<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
/_/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to _____________________
Commission File No. 0-25507
iPARTY CORP.
(Exact name of registrant as specified in its charter)
Delaware 13-4012236
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation of organization)
41 East 11th Street, 11th Floor, New York, New York 10003
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 331-1225
------------------------------------------------------------------------------
(Former name or former address, if changed since last report.)
Check whether the Issuer (1) 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.
Yes X No
---
As of October 22, 1999, there were issued and outstanding 11,005,691
shares of common stock, par value $.001 per share, of the registrant issued and
outstanding.
Transitional small business disclosure format
Yes No X
---
<PAGE>
iPARTY CORP.
Quarterly Report on Form 10-QSB
Table of Contents
PAGE
PART I FINANCIAL INFORMATION 1
Item 1. Financial Statements 5
Notes to Consolidated Financial Statements
Item 2. Plan of Operations 13
PART II OTHER INFORMATION 16
SIGNATURES 17
<PAGE>
iPARTY CORP.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
---------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................................... $ 434,510 $ 346,751
Cash, restricted................................................................... 50,000 50,000
Inventory.......................................................................... 108,466 --
Due from officers.................................................................. 5,160 34,021
Prepaid expenses and other......................................................... 130,677 60,277
---------- ----------
Total current assets............................................................ 728,813 491,049
Property and equipment, net........................................................ 476,961 341,441
Other assets....................................................................... 38,551 9,670
---------- ----------
$1,244,325 $ 842,160
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.............................................. $ 339,047 $ 297,508
Notes payable...................................................................... 1,500,000 250,000
---------- ----------
Total current liabilities....................................................... 1,839,047 547,508
Committments and contingencies....................................................... -- --
Stockholders' Equity:
Preferred stock--$.001 par value; 10,000,000 shares authorized; Series A preferred
stock--1,000,000 authorized; 1,000,000 and 0 shares issued and outstanding,
respectively.................................................................... 1,000 --
Common stock--$.001 par value; 50,000,000 shares authorized; 11,005,691 shares
issued and outstanding.......................................................... 11,006 11,006
Additional paid in capital......................................................... 2,324,446 1,146,044
Deficit accumulated during the development stage................................... (2,931,174) (862,398)
---------- ----------
Total stockholders' equity...................................................... (594,721) 294,652
---------- ----------
$1,244,325 $ 842,160
---------- ----------
---------- ----------
</TABLE>
See notes to financial statements
1
<PAGE>
iPARTY CORP.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED FROM
JUNE 30, JUNE 30, INCEPTION
---------------------------- ---------------------------- THROUGH
1998 1999 1998 1999 JUNE 30, 1999
------------- ------------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues............................. $ -- $ -- $ $ -- $ --
Cost of sales........................ -- -- -- -- --
------------- ------------- ------------- ------------- -----------
Gross profit......................... -- -- -- -- --
Operating costs:
General and administrative......... 28,072 987,988 97,254 1,543,214 2,393,212
Loss resulting from abandonment of
capitalized software
(Note B[10]).................... -- -- -- 273,288 273,288
Stock-based compensation
(Note E[6] H[2])................ -- 95,269 -- 229,403 252,492
------------- ------------- ------------- ------------- -----------
Net loss before interest and
provision for income taxes......... (28,072) (1,083,256) (97,254) (2,045,905) (2,918,992)
Interest income.................... 400 733 400 1,547 12,637
Interest expense................... -- (24,418) -- (24,418) (24,819)
------------- ------------- ------------- ------------- -----------
Net loss before income taxes......... (27,672) (1,106,942) (96,854) (2,068,776) (2,931,174)
Provision for income taxes......... -- -- -- -- --
------------- ------------- ------------- ------------- -----------
Net loss............................. $ (27,672) $ (1,106,942) $ (96,854) $ (2,068,776) $(2,931,174)
============= ============= ============= ============= ===========
Loss per share:
Basic and diluted.................. $ (0.00) $ (0.10) $ (0.01) $ (0.19) $ (0.27)
============= ============= ============= ============= ===========
Weighted Average Shares Outstanding:
Basic and diluted.................. 10,044,734 11,005,691 10,044,734 11,005,691 10,685,372
============= ============= ============= ============= ===========
</TABLE>
See notes to financial statements
2
<PAGE>
iPARTY CORP.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED FROM INCEPTION
JUNE 30, THROUGH
----------------------- JUNE 30, 1999
1998 1999
-------- ----------- --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.............................................................. $(96,854) $(2,068,776) $ (2,931,174)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization...................................... -- 216,347 228,711
Loss resulting from abandonment of capitalized software............ -- 273,288 273,288
Stock-based compensation and consulting............................ -- 229,403 252,492
Decrease (increase) in:
Inventory........................................................ -- (108,466) (108,466)
Other current assets............................................. -- (70,400) (130,677)
Other assets..................................................... -- (28,881) (38,551)
Increase (decrease) in:
Accounts payable and accrued expenses............................ 35,000 41,539 339,047
-------- ----------- ------------
Net cash used in operating activities............................ (61,854) (1,515,948) (2,115,332)
-------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.................................... -- (230,368) (307,242)
Equipment and software development.................................... -- (394,786) (671,717)
Advances to officer................................................... -- 28,861 (5,160)
Increase in restricted cash........................................... -- -- (50,000)
-------- ----------- ------------
Net cash used in investing activities............................ -- (596,293) (1,034,119)
-------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable........................................... -- 1,500,000 1,750,000
Conversion of notes payable to stock.................................. -- -- --
Capital contributions on initial capitalization....................... -- -- 246,961
Proceeds from sale of stock, net...................................... 61,854 750,000 1,747,197
Costs of sale of stock................................................ -- (50,000) (160,197)
-------- ----------- ------------
Net cash provided by investing activities........................ 61,854 2,200,000 3,583,961
-------- ----------- ------------
Net increase in cash and cash equivalents............................... -- 87,759 434,510
Cash and cash equivalents, beginning of period.......................... -- 346,751 --
-------- ----------- ------------
Cash and cash equivalents, ending of period............................. $ -- $ 434,510 $ 434,510
-------- ----------- ------------
-------- ----------- ------------
Cash expended for:
Interest expense...................................................... $ -- $ -- $ --
-------- ----------- ------------
-------- ----------- ------------
Income taxes.......................................................... $ -- $ -- $ --
-------- ----------- ------------
-------- ----------- ------------
Supplemental disclosure of non-cash financing activities:
Conversion of notes payable to preferred stock in the amount of
$250,000
</TABLE>
See notes to financial statements
3
<PAGE>
iPARTY CORP.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
DURING THE
PREFERRED COMMON PAID-IN DEVELOPMENT
# OF SHARES STOCK # OF SHARES STOCK CAPITAL STAGE
----------- --------- ------------ ------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock at $.04 per
share on March 12, 1998............... 6,000,000 $ 6,000 $ 240,961 $ --
Outstanding common stock of WSI prior to
merger on July 2, 1998................ 420,691 421 (421) --
Issuance of common stock at $.01 per
share on July 2, 1998................. 3,624,043 3,624 32,616 --
Issuance of common stock and warrants at
$1.00 per share on July 2, 1998....... 960,957 961 849,799
Accrual of pro rata portion of value of
options granted in September 1998 and
January 1999 under consultant
agreement with outside director....... -- -- 23,089
Net loss................................ -- -- -- (862,398)
--------- ------- ---------- ------- ---------- -----------
Balance December 31, 1998................. -- -- 11,005,691 11,006 1,146,044 (862,398)
Issuance of preferred stock upon
exercise of warrants, including
conversion of notes payable (Note
F[1])................................. 1,000,000 1,000 949,000
Value of options granted under
consulting agreements with outside
director and others (Note E[5]
H[2])................................. 229,402
Net loss................................ (2,068,776)
--------- ------- ---------- ------- ---------- -----------
Balance June 30, 1999 (unaudited)......... 1,000,000 $ 1,000 11,005,691 $11,006 $2,324,446 $(2,931,174)
--------- ------- ---------- ------- ---------- -----------
--------- ------- ---------- ------- ---------- -----------
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
(DEFICIENCY)
-------------
<S> <C>
Issuance of common stock at $.04 per
share on March 12, 1998............... $ 246,961
Outstanding common stock of WSI prior to
merger on July 2, 1998................ 0
Issuance of common stock at $.01 per
share on July 2, 1998................. 36,240
Issuance of common stock and warrants at
$1.00 per share on July 2, 1998....... 850,760
Accrual of pro rata portion of value of
options granted in September 1998 and
January 1999 under consultant
agreement with outside director....... 23,089
Net loss................................ (862,398)
-------------
Balance December 31, 1998................. 294,652
Issuance of preferred stock upon
exercise of warrants, including
conversion of notes payable (Note
F[1])................................. 950,000
Value of options granted under
consulting agreements with outside
director and others (Note E[5]
H[2])................................. 229,402
Net loss................................ (2,068,776)
-------------
Balance June 30, 1999 (unaudited)......... $ (594,721)
-------------
-------------
</TABLE>
See notes to financial statements
4
<PAGE>
iPARTY CORP. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
NOTE A--THE COMPANY
iParty LLC, which was created on December 11, 1997 to launch an
Internet-based merchant of party goods and services, commenced operations in
January 1998. On March 12, 1998, iParty Corp. was organized as a wholly owned
subsidiary of iParty LLC and the net assets and operations of iParty LLC were
transferred to iParty Corp. On April 9, 1998, Star Greetings, Inc. ("Star") was
incorporated as a wholly owned subsidiary of iParty Corp. to develop and operate
a personalized celebrity greeting service.
Effective July 2, 1998, iParty Corp. ("iParty" or the "Company") merged
into WSI Acquisition Corp. ("WSI"), an inactive company. The merger was
consummated through an exchange of shares that resulted in iParty LLC receiving
6,000,000 common shares or 54.5% of the outstanding shares of WSI. In connection
with the merger and as a condition thereof, WSI sold, in two private placements,
an aggregate of 4,585,000 shares of common stock of which 3,624,043 shares were
sold for $.01 per share and 960,957 shares, together with warrants to purchase
1,000,000 shares of Series A preferred stock, were sold for $1.00 per share or
aggregate proceeds of $997,197 before related expenses. The merger has been
treated as a re-capitalization for accounting purposes and iParty's historic
capital accounts were retroactively adjusted to reflect the 6,000,000 shares
issued by WSI in the transaction. In addition, as WSI had no assets before the
merger and the private placements, the 420,691 outstanding common shares of WSI
have been recorded at par value with a corresponding charge to additional
paid-in capital. The statement of operations reflects the operations of iParty
from the commencement of its operations from March 12, 1998 and also reflects
the operations of iParty LLC, the predecessor company, from January 1998 through
March 12, 1998. In connection with the merger, WSI changed its name to iParty
Corp.
The Company is in the development stage and its efforts are devoted to
developing the Internet resources to provide consumers a comprehensive website
where they can seek party planning advice and information and locate and
contract for party goods and services. The Company intends on entering into
contracts with local and national merchants who can provide such goods and
services.
NOTE B--SIGNIFICANT ACCOUNTING POLICIES
[1] Basis of presentation:
Six months ended June 30, 1998 and 1999. The unaudited interim financial
statements for the six months ended June 30, 1998 and 1999 included herein have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission and, in the opinion of the
Company, reflect all adjustments (consisting only of normal recurring
adjustments) and disclosure which are necessary for a fair presentation. The
results of operations for the six months ended are not necessarily indicative of
the results for the full year.
[2] Principles of consolidation:
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary after elimination of all significant
intercompany transactions and balances.
[3] Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles 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
5
<PAGE>
reported amounts of revenue and expenses during the reporting period. Actual
results could differ from these estimates.
[4] Cash and cash equivalents:
For purposes of the statement of cash flows, the Company considers all
highly liquid investments purchased with an original maturity of three months or
less to be cash equivalents. At December 31, 1998 and June 30, 1999, the Company
maintains its cash deposits in accounts which are in excess of Federal Deposit
Insurance Corporation limits by $126,199 and $310,841, respectively. At
December 31, 1998 and June 30, 1999, the Company maintains a cash deposit of
$50,000 in the form of a certificate of deposit which serves as the collateral
for a corporate Visa credit account.
[5] Financial instruments:
The carrying amounts for the Company's cash and cash equivalents,
restricted cash, accounts payable and notes payable approximate fair value.
[6] Inventory:
Inventories are stated at the lower of cost, determined on a first-in,
first-out basis, or market.
[7] Per share data:
Basic and diluted loss per share is based on the weighted average number of
outstanding shares of common stock and excludes the effect of stock options and
warrants. In computing the weighted average number of shares outstanding, the
3,624,043 shares issued for $.01 per share and the 420,691 outstanding shares of
WSI prior to the merger were treated as if they were outstanding for the entire
year of 1998.
[8] Stock-based compensation:
The Company has elected to follow the intrinsic value method set forth in
Accounting Principles Board Opinion 25, "Accounting for Stock Issued to
Employees" in accounting for its stock option incentive plan. As such,
compensation expense would be recorded on the date of grant if the current
market price of the underlying stock exceeded the exercise price of the option.
[9] Property and equipment:
Property and equipment are stated at cost less accumulated depreciation
which is provided on the straight-line method over the estimated useful lives of
the assets.
[10] Software costs:
In accordance with Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use", issued in March 1998
and adopted by the Company, external direct costs of materials and services
incurred in connection with developing or obtaining internal use software were
capitalized. Such costs will be amortized using the straight-line method over an
estimated useful life of 3 years beginning when the software is ready for its
intended use or over its known useful life, whichever is shorter. For the six
months ended June 30, 1999, the Company wrote off $273,288 of previously
capitalized software costs when the Company selected new vendors for support of
its website, necessitating the creation of a new website and integrating
components. With the creation of the new website, the software previously
capitalized was abandoned.
[11] Income taxes:
The Company accounts for income taxes using the liability method. Deferred
income taxes are measured by applying enacted statutory rates to net operating
loss carryforwards and to the differences between the financial reporting and
tax bases of assets and liabilities. Deferred tax assets are reduced, if
necessary, by a valuation allowance for any tax benefits which are not expected
to be realized.
6
<PAGE>
NOTE C--PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ ---------
<S> <C> <C>
Office equipment......................................................... $ 3,109 $ 1,631
Furniture and fixtures................................................... $ 2,744 $ 4,130
Computer equipment....................................................... $ 71,021 $ 301,481
Website and related software............................................. $276,931 $ 398,421
-------- ---------
$353,805 $ 705,663
Less accumulated depreciation and amortization........................... $(12,364) $(228,702)
-------- ---------
Total.................................................................... $341,441 $ 476,961
======== =========
</TABLE>
NOTE D--INCOME TAXES
The reconciliation of income tax benefit computed at the federal statutory
tax rate to the income tax benefit in the consolidated statement of operations
is as follows for the year ended December 31, 1998 and the six months ended June
30, 1999:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ ---------
<S> <C> <C>
Income tax benefit computed at the federal statutory income tax rate of
35%.................................................................... $ (301,839) $(724,000)
Increase resulting from state and local taxes, net of federal benefit.... $ (97,434) $(234,000)
Valuation allowance provided............................................. $ 399,273 $ 958,000
---------- ---------
Income tax benefit in statement of operations............................ $ 0 $ 0
========== =========
</TABLE>
The tax effects of significant items comprising the Company's net deferred
tax asset as of December 31, 1998 and June 30, 1999 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ ----------
<S> <C> <C>
Net operating loss carryforward......................................... $399,273 $1,357,273
Less valuation allowance................................................ $399,273 $1,357,273
-------- ----------
Net deferred tax asset.................................................. $ 0 $ 0
======== ==========
</TABLE>
As of December 31, 1998 and June 30, 1999, the Company has estimated net
operating loss carryforwards of $862,398 and $2,931,174, respectively, which
expire in 2018 and 2019. The Company has recorded a deferred tax asset offset by
a valuation allowance as the Company has not determined that it is more likely
than not that the available net operating loss carryforward will be utilized in
the future.
NOTE E--COMMITMENTS
[1] Leases:
The Company leases facilities and equipment under several month-to-month
and three month operating leases. The Company's rental expense under operating
leases for the year ended December 31, 1998 and for the six months ended
June 30, 1999 amounted to $27,983 and $39,832, respectively.
[2] Concentrations:
The Company has contracted with four companies to develop the web sites for
its services. Failure to perform by any one of these three parties would have a
material negative impact upon the Company's operations. At June 30, 1999, two of
the four companies had completed the services as outlined in the above mentioned
contracts.
7
<PAGE>
[3] Finder's fee arrangement:
The Company and its former Chief Executive Officer ("former CEO") had
entered into an agreement prior to such individual becoming the former CEO,
which calls for the former CEO to receive a finder's fee in the amount of 5% of
the first $2,000,000 in equity raised from any party introduced by the former
CEO. In connection with this agreement, as of June 30, 1999, approximately
$2,000,000 has been raised. As a result, $50,000 has been paid to the former CEO
during each of 1998 and 1999.
[4] License agreement:
Star entered into an agreement with Star Greetings, LLC, as the creator of
the Star Greetings concept ("Star Concept"), to license the exclusive use of the
Star Concept on the web sites of the Company and Star. The agreement calls for a
royalty of 2 1/2% of revenues derived from the Star Concept, payable quarterly.
Star Greetings, LLC is owned, in part, by the Company's former CEO. No amounts
were payable to Star Greetings, LLC under the agreement for the year ended
December 31, 1998 and for the six months ended June 30, 1999.
[5] Star Greetings agreements:
The Company has entered into several agreements with celebrities to secure
their services with Star. The agreements are substantially the same and consist
of three separate compensation components. The first component is a
participation fee (and any related expenses). The second component is a
commission payable to the celebrity and to a charity of their choice upon the
sale of each Star Greeting. The third component is an option to purchase stock
in the Company (see Note H[2]). As of December 31, 1998, no such agreements have
been entered into by the Company. As of June 30, 1999, the Company has entered
into ten such agreements with terms ranging from one year to three years.
[6] Consulting agreement:
The Company entered into a consulting agreement with one of its outside
directors. The agreement is in effect from September 15, 1998 through
December 31, 1999. Compensation under the agreement consists of options to
purchase 50,000 shares of the Company's common stock, of which 25,000 options
were granted on September 15, 1998 and 25,000 options were granted on
January 20, 1999 when the consultant's time on behalf of the Company exceeded
100 hours. For the period ended December 31, 1998, the Company charged $23,089
of the value of the options granted ($102,250) to expense. On April 1, 1999, the
consulting agreement was terminated and the remaining $79,161 value of the
options granted was charged to expense on March 31, 1999.
[7] Employment agreements:
The Company has entered into employment agreements with several of its
executives. The agreements expire from December 31, 1999 through March 30, 2002
and provide for annual salaries aggregating $1,295,000. In addition, the
executives were granted options (see Note H[1]) to purchase an aggregate of
1,970,000 shares of the Company's common stock, which vest in various increments
provided the executives remain continuously employed by the Company. In addition
to base salary, the agreements provide that the executives may receive an annual
performance bonus at the discretion of the Compensation Committee of the Board
of Directors. The agreements also have termination clauses which call for
severance payments ranging up to one year's salary.
[8] Transaction agreement:
On January 8, 1999, the Company entered into a two-year agreement with a
service provider to process financial transactions in connection with its
websites. The agreement, as amended, calls for a one-time set-up fee of $50,000,
and a transaction fee of $0.90 per transaction with a minimum monthly
transaction fee of $5,000 for February 1999, $7,500 for March 1999 and $5,000
for April 1999 and thereafter.
8
<PAGE>
[9] Advertising agreement:
On January 12, 1999, the Company entered into an advertising agreement for
the period June 1, 1999 through October 31, 1999, to solicit advertising of its
website on other websites. The agreement, as amended, calls for the Company to
pay setup and related fees of $20,000 and a transaction fee of $80,000.
NOTE F--STOCKHOLDERS' EQUITY
[1] Series A preferred stock:
On June 30, 1998, the Company's Board of Directors designated 1,000,000
shares of the Company's authorized 10,000,000 shares of preferred stock as
Series A preferred stock. Such shares have a par value of $.001, an original
issue price per share of $1.00, bear no dividends, have a liquidation preference
senior to the Company's common stock and are convertible, on a one to one basis,
as adjusted, into shares of the Company's common stock. As of December 31, 1998
and June 30, 1999, there were 0 and 1,000,000 shares of Series A preferred stock
outstanding, respectively.
[2] Warrants:
In connection with the sale of common stock, the Company issued warrants to
two shareholders, which, if exercised in full, entitles the holders to purchase
an aggregate of 1,000,000 shares of Series A preferred stock at $1.00 per share.
Such warrants cannot be exercised earlier than six months from the date of issue
(July 2, 1998), and must be exercised by June 30, 1999. As of December 31, 1998
and June 30, 1999, warrants to purchase 0 and 1,000,000 shares of Series A
preferred stock, respectively, had been exercised.
NOTE G--NOTES PAYABLE
[1] Note payable:
During December 1998, the Company borrowed $125,000 from each of two
shareholders, which is payable in 90 days, at an interest rate of 6.5% per
annum. Such shareholders are holders of warrants to purchase Series A
convertible preferred stock. In connection with such borrowing, the shareholders
may request payment in the form of application of the principal amount against
the exercise price of an appropriate number of warrants. As of December 31,
1998, the Company had accrued $401 of interest in relation to these notes.
On January 20, 1999, the shareholders exercised warrants to purchase
250,000 Series A preferred shares and applied the $250,000 outstanding principal
amount of the notes in payment of the exercise price of the warrants.
[2] Funding agreement:
The Company entered into a Funding Agreement, dated as of March 31, 1999
and amended as of April 14, 1999, with two of its directors. Pursuant to the
terms of the Funding Agreement each director will advance certain funds to the
Company totaling $2,000,000. In connection with each such funding, the funding
party will receive a 10% Senior Secured Promissory Note for the amount funded
and warrants to purchase such number of shares of Common Stock equal to the
amount funded divided by the closing bid price of the Common Stock on the date
of each such funding. The exercise price for these warrants range from $4.13 to
$5.13 per share. As of June 30, 1999, $1,500,000 has been advanced to the
company and warrants to purchase 359,616 shares of common stock have been
issued. For the six months ended June 30, 1999, interest expense of $24,418 had
been accrued (see Note I[2]).
NOTE H--STOCK OPTION PLAN
On July 14, 1998, the Company adopted the 1998 Incentive and Nonqualified
Stock Option Plan (the "98 Plan") under which options to acquire 2,500,000
shares of common stock may be granted to officers, directors, key employees and
consultants. The exercise price for incentive options cannot be less than the
fair
9
<PAGE>
market value of the stock on the grant date and the exercise price of
nonqualified options is fixed by the plan administrator. Options to purchase the
Company's common stock under the 98 Plan have been granted to employees,
directors and consultants of the Company at fair market value at the date of
grant. Generally, the options become exercisable over periods ranging from
immediately to three years and expire ten years from the date of grant.
A summary of the status of the Company's stock options outstanding as of
December 31, 1998 and June 30, 1998 and changes during the year ended
December 31, 1998 and the six months ended are as follows:
[1] Employee and director stock options:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 JUNE 30, 1999
---------------------- ----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of period.......................... 0 $ 0 1,025,000 $ 2.19
Stock options:
Granted................................................... 1,025,000 $ 2.19 1,214,000 $ 4.15
Exercised................................................. 0 $ 0 0 $ 0
--------- ------ --------- ------
Outstanding at end of period................................ 1,025,000 $ 2.19 2,239,000 $ 3.24
========= ====== ========= ======
Exercisable at end of period................................ 450,000 $ 2.31 670,000 $ 2.43
========= ====== ========= ======
</TABLE>
The effect of applying Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" ("SFAS 123") on the year ended
December 31, 1998 and the six months ended June 30, 1999 pro forma net loss as
stated below is not necessarily representative of the effects on reported net
loss for future years due to, among other things, the vesting period of the
stock options and the fair value of additional stock options in future years.
The weighted average fair value of the options granted during 1998 have been
estimated at $1.69 per share on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: no dividend yield,
volatility of 100%, a risk-free interest rate of 4.92% to 5.72%, and an expected
life of five years from date of vesting. The weighted average fair value of the
options granted during the six months ended June 30, 1999 have been estimated at
$3.20 per share on the date of grant using the Black-Scholes option-pricing
model with the following assumptions: no dividend yield, volatility of 100%, a
risk-free interest rate of 5.38% to 6.06%, and an expected life of five years
from date of vesting. Had compensation cost for the Company's stock option plan
been determined based upon the fair value at the grant date for awards under the
plan consistent with the methodology prescribed under SFAS 123, the Company's
net loss and net loss per share would have been as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ -----------
<S> <C> <C>
Net loss--as reported.................................................. $ (862,398) $(2,068,776)
============ ===========
--pro forma.................................................... $ (1,358,706) $(2,728,366)
============ ===========
Net loss per share--as reported........................................ $ (.08) $ (.19)
--pro forma.......................................... $ (.13) $ (.26)
</TABLE>
[2] StarGreetings stock options:
<TABLE>
<CAPTION>
WEIGHTED
JUNE 30, AVERAGE
1999 EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Stock options:
Granted..................................................................... 180,000 $ 1.81
Exercised................................................................... 0 $ 0
--------- --------
Outstanding at end of period.................................................. 180,000 $ 1.81
--------- --------
--------- --------
Exercisable at end of period.................................................. 180,000 $ 1.81
--------- --------
--------- --------
</TABLE>
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<PAGE>
The weighted average fair value of the options granted during 1999 have
been estimated at $3.40 per share on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: no dividend yield,
volatility of 100%, a risk-free interest rate of 5.38% to 5.81%, and an expected
life of three years from date of vesting. The Company issued options to acquire
180,000 shares of common stock at exercise prices of $1.00 and $3.50 per share
in connection with Star Greetings agreements. The options were valued at
$612,440, in accordance with applying Statement of Financial Accounting
Standards No. 123 "Accounting for Stock-Based Compensation" (See Note H) and are
amortized over the life of the contract. For the period ended December 31, 1998
and the six months ended June 30, 1999, the Company charged $0 and $145,617 of
the value of the options granted to expense.
NOTE I--SUBSEQUENT EVENTS
[1] Employment agreements:
The employment agreement with the Company's Chief Executive Officer ("CEO")
provided that in the event that, prior to December 31, 1999, the Company
completed one or more equity financing, the CEO shall be granted additional
options under the Plan (the "Additional Options") equal to 5% of the number of
shares of common stock into which the securities issued in any such equity
financing(s) may convert; provided, however, that such Additional Options will
only be granted with respect to securities issued in connection with up to the
first $5,000,000 raised in such equity financing(s). It is anticipated that the
strike price of such Additional Options shall be the lower of (i) the conversion
price (into Common Stock) of the securities issued in the equity financing
triggering such grant, or (ii) the fair market value of the common stock on the
date of grant (which date shall be the date of the closing of the equity
financing triggering such grant). On August 26, 1999, the Company granted
434,730 options to purchase common stock with a strike price of $2.00 to the
CEO.
[2] Equity financing:
On September 10, 1999, the Company completed a private placement of Series
B Convertible Preferred Stock and redeemable common stock purchase warrants,
raising net proceeds of approximately $20,899,000. The financing was comprised
of 1,050,000 shares of Series B Preferred Stock convertible into an aggregate of
10,500,000 shares of common stock and the issuance of warrants to purchase an
additional 5,250,000 shares of common stock at an exercise price of $2.00 per
share. In addition, the Company sold Series C Convertible Preferred Stock and
redeemable common stock purchase warrants. The financing was comprised of
100,000 shares of Series C Preferred Stock convertible into 1,000,000 shares of
common stock and the issuance of warrants to purchase an additional 500,000
shares of common stock at an exercise price of $2.00 per share, raising net
proceeds of $2,000,000. The placement agent in these financings received fees of
approximately $1,329,000 and warrants to purchase 929,929 shares of common stock
at an exercise price of $2.00 per share. The financing included the conversion
of $2,000,000 of the Company's outstanding 10% Senior Convertible Notes and
$54,829 of accrued interest into Series B Preferred Stock.
[3] Fulfillment agreement:
On July 8, 1999, the Company entered into a product fulfillment agreement
with Taymark, one of the nation's largest direct marketer's of party supplies.
Under the agreement, the Company will utilize Taymark's inventory and
fulfillment services to deliver merchandise ordered on the site, or directly
through a toll-free telephone number, directly to consumers. Taymark will
purchase the Company's inventory as of September 30, 1999 at cost, up to
$100,000. The initial term of the agreement runs through December 21, 2002. The
agreement contains certain restrictions on competition by Taymark. As additional
consideration for services provided by Taymark, the Company issued to Taymark
warrants to purchase 3,000,000 shares of common stock at an exercise price of
$3.75.
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<PAGE>
[4] Advertising agreement:
On September 27, 1999, the Company entered into two agreements with America
Online, Inc., a Shopping Channel Promotion Agreement and an Advertising Purchase
Agreement to provide promotions on the AOL website totaling $1,356,594. The term
of the two agreements are ten months.
[5] Website development agreement:
On August 5, 1999, the Company entered into a fixed fee agreement with Rare
Medium Inc. to develop a new website, including the development of a new visual
identity, additional functionality and a new technical infrastructure to better
support the scalability of the Company's website. The fixed fee for the services
provided is $465,000.
[6] Advertising and public relations agency agreements:
On September 29, 1999, the Company entered into an agreement with
Kirshenbaum Bond & Partners ("Kirshenbaum") to create a marketing communications
program. The annual fee payable to Kirshenbaum is $1,026,000 to be paid in 12
monthly installments. In addition to the annual fee, the Company will pay a 15%
commission on internet advertising and a 4% commission on TV and radio
advertising placed through Kirshenbaum.
[7] Affiliate program agreement:
On August 11, 1999, the Company entered into an agreement with LinkShare
Corporation to provide services, using LinkShare's proprietary software, to
facilitate establishing links between the Company and affiliates and tracking
sales through those affiliates. The initial term of the agreement is eighteen
months. For the licensing of the LinkShare software, the Company will pay a
one-time license fee of $5,000 and 2.0%--2.5% of each sale completed through the
Company's affiliate program.
[8] Stock option plan:
On August 24, 1999, the Company increased the number of options available
under the 1998 Incentive and Nonqualified Stock Option Plan to 4,000,000 shares.
[9] Consulting agreement:
On September 7, 1999, the Company entered into a three year consulting
agreement with one of its outside directors. Compensation under the agreement
consists of options to purchase 100,000 shares of the Company's common stock
with an exercise price of $2.00. The options vest ratably over three years
provided that the director is still providing consulting services to the Company
on those dates. The fair market value of the Company's stock on the grant date
was $3.94.
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<PAGE>
Safe Harbor Statement
Certain statements in this Form 10-QSB, including information set forth
under Item 2 "Plan of Operations" constitute or may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Act"). iParty Corp. (the "Company") desires to avail itself of
certain "safe harbor" provisions of the Act and is therefore including this
special note to enable the Company to do so. Forward-looking statements included
in this Form 10-QSB or hereafter included in other publicly available documents
filed with the Securities and Exchange Commission, reports to the Company's
stockholders and other publicly available statements issued or released by the
Company involve known and unknown risks, uncertainties, and other factors which
could cause the Company's actual results, performance (financial or operating)
or achievements to differ from the future results, performance (financial or
operating) achievements expressed or implied by such forward-looking statement.
Such future results are based upon management's best estimates based upon
current conditions and the most recent results of operations.
ITEM 2. PLAN OF OPERATION
General.
iParty Corp., a Delaware corporation (the "Company") is a development
stage company that intends to become the premier brand in the on-line party
industry and the leading resource on the Internet for consumers seeking party
goods, party services, party planning advice and information, and personalized
video greetings called "StarGreetings" from celebrities. The Company's web site,
www.iparty.com (the "Site"), was launched in February 1999.
To date, the Company has only generated de minimus revenues and expects
to begin to generate revenues by the end of 1999. There can be no assurance that
the Company will ever generate substantial revenues. In August and September of
1999 the Company sold an aggregate of $22.9 million of convertible preferred
stock and redeemable common stock purchase warrants in private offerings. The
financings included the conversion of the Company's $2.0 million of outstanding
senior debt. Net proceeds to the Company from the financings was approximately
$21.3 million (including the conversion of the $2.0 million in debt and interest
thereon). The Company believes, based on currently proposed plans and
assumptions relating to its operations, that the net proceeds from the
financings and related accrued interest, together with anticipated revenues from
operations, will be sufficient to fund the Company's operations and working
capital requirements for at least 12 months. In the event that the Company's
plans or assumptions change or prove inaccurate (due to unanticipated expenses,
increased competition, unfavorable economic conditions, or other unforeseen
circumstances) the Company could be required to seek additional financing sooner
than currently expected. There can be no assurance that such additional funding
will be available to the Company, or if available, that the terms of such
additional financing will be acceptable to the Company.
13
<PAGE>
The Company incurred approximately $1.47 million for the six months
ended June 30, 1999 and $2.3 million from inception through June 30, 1999 in
general and administrative expenses. The general and administrative expenses
from inception through June 30, 1999 include salaries ($900,000), operating
costs ($400,000), professional fees and consultants ($550,000), marketing
expenses ($100,000) and StarGreetings ($350,000).
The Company incurred approximately $95,000 for the six months ended
June 30, 1999 and $250,000 from inception through June 30, 1999 in stock based
compensation expenses. The stock based compensation expenses from inception
through June 30, 1999 resulted from stock options granted to consultants
($104,000) and stock options granted to StarGreetings celebrities ($146,000).
The Company incurred approximately $273,000 for the six months ended
June 30, 1999 and from inception through June 30, 1999 in loss resulting from
abandonment of capitalized software. This loss was due to a write-off of website
development costs incurred during 1998. On March 31, 1998, it was determined
that the costs, which had been capitalized as property and equipment as of
December 31, 1998, were abandoned when the Company selected new vendors for
support of its website, necessitating the creation of a new website and
integration components. During the first and second quarters of 1999, the
Company incurred approximately $147,000 in website development costs in efforts
to re-develop the website. These costs have been capitalized in accordance with
generally accepted accounting principals.
The Company expects its initial revenues to be derived from several
sources, but as with most e-commerce businesses, especially a development stage
company such as the Company, risks of operations are inherent and are largely
dependent on the economy and levels of consumer demand. The Company expects that
its initial revenues will be derived from retail sales to consumers of party
related goods. The Company anticipates that future revenues may be derived from
(i) commissions or royalties paid by strategic partners for orders received
through the Company; (ii) sales of StarGreetings personalized messages; and
(iii) advertising on the Site's pages, particularly the content features such as
the Party Planner and PartyTalk.
The Company expects to hire between five and ten additional employees
in the next six months as the needs of the Company may require to sustain
growth, and to remain competitive and creative.
The Site.
The Company is launching the Site in two stages, as follows:
First Stage. Currently, the Site contains the PartyMarket and
PartyTalk. In this first stage, the Company offers party related products,
costumes, music and editorial content. On-
14
<PAGE>
site shopping is currently limited to party goods, favors, gift wrap, cards and
invitations. During this stage Taymark is responsible for consumer fulfillment
and customer service.
Second Stage. By the end of the first quarter of 2000, the Company
expects to expand the PartyMarket offering to include cakes, gifts, flowers,
food and beverages. During the first and second quarter of 2000, the Company
expects to continue to introduce additional features to the Site, such as the
Party Planner, the Party Resource, Gift Registry, Party Workbook, Party Web
Page, Photo Gallery, Birthday Club, interactive party planning tools and an
Invitation Channel.
Acquisitions.
The Company operates in an un-branded business arena which has many small
players. As a result, the Company is considering consolidating the field through
acquisitions of other entities. Any determination to make an acquisition will be
based upon a variety of factors, including, without limitation, the purchase
price and other financial terms of the transaction, the business prospects, and
the extent to which any acquisition would enhance the Company's prospects. The
Company is not currently engaged in identifying any potential acquisition and
has no plans, agreement, understanding, or arrangement with respect to any
acquisition.
Year 2000 Compliance
Many currently installed computer systems and software products are
coded to accept or recognize only two digit entries in the date code field.
These systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and software used by many companies and governmental agencies may need
to be upgraded to comply with such Year 2000 requirements or risk system failure
or miscalculations causing disruptions of normal business activities.
State Of Readiness
The Company has made an assessment of the Year 2000 readiness of its
operating, financial and administrative systems, including the hardware and
software that support its systems. The Company's assessment plan consisted of:
o quality assurance testing of its internally developed proprietary
software;
o contacting third-party vendors and licensors of material
hardware, software and services that are both directly and
indirectly related to the delivery of the Company's services to
its users;
o contacting vendors of third-party systems;
15
<PAGE>
o assessing repair or replacement requirements;
o implementing repair or replacement;
o implementation of the plan; and
o creating of contingency plans in the event of Year 2000 failures.
The Company performed a Year 2000 simulation on its systems during the
third quarter of 1999 to test system readiness. All of the Company's systems
were designed subsequent to January 1, 1999, well after the year 2000 compliance
problem was identified. Accordingly, all of the systems the Company has
developed use four digits to identify the year rather than two digits. Based on
the simulation, the Company believes that each of its material systems is Year
2000 compliant. The Company will, if necessary, revise its internally developed
proprietary software as necessary to improve its Year 2000 compliance. Many
vendors of material hardware and software components of the Company's systems
have indicated that the products the Company's use are currently Year 2000
compliant. The Company has required vendors of its other material hardware and
software components to provide assurances of their Year 2000 compliance. This
process has been completed and the Company does not believe that its systems
will need to be revised or replaced.
Costs To Date
The Company has not incurred any material expenditures in connection
with identifying, evaluating or addressing Year 2000 compliance issues. Most of
its expenses have related to, and are expected to continue to relate to, the
operating costs associated with time spent by employees in the evaluation
process and Year 2000 compliance matters generally. At this time, the Company
does not possess the information necessary to estimate the potential costs of
revisions to its systems should such revisions be required or the replacement of
third-party software, hardware or services that are determined not to be Year
2000 compliant. Although the Company does not anticipate that such expenses will
be material, such expenses, if higher than anticipated, could have a material
adverse effect on the Company's business, results of operations and financial
condition.
PART II OTHER INFORMATION
Not applicable.
16
<PAGE>
SIGNATURES
In accordance with requirements of the Securities Exchange Act, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
iPARTY CORP.
Dated: October 22, 1999 By: /s/ Sal Perisano
----------------
Sal Perisano
Chief Executive Officer
October 22, 1999 By: /s/ Patrick Farrell
-------------------
Patrick Farrell
Chief Financial Officer
17
