Celebrate Express (BDAY) 10-Q 2005 Q4 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended February 28, 2005

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 number000-50973

CELEBRATE EXPRESS, INC.

(Exact name of registrant as specified in its charter)

Washington (State or other jurisdiction of incorporation or organization)	91-1644428 (I.R.S. Employer Identification No.)
11220 – 120th Avenue NE
Kirkland, Washington (Address of principal executive offices)	98033 (Zip Code)

(425) 250-1061
(Registrant’s telephone number, including area code)

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 that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yesþ Noo

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yeso Noþ

     As of March 31, 2005, there were 7,441,618 shares of the registrant’s common stock outstanding.

CELEBRATE EXPRESS, INC.

INDEX

	Page
PART I. FINANCIAL INFORMATION		1
Item 1. Financial Statements (unaudited)		1
Balance Sheets at February 28, 2005 and May 31, 2004		1
Statements of Operations For the Three and Nine Months Ended February 28, 2005 and February 29, 2004		2
Statements of Shareholders’ Equity (Deficit) For the Nine Months Ended February 28, 2005		3
Statements of Cash Flows For the Nine Months Ended February 28, 2005 and February 29, 2004.		4
Notes to Financial Statements		5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		8
Item 3. Quantitative and Qualitative Disclosures About Market Risk		22
Item 4. Controls and Procedures		22
PART II. OTHER INFORMATION		23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		23
Item 5. Other Information		23
Item 6. Exhibits		23
SIGNATURES		24
EXHIBIT 10.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

Cautionary Note Regarding Forward-Looking Statements

This quarterly report on Form 10-Q 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 industries 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,” “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 the caption “Factors that May Affect Future Operating Results” and elsewhere in this Form 10-Q. 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.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CELEBRATE EXPRESS, INC.

CONDENSED BALANCE SHEETS

(Unaudited)

	February 28, 2005			May 31, 2004
ASSETS
Current assets:
Cash and cash equivalents	$	3,003,968		$	2,243,300
Marketable securities		27,950,056
Accounts receivable		219,616			168,599
Inventories		6,807,992			5,926,287
Prepaid expenses		3,621,221			1,949,644
Deferred income taxes		213,580			265,700
Total current assets		41,816,433			10,553,530
Fixed assets, net		2,067,758			962,406
Deferred income taxes		7,930,564			8,746,962
Other assets, net		178,827			218,632
Total assets	$	51,993,582		$	20,481,530
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	2,173,197		$	3,030,417
Accrued liabilities		3,088,078			1,447,233
Current portion of long-term debt and capital leases		20,397			34,563
Total current liabilities		5,281,672			4,512,213
Long-term debt and capital lease obligations, net of debt discount of $64,020 at May 31, 2004 and $0 at February 28, 2005		1,699			4,953,081
Commitments and contingencies
Mandatorily redeemable convertible preferred stock, $0.001 par value — authorized 5,653,851 shares; 4,738,584 shares issued and outstanding at May 31, 2004, 0 shares at February 28, 2005; aggregate liquidation preference of $28,744,983 at May 31, 2004, $0 at February 28, 2005					28,043,782
Mandatorily redeemable convertible preferred stock warrants					1,056,344
Shareholders’ equity (deficit):
Common stock, $0.001 par value and additional paid-in-capital — authorized 10,000,000 shares; issued and outstanding, 1,635,365 shares at May 31, 2004; 7,429,312 shares at February 28, 2005		64,001,201			878,539
Contributed capital — common stock warrants		199,439			66,803
Unearned compensation		(842,130	)		(934,350	)
Accumulated deficit		(16,648,299	)		(18,094,882	)
Total shareholders’ equity (deficit)		46,710,211			(18,083,890	)
Total liabilities and shareholders’ equity (deficit)	$	51,993,582		$	20,481,530

See notes to financial statements

1

CELEBRATE EXPRESS, INC.

CONDENSED STATEMENTS OF OPERATIONS

(unaudited)

	Three months ended						Nine Months Ended
	February 28, 2005			February 29, 2004			February 28, 2005			February 29, 2004
Net sales	$	16,304,364		$	12,634,416		$	49,597,325		$	36,320,018
Cost of sales		7,884,779			6,450,439			24,548,768			18,632,150
Gross margin		8,419,585			6,183,977			25,048,557			17,687,868
Operating expenses:
Fulfillment		1,982,330			1,645,903			5,748,242			4,733,445
Selling and marketing		4,220,272			2,989,344			12,191,634			9,335,144
General and administrative		1,560,409			1,102,975			4,710,375			3,412,781
Total operating expenses		7,763,011			5,738,222			22,650,251			17,481,370
Income from operations		656,574			445,755			2,398,306			206,498
Other income (expense), net:
Interest income (expense), net		171,656			(147,273	)		(83,204	)		(457,315	)
Net income (loss) before income taxes		828,230			298,482			2,315,102			(250,817	)
Income tax expense		(307,439	)					(868,519	)
Net income (loss)		520,791			298,482			1,446,583			(250,817	)
Accretion to preferred stock redemption value					(66,476	)		(102,271	)		(199,428	)
Net income (loss) available for common shareholders’	$	520,791	��	$	232,006		$	1,344,312		$	(450,245	)
Net income (loss) per share:
Basic	$	0.07		$	0.16		$	0.31		$	(0.32	)
Diluted	$	0.07		$	0.06		$	0.22		$	(0.32	)
Weighted average shares outstanding:
Basic		7,415,750			1,420,401			4,368,272			1,411,807
Diluted		7,834,809			5,196,606			6,482,598			1,411,807

2

CELEBRATE EXPRESS, INC

CONDENSED STATEMENT OF SHAREHOLDERS’ EQUITY (DEFICIT)

(unaudited)

	Common stock and additional					Contributed capital-									Total
	paid-in-capital					common stock			Unearned			Accumulated			shareholders’
	Shares		Amount			warrants			compensation			deficit			Equity (Deficit)
BALANCE—June 1, 2004		1,635,365	$	878,539		$	66,803		$	(934,350	)	$	(18,094,882	)	$	(18,083,890	)
Exercise of common stock options		37,443		9,635												9,635
Accretion of preferred stock discount				(102,271	)											(102,271	)
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
Issuance of common stock, net of issuance 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		5,912		72,795			(66,803	)								5,992
Unearned compensation				191,822						(191,822	)					—
Cancellation of stock options				(63,951	)					63,951						—
Amortization of unearned compensation										220,091						220,091
Net Income													1,446,583			1,446,583
BALANCE—February 28, 2005		7,429,312	$	64,001,201		$	199,439		$	(842,130	)	$	(16,648,299	)	$	46,710,211

3

CELEBRATE EXPRESS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(unaudited)

	Nine months ended
	February 28, 2005			February 29, 2004
Cash flows from operating activities:
Net income (loss)	$	1,446,583		$	(250,817	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Deferred income taxes		868,518			—
Depreciation and amortization		498,518			634,328
Noncash compensation expense—stock options		220,091			60,354
Amortization of deferred financing costs		23,958			22,942
Accretion of debt discount		70,012			103,404
Changes in operating assets and liabilities:
Accounts receivable		(51,017	)		(51,275	)
Inventories		(881,705	)		(1,342,582	)
Prepaid expenses and other assets		(1,668,560	)		12,904
Accounts payable		(857,220	)		696,986
Accrued liabilities		1,640,845			850,481
Net cash provided by operating activities		1,310,023			736,725
Cash flows from investing activities:
Payments for purchases of fixed assets		(1,591,040	)		(423,980	)
Purchase of marketable securities		(60,000,056	)		—
Maturities of marketable securities		2,000,000			—
Sale of marketable securities		30,050,000			—
Net cash used in investing activities		(29,541,096	)		(423,980	)
Cash flows from financing activities:
Principal payments on capital lease obligations		(29,568	)		(28,928	)
Principal payments on notes payable		(5,000,000	)		(1,041,667	)
Net proceeds from sale of common stock, net of issuance costs		34,011,674			—
Proceeds from exercise of stock options		9,635			7,322
Other		—			721
Net cash provided by (used in) financing activities		28,991,741			(1,062,552	)
Net increase (decrease) in cash and cash equivalents		760,668			(749,807	)
Cash and cash equivalents:
Beginning of year		2,243,300			1,671,845
End of year	$	3,003,968		$	922,038
Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	213,423		$	333,823
Supplemental disclosures of noncash financing activities:
Conversion of mandatorily redeemable convertible preferred stock	$	28,146,053
Net exercise of common stock warrants	$	72,795
Net exercise of preferred stock warrants	$	856,905

4

See notes to financial statements

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 has three brands: Birthday Express, Storybook Heirlooms and Costume Express, which respectively offer children’s party products, girls’ special occasion and specialty apparel and children’s costumes and accessories.

     Basis of Presentation —Management has prepared the accompanying financial statements in accordance with accounting standards generally accepted in the United States of America. The financial information for the three and nine month periods ended February 29, 2004 and February 28, 2005 are unaudited. In the opinion of management, such information contains all adjustments, consisting of normal, recurring accruals, necessary for a fair presentation of the results for such periods. The results of operations for such interim periods are not necessarily indicative of the expected results of operations for the full fiscal year. These financial statements and related notes should be read in connection with the Company’s annual audited financial statements and notes included in the Company’s Registration Statement No. 333-117459 on Form S-1.

     The financial information as of May 31, 2004, is derived from the Company’s audited financial statements and notes thereto for the fiscal year ended May 31, 2004, included in Registration Statement No. 333-117459 on Form S-1.

     New accounting pronouncements– On December 16, 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Standard No. 123 (revised 2004),Share-Based Payment (“SFAS No. 123R”).SFAS No. 123R would require the Company to measure all employee stock-based compensation awards using a fair value method and record such expense in our consolidated financial statements. In addition, the adoption of SFAS No. 123R will require additional accounting related to the income tax effects and additional disclosure regarding the cash flow effects resulting from share-based payment arrangements. This statement is effective for the first annual or interim period beginning after June 15, 2005. The Company is currently evaluating the impact of adoption of this statement.

     On November 24, 2004, the FASB issued Statement No. 151,Inventory Costs, an amendment of ARB No. 43, Chapter 4(“SFAS No. 151”) which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. SFAS No. 151 requires that abnormal items be recognized as current-period charges, as well as unallocated overheads recognized in the period in which they are incurred. The provisions of this statement are effective for inventory costs incurred during fiscal periods beginning after June 15, 2005. The Company’s adoption of SFAS No. 151 is not expected to have a significant impact on the Company’s financial position.

     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.

     Stock-Based Compensation —The Company measures compensation cost of stock options in accordance with Accounting Principles Board (“APB”) Opinion No. 25,Accounting for Stock Issued to Employees, under which no recognition of expense is required in accounting for stock options granted to employees for which the exercise price equals or exceeds the fair value of the stock at the grant date. For stock options granted to employees for which the exercise price is less than the fair value of the stock on the date of the grant, the intrinsic value of stock options is recorded as unearned compensation and amortized into the Statement of Operations over the vesting period of the option.

     Had compensation cost been determined using Statement of Financial Accounting Standards (“SFAS”) No. 123,Accounting for Stock-Based Compensation, the impact on the Company’s net income (loss) for each period presented would have been as follows:

	Three months ended						Nine months ended
	February 28, 2005			February 29, 2004			February 28, 2005			February 29, 2004
Net income (loss) available for common shareholders, as reported	$	520,791		$	232,006		$	1,344,312		$	(450,245	)
Add: Stock-based employee compensation expense, as reported, net of tax		51,101			30,749			145,260			50,105
Deduct: Stock-based employee compensation expense determined under the fair-value-based method, net of tax		(112,076	)		(21,356	)		(278,554	)		(64,069	)
Pro forma net income (loss) available for common shareholders — basic	$	459,816		$	241,399		$	1,211,018		$	(464,209	)
Add: Accretion to preferrred stock redemption value					66,476			102,271
Pro Forma net income (loss) available for common shareholders — diluted	$	459,816		$	307,875		$	1,313,289
Net income (loss) per share:
Basic — as reported	$	0.07		$	0.16		$	0.31		$	(0.32	)
Diluted — as reported	$	0.07		$	0.06		$	0.22		$	(0.32	)
Basic — pro forma	$	0.06		$	0.17		$	0.28		$	(0.33	)
Diluted — pro forma	$	0.06		$	0.06		$	0.20		$	(0.33	)

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2. Cash and Cash Equivalents

     The Company considers all highly-liquid securities with a maturity of three months or less when purchased to be cash equivalents. The following tables summarize, by major type, the Company’s cash and cash equivalents (in thousands):

	February 28,		May 31,
	2005		2004
Cash	$	2,877	$	2,199
Money market funds		127		44
Cash and cash equivalents	$	3,004	$	2,243

3. Marketable Securities

     On February 28, 2005 the Company’s marketable securities consisted of auction rate securities which are carried at fair market value. Auction rate securities are securities earning income at a rate that is frequently reset to reflect current market conditions via an auction. As of February 28, 2005 reset dates ranged from 7 to 35 days. The Company has classified the following investments as available-for-sale securities as defined by Statement of Financial Accounting Standards No. 115,Accounting for Certain Investments in Debt and Equity Securities(in thousands):

	February 28,		May 31,
	2005		2004
Seven day auction rate securities	$	1,500		—
Twenty-eight day auction rate securities		25,450		—
Thirty-five day auction rate securities		1,000		—
	$	27,950		—

4. Inventories

     Inventories are stated at the lower of market or weighted-average cost on a first-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 conditions.

     The components were as follows (in thousands):

	February 28,		May 31,
	2005		2004
Finished goods	$	6,427	$	5,592
Raw materials		381		334
	$	6,808	$	5,926

4. Income (Loss) Per Share

     Basic net income (loss) per share is based on the weighted-average number of common shares outstanding. Diluted net income (loss) 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.

     The following table sets forth the computation of basic and diluted net income (loss) per share:

6

	Three months ended				Nine months ended
	February 28, 2005		February 29, 2004		February 28, 2005		February 29, 2004
Net income (loss) available for common shareholders — basic	$	520,791	$	232,006	$	1,344,312	$	(450,245	)
Add: Accretion to preferred stock redemption value				66,476		102,271
Net income (loss) available for common shareholders — diluted	$	520,791	$	298,482	$	1,446,583	$	(450,245	)
Weighted average common shares outstanding		7,415,750		1,420,401		4,368,272		1,411,807
Basic net income (loss) per share	$	0.07	$	0.16	$	0.31	$	(0.32	)
Common share equivalents:
Dilutive effect of common stock options		408,990		326,876		382,724
Dilutive effect of common and preferred stock warrants		10,069		311,154		87,796
Dilutive effect of mandatorily redemable convertible preferred stock				3,138,175		1,643,806
Weighted average common shares and common share equivalents		7,834,809		5,196,606		6,482,598		1,411,807
Diluted net income (loss) per share	$	0.07	$	0.06	$	0.22	$	(0.32	)

     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 (loss) would be antidilutive:

	Three months ended				Nine months ended
	February 28, 2005		February 29, 2004		February 28, 2005		February 29, 2004
Mandatorily redeemable convertible preferred Stock								3,121,302
Preferred stock warrants				27,176				99,451
Common stock warrants								198,308
Common stock options				26,239		8,033		275,360
		—		53,415		8,033		3,694,421

5. Initial public offering

     On October 19, 2004, the Company’s registration statement on Form S-1 was declared effective for its initial public offering, pursuant to which 3,200,000 shares of the Company’s common stock were sold at $15.50 per share. Of the 3,200,000 shares sold, 2,057,081 were sold by the Company and an aggregate of 1,142,919 shares were sold by selling shareholders. The Company’s common stock commenced trading on October 20, 2004. The offering closed on October 26, 2004, and, as a result, the Company received net proceeds of approximately $29.7 million (after underwriters’ discounts of $2.2 million). The Company incurred additional, estimated related expenses of approximately $1.5 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 transaction 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).

     On October 15, 2004 the Company effected a 1-for-1.51 reverse split of its common stock. 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.

     There were warrants to purchase 41,032 shares of mandatorily redeemable convertible preferred stock which were not exercised at the time of the Company’s initial public offering. Upon the closing of the offering, these warrants automatically became warrants to purchase 27,174 shares of our common stock.

6. Borrowing Arrangements

     On October 27, 2004, the Company paid in full a note payable in the amount of $5.0 million using the net proceeds of the Company’s initial public offering. The Company currently has no long-term debt.

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Item 2. 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 quarterly report on Form 10-Q. All statements in the following discussion that are not reports of historical information or descriptions of current accounting policy are 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 “Factors That May Affect Future Operating Results” set forth in this Form 10-Q, and the audited financial statements and the notes thereto and disclosures made under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Risk Factors”, “Financial Statements” and “Notes to Financial Statements”, included in our Registration Statement on Form S-1, as amended, filed with the Securities Exchange Commission, SEC File No. 333-117459.

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, girls’ special occasion and specialty apparel and children’s costumes complemented by a wide variety of accessories. Our centralized inventory management 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. Our goal is to help busy parents celebrate the special moments in their children’s lives.

In October 2004 we completed an initial public offering whereby 3,200,000 shares of the Company’s common stock were sold at $15.50 per share. Of the 3,200,000 shares sold, 2,057,081 were sold by the Company and an aggregate of 1,142,919 shares were sold by selling shareholders. The offering closed on October 26, 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 transaction 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) for a total proceeds from the offering of $35.5 million after underwriter’s discounts of $2.6 million. The Company used a portion of the proceeds from the offering for repayment of a $5.0 million term loan.

To date, we have derived our revenue primarily from the sale of party related products from our Birthday Express website and catalog. For the three months ended February 28, 2005, we generated $16.3 million in net sales, an increase of 29.0% from $12.6 million in the three months ended February 29, 2004. Our gross margin as a percentage of sales improved from 48.9% in the three months ended February 29, 2004 to 51.6% in the three months ended February 28, 2005. For the three months ended February 28, 2005, our net income before income taxes increased to $828,000 from $298,000 in the three months ended February 29, 2004.

For the nine months ended February 28, 2005, we generated $49.6 million in net sales, an increase of 36.6% from $36.3 million in the nine months ended February 29, 2004. Our gross margin as a percentage of sales improved from 48.7% in the nine months ended February 29, 2004 to 50.5% in the nine months ended February 28, 2005. For the nine months ended February 28, 2005, our net income before income taxes increased to $2.3 million from a net loss before income taxes of ($251,000) in the nine months ended February 29, 2004.

Comparison of Three Months Ended February 28, 2005 and February 29, 2004

Net Sales

Our net sales are comprised of product sales and shipping revenue. Net sales increased 29.0% to $16.3 million in the three months ended February 28, 2005 from $12.6 million in the three months ended February 29, 2004. The increase in net sales is due primarily to expanded direct marketing efforts. The increase in net sales in the three months ended February 28, 2005 over the same period in 2004 reflects an increase of approximately 22% in the number of orders shipped, which grew to 194,000 orders in the three months ended February 28, 2005 from 159,000 orders in the three months ended February 29, 2004. Net sales per order for the three months ended February 28, 2005 was $84.26, compared with net sales per order of $79.22 for the three months ending February 29, 2004, an increase of 6.4%. We saw increases in net sales per order in each of our brands. We added 110,000 new customers to our database during the third quarter, compared with 89,000 new customers added in the same quarter last year, an increase of approximately

8

23%. Revenue from our repeat customers represented approximately 49% of revenue during three months ended February 28, 2005 compared with the same percentage during the three months ended February 29, 2004.

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 36.2% to $8.4 million in the three months ended February 28, 2005 from $6.2 million in the three months ended February 29, 2004. Our gross margin percentage improved to 51.6% of net sales in the three months ended February 28, 2005 from 48.9% in the three months ended February 29, 2004. The increase in gross margin as a percent of revenue is primarily due to an increase in the percentage of our revenue derived from the sale of higher margin proprietary products.

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 in Greensboro, North Carolina. Our fulfillment expenses increased 20.4% to $2.0 million in the three months ended February 28, 2005 from $1.6 million in the three months ended February 29, 2004. As a percentage of net sales, these expenses decreased to 12.2% in the three months ended February 28, 2005 from 13.0% in the three months ended February 29, 2004. This decrease is due primarily to a reduction in labor related costs as a percentage of net sales. Approximately 63% of our revenue for the quarter came from our websites compared with roughly 57% during the third quarter last year. As the percentage of revenue from our websites continues to increase, we have seen efficiencies in our customer service labor due to the fact that, on average, fewer customer contacts are required for internet orders when compared with orders taken over the phone. We have also benefited from an increase in our net sales per order. Our fulfillment costs will fluctuate from quarter to quarter based upon the revenue mix among our three brands. For example, our Costume Express and Storybook Heirlooms brands have on average fewer items per order and require less labor in the distribution center. However, we have seen continued year-over-year reductions in our fulfillment expenses as a percentage of net sales.

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 41.2% to $4.2 million in the three months ended February 28, 2005 from $3.0 million in the three months ended February 29, 2004 due primarily to increases in online advertising and direct marketing circulation costs of $1.1 million. As a percentage of net sales selling and marketing expenses increased to 25.9% in the three months ended February 28, 2005 from 23.7% in the three months ended February 29, 2004. The increase as a percentage of net sales is due to more aggressive customer acquisition and customer reactivation efforts during the third quarter of fiscal 2005, compared with the third quarter of fiscal 2004. We also experienced an increase in paper prices, which increased the cost of print advertising. We are subject to potential increases in our online paid search costs, further increases in paper prices and postage rates related to our direct marketing campaigns. We expect that marketing will continue to be our largest operating expense line item and will increase in absolute dollars as we continue to expand sales and prospecting to new customers.

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 41.5% to $1.6 million in the three months ended February 28, 2005 from $1.1 million in the three months ended February 29, 2004. Salaries and related employee costs increased by $239,000 in the three months ended February 28, 2005 over the three months ended February 29, 2004 due to increases in employee headcount, particularly in our technology and administrative areas. Professional fees, insurance premiums and other

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related costs increased $122,000 in the three months ended February 28, 2005 over the three months ended February 29, 2004 primarily as a result of operating as a public company. Credit card fees increased by $96,000 in the three months ended February 28, 2005 over the three months ended February 29, 2004 due to the increase in net sales. As a percentage of net sales, our general and administrative expenses increased to 9.6% in the three months ended February 28, 2005 from 8.7% in the three months ended February 29, 2004.

Other Income (Expense), Net

The improvement in other income to $172,000 in the three months ended February 28, 2005, compared with other expense of ($147,000) in the three months ended February 29, 2004, is due primarily to interest earned from the proceeds from our initial public offering and the repayment of our $5.0 million term loan.

Income Taxes

In the three months ended February 28, 2005, we recognized income tax expense of $307,000 on income before taxes of $828,000. In the three months ended February 29, 2004, we did not recognize income tax expense as a result of a full valuation allowance against our deferred tax assets.

Comparison of Nine Months Ended February 28, 2005 and February 29, 2004

Net Sales

Net sales increased 36.6% to $49.6 million in the nine months ended February 28, 2005 from $36.3 million in the nine months ended February 29, 2004, due primarily to increased direct marketing efforts. The increase in net sales in the nine months ended February 28, 2005 over the same period in 2004 reflects a 31.9% increase in the number of orders shipped, which grew to 613,000 orders in the nine months ended February 28, 2005 from 465,000 orders in the nine months ended February 29, 2004. Our increase in net sales in the nine months ended February 28, 2005 over the comparable period in 2004 also reflects a 3.6% increase in net sales per order to $80.96 from $78.18. Net sales from our core brands, Birthday Express and Storybook Heirlooms, grew 32.5% in the nine months ended February 28, 2005 from the same period in the previous year.

Gross Margin

Gross margin increased 41.6% to $25.0 million in the nine months ended February 28, 2005 from $17.7 million in the nine months ended February 29, 2004. Our gross margin percentage improved to 50.5% of net sales in the nine months ended February 28, 2005 from 48.7% in the nine months ended February 29, 2004. The increase in gross margin percentage for the nine months ended February 29, 2005 is due primarily to the reduction of certain fixed production and design costs as a percentage of net revenue, as well as an increase in the percentage of our sales from higher margin proprietary products.

Fulfillment

Our fulfillment expenses increased 21.4% to $5.7 million in the nine months ended February 28, 2005 from $4.7 million in the nine months ended February 29, 2004. As a percentage of net sales, these expenses decreased to 11.6% in the nine months ended February 28, 2005 from 13.0% in the nine months ended February 29, 2004. The decrease as a percentage of sales is due primarily to labor efficiencies in our customer service and distribution centers, as well as continued leverage of our fixed costs in these areas.

Selling and Marketing

Selling and marketing costs increased 30.6% to $12.2 million in the nine months ended February 28, 2005 from $9.3 million in the nine months ended February 29, 2004, primarily due to increases in online advertising and direct marketing circulation costs of $2.6 million. As a percentage of net sales, selling and marketing expenses decreased to 24.6% in the nine months ended February 28, 2005 from 25.7% in the nine months ended February 29, 2004. The decline as a percentage of net sales is due primarily to leverage of fixed costs included in selling and marketing expenses, such as personnel and related costs.

General and Administrative

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General and administrative expenses increased 38.0% to $4.7 million in the nine months ended February 28, 2005 from $3.4 million in the nine months ended February 29, 2004. Salaries and related employee costs increased by $596,000 in the nine months ended February 28, 2005 over the nine months ended February 29, 2004 due to increases in employee headcount, particularly in our technology and administrative areas. Credit card fees increased by $380,000 in the nine months ended February 28, 2005 over the nine months ended February 29, 2004 due to the increase in net sales. Professional fees, insurance premiums and other related costs increased $281,000 in the nine months ended February 28, 2005 over the nine months ended February 29, 2004, primarily due to the increased costs of operating as a public company. As a percentage of net sales, our general and administrative expenses increased to 9.5% in the nine months ended February 28, 2005 from 9.4% in the nine months ended February 29, 2004.

Other Income (Expense), Net

Other expense, net decreased to ($83,000) in the nine months ended February 28, 2005 from ($457,000) in the nine months ended February 29, 2004. The decrease is due to interest income earned on the proceeds from our initial public offering, as well as a reduction in interest expense due to the repayment of our $5.0 million term loan.

Income Taxes

In the nine months ended February 28, 2005, we recognized income tax expense of $869,000 on income before taxes of $2.3 million. In the nine months ended February 29, 2004, we did not recognize income tax expense as a result of a full valuation allowance against our deferred tax assets.

Liquidity and Capital Resources

As of February 28, 2005 we had working capital of $36.5 million, including cash and cash equivalents of $3.0 million and marketable securities of $28.0 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.

We have financed our operations primarily through the sale of stock, capital lease obligations, short-term notes, credit facilities and term loans. On October 25, 2004, we closed an initial public offering of 3,200,000 shares of common stock at $15.50 per share. On November 2, 2004, the underwriters purchased 480,000 at $15.50 per share to cover over-allotments. Of the shares offered, 2,465,651 shares were offered by us, and 1,214,349 were offered by selling shareholders. We raised net proceeds of approximately $34.0 million in our initial public offering, net of underwriting discounts and estimated offering expenses.

Net cash provided by operating activities was $1.3 million and $737,000 for the nine months ended February 28, 2005 and February 29, 2004, respectively. The net cash provided in the nine months ended February 28, 2005 can be attributed primarily to net income. Prepaid expenses increased $1.7 million during the nine months ended February 28, 2005, which was due primarily to an increase of $1.4 million in prepaid catalog costs and an increase of $191,000 in prepaid insurance costs. The increase in prepaid expenses was partially offset by an increase in accrued liabilities of $1.6 million during the nine months ending February 28, 2005. The increase in accrued liabilities was due primarily to a $707,000 increase in deferred revenue, as well as an increase of $505,000 in accrued payroll and related employee costs due to timing. Net cash provided by operating activities in the nine months ended February 29, 2004 was used for principal payments on our notes payable, as well as purchases of fixed assets.

Net cash used in investing activities was $29.5 million and $424,000 for the nine months ended February 28, 2005 and February 29, 2004, respectively. Cash used in investing activities in the nine months ended February 28, 2005 related primarily to the net of purchases, sales and maturities of marketable securities of $28.0 million. Cash used in investing activities the nine months ended February 29, 2004 was used for capital expenditures.

Net cash provided by (used in) financing activities was $29.0 million and ($1.1 million) for the nine months ended February 28, 2005 and February 29, 2003, respectively. Cash provided by financing activities in the nine months ended February 28, 2005 was due to the net proceeds from our initial public offering, offset by the repayment of our term loan. Cash used in financing activities in the nine months ended February 29, 2004 was due primarily to principal payments on outstanding debt.

The following table summarizes our contractual obligations as of February 28, 2005 and the effect these obligations are expected to have on our liquidity and cash flows in future periods.

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	Payments Due by Period
	Total		Less than 1 year		1-3 years		3-5 years
	(in thousands)
Description of Contractual Obligations:
Capital lease obligations	$	22	$	20	$	2		—
Operating lease obligations		2,337		737		1,281	$	319
Total	$	2,359	$	757	$	1,283	$	319

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. Management believes there have been no material changes during the nine months ended February 28, 2005 to the critical accounting policies reported in the Management’s Discussion and Analysis section of our prospectus dated October 19, 2004, as filed with the Securities and Exchange Commission.

New accounting pronouncements- On December 16, 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard No. 123 (revised 2004),Share-Based Payment (“SFAS No. 123R”).SFAS No. 123R would require us to measure all employee stock-based compensation awards using a fair value method and record such expense in our consolidated financial statements. In addition, the adoption of SFAS No. 123R will require additional accounting related to the income tax effects and additional disclosure regarding the cash flow effects resulting from share-based payment arrangements. This statement is effective for the first annual or interim period beginning after June 15, 2005. The Company is currently evaluating the impact of adoption of this statement.

On November 24, 2004, the FASB issued Statement No. 151,Inventory Costs, an amendment of ARB No. 43, Chapter 4(“SFAS No. 151”) which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. SFAS No. 151 requires that abnormal items be recognized as current-period charges as well as unallocated overheads recognized in the period in which they are incurred. The provisions of this statement are effective for inventory costs incurred during fiscal periods beginning after June 15, 2005. The Company’s adoption of SFAS No. 151 is not expected to have a significant impact on the Company’s financial position.

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.

We achieved annual net income for the first time during our last fiscal year and we cannot assure you that we will continue to operate profitably.

We achieved an annual net income for the first time in our corporate history during our fiscal year ended May 31, 2004. Prior to our last fiscal year we have had a history of losses, including net losses of $1.6 million in our fiscal year ended May 31, 2003 and $4.3 million in our fiscal year ended May 31, 2002. We may incur losses again in our current or future fiscal years, especially as we introduce new products. We expect our operating expenses to increase in the future, as we, among other things:

•   expand into new product categories;

•   continue with our marketing efforts to build our brand names;

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•   expand our customer base;

•   upgrade our operational and financial systems, procedures and controls;

•   assume the responsibilities of being a public company; and

•   retain existing personnel and hire additional personnel.

In order to maintain profitability as we expand into new product categories, we will need to generate sales exceeding historical levels and/or reduce relative operating expenditures. We may not be able to generate the required sales from our current or new product categories or reduce operating expenses sufficiently to sustain or increase operating 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.

The favorable impact of the income tax benefit in 2004 affects the comparability of our results, and utilization of our deferred tax assets is dependent on future taxable income.

In our fiscal year ended May 31, 2004, based on the information existing at that time including consideration of our forecasted book and tax income, we reduced the valuation allowance on our deferred tax assets by $9.0 million and recognized a corresponding tax benefit in our fiscal 2004 results of operations. This tax benefit causes our financial results for our fiscal year ended May 31, 2004 to appear significantly more favorable than they would in the absence of the tax benefit. The favorable impact of the $9.0 million tax benefit may distort the trends in our operating results and will impact the comparability of our results of operations with other periods. The tax benefit may also make our financial results appear more favorable than those of companies with similar results of operations that have not reduced a valuation allowance on their net deferred tax assets in the comparable period. In addition, should our operating results fall below expectations, we may need to evaluate the need to re-establish a valuation allowance against our deferred tax assets. If the valuation allowance were to be re-established it would negatively affect the financial results in the period in which it was re-established. Additionally, unanticipated changes in ownership of our common stock may restrict the ability to realize the benefit of our net operating loss carryforwards.

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 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. In September 2003, we launched our website and catalog for Costume Express, a provider of children’s and family costumes. We have historically derived more than 80% of our revenues from the sale of party products and accessories to families with young children 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:

•   successfully design, produce and market new products;

•   identify and introduce new product categories;

•   maintain our gross margins with respect to new product categories;

•   provide a satisfactory mix of merchandise that is responsive to the needs of our customers;

•   broaden consumer awareness of our existing and future brands;

•   manage our online and offline marketing costs; and

•   manage our dual-channel direct marketing model.

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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.

We must compete with other party goods 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 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 merchandise returns, inventory write-downs and increased costs. Any shortcomings in our merchandise strategy could adversely affect our operating results and cash flows. This may, in turn, cause our stock price to fall.

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.

Failure to successfully manage or expand our fulfillment and distribution operations could cause us to incur increased costs or lose customers.

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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. If we are unable to successfully manage our fulfillment and distribution operations, we would be required to find one or more parties to provide these services for us. This could cause us to incur significantly higher expenses or result in additional costs related to balancing inventories among multiple distribution facilities. As our business grows we may need to further expand our fulfillment and distribution operations to accommodate increases in customer orders. Failure to expand these operations effectively could result in delays in fulfillment and shipment of customer orders, which might in turn hurt our reputation and discourage repeat sales.

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:

•   effective management of costs associated with the production and distribution of our catalogs;

•   achievement of adequate response rates to our mailings;

•   displaying a mix of merchandise in our catalogs that is attractive to our customers; and

•   timely delivery of catalog mailings to our customers.

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.

We will 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 1997 we acquired the assets of Great Days Publishing, Inc., a product line that offers a variety of personalized date history scrolls that chronicle noteworthy events. This product line is marketed under our Birthday Express brand. In April 2001, we acquired the assets of Storybook Inc. We expect to continue to 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:

•   problems assimilating the purchased products or business operations;

•   problems maintaining uniform standards, procedures, controls and policies;

•   unanticipated costs associated with the acquisition, including accounting charges and transaction expenses;

•   diversion of management’s attention from our existing brands;

•   adverse effects on existing business relationships with suppliers and customers;

•   risks associated with entering product categories in which we have no or limited prior experience; and

•   potential loss of key employees of acquired organizations.

For example, in the acquisition of Storybook, we incurred higher than expected customer returns, saleable product inventory was lower than expected and integration expenses were higher than forecasted. If we fail to properly evaluate

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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.

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 highly competitive markets including party goods, girls’ specialty apparel and children’s costumes. Our primary competition comes from traditional retailers that offer a variety of products in the party goods and apparel 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; traditional card and gift specialty retailers; supermarkets and drugstores; and catalog retailers of novelty items. Additionally, we compete in the girls’ apparel market with department stores and specialty apparel catalogs and retailers.

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 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 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 websites, and losing these customers would adversely affect our revenues and financial results.

Many consumers access our websites 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 websites. 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 websites, we would need to increase our marketing expenditures, which would adversely affect our financial results. If one or more of the search engines on which we rely for purchased listings modifies or terminates its relationship with us, our expenses could rise, we could lose customers, we could be forced to look for other advertising avenues and traffic to our websites 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 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 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.

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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 200 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. In our fiscal year ended May 31, 2004, products supplied by our ten largest suppliers represented approximately 36% of inventory purchases, with our largest supplier representing 10%. 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 associated with 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:

•   work stoppages;

•   transportation delays and interruptions;

•   political instability;

•   foreign currency fluctuations;

•   changing economic conditions;

•   an increased likelihood of counterfeit, knock-off or gray market goods;

•   expropriation, nationalization, imposition of tariffs, import and export controls and other non-tariff barriers, including quotas and restrictions on the transfer of funds;

•   environmental regulation; and

•   other changes in governmental policies.

Because of these factors, we may not be able to acquire desired products in sufficient quantities on terms acceptable to us in the future. Any inability to acquire suitable products or the loss of one or more key vendors could have a negative effect on our sales and operating results until alternative supply arrangements are made. Moreover, 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.

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 a strike or other disruption, could affect the ability of these

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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 the price of paper may increase our operating costs and make our expenses difficult to predict.

We are vulnerable to fluctuations in 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 the price of paper could make it difficult for us to accurately forecast our expenses.

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 continued services of our senior management and other key personnel. Our performance also depends on our ability to retain and motivate our officers and key employees. We do not have employment agreements with any of our key personnel. The loss of the services of any of our executive officers or other 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 other highly-skilled 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.

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, BirthdayExpress.com and Storybook Heirlooms 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 websites. We currently hold various relevant domain names, including www.BirthdayExpress.com,

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www.Storybook.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 websites, 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 websites. As our operations grow in size and scope, we will need to improve and upgrade our systems and infrastructure to offer customers enhanced services, capacity, features and functionality. The expansion of our systems and infrastructure will require us to commit substantial financial, operational and technical resources before the volume of our business increases, with no assurance of a corresponding increase in sales. If we cannot expand our systems in a timely manner to cope with increased customer usage, we could experience 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.

Our ability to provide high-quality service depends on the efficient and uninterrupted operation of our computer and communications systems. Our website has experienced system interruptions from time to time and could experience periodic system interruptions in the future. Our systems and operations are also 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. We do not have a formal disaster recovery plan or alternate providers of web hosting services, and outages at our data centers could mean the temporary loss of the use of our websites. 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 websites 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 center. Any material disruption or slowdown in our telephone order processing systems resulting from 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 center 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:

•   a failure to maintain or renew our existing lease agreement;

•   a power failure;

•   an employee strike or other labor stoppage;

•   telecommunications failure, terrorist attacks, acts of war or break-ins;

•   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 fulfill our customers’ orders through our Greensboro facility, we will 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 a decrease in sales in connection with the unfulfilled orders 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 maintain back-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.

If the equipment we use to produce our paper products breaks down, we may experience delays in our production process, deplete our inventory and lose customers.

We produce paper products, including plates, cups, party hats and favor boxes for all of our proprietary party themes. Because we do not have duplicate equipment for manufacturing all of these items, a failure of any piece of this equipment, particularly our printing machine, could halt our production process. Because we use specialized equipment, spare parts or repair technicians may not be immediately available. We keep only limited amounts of extra inventory in our warehouses to compensate for delays in production, and any extended mechanical failure could severely deplete our inventory, resulting in decreased sales and loss of customers.

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 three months ending February 28, 2005, our online sales represented approximately 63% 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:

•   actual or perceived lack of security of information or privacy protection;

•   possible disruptions, computer viruses or other damage to the Internet servers or to users’ computers; and

•   excessive governmental regulation.

If the Internet fails to grow as a commercial marketplace in the future, our sales may not increase as much as desired by our shareholders, or at all.

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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 graphically-rich websites that require 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.

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, 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 could damage our reputation and brands.

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. Such losses 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.

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We have based our policies for sales 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 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 by state and local governments of various taxes upon Internet commerce could create administrative burdens for us and could decrease our future sales.

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 websites and transaction-processing systems to customer requirements or emerging industry standards. 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.

Item 3. Quantitative and Qualitative Disclosures About Market 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 February 28, 2005 we held marketable securities consisting primarily of auction rate notes, which are subject to interest rate risk. On February 28, 2005, we had no long-term or short-term bank debt outstanding.

Item 4. 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 February 28, 2005 that our certifying officers concluded materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

(b) On October 19, 2004, the Company’s registration statement on Form S-1 (Registration Nos. 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 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 February 28, 2005, the Company has used the net proceeds from the offering for repayment of the Company’s $5.0 million term loan. The remaining proceeds from the offering are invested in commercial paper, auction rate securities and money market securities.

Item 5. Other Information

Our Current Report on Form 8-K filed on March 31, 2005, reporting our financial results for the three and nine months ended February 28, 2005, incorrectly stated the year-to-date net income per diluted share and weighted average diluted shares outstanding for the nine months ended February 28, 2005. As disclosed in Item 1 of this Form 10-Q, the correct net income per diluted share is $0.22 for the nine months ended February 28, 2005 and the correct weighted average diluted shares outstanding are 6.5 million for the same nine-month period. In the Current Report on Form 8-K filed on March 31, 2005, we had reported net income per diluted share of $0.23 for the nine months ended February 28, 2005 and weighted average diluted shares outstanding of 6.4 million for the same nine-month period.

Item 6. Exhibits.

Exhibit No.	Description
3.1(1)	Amended and Restated Articles of Incorporation of Celebrate Express, Inc.
3.2(1)	Bylaws of the Registrant — 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.
10.1	Second Amendment to Lease Agreement between the Company and Highwoods Realty Limited Partnership, dated as of December 15, 2004
31.1	Certification of Chief Executive Officer Required Under Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.2	Certification of Principal Financial Officer Required Under Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
32.1	Certification of Chief Executive Officer Required Under Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350.
32.2	Certification of Principal Financial Officer Required Under Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350.

(1) Incorporated by reference to Registrant’s Registration Statement on Form S-1 (File No. 333-117459), as amended, initially filed with the Securities and Exchange Commission on July 16, 2004.

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SIGNATURES

Pursuant to the requirements 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.
Date: April 14, 2005	By:	/s/ Michael K. Jewell
		Michael K. Jewell
		Chief Executive Officer and President
		(Principal Executive Officer)
Date: April 14, 2005	By:	/s/ Darin L. White
		Darin L. White
		Vice President, Finance
		(Principal Financial and Accounting Officer)

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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)	Bylaws of the Registrant — 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 Registrant and the investors named therein.
10.1	Second Amendment to Lease Agreement between the Company and Highwoods Realty Limited Partnership, dated as of December 15, 2004.
31.1	Certification of Chief Executive Officer Required Under Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.2	Certification of Principal Financial Officer Required Under Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
32.1	Certification of Chief Executive Officer Required Under Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350.
32.2	Certification of Principal Financial Officer Required Under Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350.

(1)   Incorporated by reference to Registrant’s Registration Statement on Form S-1 (File No. 333-117459), as amended, initially filed with the Securities and Exchange Commission on July 16, 2004.

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