<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB/A
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
/_/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________________to _____________________
Commission File No. 0-25507
iPARTY CORP.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-4012236
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation of organization)
41 East 11th Street, 11th Floor, New York, New York 10003
- --------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 331-1225
------------------------------------------------------------------------------
(Former name or former address, if changed since last report.)
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes X No
---- ----
As of November 1, 1999, there were issued and outstanding 11,005,691
shares of common stock, par value $.001 per share, of the registrant issued and
outstanding.
Transitional small business disclosure format
Yes No X
---- -----
================================================================================
The financial statements included herein have been restated for the financial
statement errors discovered subsequent to the filing of the Issuer's Form 10-QSB
on November 15, 1999 for nine months ended September 30, 1999 (File No.
0-25507). See Note B of the financial statements for further explanation of the
restatement filed herein.
<PAGE>
iPARTY CORP.
Quarterly Report on Form 10-QSB
Table of Contents
PAGE
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements 3
Notes to Consolidated Financial Statements 7
Item 2. Plan of Operation 18
PART II OTHER INFORMATION
Item 2. Changes in Securities 22
Item 5. Other Information 24
Item 6. Exhibits 25
SIGNATURES 26
<PAGE>
iParty Corp.
(A development stage company)
Balance Sheet
<TABLE>
<CAPTION>
ASSETS September 30, December 31,
1999 1998
---------------- ---------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 18,856,768 $ 346,751
Cash, restricted 50,109 50,000
Due from officers 11,365 34,021
Prepaid expenses and other 210,569 60,277
--------------- ---------------
Total current assets 19,128,811 491,049
Property and equipment, net 842,109 341,441
Intangible assets 4,909,157 -
Other assets 46,651 9,670
--------------- ---------------
Total assets $ 24,926,728 $ 842,160
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,098,166 $ 297,508
Notes payable - 250,000
--------------- ---------------
Total current liabilities 1,098,166 547,508
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 and 0 shares issued and outstanding, respectively 1,000 -
Series B preferred stock - 1,150,000 authorized;
1,044,952 and 0 shares issued and outstanding, respectively 1,045 -
Series C preferred stock - 100,000 authorized;
100,000 and 0 shares issued and outstanding, respectively 100 -
Common stock - $.001 par value; 50,000,000 shares authorized;
11,005,691 shares issued and outstanding 11,006 11,006
Additional paid in capital 45,939,652 1,146,044
Deficit accumulated during the development stage (22,124,241) (862,398)
--------------- ---------------
Total stockholders' equity 23,828,562 294,652
--------------- ---------------
Total liabilities and stockholders' equity $ 24,926,728 $ 842,160
=============== ===============
</TABLE>
See notes to financial statements
3
<PAGE>
iParty Corp.
(A development stage company)
Statement of Operations
<TABLE>
<CAPTION>
For the three For the nine
months ended months ended From
September 30, September 30, Inception
---------------------------------------------------------------- through
1998 1999 1998 1999 September 30,
1999
------------- -------------- ------------- -------------- --------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues $ - $ 4,257 $ - $ 4,257 $ 4,257
Operating costs:
Cost of product sold - 5,107 - 5,107 5,107
Amortization of fulfillment partner warrant - 379,262 - 379,262 379,262
Marketing and sales - 632,442 - 878,372 878,372
Product and technology development - 399,143 - 893,466 893,466
General and administrative 326,767 725,653 424,020 1,528,614 2,378,612
Loss resulting from abandonment of assets
(Note C[10]) - 92,924 - 366,212 366,212
Stock-based compensation (Note F[6] I[2]) - 531,900 - 761,303 784,392
----------- -------------- ------------- -------------- --------------
Net loss before interest and provision for
income taxes (326,767) (2,762,174) (424,020) (4,808,079) (5,681,166)
Interest income 4,974 41,141 5,374 42,688 53,778
Interest expense - (763,463) - (1,004,452) (1,004,853)
----------- -------------- ------------- -------------- ---------------
Net loss before income taxes (321,793) (3,484,496) (418,646) (5,769,843) (6,632,241)
Provision for income taxes - - - - -
----------- -------------- ------------- -------------- ---------------
Net loss $ (321,793) $ (3,484,496) $ (418,646) $ (5,769,843) $ (6,632,241)
=========== ============== ============= ============== ===============
Loss per share:
Basic and diluted $ (0.03) $ (1.72) $ (.04) $ (1.93)
============ ============== ============= =============
Weighted Average Shares Outstanding:
Basic and diluted 11,005,691 11,005,691 10,364,733 11,005,691
============ ============== ============= =============
</TABLE>
See notes to financial statements
4
<PAGE>
iParty Corp.
(A development stage company)
Statement of Changes in Stockholders' Equity/(Deficiency)
<TABLE>
<CAPTION>
Deficit
Preferred Common Accumulated
----------------------- ---------------------- during the Total
# of # of Paid-In Development Shareholders'
shares Stock shares Stock Capital Stage Equity
---------- --------- ---------- --------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock at $.04 per
share on March 12, 1998 - $ - 6,000,000 $ 6,000 $ 240,961 $ - $ 246,961
Outstanding common stock of
WSI prior to merger on July 2, 1998 - - 420,691 421 (421) - 0
Issuance of common stock at $.01 per
share on July 2, 1998 - - 3,624,043 3,624 32,616 - 36,240
Issuance of common stock and warrants at
$1.00 per share on July 2, 1998 - - 960,957 961 849,799 - 850,760
Accrual of pro rata portion of
value of options granted in
September 1998 and January 1999
under consultant agreement
with outside director - - - - 23,089 - 23,089
Net loss - - - - - (862,398) (862,398)
---------- --------- ---------- --------- ----------- ----------- -----------
Balance December 31, 1998 - - 11,005,691 11,006 1,146,044 (862,398) 294,652
Issuance of preferred stock
upon exercise of warrants,
including conversion of notes
payable (Note G[1]) 1,000,000 1,000 - - 949,000 - 950,000
Issuance of preferred stock
and warrants at $2.00 per
share during September 1999, net
net of issuance costs of
$1,545,640 (Note G[2]) 1,144,952 1,145 - - 21,354,284 - 21,355,429
Accrual of pro rata portion
of value of options granted
under consulting agreements
with outside director and
others (Note F[6] J[2]) - - - - 761,303 - 761,303
Value of warrants granted under
fulfillment agreement - - - - 5,288,419 - 5,288,419
Discount to fair market value of
the convertable notes payable - - - - 948,602 - 948,602
Preferred stock beneficial
conversion feature - - - - 15,492,000 (15,492,000) --
Net loss - - - - - (5,769,843) (5,769,843)
---------- --------- ---------- --------- ----------- ------------ -----------
Balance September 30, 1999 (unaudited) 2,144,952 $ 2,145 11,005,691 $ 11,006 $45,939,652 $(22,124,241) $23,828,562
========== ========= ========== ========= =========== ============ ===========
</TABLE>
See notes to financial statements
5
<PAGE>
iParty Corp.
(A development stage company)
Statement of Cash Flows
<TABLE>
<CAPTION>
For the nine
months ended
September 30, From Inception
---------------------------- through
1998 1999 September 30, 1999
----------- ----------- -------------------
Cash flows from operating activities: (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Net loss (418,646) $(5,769,843) $ (6,632,241)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 4,954 665,723 678,087
Loss resulting from abandonment of assets - 366,213 366,213
Stock-based compensation - 761,303 784,392
Amortization of discount on issuances of convertible
notes - 948,602 948,602
Decrease (increase) in:
Other current assets (81,666) (150,292) (210,569)
Other assets - (36,981) (46,651)
Increase (decrease) in:
Accounts payable and accrued expenses 242,288 857,606 1,155,114
----------- ----------- ------------
Net cash used in operating activities (253,070) (2,357,669) (2,957,053)
----------- ----------- ------------
Cash flows from investing activities:
Purchase of property and equipment, net of disposals (67,705) (457,811) (534,685)
Equipment and software development, net of disposals (109,696) (695,533) (972,464)
Advances to officer - 22,656 (11,365)
Increase in restricted cash - (109) (50,109)
----------- ----------- ------------
Net cash used in investing activities (177,401) (1,130,797) (1,568,623)
----------- ----------- ------------
Cash flows from financing activities:
Proceeds from notes payable - 2,000,000 2,250,000
Capital contributions on initial capitalization - - 246,961
Proceeds from sale of stock, net 860,706 21,593,191 22,590,388
Costs of sale of stock - (1,594,708) (1,704,905)
----------- ----------- ------------
Net cash provided by investing activities 860,706 21,998,483 23,382,444
----------- ----------- ------------
Net increase in cash and cash equivalents 430,235 18,510,017 18,856,768
Cash and cash equivalents, beginning of period - 346,751 -
----------- ----------- ------------
Cash and cash equivalents, ending of period $ 430,235 $18,856,768 $ 18,856,768
=========== =========== ============
Supplemental disclosure of non-cash financing activities:
Conversion of notes payable to Series A preferred
stock (Note H[1]) $ - $ 250,000 $ 250,000
=========== =========== ============
Conversion of notes payable and accrued interest to
Series B preferred stock (Note H[2]) $ - $ 2,055,850 $ 2,055,850
=========== =========== ============
</TABLE>
See notes to financial statements
6
<PAGE>
iPARTY CORP. AND SUBSIDIARY
(a development stage company)
Notes to Financial Statements
September 30, 1999
(Unaudited)
NOTE A - THE COMPANY
iParty LLC, which was created on December 11, 1997 to launch an Internet-based
merchant of party goods and services, commenced operations in January 1998. On
March 12, 1998, iParty Corp. was organized as a wholly owned subsidiary of
iParty LLC and the net assets and operations of iParty LLC were transferred to
iParty Corp. On April 9, 1998, 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 420,691 outstanding common shares of WSI
have been recorded at par value with a corresponding charge to additional
paid-in capital. The statement of operations reflects the operations of iParty
from the commencement of its operations from March 12, 1998 and also reflects
the operations of iParty LLC, the predecessor company, from January 1998 through
March 12, 1998. In connection with the merger, WSI changed its name to iParty
Corp.
The Company is in the development stage and its efforts are devoted to
developing the Internet resources to provide consumers a comprehensive website
where they can seek party planning advice and information and locate and
contract for party goods and services. The Company intends on entering into
contracts with local and national merchants who can provide such goods and
services.
NOTE B - RESTATEMENT
The restatement of the September 30, 1999 financial statements is the result of
the discovery of errors included in the Company's 10-QSB filed on November 15,
1999. The error resulted in a misallocation of the proceeds received in the
Funding Agreement. In the restated financials 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 of the note and amortized over the life
of the debt.
The restated financial statements also include a reallocation of the proceeds
received in the Series B and C Preferred Stock offerings. The net proceeds were
allocated to the Preferred Stock and warrants based on their relative fair
values. 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. Such amount has been reflected as a dividend in the restated
financial statements.
Additionally, the estimated fair value of the warrants issued to the Company's
fulfillment partner has been reclassified to intangible assets from additional
paid in capital. The Company also reclassified its statement of operations to
properly reflect the amortization of the estimated fair value of those warrants.
The net effect of the errors described above resulted in an increase to net loss
and net loss per share of approximately $949,000 and $1.49, respectively for the
nine months ended September 30, 1999.
NOTE C - SIGNIFICANT ACCOUNTING POLICIES
[1] Basis of presentation:
Nine months ended September 30, 1998 and 1999. The unaudited interim
financial statements for the nine months ended September 30, 1998 and
1999 included herein have been prepared by the Company, without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission and, in the opinion of the Company, reflect all adjustments
7
<PAGE>
(consisting only of normal recurring adjustments) and disclosure which
are necessary for a fair presentation. The results of operations for the
nine months ended are not necessarily indicative of the results for the
full year.
[2] Principles of consolidation:
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary after elimination of all significant
intercompany transactions and balances.
[3] Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from these
estimates.
[4] Cash and cash equivalents:
For purposes of the statement of cash flows, the Company considers all
highly liquid investments purchased with an original maturity of three
months or less to be cash equivalents. At December 31, 1998 and September
30, 1999, the Company maintains its cash deposits in accounts which are
in excess of Federal Deposit Insurance Corporation limits by $126,199 and
$18,756,768, respectively. At December 31, 1998 and September 30, 1999,
the Company maintains a cash deposit of $50,000 and $50,109,
respectively, in the form of a certificate of deposit which serves as the
collateral for a corporate Visa credit account.
[5] Financial instruments:
The carrying amounts for the Company's cash and cash equivalents,
restricted cash, accounts payable and notes payable approximate fair
value.
[6] Inventory:
Inventories are stated at the lower of cost, determined on a first-in,
first-out basis, or market.
[7] Per share data:
Basic and diluted loss per share is based on the weighted average number
of outstanding shares of common stock and excludes the effect of stock
options and warrants. In computing the weighted average number of shares
outstanding, the 3,624,043 shares issued for $.01 per share and the
420,691 outstanding shares of WSI prior to the merger were treated as if
they were outstanding for the entire year of 1998.
[8] Stock-based compensation:
8
<PAGE>
The Company has elected to follow the intrinsic value method set forth in
Accounting Principles Board Opinion 25, "Accounting for Stock Issued to
Employees" in accounting for its stock option incentive plan. As such,
compensation expense would be recorded on the date of grant if the
current market price of the underlying stock exceeded the exercise price
of the option.
The following table shows the amounts of stock-based compensation that
would have been recorded under the following income statement categories
had stock-based compensation not been separately stated in the Statement
of Operations:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
Quarter ended Nine months ended Inception
September 30, September 30, through
------------------------------------------------------------------------------------------------
September 30,
1998 1999 1998 1999 1999
---- ---- ---- ---- ----
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales and Marketing $0 $466,823 $0 $ 612,440 $ 612,440
--------------------------------------------------------------------------------------------------
Product and technology development $0 $ 6,973 $0 $ 10,369 $ 10,369
--------------------------------------------------------------------------------------------------
General and administration $0 $ 58,164 $0 $ 138,494 $ 161,583
--------------------------------------------------------------------------------------------------
Total $0 $531,960 $0 $ 761,303 $ 784,392
--------------------------------------------------------------------------------------------------
</TABLE>
[9] Property and equipment:
Property and equipment are stated at cost less accumulated depreciation
which is provided on the straight-line method over the estimated useful
lives of the assets.
[10] Software costs:
In accordance with Statement of Position 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use", issued in
March 1998 and adopted by the Company, external direct costs of materials
and services incurred in connection with developing or obtaining internal
use software were capitalized. Such costs will be amortized using the
straight-line method over an estimated useful life of 3 years beginning
when the software is ready for its intended use or over its known useful
life, whichever is shorter. For the nine months ended September 30, 1999,
the Company wrote off $366,213 of previously capitalized software costs
when the Company selected new vendors for support of its website,
necessitating the creation of a new website and integrating components.
With the creation of the new website, the software previously capitalized
was abandoned.
[11] Income taxes:
The Company accounts for income taxes using the liability method.
Deferred income taxes are measured by applying enacted statutory rates to
net operating loss carryforwards and to the differences between the
financial reporting and tax bases of assets and liabilities. Deferred tax
assets are reduced, if necessary, by a valuation allowance for any tax
benefits which are not expected to be realized.
9
<PAGE>
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
- --------------------------------------------------------------------------------
December 31, 1998 September 30, 1999
- --------------------------------------------------------------------------------
Computer, office equipment and
furniture and fixtures $ 76,874 $ 505,423
- --------------------------------------------------------------------------------
Website and related software $ 276,931 $ 537,245
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$ 353,805 $1,042,668
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Less accumulated depreciation and
amortization $(12,364) $(200,559)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Total $ 341,441 $ 842,109
- --------------------------------------------------------------------------------
NOTE E - INCOME TAXES
The reconciliation of income tax benefit computed at the federal statutory tax
rate to the income tax benefit in the consolidated statement of operations is as
follows for the year ended December 31, 1998 and the nine months ended September
30, 1999:
- --------------------------------------------------------------------------------
December 31, 1998 September 30, 1999
- --------------------------------------------------------------------------------
Income tax benefit computed at the
federal statutory income tax rate of
35% $(301,839) $(1,687,435)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Increase resulting from state and local
taxes, net of federal benefit $ (97,434) $ (544,706)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Valuation allowance provided $ 399,273 $ 2,232,141
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Income tax benefit in statement of
operations $ 0 $ 0
- --------------------------------------------------------------------------------
The tax effects of significant items comprising the Company's net deferred tax
asset as of December 31, 1998 and September 30, 1999 is as follows:
- --------------------------------------------------------------------------------
December 31, 1998 September 30, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Net operating loss carryforward $399,273 $2,631,414
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Less valuation allowance $399,273 $2,631,414
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Net deferred tax asset $ 0 $ 0
- --------------------------------------------------------------------------------
As of December 31, 1998 and September 30, 1999, the Company has estimated net
operating loss carryforwards of $862,398 and $5,683,641, respectively, which
expire in 2018 and 2019. The Company has recorded a deferred tax asset offset by
a valuation allowance as the Company has
10
<PAGE>
not determined that it is more likely than not that the available net operating
loss carryforward will be utilized in the future.
NOTE F - COMMITMENTS
[1] Leases:
The Company leases facilities and equipment under several month-to-month
and three month operating leases. The Company's rental expense under
operating leases for the year ended December 31, 1998 and for the nine
months ended September 30, 1999 amounted to $27,983 and $67,593,
respectively.
[2] Concentrations:
The Company has contracted with four companies to develop the web sites
for its services. Failure to perform by any one of these three parties
would have a material negative impact upon the Company's operations. At
September 30, 1999, the four companies had completed the services as
outlined in the above mentioned contracts (see Note F[10]).
[3] Finder's fee arrangement:
The Company and its former Chief Executive Officer ("former CEO") had
entered into an agreement prior to such individual becoming the former
CEO, which calls for the former CEO to receive a finder's fee in the
amount of 5% of the first $2,000,000 in equity raised from any party
introduced by the former CEO. In connection with this agreement, as of
September 30, 1999, approximately $2,000,000 has been raised. As a
result, $50,000 has been paid to the former CEO during each of 1998 and
1999.
[4] License agreement:
Star entered into an agreement with Star Greetings, LLC, as the creator
of the StarGreetings concept ("Star Concept"), to license the exclusive
use of the Star Concept on the web sites of the Company and Star. The
agreement calls for a royalty of 2 1/2% of revenues derived from the Star
Concept, payable quarterly. Star Greetings, LLC is owned, in part, by the
Company's former CEO. No amounts were payable to StarGreetings, LLC under
the agreement for the year ended December 31, 1998 and for the nine
months ended September 30, 1999.
[5] StarGreetings agreements:
The Company has entered into several agreements with celebrities to
secure their services with Star. The agreements are substantially the
same and consist of three separate compensation components. The first
component is a participation fee (and any related expenses). The second
component is a commission payable to the celebrity and to a charity of
their choice upon the sale of each StarGreeting. The third component is
an option to purchase stock in the Company (see Note J[2]). As of
December 31, 1998, no such agreements had been entered into by the
Company. As of September 30, 1999, the Company has entered into ten such
agreements with terms ranging from one year to three years.
11
<PAGE>
[6] Consulting agreement:
The Company entered into a consulting agreement with one of its outside
directors. The agreement is in effect from September 15, 1998 through
December 31, 1999. Compensation under the agreement consists of options
to purchase 50,000 shares of the Company's common stock, of which 25,000
options were granted on September 15, 1998 and 25,000 options were
granted on January 20, 1999 when the consultant's time on behalf of the
Company exceeded 100 hours. For the period ended December 31, 1998, the
Company charged $23,089 of the value of the options granted ($102,250) to
expense. On April 1, 1999, the consulting agreement was terminated and
the remaining $79,161 value of the options granted was charged to expense
on March 31, 1999.
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 nine months ended
September 30, 1999, the Company charged $9,284 of the value of the
options granted ($334,208) to expense.
[7] Employment agreements:
The Company has entered into employment agreements with several of its
executives. The agreements expire from December 31, 1999 through March
30, 2002 and provide for annual salaries aggregating $1,295,000. In
addition, the executives were granted options (see Note H[1]) to purchase
an aggregate of 2,404,730 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 which call for severance
payments ranging up to one year's salary.
[8] Transaction agreement:
On January 8, 1999, the Company entered into a two-year agreement with a
service provider to process financial transactions in connection with its
websites. The agreement, as amended, calls for a one-time set-up fee of
$50,000, and a transaction fee of $0.90 per transaction with a minimum
monthly transaction fee of $5,000 for February 1999, $7,500 for March
1999 and $5,000 for April 1999 and thereafter.
[9] Advertising agreement:
On January 12, 1999, the Company entered into an advertising agreement
for the period June 1, 1999 through November 30, 1999, to solicit
advertising of its website on another
12
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website. The agreement, as amended, calls for the Company to pay setup
and related fees of $20,000 and a transaction fee of $80,000.
On September 27, 1999, the Company entered into two agreements with
America Online, Inc., a Shopping Channel Promotion Agreement and an
Advertising Purchase Agreement to provide promotions on the AOL website
totaling $1,356,594. The terms of the two agreements are ten months
commencing October 1, 1999.
[10] Website development agreement:
On August 5, 1999, the Company entered into a fixed fee agreement with
Rare Medium Inc. to develop a new website, including the development of a
new visual identity, additional functionality and a new technical
infrastructure to better support the scalability of the Company's
website. The fixed fee for the services provided is $465,000.
[11] 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 September 30, 1999 and is being amortized over the initial
term of the fulfillment agreement. For the nine months ended September
30, 1999, the Company amortized $379,262 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.
[12] Affiliate program agreement:
On August 11, 1999, the Company entered into an agreement with LinkShare
Corporation to provide services, using LinkShare's proprietary software,
to facilitate establishing links between the Company and affiliates and
tracking sales through those affiliates. The initial term of the
agreement is eighteen months. For the licensing of the LinkShare
software, the Company will pay a one-time license fee of $5,000 and 2.0%
- 2.5% of each sale completed through the Company's affiliate program.
[13] 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 nine months
ended September 30, 1999, the Company charged $218,250 of this fee and $0
in commission to expense.
13
<PAGE>
NOTE G - STOCKHOLDERS' EQUITY
[1] Series A preferred stock:
On June 30, 1998, the Company's Board of Directors designated 1,000,000
shares of the Company's authorized 10,000,000 shares of preferred stock
as Series A preferred stock. Such shares have a par value of $.001, an
original issue price per share of $1.00, bear no dividends, have a
liquidation preference senior to the Company's common stock and are
convertible, on a one to one basis, as adjusted, into shares of the
Company's common stock. As of December 31, 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.
[2] 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 if 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 Issues 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
EITP 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 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.
NOTE H - 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 for the nine months ended September 30:
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss ($321,793) ($3,484,496) ($418,646) ($5,769,843)
Preferred stock beneficial conversion feature $0 ($15,492,000) $0 ($15,492,000)
--- ------------ --- -------------
Net(loss) available to common shareholders ($321,793) ($18,976,496) ($418,646) ($21,261,843)
========== ============= ========== =============
Weighted Average Shares Outstanding:
Basic and diluted 11,005,691 11,005,691 10,364,733 11,005,691
========== ========== ========== ==========
Loss per share - basic and diluted: ($0.03) ($1.72) ($0.04) ($1.93)
======= ======= ======= =======
</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.
NOTE I - 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. 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.
14
<PAGE>
NOTE J - STOCK OPTION PLAN
On July 14, 1998, the Company adopted the 1998 Incentive and Nonqualified Stock
Option Plan (the "98 Plan") under which options to acquire 2,500,000 shares of
common stock may be granted to officers, directors, key employees and
consultants. The exercise price for incentive options cannot be less than the
fair market value of the stock on the grant date and the exercise price of
nonqualified options is fixed by the plan administrator. Options to purchase the
Company's common stock under the 98 Plan have been granted to employees,
directors and consultants of the Company at fair market value at the date of
grant. Generally, the options become exercisable over periods ranging from
immediately to 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
Incentive and Nonqualified Stock Option Plan to 4,000,000 shares.
A summary of the status of the Company's stock options outstanding as of
December 31, 1998 and September 30, 1999 and changes during the year ended
December 31, 1998 and the nine months ended September 30, 1999 are as follows:
[1] Employee and director stock options:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
December 31, 1998 September 30, 1999
- ------------------------------------------------------------------------------------------
Weighted Weighted
average average
exercise exercise
Shares price Shares price
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of period 0 $ 0 1,025,000 $2.17
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
Stock options:
- -----------------------------------------------------------------------------------------
Granted 1,025,000 $2.17 2,195,730 $3.48
- -----------------------------------------------------------------------------------------
Expired/Forfeited 0 $ 0 150,000 $2.67
- -----------------------------------------------------------------------------------------
Outstanding at end of period 1,025,000 $2.17 3,070,730 $3.08
- -----------------------------------------------------------------------------------------
Exercisable at end of period 450,000 $2.31 1,109,000 $3.00
- -----------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
The effect of applying Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" ("SFAS 123") on the year ended
December 31, 1998 and the nine months ended September 30, 1999 pro forma net
loss as stated below is not necessarily representative of the effects on
reported net loss for future years due to, among other things, the vesting
period of the stock options and the fair value of additional stock options in
future years. The weighted average fair value of the options granted during 1998
have been estimated at $1.69 per share on the date of grant using the
Black-Scholes option-pricing model with the following assumptions: no dividend
yield, volatility of 100%, a risk-free interest rate of 4.92% to 5.72%, and an
expected life of five years from date of vesting. The weighted average fair
value of the options granted during the nine months ended September 30, 1999
have been estimated at $2.98 per share on the date of grant using the
Black-Scholes option-pricing model with the following assumptions: no dividend
yield, volatility of 100%, a risk-free interest rate of 5.38% to 6.44%, and an
expected life of five years from date of vesting. Had compensation cost for the
Company's stock option plan been determined based upon the fair value at the
grant date for awards under the plan consistent with the methodology prescribed
under SFAS 123, the Company's net loss and net loss per share would have been as
follows:
- ------------------------------------------------------------------------------
December 31, 1998 September 30, 1999
- ------------------------------------------------------------------------------
Net loss - as reported $ (862,398) $(5,769,843)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- pro forma $(1,358,706) $(7,212,679)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Net loss per share - as reported $ (.08) $ (1.93)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- pro forma $ (.13) $ (2.06)
- ------------------------------------------------------------------------------
[2] StarGreetings stock options:
-------------------------------------------------------------------
September 30, 1999
-------------------------------------------------------------------
Weighted average
Shares exercise price
-------------------------------------------------------------------
Stock options:
-------------------------------------------------------------------
Granted 180,000 $1.81
-------------------------------------------------------------------
Exercised 0 $ 0
-------------------------------------------------------------------
-------------------------------------------------------------------
Outstanding at end of period 180,000 $1.81
-------------------------------------------------------------------
-------------------------------------------------------------------
Exercisable at end of period 180,000 $1.81
-------------------------------------------------------------------
16
<PAGE>
The weighted average fair value of the options granted during 1999 have been
estimated at $3.40 per share on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: no dividend yield,
volatility of 100%, a risk-free interest rate of 5.38% to 5.81%, and an expected
life of three years from date of vesting. The Company issued options to acquire
180,000 shares of common stock at exercise prices of $1.00 and $3.50 per share
in connection with StarGreetings agreements. The options were valued at
$612,440, in accordance with applying Statement of Financial Accounting
Standards No. 123 "Accounting for Stock-Based Compensation" and are amortized
over the life of the contract. For the period ended December 31, 1998 and the
nine months ended September 30, 1999, the Company charged $0 and $236,261 of the
value of the options granted to expense. On September 30,1999, the Company
modified its plans regarding the Star Concept and as a result, wrote-off the
unamortized balance of previously capitalized software costs in the amount of
$89,917 and unamortized balance of the value of the options granted in the
amount of $376,179.
17
<PAGE>
Safe Harbor Statement
Certain statements in this Form 10-QSB, including information set forth
under Item 2 "Plan of Operations" constitute or may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Act"). iParty Corp. (the "Company") desires to avail itself of
certain "safe harbor" provisions of the Act and is therefore including this
special note to enable the Company to do so. Forward-looking statements included
in this Form 10-QSB or hereafter included in other publicly available documents
filed with the Securities and Exchange Commission, reports to the Company's
stockholders and other publicly available statements issued or released by the
Company involve known and unknown risks, uncertainties, and other factors which
could cause the Company's actual results, performance (financial or operating)
or achievements to differ from the future results, performance (financial or
operating) achievements expressed or implied by such forward-looking statement.
Such factors include, but are not limited to: (i) the Company's insignificant
historical revenues; (ii) the Company's reliance of third-party suppliers; (iii)
the Company's ability to expand its website; (iv) the Company's ability to
manage growth; (v) the Company's ability to develop its brand; (vi) competition;
(vii) the Company's ability to adapt evolving technologies; and (viii)
governmental regulation of the Internet Such future results are based upon
management's best estimates based upon current conditions and the most recent
results of operations.
ITEM 2. PLAN OF OPERATION
General.
The Company is a development stage company that intends to become the
premier brand in the on-line party industry and the leading resource on the
Internet for consumers seeking party goods, party services, party planning
advice and information. The Company's web site, www.iparty.com (the "Site"), was
launched in February 1999. On October 12, 1999, the Company launch the new
iParty.com site, a premier 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 a
sophisticated, yet fun and easy-to-navigate online party resource. Offering
breakthrough convenience and an extensive assortment of merchandise, 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 for birthday bashes, at-home
Millennium celebrations, Super Bowl parties, Halloween festivals and more.
To date, the Company has only generated de minimus revenues and expects
to begin to generate revenues by the end of 1999. There can be no assurance that
the Company will ever generate substantial revenues. In August and September of
1999, the Company sold an aggregate of $22.9 million of convertible preferred
stock and redeemable common stock purchase warrants in private offerings. The
financings included the conversion of the Company's $2.0 million of outstanding
senior debt. Net proceeds to the Company from the financings was approximately
$21.3 million (including the conversion of the $2.0 million in debt and interest
thereon). The Company believes, based on currently proposed plans and
assumptions relating to its operations, that the net proceeds from the
financings and related accrued interest, together with anticipated
18
<PAGE>
revenues from operations, will be sufficient to fund the Company's operations
and working capital requirements for at least 12 months. In the event that the
Company's plans or assumptions change or prove inaccurate (due to unanticipated
expenses, increased competition, unfavorable economic conditions, or other
unforeseen circumstances) the Company could be required to seek additional
financing sooner than currently expected. There can be no assurance that such
additional funding will be available to the Company, or if available, that the
terms of such additional financing will be acceptable to the Company.
The Company expects its initial revenues to be derived from several
sources, but as with most e-commerce businesses, especially a development stage
company such as the Company, risks of operations are inherent and are largely
dependent on the economy and levels of consumer demand. The Company expects that
its initial revenues will be derived from retail sales to consumers of party
related goods. The Company anticipates that future revenues may be derived from
(i) commissions or royalties paid by strategic partners for orders received
through the Company; and (ii) advertising on the Site's pages, particularly the
content features such as the Party Planner and PartyTalk.
Net sales for the nine months ended September 30, 1999, include the
selling price of party goods sold by the Company, net of returns, as well as
outbound shipping and handling charges. Net sales for the nine months ended
September 30, 1999, were approximately $4,300.
Cost of products sold consists of the cost of merchandise sold to
customers and outbound shipping and handling costs. For the nine months ended
September 30, 1999, the cost of products sold was approximately $5,100.
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 customers.
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 September 30, 1999 and
is being amortized over the initial term of the fulfillment agreement. For the
nine months ended September 30, 1999, amortization of fulfillment partner
warrant expense was approximately $379,000 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 nine months ended September 30, 1999, were
approximately $878,000. The Company intends 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 nine months ended September 30, 1999,
were approximately $893,000. The Company believes that continued investment in
Product and technology development is critical to attaining its strategic
objectives. In addition to ongoing investments in its website and
infrastructure, the Company intends 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
nine months ended September 30, 1998 and 1999, were approximately $424,000 and
$1,529,000, respectively. Increases in G&A costs are largely
19
<PAGE>
attributable to increased payroll-related and infrastructure costs associated
with the Company's expansion efforts, legal and other professional fees, and
recruiting costs. The company expects G&A costs to continue to increase
commensurate with its expansion plans.
The Company incurred approximately $366,000 for the nine months ended
September 30, 1999, in losses resulting from abandonment of assets. This loss
was due to a write-off of website development costs incurred during 1998 and
1999. It was determined that the costs, which had been capitalized as property
and equipment, were abandoned when the Company selected new vendors for support
of its website, necessitating the creation of a new website and integration
components. During the nine months ended September 30, 1999, the Company
incurred approximately $695,000 in website development costs in efforts to
enhance the website. These costs have been capitalized in accordance with
generally accepted accounting principals.
The Company incurred approximately $761,000 for the nine months ended
September 30, 1999 in stock based compensation expenses. The stock based
compensation expenses resulted from stock options granted to consultants
($149,000) and stock options granted to celebrities who provided services to
StarGreetings ($612,000).
Interest income on cash and cash equivalents for the nine months ended
September 30, 1998 and 1999, was approximately $5,400 and $43,000, respectively.
The increase in income was due to higher balances resulting from the Company's
financing activities, principally the private placement of Series B and C
Preferred Stock completed in September 1999. Interest expense for the nine
months ended September 30, 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 in April 1999. In connection
with the private placement of Series B Preferred Stock, these Notes were
converted to equity.
The Company expects to hire between ten and fifteen additional
employees in the next six months as the needs of the Company may require to
sustain growth, and to remain competitive and creative.
The Site.
The Company is launching the Site in two stages, as follows:
First Stage. Currently, the Site contains the PartyMarket and PartyTalk
areas. In this first stage, the Company offers 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, a division of Taylor Corporation, is responsible for consumer
fulfillment and customer service.
Second Stage. By the end of the first quarter of 2000, the Company
expects to expand the PartyMarket offering to include cakes, gifts, flowers,
food and beverages. During the second quarter of 2000, the Company expects to
continue to introduce additional features to the Site, such as the Party
Planner, the Party Resource, Gift Registry, Party Workbook, Party Web Page,
Photo Gallery, Birthday Club, interactive party planning tools and an Invitation
Channel.
20
<PAGE>
Acquisitions.
The Company operates in an un-branded business arena which has many small
players. As a result, the Company is considering consolidating the field through
acquisitions of other entities. Any determination to make an acquisition will be
based upon a variety of factors, including, without limitation, the purchase
price and other financial terms of the transaction, the business prospects, and
the extent to which any acquisition would enhance the Company's prospects. The
Company is not currently engaged in identifying any potential acquisition and
has no plans, agreement, understanding, or arrangement with respect to any
acquisition.
Year 2000 Compliance
Many currently installed computer systems and software products are
coded to accept or recognize only two digit entries in the date code field.
These systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and software used by many companies and governmental agencies may need
to be upgraded to comply with such Year 2000 requirements or risk system failure
or miscalculations causing disruptions of normal business activities.
State Of Readiness
The Company has made an assessment of the Year 2000 readiness of its
operating, financial and administrative systems, including the hardware and
software that support its systems. The Company's assessment plan consisted of:
o quality assurance testing of its internally developed proprietary
software;
o contacting third-party vendors and licensors of material hardware,
software and services that are both directly and indirectly related to
the delivery of the Company's services to its users;
o contacting vendors of third-party systems;
o assessing repair or replacement requirements;
o implementing repair or replacement;
o implementation of the plan; and
o creating of contingency plans in the event of Year 2000 failures.
The Company performed a Year 2000 simulation on its systems during the
third quarter of 1999 to test system readiness. All of the Company's systems
were designed subsequent to January 1, 1999, well after the year 2000
21
<PAGE>
compliance problem was identified. Accordingly, all of the systems the Company
has developed use four digits to identify the year rather than two digits. Based
on the simulation, the Company believes that each of its material systems is
Year 2000 compliant. The Company will, if necessary, revise its internally
developed proprietary software as necessary to improve its Year 2000 compliance.
Many vendors of material hardware and software components of the Company's
systems have indicated that the products the Company's use are currently Year
2000 compliant. The Company has required vendors of its other material hardware
and software components to provide assurances of their Year 2000 compliance.
This process has been completed and the Company does not believe that its
systems will need to be revised or replaced.
Costs To Date
The Company has not incurred any material expenditures in connection
with identifying, evaluating or addressing Year 2000 compliance issues. Most of
its expenses have related to, and are expected to continue to relate to, the
operating costs associated with time spent by employees in the evaluation
process and Year 2000 compliance matters generally. At this time, the Company
does not possess the information necessary to estimate the potential costs of
revisions to its systems should such revisions be required or the replacement of
third-party software, hardware or services that are determined not to be Year
2000 compliant. Although the Company does not anticipate that such expenses will
be material, such expenses, if higher than anticipated, could have a material
adverse effect on the Company's business, results of operations and financial
condition.
PART II OTHER INFORMATION
Item 2. Changes in Securities
In August and September of 1999 the Company issued an aggregate of
approximately 522,475 Units (the "Units") 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 B Convertible Preferred Stock
and ten (10) Common Stock Purchase Warrants. Accordingly, the Company issued an
aggregate of approximately 1,044,950 shares of Series B Preferred Stock and
5,224,750 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 may be exercised
to purchase 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 outstanding Senior Notes of the Company.
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, additional, sales of Units were held on September 9, 1998 and
September 10, 1999.
22
<PAGE>
On September 10, 1999, the Company issued an aggregate of 100,000
shares of Series C Preferred Stock and 500,000 Common Stock Warrants to Boston
Millennia Partners, L.P., and an affiliated entity, both are "accredited
investors" (as such term is defined under Regulation D promulgated under the
Securities Act) for $2,000,000 in cash. Each share of Series C 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 Purchase Warrant may be
exercised to purchase one share of Common Stock at an exercise price of $2.00
per share. Commonwealth Associates, L.P. also 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.
The following is a summary of the terms of the Series B Preferred Stock
and Series C Preferred Stock:
Rank. The Series B Preferred Stock and the Series C Preferred Stock
rank junior to any classes of stock designated by the Company as "Senior
Securities;" prior to all of the Company's Common Stock and any class or series
of capital stock of the Company created thereafter not specifically ranking by
its terms senior to, or on parity with, the Series B Preferred Stock and Series
C Preferred, and on parity with each other and the Company's Series A Preferred
Stock, as to distribution of assets upon liquidation, dissolution or winding up
of the Company, whether voluntary or involuntary.
Dividends. Neither the Series B Preferred Stock nor the Series C
Preferred Stock bear a 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 and 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 (i) $20.00 by (ii) the
conversion price in effect at the time of the conversion (the "Conversion
Price"). 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 or
Series C Preferred Stock (the "Conversion Rate"). In addition, the Series B
Preferred Stock and Series C Preferred Stock will automatically convert into
Common Stock, at the Conversion Rate then in effect, in the event that the
Company consummates a public offering of its Common Stock resulting in gross
proceeds to the Company 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 the Company's Stock Option Plan, and the conversion of the
Series A Preferred Stock), if the Company issues Common Stock at a price less
than the Conversion Price then in effect or the then current market price of the
Common Stock, then the 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
Conversion Rate is to be proportionately reduced,
23
<PAGE>
or if the number of outstanding shares of Common Stock is decreased by a
combination or reclassification of shares, or other similar event, the
Conversion Rate is to be proportionately increased. In addition, if, prior to
the conversion of all the Series B Preferred Stock or Series C Preferred Stock,
as applicable, there is any merger, consolidation, exchange of shares,
recapitalization, reorganization or other similar event, as a result of which
shares of Common Stock of the Company are to be changed into the same or a
different number of shares of the same or another class or classes of stock or
securities of the Company or another entity, that the holders of then
outstanding shares of Series B Preferred Stock or Series C Preferred Stock, as
applicable, would have the right to receive upon conversion of Series B
Preferred Stock or Series C Preferred Stock, as applicable, upon the basis and
upon the terms and conditions specified in their respective Certificates 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 or Series C Preferred Stock, as applicable, been converted immediately
prior to such transaction.
Voting Rights. The Series B Preferred Stock and Series C Preferred
Stock will vote together as a single class with the Holders of Common Stock,
with each share of Series B Preferred Stock and 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).
Consent of 50% of the shares of Series B Preferred Stock then
outstanding is required before the Company can take certain actions which
adversely affect the rights preferences or privileges of the Series B Preferred
Stock. Consent of 50% of the shares of Series C Preferred Stock then outstanding
is required before the Company can take certain actions which adversely affect
the rights, preferences or privileges of the Series C Preferred Stock.
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, shall have the right to elect one director of the Company.
Item 5. Other Information
On October 11, 1999, the Company's Board of Directors elected Stuart
Moldaw to the Board. Mr. Moldaw is an entrepreneur and operating manager with
over 50 years of experience in the specialty retailing industry. He has founded
and operated such stores as Pic-a-Dilly, Athletic Shoe Factory, Ross Department
Stores and Gymboree Corporation, where he is currently the Chairman of the
Board. He co-founded and currently serves as a special venture partner of U.S.
Venture Partners, one of the premier venture capital firms in the country. Mr.
Moldaw also serves as a director and Chairman Emeritus of Ross Stores, Inc. an
off-price retailer of apparel and home accessories.
Effective as of November 15, 1999, Ms. Maureen Broughton Murrah
("former President") has resigned as President and as a Director of the Company.
Sal Perisano, the Company's CEO, will assume the responsibilities of the former
President. The Company intends to hire a senior level operations executive to
assume the operational responsibilities previously performed by the former
President. The Company also intends to elect another member to its Board of
Directors to replace the former President.
24
<PAGE>
Item 6. Exhibits.
<TABLE>
<S> <C>
Exhibit 4.1 Certificate of Designation of Series B Convertible Preferred Stock**
Exhibit 4.2 Certificate of Designation of Series C Convertible Preferred Stock **
Exhibit 27.1 Financial Data Schedule
</TABLE>
** Incorporated by reference from Amendment No. 2 the to the Company's
Registration Statement on Form 10-SB as filed with the U.S. Securities and
Exchange Commission on October 19, 1999.
25
<PAGE>
SIGNATURES
In accordance with requirements of the Securities Exchange Act, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
iPARTY CORP.
Dated: April 7, 2000 By: /s/ Sal Perisano
---------------------------------
Sal Perisano
Chief Executive Officer
April 7, 2000 By: /s/ Patrick Farrell
---------------------------------
Patrick Farrell
Chief Financial Officer
26
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains financial information extracted from the Balance Sheet,
Statement of Operations, Statement of Cash Flows and notes thereto incorporated
in Part 1 of the 10-QSB and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 SEP-30-1999
<EXCHANGE-RATE> 1.000 1.000
<CASH> 346,751 18,856,768
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 491,049 19,128,811
<PP&E> 341,441 842,109
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 842,160 24,926,728
<CURRENT-LIABILITIES> 547,508 1,098,166
<BONDS> 0 0
0 0
0 2,145
<COMMON> 11,006 11,006
<OTHER-SE> 283,646 23,815,411
<TOTAL-LIABILITY-AND-EQUITY> 842,160 24,926,728
<SALES> 0 4,257
<TOTAL-REVENUES> 0 4,257
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 843,087 4,812,336
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 401 961,764
<INCOME-PRETAX> (862,398) (5,769,843)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (862,398) (5,769,843)
<EPS-BASIC> (.08) (1.93)
<EPS-DILUTED> (.08) (1.93)
</TABLE>
