354,668 | | | | | | | | — | |
| Tax effect of stock option exercises | | | | | | | 1,020,132 | | | | | | | | | | | | | | | | 1,020,132 | |
| Amortization of stock-based compensation | | | | | | | | | | | | | | | 158,332 | | | | | | | | 158,332 | |
| Restricted stock grant | | | | | | | 20,366 | | | | | | | | | | | | | | | | 20,366 | |
| Net income | | | | | | | | | | | | | | | | | | | 405,226 | | | | 405,226 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| BALANCE — May 31, 2006 | | | 7,785,899 | | | $ | 65,495,253 | | | | — | | | $ | (213,206 | ) | | $ | (15,204,808 | ) | | $ | 50,077,239 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Adjustment to beginning accumulated deficit (see Note 1) | | | | | | | | | | | | | | | | | | | (299,223 | ) | | | (299,223 | ) |
| Exercise of common stock options and issuance of restricted stock | | | 160,188 | | | | 252,989 | | | | | | | | | | | | | | | | 252,989 | |
| Issuance of common stock in connection with employee stock purchase plan | | | 7,637 | | | | 64,736 | | | | | | | | | | | | | | | | 64,736 | |
| Tax effect of stock option exercises | | | | | | | 217,289 | | | | | | | | | | | | | | | | 217,289 | |
| Stock-based compensation | | | | | | | 1,305,331 | | | | | | | | | | | | | | | | 1,305,331 | |
| Dividends paid | | | | | | | | | | | | | | | | | | | (9,941,577 | ) | | | (9,941,577 | ) |
| Reversal of unearned compensation | | | | | | | (213,206 | ) | | | | | | | 213,206 | | | | | | | | — | |
| Net income | | | | | | | | | | | | | | | | | | | 43,105 | | | | 43,105 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| BALANCE — May 31, 2007 | | | 7,953,724 | | | $ | 67,122,392 | | | | — | | | $ | — | | | $ | (25,402,503 | ) | | $ | 41,719,889 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
See notes to financial statements.
39
CELEBRATE EXPRESS, INC.
Years Ended May 31, 2007, 2006 and 2005
| | | | | | | | | | | | | |
| | | 2007 | | | 2006 | | | 2005 | |
| |
| Cash flows from operating activities: | | | | | | | | | | | | |
| Net income | | $ | 43,105 | | | $ | 405,226 | | | $ | 2,484,848 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | |
| Deferred income taxes | | | 138,656 | | | | 204,269 | | | | 1,489,259 | |
| Depreciation and amortization | | | 1,602,357 | | | | 1,505,695 | | | | 709,485 | |
| Stock-based compensation | | | 1,305,331 | | | | 178,698 | | | | 295,410 | |
| Excess tax benefit from exercise of stock options | | | (217,289 | ) | | | — | | | | — | |
| Amortization of deferred financing costs | | | — | | | | — | | | | 23,958 | |
| Accretion of debt discount | | | — | | | | — | | | | 70,012 | |
| Changes in operating assets and liabilities: | | | | | | | | | | | | |
| Accounts receivable | | | (1,151,611 | ) | | | (125,407 | ) | | | (44,766 | ) |
| Inventories | | | (705,526 | ) | | | 62,503 | | | | (2,469,719 | ) |
| Prepaid expenses and other assets | | | 404,974 | | | | (626,166 | ) | | | (1,510,803 | ) |
| Accounts payable | | | (399,927 | ) | | | 182,536 | | | | (61,871 | ) |
| Accrued liabilities | | | (323,446 | ) | | | 1,901,103 | | | | 623,567 | |
| | | | | | | | | | | | | |
| Net cash provided by operating activities | | | 696,624 | | | | 3,688,457 | | | | 1,609,380 | |
| | | | | | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | | | | | |
| Payments for purchases of fixed assets | | | (1,392,687 | ) | | | (3,586,042 | ) | | | (2,247,324 | ) |
| Purchase of marketable securities | | | — | | | | — | | | | (61,050,000 | ) |
| Maturities of marketable securities | | | — | | | | — | | | | 8,950,000 | |
| Sale of marketable securities | | | — | | | | — | | | | 52,100,000 | |
| | | | | | | | | | | | | |
| Net cash used in investing activities | | | (1,392,687 | ) | | | (3,586,042 | ) | | | (2,247,324 | ) |
| | | | | | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | | | | | |
| Dividends paid | | | (9,941,577 | ) | | | — | | | | — | |
| Principal payments on capital lease obligations | | | — | | | | (17,102 | ) | | | (34,562 | ) |
| Principal payments on notes payable | | | — | | | | — | | | | (5,000,000 | ) |
| Net proceeds from sale of common stock, net of issuance costs | | | — | | | | — | | | | 34,011,674 | |
| Proceeds from shares issued under the employee stock purchase plan | | | 64,736 | | | | 85,809 | | | | 104,715 | |
| Proceeds from exercise of stock options | | | 252,989 | | | | 386,988 | | | | 81,511 | |
| Excess tax benefit from exercise of stock options | | | 217,289 | | | | — | | | | — | |
| | | | | | | | | | | | | |
| Net cash provided by (used in) financing activities | | | (9,406,563 | ) | | | 455,695 | | | | 29,163,338 | |
| | | | | | | | | | | | | |
| Net increase (decrease) in cash and cash equivalents | | | (10,102,626 | ) | | | 558,110 | | | | 28,525,394 | |
| Cash and cash equivalents: | | | | | | | | | | | | |
| Beginning of year | | | 31,326,804 | | | | 30,768,694 | | | | 2,243,300 | |
| | | | | | | | | | | | | |
| End of year | | $ | 21,224,178 | | | $ | 31,326,804 | | | $ | 30,768,694 | |
| | | | | | | | | | | | | |
| Supplemental disclosures of cash flow information: | | | | | | | | | | | | |
| Cash paid for interest | | $ | — | | | $ | 445 | | | $ | 213,707 | |
| Supplemental disclosures of noncash financing activities: | | | | | | | | | | | | |
| Conversion of mandatorily redeemable convertible preferred stock and preferred stock warrants | | $ | — | | | $ | — | | | $ | 28,345,492 | |
| Net exercise of common stock warrants | | | — | | | | — | | | | 272,234 | |
| Net exercise of preferred stock warrants | | | — | | | | — | | | | 856,905 | |
| Cancellation of unvested stock options | | | — | | | | 354,668 | | | | 104,556 | |
| Accretion of preferred stock discounts | | | — | | | | — | | | | 102,271 | |
| Tax effect of stock option exercises | | | — | | | | 1,020,132 | | | | — | |
See notes to financial statements.
40
CELEBRATE EXPRESS, INC.
| |
| 1. | Organization of Business and Summary of Significant Accounting Policies |
Description of Business —Celebrate Express, Inc. (the “Company”), a Washington corporation, is a provider of celebration products for families with young children, via the Internet and catalogs. The Company currently operates two brands, Birthday Express and Costume Express, which respectively offer children’s party products and children’s costumes and accessories. The Company wound down the operations of the Storybook Heirlooms brand in fiscal 2007, which offered girls’ special occasion and specialty apparel.
Basis of Presentation —Management has prepared the accompanying financial statements in accordance with accounting standards generally accepted in the United States of America.
Use of Estimates —The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Some of the more significant estimates include allowance for sales returns, lower of cost or market adjustments to inventory and deferred income taxes. Actual results could differ from those estimates.
Concentrations of Risk —The Company maintains its cash and cash equivalents with two major financial institutions in the United States of America, in the form of demand deposits, money market accounts and commercial paper. Deposits in these banks may exceed the amount of insurance provided on such deposits. The Company has not experienced any losses on its cash and cash equivalents.
The Company’s ability to acquire products is dependent on its relationship with various suppliers from whom it purchases party products, costumes and various accessories. One vendor accounted for 14.6% and 10.6% of the Company’s purchases for the years ended May 31, 2007 and May 31, 2006, respectively. No vendors accounted for more than 10% of purchases in fiscal 2005.
Segments— The Company complies with the requirements of Statement of Financial Accounting Standards No. 131,Disclosure about Segments of an Enterprise and Related Information, (“SFAS No. 131”), which establishes annual and interim reporting standards for an enterprise’s operating segments and related disclosures. Management has determined that the Company operates in one segment, celebration products. Net sales by product line in fiscal 2007 were $69.2 million, $2.2 million, and $13.3 million for Birthday Express, Storybook Heirlooms, and Costume Express, respectively. Net sales by product line in fiscal 2006 were $68.4 million, $9.0 million and $9.6 million for Birthday Express, Storybook Heirlooms and Costume Express, respectively. Net sales by product line in fiscal 2005 were $54.9 million, $9.0 million, and $5.2 million for Birthday Express, Storybook Heirlooms and Costume Express, respectively. In the year ended May 31, 2007 the Company also had $560,000 of other revenue. There was no such revenue in fiscal 2006 or fiscal 2005.
Cash and Cash Equivalents —Cash equivalents include short-term investments that have a maturity date at the time of purchase of three months or less, and consist primarily of money market accounts and commercial paper.
Accounts Receivable —Accounts receivable includes $1.2 million in amounts due from customers who have elected to take advantage of our deferred billing program, which allows customers to defer payment for up to 90 days. The Company assumes the credit risk for these transactions and has recorded an allowance for doubtful accounts based upon estimated uncollectible amounts.
Inventories —Inventories are stated at the lower of market or weighted-average cost on afirst-in first-out basis. The Company writes down inventory for estimated obsolescence or damage for the excess cost of the inventory over estimated market value based upon assumptions about future demand and market condition.
41
CELEBRATE EXPRESS, INC.
Notes to financial Statements — (Continued)
The components were as follows:
| | | | | | | | | |
| | | May 31, | |
| | | 2007 | | | 2006 | |
| |
| Finished goods | | $ | 8,706,354 | | | $ | 7,986,237 | |
| Raw materials | | | 332,675 | | | | 347,266 | |
| | | | | | | | | |
| | | $ | 9,039,029 | | | $ | 8,333,503 | |
| | | | | | | | | |
Prepaid Expenses —Prepaid expenses include prepaid catalog costs of $1,388,719 and $1,682,845 as of May 31, 2007 and 2006, respectively. These prepaid catalog costs consist of the costs to produce, print and distribute catalogs. Such costs are capitalized and amortized over the expected sales life of each catalog, which is generally 90 to 120 days.
Fixed Assets —Fixed assets, which include equipment, computers and software, furniture and fixtures, and leasehold improvements, are depreciated on a straight-line basis over their estimated useful lives, ranging from three to ten years, or the life of the lease, whichever is shorter. Routine maintenance and repairs are expensed as incurred.
Capitalized Software —The Company capitalizes internally developed software costs and website development costs in accordance with the provisions of Statement of Position98-1,Accounting for Costs of Computer Software Developed or Obtained for Internal Useand Emerging Issues Task Force (“EITF”)No. 00-2,Accounting for Website Development Costs. Capitalized costs are amortized on a straight-line basis over the estimated useful life of the software once it is available for use.
Long-Lived Assets —The Company reviews the carrying value of its long-lived assets, including property and equipment, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. To the extent the estimated future cash inflows attributable to the assets, less estimated future cash outflows, are less than the carrying amount, an impairment loss would be recognized. No impairment was recognized for the years ended May 31, 2007 and 2005. An impairment loss of approximately $268,000 was recognized in the fiscal year ended May 31, 2006 related to various warehouse equipment, software and Storybook Heirlooms assets that were no longer in use. The statement of operations included $98,000 and $170,000 in fulfillment and general and administrative expenses, respectively for this impairment in the fiscal year ended May 31, 2006.
Fair Value of Financial Instruments —The carrying amount of the Company’s cash, accounts receivable, accounts payable, accrued liabilities, and capital lease obligations approximates fair value based on the short term nature of these instruments.
Revenue Recognition —Internet and catalog sales include shipping revenue and are recorded net of estimated returns and promotional discounts on the estimated date of receipt by the customer. We require payment for goods prior to shipment, which is recorded as deferred revenue until the estimated date the customer has received the shipment. A sales return liability is estimated based on historical return experience. Our reserve for product returns was $75,413 and $143,235 for fiscal years ended May 31, 2007 and 2006, respectively.
Cost of Sales —Cost of sales consists primarily of the cost of merchandise sold to customers, inbound and outbound shipping costs, rent, depreciation, and other operating costs for the manufacturing facility.
Shipping and Handling Charges —Outbound shipping charges billed to customers are included in net sales and amounted to $12,705,120, $12,323,602, and $8,895,092 for the years ended May 31, 2007, 2006 and 2005, respectively. Outbound shipping and handling charges incurred by the Company are included within cost of goods sold and amounted to $11,360,479, $11,844,910, and $8,180,282 for the years ended May 31, 2007, 2006 and 2005, respectively.
42
CELEBRATE EXPRESS, INC.
Notes to financial Statements — (Continued)
Advertising —Advertising costs include on-line marketing efforts, print advertising and other direct marketing strategies and are generally expensed as incurred. The pre-paid direct marketing expenses consist of third party costs including paper, printing and mailing costs and are capitalized and amortized, upon release, over the expected period of future benefit which is generally 90 to 120 days. Advertising costs included in Selling and Marketing expense for the years ended May 31, 2007, 2006 and 2005 was $19,835,467, $17,833,424, and $13,294,700, respectively.
Income Taxes —The Company accounts for income taxes under the asset and liability method whereby deferred income taxes are recorded for the temporary differences between the amounts of assets and liabilities for financial reporting purposes and amounts as measured for tax purposes. A valuation allowance is recorded when we believe it is more likely than not that we will not utilize a portion or all of our net deferred tax assets.
Stock-Based Compensation —The Company grants stock awards under our 2004 Amended and Restated Equity Incentive Plan (the “2004 Plan”). Additionally, in October 2004, the Company adopted an Employee Stock Purchase Plan (the “ESPP”).
Prior to June 1, 2006, we accounted for the 2004 Plan and the ESPP under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25,Accounting for Stock Issued to Employees(APB 25), and related Interpretations, as permitted by Financial Accounting Standards Board (FASB) Statement No. 123,Accounting for Stock-based Compensation(FAS 123). Under APB 25, no compensation expense was recognized when the exercise price of employee stock options equaled the fair value of the underlying stock on the date of grant. Deferred stock-based compensation was recorded for those situations where the exercise price of an option was lower than the fair value for financial reporting purposes of the underlying common stock on the date of grant. Deferred stock-based compensation was being amortized over the vesting period of the underlying options and the remaining balance of $213,000 was reversed against shareholders’ equity on June 1, 2006.
Effective June 1, 2006, we adopted the fair value recognition provisions of FAS 123R using the modified-prospective-transition method, which requires measurement of compensation cost for all stock-based awards at fair value on the date of grant and recognition of compensation over the service period for awards expected to vest. Under the modified-prospective-transition method, compensation cost recognized in fiscal 2007 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of June 1, 2006, which is based on the grant date fair value estimated in accordance with the original provisions of FAS 123, recognized over the vesting period of the underlying options, (b) compensation cost for all share-based payments granted after June 1, 2006, which is based on the grant-date fair value estimated in accordance with the provisions of FAS 123R, recognized over the requisite service period of the award on a straight-line basis, and (c) compensation cost for shares issued under the ESPP, which is based on the fair value estimated in accordance with the provisions of FAS 123R and is not considered material to our overall financial statements. As prescribed under the modified prospective method, results for the prior periods have not been restated.
43
CELEBRATE EXPRESS, INC.
Notes to financial Statements — (Continued)
The following table presents the impact of the Company’s adoption of FAS 123R on selected line items from its financial statements for the year ended May 31, 2007:
| | | | | | | | | |
| | | Year Ended May 31,
| |
| | | 2007 | |
| | | | | | Impact of Adopting
| |
| | | As Reported | | | FAS 123R(1) | |
| |
| Cost of sales | | $ | 40,820,671 | | | $ | 10,620 | |
| Fulfillment | | | 11,501,109 | | | | 28,946 | |
| Selling and marketing | | | 23,639,950 | | | | 151,485 | |
| General and administrative | | | 10,715,276 | | | | 944,645 | |
| Net income | | | 43,105 | | | | (749,559 | ) |
| Basic net income per share | | $ | 0.01 | | | $ | (0.09 | ) |
| Diluted net income per share | | $ | 0.01 | | | $ | (0.09 | ) |
| | |
| (1) | | Incremental stock-based compensation resulting from the adoption of FAS 123R, which excludes stock-based compensation that would have been recognized under APB 25 for options granted with exercise prices below market value on the date of grant prior to adoption of FAS 123R. |
The following table illustrates the effect on net income and net income per share had we applied the fair value recognition provisions of FAS 123 to options granted under the 2004 Plan and ESPP for all periods presented prior to June 1, 2006.
| | | | | | | | | |
| | | Year Ended May 31, | |
| | | 2006 | | | 2005 | |
| |
| Net income available for common sharehoders, as reported | | $ | 405,226 | | | $ | 2,382,577 | |
| Add: Stock-based employee compensation expense, as reported | | | 178,698 | | | | 295,410 | |
| Deduct: Stock-based employee compensation expense determined under the fair-value-based method | | | (444,766 | ) | | | (634,610 | ) |
| | | | | | | | | |
| Pro forma net income available for common shareholders — basic | | $ | 139,158 | | | $ | 2,043,377 | |
| | | | | | | | | |
| Add: Accretion to preferrred stock redemption value | | | — | | | | 102,271 | |
| | | | | | | | | |
| Pro Forma net income available for common shareholders — diluted | | $ | 139,158 | | | $ | 2,145,648 | |
| | | | | | | | | |
| Total weighted average shares outstanding in in computing pro forma net income per share | | | | | | | | |
| Basic | | | 7,671,733 | | | | 5,152,155 | |
| Diluted | | | 7,945,135 | | | | 6,892,204 | |
| Net income per share: | | | | | | | | |
| Basic — as reported | | $ | 0.05 | | | $ | 0.46 | |
| | | | | | | | | |
| Diluted — as reported | | $ | 0.05 | | | $ | 0.35 | |
| | | | | | | | | |
| Basic — FAS 123 pro forma | | $ | 0.02 | | | $ | 0.40 | |
| | | | | | | | | |
| Diluted — FAS 123 pro forma | | $ | 0.02 | | | $ | 0.31 | |
| | | | | | | | | |
Disclosures for the year ended May 31, 2007 are not presented as the amounts are recognized in the financial statements in accordance with the fair value method of FAS 123R, as discussed above.
Initial Adoption of Staff Accounting Bulletin No. 108 —At May 31, 2007, we adopted Staff Accounting Bulletin No. 108 (SAB 108),Considering the Effects of Prior Year Misstatements when Quantifying Misstatements
44
CELEBRATE EXPRESS, INC.
Notes to financial Statements — (Continued)
in Current Year Financial Statements. We identified two errors in our previously issued financial statements relating to deferred income taxes. These errors were the result of the understatement of deferred tax assets related to net operating loss carryforwards and an overstatement of deferred tax assets related to fixed assets in the net amount of $381,000. We also identified an adjustment related to incorrectly but consistently accruing audit fees during the fiscal year instead of in the year the services were actually performed resulting in an overstatement of accrued liabilities in the amount of $82,000. Based on an analysis of the errors performed in accordance with SAB 108, we have concluded that the effect of the errors is not material to any of the individual prior periods’ income statements or balance sheets, however the adjustment is material to the financial statements for the year ended May 31, 2007 using the dual approach established under SAB 108. As such, we have recorded the correction as a cumulative effect adjustment to the fiscal year 2007 beginning accumulated deficit, as follows (in thousands):
| | | | | |
| Accumulated deficit, May 31, 2006, as reported | | $ | (15,205 | ) |
| Cumulative effect adjustment | | | (299 | ) |
| | | | | |
| Accumulated deficit, May 31, 2006, as restated | | $ | (15,504 | ) |
| | | | | |
New Accounting Pronouncements —In July 2006, the FASB issued Interpretation No. 48,Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109(“FIN 48”). This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109,Accounting for Income Taxes. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 will be effective as of June 1, 2007. We do not expect that the adoption of this statement will have a material impact on our consolidated results of operations or financial condition.
In June 2006, the FASB ratified the consensus reached on Emerging Issues Task Force (EITF) IssueNo. 06-03,How Sales Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (that is, Gross Versus Net Presentation).The EITF reached a consensus that the presentation of taxes on either a gross or net basis is an accounting policy decision that requires disclosure.EITF 06-03 is effective for the first interim or annual reporting period beginning after December 15, 2006. The Company adopted this issue for the quarter ended May 31, 2007. The Company collects amounts from customers, which under common trade practices are referred to as sales taxes, and records these amounts on a net basis. The Company has not modified this accounting policy; therefore, the adoption ofEITF 06-03 did not have any effect on the Company’s financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157,Fair Value Measurements(“FAS 157”). FAS 157 establishes a common definition for fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. FAS 157 is effective for fiscal years beginning after November 15, 2007. We will apply this guidance beginning June 1, 2008. We do not expect that the adoption of this statement will have a material impact on our results of operations or financial condition.
In February 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 159,The Fair Value Option for Financial Assets and Financial Liabilities, (“FAS 159”). FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. FAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. FAS 159 is effective for fiscal years beginning after November 15, 2007. We will apply this guidance beginning June 1, 2008. We do not expect that the adoption of this statement will have a material impact on our results of operations or financial condition.
45
CELEBRATE EXPRESS, INC.
Notes to financial Statements — (Continued)
| |
| 2. | Initial Public Offering |
On October 20, 2004 the Company issued 2,057,081 shares of its common stock in an initial public offering. In November 2004 the Company issued 408,570 shares upon exercise by the underwriters of their over allotment option. All shares were sold at an offering price of $15.50 per share. The proceeds to the Company from the offering were $34.0 million, net of $4.2 million in direct and incremental offering expenses and underwriters’ discounts.
On October 15, 2004 the Company affected a1-for-1.51 reverse split of its common stock. The common share and per share data in the accompanying financial statements has been restated to reflect this reverse stock split.
Simultaneous with the closing of the offering, the Company’s 4.7 million outstanding shares of mandatorily redeemable convertible preferred stock were automatically converted into approximately 3.1 million shares of common stock.
Fixed assets consist of the following at May 31:
| | | | | | | | | |
| | | 2007 | | | 2006 | |
| |
| Equipment | | $ | 4,128,445 | | | $ | 4,195,958 | |
| Computers and software | | | 3,220,134 | | | | 5,788,136 | |
| Furniture and fixtures | | | 2,900,731 | | | | 2,739,402 | |
| Leasehold improvements | | | 1,070,071 | | | | 1,096,050 | |
| | | | | | | | | |
| | | | 11,319,381 | | | | 13,819,546 | |
| Accumulated depreciation | | | (6,865,905 | ) | | | (9,157,107 | ) |
| | | | | | | | | |
| | | $ | 4,453,476 | | | $ | 4,662,439 | |
| | | | | | | | | |
Depreciation and amortization expenses were $1,602,357, $1,440,955, and $709,485 for the years ended May 31, 2007, 2006 and 2005, respectively.
Capitalized software costs include external direct costs and internal direct labor costs of developing software for internal use. Amortization begins in the period in which the software is ready for its intended use. The Company had $788,000 and $287,000 of unamortized computer software and website development costs at May 31, 2007 and May 31, 2006, respectively.
Income tax expense consists of the following:
| | | | | | | | | | | | | |
| | | Years Ended May 31, | |
| | | 2007 | | | 2006 | | | 2005 | |
| |
| Current income tax expense | | $ | 25,822 | | | $ | 45,109 | | | $ | — | |
| Deferred income tax expense | | $ | 57,967 | | | $ | 204,269 | | | $ | 1,489,259 | |
| | | | | | | | | | | | | |
| Total income tax expense | | $ | 83,789 | | | $ | 249,378 | | | $ | 1,489,259 | |
| | | | | | | | | | | | | |
46
CELEBRATE EXPRESS, INC.
Notes to financial Statements — (Continued)
Differences between income taxes computed by applying the U.S. federal income tax rate of 34% to pretax income are as follows for the years ended May 31:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2007 | | | 2006 | | | 2005 | |
| |
| Federal income tax expense at statutory rate | | $ | 43,144 | | | | 34.0 | % | | $ | 222,566 | | | | 34.0 | % | | $ | 1,351,196 | | | | 34.0 | % |
| Permanent differences & other | | | 5,694 | | | | 4.5 | % | | | 9,933 | | | | 1.5 | % | | | 91,547 | | | | 2.3 | % |
| State income taxes, net of federal effect | | | 3,133 | | | | 2.4 | % | | | 9,320 | | | | 1.4 | % | | | 46,516 | | | | 1.2 | % |
| Stock compensation | | | 31,818 | | | | 25.1 | % | | | 7,559 | | | | 1.2 | % | | | — | | | | 0.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Income tax expense | | $ | 83,789 | | | | 66.0 | % | | $ | 249,378 | | | | 38.1 | % | | $ | 1,489,259 | | | | 37.5 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Deferred income taxes reflect the net tax effect of temporary differences between amounts recorded for financial reporting purposes and amounts used for tax purposes. The major components of deferred tax assets are as follows at May 31 (in thousands):
| | | | | | | | | |
| | | 2007 | | | 2006 | |
| |
| Deferred tax assets: | | | | | | | | |
| Current: | | | | | | | | |
| Reserves and allowances | | $ | 252,748 | | | $ | 289,557 | |
| Accrued liabilities | | | 94,271 | | | | 110,070 | |
| Noncurrent: | | | | | | | | |
| Net operating loss carryforwards | | | 7,327,120 | | | | 7,419,469 | |
| Fixed assets and intangible assets | | | 50,131 | | | | 517,888 | |
| Stock-based compensation | | | 394,406 | | | | 2,282 | |
| | | | | | | | | |
| Net deferred tax asset | | $ | 8,118,676 | | | $ | 8,339,266 | |
| | | | | | | | | |
As of May 31, 2007, the Company had net operating loss carryforwards for federal income tax purposes of $21.1 million that are scheduled to expire between 2020 and 2026 if unused and net operating loss carryforwards for state income tax purposes of $1.5 million that are scheduled to expire between 2016 and 2021 if unused. Under the Internal Revenue Code of 1986, as amended, the amounts of and benefits from net operating loss and tax carryforwards may be impaired or limited in certain circumstances. Events which could cause limitations in the amount of net operating losses that the Company may utilize in any one year, include, but are not limited to, a cumulative ownership change of more than 50%, as defined, over a three year period. The Company continually evaluates whether changes in its stock ownership have resulted in annual limitations to the utilization of our deferred tax assets. We have considered future taxable income in assessing the need for a valuation allowance against our deferred tax assets. At this time the Company believes it is more likely than not that it will be able to utilize its net operating loss carryforwards prior to any expiration.
| |
| 5. | Commitments and Contingencies |
The Company leases buildings under non-cancelable operating lease agreements with expiration dates through December 2011 and renewal options ranging from 0 to 3 years. Rental expense totaled $876,909, $778,101, and $632,151 for the years ended May 31, 2007, 2006 and 2005, respectively.
47
CELEBRATE EXPRESS, INC.
Notes to financial Statements — (Continued)
As of May 31, 2007, future annual minimum rental payments under non-cancelable operating lease agreements are as follows for the years ending May 31:
| | | | | |
| | | Operating Leases | |
| |
| 2008 | | $ | 814,146 | |
| 2009 | | | 632,642 | |
| 2010 | | | 241,423 | |
| 2011 | | | 19,964 | |
| 2012 | | | 10,130 | |
| | | | | |
| | | $ | 1,718,305 | |
| | | | | |
Contingencies —From time to time, the Company is subject to contingencies resulting from legal proceedings and claims in the ordinary course of business. The Company is not currently aware of any such legal proceedings or claims that it believes will have, individually or in the aggregate, a material adverse effect on its financial position or results of operations.
On March 15, 2007 our Board of Directors declared a special dividend of $1.25 per share of common stock, payable to shareholders of record as of April 12, 2007. The aggregate dividend of $9.9 million was paid on April 26, 2007 from existing cash resources.
Basic net income per share is based on the weighted-average number of common shares outstanding. Diluted net income per share is based on the weighted number of common shares and common share equivalents outstanding. Common shares and common share equivalents included in the computation represent shares issuable upon assumed exercise of outstanding stock options and warrants and the conversion of mandatorily redeemable convertible preferred stock, except when the effect of their inclusion would be antidilutive.
48
CELEBRATE EXPRESS, INC.
Notes to financial Statements — (Continued)
The following table sets forth the computation of basic and diluted net income per share for the years ended May 31:
| | | | | | | | | | | | | |
| | | 2007 | | | 2006 | | | 2005 | |
| |
| Net income available for common shareholders — basic | | $ | 43,105 | | | $ | 405,226 | | | $ | 2,382,577 | |
| Add: Accretion to preferred stock redemption value | | | — | | | | 0 | | | | 102,271 | |
| | | | | | | | | | | | | |
| Net income available for common shareholders — diluted | | $ | 43,105 | | | $ | 405,226 | | | $ | 2,484,848 | |
| | | | | | | | | | | | | |
| Weighted average common shares outstanding | | | 7,849,842 | | | | 7,671,733 | | | | 5,152,155 | |
| Basic net income per share | | $ | 0.01 | | | $ | 0.05 | | | $ | 0.46 | |
| | | | | | | | | | | | | |
| Common share equivalents: | | | | | | | | | | | | |
| Dilutive effect of common stock options | | | 104,681 | | | | 267,906 | | | | 579,514 | |
| Dilutive effect of common and preferred stock warrants | | | — | | | | — | | | | 65,856 | |
| Dilutive effect of mandatorily redeemable convertible preferred stock | | | — | | | | — | | | | 1,229,477 | |
| | | | | | | | | | | | | |
| Weighted average common shares and common share equivalents | | | 7,954,523 | | | | 7,939,639 | | | | 7,027,002 | |
| Diluted net income per share | | $ | 0.01 | | | $ | 0.05 | | | $ | 0.35 | |
| | | | | | | | | | | | | |
The following is a summary of the weighted average securities during the respective periods that have been excluded from the calculation because the effect on net income per share would be antidilutive:
| | | | | | | | | | | | | |
| | | Year Ended May 31, | |
| | | 2007 | | | 2006 | | | 2005 | |
| |
| Restricted stock | | | 2,728 | | | | 2,643 | | | | — | |
| Common stock options | | | 634,401 | | | | 194,030 | | | | 23,589 | |
| | | | | | | | | | | | | |
| | | | 637,129 | | | | 196,673 | | | | 23,589 | |
| | | | | | | | | | | | | |
| |
| 8. | Stock Based Compensation |
In July 2004, the Board of Directors adopted the 2004 Plan, which amended and restated in its entirety the 1999 Amended and Restated Equity Incentive Plan (the “1999 Plan”). Options granted prior to July 10, 2004 shall remain in effect and subject to the terms of the 1999 Plan. A total of 1,549,669 shares of common stock were authorized for issuance under the 2004 Plan. Generally, options vest at the rate of 25% on the first anniversary of the grant and 25% each successive year until fully vested. Options granted under the 2004 Plan are exercisable over a period of time, generally either 7 or 10 years, designated by the Board and are subject to other terms and conditions as determined by the Board. When a stock award expires or is terminated before it is exercised, the shares become available for issuance under the 2004 Plan.
The 2004 Plan permits the grant of options to directors, officers, employees, consultants, and advisors. Options may be either incentive stock options or nonqualified stock options. The 2004 Plan also permits the grant of stock bonuses and rights to purchase restricted stock. There were 345,252 shares remaining for future grant under the Plan as of May 31, 2007.
Beginning on June 1, 2006, the number of reserved shares is increased annually on the first day of each fiscal year by the lesser of (i) 3% of the total number of shares of common stock outstanding on the last day of the previous fiscal year, (ii) 198,675 shares, or (iii) a lesser number of shares as determined by our board of directors.
49
CELEBRATE EXPRESS, INC.
Notes to financial Statements — (Continued)
Determining Fair Value
We calculate the fair value of our stock options granted to employees using the Black-Scholes option pricing model using the single option award approach. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. The following weighted-average assumptions were used in arriving at the fair value of each option grant:
| | | | | | | |
| | | Years Ended May 31, |
| | | 2007 | | 2006 | | 2005 |
| |
| Expected dividend rate | | 0% | | 0% | | 0% |
| Expected volatility | | 58.3% | | 56.6% | | 92.5% |
| Expected term (in years) | | 5.6 | | 4.3 | | 3.9 |
| Risk-free interest rate | | 5.0% | | 4.4% | | 4.3% |
| Weighted average fair value | | $6.92 | | $6.54 | | $9.87 |
Expected Volatility. Our computation of expected volatility in fiscal 2007 is based on the historical volatility of our common stock and the experience of what we believe are peer companies based on the similar nature of our industry and option plan characteristics. We used a volatility factor that considers the historical experience of these peer companies using a period commensurate with the expected life of the award.
Expected Term. Our expected life in fiscal 2007 was calculated using the simplified method outlined by SEC Staff Accounting Bulletin No. 107 (SAB 107). Under this method, our expected term is equal to the sum of the weighted average vesting term plus the original contractual term divided by two. Prior to fiscal 2007, our computation of expected life was based on vesting schedules and historical experience of options exercised.
Risk-Free Interest Rate. We base the risk-free interest rate on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent term to the expected life of the award.
Expected Dividend. A dividend yield of 0% was considered appropriate due to the lack of historical dividends paid. Although a dividend was paid to shareholders in April 2007, this is considered a special one-time dividend that is not indicative of future dividend activity.
When estimating forfeitures, we considered historical termination behavior, in addition to analyzing actual option forfeitures. Our forfeiture rate is based on the weighted average termination behavior of our employees and board members, which is approximately 10.9%. This forfeiture rate was applied to all options granted subsequent to June 1, 2006 and to the carryover amount for options granted prior to, but not vested as of June 1, 2006. Prior to adoption of FAS 123R, we recognized the impact of forfeitures when they occurred.
Stock Compensation Expense
We recognized stock-based compensation totaling $1.3 million for the year ended May 31, 2007 under FAS 123R. As required by FAS 123R, management made an estimate of expected forfeitures and is recognizing compensation costs only for those equity awards expected to vest. Prior to June 1, 2006, we recognized stock-based compensation under the provisions of APB 25 for options granted with exercise prices below market value on the date of grant. Compensation expense under the previous methods for the years ended May 31, 2006 and May 31, 2005 totaled $179,000 and $295,000, respectively.
50
CELEBRATE EXPRESS, INC.
Notes to financial Statements — (Continued)
The following table summarizes stock-based compensation by operating function recorded in the Statement of Operations:
| | | | | | | | | | | | | |
| | | Years Ended May 31, | |
| | | 2007 | | | 2006 | | | 2005 | |
| |
| Cost of sales | | $ | 28,272 | | | $ | 20,973 | | | $ | 20,112 | |
| Fulfillment | | | 57,539 | | | | 21,854 | | | | 19,608 | |
| Selling and marketing | | | 198,307 | | | | 62,458 | | | | 183,868 | |
| General and administrative | | | 1,021,213 | | | | 73,413 | | | | 71,822 | |
| | | | | | | | | | | | | |
| | | $ | 1,305,331 | | | $ | 178,698 | | | $ | 295,410 | |
| | | | | | | | | | | | | |
As of May 31, 2007, the total compensation cost related to unvested options and restricted stock units granted to employees totaled $2.9 million, inclusive of estimated forfeitures. This cost will be amortized on a straight-line basis over a weighted-average period of 1.5 years and will be adjusted for actual forfeitures.
Recorded stock compensation expense in fiscal 2006 and 2005 relates primarily to options granted prior to our October 2004 initial public offering. For such options, the Company determined the fair value of the underlying common stock using a retrospective valuation approach based on several factors, including market capitalizations of similar retailers and discounted cash flow modeling techniques. The valuations were performed by Company personnel and supported by a valuation report received from an independent valuation firm. Subsequent to the offering date the fair value of options granted is determined based on the market value on the date of grant.
Stock Option Activity
Stock option transactions are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2007 | | | 2006 | | | 2005 | |
| | | | | | Weighted-Average
| | | | | | Weighted-Average
| | | | | | Weighted-Average
| |
| | | Shares | | | Exercise Price | | | Shares | | | Exercise Price | | | Shares | | | Exercise Price | |
| |
| Outstanding, beginning of year | | | 512,260 | | | $ | 9.33 | | | | 757,584 | | | $ | 4.86 | | | | 702,588 | | | $ | 1.36 | |
| Granted | | | 483,240 | | | | 11.97 | | | | 209,556 | | | | 13.47 | | | | 288,055 | | | | 14.36 | |
| Exercised | | | (155,496 | ) | | | 1.73 | | | | (255,677 | ) | | | 1.51 | | | | (120,103 | ) | | | 0.68 | |
| Cancelled or expired | | | (122,258 | ) | | | 12.99 | | | | (199,203 | ) | | | 6.45 | | | | (112,956 | ) | | | 11.87 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Outstanding, end of year | | | 717,746 | | | | 12.07 | | | | 512,260 | | | | 9.33 | | | | 757,584 | | | | 4.86 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Exercisable, end of year | | | 170,370 | | | | 11.71 | | | | 256,864 | | | | 5.88 | | | | 395,331 | | | | 2.35 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
The aggregate intrinsic value of the option shares outstanding and exercisable at May 31, 2007 was $182,000 and $159,000, respectively. The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the market price of our common stock for the shares subject to options that were in-the-money at May 31, 2007. The weighted-average remaining contractual term of the option shares outstanding and exercisable at May 31, 2007 is 8.08 years and 7.06 years, respectively. The weighted-average fair value at grant date of options granted during fiscal 2007, 2006 and 2005 was $6.92, $6.66 and $9.87, respectively. The exercise price of all options granted in fiscal 2007 and 2006 was equal to the fair value on the grant date. There were 167,563 options granted in fiscal 2005 with exercise prices less than the market value on the date of grant. The weighted-average fair value at the date of grant for these options was $10.55. The remaining options granted in 2005 had exercise prices equal to the market value on the date of grant and had a weighted-average fair value at the date of grant of $8.93.
Certain employees have been granted restricted stock unit awards pursuant to the 2004 Plan. In fiscal 2006, a total of 10,600 shares were granted and were valued at the closing stock price of $11.98 on the date of grant. In fiscal
51
CELEBRATE EXPRESS, INC.
Notes to financial Statements — (Continued)
2007, an additional 2,000 shares were granted and were valued at the closing stock price of $13.07 on the date of grant. There were no restricted stock unit awards granted during fiscal 2005. During the twelve months ended May 31, 2007, 6,300 shares vested and 3,500 shares were forfeited. As of May 31, 2007 there were 2,800 shares outstanding and unvested.
Additional information regarding options outstanding as of May 31, 2007 is as follows:
| | | | | | | | | | | | | |
| | | | | | Weighted-Average
| | | | |
| | | Number
| | | Remaining Contractual
| | | Number
| |
Range of Exercise Prices | | Outstanding | | | Life (in Years) | | | Exercisable | |
| |
| $ 0.41 - 0.53 | | | 14,860 | | | | 5.62 | | | | 13,286 | |
| 1.66 - 1.72 | | | 5,300 | | | | 6.65 | | | | 3,829 | |
| 7.55 - 9.12 | | | 43,115 | | | | 4.95 | | | | 18,115 | |
| 11.69 - 12.91 | | | 489,329 | | | | 8.48 | | | | 67,555 | |
| 13.05 - 14.72 | | | 139,396 | | | | 7.61 | | | | 48,855 | |
| 16.06 - 18.75 | | | 25,746 | | | | 7.53 | | | | 18,730 | |
| | | | | | | | | | | | | |
| | | | 717,746 | | | | | | | | 170,370 | |
| | | | | | | | | | | | | |
| |
| 9. | Employee Stock Purchase Plan |
Effective in October 2004, the Company adopted an Employee Stock Purchase Plan (the “ESPP”) to provide certain eligible employees with the opportunity to purchase from the Company shares of common stock of the Company at a discount from the market price. Employees may contribute a maximum of 15% of his or her total earnings through payroll deductions. The accumulated deductions will be applied to the purchase of shares on each semi-annual purchase date.
The ESPP provides for consecutive six month offering periods, with the offering periods beginning on April 1 and October 1, and ending on September 30 and March 31, respectively of each year thereafter. The first business day of each offering period is the offering date. The last business day of each offering period is the purchase date for the applicable offering period. The purchase price per share will be equal to 85% of the fair market value of a share on the offering date for the applicable offering period, or if lower, the fair market value of a share on the applicable purchase date in such a period.
The Company’s board of directors has reserved 132,450 shares of common stock for issuance under the ESPP. The number of shares of common stock reserved and available for issuance pursuant to the ESPP will automatically increase on June 1 of each year until and including June 1, 2010, by a number of shares equal to the lesser of (i) 132,450, (ii) 2% of the number of shares of common stock of the Company outstanding on that date, or (iii) a lesser number determined by the board of directors or a committee appointed by the board of directors.
| |
| 10. | Employee Benefit Plan |
The Company sponsors a 401(k) Profit Sharing Plan (the “Plan”), which covers all eligible employees. The Plan is a qualified defined contribution plan in which all eligible employees may elect to have a percentage of their pretax compensation contributed to the Plan, subject to certain guidelines issued by the Internal Revenue Service. The Company can match contributions and provide profit sharing contributions. The Company made no such contributions during the years ended May 31, 2007, 2006 or 2005.
| |
| 11. | Severance and Related Costs |
The results for the prior fiscal year ended May 31, 2006 include approximately $1.2 million in severance and related costs. On October 17, 2005, the Company entered into settlement agreements with Ms. Lori Liddle, Chief Marketing and Merchandising Officer, Ms. Dina Alhadeff, Vice President, Storybook and a third individual, which
52
CELEBRATE EXPRESS, INC.
Notes to financial Statements — (Continued)
agreements provide for, among other things, cash severance payments, agreements not to compete and agreements to dismiss a legal complaint by such individuals alleging wrongful termination. The $1.2 million of severance and related costs was incurred during the quarter ending November 30, 2005, at which time we agreed to settlement of all claims including claims of wrongful termination by these former employees, and is comprised of the cash severance payments and related payroll taxes, as well as legal fees incurred by the Company relating to the severance negotiations and the complaint of wrongful termination. There were no significant severance and related costs in fiscal 2007.
| |
| 12. | Quarterly Financial Data (Unaudited) |
The following tables set forth our unaudited quarterly results of operations data for the eight most recent quarters for the period ended May 31, 2007. We have prepared this information on the same basis as the Statements of Operations and the information includes all adjustments, consisting only of normal recurring adjustments, that we consider necessary.
| | | | | | | | | | | | | | | | | |
| | | 2007 Quarter Ended | |
| | | Aug. 31 | | | Nov. 30 | | | Feb. 28 | | | May 31 | |
| | | (In thousands, except per share amounts) | |
| |
| Net sales | | $ | 19,942 | | | $ | 28,511 | | | $ | 16,680 | | | $ | 20,109 | |
| Cost of sales | | | 9,944 | | | | 14,193 | | | | 7,582 | | | | 9,101 | |
| | | | | | | | | | | | | | | | | |
| Gross margin | | | 9,998 | | | | 14,318 | | | | 9,098 | | | | 11,008 | |
| Operating expenses: | | | | | | | | | | | | | | | | |
| Fulfillment | | | 2,979 | | | | 3,433 | | | | 2,495 | | | | 2,594 | |
| Selling and marketing | | | 5,318 | | | | 7,751 | | | | 4,714 | | | | 5,857 | |
| General and administrative | | | 2,442 | | | | 2,801 | | | | 2,491 | | | | 2,982 | |
| | | | | | | | | | | | | | | | | |
| Total operating expenses | | | 10,739 | | | | 13,985 | | | | 9,700 | | | | 11,433 | |
| Income (loss) from operations | | | (741 | ) | | | 333 | | | | (602 | ) | | | (425 | ) |
| Other income, net: | | | | | | | | | | | | | | | | |
| Interest income, net | | | 383 | | | | 427 | | | | 400 | | | | 351 | |
| | | | | | | | | | | | | | | | | |
| Net income (loss) before income taxes | | | (358 | ) | | | 760 | | | | (202 | ) | | | (74 | ) |
| Income tax benefit (expense) | | | 32 | | | | (192 | ) | | | 65 | | | | 12 | |
| | | | | | | | | | | | | | | | | |
| Net income (loss) | | | (326 | ) | | | 568 | | | | (137 | ) | | | (62 | ) |
| | | | | | | | | | | | | | | | | |
| Net income (loss) per share: | | | | | | | | | | | | | | | | |
| Basic | | $ | (0.04 | ) | | $ | 0.07 | | | $ | (0.02 | ) | | $ | (0.01 | ) |
| | | | | | | | | | | | | | | | | |
| Diluted | | $ | (0.04 | ) | | $ | 0.07 | | | $ | (0.02 | ) | | $ | (0.01 | ) |
| | | | | | | | | | | | | | | | | |
53
CELEBRATE EXPRESS, INC.
Notes to financial Statements — (Continued)
| | | | | | | | | | | | | | | | | |
| | | 2006 Quarter Ended | |
| | | Aug. 31 | | | Nov. 30 | | | Feb. 28 | | | May 31 | |
| | | (In thousands, except per share amounts) | |
| |
| Net sales | | $ | 17,928 | | | $ | 26,129 | | | $ | 18,786 | | | $ | 24,173 | |
| Cost of sales | | | 8,917 | | | | 13,113 | | | | 9,788 | | | | 12,426 | |
| | | | | | | | | | | | | | | | | |
| Gross margin | | | 9,011 | | | | 13,016 | | | | 8,998 | | | | 11,747 | |
| Operating expenses: | | | | | | | | | | | | | | | | |
| Fulfillment | | | 2,310 | | | | 2,857 | | | | 3,001 | | | | 3,449 | |
| Selling and marketing | | | 4,022 | | | | 6,403 | | | | 4,927 | | | | 6,724 | |
| General and administrative | | | 1,820 | | | | 2,247 | | | | 2,008 | | | | 2,401 | |
| Severance and related expenses(1) | | | — | | | | 1,179 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | |
| Total operating expenses | | | 8,152 | | | | 12,686 | | | | 9,936 | | | | 12,574 | |
| Income (loss) from operations | | | 859 | | | | 330 | | | | (938 | ) | | | (827 | ) |
| Other income, net: | | | | | | | | | | | | | | | | |
| Interest income, net | | | 242 | | | | 304 | | | | 323 | | | | 362 | |
| | | | | | | | | | | | | | | | | |
| Net income (loss) before income taxes | | | 1,101 | | | | 634 | | | | (615 | ) | | | (465 | ) |
| Income tax benefit (expense) | | | (401 | ) | | | (207 | ) | | | 217 | | | | 141 | |
| | | | | | | | | | | | | | | | | |
| Net income (loss) | | | 700 | | | | 427 | | | | (398 | ) | | | (324 | ) |
| | | | | | | | | | | | | | | | | |
| Net income (loss) per share: | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.09 | | | $ | 0.06 | | | $ | (0.05 | ) | | $ | (0.04 | ) |
| | | | | | | | | | | | | | | | | |
| Diluted | | $ | 0.09 | | | $ | 0.05 | | | $ | (0.05 | ) | | $ | (0.04 | ) |
| | | | | | | | | | | | | | | | | |
| | |
| (1) | | In our second quarter ended November 30, 2005, we recorded severance and related costs of $1,179 related to the termination of certain officers of the corporation in July 2005. |
54
| |
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
None.
| |
| Item 9A. | Controls and Procedures. |
As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of our management, including our chief executive officer and chief financial officer (collectively, our “certifying officers”), of the effectiveness of the design and operation of our disclosure controls and procedures. Based on their evaluation, our certifying officers concluded that these disclosure controls and procedures are effective in providing reasonable assurance that the information required to be disclosed by us in our periodic reports filed with the Securities and Exchange Commission (“SEC”) is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and SEC reports.
We believe that a system of internal controls, no matter how well designed and operated, is based in part upon certain assumptions about the likelihood of future events, and therefore can only provide reasonable, not absolute, assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
We have reviewed our internal controls over financial reporting and have made no changes during the quarter ended May 31, 2007 that our certifying officers concluded materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| |
| Item 9B. | Other Information. |
None.
PART III
Certain information required by Part III is omitted from this report because the Company will file a definitive proxy statement within 120 days after the end of its fiscal year pursuant to Regulation 14A (the “Proxy Statement”) for its 2007 annual meeting of shareholders (“2007 Annual Meeting of Shareholders”), and the information included in the Proxy Statement is incorporated herein by reference.
| |
| Item 10. | Directors and Executive Officers of the Registrant. |
The information required by Item 10 is incorporated by reference to the Proxy Statement.Compliance with Section 16(a) of the Exchange Act. The information required by Item 10 relating to compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to the Proxy Statement.
Code of Ethics. We have adopted a “Code of Ethics” applicable to our directors, officers and employees including our chief executive officer and our senior financial officers. Our Code of Ethics is available in the Investor Information section of our website www.celebrateexpress.com or by requesting a free copy by writing us at Celebrate Express, Inc., 11232 — 120th Avenue NE, Suite 204, Kirkland, Washington 98033, attention Investor Relations. We intend to satisfy the disclosure requirements regarding any amendment to, or waiver from, a provision of our Code of Ethics by disclosing such matters in the Investor Relations section of our website.
| |
| Item 11. | Executive Compensation. |
The information required by Item 11 is incorporated by reference to the Proxy Statement.
| |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
The information required by Item 12 is incorporated by reference to the Proxy Statement.
| |
| Item 13. | Certain Relationships and Related Transactions. |
The information required by Item 13 is incorporated by reference to the Proxy Statement.
| |
| Item 14. | Principal Accountant Fees and Services. |
The information required by Item 14 is incorporated by reference to the Proxy Statement.
55
PART IV
| |
| Item 15. | Exhibits and Financial Statement Schedules. |
(a) The following documents are filed as part of this report:
(1) See Item 8 for Financial Statements and Report of Grant Thornton LLP
(2) Exhibits
| | | | | |
| | 3 | .1(1) | | Amended and Restated Articles of Incorporation of Celebrate Express, Inc. |
| | 3 | .2(1) | | Amended and Restated Bylaws of Celebrate Express, Inc. |
| | 3 | .3(2) | | Amendments to Sections 2.1, 2.2 and 3.3 of the Amended and Restated Bylaws of Celebrate Express, Inc. |
| | 3 | .4(3) | | Amendments to Sections 3.9 and 11.1 of the Amended and Restated Bylaws of Celebrate Express, Inc. |
| | 3 | .5(4) | | Amendment to Section 11.1 of the Amended and Restated Bylaws of Celebrate Express, Inc. |
| | 4 | .1(1) | | Specimen Common Stock Certificate |
| | 4 | .2(1) | | Amended and Restated Investor’s Rights Agreement dated November 15, 2001, by and among the Company and the investors named therein |
| | 4 | .3(5) | | Preferred Shares Rights Agreement, dated July 25, 2005 |
| | 4 | .4(5) | | Form of Preferred Shares Rights Certificate |
| | 10 | .1(1)* | | Form of Indemnity Agreement entered into by the Registrant and each of its directors and executive officers |
| | 10 | .2(1)* | | 2004 Amended and Restated Equity Incentive Plan and forms of agreements thereunder |
| | 10 | .3(1)* | | Employee Stock Purchase Plan |
| | 10 | .4(1) | | Lease agreement between Registrant and Highwoods Realty Limited Partnership dated November 12, 1999 |
| | 10 | .5(1) | | First Amendment to Lease between Registrant and Highwoods Realty Limited Partnership dated June 14, 2004 |
| | 10 | .6(6) | | Second Amendment to Lease Agreement between the Company and Highwoods Realty Limited Partnership, dated as of December 15, 2004. |
| | 10 | .7(1) | | Lease agreement between Registrant and Queen Investment Company dated October 1, 2003 |
| | 10 | .8(1) | | Lease Amendment No. 1 between Registrant and Queen Investment Company dated March 3, 2004 |
| | 10 | .9(7) | | Lease agreement between Registrant and Queen Investment Company dated June 8, 2006 |
| | 10 | .10(8) | | Third Amendment to Lease Agreement between the Company and Highwoods Realty Limited Partnership, dated as of April 18, 2007 |
| | 10 | .11(9)* | | Employment offer letter with Mr. Dennis Everhart, dated July 28, 2006. |
| | 10 | .12(9)* | | Employment offer letter with Ms. Lisa Tuttle, dated August 30, 2006. |
| | 10 | .13(9)* | | Severance and Change in Control Agreement with Mr. Darin White, dated September 18, 2006 |
| | 10 | .14(10)* | | Employment offer letter with Ms. Beth Sommers dated November 27, 2006 |
| | 10 | .15(11)* | | Celebrate Express Fiscal 2007 Bonus Program Summary |
| | 10 | .16* | | Employment offer letter with Mr. Michael Eisenberg, dated May 14, 2007 |
| | 23 | .1 | | Consent of Grant Thornton LLP, Independent Registered Public Accounting Firm |
| | 31 | .1 | | Rule 13a-14(a) Certification (CEO) |
| | 31 | .2 | | Rule 13a-14(a) Certification (CFO) |
| | 32 | .1 | | Section 1350 Certification (CEO) |
| | 32 | .2 | | Section 1350 Certification (CFO) |
| | |
| (1) | | Incorporated by reference to Registrant’s Registration Statement onForm S-1 (FileNo. 333-117459), as amended, initially filed with the Securities and Exchange Commission on July 16, 2004. |
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| | |
| (2) | | Incorporated by reference to Registrant’s Current Report onForm 8-K filed with the Securities and Exchange Commission on July 11, 2006 |
| |
| (3) | | Incorporated by reference to Registrant’s Current Report onForm 8-K filed with the Securities and Exchange Commission on July 20, 2006 |
| |
| (4) | | Incorporated by reference to Registrant’s Current Report onForm 8-K filed with the Securities and Exchange Commission on March 9, 2007. |
| |
| (5) | | Incorporated by reference to Registrant’s Current Report onForm 8-K filed with the Securities and Exchange Commission on July 25, 2006. |
| |
| (6) | | Incorporated by reference to Registrant’s Quarterly Report onForm 10-Q filed with the Securities & Exchange Commission on April 14, 2005. |
| |
| (7) | | Incorporated by reference to Registrant’s Annual Report onForm 10-K for the year ended May 31, 2006. |
| |
| (8) | | Incorporated by reference to Registrant’s Current Report onForm 8-K filed with the Securities and Exchange Commission on April 24, 2007. |
| |
| (9) | | Incorporated by reference to Registrant’s Quarterly Report onForm 10-Q filed with the Securities & Exchange Commission on October 13, 2006. |
| |
| (10) | | Incorporated by reference to Registrant’s Quarterly Report onForm 10-Q filed with the Securities & Exchange Commission on January 12, 2007 |
| |
| (11) | | Incorporated by reference to Registrant’s Quarterly Report onForm 10-Q filed with the Securities & Exchange Commission on April 13, 2007. |
| |
| * | | Management compensatory plans, contract or arrangement required to be filed as exhibits to this report. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CELEBRATE EXPRESS, INC.
Kevin A. Green
President and Chief Executive Officer
Date: August 17, 2007
Darin L. White
Vice President, Finance
Date: August 17, 2007
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
��
| | | | | | | |
Signature | | Title | | Date |
| |
/s/ Kevin A. Green
Kevin A. Green | | President and Chief Executive Officer (Principal Executive Officer) | | August 17, 2007 |
/s/ Darin L. White
Darin L. White | | Vice President, Finance and Secretary (Principal Financial and
Accounting Officer) | | August 17, 2007 |
/s/ Keith Crandell
Keith Crandell | | Director | | August 17, 2007 |
/s/ Estelle DeMuesy
Estelle DeMuesy | | Director | | August 17, 2007 |
/s/ Donald R. Hughes
Donald R. Hughes | | Director | | August 17, 2007 |
/s/ Jean Reynolds
Jean Reynolds | | Director | | August 17, 2007 |
/s/ Stephen Roseman
Stephen Roseman | | Director | | August 17, 2007 |
/s/ Kenneth A. Shubin Stein
Kenneth A. Shubin Stein | | Director | | August 17, 2007 |
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EXHIBIT INDEX
| | | | | |
Exhibit No. | | Description |
| |
| | 3 | .1(1) | | Amended and Restated Articles of Incorporation of Celebrate Express, Inc. |
| | 3 | .2(1) | | Amended and Restated Bylaws of Celebrate Express, Inc. |
| | 3 | .3(2) | | Amendments to Sections 2.1, 2.2 and 3.3 of the Amended and Restated Bylaws of Celebrate Express, Inc. |
| | 3 | .4(3) | | Amendments to Sections 3.9 and 11.1 of the Amended and Restated Bylaws of Celebrate Express, Inc. |
| | 3 | .5(4) | | Amendment to Section 11.1 of the Amended and Restated Bylaws of Celebrate Express, Inc. |
| | 4 | .1(1) | | Specimen Common Stock Certificate |
| | 4 | .2(1) | | Amended and Restated Investor’s Rights Agreement dated November 15, 2001, by and among the Company and the investors named therein |
| | 4 | .3(5) | | Preferred Shares Rights Agreement, dated July 25, 2005 |
| | 4 | .4(5) | | Form of Preferred Shares Rights Certificate |
| | 10 | .1(1)* | | Form of Indemnity Agreement entered into by the Registrant and each of its directors and executive officers |
| | 10 | .2(1)* | | 2004 Amended and Restated Equity Incentive Plan and forms of agreements thereunder |
| | 10 | .3(1)* | | Employee Stock Purchase Plan |
| | 10 | .4(1) | | Lease agreement between Registrant and Highwoods Realty Limited Partnership dated November 12, 1999 |
| | 10 | .5(1) | | First Amendment to Lease between Registrant and Highwoods Realty Limited Partnership dated June 14, 2004 |
| | 10 | .6(6) | | Second Amendment to Lease Agreement between the Company and Highwoods Realty Limited Partnership, dated as of December 15, 2004. |
| | 10 | .7(1) | | Lease agreement between Registrant and Queen Investment Company dated October 1, 2003 |
| | 10 | .8(1) | | Lease Amendment No. 1 between Registrant and Queen Investment Company dated March 3, 2004 |
| | 10 | .9(7) | | Lease agreement between Registrant and Queen Investment Company dated June 8, 2006 |
| | 10 | .10(8) | | Third Amendment to Lease Agreement between the Company and Highwoods Realty Limited Partnership, dated as of April 18, 2007 |
| | 10 | .11(9)* | | Employment offer letter with Mr. Dennis Everhart, dated July 28, 2006. |
| | 10 | .12(9)* | | Employment offer letter with Ms. Lisa Tuttle, dated August 30, 2006. |
| | 10 | .13(9)* | | Severance and Change in Control Agreement with Mr. Darin White, dated September 18, 2006 |
| | 10 | .14(10)* | | Employment offer letter with Ms. Beth Sommers dated November 27, 2006 |
| | 10 | .15(11)* | | Celebrate Express Fiscal 2007 Bonus Program Summary |
| | 10 | .16* | | Employment offer letter with Mr. Michael Eisenberg, dated May 14, 2007 |
| | 23 | .1 | | Consent of Grant Thornton LLP, Independent Registered Public Accounting Firm |
| | 31 | .1 | | Rule 13a-14(a) Certification (CEO) |
| | 31 | .2 | | Rule 13a-14(a) Certification (CFO) |
| | 32 | .1 | | Section 1350 Certification (CEO) |
| | 32 | .2 | | Section 1350 Certification (CFO) |
| | |
| (1) | | Incorporated by reference to Registrant’s Registration Statement onForm S-1 (FileNo. 333-117459), as amended, initially filed with the Securities and Exchange Commission on July 16, 2004. |
| |
| (2) | | Incorporated by reference to Registrant’s Current Report on Form8-K filed with the Securities and Exchange Commission on July 11, 2006 |
| |
| (3) | | Incorporated by reference to Registrant’s Current Report on Form8-K filed with the Securities and Exchange Commission on July 20, 2006 |
59
| | |
| (4) | | Incorporated by reference to Registrant’s Current Report on Form8-K filed with the Securities and Exchange Commission on March 9, 2007. |
| |
| (5) | | Incorporated by reference to Registrant’s Current Report on Form8-K filed with the Securities and Exchange Commission on July 25, 2006. |
| |
| (6) | | Incorporated by reference to Registrant’s Quarterly Report on Form10-Q filed with the Securities & Exchange Commission on April 14, 2005. |
| |
| (7) | | Incorporated by reference to Registrant’s Annual Report on Form10-K for the year ended May 31, 2006. |
| |
| (8) | | Incorporated by reference to Registrant’s Current Report on Form8-K filed with the Securities and Exchange Commission on April 24, 2007. |
| |
| (9) | | Incorporated by reference to Registrant’s Quarterly Report on Form10-Q filed with the Securities & Exchange Commission on October 13, 2006. |
| |
| (10) | | Incorporated by reference to Registrant’s Quarterly Report on Form10-Q filed with the Securities & Exchange Commission on January 12, 2007 |
| |
| (11) | | Incorporated by reference to Registrant’s Quarterly Report on Form10-Q filed with the Securities & Exchange Commission on April 13, 2007. |
| |
| * | | Management compensatory plans, contract or arrangement required to be filed as exhibits to this report. |
60
