<PAGE>
As filed with the Securities and Exchange Commission on June 30, 2000
Registration No. 333-__________
==============================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
iPARTY CORP.
(Exact Name of Registrant as Specified in its Charter)
----------------
Delaware 7373 13-4012236
------------------------ ---------------------------- -------------------
(State of Incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification No.)
----------------
130 West 30th Street, 10th Floor
New York, NY 10001
(212) 609-4300
(Address and Telephone Number of Principal Executive Offices)
Sal Perisano
Chief Executive Officer
iParty Corp.
130 West 30th Street, 10th Floor
New York, New York 10001
(212) 609-4300
(Name, Address and Telephone Number of Agent for Service)
----------------
Please send copies of all communications to:
Robert S. Matlin, Esq.
Karla A. Olivier, Esq.
Camhy Karlinsky & Stein LLP
1740 Broadway, New York, New York 10019-4315
(212) 977-6600
----------------
Approximate date of proposed sale to the public: As soon as practicable after
this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434 under
the Securities Act, please check the following box. / /
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act,
please check the following box. /X/
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
====================================================================================================================
Proposed Maximum Proposed Maximum
Title of Each Class of Amount to be Offering Price Per Aggregate Offering Amount of Registration
Securities Registered Share(1) Price(1) Fee
To Be Registered
----------------------------- ------------------- -------------------- --------------------- -----------------------
<S> <C> <C> <C> <C>
Common Stock underlying the 10,449,520 $0.5625 $5,877,855 $1,551.75
Series B Convertible
Preferred Stock
----------------------------- ------------------- -------------------- --------------------- -----------------------
Common Stock underlying the 1,000,000 $0.5625 $562,500 $148.50
Series C Convertible
Preferred Stock
----------------------------- ------------------- -------------------- --------------------- -----------------------
Common Stock underlying the 2,500,000 $0.5625 $1,406,250 $371.25
Series D Convertible
Preferred Stock
----------------------------- ------------------- -------------------- --------------------- -----------------------
Common Stock underlying 5,771,181 $0.5625 $3,246,289 $857.02
Common Stock Warrants
issued to Series B
Convertible Preferred Stock
holders
----------------------------- ------------------- -------------------- --------------------- -----------------------
Common Stock underlying 552,291 $0.5625 $310,664 $82.02
Common Stock Warrants
issued to Series C
Convertible Preferred Stock
holders
----------------------------- ------------------- -------------------- --------------------- -----------------------
Common Stock underlying 1,250,000 $0.5625 $703,125 $185.63
Common Stock Warrants
issued to Series D
Convertible Preferred Stock
holders
----------------------------- ------------------- -------------------- --------------------- -----------------------
Common Stock underlying 1,054,684 $0.5625 $593,260 $156.62
Common Stock Warrants
issued to Placement Agent
----------------------------- ------------------- -------------------- --------------------- -----------------------
Common Stock underlying 3,000,000 $0.5625 $1,687,500 $445.50
Common Stock Warrants
issued to Taymark
----------------------------- ------------------- -------------------- --------------------- -----------------------
Common Stock underlying 550,000 $0.5625 $309,375 $81.68
Common Stock Warrants
issued to Margaritaville
Holdings
----------------------------- ------------------- -------------------- --------------------- -----------------------
Common Stock Warrants 8,600,656 $0.5625 $4,837,869 $1,277.20
----------------------------- ------------------- -------------------- --------------------- -----------------------
Total $19,534,687 $5,157.17
====================================================================== ===================== =======================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) of the Securities Act of 1933, as amended, based
on the average of the high and low prices of the common stock on the
American Stock Exchange on June 27, 2000, which was $0.5625.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act or until the Registration Statement shall become effective on
such date as the Securities and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 29, 2000
PROSPECTUS
iPARTY CORP.
26,127,676 Shares of Common Stock
8,600,656 Common Stock Warrants
This prospectus is part of a registration statement that covers the issuance of
up to:
1. 10,449,520 shares of our common stock that is issuable by us upon
the conversion of our Series B convertible preferred stock issued in
our private placement in August and September 1999;
2. 1,000,000 shares of our common stock that is issuable by us upon the
conversion of our Series C convertible preferred stock issued in our
private placement in September 1999;
3. 2,500,000 shares of our common stock that is issuable by us upon the
conversion of our Series D convertible preferred stock issued in our
private placement in December 1999;
4. 5,771,181 shares of our common stock that is issuable by us upon the
exercise of our common stock warrants issued to holders of our
Series B convertible preferred stock;
5. 552,291 shares of our common stock that is issuable by us upon the
exercise of our common stock warrants issued to holders of our
Series C convertible preferred stock;
6. 1,250,000 shares of our common stock that is issuable by us upon the
exercise of our common stock warrants issued to holders of our
Series D convertible preferred stock;
7. 3,000,000 shares of our common stock that is issuable by us upon the
exercise of our common stock warrants issued to Taymark in
connection with a services agreement;
8. 550,000 shares of our common stock that is issuable by us upon the
exercise of our common stock warrants issued to Margaritaville
Holdings in connection with a cross-promotion agreement;
9. 1,054,684 shares of our common stock that is issuable by us upon the
exercise of our common stock warrants issued in connection with the
sale of our convertible preferred stock and common stock warrants by
our placement agent, Commonwealth Associates, L.P.; and
10. 8,600,656 common stock warrants issued in connection with our
private placements.
-----------------------
The shares of our common stock are listed on the American Stock Exchange
under the symbol "IPT." On June 27, 2000, the closing price of one share of our
common stock on the American Stock Exchange was $.0625 per share.
-----------------------
The securities offered hereby are speculative and involve a high degree of
risk. See "Risk Factors" commencing on page 4.
-----------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
-----------------------
The date of this prospectus is June 30, 2000.
The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with the
SEC is effective. This prospectus is not an offer to sell these securities and
it is not soliciting an offer to buy these securities in any state where the
offer or sale is not permitted.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY......................................................................1
SUMMARY OF FINANCIAL INFORMATION........................................................3
RISK FACTORS............................................................................4
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS.............................................14
SELECTED FINANCIAL DATA................................................................16
MANAGEMENT'S DISCUSSION AND ANALYSIS...................................................17
OUR BUSINESS...........................................................................22
MANAGEMENT.............................................................................26
PRINCIPAL STOCKHOLDERS.................................................................31
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.........................................34
DESCRIPTION OF CAPITAL STOCK...........................................................35
PLAN OF DISTRIBUTION...................................................................39
SELLING SECURITYHOLDERS................................................................41
SHARES ELIGIBLE FOR FUTURE SALE........................................................50
LEGAL MATTERS..........................................................................51
EXPERTS................................................................................51
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES......................................................51
MARKET FOR OUR COMMON STOCK............................................................52
FINANCIAL STATEMENTS...................................................................53
INDEX TO FINANCIAL STATEMENTS - For the quarterly period ended March 31, 2000.........F-1
INDEX TO FINANCIAL STATEMENTS - For the fiscal year ended December 31, 1999...........F-6
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
Since this is a summary, it does not contain all the information that may
be important to you in evaluating your investment. You should read the following
summary and the "Risk Factors" section, along with the more detailed information
and financial statements and notes to the financial statements appearing
elsewhere in this prospectus before you decide whether to make an investment in
our common stock or our common stock warrants.
About iParty
We intend to provide various resources on the Internet for consumers
seeking party goods, party services, party planning advice and information.
We intend to make it easy and convenient for the party-giving consumer to
select themes, make comprehensive plans, and purchase all of the goods and
services needed for a successful event. Our operational goal is to provide a
simple, seamless transaction process for the consumer. When a consumer comes to
our web site, the consumer will be able to select a theme, fill a virtual
shopping basket with goods and services, and pay for everything at one time at
the checkout screen. Once the order has been placed, the consumer will be
notified of the order's status via e-mail. The consumer will also be able to
dial our toll-free number, 1-800-4iParty, to talk to a customer service
representative who is knowledgeable about our products.
Our History
We were formed under the laws of the State of Texas and under the name WSI
Acquisitions, Inc. On June 30, 1998, WSI Acquisitions merged with WSI
Acquisition Corp., a Delaware corporation. iParty Corp. merged with WSI
Acquisition Corp. on July 2, 1998 and WSI Acquisition Corp. changed its name to
iParty Corp.
Our offices are located at 130 West 30th Street, 10th Floor, New York, New
York 10001. Our Internet address is http://www.iparty.com.
The Offering
Securities offered Up to 13,949,520 shares of our common stock
issuable upon the conversion of our
convertible preferred stock.
Up to 12,178,156 shares of our common stock
issuable upon the exercise of our common
stock warrants.
Up to 8,600,656 common stock purchase
warrants.
Common stock to be outstanding
after the offering(1) 37,263,783 shares
Common stock warrants to be
Outstanding after the offering 8,600,656 common stock warrants
<PAGE>
Use of proceeds Any proceeds received by us from the
exercise of the common stock warrants may be
used for our general working capital to grow
our business. We will not receive any
proceeds from the sale of the common stock
or the common stock warrants.
Risk factors An investment in the shares involve a high
degree of risk. See "Risk Factors."
American Stock Exchange
Trading symbol "IPT"
-------------------
(1) Does not include shares issuable upon exercise of all options under
our 1998 Incentive and Nonqualified Stock Option Plan, of which 3,731,330 have
been granted.
2
<PAGE>
SUMMARY FINANCIAL INFORMATION
The summary financial information set forth below is derived from and should
be read in conjunction with the consolidated financial statements, including
the notes thereto, appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31 December 31
2000 1999 1999 1998
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Statements of Operations Data:
Net revenues.......................................... 146,834 -- 138,545 --
Operating Loss........................................ (5,737,199) (962,649) (10,541,085) (873,087)
Net Loss.............................................. (5,463,744) (961,835) (11,255,415) (862,398)
Net loss per common share - basic and diluted......... (0.49) (0.09) (2.97) (0.08)
Weighted average shares outstanding -
basic and diluted..................................... 11,136,107 11,005,421 11,005,421 10,525,213
</TABLE>
<TABLE>
<CAPTION>
As of As of
March 31, 2000 December 31, 1999
-------------- -----------------
(unaudited)
<S> <C> <C>
Balance Sheet Data:
Total assets.................................................. $22,867,516 $27,256,750
Total liabilities............................................. 2,731,014 2,202,682
Stockholders' equity.......................................... 20,136,502 25,054,068
</TABLE>
3
<PAGE>
RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should carefully review and consider the information below, as well as the other
information contained in this prospectus and incorporated by reference, before
you make an investment in our common stock or our common stock warrants.
Insignificant historical revenues make it difficult to evaluate whether we will
operate profitably.
We first launched our web site in February 1999. Given our limited
operating history, it is extremely difficult to evaluate our business and
prospects. Our revenue and income potential are unproven and our business model
is constantly evolving. Because the way in which uses for the Internet are
constantly changing, we may need to further change our business model to adapt
to those changes. Frequent changes in organizational structure could impose
significant burdens on our management and our employees and could further result
in loss of productivity or even increased attrition.
Any investment in our company must be considered in light of the problems
frequently encountered by companies in an early stage of development in newly
and rapidly evolving markets. To address the risks we face, we must, among other
things:
o Maintain and enhance our web site;
o Expand our product and service offerings;
o Increase the amount of traffic to our web site by obtaining new
customers at reasonable cost, and retaining customers or encouraging
repeat purchases;
o Build and maintain brand awareness of our services;
o Expand our affiliate network;
o Attract, integrate, retain and motivate qualified personnel; and
o Maintain the leadership and quality of our services.
We cannot be certain that our business strategy, services or products will
be successful, and we may need to adjust our strategy, services or products in
order to enable our operations to become profitable.
Since we have a history of net losses, we expect to continue to incur net
losses.
Our financial statements reflect that we have incurred losses since
inception, including a net loss of $5,463,744 in the quarter ended March 31,
2000. As of March 31, 2000, we had an accumulated deficit of $39,039,508. We
expect to have increasing net losses and negative cash flows for the foreseeable
future. The size of these net losses will depend, in part, on the rate of growth
in our revenues from sales of party goods and on our expenses. It is critical to
our success that we continue to expend financial and management resources to
develop brand loyalty through marketing and promoting and enhancing our
services. As a result, we expect that our operating expenses will increase
significantly for the foreseeable future. With increased expenses, we will need
to generate significant additional revenues to achieve profitability.
Consequently, it is possible that we may never achieve profitability, and even
if
4
<PAGE>
we do achieve profitability, we may not sustain or increase profitability on a
quarterly or annual basis in the future.
We are uncertain that we will be able to obtain the additional capital that may
be necessary to establish our business.
Our recurring operating losses and growing working capital needs may
require us to obtain additional capital to operate our business before we have
established that our business will generate significant revenue. Although
management believes that we will be able to achieve our plans to begin
generating revenue, we cannot be sure that those plans will succeed. If
additional financing is required, the terms of the financing may be adverse to
the interests of existing stockholders, including the possibility of
substantially diluting their ownership position.
Third-party suppliers inability to fulfill their obligations may injure our
reputation and brand.
We have no fulfillment operation or facility of our own and, accordingly,
are dependent on third parties to fulfill product orders placed on our web site.
We have created systems necessary to transmit orders placed on our web site to
Taymark, our fulfillment provider. However, if Taymark is unable to satisfy our
increasing requirements or deliveries to customers on a timely basis our
reputation and brand will be damaged.
Our agreement with Taymark expires on December 31, 2002. There can be no
assurance that we will maintain our relationship with Taymark beyond December
31, 2002. In the event that our relationship with Taymark ends, we may be unable
to find an alternative, comparable vendor capable of providing fulfillment
services on satisfactory terms. An unanticipated termination of our relationship
with Taymark, particularly during the fourth quarter of the calendar year, could
result in a loss in profits, even if we were able to establish a relationship
with an alternative vendor.
If our operating results decrease, then our stock price may also decrease and
our stockholders may be unable to resell their shares.
Due to a variety of factors that could affect our revenues or our expenses
in any particular quarter our quarterly operating results may decrease
significantly in the future. It is possible that in some future periods our
results of operations or other performance measures may be below the
expectations of public market analysts and investors. If this occurs, the price
of our common stock will likely fall.
You should not rely on our results of operations during any particular
quarter as an indication of our future results for a full year or any other
quarter. Our quarterly revenues and operating results may vary significantly in
the future due to a number of factors including but not limited to, the
following:
o Fluctuations in demands for our services, including seasonality;
o Unexpected rescheduling or cancellations of significant orders and
affiliate relationships;
o An unexpected termination of our relationship with Taymark;
o Our ability to develop and introduce new technology;
o Announcements and new technology introductions by our competitors;
5
<PAGE>
o Our ability to achieve required cost reductions;
o Pricing competition;
o High levels of product returns;
o Increased costs of online or offline advertising;
o Fluctuations in shipping costs and delivery times, particularly
during holiday seasons;
o Our ability to attract and retain key personnel; and
o Costs relating to possible acquisitions and integration of technologies
or businesses.
Our operating expenses are based on our expectations of our future
revenues and are relatively fixed in the short term. Given our limited operating
history, user traffic on our web site is extremely difficult to forecast
accurately. Moreover, obtaining new affiliate relationships is time-consuming
and depends on many factors that we are unable to control. Therefore, it is
difficult to predict the number of affiliate relationship customers that we will
have in the future. In particular, we intend to spend significant amounts of
capital to build brand awareness of our company. We may be unable to adjust the
amount of money we spend on building brand awareness and developing third-party
supplier relationships quickly enough to offset any unexpected revenue
shortfall. As such, our revenues are difficult to predict accurately.
If we do not successfully expand our web site and the systems that process
customers' orders, we could lose customers and our net sales could be reduced.
If we fail to rapidly upgrade our web site in order to accommodate
increased traffic, we may lose customers, which would reduce our net sales.
Similarly, if we fail to rapidly expand the computer systems that we use to
process customer orders, we may be unable to successfully distribute customer
orders. As a result, we could lose customers and our net sales could be reduced.
In addition, our failure to rapidly upgrade our web site or expand these
computer systems without system downtime, particularly during the fourth
calendar quarter, would further reduce our net sales. We may experience
difficulty in improving and maintaining such systems if our employees or
contractors that develop or maintain our computer systems become unavailable to
us. In the past, we have experienced periodic systems interruptions while
enhancing and expanding these computer systems, we believe these interruptions
will continue to occur.
If our online security measures fail, our customers' personal information may be
compromised and damage our customer dealings.
Our relationships with our customers may be damaged if the security
measures that we use to protect their personal information, such as credit card
numbers, are ineffective. We cannot predict whether events or developments will
result in a compromise or breach of the technology that we or our third-party
suppliers use to protect customer's personal information.
Inability to prevent credit card fraud could reduce our profits.
All orders placed on our web site are paid for with credit cards. Failure
to adequately control fraudulent credit card transactions would reduce our net
sales and our gross margins because we do not
6
<PAGE>
carry insurance against this risk. Under current credit card practices, we are
liable for fraudulent credit card transactions because we cannot obtain a
cardholder's signature.
If our business grows, our managerial, financial and operational resources may
be strained.
We have experienced, and may continue to experience, rapid growth, which
has placed, and could continue to place, a significant strain on our managerial,
financial and operational resources. Any growth we may experience will result in
increased responsibility for existing and new management personnel. Effective
growth management will depend on our ability to:
o Integrate new personnel into our corporate structure;
o Improve our operational, management and financial systems and
controls; and
o Recruit, train, motivate and manage employees.
We cannot assure you that our systems, procedures or controls will be
adequate to support our operations. In addition, we are unable to guarantee that
we will be able to manage any growth effectively. If we do not manage growth
effectively then our expenses may exceed our revenues.
A loss of any key personnel could impair our ability to succeed.
In part, our future success depends on the continued service of our key
management personnel, particularly: (1) Sal Perisano, our Chief Executive
Officer, (2) Dorice Dionne, our Senior Vice President - Merchandising and the
wife of Mr. Perisano, (3) Patrick Farrell, our Chief Financial Officer, and (4)
John Jolly, our Chief Operating Officer. The loss of their services, or the
services of other key employees, could impair our ability to grow our business.
Currently, we have employment agreements with these employees. However, the
employment agreements expire in 2001 and 2002.
We have key-man life insurance policies in the amount of $2,000,000 on the
lives of both Mr. Perisano and Ms. Dionne. However, we cannot be certain that
the proceeds from such policies would enable us to retain suitable replacement
for them in the event we lose either of their services.
Our future success also depends on our ability to attract, retain and
motivate highly skilled employees. Competition for employees in our industry is
intense. We may be unable to attract, assimilate or retain other highly
qualified employees in the future. In the past we have occasionally experienced
difficulty hiring and retaining highly skilled employees with appropriate
qualifications. We expect this difficulty to continue in the future.
Our inability to expand our sales and support organizations may result in a
failure to increase market awareness of our products and services.
We need to substantially expand both our advertising sales and corporate
sales operations as well as our marketing efforts to increase market awareness
and sales of our products and services. We plan to hire additional sales
personnel. Competition for qualified sales personnel is intense, and we may be
unable to hire the kind and number of sales personnel we are targeting. We will
need to increase our staff if our customer base increases. Hiring qualified
customer service and support personnel is very competitive in our industry due
to limited number of people available with the necessary technical skills and
understanding of the Internet. If we are unable to hire additional sales
personnel we will be unable to increase market awareness of our products and
services.
7
<PAGE>
If we are unable to develop our brand, we will be unable to build our business.
We believe that broader brand recognition and a favorable consumer
perception of the iParty brand are essential to our future success. Accordingly,
we intend to continue pursuing an aggressive brand-enhancement strategy, which
will include mass marketing and multimedia advertising, promotional programs and
public relations activities. To date we have spent approximately $6,350,000 on
these activities and we intend to incur significant expenditures on these
advertising and promotional programs and activities in the future. These
expenditures may not result in a sufficient increase in revenues to cover our
advertising and promotion expenses. In addition, even if brand recognition
increases, the number of new users may not increase. Further, even if the number
of new users increases, the amount of our sales may not increase sufficiently to
justify the expenditures. If our brand enhancement strategy is unsuccessful,
these expenses may never be recovered and we may be unable to increase future
revenues.
Since we will not receive funds from this offering, we are uncertain we can
obtain the capital to grow our business.
To fully realize our business objectives and potential, we may require
significant additional financing. Based on our current operating plan, we
anticipate that we may require additional financing by the end of the first
quarter of 2001. In the past, we have been largely dependent upon private
convertible debt and financing when we required funds. We may need to raise
additional funds in the future to:
o Fund more aggressive brand promotion or more rapid expansion;
o Develop new or enhanced services; and
o Respond to competitive pressures or to make acquisitions.
We may be unable to obtain required additional financing on terms
favorable to us. If adequate funds are not available on acceptable terms, we may
be unable to:
o Fund our expansion;
o Promote our brand;
o Develop or enhance services;
o Respond to competitive pressures; or
o Take advantage of acquisition opportunities.
Additional financing may be debt, equity or a combination of debt and
equity. If we raise additional funds through the issuance of equity securities,
our stockholders may experience dilution of their ownership interest and the
newly issued securities may have rights superior to those of the common stock.
If we raise additional funds by issuing debt, we may be subject to limitations
on our operations, including limitations on the payment of dividends.
8
<PAGE>
Since we are in the process of establishing our name recognition, we may be
unable to effectively compete against our current and potential competitors.
Our ability to compete effectively depends on numerous factors, many of
which are outside of our control. These factors include, but are not limited to
the following:
o Quality of our products, services and content;
o Ability to use our online services;
o Timing and market acceptance of our new and enhanced online services;
and
o Sales and marketing efforts by our competitors and us.
We have competitors in various markets. For example, we compete against
Hallmark and American Greetings in the greeting cards and invitation business;
Party City and the Big Party Corporation in the retail party-goods supply
business. We also compete with a number of online businesses such as
BirthdayExpress.com, GreatEntertaining.com, ShindigZ.com and eparties.com. All
of these businesses offer customers party-related products and services.
Many of our existing competitors, as well as potential new competitors,
have longer operating histories, greater name recognition, larger customer bases
and significantly greater financial, technical and marketing resources than we
do. This may allow them to devote greater resources than we can to develop and
promote their services. In addition, many of these competitors offer a wider
range of services than we do in certain categories. These services may attract
users to our competitors and, consequently, result in a decrease of traffic to
our web site.
These competitors may also engage in more extensive research and
development, adopt more aggressive pricing policies and make more attractive
offers to existing and potential employees, partners, advertisers and electronic
commerce partners. Our competitors may develop products and services that are
equal or superior to ours, which could achieve greater market acceptance.
Moreover, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to better
address the needs of advertisers and businesses engaged in electronic commerce.
As a result, it is possible that existing or new competitors may emerge and
rapidly acquire a significant market share.
If Internet usage does not grow, we may be unable to execute our business plan
to increase our operations.
Our business will be unable to succeed if Internet usage does not continue
to grow or grows at significantly lower rates compared to current trends. The
continued growth of the Internet depends on various factors, many of which are
outside our control. These factors include, but are not limited to the following
factors:
o The Internet infrastructure's ability to support the demands placed on
it;
o The public's concerns regarding security and authentication concerns
with respect to the transmission over the Internet of confidential
information, such as credit card numbers and attempts by unauthorized
computer users, so-called hackers, to penetrate online security
systems; and
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<PAGE>
o The public's concern regarding privacy issues, including those related
to the ability of web sites to gather user information without the
user's knowledge or consent.
Our inability to adapt to evolving Internet technologies and customer demands
may impede our future growth.
To be successful, we must adapt to rapidly changing Internet technologies
and customer demands. To that end, we must continually enhance our products and
services and introduce new services to address our customers' changing needs. If
we need to modify our services or infrastructure to adapt to changes affecting
providers of Internet services, we could incur substantial development or
acquisition costs. If we cannot adapt to these changes, or do not sufficiently
increase the features and functionality of our products and services, our
customers may switch to the product and service offerings of our competitors or
potential competitors. Furthermore, our competitors or potential competitors may
develop novel Internet applications that are equal or superior to our services.
As a result, customer demand for our services may decrease.
If our systems do not perform as expected, our revenues may be significantly
reduced.
Any system failure, including network, software or hardware failure, that
causes an interruption in our service or a decrease in our responsiveness could
result in reduced user traffic on our web site and therefore cause a reduction
in revenues. Our web site and data are backed-up on tapes and are stored
remotely. Although we believe that our current back-up methods are adequate, we
cannot assure you that the back-up tapes will not cause an interruption in our
service. Computer viruses, electronic break-ins or other similar disruptions
could also affect our web site. Our users and customers depend on Internet
service providers, online service providers and other web site operators for
access to our web site. Each of these providers has experienced significant
outages in the past, and could experience outages, delays and other difficulties
due to system failures unrelated to our systems in the future. Our systems are
vulnerable to damage or interruption from fire, flood, power loss,
telecommunications failure, break-ins, earthquake and other similar events. Our
insurance policies have low coverage limits and may not adequately compensate us
for losses that may occur due to interruptions in our service.
If we are unable to protect our intellectual property rights or are held liable
for infringing on the intellectual property rights of others, we may be forced
to devote significant time, attention and money to defend these claims.
Third parties may infringe or misappropriate our patents, trademarks or
other proprietary rights, which could injure our reputation and business. We
have filed a patent application covering the StarGreeting concept, but there can
be no assurance that we will be issued a patent. We may be subject to or may
initiate proceedings in the United States Patent and Trademark Office, which may
demand significant financial and management resources. While we enter into
confidentiality agreements with our employees and consultants, and generally
control access to and distribution of our proprietary information, the steps we
have taken to protect our proprietary rights may not prevent misappropriation.
In addition, we do not know whether we will be able to defend our proprietary
rights since the validity, enforceability and scope of protection of proprietary
rights in Internet-related industries is uncertain and still evolving.
Although we believe our products and information system do not infringe
upon the proprietary rights of others, there can be no assurance that third
parties will not assert infringement claims against us. From time to time, in
the ordinary course of business we may be subject to claims of alleged
infringement of the trademarks and other intellectual property rights of third
parties. These claims and any resultant litigation, should this occur, could
further subject us to significant liability for damages. In addition, even if we
prevail, litigation could be time-consuming and expensive to defend, and could
result
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in the diversion of our time and attention and a reduction in any potential
profits. Any claims from third parties may also result in limitations on our
ability to use the intellectual property subject to these claims unless we are
able to enter into agreements with the third parties making these claims.
If we are held liable for publishing certain content on the Internet, we may be
forced to devote significant resources to defend those claims.
As a publisher of online content, we face potential liability for
defamation, negligence, copyright, patent or trademark infringement, or other
claims based on the nature and content of materials that we publish or
distribute. In the past, plaintiffs have brought these types of claims and
sometimes successfully litigated them against online services. If a plaintiff
were to bring a claim against our company, we would incur legal expenses
associated with defending the litigation. Furthermore, there exists the
possibility that we may not prevail. Litigating any one of these claims would be
time-consuming and expensive to defend and could impair our ability to become
profitable.
If we ever decide to collect personal information about our users, we may face
potential liability for invasion of privacy.
Although we have a policy against using personal information, current
computing and Internet technology allows us to collect personal information
about our users. We may decide in the future to compile and provide such
information to our electronic commerce partners. If we begin collecting such
information, we may face potential liability for invasion of privacy for
compiling and providing to our electronic commerce partners information based on
questions asked by users and visitors on our web site. Because we may not obtain
permission from users to distribute this information, we may potentially face
liability for invasion of privacy.
If we are unable to acquire the necessary web domain names, our brand and
reputation could be damaged and we could lose customers.
We may be unable to acquire or maintain web domain names relating to our
brand 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 brand. Such use could damage our brand and
reputation and take customers away from our web site. We currently hold various
relevant domain names, including the "iparty.com" domain name.
Governmental agencies and their designees generally regulate the
acquisition and maintenance of domain names. The regulation of domain names in
the United States and in foreign countries is subject to change in the near
future. Such changes in the United States are expected to include a transition
from the current system to a system that is controlled by a non-profit
corporation and the creation of additional top-level domains. Governing bodies
may establish additional top-level domains, appoint additional domain name
registrars or modify the requirements for holding domain names.
If a new law or new government regulation is created pertaining to the Internet,
it could decrease the demand for our services or increase the cost of doing
business.
Any new law or regulation pertaining to the Internet, or the application
or interpretation of existing laws, could decrease the demand for our services
or increase our cost of doing business. There is, and will likely continue to
be, an increasing number of laws and regulations pertaining to the Internet.
These laws or regulations may relate to liability for information retrieved from
or transmitted over the Internet, online content regulation, user privacy,
taxation and the quality of products and services. Furthermore, the growth and
development of electronic commerce may prompt calls for more stringent consumer
protection laws that may impose additional burdens on electronic commerce
companies as well
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as companies like ours that provide electronic commerce services. Moreover, the
applicability to the Internet of existing laws governing intellectual property
ownership and infringement, copyright, trademark, trade secret, obscenity,
libel, employment, personal privacy and other issues is uncertain and
developing.
We file tax returns in such states as required by law based on principles
applicable to traditional businesses. However, one or more states could seek to
impose additional income tax obligations or sales tax collection obligations on
out-of-state companies, such as ours, that engage in or facilitate electronic
commerce. A number of proposals have been made at state and local levels that
could impose such taxes on the sale of products and services through the
Internet. Such proposals, if adopted, could substantially impair the growth of
electronic commerce and adversely affect our opportunity to become profitable.
The United States Congress has enacted legislation limiting the ability of
the states to impose taxes on Internet-based transactions. This legislation,
known as the Internet Tax Freedom Act was enacted on October 1, 1998 and ends on
October 21, 2001. The legislation imposes only a three-year moratorium on state
and local taxes on (1) electronic commerce where such taxes are discriminatory
and (2) Internet access unless such taxes were generally imposed and actually
enforced prior to October 1, 1998. It is possible that the tax moratorium could
fail to be renewed prior to October 21, 2001. Failure to renew this legislation
would allow various states to impose taxes on Internet-based commerce. The
imposition of such taxes could adversely affect our ability to become
profitable.
Since we plan to enter into revenue-sharing contracts with third parties, this
exposure may subject us to legal risks and possible liabilities.
As part of our business, we plan to enter into agreements with sponsors,
content providers, service providers and merchants. As a result, we will be
entitled to receive a share of revenues from the purchase of goods and services
by users of our online properties. Such arrangements may expose us to additional
legal risks and uncertainties, including potential liabilities to consumers of
such products and services. Although we carry general liability insurance, our
insurance may not cover potential claims of this type or may not be adequate to
indemnify us against all potential liability.
Some of the risks that may result from these arrangements with businesses
engaged in electronic commerce include, but are not limited to the following:
o Potential liabilities for illegal activities that may be conducted
by participating merchants;
o Product liability or other tort claims relating to goods or services
sold through third-party commerce web sites;
o Consumer fraud and false or deceptive advertising or sales practices;
o Breach of contract claims relating to merchant transactions;
o Claims that materials included in merchant web sites or sold by
merchants through these web sites infringe third-party patents,
copyrights, trademarks or other intellectual property rights, or are
libelous, defamatory or in breach of third-party confidentiality or
privacy rights; and
o Claims relating to any failure of merchants to appropriately collect
and remit sales or other taxes arising from electronic commerce
transactions.
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Even to the extent that such claims do not result in material liability,
investigating and defending such claims could cause a strain on our finances,
damage our reputation and distract the attention of our management.
If we experience problems in our distribution operations, we could lose
customers.
We rely upon third-party carriers for product shipments. We are therefore
subject to the risks, including employee strikes and inclement weather,
associated with such carriers' ability to provide delivery services to meet our
shipping needs. Failure to deliver products to our customers in a timely manner
would damage our reputation and brand.
Since our officers and directors own a large percentage of our outstanding
shares, they are able to significantly influence matters regarding stockholder
approval.
Our executive officers and directors beneficially own in the aggregate
approximately 22.80% of our outstanding common stock, on a fully diluted basis
and 63.81% of our currently issued and outstanding common stock. These
stockholders may be able to exercise control over all matters requiring approval
by our stockholders, including the election of directors and the approval of
significant corporate transactions. This concentration of ownership may also
have the effect of delaying or preventing an acquisition or change in control of
our company, which could significantly reduce our stock price.
Since the market for stocks of Internet companies historically has experienced
extreme price fluctuations, our shares may experience extreme price and volume
fluctuations.
The market for the stocks of Internet-related companies has experienced
extreme price and volume fluctuations. The market price of our common stock may
be volatile and may decline. In the past, securities class action litigation has
often been initiated against companies following periods of volatility in the
market price of their securities. If initiated against us, regardless of the
outcome, litigation could result in substantial costs and a diversion of our
management's attention and resources.
If holders of our options exercise their options or convert their shares of our
convertible preferred stock, our common stock may be diluted and sales of the
shares may reduce our stock price.
The existence of options and convertible preferred stock may make it more
difficult for us to raise capital when necessary and may depress the market
price of our common stock in any market that may develop for such securities.
Future sales of a substantial number of shares of our common stock in the public
market could reduce the market price of the stock. It could also impair our
ability to raise additional capital by selling more of our common stock.
Future sales of common stock by our existing stockholders could reduce the price
of our common stock.
The market price of our common stock could decline as a result of sales by
our existing stockholders of shares of common stock in the market. Likewise, the
perception that these sales could occur may result in the decline of the market
price of our common stock. These sales also might make it more difficult for us
to sell equity securities in the future at a time and at a price that we deem
appropriate.
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Provisions in our charter or agreements may prevent or delay a change of
control.
Provisions of our certificate of incorporation and bylaws as well as
provisions of applicable Delaware law may discourage, delay or prevent a merger
or other change of control that a stockholder may consider favorable. Our board
of directors has the authority to issue up to 10,000,000 shares of preferred
stock and to determine the price and terms, including preferences and voting
rights, of those shares without stockholder approval. We have issued the
following: (1) 1,000,000 shares of Series A preferred stock, convertible into
1,000,000 shares of our common stock, (2) 1,044,952 shares of Series B preferred
stock, convertible into 10,449,520 shares of our common stock, (3) 100,000
shares of Series C preferred stock, convertible into 1,000,000 shares of our
common stock, and (4) 250,000 shares of Series D preferred stock convertible
into 2,500,000 shares of our common stock. Although we have no current plans to
issue additional shares of our preferred stock, any such issuance could, among
other things have the following effect:
o Delay, defer or prevent an acquisition or a change in control of our
company;
o Discourage bids for our common stock at a premium over the market
price; or
o Reduce the market price of, and the voting and other rights of the
holders of, our common stock.
Furthermore, we are subject to Delaware laws that could have the effect of
delaying, deterring or preventing a change in control of our company. One of
these laws prohibits us from engaging in a business combination with any
interested stockholder for a period of three years from the date the person
became an interested stockholder, unless certain conditions are met. In
addition, certain provisions of our certificate of incorporation and by-laws,
and the significant amount of common stock held by our executive officers,
directors and affiliates, could together have the effect of discouraging
potential takeover attempts or making it more difficult for stockholders to
change management.
We do not expect to pay dividends.
We have not paid dividends on our common stock or preferred stock and do
not expect to do so in the foreseeable future.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
Some of the statements contained in or incorporated by reference in this
prospectus discuss our plans and strategies for our business or state other
forward-looking statements, as this term is defined in the Private Securities
Litigation Reform Act. The words "anticipates," "believes," "estimates,"
"expects," "plans," "intends" and other similar expressions are intended to
identify these forward-looking statements, but are not the exclusive means of
identifying them. These forward-looking statements reflect the current views of
our management; however, various risks, uncertainties and contingencies could
cause our actual results, performance or achievements to differ materially from
those expressed in, or implied by, these statements, including the following:
o The success or failure of our efforts to implement our business
strategy; and
o The other factors discussed under the heading "Risk Factors" and
elsewhere in this prospectus.
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We assume no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise. For a
discussion of important risks of an investment in our securities, including
factors that could cause actual results to differ materially from results
referred to in the forward-looking statements, see the "Risk Factors" section.
You should carefully consider the information set forth under the caption the
"Risk Factors" section. In light of these risks, uncertainties and assumptions,
the forward-looking events discussed in or incorporated by reference in this
prospectus might not occur.
USE OF PROCEEDS
Any proceeds received by us from the exercise of any or all of our common
stock warrants may be used for our general working capital purposes. We will not
receive any proceeds from the sale of the common stock or common stock warrants
covered in this prospectus. The use of any proceeds from the exercise of the
common stock warrants, and the timing of such use, will depend on the
availability to us of cash from other sources. Proceeds not immediately required
for the purposes described above will be invested by us principally in United
States government obligations, short term certificates of deposit, money market
funds or other short term, interest bearing investments.
DIVIDEND POLICY
The payment by us of dividends, if any, in the future rests within the
discretion of our Board of Directors and will depend, among other things, upon
our earnings, capital requirements and financial condition, as well as other
relevant factors. We have never paid a dividend on our common stock or preferred
stock. We do not contemplate or anticipate paying any dividends upon our common
stock or preferred stock in the foreseeable future.
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SELECTED FINANCIAL DATA
Set forth below is selected financial data as of March 31, 2000 and 1999
and for the years ended December 31, 1999 and 1998. The balance sheet as of
December 31, 1999 is derived from our consolidated financial statements audited
by Arthur Andersen LLP that appear elsewhere in this prospectus. The information
set forth below should be read in conjunction with our financial statements and
"Management's Discussion and Analysis" included herein.
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31 December 31
2000 1999 1999 1998
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Statements of Operations Data:
Net revenues.............................................. 146,834 -- 138,545 --
Operating Costs...........................................
Cost of products sold............................... 117,357 -- 111,961 --
Amortization of fulfillment partner warrant......... 377,744 -- 755,488 --
Marketing and sales.................................. 2,405,456 -- 4,016,539 --
Product and technology development................... 1,864,459 -- 2,418,516 --
General and administrative........................... 572,839 555,227 2,010,470 849,998
Loss resulting from abandonment of assets........... -- 273,288 518,915 --
Non-cash compensation expenses...................... 546,178 134,134 847,741 23,089
------- ------- ------- ------
Operating Loss (5,737,199) (962,649) (10,541,085) (873,087)
Interest Income/(Expense) 273,455 814 (714,330) 10,689
------- --- --------- ------
Loss before income taxes.................................. (5,463,744) (961,835) (11,255,415) (862,398)
=========== ========= ============ =========
Net Loss.................................................. (5,463,744) (961,835) (11,255,415) (862,398)
=========== ========= ============ =========
Net loss per common share - basic and diluted............. (0.49) (0.09) (2.97) (0.08)
=========== ========= ============ =========
Weighted average shares outstanding -
basic and diluted...................................... 11,136,107 11,005,421 11,005,421 10,525,213
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
As of As of
March 31, 2000 December 31, 1999
-------------- -----------------
(unaudited)
<S> <C> <C>
Balance Sheet Data:
Total assets............................................................. $22,867,516 $27,256,750
Total liabilities........................................................ 2,731,014 2,202,682
Stockholders' equity.................................................... 20,136,502 25,054,068
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS
Overview
We intend 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. Our original web site was
launched in February 1999. On October 12, 1999, we launched the new iParty.com
site, a destination for party goods and party planning. From Pokemon costumes to
birthday party packs to fog machines, an online party magazine to party safety
tips, iParty.com presents consumers with what we believe to be a sophisticated,
yet fun and easy-to-navigate online party resource. Offering convenience and an
extensive assortment of merchandise, we believe iParty.com is refocusing the
party goods industry back to the needs of the consumer. At the click of a mouse,
party givers can enjoy one-stop shopping and easy-to-find pricing while
purchasing all their party needs.
We expect that our initial revenues will be derived from retail sales to
consumers of party related goods. We anticipate that future revenues may be
derived from (1) commissions or royalties paid by strategic partners for orders
received through us; and (2) advertising on our web site's pages, particularly
the content features such as the Party Planner and PartyTalk.
Results of Operations
Three months ended March 31, 1999 compared to three months ended March 31, 2000
Revenue for the three months ended March 31, 2000, includes the selling
price of party goods sold by us, net of returns, as well as outbound shipping
and handling charges. Revenue for the three months ended March 31, 2000, was
approximately $147,000. There were no revenues for the three months ended March
31, 1999. Revenue is recognized at the time products are shipped to customers.
Cost of products sold consists of the cost of merchandise sold to
customers and outbound shipping and handling costs charged to us by our
fulfillment partner, Taymark. For the three months ended March 31, 2000, the
cost of products sold was approximately $117,000.
Amortization of fulfillment partner warrant expense consists of the
amortization of the estimated fair value of the warrant issued to Taymark to
provide inventory and fulfillment services to deliver merchandise ordered on the
site, or directly through a toll-free telephone number, directly to consumers.
On July 8, 1999, we entered into a product fulfillment agreement with Taymark.
The initial term of the agreement runs through December 31, 2002. The agreement
contains certain restrictions on competition by the direct marketer. As
additional consideration for such restrictions and services, we issued a warrant
to purchase 3,000,000 shares of common stock at an exercise price of $3.75. The
warrant expires on October 1, 2002. The estimated fair value of the warrant on
the date of issue was approximately $5.3 million as determined using the
Black-Scholes option pricing model. The value of the warrant is included in
intangible assets on the accompanying Balance Sheet as of March 31, 2000 and is
being amortized over the initial term of the fulfillment agreement. For the
three months ended March 31, 2000, amortization of fulfillment partner warrant
expense was approximately $378,000.
Marketing and sales expenses consist primarily of advertising, public
relations and promotional expenditures, and all related payroll and related
expenses for personnel engaged in marketing and selling activities. Marketing
and sales expenses for the three months ended March 31, 2000, were approximately
$2,405,000. We intend to pursue a marketing campaign and will incur significant
incremental costs in the future.
Included in this expense was approximately $135,000 resulting from the
amortization of the Margaritaville warrant. Amortization of the Margaritaville
warrant consists of the amortization of the estimated fair value of the warrant
issued to Margaritaville Holdings for the use of the "Margaritaville"
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name in a distinct area of the iParty.com web site. On December 21, 1999, we
entered into a license agreement with Margaritaville Holdings. The initial term
of the agreement runs through December 20, 2002. As consideration for the
license, we will pay a 6% royalty on sales of product which bear the
"Margaritaville" name. As additional consideration, we issued a warrant to
purchase 550,000 shares of common stock at an exercise price of $2.88. The
warrant expires on December 21, 2004. The estimated fair value of the warrant on
the date of issue was approximately $1.6 million as determined using the
Black-Scholes option pricing model. The value of the warrant is included in
intangible assets on the accompanying Balance Sheet as of March 31, 2000 and is
being amortized over the initial term of the fulfillment agreement.
Product and technology development expenses consist principally of payroll
and related expenses for product development, editorial, systems and operations
personnel and consultants, and systems infrastructure. Operating and development
expenses for the three months ended March 31, 2000, were approximately
$1,864,000. We believe that continued investment in product development is
critical to attaining its strategic objectives. In addition to ongoing
investments in our web site and infrastructure, we intend to increase
investments in product and services.
General and administrative ("G&A") expenses consist of payroll and related
expenses for executive, finance and administrative personnel, professional fees
and other general corporate expenses. G&A expenses for the three months ended
March 31, 1999 and 2000 were approximately $555,000 and $573,000, respectively.
We expect G&A costs to continue to increase commensurate with our expansion
plans.
We incurred approximately $273,000 for the three months ended March 31,
1999, in losses resulting from abandonment of assets due to a write-off of web
site development costs incurred during 1998 and 1999. It was determined that the
costs, which had been capitalized as property and equipment, were abandoned when
we selected new vendors for support of our web site, necessitating the creation
of a new web site and integration components.
We incurred approximately $134,000 and $546,000 for the three months ended
March 31, 1999 and 2000, respectively, in non-cash compensation expenses. The
non-cash compensation expenses resulted from stock options granted to
consultants, stock options granted to celebrities who provided services to
StarGreetings and the compensation expense associated with the cash-less
exercise of stock options.
Interest income on cash and cash equivalents for the three months ended
March 31, 1999 and 2000, was approximately $1,000 and $273,000, respectively.
The increase in income was due to higher cash and investment balances resulting
from our financing activities, principally the private placement of Series B, C
and D preferred stock completed in 1999.
We expect to hire between ten and fifteen additional employees in the next
six months as our needs may require to sustain growth and to remain competitive
and creative.
Liquidity and Capital Resources
We used cash in operating activities for the three months ended March 31,
1999 and 2000 totaling $319,000 and $3,450,000, respectively. In addition, we
invested cash in property and equipment, including web site development
expenditures for the three months ended March 31, 1999 and 2000 totaling
$388,000 and $173,000, respectively. We believe, based on currently proposed
plans and assumptions relating to its operations, that the net proceeds from the
financings and related interest income, together with anticipated revenues from
operations, will be sufficient to fund our operations and working capital
requirements for at least twelve months. In the event that our plans or
assumptions change or prove inaccurate (due to unanticipated expenses, increased
competition, unfavorable economic
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conditions, or other unforeseen circumstances) we could be required to seek
additional financing sooner than currently expected. There can be no assurance
that such additional funding will be available to us, or if available, that the
terms of such additional financing will be acceptable to us.
Year ended December 31, 1998 compared to year ended December 31, 1999
Revenue for the year ended December 31, 1999, includes the selling price
of party goods sold by us, net of returns, as well as outbound shipping and
handling charges. Revenue for the year ended December 31, 1999, was
approximately $139,000. There were no revenues in 1998. Revenue is recognized at
the time products are shipped to customers.
Cost of products sold consists of the cost of merchandise sold to
customers and outbound shipping and handling costs charged to us by our
fulfillment partner, Taymark. For the year ended December 31, 1999, the cost of
products sold was approximately $112,000. Taymark began fulfilling orders placed
on our web site on October 1, 1999.
Amortization of fulfillment partner warrant expense consists of the
amortization of the estimated fair value of the warrant issued to Taymark to
provide inventory and fulfillment services to deliver merchandise ordered on the
site, or directly through a toll-free telephone number, directly to consumers.
On July 8, 1999, we entered into a product fulfillment agreement with Taymark.
The initial term of the agreement runs through December 31, 2002. The agreement
contains certain restrictions on competition by the direct marketer. As
additional consideration for such restrictions and services, we issued a warrant
to purchase 3,000,000 shares of common stock at an exercise price of $3.75. The
warrant expires on October 1, 2002. The estimated fair value of the warrant on
the date of issue was approximately $5.3 million as determined using the
Black-Scholes option pricing model. The value of the warrant is included in
intangible assets on the accompanying Balance Sheet as of December 31, 1999 and
is being amortized over the initial term of the fulfillment agreement. For the
year ended December 31, 1999, amortization of fulfillment partner warrant
expense was approximately $755,000 resulting from the amortization of this
warrant.
Marketing and sales expenses consist primarily of advertising, public
relations and promotional expenditures, and all related payroll and related
expenses for personnel engaged in marketing and selling activities. Marketing
and sales expenses for the year ended December 31, 1999, were approximately
$4,017,000. Included in this expense was approximately $45,000 resulting from
the amortization of the Margaritaville warrant. We intend to pursue a marketing
campaign and will incur significant incremental costs in the future.
Product and technology development expenses consist principally of payroll
and related expenses for product development, editorial, systems and operations
personnel and consultants, and systems infrastructure. Product and technology
development expenses for the year ended December 31, 1999, were approximately
$2,419,000. We believe that continued investment in product development is
critical to attaining its strategic objectives. In addition to ongoing
investments in our web site and infrastructure, we intend to increase
investments in product and services.
General and administrative ("G&A") expenses consist of payroll and related
expenses for executive, finance and administrative personnel, professional fees
and other general corporate expenses. G&A expenses for the year ended December
31, 1998 and 1999, were approximately $850,000 and $2,010,000, respectively.
Increases in G&A costs are largely attributable to increased payroll-related and
infrastructure costs associated with our expansion efforts, legal and other
professional fees, and recruiting costs. We expect G&A costs to continue to
increase commensurate with our expansion plans.
We incurred approximately $519,000 for the year ended December 31, 1999,
in losses resulting from abandonment of assets. Approximately $273,000 of this
loss was due to a write-off of web site
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development costs incurred during 1998 and 1999. It was determined that the
costs, which had been capitalized as property and equipment, were abandoned when
we selected new vendors for support of our web site, necessitating the creation
of a new web site and integration components. During the year ended December 31,
1999, we incurred approximately $647,000 in web site development costs in
efforts to enhance our web site. These costs have been capitalized in accordance
with generally accepted accounting principals. The remaining $246,000 represents
capitalized production and development costs that were written off when we
modified the StarConcept.
We incurred approximately $23,000 and $848,000 for the year ended December
31, 1998 and 1999, respectively, in non-cash compensation expenses. The non-cash
compensation expenses resulted from stock options granted to consultants and
stock options granted to celebrities who provided services to StarGreetings.
Interest income on cash and cash equivalents for the year ended December
31, 1998 and 1999, was approximately $11,000 and $290,000, respectively. The
increase in income was due to higher cash and investment balances resulting from
our financing activities, principally the private placement of Series B, C and D
Preferred Stock completed in 1999. Interest expense for the year ended December
31, 1999, was approximately $1,004,000. This expense consists primarily of
amortization of the discount and interest on the 10% Senior Secured Convertible
Promissory Notes issued during 1999. In connection with the private placement of
Series B Preferred Stock, these Notes were converted to equity.
Liquidity and Capital Resources
We used cash in operating activities for the year ended December 31, 1998
and 1999 totaling $599,000 and $6,176,000, respectively. In addition, we
invested $1,535,000 in property and equipment, including web site development
expenditures, in 1999 compared to $354,000 in 1998.
In 1999, we raised an aggregate of $28.5 million in equity financing. In
January and February of 1999, we received net proceeds of $950,000 from the
exercise of warrants for Series A convertible preferred stock. In August,
September and December of 1999, we sold an aggregate of $27.9 million of
convertible preferred stock and redeemable common stock purchase warrants in
private offerings. The financings included the conversion of our $2.0 million of
outstanding senior debt. Net proceeds to us from the financings were
approximately $26.3 million (including the conversion of the $2.0 million in
debt and interest thereon). We believe, based on currently proposed plans and
assumptions relating to its operations, that the net proceeds from the
financings and related interest income, together with anticipated revenues from
operations, will be sufficient to fund our operations and working capital
requirements for at least twelve months. In the event that our plans or
assumptions change or prove inaccurate (due to unanticipated expenses, increased
competition, unfavorable economic conditions, or other unforeseen circumstances)
we could be required to seek additional financing sooner than currently
expected. There can be no assurance that such additional funding will be
available to us, or if available, that the terms of such additional financing
will be acceptable to us.
Our Web Site
We are launching our web site in two stages, as follows:
First Stage. Currently, our web site contains the PartyMarket, PartyTalk
and an Invitation Channel. In this first stage, we offer party related products,
costumes, music, and editorial content. On-site shopping is currently limited to
party goods, favors, gift wrap, cards and invitations. During this stage an
outside vendor, Taymark, is responsible for consumer fulfillment and customer
service.
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Second Stage. By the end of the third quarter of 2000, we expect to
continue to introduce additional features to our web site, such as the Party
Planner, the Party Resource, Gift Registry, Party Web Page, Birthday Club, and
interactive party planning tools.
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OUR BUSINESS
The Company
We intend 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. Our initial web site was
launched in February 1999.
From children's birthday parties to weddings, from Super Bowl to Halloween
parties, we intend to make it easy and convenient for the party giving consumer
to select themes, make comprehensive plans, and purchase all of the goods and
services needed for a successful event. Our operational goal is to provide a
simple, seamless transaction process for the consumer. When a consumer comes to
our web site, the consumer will be able to select a theme, fill a virtual
shopping basket with goods and services, and pay for everything at one time at
the check-out screen. Once the order has been placed, the consumer will be
notified of the order's status via e-mail. The consumer will also be able to
dial our toll-free number, 1-800-4iParty, to talk to a customer service
representative who is knowledgeable about our products.
Although the consumer will interact only with us, the actual fulfillment
will come from a network of strategic partners, vendors, or subcontractors.
These strategic partners will ship direct to the consumer. Typically, the
strategic partners will be catalog companies and/or established direct marketing
merchants.
In furtherance of this strategy, on July 8, 1999 we entered into a product
fulfillment agreement with Taymark, one of the largest direct marketers of
party supplies in the United States. Pursuant to the agreement, we utilize
Taymark's inventory and fulfillment services to deliver merchandise ordered on
our web site, or through a toll-free telephone number, directly to consumers.
Taymark provides our customers with customer service through a toll-free
telephone number.
The initial term of the agreement runs through December 31, 2002 and it
may be renewed by us under certain circumstances. The agreement contains certain
restrictions on competition by Taymark. Nothing in the agreement prohibits us
fulfilling orders placed on our web site directly or through third parties.
The History of the Company
We were previously known as WSI Acquisitions, Inc. and were
incorporated under the laws of the State of Texas. On June 30, 1998, in order
to change domicile, WSI Acquisitions, Inc. merged with WSI Acquisitions,
Corp., a Delaware corporation, with WSI Acquisitions Corp. being the
surviving entity. On July 2, 1998, iParty Corp., a Delaware corporation,
which was a wholly-owned subsidiary of iParty LLC, a Delaware limited
liability company, merged into WSI Acquisitions Corp. and WSI Acquisitions
Corp. changed its name to iParty Corp. iParty LLC, which was created on
December 11, 1997, commenced operations in January 1998 to launch an
Internet-based merchant of party goods and services. As a result of the
merger, iParty LLC became our majority shareholder. Neither WSI Acquisitions
Corp. nor WSI Acquisitions, Inc. had operations prior to the merger with
iParty Corp.
Design and Content of Our Web Site
Our initial web site, which was launched in February 1999, was, in large
part, out-sourced to operating partners. Over the following two months, our
internal staff and operating partners, further developed our web site. The
re-developed web site was launched in April 1999. On August 5, 1999, we entered
into a fixed fee agreement with Rare Medium, Inc. to develop a new visual
identity, additional functionality and a new technical infrastructure to better
support the scalability of our web site. The fixed
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fee for the services provided is $500,000. The re-developed site was launched in
October 1999. Our goal in designing our web site was, and continues to be, to
allow the consumer to easily navigate our web site and to be able to pay for
everything ordered in one payment transaction without ever having to leave our
web site.
Currently, our web site contains two key features: the PartyMarket and
PartyTalk. PartyMarket resembles a mall of shops devoted entirely to the goods
and services that relate to the party theme chosen by the consumer. The
PartyMarket's theme channels include birthday, milestone, seasonal, basic and
costumes. Within each channel, the consumer can select a specific party, such as
anniversaries or weddings in the milestone channel or New Year's Eve in the
seasonal channel. Once the consumer has selected a theme, she will be able to
order party goods, favors, gift wrap, cards and invitations for direct shipment.
As the consumer selects products, they are added to the shopping basket, and
when the consumer is finished shopping, the transaction is completed at a simple
check-out screen.
PartyTalk is a continuation of the PartyMarket. It carries news,
articles and features. The content is directed at our target consumers:
mothers, and party-givers. Articles will include topics such as Tips &
Trends, the Craft Corner, the Safety Zone and Party Tips.
When our web site is fully developed, which is expected to be by the end
of the third quarter of 2000, it will offer the Party Planner and the Party
Resource. The Party Planner will be a resource for party-related advice, tips
and party planning information. Once a consumer has selected a theme and party,
the party planner icon will be displayed. By clicking on the Party Planner icon,
the consumer will arrive at the Party Planning page. The Party Planner page will
be a "road map" that provides specific tips and ideas for the consumer's
selected party. The information will include location ideas, activities,
decoration tips, and helpful cues as to what products to look for in each of the
Party Market shops. The Party Resource will be a directory for party related
services including entertainers (orchestras, bands, clowns, magicians, pony
rides); caterers; bakers; rental firms (tents, furniture, equipment); and
facilities operators (skating rinks, pools, bowling alleys). These local
partners will be classified advertisers in the party resource directory.
Consumers will be able to enter their zip code, and select from a list of
service providers.
We also have a wholly-owned subsidiary, StarGreetings, Inc., a Delaware
corporation. StarGreetings intends to offer a personalized video greeting from a
celebrity who will talk about the special occasion, such as a birthday,
anniversary, etc. StarGreetings plans to offer greetings from celebrities from
entertainment, music, fashion, politics and animation.
As of March 28, 2000, we have entered into exclusive StarGreeting
contracts with ten celebrities. We will continue to attempt to sign up
additional celebrities if demand for the StarGreetings product warrants. The
agreements are substantially similar and consist of three compensation
components: (1) a flat fee; (2) a commission upon the sale of each greeting (a
portion of which is payable to the charity of the celebrities choice); and (3)
an option to purchase common stock. The terms of the agreements range from one
to three years.
The concept underlying StarGreetings is licensed to StarGreetings, Inc.
through August 15, 2018. We pay a 2.5% royalty on the gross revenues received in
connection with each greeting. To date, no revenues have been generated using
this concept.
Development Costs
Since inception, we have spent approximately $1,000,000 on construction of
our web site and $100,000 on development of StarGreetings video software. We
expect to invest a minimum of $1,000,000 on construction and further development
of our web site in the next twelve months.
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Competition
We are aware of a few direct competitors to our PartyMarket concept,
including BirthdayExpress.com, Great Entertaining.com, ShindigZ.com and
eparties.com. All of these businesses provide customers with party-related
products and services. There are also a variety of other types of party
resources on the Internet, including party planners, directories and search
engines. Additional competitors exist in individual categories, such as Hallmark
and American Greetings for cards and invitations; Party City and The Big Party
Corporation in the retail party-goods supply businesses.
Party City and The Big Party Corporation have locations throughout the
United States. Mr. Perisano, our Chief Executive Officer and a Director, is a
co-founder and a Director of and consultant to The Big Party Corporation. While
Mr. Perisano remains a director of and consultant to The Big Party Corporation,
he is not involved in its day-to-day operations and has permission from its
board of directors to engage in e-commerce within the party industry.
Although barriers to entry are minimal, as new competitors can launch new
sites at a relatively low cost, we believe that the costs to remain competitive,
can be significant. These costs include the development of a robust site, the
hiring of human resources with industry knowledge and the marketing costs
associated with the building of a widely-recognized brand.
Sales and Marketing
On September 27, 1999, we entered into two separate agreements with
America Online, Inc. a Shopping Channel Promotion Agreement and an Advertising
Purchase Agreement. Pursuant to the terms of the Shopping Channel Promotion
Agreement, we occupy Featured Branding Position on the front page of AOL's
Kid's, Toys & Babies Commerce Center. The position features a direct link to our
web site. We also occupy a Gold Position in AOL's Tabletop & Entertainment
Commerce Center. We will pay AOL $1.28 million in connection with those
agreements.
On August 11, 1999, we entered into an 18 month agreement with LinkShare
Corporation to provide services, using LinkShare's proprietary software, to
facilitate establishing links between our web site and tracking sales through
such affiliates. We paid LinkShare a one-time fee and will pay commissions for
sales completed through the system.
On December 21, 1999, we entered into a product license agreement with
Margaritaville Holdings. Under the agreement, we license the "Margaritaville"
name for use in a distinct area of our web site which we will use for the offer
and sale of Margaritaville related products. The initial term of the agreement
runs through December 20, 2002. We will pay a 6% royalty on the sale of products
which bear the "Margaritaville" name.
Patents and Trademarks
The concept underlying StarGreetings is licensed to StarGreetings for 20
years pursuant to a License Agreement dated August 15,1998, by and between
StarGreetings and Star Greetings, LLC, a Delaware limited liability company.
A provisional patent application for our StarGreetings "athlete/celebrity"
video greeting concept was filed with the U.S. Patent and Trademark Office on
November 20, 1998 in the name of Mr. Byron Hero, a former director, a principal
shareholder and our former Chief Executive Officer. Mr. Hero has agreed to
assign the patent, if issued, to StarGreetings LLC which will in turn assign the
patent to StarGreetings, Inc. We filed a patent application covering the
StarGreeting concept in the third quarter of 1999.
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We have applied for the trademarks "iParty", "iParty.com" and
"StarGreetings". The applications for the trademarks "iParty" and "iParty.com"
were filed with the U.S. Patent and Trademark Office on April 29, 1999. The
application for the trademark "StarGreetings" was filed with the U.S. Patent and
Trademark Office on August 17, 1999.
Employees
We have 25 full-time employees. None of our employees are represented by a
labor union, and we consider our relationship with our employees to be good.
Properties
We entered into a new lease for office space at 130 West 30th Street, 10th
Floor, New York, New York 10001 beginning April 1, 2000. The total monthly rent
is $17,833. The lease extends through March 31, 2005. We believe that our space
is adequate for our immediate needs. This property is used for office space and
we believe that it is adequately covered by insurance.
Legal Proceedings
There is no material litigation pending against us.
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MANAGEMENT
The following table sets forth certain information regarding our executive
officers and directors:
Name Age Position
---- --- --------
Sal Perisano 49 Chief Executive Officer, Director
Patrick Farrell 32 Senior Vice President, Chief Financial Officer
John Jolly 48 Senior Vice President, Chief Operating Officer
Robert Jevon 47 Director
Ajmal Khan 37 Director
Robert H. Lessin 44 Director
Michael Levitt 41 Director
Stuart G. Moldaw 72 Director
Sal Perisano has been a Director of our company since October 1998 and
our Chief Executive Officer since April 15, 1999. In December 1992, Mr.
Perisano co-founded The Big Party Corporation, a retail chain of 51 party
supply stores, headquartered in West Roxbury, Massachusetts. Mr. Perisano
served as President and Chairman of The Big Party Corporation from 1992 to
January 1999. Mr. Perisano currently serves as a director of and a
consultant to The Big Party Corporation. In 1981, he co-founded Videosmith,
which became Boston's dominant video retailer. In 1989, Videosmith was sold
to a publicly traded company called Xtravision PLC, which owned 250 stores
throughout the U.K. and Ireland. Mr. Perisano stayed on as director and was
later named Chief Executive of the parent company, which was subsequently
acquired by Blockbuster Video. Mr. Perisano holds a B.A. from Boston College
and an M.A. from Harvard University.
Patrick Farrell has been our Senior Vice President and Chief Financial
Officer since April 1999. From 1996 until joining iParty, Mr. Farrell was a
director, Financial Planning & Analysis and Controller for N2KInc. where he
helped negotiate that company's merger with CDnow. Prior to N2K, he served as
Controller at EMI Music Group/Angel Records and as Manager of Finance and
Accounting of Polygram/Def Jam Recordings, Inc. He began his professional career
at Arthur Andersen LLP, where he was an Audit Senior when he left in 1994. Mr.
Farrell holds an M.B.A. from New York University and graduated with honors in
Accounting from Temple University and is a Certified Public Accountant.
John Jolly has been our Senior Vice President and Chief Operating
Officer since April 2000. From 1998 until joining iParty, Mr. Jolly was Vice
President of Operations and Customer Care for KBkids.com, where he
established their Distribution and Customer Care strategies and operations.
Mr. Jolly lead their operations to over $50 million in sales during their
initial year after merging BrainPlay.com and KBToys.com. From 1988 through
1998, Mr. Jolly was Vice President of Operations for QVC Network, a leader in
Electronic Retailing. Mr. Jolly was responsible for four Distribution
Facilities, Engineering, Quality Control and Customer Care operations. Mr.
Jolly holds a B.A. from LaSalle University.
Robert Jevon has been a Director of our company since February 2000. Mr.
Jevon is a Partner of Boston Millennia Partners, a venture capital firm and has
held such position since February 2000. He has been a Principal of the firm
since 1997. Mr. Jevon's primary investment focus is business services,
information technology and life sciences. Mr. Jevon serves on the Board of
Directors of Proteome, Inc., an Internet-based provider of biological knowledge
databases to pharmaceutical and biotechnology researchers, and TeleCommute
Solutions, Inc., a provider of telecommunications services. Prior to his current
position, Mr. Jevon was a Venture Affiliate of Boston Capital Ventures from 1995
to 1996 and was a Principal of Watch Hill Corporation from 1993 to 1995. From
1989 to 1992, he was the Controller of Bolt Beranek & Newman's Communications
Division. He is a graduate of Haverford College and holds an MBA from the Amos
Tuck School at Dartmouth College.
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Ajmal Khan has been a Director of our company since July 1998. Mr.
Khan is founder and President of the Verus Capital Corp., a diversified
investment group. Mr. Khan founded Verus and has been its President since
1987. Verus is involved in the ownership of hotels; venture capital
financing; corporate acquisitions; and several joint ventures entailing name
brand franchising and licensing. Mr. Khan also has a joint venture interest
in Barakaat Holdings Ltd., a sports marketing company. Since October 1998,
he has also served as a Director of Advanced Bodymetrics, Inc., a publicly
traded high-tech company dedicated to developing sports wristwatches that are
able to monitor and display various functions of the human body. Mr. Khan is
also a Director of Wattage Monitor, Inc., a provider of electricity and power.
Robert H. Lessin has been a Director of our company since July 1998.
Mr. Lessin has been Chairman and Chief Executive Officer of Wit Capital
Corp., an on-line broker-dealer, since April 1998. From 1993 until 1997, Mr.
Lessin was Vice Chairman of Salomon Smith Barney, where he served as head of
its Investment Banking Division. Mr. Lessin also serves on the Board of
Directors of CBS MarketWatch.com, a financial and news provider on the
Internet.
Michael Levitt has been a Director of our company since February 2000.
Mr. Levitt has been a partner of Hicks, Muse, Tate & Furst Incorporated, a
global investment firm, since 1996. He is responsible for originating,
structuring and monitoring Hicks Muse's investments and is involved in
building relationships with investment banks and commercial banking firms
worldwide. Mr. Levitt serves on the Board of Directors of AMFM Corp., El
Sitio, Inc., Globix Corporation, International Home Foods, Inc., RCN
Corporation, Metrocall, Inc., Regal Cinemas, Inc., Rhythms NetConnections,
Inc., and STC Broadcasting, Inc., among others. Prior to joining Hicks Muse,
Mr. Levitt was a Managing Director and Deputy Head of Investments with Smith
Barney, and a Managing Director with Morgan Stanley & Co., responsible for
corporate finance and mergers and acquisitions. Mr. Levitt received his
undergraduate and Juris Doctor degrees from the University of Michigan.
Stuart G. Moldaw has been a Director of our company since October
1999. Mr. Moldaw has been Chairman of Gymboree Corporation, a specialty
retailer of apparel and accessories for children, since 1994. From 1980
through February 1990 Mr. Moldaw served as a general partner of U.S. Venture
Partners and he currently serves as a special venture partner of such entity.
Mr. Moldaw also serves as a Director and Chairman Emeritus of Ross Stores,
Inc., an off-price retailer of apparel and home accessories.
Committees of the Board of Directors
We have no nominating committee. We have an audit committee consisting
of Messrs. Khan and Moldaw, and a compensation committee consisting of
Messrs. Khan and Perisano. We also have an executive committee consisting of
Messrs. Perisano, Lessin and Moldaw. We have key-man life insurance policies
in the amount of $2,000,000 on the lives of both Mr. Perisano and Ms. Dorice
Dionne, our Senior Vice President - Merchandising.
Director Compensation
Under our 1998 Incentive and Non-qualified Stock Option Plan, each
non-employee director is granted, on the effective date of the commencement of
his term as director, options to purchase 25,000 shares of common stock. In
addition, each of our directors who is not an executive officer is granted, on
an annual basis on the last trading date in August of each year, commencing
August 1998, options to acquire 25,000 shares of common stock, at an exercise
price equal to the fair market value of the underlying common stock on the date
of grant.
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Employment and Consulting Agreements
We have entered into a consulting agreement with Mr. Perisano for the
services of Mr. Perisano and his wife, Ms. Dionne. The consulting period
terminated on December 31, 1999. Pursuant to this agreement, Mr. Perisano was
entitled to options to purchase 25,000 shares of common stock, at the price on
the date of grant ($1.43), and additional options to purchase 25,000 shares of
common stock in the event their consulting hours exceed 100. Their consulting
hours exceeded 100 on January 19, 1999. Consequently, Mr. Perisano was granted
options to purchase 25,000 shares of common stock at an exercise price of $5.38
per share, the price of the common stock on such date.
We have entered into an employment agreement with Mr. Perisano which
provides for him to act as our Chief Executive Officer for a term expiring on
March 30, 2002. He is required to devote substantially his full working time and
attention to our business provided that he may continue to fulfill his duties
and obligations to The Big Party Corporation as a consultant and a member of its
Board of Directors. The agreement provided for an initial annual salary of
$150,000, which amount was increased to $250,000 beginning January 1, 2000 plus
a discretionary bonus to be determined by the Board of Directors. As described
in the agreement, on March 30, 1999 Mr. Perisano was granted options to purchase
an aggregate of 337,500 shares of common stock under our stock option plan with
an exercise price equal to the fair market value of the common stock on the date
of grant ($3.75). Such options will vest as follows: provided that Mr. Perisano
remains continuously employed by us, options with respect to 112,500 shares of
common stock vested on March 30, 2000, 1/24th of the remaining 225,000 shares of
common stock will vest each month beginning on April 30, 2000 for a period of 24
months. As further described in the agreement, on August 26, 1999, Mr. Perisano
was granted options to purchase an aggregate of 434,730 shares of common stock
pursuant to our stock option plan with an exercise price equal to $2.00. Such
options will vest as follows: provided that Mr. Perisano remains continuously
employed by us, options with respect to 144,910 shares of common stock will vest
on August 26, 2000, 1/24th of the remaining 289,820 will vest each month
beginning September 26, 2000 for a period of 24 months. The agreement provides
that if Mr. Perisano is terminated without cause, or resigns for "good reason"
he will be entitled to receive his then current salary for a period of nine
months. The agreement contains certain restrictions on competition.
We have entered into an employment agreement with Ms. Dionne. The
agreement provides that she will act as Senior Vice President--Merchandising for
a term expiring on March 30, 2000. Ms. Dionne is required to devote
substantially her full working time and attention to our business provided that
she may continue to fulfill her duties and obligations to The Big Party
Corporation as a consultant. The agreement provides for an initial annual salary
of $100,000, which amount was increased to $125,000 beginning January 1, 2000,
plus a discretionary bonus to be determined by the Board of Directors. As
described in the agreement, on March 30, 1999 she was granted options to
purchase an aggregate of 337,500 shares of common stock pursuant to our stock
option plan with an exercise price equal to the fair market value of the common
stock on the date of grant ($3.75 per share). Such options will vest as follows:
provided that she remains continuously employed by us, options with respect to
112,500 shares of common stock vested on March 30, 2000, 1/24th of the remaining
225,000 shares of common stock will vest each month beginning on April 30, 2000
for a period of 24 months. The agreement provides that if she is terminated
without cause, she will be entitled to receive her then current salary for a
period of six months. The agreement contains certain customary restrictions on
competition.
We have entered into an employment agreement with Mr. Farrell dated March
12, 1999, which provides for Mr. Farrell to serve as our Senior Vice President
and Chief Financial Officer for a term expiring on December 31, 2000. The
agreement provides for an initial base salary of $115,000 per year. In
connection with the agreement, Mr. Farrell was granted options to purchase an
aggregate of 115,000 shares of common stock under our stock option plan. Options
with respect to 50,000 shares vested on August 1, 1999 and options with respect
to the remaining 65,000 shares vested on February 1, 2000. If we terminate the
employment agreement without cause, Mr. Farrell is entitled to receive his full
then
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current base salary for a period of three months from the date of termination
and half of his then current base salary for a period of three months
thereafter.
We have entered into a consulting agreement with Mr. Moldaw, a Director of
our company, dated September 7, 1999. The agreement has a term of three years
but may be terminated by either party upon 90 days' written notice. Under the
terms of agreement, Mr. Moldaw was granted options to purchase 100,000 shares of
common stock with an exercise price of $2.00 per share. Such options vest as
follows: provided that Mr. Moldaw is still providing us with consulting
services, options with respect to 33,334 shares of common stock will vest on
September 6, 2000. 1/24th of options with respect to 66,666 shares of common
stock will vest each month beginning on September 6, 2001 for a period of 24
months.
We entered into a consulting agreement with Mr. Byron Hero, our former
Chief Executive Officer and a former Director, dated April 14, 1999. In
connection with the consulting agreement, Mr. Hero's employment agreement was
terminated and Mr. Hero resigned as Chief Executive Officer and a Director of
our company. Mr. Hero did not receive any severance payment in connection with
his resignation as Chief Executive Officer. Pursuant to the terms of the
consulting agreement, Mr. Hero served as non-executive Chairman of StarGreeting,
Inc., our wholly-owned subsidiary, until April 14, 2000. During the term of the
agreement, Mr. Hero received a fee of $20,833.33 per month. As a result of the
modification of the StarConcept, Mr. Hero was terminated on September 30, 1999
and he will be entitled to receive his fee for the remainder of the contract.
Under Mr. Hero's employment agreement, he was granted options to purchase an
aggregate of 300,000 shares of common stock under our stock option plan. Such
options remain in effect. Options to purchase 150,000 shares have vested.
Summary Executive Officer Compensation Table
The following table summarizes the aggregate cash compensation paid during
1999 (see footnotes below) to our Chief Executive Officer and other executive
officers that received compensation in excess of $100,000 in salary and bonus
pursuant to their contracts. Currently, options have been granted to management
as indicated below.
<TABLE>
<CAPTION>
Other Annual Securities Under
Name and Principal Position 1999 Salary Compensation Options/SAR's
--------------------------- ----------- ------------ -------------
<S> <C> <C> <C>
Sal Perisano, $111,442 - 797,230
Chief Executive Officer(1)
Byron Hero, $72,917 $145,836 -
Former Chief Executive Officer(2)
Maureen Broughton Murrah, $154,919 $5,000 -
Former President(3)
</TABLE>
(1) Mr. Perisano did not begin his employment with us until March 30, 1999.
(2) Mr. Hero resigned as our Chief Executive Officer as of April 15, 1999.
Mr. Hero did not receive any severance payment in connection with his
resignation. On April 15, 1999, Mr. Hero entered into a 12-month
consulting agreement. Payments made under this agreement are reflected in
the other annual compensation column.
(3) Ms. Broughton Murrah resigned as our President on November 15, 1999.
Ms. Broughton Murrah did not receive any severance payment in connection
with her resignation.
Stock Option Plan
In July 1998, our Board of Directors adopted the Incentive and
Nonqualified Stock Option Plan, under which there are currently 4,000,000 shares
of common stock reserved for issuance. Our plan provides for the award of
options, which may either be incentive stock options within the meaning of
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Section 422A of the Internal Revenue Code of 1986, as amended or non-qualified
options which are not subject to special tax treatment under the Code. Our Board
of Directors or a committee appointed by our Board administers our stock option
plan. Officers, directors, key employees of, and consultants to, us or any
parent or subsidiary corporation selected by the administrator are eligible to
receive options under the plan. Subject to certain restrictions, the
administrator is authorized to designate the number of shares to be covered by
each award, the terms of the award, the dates on which and the rates at which
options or other awards may be exercised, the method of payment and other terms.
The exercise price for incentive stock options cannot be less than the
fair market value of the stock subject to the option on the grant date (110% of
such fair market value in the case of incentive stock options granted to a
stockholder who owns more than 10% of our common stock). The administrator will
fix the exercise price of a nonqualified stock option at whatever price the
administrator may determine in good faith. Unless the administrator determines
otherwise, options generally have a 10-year term (or five years in the case of
incentive stock options granted to a participant owning more than 10% of the
total voting power of our capital stock). Unless the administrator provides
otherwise, options terminate upon the termination of a participant's employment,
except that the participant may exercise an option to the extent it was
exercisable on the date of termination for a period of time after termination.
Generally, awards must be exercised by cash payment of the exercise price.
However, the administrator may allow a participant to pay all or a portion of
the exercise price by means of stock.
In the event of any change in the outstanding shares of common stock by
reason of any reclassification, recapitalization, merger, consolidation,
reorganization, spin-off, issuance of warrants or rights or debentures, stock
dividend, stock split or reverse stock split, cash dividend, property dividend
or similar change in the corporate structure, the administrator will make an
appropriate adjustment in the aggregate number of shares available under our
stock option plan and in the number of shares and price per share subject to
outstanding options. In the event that we are reorganized, consolidated, or
merged with another corporation, or if all or substantially all of our assets
are sold or exchanged, the holder of the option is entitled to receive upon the
exercise of his or her option, the same number and kind of shares of stock as he
or she would have been entitled to receive upon the happening of any such
corporate event as if he had exercised such option and had been immediately
prior to such event, the holder of the number of shares covered by such option.
The administrator may, at any time, modify, amend or terminate our stock
option plan as is necessary to maintain compliance with applicable statutes,
rules or regulations; provided, however, that the administrator may condition
the effectiveness of any such amendment on the receipt of stockholder approval
as may be required by applicable statute, rule or regulation. In addition, our
plan may be terminated by the Board of Directors as it determines or will
determine in its sole discretion, in the absence of stockholder approval;
provided, however, that any such termination will not adversely alter or impair
any option awarded under our plan prior to such termination without the consent
of the holder thereof.
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Option Granted in Last Fiscal Year
<TABLE>
<CAPTION>
Number of
Securities Percent of Total
Underlying Options Granted
Options to Employees in Exercise
Name and Principal Position Granted Fiscal Year Price Expiration Date
--------------------------- ------------ ----------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Sal Perisano, 25,000 35.7% $5.38 1/19/09
Chief Executive Officer 337,500 $3.75 3/30/09
and Director 434,730 $2.00 8/26/09
Patrick Farrell,
Senior Vice President 115,000 8.5% $3.63 4/5/09
and Chief Financial Officer 75,000 $3.81 10/11/09
</TABLE>
Indemnification of Directors and Executive Officers
Our certificate of incorporation and bylaws provide that we indemnify all
of our directors and officers to the fullest extent permitted by the Delaware
General Corporation Law. Under our certificate of incorporation and bylaws, any
director or officer, who in his capacity as such is made or threatened to be
made, party to any suit or proceeding, will be indemnified. A director or
officer will be indemnified if it is determined that the director or officer
acted in good faith and in a manner he reasonably believed to be in or not
opposed to our best interests. Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors, officers and
persons controlling our company pursuant to the foregoing provision, or
otherwise, we have been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
We maintain a directors' and officers' liability insurance policy covering
certain liabilities that may be incurred by directors and officer in connection
with the performance of their duties. We pay the entire premium for the
liability insurance.
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of June 27, 2000, certain information
with respect to the beneficial ownership of each class of our equity securities
as follows:
o By each person who is known by us to beneficially own more than 5% of
our common stock, fully diluted;
o By each of our directors;
o By each officer under the "Management - Summary Compensation Table";
and
o By all executive officers and directors as a group.
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<PAGE>
<TABLE>
<CAPTION>
Number of
Common Shares
Name of Beneficial Owner(1) Beneficially Owned(2) Percent of Class
-------------------------- --------------------- ---------------------
<S> <C> <C>
Sal Perisano 206,250(3) 1.94%
Patrick Farrell 115,000(4) 1.02%
Robert H. Lessin 7,900,558(5)(7) 60.60%
c/o WIT Capital
826 Broadway, 6th Floor
New York, NY 10003
James McCann 699,600(6) 6.28%
1-800 Flowers
1000 Stewart Avenue
Westbury, NY 11590
iParty LLC 6,000,000(7) 53.88%
c/o Robert H. Lessin
826 Broadway, 6th Floor
New York, NY 10003
Ajmal Khan 565,000(8) 4.83%
The Verus Group
1177 West Hastings Street
Vancouver, British Columbia
Canada V6E 2K3
Stuart G. Moldaw 180,229(9) 1.59%
700 Airport Boulevard
Burlingame, California 94010
Byron Hero 750,000(10) 6.65%
420 East 54th Street
New York, NY 10022
Roccia Partners, L.P. 2,788,074(11) 20.02%
826 Broadway
New York, NY 10003
Boston Millennia Partners, LP 1,552,290(123) 12.23%
30 Rowes Wharf
Suite 330
Boston, MA 02110
Hampton Associates Limited 951,020(13) 7.87%
1702 Dina House
Ruttonjee Centre
11 Duddell Street
Central Hong Kong
HMTF-iPC, LLC 3,750,000(14) 25.19%
200 Crescent Court, Suite 1600
Dallas, TX 75201
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Number of
Common Shares
Name of Beneficial Owner(1) Beneficially Owned(2) Percent of Class
-------------------------- --------------------- ---------------------
<S> <C> <C>
Robert Jevon 25,000(15) --
Boston Millennia Partners, LP
30 Rowes Wharf
Suite 330
Boston, MA 02110
Michael Levitt 25,000(16) --
Hicks Muse, Tate & Furst
Incorporated
200 Crescent Court, Suite 1600
Dallas, TX 75201
Taymark 1,500,000(17) 11.88%
4875 White Bear Parkway
White Bear Lake, MN 55110
All Officers and Directors as a Group
(7 persons) 9,017,037 63.82%
</TABLE>
-----------------
(1) Unless otherwise indicated, all addresses are c/o iParty Corp., 130
West 30th Street, 10th Floor, New York, NY 10001.
(2) Beneficial ownership has been determined in accordance with Rule 13d-3
under the Securities and Exchange Act, and unless otherwise indicated,
represents shares for which the beneficial owner has sole voting and
investment power. The percentage of class is calculated in accordance
with Rule 13d-3.
(3) Includes 75,000 shares that may be acquired upon the exercise of
presently exercisable options issued pursuant to our stock option plan
(50,000 options in connection with his consulting agreement and 25,000
options in connection with his role as a Director of our company. See
"Executive Compensation").
(4) Includes 115,000 shares that may be acquired upon the exercise of
presently exercisable options issued pursuant to our stock plan.
(5) Includes (1) 6,000,000 shares of common stock owned by iParty LLC, in
which Mr. Lessin is a member and the manager and a 78.34% owner, (2)
75,000 shares of common stock which may be acquired upon the exercise of
presently exercisable options issued under our stock option plan, (3)
273,268 shares of common stock which may be acquired upon the exercise of
presently exercisable warrants, (4) 1,000,000 shares of common stock
which may be acquired upon the conversion of 100,000 shares of presently
convertible Series B convertible preferred stock and (5) 552,290 shares
of common stock which may be acquired upon the exercise of redeemable
common stock purchase warrants.
(6) Includes 699,000 shares of common stock owned by iParty LLC, in which Mr.
McCann is a member and a 11.66% owner. Such shares represent his
ownership interest in iParty LLC.
(7) iParty LLC is a Delaware limited liability company and a 54.5%
shareholder of iParty Corp. Mr. Lessin is the manager and 78.334%
owner of iParty LLC.
(8) Includes 75,000 shares of common stock which may be acquired upon the
exercise of presently exercisable options issued pursuant to our stock
option plan, and 25,000 shares of common stock held by Verus Capital
Corp., of which Mr. Khan is the sole stockholder. Also includes presently
exercisable options, held by Verus Capital Corp., to purchase 225,000 and
240,000 shares of Series A preferred stock from Henslowe Trading Limited
and Ruffino Developments Limited, respectively.
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<PAGE>
(9) Includes 100,000 shares of common stock which may be acquired upon the
conversion of 10,000 shares of presently convertible Series B convertible
preferred stock, 55,229 shares of common stock which may be acquired upon
the exercise of redeemable common stock purchase warrants and 25,000
shares of common stock which may be acquired upon the exercise of
presently exercisable options issued under our stock option plan.
(10) Includes 600,000 shares of common stock owned by iParty LLC, in which Mr.
Hero is a member and a 10% owner, such shares represent Mr. Hero's
membership interest in iParty LLC. Also includes 150,000 shares that may
be acquired by the exercise of presently exercisable options issued under
our stock option plan.
(11) Includes 1,796,104 shares of common stock which may be acquired upon the
conversion of 179,610 shares of presently convertible Series B
convertible preferred stock and 991,970 shares of common stock which may
be acquired upon the exercise of redeemable common stock purchase
warrants.
(12) Includes 1,000,000 shares of common stock that may be acquired upon the
conversion of 100,000 shares of presently convertible Series C
convertible preferred stock and 552,290 shares of common stock which may
be acquired upon the exercise of redeemable common stock purchase
warrants owned by Boston Millennia Partners Limited Partnership and an
affiliated entity. Mr. Jevon disclaims beneficial ownership of such
shares except to the extent of his ownership interest in the entities
which own such shares.
(13) Includes 448,420 shares of common stock which may be acquired upon the
conversion of 44,842 shares of presently convertible Series B convertible
preferred stock, 247,658 shares of common stock which may be acquired upon
the exercise of redeemable common stock purchase warrants and 254,942
shares of common stock which may be acquired upon the exercise of
presently exercisable warrants.
(14) Includes 2,500,000 shares of common stock which may be acquired upon the
conversion of 250,000 shares of presently convertible Series D convertible
preferred stock and 1,250,000 shares of common stock which may be acquired
upon the exercise of redeemable common stock purchase warrants owned by
HMTF-iPC, LLC. HMTF-iPC, LLC is a limited liability company of which the
sole member is HMTF Bridge Partners, L.P., a limited partnership the sole
general partner of which is HMTF Bridge Partners, LLC, a limited liability
company of which Mr. Thomas O. Hicks is the sole member. Accordingly, Mr.
Hicks may be deemed to be the beneficial owner of all or a portion of the
stock owned of record by HMTF-iPC, LLC. Mr. Hicks expressly disclaims (1)
the existence of any group and (2) beneficial ownership with respect to
any shares of common stock not owned of record by him. Mr. Michael J.
Levitt, a limited partner of HMTF Bridge Partners, L.P. and an executive
officer of HMTF Bridge Partners, LLC, serves as a director of our company.
(15) Includes 25,000 shares of common stock which may be acquired upon the
exercise of presently exercisable options issued under our stock option
plan.
(16) Includes 25,000 shares of common stock which may be acquired upon the
exercise of presently exercisable options issued under our stock option
plan.
(17) Includes 1,500,000 shares of common stock which may be acquired upon the
exercise of presently exercisable warrants.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
StarGreetings, Inc. our wholly-owned subsidiary, licenses certain
technology from StarGreetings, LLC. Mr. Byron Hero, a former director and our
former Chief Executive Officer, is a member and the manager of StarGreetings,
LLC. In exchange for the license, we pay the licensor 2 1/2% royalty from the
gross revenues received from the sale of StarGreetings. As of May 31, 2000, we
have not paid any fees to StarGreetings, LLC under this agreement.
Pursuant to the terms of an April 1998 finders fee agreement between Mr.
Hero and a predecessor entity, prior to him becoming a director or officer of
us, he was entitled 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 him. In connection
34
<PAGE>
with our merger, we assumed the obligations under this agreement. In connection
with the agreement, $2,000,000 was raised. As a result, we paid Mr. Hero
$100,000. Mr. Hero is not a registered broker-dealer.
We entered into a Funding Agreement, dated as of March 31, 1999, and
amended as of April 14, 1999, with Mr. Ajmal Khan and Mr. Robert H. Lessin, who
are directors. Pursuant to the terms of the Funding Agreement each of Mr. Khan
(or his designees) and Mr. Lessin advanced certain funds to our company. In
connection with each such funding, the funding party received 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.
$2,000,000 was funded pursuant to the Funding Agreement and warrants to purchase
528,210 shares of Common Stock were issued at a weighted-average exercise price
of $3.79.
DESCRIPTION OF CAPITAL STOCK
Common Stock
Our Restated Certificate of Incorporation authorizes the issuance of an
aggregate of 50,000,000 shares of common stock. As of June 15, 2000, there were
11,136,107 shares of common stock issued and outstanding. As of June 15, 2000,
the number of holders of our common stock was at least 500. Each holder of
record of common stock is entitled to one vote for each share held on all
matters promptly submitted to the stockholders for their vote. Holders of
outstanding shares of common stock are entitled to such dividends as may be
declared from time to time by the Board of Directors out of legally available
funds. We have not paid a dividend and it is not anticipated that any cash
dividends will be paid in the foreseeable future. The Board of Directors
initially may follow a policy of retaining earnings, if any, to finance our
future growth. Accordingly, future cash dividends, if any, will depend on our
need for working capital and its financial condition at the time. Shares of
common stock are not redeemable, carry no preemptive rights, or other rights to
subscribe for additional shares of common stock in the event of an offering. All
outstanding shares of common stock are fully paid and non-assessable.
Preferred Stock
Our Restated Certificate of Incorporation authorizes the issuance of an
aggregate of 10,000,000 preferred shares. The Board of Directors is authorized
from time to time to issue the preferred shares as preferred shares of any
series and in connection with the creation of each such series, to fix by
resolution or resolutions providing for the issue of shares thereof, the number
of shares of such series, the designations, powers and preferences and rights
and the qualifications, limitations and restrictions of such series to the full
extent now or hereafter permitted by the laws of the State of Delaware. At
present, our Board of Directors has designated the following classes of
preferred shares: (1) 1,000,000 shares as Series A convertible preferred stock,
all of which are currently issued and outstanding; (2) 1,150,000 shares as
Series B convertible preferred stock, 1,044,952 shares of which are currently
issued and outstanding; (3) 100,000 shares as Series C convertible preferred
stock, all of which are currently issued and outstanding; and (4) 250,000 shares
a Series D convertible preferred stock, all of which are currently issued and
outstanding.
Series B Preferred Stock
Rank. The Series B preferred stock ranks junior to any classes of stock we
have designated as "Senior Securities," prior to all of our common stock and any
class or series of our capital stock created thereafter not specifically ranking
by its terms senior to, or on parity with, the Series B preferred stock, and on
parity with the Series A, Series C and Series D preferred stock, as to
distribution of our assets upon liquidation, dissolution or winding up of our
company, whether voluntary or involuntary.
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<PAGE>
Dividends. The Series B preferred stock bears no dividend provided that
the holders will be entitled to dividends ratably with any payment to holders of
common stock if declared by the Board of Directors.
Conversion. Subject to certain adjustments, each share of Series B
preferred stock is convertible at any time, and from time to time, at the option
of the holder thereof, into a number of shares of common stock equal to the
quotient derived by dividing (1) $20.00 by (2) the conversion price in effect at
the time of the conversion. The initial conversion price is $2.00, reflecting an
initial conversion rate of 10 shares of common stock for each share of Series B
preferred stock. In addition, the Series B preferred stock will automatically
convert into common stock, at the conversion rate then in effect, in the event
that we consummate a secondary public offering of our common stock resulting in
gross proceeds to us of at least $10,000,000.
Anti-Dilution Provisions. Subject to certain exceptions (including the
exercise of currently outstanding options or warrants, the exercise of future
options issued under our stock option plan, and the conversion of the Series A
preferred stock), if we issue common stock at a price less than the Series B
conversion price then in effect or the then current market price of the common
stock, then the Series B conversion rate will be adjusted on a weighted-average
formula basis. In addition, if the number of outstanding shares of common stock
is increased by a stock split, stock dividend or other similar event, the Series
B conversion rate is to be proportionately reduced, or if the number of
outstanding shares of common stock is decreased by a combination or
reclassification of shares, or other similar event, the Series B conversion rate
is to be proportionately increased. In addition, if, prior to the conversion of
all the Series B preferred stock, there is any merger, consolidation, exchange
of shares, recapitalization, reorganization or other similar event, as a result
of which our shares of common stock are to be changed into the same or a
different number of shares of the same or another class or classes of our stock
or securities or another entity, that the holders of then outstanding shares of
Series B preferred stock would have the right to receive upon conversion of
Series B preferred stock, upon the basis and upon the terms and conditions
specified in the certificate of designation and in lieu of the shares of common
stock immediately issuable upon conversion, such stock, securities and/or other
assets which the holders would have been entitled to receive in such transaction
had the Series B preferred stock been converted immediately prior to such
transaction.
Voting Rights. The Series B preferred stock will vote together as a single
class with the holders of common stock, with each share of Series B preferred
stock being entitled to cast a number of votes equal to the number of shares of
common stock into which each share is then convertible (initially 10). In
addition, consent of 50% of the shares of Series B preferred stock then
outstanding is required before we can take certain actions which adversely
affect the rights preferences or privileges of the Series B preferred stock.
Series C Preferred Stock
Rank. The Series C preferred stock ranks junior to any classes of stock we
have designated as "Senior Securities," prior to all of our common stock and any
class or series of our capital stock created thereafter not specifically ranking
by its terms senior to, or on parity with, the Series C preferred stock, and on
parity with the Series A, Series B and Series D preferred stock, as to
distribution of our assets upon liquidation, dissolution or winding up of our
company, whether voluntary or involuntary.
Dividends. The Series C preferred stock bears no dividend provided that
the holders will be entitled to dividends ratably with any payment to holders of
common stock if declared by the Board of Directors.
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<PAGE>
Conversion. Subject to certain adjustments, each share of Series C
preferred stock is convertible at any time, and from time to time, at the option
of the holder thereof, into a number of shares of common stock equal to the
quotient derived by dividing (1) $20.00 by (2) the conversion price in effect at
the time of the conversion. The initial conversion price is $2.00, reflecting an
initial conversion rate of 10 shares of common stock for each share of Series C
preferred stock. In addition, the Series C preferred stock will automatically
convert into common stock, at the conversion rate then in effect, in the event
that we consummate a secondary public offering of our common stock resulting in
gross proceeds to us of at least $10,000,000.
Anti-Dilution Provisions. Subject to certain exceptions (including the
exercise of currently outstanding options or warrants, the exercise of future
options issued under our stock option plan, and the conversion of the Series A
or Series B preferred stock), if we issue common stock at a price less than the
Series C conversion price then in effect or the then current market price of the
common stock, then the Series C conversion rate will be adjusted on a
weighted-average formula basis. In addition, if the number of outstanding shares
of common stock is increased by a stock split, stock dividend or other similar
event, the Series C conversion rate is to be proportionately reduced, or if the
number of outstanding shares of common stock is decreased by a combination or
reclassification of shares, or other similar event, the Series C conversion rate
is to be proportionately increased. In addition, if, prior to the conversion of
all the Series C preferred stock, there is any merger, consolidation, exchange
of shares, recapitalization, reorganization or other similar event, as a result
of which our shares of common stock are to be changed into the same or a
different number of shares of the same or another class or classes of our stock
or securities or another entity, that the holders of then outstanding shares
Series C preferred stock would have the right to receive upon conversion of
Series C preferred stock, upon the basis and upon the terms and conditions
specified in the certificate of designation and in lieu of the shares of common
stock immediately issuable upon conversion, such stock, securities and/or other
assets which the holders would have been entitled to receive in such transaction
had the Series C preferred stock been converted immediately prior to such
transaction.
Voting Rights. The Series C preferred stock will vote together as a single
class with the holders of common stock, with each share of Series C preferred
stock being entitled to cast a number of votes equal to the number of shares of
common stock into which each share is then convertible (initially 10). In
addition, so long as 50% of the initially issued shares of Series C preferred
stock remain outstanding, the holders of the Series C preferred stock, voting as
a class, will have the right to elect one director. In addition, consent of 50%
of the shares of Series C preferred stock then outstanding is required before we
can take certain actions which adversely affect the rights, preferences or
privileges of the Series C preferred stock.
Series D Preferred Stock
Rank. The Series D preferred stock ranks junior to any classes of stock we
have designated as "Senior Securities," prior to all of our common stock and any
class or series of our capital stock created thereafter not specifically ranking
by its terms senior to, or on parity with, the Series D preferred stock, and on
parity with the Series A, Series B and Series C preferred stock, as to
distribution of our assets upon liquidation, dissolution or winding up of our
company, whether voluntary or involuntary.
Dividends. The Series D preferred stock bears no dividend provided that
the holders will be entitled to dividends ratably with any payment to holders of
common stock if declared by the Board of Directors.
Conversion. Subject to certain adjustments, each share of Series D
preferred stock is convertible at any time, and from time to time, at the option
of the holder thereof, into a number of shares of common stock equal to the
quotient derived by dividing (1) $20.00 by (2) the conversion price in effect at
the time of the conversion. The initial conversion price is $2.00, reflecting an
initial conversion rate of 10 shares
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<PAGE>
of common stock for each share of Series D preferred stock. In addition, the
Series D preferred stock will automatically convert into common stock, at the
conversion rate then in effect, in the event that we consummate a secondary
public offering of our common stock resulting in gross proceeds to us of at
least $10,000,000.
Anti-Dilution Provisions. Subject to certain exceptions (including the
exercise of currently outstanding options or warrants, the exercise of future
options issued under our stock option plan, and the conversion of the Series A,
Series B or Series C preferred stock), if we issue common stock at a price less
than the Series D conversion price then in effect or the then current market
price of the common stock, then the Series D conversion rate will be adjusted on
a weighted-average formula basis. In addition, if the number of outstanding
shares of common stock is increased by a stock split, stock dividend or other
similar event, the Series D conversion rate is to be proportionately reduced, or
if the number of outstanding shares of common stock is decreased by a
combination or reclassification of shares, or other similar event, the Series D
conversion rate is to be proportionately increased. In addition, if, prior to
the conversion of all the Series D preferred stock, there is any merger,
consolidation, exchange of shares, recapitalization, reorganization or other
similar event, as a result of which our shares of common stock are to be changed
into the same or a different number of shares of the same or another class or
classes of our stock or securities or another entity, that the holders of then
outstanding shares Series D preferred stock would have the right to receive upon
conversion of Series D preferred stock, upon the basis and upon the terms and
conditions specified in the certificate of designation and in lieu of the shares
of common stock immediately issuable upon conversion, such stock, securities
and/or other assets which the holders would have been entitled to receive in
such transaction had the Series D preferred stock been converted immediately
prior to such transaction.
Voting Rights. The Series D preferred stock will vote together as a single
class with the holders of common stock, with each share of Series D preferred
stock being entitled to cast a number of votes equal to the number of shares of
common stock into which each share is then convertible (initially 10). In
addition, so long as 50% of the initially issued shares of Series D preferred
stock remain outstanding, the holders of the Series D preferred stock, voting as
a class, will have the right to elect one director. In addition, consent of 50%
of the shares of Series D preferred stock then outstanding is required before we
can take certain actions which adversely affect the rights, preferences or
privileges of the Series D preferred stock.
Common Stock Warrants
Exercise. Each common stock warrant will be exercisable for a period of
five years commencing one year from the issue date for one share of common stock
at an exercise price equal to $2.00 per share.
Anti-Dilution Provisions. The common stock warrants will be protected
against dilution upon the occurrence of certain events, including, but not
limited to, sales of shares of common stock for less than fair market value of
the Common Stock if such fair market value is less than the exercise price;
provided, however, that this provision will not apply to specified exempted
issuances, including shares of common stock issued upon (1) the exercise of
presently outstanding options and warrants, (2) the exercise of future options
issued under our stock option plan (or any successor thereto), or (3) the
conversion of up to 1,000,000 shares of presently outstanding Series A
convertible preferred stock.
The market price at the time of the Series D preferred stock transaction was
$3.19, therefore triggering the anti-dilution provision in the Series B and C
preferred stock. The effect of this anti-dilution provision was (1) an
adjustment to the exercise price of the redeemable common stock purchase
warrants attached to the Series B and C preferred stock to $1.81 and (2) the
issuance of 695,966 additional redeemable common stock purchase warrants with an
exercise price of $1.81 to the holders of the warrants issued in the Series B
and C financings.
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<PAGE>
Redemption. The common stock warrants may be redeemed at our option on 30
days' notice to the common stock warrant holders at a redemption price of $0.05
per warrant if the average closing bid price of our common stock equals or
exceeds $8.00 per share for 20 consecutive trading-days within a period of 30
consecutive trading days, ending on the fifth trading day immediately preceding
the notice of redemption. The common stock warrants may be called for redemption
only if a registration statement covering the resale of the common stock
warrants and the warrant shares has been declared effective and remains
effective on the date fixed for redemption.
PLAN OF DISTRIBUTION
We are registering the shares of our common stock, shares of our common
stock underlying our convertible preferred stock, shares of our common stock
underlying our common stock warrants, and our common stock warrants. We will not
receive any of the proceeds from the sale of our common stock and our common
stock warrants offered by our stockholders. However, we may receive between
$11,250,000 and $28,986,685 from our stockholders upon the exercise of the
common stock warrants depending whether or not the exercise is done on a
cashless basis.
Our stockholders may sell shares of common stock and our common stock
warrants in transactions on the American Stock Exchange, in negotiated
transactions, or a combination of the two. The shares and common stock warrants
may be sold at market prices prevailing at the time of sale, at prices related
to market prices or at negotiated prices. Our stockholders may sell the shares
or common stock warrants directly to purchasers or through underwriters or
broker-dealers who may act as agents or principals.
The sale of our common stock and our common stock warrants by our
stockholders may be affected from time to time by selling the stock directly to
purchasers or to or through broker-dealers. In connection with any sale, a
broker-dealer may act as agent for our stockholders or may purchase from our
stockholders all or a portion of our common stock or our common stock warrants
registered herein and sales may be made pursuant to any of the methods described
below. These sales may be made on the American Stock Exchange, in negotiated
transactions or otherwise, in each case at prices and at terms then prevailing
or at prices related to the then-current market prices or at prices otherwise
negotiated.
The sale of our common stock and our common stock warrants by a
stockholder may be also affected from time to time in one or more underwritten
transactions at a fixed price or prices, which may be changed, or in other
transactions at market prices prevailing at the time of sale, at prices related
to the prevailing market prices or at negotiated prices. Any underwritten
offering may be on either a "best efforts" or a "firm commitment" basis. In
connection with any underwritten offering, underwriters or agents may receive
compensation in the form of discounts, concessions or commissions from our
stockholders and/or from purchasers for whom they may act as agents.
Underwriters may sell our common stock and our common stock warrants to or
through dealers, and the dealers may receive compensation in the form of
discounts, concessions or commissions from the underwriters and/or commissions
from the purchasers for whom they may act as agents. Any such compensation may
be higher than customary compensation.
Our stockholders and any underwriters, dealers or agents that participated
in the distribution of our common stock may be deemed to be underwriters within
the meaning of the Securities Act, and any profit on the sale of our common
stock and our common stock warrants by them and any discounts, commissions or
concessions received by those underwriters, dealers or agents might be deemed to
be underwriting discounts and commissions under the Securities Act.
At the time a particular offer of our common stock is made by a
stockholder, a prospectus supplement, if required, will be distributed that will
set forth the names of any underwriters, dealers or
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<PAGE>
agents and any discounts, commissions and other terms constituting compensation
from our stockholders and any other required information.
Our stockholders may also sell our shares and our common stock warrants in
one or more of the following transactions:
o Block transactions, which may involve crosses, in which a broker-dealer
may sell all or a portion of the shares as agent but may position and
resell all or a portion of the block as principal to facilitate the
transaction;
o Purchases by a broker-dealer as principal and resale by a broker-dealer
for its own account pursuant to a prospectus supplement;
o A special offering, an exchange distribution or a secondary
distribution in accordance with applicable exchange rules;
o Ordinary brokerage transactions and transactions in which these
broker-dealers solicit purchasers;
o Sales at the market to or through a specialist or market maker or into
an existing trading market, on an exchange or otherwise, for the
shares; and
o Sales in other ways not involving market makers or established trading
markets, including direct sales to purchasers.
In effecting sales, broker-dealers engaged by our stockholders may arrange
for other broker-dealers to participate. Broker-dealers will receive commissions
or other compensation from our stockholders in amounts to be negotiated
immediately prior to the sale. Broker-dealers also may receive compensation from
purchasers of our common stock and our common stock warrants from our
stockholders, which is not expected to exceed amounts that are customary for the
types of transactions involved.
In connection with distributions of our common stock and our common stock
warrants or otherwise, our stockholders may enter into hedging transactions with
broker-dealers or others prior to or after the effective time of this
registration statement. These broker-dealers may engage in short sales of our
common stock or other transactions in the course of hedging the positions
assumed by persons in connection with hedging transactions or otherwise. Our
stockholders also may sell our common stock and our common stock warrants short
and redeliver our common stock or our common stock warrants to close out short
positions; enter into option or other transactions with broker-dealers or others
which may involve the delivery to these persons of our common stock or our
common stock warrants offered hereby, which common stock and our common stock
warrants these people may resell pursuant to this prospectus; and/or pledge our
common stock or our common stock warrants to a broker or dealer or others and,
upon a default, these people may effect sales of our common stock and our common
stock warrants pursuant to this prospectus. In addition, any of our common stock
and our common stock warrants covered by this prospectus that qualifies for
resale pursuant to Rule 144 of the Securities Act may be sold under Rule 144,
rather than with this prospectus.
In order to comply with securities laws of certain states, if applicable,
our common stock and our common stock warrants held by our stockholders may be
sold only through registered or licensed brokers or dealers.
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<PAGE>
Until the distribution of our common stock or our common stock warrants
held by our stockholders is completed, rules of the SEC may limit the ability of
any underwriters and selling group members to bid for and purchase our common
stock and our common stock warrants. As an exception to these rules,
underwriters are permitted to engage in certain transactions that stabilize the
price of our common stock and our common stock warrants. These transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of our common stock and our common stock warrants.
The lead underwriters also may impose a penalty bid on certain other
underwriters participating in the offering and selling group members. This means
that, if the lead underwriters purchase our common stock and our common stock
warrants in the open market to reduce the underwriters' short position or to
stabilize the price of our common stock and our common stock warrants, they may
reclaim the amount of any selling concession from the underwriters and selling
group members who sold our common stock and our common stock warrants as part of
the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of these purchases. The imposition of a penalty bid
also might have an effect on the price of a security to the extent that it
discouraged resale of the security before the distribution is completed.
We make no representation or prediction as to the direction or magnitude
of any effect that the transactions described above might have on the price of
our common stock. In addition, we make no representation that underwriters will
engage in these transactions or that these transactions, once commenced, will
not be discontinued without notice.
Under the rules and regulations of the Exchange Act, a person engaged in
an offering of securities may not simultaneously engage in buying and selling of
securities for its own account, prior to the day of the pricing of the
securities that are part of the distribution for a period of:
o One (1) business day if such securities have an average daily trading
volume over a two month period of $100,000 and the value of the
issuer's equity securities held by no-affiliate is $25 million or more;
or
o Five (5) business days.
These restrictions do not apply to those trading in "actively traded
securities" but always apply to the issuer or selling stockholders and
affiliates. "Actively traded securities" are securities with an average daily
trading volume of $1 million issued by companies with at least $150 million
worth of shares held by non-affiliates. In addition, and without limiting the
foregoing, the stockholders and any other person participating in that
distribution will be subject to applicable provisions of the Exchange Act. These
provisions may limit the timing of purchases and sales of any of the shares of
common stock by the stockholders and any other person.
We will pay all expenses associated with filing and maintaining the
effectiveness of this registration statement. Other expenses incident to the
offering and sale of our common stock by our stockholders, including brokerage
and underwriting commissions, will be paid by our stockholders.
SELLING SECURITYHOLDERS
The table below sets forth certain information, as of the date of this
prospectus, with respect to the amount and percentage ownership of each selling
securityholder before this offering, the number of shares covered by this
prospectus with respect to each selling securityholder, and the amount and
percentage ownership of each selling securityholder after this offering,
assuming that all of the shares
41
<PAGE>
covered by this prospectus are sold by the selling securityholders. Unless
otherwise indicated, none of the selling securityholders has had any position,
office, or other material relationship with us within the past three years,
other than as a result of the ownership of the shares or other securities of
ours.
42
<PAGE>
<TABLE>
<CAPTION>
Number of
Number of Shares Common % Owned % Owned
Being Stock Before After
Name of Shareholder Registered(1) Warrants Offering (2) Offering (2)
------------------- ------------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Dean Abraham 9,702 3,452 * *
Revocable Trust of James Adametz 11,642 4,142 * *
Ferdinand Anderson 19,404 6,904 * *
Bear Stearns c/f Basil J. Asciutto IRA 3,881 1,381 * *
Shanthamallappa A. Ashok 19,404 6,904 * *
Michael Astor 19,404 6,904 * *
The Bald Eagle Fund Ltd. 14,241 5,067 * *
Scott Ballin 19,404 6,904 * *
Charles A. Barnes, Jr. 11,642 4,142 * *
Edwin J. Beattie 19,404 6,904 * *
William D. Bennett Jr. 15,523 5,523 * *
Marc G. Berman 7,761 2,761 * *
Harvey Bibicoff 23,284 8,284 * *
Bickford Limited 341,504 121,504 * *
Nicholas Bienstock 19,404 6,904 * *
Gerald Blank 7,761 2,761 * *
Jeffrey Blomstedt & Susan LaScala, JTROS 19,404 6,904 * *
Gary Blum 23,284 8,284 * *
Hans Bodmer 194,036 69,036 * *
Joseph T. Bolognue 19,404 6,904 * *
Ralph L. & Louise L. Brown, JTROS 38,807 13,807 * *
Burr Family Trust 19,404 6,904 * *
R M & L Burwick TTES Family 38,807 13,807 * *
Richard Campanella 3,881 1,381 * *
J.A. Cardwell 19,404 6,904 * *
James A. Cardwell, Jr. 19,404 6,904 * *
C.E. Unterberg, Towbin Capital Partners I, L.P. 58,211 20,711 * *
Chesed Congregations of America 155,229 55,229 * *
David Cohen 38,807 13,807 * *
Jonathan R. Cohen & Nancy D. Shapiro, JTROS 7,761 2,761 * *
Commonwealth Associates L.P. 22,120 7,870 * *
Comvest Capital Management LLC 77,615 27,615 * *
Bruce Corbin 3,881 1,381 * *
Richard Corbin IRA 19,404 6,904 * *
CP Baker Venture Fund 1, L.P. 38,807 13,807 * *
Richard A. & Barbara K. Crow, JTROS 7,761 2,761 * *
James A. & Rebecca C. Davenport, JTROS 19,404 6,904 * *
David L. & Susan M. Dickey, JTROS 11,642 4,142 * *
Tony DiFatta 7,761 2,761 * *
DW Trustees (BVI) Limited -- Children's Fund 19,404 6,904 * *
DW Trustees (BVI) Limited - Main Fund 38,807 13,807 * *
The Dexter Corporation Grantor Trust 38,807 13,807 * *
Richard Dold 31,046 11,046 * *
Cornelia F. Eldridge, IRA BSSC 19,404 6,904 * *
Frederick B. Epstein 27,165 9,665 * *
Kenneth R. Falchuk 77,615 27,615 * *
Michael S. Falk 77,615 27,615 * *
Bear Stearns c/f Michael S. Falk IRA 19,404 6,904 * *
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
Number of
Number of Shares Common % Owned % Owned
Being Stock Before After
Name of Shareholder Registered(1) Warrants Offering (2) Offering (2)
------------------- ------------- -------- ------------ ------------
<S> <C> <C> <C> <C>
John & Helen Fattorusso, JTROS 7,761 2,761 * *
S. Marcus Finkle 77,615 27,615 * *
Flavin, Blake Investors, L.P. 155,229 55,229 * *
John P. Flavin 38,807 13,807 * *
Fleming (Jersey) Ltd. 77,615 27,615 * *
Joseph H. Flom 77,615 27,615 * *
Flynn Investment Corporation 155,229 55,229 * *
FM Grandchildren's Trust 38,807 13,807 * *
Charles Friedlander 19,404 6,904 * *
Marshall Geller 77,615 27,615 * *
Anthony J. Giardina 3,881 1,381 * *
Bruce Glaser 7,761 2,761 * *
Mark & Joanna Goldberg, JTROS 15,523 5,523 * *
Paul D. Goldenheim 19,404 6,904 * *
Paul & Linda Gubitosa, JTROS 11,642 4,142 * *
Dr. Harold E. Hamburg Trust 7,761 2,761 * *
Alan H. Hammerman 19,404 6,904 * *
Frank H. Harvey 15,523 5,523 * *
William O.E. Henry 38,807 13,807 * *
Alan R. Hirsch 31,046 11,046 * *
Annette Holtvogt 23,284 8,284 * *
The Hunter Group Assoc., Inc. 15,523 5,523 * *
Richard S. Hurwitz 77,627 27,627 * *
Charles E. Isbell 7,761 2,761 * *
Andre Iseli 38,807 13,807 * *
J.F. Shea Co., Inc. 465,687 165,687 1.25% *
Ben A. Johnson 232,844 82,844 * *
Edward C. Jordan 9,314 3,314 * *
Kabuki Partners 77,615 27,615 * *
Kenneth S. Katzoff 31,046 11,046 * *
David R. Kennett 7,761 2,761 * *
Kensington Partners, L.P. 59,645 21,221 * *
Kensington Partners II, L.P. 3,725 1,325 * *
Bernard Kirsner Revocable Trust 19,404 6,904 * *
Peter J. Latour 19,404 6,904 * *
Brian C. Lerner 19,404 6,904 * *
Leroy Cramer & Associates 77,615 27,615 * *
Stephen Mallis 7,761 2,761 * *
Leo & Nancy T. Mazzocchi, JTROS 38,807 13,807 * *
Robert A. McCleeary 15,523 5,523 * *
Gerald Jay Millstein 7,761 2,761 * *
F. Andrew & Gail Morfesis, JTROS 23,284 8,284 * *
Jody Nelson 11,642 4,142 * *
Virginia R. Nelson Trust 38,807 13,807 * *
Amy L. Newmark 38,807 13,807 * *
Richard & Lynne Marie Palmer, JTROS 19,404 6,904 * *
Pamela Equities Corporation 58,211 20,711 * *
Garo A. Partoyan 27,165 9,665 * *
Sanjiv M. Patel 19,404 6,904 * *
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
Number of
Number of Shares Common % Owned % Owned
Being Stock Before After
Name of Shareholder Registered(1) Warrants Offering (2) Offering (2)
------------------- ------------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Carmen Pecord 9,702 3,452 * *
Paul F. Petrus 7,761 2,761 * *
George F. & Elizabeth H. Pickett , JTROS 77,615 27,615 * *
Anna M. Pocisk 27,165 9,665 * *
Robert Priddy 310,458 110,458 * *
Radix Associates 38,807 13,807 * *
Reese-Cole Partnership, Ltd. 38,807 13,807 * *
Robert H. Lessin (3) 1,552,290 552,290 21.01% 16.88%
William A. Rice 77,615 27,615 * *
Gerald & Amy Richmond, JTROS 11,642 4,142 * *
James H. Rion 27,165 9,665 * *
Amy Robinson 7,761 2,761 * *
Lawrence Rodler 38,807 13,807 * *
Rolling Investment Group 7,761 2,761 * *
Edmund J. Ronco 7,761 2,761 * *
Richard Rosenblatt 19,404 6,904 * *
Dale Rosenbloom 77,615 27,615 * *
Keith M. Rosenbloom 19,404 6,904 * *
Adam & Lisa Falk-Ross, JTROS 11,642 4,142 * *
Douglas Runckel & Evelyn Luers, JTROS 38,807 13,807 * *
Sax Family Limited Partnership 7,761 2,761 * *
Monroe H. Schenker 23,284 8,284 * *
William R. & Barbara J. Schoen, JTROS 19,404 6,904 * *
The Rodney & Vikki Schorlemmer Trust 23,284 8,284 * *
John J. Shaw 77,615 27,615 * *
Matthew P. Sheppard 7,761 2,761 * *
Michael A. Singer 38,807 13,807 * *
Lee H. Spence 19,404 6,904 * *
Joel Spivack 19,404 6,904 * *
Bear Stearns c/f Patrick Sutton, IRA 9,702 3,452 * *
William Sybesma, M.D. 34,927 12,427 * *
Glen Tachibana 19,404 6,904 * *
Inder Tallur 7,761 2,761 * *
George L. Thompson 19,404 6,904 * *
Todd Tickner 7,761 2,761 * *
Lord Tim Torrington 15,523 5,523 * *
Salvatore Trupiano 7,761 2,761 * *
Syd & Helen Verbin, Trustees under
Trust Agreement dated 12/20/88, FBO Syd Verbin 7,761 2,761 * *
Ventana Partners, L.P. 77,615 27,615 * *
David B. Waxman & Jeremy Waxman, JTROS 7,761 2,761 * *
Alex Weiss 38,807 13,807 * *
Roslyn Weiss 38,807 13,807 * *
Joe M. & Carol H. Weller , JTROS 38,807 13,807 * *
Westmont Venture Partners, LLC 31,046 11,046 * *
Charles L. Wisseman, III 19,404 6,904 * *
Joseph P. Wynne 3,881 1,381 * *
Kenneth Zises 77,615 27,615 * *
Bijan Abachizadeh 11,642 4,142 * *
Burton Abrams 11,642 4,142 * *
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
Number of
Number of Shares Common % Owned % Owned
Being Stock Before After
Name of Shareholder Registered(1) Warrants Offering (2) Offering (2)
------------------- ------------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Richard Abrams 34,927 12,427 * *
Rodney Abrams 34,927 12,427 * *
James Adametz Revocable Trust 3,881 1,381 * *
Michael F. & Maxine C. Ahearn, JTROS 15,523 5,523 * *
Alya Abdulaziz & Lulwa Khalid Zaid Akhalid
Al-Bahar, JTROS 155,229 55,229 * *
Alliance Equities, Inc. 31,046 11,046 * *
Sahar Ahmed Al Refai 19,404 6,904 * *
Jim Aukstuolis 19,404 6,904 * *
A. Philip Auerbach 19,404 6,904 * *
Elias G. & Roseann E. Baddour, JTROS 15,523 5,523 * *
Christopher Perry Baker 38,807 13,807 * *
Barrington Capital Corp. 19,404 6,904 * *
Andrew L. Barroway 77,615 27,615 * *
Thomas W. & Paula S. Bauer 19,404 6,904 * *
Kim M. Beretta Trust 19,404 6,904 * *
Don Berglund 7,761 2,761 * *
Lincoln Edward Blank 9,702 3,452 * *
Gary Blum 27,165 9,665 * *
Mody K. & Frances A. Boatright, JTROS 11,642 4,142 * *
Michael Bollag 116,422 41,422 * *
John W. & Sandra L. Boyd, JTROS 19,404 6,904 * *
BNB Investment Associates L.P. 38,807 13,807 * *
R M and L Burwick Family L.P. 19,404 6,904 * *
Jeffrey S. Cameron 11,642 4,142 * *
Felix & Joyce Campos, JTROS 11,642 4,142 * *
Anders Carlegren 7,761 2,761 * *
Brewster B. Carroll 11,642 4,142 * *
Arthur M. Chase 15,523 5,523 * *
Oliver T. & Sharon L. Clark, JTROS 7,761 2,761 * *
Riley B. & Marilyn Collins, JTROS 15,523 5,523 * *
Comvest Capital Management LLC 7,761 2,761 * *
Stephen Cunningham & Wendell Fleming,
JTROS 19,404 6,904 * *
Sloan d'Autremont 15,523 5,523 * *
Thomas & Marie D'Avanzo, JTROS 11,642 4,142 * *
David DeAtkine, Jr. 19,404 6,904 * *
David & Suellen Dercher, JTROS 38,807 13,807 * *
Iqbal Dhillon 15,523 5,523 * *
Paul R. Doering 7,761 2,761 * *
Robert & Deborah G. Dozier, JTROS 19,404 6,904 * *
John Duncan 19,404 6,904 * *
James P. Elder 7,761 2,761 * *
Michael Engfer & Jodi Abrams, JTROS 7,761 2,761 * *
Hamid & Nildufar Farzaneh, JTROS 38,807 13,807 * *
Hilaire and Sandra Fernandes, JTROS 7,761 2,761 * *
Forman Investment Group 38,807 13,807 * *
Charles Friedlander 3,881 1,381 * *
Peter Fulton 6,209 2,209 * *
Martin W. Gangel Roth IRA 23,284 8,284 * *
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
Number of
Number of Shares Common % Owned % Owned
Being Stock Before After
Name of Shareholder Registered(1) Warrants Offering (2) Offering (2)
------------------- ------------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Generation Capital Associates 155,229 55,229 * *
Anthony Michael Gethin 9,702 3,452 * *
David S. Gilfand 11,642 4,142 * *
Andrew Gonchar 19,404 6,904 * *
Roger H. Grace 38,807 13,807 * *
Richard W. & Mary J. Graves, JTROS 11,642 4,142 * *
J. Thomas Grunwald 38,807 13,807 * *
Leonard D. Hamilton 15,523 5,523 * *
Hampton Associates Limited 696,078 247,658 1.87% *
Roland F. Hartman 11,642 4,142 * *
Richard Hubbard IRA 11,642 4,142 * *
Steve Illes, JTROS 38,807 13,807 * *
James & Aileen Jaber, JTROS 15,523 5,523 * *
Robert J. Jahn 19,404 6,904 * *
L. Wayne Johnson 38,807 13,807 * *
Tom Jones 7,761 2,761 * *
Ralph Joseph IRA 15,523 5,523 * *
Norman Kane 20,180 7,180 * *
Patrick N. & Julie S. Keating, JTROS 19,404 6,904 * *
Edward Ketcham 9,702 3,452 * *
Philip R. Ladouceur 31,046 11,046 * *
Maerki, Bauman & Co. AG 19,404 6,904 * *
James R. Malone 15,523 5,523 * *
Laurel Lester Mark 15,523 5,523 * *
John R. & Victoria A. Martin, JTROS 11,642 4,142 * *
Eugene Mascarenhas 7,761 2,761 * *
Richard B. & Margaret J. Mateer, JTROS 7,761 2,761 * *
Gary D. May 27,165 9,665 * *
Anthony Mazzarella 19,404 6,904 * *
John J. & Donna P. McCarthy, JTROS 58,211 20,711 * *
Shawn McDermott 7,761 2,761 * *
Jeremy Merrin & Linda Blum, JTROS 194,036 69,036 * *
Merrin Limited Partnership 388,073 138,073 1.04% *
Sheldon Misher 31,046 11,046 * *
Moldaw Variable Fund (4) 155,229 55,229 * *
David J. and Ioanna Moore, JTROS 19,404 6,904 * *
Vijaykumar S. Monie 7,761 2,761 * *
Claude & Roshan Moraes, Tenants by the Entirety 7,761 2,761 * *
Lloyd A. Moriber 19,404 6,904 * *
Mulkey II Limited Partnership 28,717 10,217 * *
Samuel R. Nussbaum 38,807 13,807 * *
William & Linda O'Neill, JTROS 19,404 6,904 * *
Fred Orpen 9,702 3,452 * *
Richard E. Otoski M.D. PC Pension and Profit
Sharing Plan and Trust 19,404 6,904 * *
Overdrive Capital Corporation 77,615 27,615 * *
Jaswant Singh & Debra Bogner Pannu, JTROS 15,523 5,523 * *
August Piccolo 11,642 4,142 * *
John Piccolo 19,404 6,904 * *
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
Number of
Number of Shares Common % Owned % Owned
Being Stock Before After
Name of Shareholder Registered(1) Warrants Offering (2) Offering (2)
------------------- ------------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Ronald Pobiel 7,761 2,761 * *
P. Tony Polyviu 19,404 6,904 * *
Michael A. & Angela G. Poujol, JTROS 19,404 6,904 * *
Randy Prude 19,404 6,904 * *
R & S Perry Ltd. Partnership 7,761 2,761 * *
William C. Radichel 19,404 6,904 * *
Rare Medium Group, Inc. 776,145 276,145 2.08% *
James A. & MaryAnn Rasnick, JTROS 19,404 6,904 * *
Kurt V. & Laura M. Reichelt, JTROS 7,761 2,761 * *
Mark Reichenbaum 38,807 13,807 * *
RS Emerging Growth Partners L.P. 92,548 32,928 * *
RS Pacific Partners 179,265 63,781 * *
RS Premium Partners L.P. 116,257 41,363 * *
Roccia Partners, L.P. 2,788,074 991,970 7.48% *
Paul & Sally Russo, JTROS 77,615 27,615 * *
Avthar Sandhu 15,523 5,523 * *
Baljeet K. Sandhu 11,642 4,142 * *
The Jonathan L. & Lynn M. Schmidt Living Trust 3,881 1,381 * *
Gilbert R. & Wanda R. Schorlemmer, JTROS 7,761 2,761 * *
James E. & Jayne Schriver, JTROS 7,761 2,761 * *
Gary D. & Barbara A. Schultz, JTROS 38,807 13,807 * *
Philip Serbin 7,761 2,761 * *
Fred Sheats & Don Russell, JTROS 38,807 13,807 * *
Jay & Carole B. Shrager, JTROS 31,046 11,046 * *
Burjis N. and Havovi B. Shroff, JTROS 7,761 2,761 * *
Simon Investors II, LLC 194,036 69,036 * *
Tarik Siddiqui 7,761 2,761 * *
Gushan B. & Daluit K. Singh, JTROS 7,761 2,761 * *
George C. Sivak 7,761 2,761 * *
Stephen T. Skoly 19,404 6,904 * *
Special Situations Private Equity Fund, L.P. 310,458 110,458 * *
Special Situations Technology Fund, L.P. 155,229 55,229 * *
Robert J. Spencer 19,404 6,904 * *
Fedele Staropoli 7,761 2,761 * *
Michael Steele 19,404 6,904 * *
David L. Stellway 11,642 4,142 * *
Tabrizi Trust dated 1/22/99 19,404 6,904 * *
George N. Tsamutalis 2,328 828 * *
John Joos- Vandewalle 15,523 5,523 * *
Syd Verbin & Helen Verbin, Trustees under Trust
Agreement Dated 12/20/88, FBO Syd Vergin 17,851 6,351 * *
Voss Limited Partnership 11,642 4,142 * *
Erich J. & Diane D. Weidenbener, JTROS 7,761 2,761 * *
Charles P. Wilkins 19,404 6,904 * *
Frank J. Wypychowski, Jr. 19,404 6,904 * *
Zuck Investment Group, LLC 7,761 2,761 * *
Craig & Annette Blitz, JTROS 3,881 1,381 * *
Dana G. Emery 15,523 5,523 * *
Joseph C. Primo 7,761 2,761 * *
Boston Millennia 1,552,290 552,290 4.17% *
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
Number of
Number of Shares Common % Owned % Owned
Being Stock Before After
Name of Shareholder Registered(1) Warrants Offering (2) Offering (2)
------------------- ------------- -------- ------------ ------------
<S> <C> <C> <C> <C>
HMTF-iPC, LLC 3,750,000 1,250,000 10.06% *
Commonwealth Associates L.P 526,788 499,288 1.41% *
Michael Falk 195,644 195,644 * *
Keith M. Rosenbloom 56,197 56,197 * *
Sheldon Misher 52,011 52,011 * *
Robert O'Sullivan 28,098 28,098 * *
Craig Blitz 16,964 16,964 * *
Ronald Moschetta 14,218 14,218 * *
Inder Tallur 10,519 10,519 * *
Bruce Glaser 10,435 10,435 * *
Carl Kleidman 10,355 10,355 * *
Michael Applebaum 9,836 9,836 * *
Alexandra Salas 8,284 8,284 * *
Vladik Vainberg 8,236 8,236 * *
Robert Beuret 7,829 7,829 * *
George Tsamutalis 7,585 7,585 * *
Beth Lipman 7,039 7,039 * *
Peter Fulton 6,443 6,443 * *
Basil Ascuitto 5,894 5,894 * *
Joseph P. Wynne 5,731 5,731 * *
Peter Palmieri 5,669 5,669 * *
Steven Hart 5,523 5,523 * *
Timothy Herrmann 5,317 5,317 * *
Mark Danieli 4,567 4,567 * *
Peter Latour 3,513 3,513 * *
Brian Coventry 2,761 2,761 * *
Fiona McKone 2,761 2,761 * *
Lindy Sin 2,761 2,761 * *
Roderick Beck 2,761 2,761 * *
John Gruber 2,761 2,761 * *
Manu Kalia 2,761 2,761 * *
Anthony Giardina 2,650 2,650 * *
Richard Campanella 2,650 2,650 * *
Jerome Messana 2,610 2,610 * *
Thom Waye 2,209 2,209 * *
Zachary Malone 1,694 1,694 * *
Katelyn Lobue 1,381 1,381 * *
Karen Dacey 1,105 1,105 * *
Susan Hoffman 1,105 1,105 * *
Marlene Layne 1,105 1,105 * *
Linda Rodriguez 1,105 1,105 * *
David Stein 1,060 1,060 * *
Philip R. Ladouceur 1,027 1,027 * *
Edwin M. Cooperman 1,027 1,027 * *
Richard Yalen 1,027 1,027 * *
Cassandra Lim 514 514 * *
Nicole Swiatek 308 308 * *
Diana O'Toole 308 308 * *
Jeanine Ianazzi 308 308 * *
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
Number of
Number of Shares Common % Owned % Owned
Being Stock Before After
Name of Shareholder Registered(1) Warrants Offering (2) Offering (2)
------------------- ------------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Lorraine Verdino 308 308 * *
Joseph Defini 308 308 * *
Jaimee Stecker 308 308 * *
Audrey Jimenez 308 308 * *
Mario Kustera 219 219 * *
Thomas Renna 163 163 * *
Richard Perrreira 154 154 * *
Evelyn Aploff 154 154 * *
Else Falk 154 154 * *
Joseph Anzalone 154 154 * *
Taymark 3,000,000 0 8.05% *
Margaritaville Holdings, LLC 550,000 0 1.48% *
---------------------------------------------------------------
Total 26,127,676 8,600,656 70.12% 17.49%
===============================================================
</TABLE>
----------------
* Less than one percent
(1) Includes number of shares underlying the convertible preferred stock and
the common stock warrants.
(2) Based upon a total number of shares of Common Stock outstanding of
11,136,107.
(3) Mr. Lessin is a director of our company.
(4) These shares are owned by Mr. Moldaw, a director of our company.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock in the public market
could adversely affect prevailing market prices of our common stock. Upon the
consummation of this offering, we will have 25,085,628 shares of common stock
outstanding (assuming no exercise of any outstanding options or warrants), of
which 17,960,628 shares of common stock will be freely tradable without
restriction or further registration under the Securities Act, unless such shares
are purchased by "affiliates" as that term is defined in Rule 144 under the
Securities Act. The remaining 7,125,000 shares of our common stock held by
existing stockholders are "restricted securities" as that term is defined in
Rule 144 under the Securities Act. Restricted securities may be sold in the
public market only if registered or if they qualify for an exemption from
registration under Rule 144 or 701 under the Securities Act, which rules are
summarized below.
Rule 144
In general, under Rule 144 as currently in effect, after the date of
this prospectus, a person who has beneficially owned shares of our common stock
for at least one year would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of:
o 1% of the number of shares of common stock then outstanding; or
o The average weekly trading volume of the common stock on the
American Stock Exchange during the four calendar weeks preceding
the filing of a notice on Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain manner of sale provisions and
notice requirements and to the availability of current public information about
our company.
50
<PAGE>
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted, "144(k) shares" may be sold immediately upon the
completion of this offering.
Rule 701
In general, under Rule 701 of the Securities Act as currently in
effect, any of our employees, consultants or advisors who purchases shares from
us in connection with a compensatory stock or option plan or other written
agreement is eligible to resell such shares 90 days after the effective date of
this offering in reliance on Rule 144, but without compliance with certain
restrictions, including the holding period, contained in Rule 144.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be
passed upon for us by Camhy Karlinsky & Stein LLP, New York, New York.
EXPERTS
Our consolidated financial statements for the year ended December 31,
1999 included in this prospectus and registration statement have been audited by
Arthur Andersen LLP, independent public accountants as indicated in their report
with respect thereto and are included herein in reliance upon the authority of
said firm as experts in given said reports.
Our consolidated financial statements for the year ended December 31,
1998 included in this prospectus and registration statement have been audited by
Richard A. Eisner & Company, LLP, independent public accountants as indicated in
their report with respect thereto and are included herein in reliance upon the
authority of said firm as experts in given said reports.
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our certificate of incorporation provides that none of our directors
will be liable to us or our stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability
o For any breach of the director's duty of loyalty to us or our
stockholders;
o For acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law;
o Under section 174 of the General Corporation Law; or
o For any transaction from which such director derives improper
personal benefit.
The effect of this provision is to eliminate our rights and those of
our stockholders (through stockholders' derivative suits on our behalf) to
recover monetary damages against a director for breach of his or her fiduciary
duty of care as a director (including breaches resulting from negligent or
grossly negligent behavior) except in the situations described above. The
limitations summarized above,
51
<PAGE>
however, do not affect our ability or that of our stockholders to seek
nonmonetary remedies, such as an injunction or rescission, against a director
for breach of his or her fiduciary duty.
Insofar as indemnification for liabilities arising under the
Securities Act, may be permitted to our directors, officers, or persons
controlling pursuant to the foregoing provisions, we have been informed that in
the opinion of the SEC, such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
No dealer, salesperson, or other person has been authorized to give
any information or to make any representations other than those contained in
this prospectus and, if given or made, such information or representations must
not be relied upon as having been authorized. Neither the delivery of this
prospectus nor any sale made hereunder will, under any circumstances, create any
implication that there has been no change in our affairs since the date hereof
or that the information contained herein is correct as of any date subsequent to
the date hereof. This prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any securities offered hereby by anyone in any
jurisdiction in which such offer or solicitation is not authorized or in which
the person making the offer is not qualified to do so or to anyone to whom it is
unlawful to make such offer or solicitation.
MARKET FOR OUR COMMON STOCK
Our common stock is traded on the American Stock Exchange under the
symbol "IPT."
The following table sets forth the range of high and low bid
quotations for our common stock for each of the quarters of the fiscal year
ended December 31, 1999 and for the first quarter of the fiscal year ending
December 31, 2000. Our common stock began trading on the American Stock Exchange
under the name iParty Corp., symbol "IPT" on January 3, 2000. Our common stock
commenced trading on the OTC Electronic Bulletin Board under the name iParty
Corp., symbol "IPTY" in July 1998. Prior to that time, from February 1998, until
July 1998, our common stock was quoted on the OTC Bulletin Board under the name
of WSI Acquisitions, Inc., symbol "WSIA." There is no available information with
respect to the common stock of WSI Acquisitions, Inc. for the time period before
February 12, 1998. Accordingly quotations for the 1997 fiscal year have not been
provided. The quotations represent inter-dealer prices without retail markup,
mark down or commission and may not necessarily represent actual transactions.
Period High Low
------ ---- ---
First Quarter--2000 $4.25 $2.06
Fourth Quarter--1999 3.81 2.19
Third Quarter--1999 3.93 2.63
Second Quarter--1999 5.00 2.44
First Quarter--1999 6.69 3.13
Fourth Quarter--1998 3.38 1.07
Third Quarter--1998 3.38 0.05
Second Quarter--1998 0.06 0.03
First Quarter--1998 0.06 0.01
52
<PAGE>
FINANCIAL STATEMENTS
Arthur Andersen LLP, independent public accountants, has audited our
consolidated financial statements for the fiscal year ended December 31, 1999.
Richard A. Eisner & Company, LLP, independent public accountants, has
audited our consolidated financial statements for the fiscal year ended December
31, 1998.
Information in response to this item is set forth in the Financial
Statements, beginning on Page F-1 of this filing.
53
<PAGE>
iParty Corp.
Index to Financial Statements
For the Quarterly Period Ended March 31, 2000 (Unaudited)
<TABLE>
<CAPTION>
<S> <C>
Consolidated Balance Sheet as of March 31, 2000 and December 31, 1999...........................................F-2
Consolidated Statements of Operations
for the three months ended March 31, 2000 and 1999...........................................................F-3
Consolidated Statements of Cash Flows
for the three months ended March 31, 2000 and 1999...........................................................F-4
Notes to Financial Statements...................................................................................F-5
</TABLE>
F-1
<PAGE>
iPARTY CORP.
CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
------------ ------------
2000 1999
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 12,173,001 $ 18,673,304
Marketable securities 3,887,659 973,877
Cash, restricted -- 51,012
Accounts receivable 25,180 99,476
Prepaid expenses and other current assets 303,532 428,645
------------ ------------
Total current assets 16,389,372 20,226,314
Property and equipment, net 812,056 860,457
Intangible Assets 5,605,978 6,119,734
Other assets 60,110 50,245
------------ ------------
Total assets $ 22,867,516 $ 27,256,750
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,388,019 $ 1,749,806
Accrued severance 149,175 213,987
Accrued expenses 193,820 238,889
------------ ------------
Total current liabilities 2,731,014 2,202,682
Commitments 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 shares issued and outstanding 1,000 1,000
Series B preferred stock - 1,150,000 authorized;
1,044,952 shares issued and outstanding 1,045 1,045
Series C preferred stock - 100,000 authorized;
100,000 shares issued and outstanding 100 100
Series D preferred stock - 250,000 authorized;
250,000 shares issued and outstanding 250 250
Common stock - $.001 par value; 50,000,000 shares authorized;
11,136,107 shares issued and outstanding 11,137 11,006
Additional paid in capital 59,162,478 58,616,431
Accumulated deficit (39,039,508) (33,575,764)
------------ ------------
Total stockholders' equity 20,136,502 25,054,068
------------ ------------
Total liabilities and stockholders' equity $ 22,867,516 $ 27,256,750
============ ============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of this Consolidated Balance Sheet.
F-2
<PAGE>
iPARTY CORP.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
March 31,
------------------------------
2000 1999
------------ -----------
<S> <C> <C>
Revenues $ 146,834 $ --
------------ ------------
Operating costs:
Cost of products sold 117,357 --
Amortization of fulfillment partner warrant 377,744 --
Marketing and sales 2,405,456 --
Product and technology development 1,864,459 --
General and administrative 572,839 555,227
Loss resulting from abandonment of assets -- 273,288
Non-cash compensation expense 546,178 134,134
------------ ------------
Operating loss (5,737,199) (962,649)
Interest income 273,455 814
------------ ------------
Net loss before income taxes (5,463,744) (961,835)
Provision for income taxes -- --
------------ ------------
Net loss $ (5,463,744) $ (961,835)
============ ============
Loss per share:
Basic and diluted $ (0.49) $ (0.09)
============ ============
Weighted Average Shares Outstanding:
Basic and diluted 11,136,107 11,005,421
============ ============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these Consolidated Statements.
F-3
<PAGE>
iPARTY CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
March 31,
---------------------------------
2000 1999
------------ ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (5,463,744) $ (961,835)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 735,120 9,466
Loss resulting from abandonment of assets -- 273,288
Reserve for bad debt 14,607 --
Non-cash compensation expense 546,178 134,134
Decrease (increase) in:
Accounts receivable 74,296 --
Prepaid expenses and other current assets 125,113 (83,355)
Other assets (9,865) (23,086)
Increase (decrease) in:
Accounts payable 638,213 332,196
Accrued severance (64,812) --
Accrued expenses (45,069) --
------------ ------------
Net cash used in operating activities (3,449,963) (319,192)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (172,963) (387,510)
Advances to officer (14,607) 1,896
Purchase of marketable securities (2,913,782) --
Increase in restricted cash 51,012 --
------------ ------------
Net cash used in investing activities (3,050,340) (385,614)
------------ ------------
Cash flows from financing activities:
Conversion of notes payable to stock -- (250,000)
Proceeds from sale of stock, net of offering costs -- 828,320
------------ ------------
Net cash provided by investing activities -- 578,320
------------ ------------
Net increase in cash and cash equivalents (6,500,303) (126,486)
Cash and cash equivalents, beginning of period 18,673,304 346,751
------------ ------------
Cash and cash equivalents, end of period $ 12,173,001 $ 220,265
============ ============
Cash paid for:
Interest expense $ -- $ --
============ ============
Income taxes $ -- $ --
============ ============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these Consolidated Statements.
F-4
<PAGE>
iPARTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 (Unaudited)
1. 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, StarGreetings, 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 420,421 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's efforts are devoted to developing the Internet resources
to provide consumers a comprehensive web site where they can seek party planning
advice and information and locate and contract for party goods and services.
2. UNAUDITED INTERIM FINANCIAL INFORMATION
The interim consolidated financial statements as of March 31, 2000 have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC") for interim financial reporting.
These consolidated statements are unaudited and, in the opinion of management,
include all adjustments (consisting of normal recurring adjustments and
accruals) necessary to present fairly the consolidated balance sheets,
consolidated operating results, and consolidated cash flows for the periods
presented in accordance with generally accepted accounting principles. The
consolidated balance sheet at December 31,1999 has been derived from the audited
consolidated financial statements at that date. Operating results for the three
months ended March 31, 2000 may not be indicative of the results for the year
ending December 31, 2000. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been omitted in accordance with the rules and
regulations of the SEC. These consolidated financial statements should be read
in conjunction with the audited consolidated financial statements, and
accompanying notes, included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1999. Certain prior period amounts have been
reclassified to conform to the current period presentation.
F-5
<PAGE>
iParty Corp.
Index to Financial Statements
For the Fiscal Year Ended December 31, 1999
<TABLE>
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS--1999............................................................................ F-7
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS--1998............................................................................ F-8
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet--December 31, 1999........................................................................... F-9
Consolidated Statements of Operations--Years ended December 31, 1999 and 1998........................................... F-10
Consolidated Statements of Stockholders' Equity--Years ended December 31, 1999 and 1998................................. F-11
Consolidated Statements of Cash Flows--Years ended December 31, 1999 and 1998........................................... F-12
Notes to Consolidated Financial Statements.............................................................................. F-13
</TABLE>
F-6
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To iParty Corp.:
We have audited the accompanying consolidated balance sheet of iParty Corp. (a
Delaware corporation) and subsidiary as of December 31, 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of iParty Corp. and subsidiary as
of December 31, 1999, and the results of their operations and their cash flows
for the year then ended in conformity with accounting principles generally
accepted in the United States.
New York, New York Arthur Andersen LLP
February 24, 2000
F-7
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
iParty Corp.
New York, New York
We have audited the accompanying consolidated statements of operations, changes
in stockholders' equity and cash flows of iParty Corp. and subsidiary (a
development stage company) for the year ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all
material respects, the consolidated results of operations, and cash flows of
iParty Corp. and subsidiary for the year ended December 31, 1998, in conformity
with generally accepted accounting principles.
New York, New York RICHARD A. EISNER & COMPANY, LLP
February 26, 1999
F-8
<PAGE>
iPARTY CORP.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1999
------------
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents ....................................... $ 18,673,304
Marketable securities ........................................... 973,877
Cash, restricted ................................................ 51,012
Accounts receivable ............................................. 99,476
Prepaid expenses and other current assets ....................... 428,645
------------
Total current assets ....................................... 20,226,314
Property and equipment, net (Note 3) ............................ 860,457
Intangible assets (Note 2) ...................................... 6,119,734
Other assets .................................................... 50,245
------------
Total assets ............................................... $ 27,256,750
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................ $ 1,749,806
Accrued severance ............................................... 213,987
Accrued expenses ................................................ 238,889
------------
Total current liabilities .................................. 2,202,682
Commitments and contingencies
Stockholders' Equity (Note 6):
Preferred stock--$.001 par value; 10,000,000 shares authorized;
Series A preferred stock--1,000,000 authorized;
1,000,000 shares issued and outstanding .................... 1,000
Series B preferred stock--1,150,000 authorized;
1,044,952 shares issued and outstanding .................... 1,045
Series C preferred stock--100,000 authorized;
100,000 shares issued and outstanding ...................... 100
Series D preferred stock--250,000 authorized;
250,000 shares issued and outstanding ...................... 250
Common stock--$.001 par value; 50,000,000 shares authorized;
11,005,421 shares issued and outstanding ..................... 11,006
Additional paid in capital ...................................... 58,616,431
Accumulated deficit ............................................. (33,575,764)
------------
Total stockholders' equity ................................. 25,054,068
------------
Total liabilities and stockholders' equity ........................ $ 27,256,750
============
</TABLE>
The accompanying Notes to the Consolidated Financial Statements are an integral
part to this Consolidated Balance Sheet.
F-9
<PAGE>
iPARTY CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------------
1998 1999
----------- ------------
<S> <C> <C>
Revenues (Note 2) .................................... $ -- $ 138,545
Operating costs:
Cost of products sold (Note 5) ..................... -- 111,961
Amortization of fulfillment partner warrant (Note 5) -- 755,488
Marketing and sales ................................ -- 4,016,539
Product and technology development ................. -- 2,418,516
General and administrative ......................... 849,998 2,010,470
Loss resulting from abandonment of assets (Note 2) . -- 518,915
Non-cash compensation expense (Note 9) ............. 23,089 847,741
------------ ------------
Operating loss ....................................... (873,087) (10,541,085)
Interest income .................................... 11,090 289,721
Interest expense (Note 8) .......................... (401) (1,004,051)
------------ ------------
Net loss before income taxes ......................... (862,398) (11,255,415)
Provision for income taxes ......................... -- --
------------ ------------
Net loss ............................................. $ (862,398) $(11,255,415)
============ ============
Loss per share (Note 7):
Basic and diluted .................................. $ (0.08) $ (2.97)
------------ ------------
Weighted Average Shares Outstanding:
Basic and diluted .................................. 10,525,213 11,005,421
============ ============
</TABLE>
The accompanying Notes to the Consolidated Financial Statements are an
integral part to these Consolidated Statements.
F-10
<PAGE>
iPARTY CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Issuance of common stock ...................................... -- -- 6,000,000 $ 6,000
Recapitalization resulting from acquisitions of WSI Acquisition
Corp ........................................................ -- -- 420,421 421
Issuance of common stock ...................................... -- -- 3,624,043 3,624
Issuance of common stock and warrants ......................... -- -- 960,957 961
Stock-based compensation expense .............................. -- -- -- --
Net loss
---------- ---------- ---------- ----------
Balance December 31, 1998 ....................................... -- -- 11,005,421 11,006
Issuance of Series A preferred stock upon exercise of warrants,
including conversion of notes payable, net of issuance costs
of $50,000 (Note 6) ......................................... 1,000,000 1,000 -- --
Issuance of Series B and C preferred stock and warrants, net of
issuance costs of $1,545,640 (Note 6) ....................... 1,144,952 1,145 -- --
Issuance of Series D preferred stock and warrants, net of
issuance costs of $7,500 (Note 6) ........................... 250,000 250 -- --
Value of warrants granted under fulfillment and license
agreements .................................................. -- -- -- --
Discount to fair market value of the convertible notes payable -- -- -- --
Preferred stock beneficial conversion feature ................. -- -- -- --
Non-cash compensation expense ................................. -- -- -- --
Net loss ...................................................... -- -- -- --
---------- ---------- ---------- ----------
Balance December 31, 1999 ....................................... 2,394,952 $ 2,395 11,005,421 $ 11,006
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
PAID-IN ACCUMULATED STOCKHOLDERS'
CAPITAL DEFICIT EQUITY
----------- ------------ -------------
<S> <C> <C> <C>
Issuance of common stock ......................................... $ 240,961 $ -- $ 246,961
Recapitalization resulting from acquisition of WSI Acquisitions
Corp ........................................................... (421) -- --
Issuance of common stock ......................................... 32,616 -- 36,240
Issuance of common stock and warrants ............................ 849,799 -- 850,760
Stock-based compensation expense ................................. 23,089 -- 23,089
Net loss ......................................................... -- (862,398) (862,398)
------------ ------------ ------------
Balance December 31, 1998 .......................................... 1,146,044 (862,398) 294,652
Issuance of Series A preferred stock upon exercise of warrants,
including conversion of notes payable, net of issuance
costs of $50,000 (Note 6) ...................................... 949,000 -- 950,000
Issuance of Series B and C preferred stock and warrants, net of
issuance costs of $1,545,640 (Note 6) .......................... 21,354,284 -- 21,355,429
Issuance of Series D preferred stock and warrants, net of issuance
costs of $7,500 (Note 6) ....................................... 4,992,250 -- 4,992,500
Value of warrants granted under fulfillment and license agreements 6,920,559 -- 6,920,559
Discount to fair market value of the convertible
notes payable .................................................. 948,602 -- 948,602
Preferred stock beneficial conversion feature .................... 21,457,951 (21,457,951) --
Non-cash compensation expense .................................... 847,741 -- 847,741
Net loss ......................................................... -- (11,255,415) (11,255,415)
============ ============ ============
Balance December 31, 1999 .......................................... $ 58,616,431 $(33,575,764) $ 25,054,068
============ ============ ============
</TABLE>
The accompanying Notes to the Consolidated Financial Statements are an integral
part to these Consolidated Statements.
F-11
<PAGE>
iPARTY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------
1998 1999
---------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ..................................................... $ (862,398) $(11,255,415)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ........................... 12,364 1,297,564
Loss resulting from abandonment of assets ............... -- 518,915
Reserve for bad debt .................................... -- 14,258
Amortization of discount on issuance of convertible notes -- 948,602
Non-cash compensation expense ........................... 23,089 847,741
Decrease (increase) in:
Accounts receivable .................................. -- (99,476)
Prepaid expenses and other current assets ............ (60,277) (368,368)
Other assets ......................................... (9,670) (40,575)
Increase (decrease) in:
Accounts payable ..................................... 297,508 1,452,299
Accrued severance .................................... -- 213,987
Accrued expenses ..................................... -- 238,889
Accrued interest ..................................... -- 55,850
------------ ------------
Net cash used in operating activities .......................... (599,384) (6,175,729)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment ........................... (353,805) (1,534,669)
Advances to officer .......................................... (34,021) 19,763
Purchase of marketable securities ............................ -- (973,877)
Increase in restricted cash .................................. (50,000) (1,013)
------------ ------------
Net cash used in investing activities ................... (437,826) (2,489,796)
------------ ------------
Cash flows from financing activities:
Proceeds from notes payable .................................. 250,000 2,000,000
Capital contributions on initial capitalization .............. 246,961 --
Proceeds from sale of stock, net of offering costs ........... 887,000 24,992,079
------------ ------------
Net cash provided by investing activities ............... 1,383,961 26,992,079
------------ ------------
Net increase in cash and cash equivalents ...................... 346,751 18,326,553
Cash and cash equivalents, beginning of period ................. -- 346,751
------------ ------------
Cash and cash equivalents, end of period ....................... $ 346,751 $ 18,673,304
============ ============
Supplemental disclosure of non-cash financing activities:
Conversion of notes payable to Series A preferred stock ...... $ -- $ 250,000
============ ============
Conversion of notes payable and accrued interest
to Series B preferred stock ............................... $ -- $ 2,055,850
============ ============
</TABLE>
The accompanying Notes to the Consolidated Financial Statements are an integral
part to these Consolidated Statements.
F-12
<PAGE>
iPARTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. 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, StarGreetings, 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 420,421 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's efforts are devoted to developing the Internet resources
to provide consumers a comprehensive web site 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.
2. SIGNIFICANT ACCOUNTING POLICIES
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.
Segment reporting:
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures About
Segments of an Enterprise and Related Information." This statement establishes
standards for the way business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. The Company's management does not believe it
operates in more than one segment.
F-13
<PAGE>
Comprehensive income:
During 1998, the Company adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 30 establishes standards for
reporting comprehensive income and its components in the financial statements.
Other comprehensive income, as defined, includes all changes in equity (net
assets) during a period from nonowner sources. To date, the Company has not had
any transactions that are required to be reported as comprehensive income.
Concentrations:
The Company relies on a single vendor as its sole provider of inventory,
fulfillment and shipping services. While management of the Company believes it
could obtain similar services from other vendors for similar terms, a disruption
in the services received from this vendor could materially harm the Company's
business. In July, 1999, the Company granted this vendor a warrant to purchase
3,000,000 shares of the Company's common stock at an exercise price of $3.75 per
share. See Note 5.
Reclassifications:
Certain reclassifications have been made to prior years amounts to
conform to the current year presentation.
Development Stage:
The Company commenced its principal operations during the fiscal year
beginning January 1, 1999, and is no longer considered a "Development Stage
Enterprise", as defined by Statement of Financial Accounting Standard (SFAS) No.
7, Accounting and Reporting by Development Stage Enterprise.
Revenue recognition:
The Company recognizes revenue when the party goods are shipped to
customers. Outbound shipping charges and sales returns are included in net
revenue. The Company provides allowances for sales returns based on historical
experience in the period of the sale.
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 reported amounts of revenue and expenses during the reporting
period. Actual results could differ from these estimates.
Cash and cash equivalents
Cash equivalents are carried at cost plus accrued interest, which
approximates fair value. The Company considers all highly liquid investments
with an original maturity date of three months or less to be cash equivalents.
Cash and cash equivalents of $18,673,304 at December 31, 1999, included money
market funds and highly rated corporate securities.
Marketable securities
The Company determines the appropriate classification of marketable
securities at the time of acquisition and reevaluates such determinations at
each balance sheet date. Marketable securities which
F-14
<PAGE>
meet the criteria for classification as available-for-sale are carried at fair
value, based on quoted market prices, with unrealized gains and losses reported
as a component of comprehensive income. As of December 31, 1999 all of the
Company's marketable securities were classified as available-for-sale.
Stock-based compensation:
The Company has elected to follow 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. In accordance with Statement of Financial
Accounting Standards No. 123, the Company provides the necessary pro forma
disclosures as if the fair value method had been applied.
Property and equipment:
Property and equipment are stated at cost less accumulated depreciation
and are depreciated on the straight-line method over the estimated useful lives
of the assets, ranging from three to seven years. Expenditures for maintenance
and repairs are charged to operations as incurred.
Intangible Assets:
Intangible Assets consist of the estimated fair value of warrants issued
to the Company's fulfillment partner, Taymark, and Margaritaville less
amortization. The intangible assets are amortized over the life of the
agreements. See Note 5 for further discussion.
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.
The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
to be Disposed of" ("SFAS 121"). This statement establishes financial accounting
and reporting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held and
used, and for long-lived assets and certain identifiable intangibles to be
disposed of. SFAS 121 requires, among other things, that the entity review its
long-lived assets and certain related intangibles for impairment whenever
changes in circumstances indicate that the carrying amount of an asset may not
be fully recoverable.
During the year 1999 the Company replaced it web site necessitating the
write-off of $273,288 of previously capitalized software costs. On September 30,
1999, the Company modified the Star Concept (see Note 5) and as a result wrote
off $245,627 of capitalized production and development costs. In total, these
amounts are included in loss resulting from abandonment of assets in the
accompany statement of operations for the year ended December 31, 1999.
On August 5, 1999, the Company entered into a fixed fee agreement with
Rare Medium Inc. to develop a new web site, including the development of a new
visual identity, additional functionality and a new technical infrastructure to
better support the scalability of the Company's web site. The fixed fee for the
services provided was $500,000, which is included in property and equipment in
the accompanying balance sheet.
F-15
<PAGE>
Income taxes:
The Company accounts for income taxes using the asset and 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 that are
not expected to be realized.
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
during 1998, 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.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
1999
------------
Computer, office equipment and furniture and fixtures........... $ 624,821
Web site and related software................................... $ 646,572
============
$1,271,393
Less accumulated depreciation and amortization.................. $ (410,936)
------------
Total $ 860,457
============
4. INCOME TAXES
As of December 31, 1998 and 1999, the Company has estimated net
operating loss carryforwards of approximately $800,000 and $10,000,000,
respectively, which begin to expire in 2018. The Company has recorded a deferred
tax asset offset by a valuation allowance because of uncertainty regarding its
realizability. A change in control, as defined by the federal income tax
regulations could limit the Company's ability to utilize its carryforwards.
5. COMMITMENTS AND CONTINGENCIES
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 1999 amounted to $27,983 and
$105,164 respectively. Future minimum payments under these leases are $37,500.
See Note 10.
Finder's fee arrangement:
The Company and its former Chief Executive Officer ("former CEO")
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 December 31, 1999, amounts in
excess of $2,000,000 have been raised. As a result, $50,000 has been paid to the
former CEO in both 1998 and 1999.
F-16
<PAGE>
License and StarGreetings agreements:
Star entered into an agreement with StarGreetings, LLC, as the creator
of the StarGreetings concept ("StarConcept"), to license the exclusive use of
the StarConcept on the web sites of the Company and Star. The agreement calls
for a royalty of 2 1/2% of revenues derived from the StarConcept, payable
quarterly. Star Greetings, LLC is owned, in part, by the Company's former CEO.
No amounts were payable to StarGreetings, LLC under the agreement for the years
ended December 31, 1998 and 1999.
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 StarGreeting. The third component is an option to purchase stock in
the Company. During 1999, the Company entered into ten such agreements with
terms ranging from one year to three years. No commissions are due under these
agreements as of December 31, 1999. The value of the options approximated
$612,000, as determined using the Black-Scholes option pricing model. Upon the
modification of the StarConcept, the Company expensed the remaining unamortized
value of the options.
The Company entered into a 12 month consulting agreement with the former
CEO which expires on April 14, 2000. As a result of the modification of the
StarConcept, the former CEO was terminated on September 30, 1999 and his fee for
the remainder of the contract was accrued for in accrued severance. As of
December 31, 1999, approximately $73,000 of this fee remains in accrued
expenses.
Consulting agreements:
The Company entered into a consulting agreement with one of its outside
directors. The agreement was 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 ($102,487) to expense. On April 1, 1999, the consulting
agreement was terminated and the remaining $79,398 value of the options granted
was charged to expense during 1999.
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. For the year ended December 31, 1999, the Company charged $40,928 of
the value of the options granted ($368,350) to expense.
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 $740,000. In addition, the
executives were granted options to purchase an aggregate of 1,524,730 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 that call for
severance payments ranging up to one year's salary.
F-17
<PAGE>
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 web site requiring total
payments of $1,276,481 over the term of the agreement. The term of the two
agreements is ten months commencing October 1, 1999.
Fulfillment agreement:
On July 8, 1999, the Company entered into a product fulfillment
agreement with a direct marketer of party supplies. Under the agreement, the
Company will utilize the direct marketer's inventory and fulfillment services to
deliver merchandise ordered on the site, or directly through a toll-free
telephone number, directly to consumers. The initial term of the agreement runs
through December 31, 2002. The agreement contains certain restrictions on
competition by the direct marketer. As additional consideration for such
restrictions and services, the Company issued a warrant to purchase 3,000,000
shares of common stock at an exercise price of $3.75. The warrant expires on
October 1, 2002. The estimated fair value of the warrant on the date of issue
was approximately $5.3 million as determined using the Black-Scholes option
pricing model. The value of the warrant is included in intangible assets on the
accompanying Balance Sheet as of December 31, 1999 and is being amortized over
the initial term of the fulfillment agreement. For the year ended December 31,
1999, the Company amortized $755,488 to expense related to the amortization of
the warrant, which has been included in amortization of fulfillment partner
warrant on the accompanying statement of operations.
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 during the period from July 1, 1999 through June 30, 2000. 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. For the year ended December 1999, the Company charged $442,500 of
this annual fee to expense. See Note 10.
License agreement:
On December 21, 1999, the Company entered into a product license
agreement with Margaritaville Holdings. Under the agreement, the Company will
license the "Margaritaville" name for use in a distinct area of the iParty.com
web site, which shall be used to aggregate and offer for sale products that are
consistent with themes associated with Margaritaville and Jimmy Buffet. The
initial term of the agreement runs through December 20, 2002. For consideration
for the license, the Company will pay a 6% royalty on sales of product which
bear the "Margaritaville" name. As additional consideration, the Company issued
a warrant to purchase 550,000 shares of common stock at an exercise price of
$2.88. The warrant expires on December 21, 2004. The estimated fair value of the
warrant on the date of issue was approximately $1.6 million as determined using
the Black-Scholes option pricing model. The value of the warrant is included in
intangible assets on the accompanying Balance Sheet as of December 31, 1999 and
is being amortized over the life of the agreement. For the year ended December
31, 1999, the Company charged $45,337 to expense related to the amortization of
the agreement which has been included in marketing & sales in the accompanying
statement of operations.
6. STOCKHOLDERS' EQUITY
Series A preferred stock:
On June 30, 1998, the Company's Board of Directors designated 1,000,000
shares of the
F-18
<PAGE>
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, 1999, there were
1,000,000 shares of Series A preferred stock outstanding, respectively. The
shares of preferred stock were issued in connection with the exercise of
outstanding warrants. The exercise of the warrants resulted in gross proceeds of
$1,000,000 including the conversion of $250,000 in notes payable.
Series B and C preferred stock:
During 1999, the Company completed a private placement of Series B
Convertible Preferred Stock and redeemable common stock purchase warrants,
raising gross proceeds of $20,899,000. The financing was comprised of 1,044,952
shares of Series B Preferred Stock convertible into an aggregate of 10,449,520
shares of common stock and the issuance of warrants to purchase an additional
5,224,760 shares of common stock at an exercise price of $2.00 per share. The
Series B Preferred Stock is convertible at any time into a number of shares of
common stock equal to the quotient derived by dividing (1) $20.00 by (2) the
conversion price in effect at the time of the conversion. The initial conversion
price is $2.00 per share, reflecting an initial conversion ratio of 10:1. With
certain exceptions, the conversion price will be adjusted on a weighted-average
basis in the event the Company issues common stock at price below the conversion
price. The Series B Preferred Stock will automatically convert into common stock
at the conversion price then in effect in the event the Company consummates a
secondary public offering resulting in gross proceeds to the Company of at least
$10,000,000. The Series B Preferred Stock will be treated as prior to the
Company's common stock, and pari passu with the Company's Series A, C and D
Preferred Stock in the event of a liquidation of the Company. Holders of Series
B Preferred Stock vote on an as-if-converted basis on all matters submitted to a
vote of the Company's shareholders. Each common stock purchase warrant is
exercisable for a period of five years, commencing one year from the issue date,
at an initial exercise price of $2.00 per share. Under certain circumstances,
the common stock warrants are protected against dilution upon the occurrence of
certain events including the sale of common stock for less than fair market
value or less than the conversion price. Commencing one year from the issue
date, the Company may, on thirty-days notice, redeem the common stock warrants
at a price of $.05 per warrant if the average closing bid price of the common
stock equals or exceeds $8.00 per share for 20 consecutive trading days within a
period of 30 consecutive trading days.
The net proceeds of $19,513,000 were allocated to the preferred stock
and warrants based on their relative fair values of approximately $14,160,000
and $5,353,000, respectively. In addition, the preferred stock's conversion
features provide for an immediate benefit to its holders, computed by
determining the fair value of the common stock obtained upon conversion, less
the relative fair value of the preferred stock. In accordance with Emerging
Issuer Task Force ("EITF") Issue No. 98-5, the value of the preferred stock's
beneficial conversion feature cannot exceed the relative fair value assigned to
the preferred stock. Such amount of $14,160,000 has been reflected as a dividend
in the accompanying financial statements.
In addition, the Company sold Series C Convertible Preferred Stock and
redeemable common stock purchase warrants. The Series C 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 gross
proceeds of $2,000,000. The terms of the Series C Preferred Stock are identical
to those of the Series B Preferred Stock.
The net proceeds of $1,840,000 were allocated to the preferred stock and
warrants based on their relative fair values of approximately $1,332,000 and
$508,000, respectively. In addition, the preferred stock's conversion features
provide for an immediate benefit to its holders, computed by determining the
fair value of the common stock obtained upon conversion, less the relative fair
value of the preferred stock. In accordance with EITF Issue No. 98-5, the value
of the preferred stock's beneficial conversion feature cannot exceed the
relative fair value assigned to the preferred stock. Such amount of $1,332,000
has been
F-19
<PAGE>
reflected as a dividend in the accompanying financial statements.
The placement agent in the Series B and C 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. At the time of grant, the 929,929
warrants had an estimated fair value of approximately $2.9 million as determined
using the Black-Scholes option pricing model. The Series B financing included
the conversion of $2,000,000 of the Company's outstanding 10% Senior Convertible
Notes and $55,850 of accrued interest into 102,792 shares of Series B Preferred
Stock.
Series D preferred stock:
On December 20, 1999, the Company completed a private placement of
Series D Convertible Preferred Stock and redeemable common stock purchase
warrants, raising proceeds of $5,000,000. The financing was comprised of 250,000
shares of Series D Preferred Stock convertible into an aggregate of 2,500,000
shares of common stock and the issuance of warrants to purchase an additional
1,250,000 shares of common stock at an exercise price of $2.00 per share. The
Series D Preferred Stock is convertible at any time into a number of shares of
common stock equal to the quotient derived by dividing (1) $20.00 by (2) the
conversion price in effect at the time of the conversion. The initial conversion
price is $2.00 per share, reflecting an initial conversion ratio of 10:1. With
certain exceptions, the conversion price will be adjusted on a weighted-average
basis in the event the Company issues common stock at price below the conversion
price.
The Series D Preferred Stock will automatically convert into common
stock at the conversion price then in effect in the event the Company
consummates a secondary public offering resulting in gross proceeds to the
Company of at least $10,000,000. The Series D Preferred Stock will be treated as
prior to the Company's common stock, and pari passu with the Company's Series A,
B and C Preferred Stock in the event of a liquidation of the Company. Holders of
Series D Preferred Stock vote on an as-if-converted basis on all matters
submitted to a vote of the Company's shareholders. Each common stock purchase
warrant is exercisable for a period of five years, commencing one year from the
issue date, at an initial exercise price of $2.00 per share. Under certain
circumstances, the common stock warrants are protected against dilution upon the
occurrence of certain events including the sale of common stock for less than
fair market value or less than the conversion price. Commencing one year from
the issue date, the Company may, on thirty-days notice, redeem the common stock
warrants at a price of $.05 per warrant if the average closing bid price of the
common stock equals or exceeds $8.00 per share for 20 consecutive trading days
within a period of 30 consecutive trading days.
The net proceeds of $4,993,000 were allocated to the preferred stock and
warrants based on their relative fair values of approximately $3,646,000 and
$1,347,000, respectively. In addition, the preferred stock's conversion features
provide for an immediate benefit to its holders, computed by determining the
fair value of the common stock obtained upon conversion, less the relative fair
value of the preferred stock. In accordance with EITF Issue No. 98-5, the value
of the preferred stock's beneficial conversion feature cannot exceed the
relative fair value assigned to the preferred stock. Such amount of $3,646,000
has been reflected as a dividend in the accompanying financial statements.
The market price at the time of this transaction was $3.19, therefore
triggering the anti-dilution provision in the Series B and C preferred stock.
The effect of this anti-dilution provision was (1) an adjustment to the exercise
price of the redeemable common stock purchase warrants attached to the Series B
and C preferred stock to $1.81 and (2) the issuance of 695,966 additional
redeemable common stock purchase warrants with an exercise price of $1.81 to the
holders of the warrants issued in the Series B and C financings.
Upon issuance of the additional warrants and adjustment to the exercise
price of the warrants, the Company allocated approximately $2,242,000 to
additional paid in capital which represents the fair value
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<PAGE>
of the new warrants, and the increase in value of the then outstanding warrants
related to the Series B and C Preferred Stock. This amount has been reflected as
a dividend in the accompanying financial statements.
7. EARNINGS PER SHARE
The Company has computed net income (loss) per share in accordance with
Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS
No. 128"). Under the provisions of SFAS No. 128, basic net income (loss) per
common share ("Basic EPS") is computed by dividing net income (loss) by the
weighted average number of common shares outstanding. Diluted net income (loss)
per common share ("Diluted EPS") is computed by dividing net income (loss) by
the weighted average number of common shares and dilutive common share
equivalents then outstanding using the treasury-stock method.
The following table sets forth the computation of pro-forma basic and
diluted earnings per share:
<TABLE>
<CAPTION>
1998 1999
------------- -------------
<S> <C> <C>
Net loss .................................... $ (862,398) $(11,255,415)
Preferred stock beneficial conversion feature $ 0 $(21,380,000)
Net (loss) available to common shareholders . $ (862,398) $(32,635,415)
============ ============
Weighted Average Shares Outstanding:
Basic and diluted ....................... 10,525,213 11,005,421
============ ============
Loss per share--basic and diluted: .......... $ (0.08) $ (2.97)
============ ============
</TABLE>
The effect of the exercise of certain warrants and options issued are
not included as the effect on loss per share would be anti-dilutive.
8. NOTES PAYABLE
Note payable:
During December 1998, the Company borrowed $125,000 from each of two
shareholders, which was payable in 90 days, at an interest rate of 6.5% per
annum. The shareholders are also holders of warrants to purchase Series A
convertible preferred stock. In connection with such borrowing, a provision
allowed the shareholders to request payment in the form of application of the
principal amount against the exercise price of an appropriate number of
warrants.
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.
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 advanced certain funds to the
Company totaling $2,000,000. In connection with each such funding, the funding
party received 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. During 1999, $2,000,000 was advanced to the Company and,
accordingly, warrants to purchase 528,210 shares of common stock have been
issued with exercise prices ranging from $2.63 to $5.13 per share.
The fair market value of the warrants was treated as a discount on the
issuance of the note and accordingly was netted against the principal amount
outstanding and amortized over the life of the debt.
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<PAGE>
The discount, totaling approximately $949,000 was expensed as interest expense
in 1999.
On September 10, 1999, the note holders converted the $2,000,000
outstanding balance and $55,850 of accrued interest into Series B Preferred
Stock.
9. STOCK OPTION PLAN
On July 14, 1998, the Company adopted the 1998 Incentive and
Nonqualified Stock Option Plan, as amended (the "1998 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 qualified
incentive options cannot be less than the fair market value of the stock on the
grant date and the exercise price of nonqualified options can be fixed by the
plan administrator. Qualified incentive options to purchase the Company's common
stock under the 1998 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 up to four years and expire ten
years from the date of grant. On August 24, 1999, the Company increased the
number of options available under the 1998 Plan to 4,000,000 shares.
A summary of the Company's stock options outstanding as of December 31,
1998 and 1999 and activity during the years then ended are as follows:
<TABLE>
<CAPTION>
1998 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 $ 2.17
Stock options:
Granted ......................... 1,025,000 $ 2.17 2,750,030 3.32
Expired ......................... 0 0 430,000 3.17
Outstanding at end of period ........ 1,025,000 $ 2.17 3,345,030 $ 2.99
========= ======== ========== ========
Exercisable at end of period ........ 450,000 $ 2.31 1,324,000 $ 2.77
========= ======== ========== ========
</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 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 option grants in future years. The weighted average fair
value of the options granted during 1998 has 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 year
ended December 31, 1999 have been estimated at $2.85 per share on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions: no dividend yield, volatility of 95%, a risk-free interest rate of
5.38% to 6.64%, 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 the following pro forma amounts:
F-22
<PAGE>
1998 1999
------------- -------------
Net loss
-- as reported........................... $ (862,398) $(11,255,415)
-- pro forma $ (1,617,473) $(14,395,826)
Net loss per share
-- as reported........................... $ (.08) $ (2.97)
-- pro forma............................. $ (.15) $ (3.25)
============= =============
In connection with the stock options granted to consultants and to
employees with exercise prices less than fair market value, the Company has
$832,623 of remaining compensation expense which will be recorded in future
periods as these options vest.
10. SUBSEQUENT EVENTS
In March 2000, the Company entered into a five year operating lease in
New York City. Contracted minimum lease and office equipment payments are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING PROPERTY OFFICE
DECEMBER 31, LEASE EQUIPMENT TOTAL
-------------------------------- ------------ ----------- ------------
<S> <C> <C> <C>
2000............................ $ 142,667 $ 22,469 $ 165,136
2001............................ 217,840 34,384 252,224
2002............................ 223,715 34,384 258,099
2003............................ 229,765 12,969 242,734
2004............................ 235,998 0 235,998
Thereafter...................... 79,365 0 79,365
------------ ----------- ------------
Total....................... $ 1,129,350 $ 104,206 $ 1,233,556
============ =========== ============
</TABLE>
F-23
<PAGE>
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our certificate of incorporation and bylaws provide that we indemnify
all of our directors and officers to the fullest extent permitted by the
Delaware General Corporation Law. Under our certificate of incorporation and
bylaws, any director or officer, who in his capacity as such is made or
threatened to be made, party to any suit or proceeding, will be indemnified. A
director or officer will be indemnified if it is determined that the director or
officer acted in good faith and in a manner he reasonably believed to be in or
not opposed to our best interests. Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors, officers and
persons controlling us pursuant to the foregoing provision, or otherwise, we
have been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable.
We maintain a directors' and officers' liability insurance policy
covering certain liabilities that may be incurred by directors and officer in
connection with the performance of their duties. We pay the entire premium for
the liability insurance.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
It is expected that the following expenses will be incurred in
connection with the issuance and distribution of the common stock being
registered. All such expenses are being paid by us.
SEC Registration fee $ 5,157
Printing and Edgarization $ 5,000
Accountants' fees and expenses $10,000
Attorneys' fees and expenses $15,000
Miscellaneous $ 5,000
-------
Total $40,157
=======
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
During the past three fiscal years we have issued securities pursuant to
exemptions to registration under the Securities Act of 1933. We issued an
aggregate of 4,585,000 shares of common stock and warrants to purchase an
aggregate of 1,000,000 shares of Series A preferred stock to certain offshore
holding companies, for $997,197.43 in cash. We did not use an underwriter. This
sale was exempt from registration pursuant to Section 3(b) of the Securities Act
and Rule 504 promulgated thereunder, which provides an exemption for limited
offers and sales of securities not exceeding an annual aggregate amount of $1
million. The Rule 504 Sale was a condition to the merger of iParty Corp and WSI,
pursuant to which WSI changed its name to iParty Corp. The Rule 504 Sale was
conducted in three issues, one at $.01 per share, a second issue at $1.00 per
share which also included the Warrants, and a third at $1.00 per share without
the Warrants, as set forth in the tables below.
On June 25, 1998, we sold, in the first issue, an aggregate of 3,624,043
shares of common stock, at a purchase price of $.01 per share, to the following
entities, in the amounts set forth below:
<TABLE>
<CAPTION>
Number of Total
Name of Purchaser Shares Purchased Purchase Price
----------------- ---------------- --------------
<S> <C> <C>
Fletcher Investments Limited. 370,000 $ 3,700
</TABLE>
II-1
<PAGE>
<TABLE>
<S> <C> <C>
Sandown Limited 345,000 $ 3,450
Seaborne Limited 330,000 $ 3,300
Stamford Securities Limited 365,000 $ 3,650
Hampton Associates 360,000 $ 3,600
Intention Group Limited 320,000 $ 3,200
Stackridge Associates Limited 375,000 $ 3,750
Hoffman Finance Limited 380,000 $ 3,800
Apostle Associates Limited 379,043 $ 3,790.43
Clanstar International Limited 300,000 $ 3,000
Intrepid International Corp 100,000 $ 1,000
Total: 3,624,043 $36,240.43
</TABLE>
On June 26, 1998, we sold, in the second issue, an aggregate of 80,000
shares of common stock and warrants to purchase an aggregate of 1,000,000 shares
of Series A preferred stock, at $1.00 per share, to the following entities, in
the amounts set forth below:
<TABLE>
<CAPTION>
Number of Shares and Total
Name of Purchaser Warrants Purchased Purchase Price
----------------- ------------------ --------------
<S> <C> <C>
Ruffino Developments 40,000 shares of common stock $ 40,000
Limited and warrants to purchase 556,500
shares of Series A preferred
stock
Henslowe Trading Limited 40,000 shares of common stock $ 40,000
and warrants to purchase 443,500
shares of Series A preferred stock
TOTAL: 80,000 shares of common stock, $ 80,000
and warrants to purchase
1,000,000 shares of Series A
preferred stock
</TABLE>
Also, on June 26, 1998, we sold, in the third issue, an aggregate of
880,957 shares of common stock at a purchase price of $1.00 per share, to the
following entities, in the amounts set forth below:
<TABLE>
<CAPTION>
Number and
Name of Purchaser Shares Purchased Total Purchase Price
----------------- ---------------- --------------------
<S> <C> <C>
Stackridge Associates Limited 140,000 $140,000
Hoffman Finance Limited 140,957 $140,957
Altis Limited 600,000 $600,000
Total: 880,957 $880,957
</TABLE>
In August and September of 1999 we issued an aggregate of approximately
522,476 units of Series B convertible preferred stock to certain "accredited
investors" (as such term is defined under Regulation D promulgated under the
Securities Act). Each unit was composed of two (2) shares of Series
II-2
<PAGE>
B convertible preferred stock and ten (10) common stock purchase warrants;
accordingly, we issued an aggregate of approximately 1,044,952 shares of Series
B preferred stock and 5,224,760 common stock warrants. Each share of Series B
preferred stock is convertible at any time into ten (10) shares of common stock
at an initial conversion price of $2.00 per share. Each common stock warrant is
convertible into one share of common stock at an exercise price of $2.00 per
share. The units were offered at a price of $40.00 per unit, in cash, provided
that approximately 50,000 units were issued in exchange for the conversion of
approximately $2,000,000 of our outstanding Senior Notes. Commonwealth
Associates, L.P. acted as Placement Agent in connection with the sale of the
units. In connection therewith, Commonwealth Associates, L.P. received
approximately $1,250,000 (for commissions, structuring fees, and expenses) and
warrants to purchase approximately 779,929 shares of common stock at an exercise
price of $2.00 per share. The sale of the units was exempt from registration
pursuant to Section 4(2) of the Securities Act and Rule 506 promulgated
thereunder, which generally provides an exemption for certain private sales of
securities.
The first closing of the sale of units was held on August 26, 1999 in
addition, sales of units were held on September 9, 1998 and September 10, 1999.
On September 10, 1999 we issued an aggregate of 100,000 shares of Series
C convertible preferred stock and 500,000 common stock warrant to Boston
Millennia Partners, L.P., an "accredited investor" (as such term is defined
under Regulation D promulgated under the Securities Act) for $2,000,000 in cash.
Each share of Series C convertible preferred stock is convertible at any time
into ten (10) shares of common stock at an initial conversion price of $2.00 per
share. Each common stock warrant is convertible into one share of common stock
at an exercise price of $2.00 per share. Commonwealth Associates acted as
Placement Agent in connection with the sale of the units. In connection
therewith, Commonwealth Associates, L.P. received approximately $160,000 (for
commissions, structuring fees, and expenses) and warrants to purchase
approximately 150,000 shares of common stock at an exercise price of $2.00 per
share. The sale of the securities was exempt from registration pursuant to
Section 4(2) of the Securities Act and Rule 506 promulgated thereunder, which
generally provides an exemption for certain private sales of securities.
On December 23, 1999 we issued an entity affiliated with an aggregate of
250,000 shares of Series D convertible preferred stock and 1,250,000 common
stock warrant to Hicks, Muse, Tate & Furst Incorporated in a private placement,
Hicks Muse is an "accredited investor" (as such term is defined under Regulation
D promulgated under the Securities Act) for $5,000,000 in cash. Each share of
Series D convertible preferred stock is convertible at any time into ten (10)
shares of common stock at an initial conversion price of $2.00 per share. Each
common stock warrant is convertible into one share of common stock at an
exercise price of $2.00 per share. The sale of the securities was exempt from
registration pursuant to Section 4(2) of the Securities Act and Rule 506
promulgated thereunder, which generally provides an exemption for certain
private sales of securities.
II-3
<PAGE>
ITEM 27. EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- ------------
<S> <C>
3.1 Restated Certificate of Incorporation of WSI Acquisition Corp. and
Certificate of Merger by iParty Corp. into WSI Acquisition Corp.(1)
3.2 by-laws of WSI Acquisition Corp., as amended.(1)
4.1 Certificate of Designation of Series B Preferred Stock of iParty
Corp.(2)
4.2 Certificate of Designation of Series C Preferred Stock of iParty
Corp.(2)
4.3 Certificate of Designation of Series D Preferred Stock of iParty
Corp.(5)
4.4 Warrant Agreement between iParty Corp., Continental Stock Transfer and
Trust Company and Commonwealth Associates, LP.(2)
4.5 Warrant Agreement between iParty Corp., Continental Stock Transfer and
Trust Company and Commonwealth Associates, LP.(2)
4.6 Taymark Warrant**
4.7 Margaritaville Holdings LLC Warrant**
5.1 Opinion of Camhy Karlinsky & Stein LLP, counsel for the Registrant.**
10.1 Merger Agreement by and between iParty Corp. and WSI Acquisitions
Corp.(1)
10.2 1998 Incentive and Non-Qualified Stock Option Plan.(1)
10.3 Fry Multimedia Web Site Development Service Agreement.(1)
10.4 iVillage Web Site Development Service Agreement.(1)
10.5 OrderTrust Agreement between iParty Corp. and OrderTrust.(1)
10.6 Consulting Agreement by Byron Hero.(3)
10.7 Employment Agreement of Patrick Farrell.(3)
10.8 Employment Agreement of Sal Perisano.(2)
10.9 Employment Agreement of Dorice Dionne.**
10.10 StarGreetings License Agreement.(1)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.11 Service Agreement between iParty Corp. and TechSpace LLC (as amended)(3)
10.12 Consulting Agreement of Sal Perisano.(1)
10.13 Finder's Fee Agreement between iParty LLC and Byron Hero.(1)
10.14 Form of "StarGreeting" Agreement with Celebrities.(3)
10.15 Funding Agreement among iParty Corp., Robert H. Lessin and Ajmal Khan.(3)
10.16 Fulfillment Agreement between iParty Corp. and Taymark.(3)
10.17 Agreement between iParty Corp. and Rare Medium, Inc.(2)
10.18 Agreement between iParty Corp. and LinkShare Corporation.(2)
10.19 Agreement between iParty Corp. and America Online, Inc.(2)
10.20 Agreement between iParty Corp. and Kirshenbaum Bond Partners.(2)
10.21 Consulting Agreement between iParty Corp. and Stuart Moldaw.(2)
10.22 Agreement between iParty Corp. and Margaritaville Holdings LLC.**
23.1 Consent of Arthur Andersen LLP**
23.2 Consent of Richard A. Eisner & Company, LLP. **
23.3 Consent of Camhy Karlinsky & Stein LLP (included in Exhibit 5.1).**
24.1 Power of Attorney.**
27.1 Financial Data Schedule.(4)
</TABLE>
--------------------
(1) Incorporated herein in its entirety by reference to iParty's
Registration Statement on Form 10-SB, Registration No. 0-25507, as filed
with the Securities and Exchange Commission on March 8, 1999.
(2) Incorporated herein in its entirety by reference to Amendment No. 2 to
iParty's Registration Statement on Form 10-SB, Registration No. 0-25507,
as filed with the Securities and Exchange Commission on October 19,
1999.
(3) Incorporated herein in its entirety by reference to Amendment No. 1 to
iParty's Registration Statement on Form 10-SB, Registration No. 0-25507,
as filed with the Securities and Exchange Commission on July 12, 1999.
(4) Incorporated herein by reference to iParty's Quarterly Report on Form
10-QSB for the quarter ended September 30, 1999.
(5) Incorporated herein by reference to iParty's Annual Report on Form
10-KSB for the year ended December 31, 1999.
II-5
<PAGE>
(6) Incorporated herein by reference to iParty's Quarterly Report on Form
10-QSB for the quarter ended March 31, 2000.
**Filed herewith.
II-6
<PAGE>
ITEM 28. UNDERTAKINGS
The Registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to include any
prospectus required by section 10(a)(3) of the Securities Act, any material
information with respect to the plan of distribution not previously disclosed in
this registration statement or any fundamental change to the information in this
registration statement.
2. That for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
3. To remove from registration by means of a post-effective amendment any
of the securities being registered that remain unsold at the termination of the
offering.
4. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, offices and controlling persons of
the Registrant pursuant to the Registrant's certificate of incorporation,
indemnification agreement, insurance or otherwise, the Registrant has been
advised that in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act, and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-7
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of
1933, the Registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form SB-2 and has duly authorized
this Registration Statement or amendment thereto to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of New York, State of
New York, on June 29, 2000.
iPARTY CORP.
By: /s/ Sal Perisano
------------------------------------
Sal Perisano
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that each person whose signature
appears below under the heading "Signature" constitutes and appoints Sal
Perisano as his true and lawful attorney-in-fact and agent for him and in his
name, place and stead, in any and all capacities to sign this, and any or all
amendments to this, Registration Statement on Form SB-2, and to file the same
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, each acting alone, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully for all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, each acting alone, or their substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Sal Perisano Chief Executive Officer and Director June 29, 2000
-------------------------
Sal Perisano
/s/ Robert Jevon Director June 29, 2000
-----------------------
Robert Jevon
/s/ Ajmal Khan Director June 29, 2000
-----------------------
Ajmal Khan
/s/ Robert H. Lessin Director June 29, 2000
-----------------------
Robert H. Lessin
/s/ Michael Levitt Director June 29, 2000
-----------------------
Michael Levitt
/s/ Stuart G. Moldaw Director June 29, 2000
----------------------
Stuart G. Moldaw
</TABLE>
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<S> <C>
3.1 Restated Certificate of Incorporation of WSI Acquisition Corp. and
Certificate of Merger by iParty Corp. into WSI Acquisition Corp.(1)
3.2 By-Laws of WSI Acquisition Corp., as amended.(1)
4.1 Certificate of Designation of Series B Preferred Stock of iParty
Corp.(2)
4.2 Certificate of Designation of Series C Preferred Stock of iParty
Corp.(2)
4.3 Certificate of Designation of Series D Preferred Stock of iParty
Corp.(5)
4.4 Warrant Agreement between iParty Corp., Continental Stock Transfer and
Trust Company and Commonwealth Associates, LP.(2)
4.5 Warrant Agreement between iParty Corp., Continental Stock Transfer and
Trust Company and Commonwealth Associates, LP.(2)
4.6 Taymark Warrant.**
4.7 Margaritaville Holdings LLC Warrant.**
5.1 Opinion of Camhy Karlinsky & Stein LLP, counsel for the Registrant.**
10.1 Merger Agreement by and between iParty Corp. and WSI Acquisitions
Corp.(1)
10.2 1998 Incentive and Non-Qualified Stock Option Plan.(1)
10.3 Fry Multimedia Web Site Development Service Agreement.(1)
10.4 iVillage Web Site Development Service Agreement.(1)
10.5 OrderTrust Agreement between iParty Corp. and OrderTrust.(1)
10.6 Consulting Agreement by Byron Hero.(3)
10.7 Employment Agreement of Patrick Farrell.(3)
10.8 Employment Agreement of Sal Perisano.(2)
10.9 Employment Agreement of Dorice Dionne.**
10.10 StarGreetings License Agreement.(1)
10.11 Service Agreement between iParty Corp. and TechSpace LLC (as amended)(3)
10.12 Consulting Agreement of Sal Perisano.(1)
10.13 Finder's Fee Agreement between iParty LLC and Byron Hero.(1)
</TABLE>
<PAGE>
<TABLE>
<S> <C>
10.14 Form of "StarGreeting" Agreement with Celebrities.(3)
10.15 Funding Agreement among iParty Corp., Robert H. Lessin and Ajmal Khan.(3)
10.16 Fulfillment Agreement between iParty Corp. and Taymark.(3)
10.17 Agreement between iParty Corp. and Rare Medium, Inc.(2)
10.18 Agreement between iParty Corp. and LinkShare Corporation.(2)
10.19 Agreement between iParty Corp. and America Online, Inc.(2)
10.20 Agreement between iParty Corp. and Kirshenbaum Bond Partners.(2)
10.21 Consulting Agreement between iParty Corp. and Stuart Moldaw.(2)
10.22 Agreement between iParty Corp. and Margaritaville Holdings LLC.**
23.1 Consent of Arthur Andersen LLP**
23.2 Consent of Richard A. Eisner & Company, LLP. **
23.3 Consent of Camhy Karlinsky & Stein LLP (included in Exhibit 5.1).**
24.1 Power of Attorney.**
27.1 Financial Data Schedule.(6)
</TABLE>
----------------
(1) Incorporated herein in its entirety by reference to iParty's
Registration Statement on Form 10-SB, Registration No. 0-25507, as filed
with the Securities and Exchange Commission on March 8, 1999.
(2) Incorporated herein in its entirety by reference to Amendment No. 2 to
iParty's Registration Statement on Form 10-SB, Registration No. 0-25507,
as filed with the Securities and Exchange Commission on October 19,
1999.
(3) Incorporated herein in its entirety by reference to Amendment No. 1 to
iParty's Registration Statement on Form 10-SB, Registration No. 0-25507,
as filed with the Securities and Exchange Commission on July 12, 1999.
(4) Incorporated herein by reference to iParty's Quarterly Report on Form
10-QSB for the quarter ended September 30, 1999.
(5) Incorporated by reference to iParty's Annual Report on Form 10-KSB for
the year ended December 31, 1999.
(6) Incorporated by reference to iParty's Quarterly Report on Form 10-QSB
for the quarter ended March 31, 2000.
**Filed herewith.