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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-25507
IPARTY CORP.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
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DELAWARE 13-4012236
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
130 WEST 30TH STREET, 10TH FL., 10001
NEW YORK, NEW YORK (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(212) 609-4300
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT:
COMMON STOCK, $.001 PAR VALUE AMERICAN STOCK EXCHANGE
(TITLE OF EACH CLASS) (NAME OF EACH EXCHANGE ON WHICH REGISTERED)
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT: NONE
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 /_/
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB. / /
The Issuer's revenues for its most recent fiscal year ended December 31,
1999 were $138,545.
On March 28, 2000, the aggregate market value of the voting stock of the
Registrant (consisting of common stock, $.001 par value (the "Common Stock"))
held by non-affiliates of the Registrant was approximately $11,205,947 based on
the closing price for such Common Stock on said date as reported by the American
Stock Exchange.
On March 29, 2000, there were 11,005,421 shares of Common Stock, $.001 par
value, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
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PART I
ITEM 1. BUSINESS
Our History
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.
Our executive offices are located at 130 West 30th Street, 10th floor, New
York, New York 10001. Our phone number is (212) 609-4300. Our Web site is
located at http://www.iparty.com. The information on our web site is not a part
of this Report.
Our Business
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 web site was initially
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 marketer's 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
maybe 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 Design and Content of Our Web Site
The initial design, construction, operation and maintenance of our web
site, which was initially 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 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.
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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.
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.
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
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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.
Competition
We are aware of a few direct competitors to our PartyMarket concept,
including Celebrate Express.com, Great Entertaining.com, and ShindigZ.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.
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.
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.
ITEM 2. PROPERTIES
We lease office space at 41 East 11th Street, 11th Floor, New York, New
York 10003 from TechSpace LLC. The total monthly rent is $12,500 with an
additional monthly variable service fee of an average of $3,500 depending on
office equipment usage. This lease was terminated on March 31, 2000.
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. 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.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
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PART II
ITEM 5. MARKET FOR AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Principal Market
The American Stock Exchange is the principal market for our Common Stock,
where our shares are traded under the symbol "IPT."
Market Information
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 years ended
December 31, 1998 and December 31, 1999. Our Common Stock began trading on the
American Stock Exchange under the name iParty Corp., symbol "IPT" on January 3,
2000. Our Common Stock was quoted OTC Electronic Bulletin Board under the name
iParty Corp., symbol "IPTY" commencing 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". The quotations
represent inter-dealer prices without retail markup, mark down or commission and
may not necessarily represent actual transactions.
PERIOD HIGH LOW
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Fourth Quarter--1999.......................................... $2.81 $2.19
Third Quarter--1999........................................... 3.93 2.62
Second Quarter--1999.......................................... 5.00 2.44
First Quarter--1999........................................... 6.68 3.12
Fourth Quarter--1998.......................................... 3.37 1.06
Third Quarter--1998........................................... 3.37 0.05
Second Quarter--1998.......................................... 0.06 0.03
First Quarter--1998........................................... 0.06 0.01
Dividends
We have never paid a cash dividend on our shares of Common Stock and we
have no present expectation of doing so in the foreseeable future.
Approximated Number of Equity Security Holders
The approximate number of record holders of our Common Stock as of
March 28, 2000 was 85. Such number of record owners was determined from our
shareholder records, and does not include beneficial owners of our Common Stock
whose shares are held in the names of various security holders, dealers and
clearing agencies. We believe that the number of beneficial owners of our Common
Stock held by others as or in nominee names exceeds 500 in number.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
Certain statements in this Form 10-KSB, including information set forth
under Item 6 "Plan of Operations" constitute "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995 (the "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. We desire to
avail ourselves of certain "safe harbor" provisions of the Act and are therefore
including this special note to enable us to do so. Forward-looking statements
included in this Form 10-KSB or hereafter included in other publicly available
documents filed with the Securities and Exchange Commission, reports to our
stockholders and other publicly available statements issued or released by us
involve known and unknown risks, uncertainties, and other factors which could
cause our 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 statements. Such
future results are based upon our best estimates based upon current conditions
and the most recent results of operations. Various risks, uncertainties and
contingencies could cause our actual results, performance or achievements to
differ materially
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from those expressed in, or implied by, these statements, including, but not
limited to, the following: the success or failure of our efforts to implement
our business strategy; our inability to obtain additional financing if required;
third-party suppliers failure to fulfil their obligations to us; intense
competition; the failure of our systems or those of our third-party suppliers;
and government regulation of the Internet.
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 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 for birthday bashes, Super Bowl parties,
Halloween festivals and more.
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
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
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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 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.
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 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 was
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 and
PartyTalk areas. In this first stage, we offer party related products,
costumes, music and editorial content. On-site shopping is currently
limited
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to party goods, favors, gift wrap, cards and invitations. During this stage
an outside vendor, Taymark, is responsible for consumer fulfillment and
customer service.
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 Workbook, Party Web
Page, Photo Gallery, Birthday Club, interactive party planning tools and an
Invitation Channel.
Acquisitions
We operate in an un-branded business arena that has many small players. As
a result, we are 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 our prospects. We are not currently engaged
in identifying any potential acquisition and have no plans, agreement,
understanding, or arrangement with respect to any acquisition.
Effects of Inflation
We do not view the effects of inflation to have a material effect upon our
business.
Year 2000
We have not experienced any Year 2000 related problems. During the year
ended December 31, 1999, we expended no additional funds to ensure that our
computer systems would be Year 2000 compliant.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements attached hereto.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On December 31, 1999, we dismissed Richard A. Eisner & Company, LLP
("Richard Eisner") as our independent auditors. On January 5, 2000, we engaged
Arthur Andersen LLP ("Arthur Andersen") as our independent public accountants to
audit our financial statements for the fiscal year ending December 31, 1999. The
decision to dismiss Richard Eisner and to retain Arthur Andersen was recommended
by our audit committee and approved by our Board of Directors. The report of
Richard Eisner on our financial statements for the year ended December 31, 1998
did not contain an adverse opinion or a disclaimer of opinion, and was not
qualified or modified as to uncertainty, audit scope or accounting principles.
During that period, there were no (1) disagreements between Richard Eisner and
us on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements, if not resolved
to the satisfaction of Richard Eisner, would have caused it to make a reference
to the subject matter of the disagreement in connection with its reports on our
financial statements, or (2) "reportable events" within the meaning of Item
304(a)(1)(v) of Regulation S-K promulgated under the Securities Act of 1933, as
amended. On January 5, 2000, we engaged Arthur Andersen to serve as our
principal independent accounting firm to audit our financial statements for the
year ended December 31, 1999. Prior to the engagement of Arthur Andersen, we did
not consult with such firm on any accounting, auditing or financial reporting
issue.
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
The following table sets forth certain information regarding our executive
officers and directors:
NAME AGE POSITION
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Sal Perisano........... 49 Chief Executive Officer, Director
Patrick Farrell........ 32 Senior Vice President, Chief Financial 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 a 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 for 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.
Robert Jevon has been a Director of our company since February 2000.
Mr. Jevon is a Partner of Boston Millenia Partners, a venture capital firm and
has held such position since February 2000, and 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 telecommunication 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.
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 of Wit Capital Corp., an
on-line broker-dealer, since April 1998. From 1993 until 1997,
8
<PAGE>
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, 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., AMFMi Corp., G.H. Mumm/Perrier Jouet &
Cie., International Home Foods, Inc., RCN Corporation, 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.
CERTAIN REPORTS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
No person who, during the fiscal year ended December 31, 1999, was a
Director, Officer or beneficial owner of more than ten percent of our Common
Stock (which is the only class of our securities registered under Section 12 of
the Securities Exchange Act of 1934 (the "Act") (a "Reporting Person"), failed
to file on a timely basis, reports required by Section 16 of the Act during the
most recent fiscal year, except that, in connection with our becoming subject to
the provisions of the Act, Messrs. Farrell, Khan, Lessin and Perisano were late
in filing a Form 3, and Messrs. Lessin and Perisano were late in filing a Form
4. The foregoing is based solely upon our a review of Forms 3 and 4 during the
most recent fiscal year as furnished to us under Rule 16a-3(d) under the Act,
and Forms 5 and amendments thereto furnished to us with respect to our most
recent fiscal year.
9
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY EXECUTIVE OFFICER COMPENSATION TABLE
The following table summarizes the aggregate cash compensation paid during
1999, 1998 and 1997 (see footnotes below) to our Chief Executive Officer and
other executive officers that received compensation during 1999 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>
SECURITIES UNDER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS/SAR'S
- ----------------------------------------------------- ---- -------- ----- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Sal Perisano, Chief Executive Officer(1)............. 1999 $111,442 -- -- 797,230
1998 -- -- -- 50,000
1997 -- -- -- --
--
Byron Hero, Former Chief Executive
Officer(2)......................................... 1999 $ 72,917 -- $145,836 --
1998 $104,166 -- -- -- 300,000
1997 -- -- --
Maureen Broughton Murrah,
Former President(3)................................ 1999 $154,919 -- $ 5,000 --
1998 $ 69,327 -- -- 300,000
1997 -- -- -- --
</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 other annual
compensation.
(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.
<TABLE>
<CAPTION>
OPTION GRANTED IN LAST
FISCAL YEAR
---------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION
NAME AND PRINCIPAL POSITION GRANTED FISCAL YEAR PRICE DATE
- ---------------------------------------------------------------- ---------- ------------- -------- ----------
<S> <C> <C> <C> <C>
Sal Perisano, Chief Executive Officer
and Director.................................................. 25,000 35.7% $ 5.38 1/19/09
337,500 $ 3.75 3/30/09
434,730 $ 2.00 8/26/09
Patrick Farrell, Senior Vice President
and Chief Financial Officer................................... 115,000 8.5% $ 3.63 4/5/09
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 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.
10
<PAGE>
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.
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
terminates 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 and devote substantially his full working time and attention to
our business provided that he may continue 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 purchase 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 will vest 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 purchase 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, 2002 and 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 will vest 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 which expires 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 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.
11
<PAGE>
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.
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 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 to us 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
12
<PAGE>
applicable statute, rule or regulation. In addition, our plan may be terminated
by the Board of Directors as it 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.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 29, 2000, certain information
with respect to the beneficial ownership of each class of our equity securities
by each director, beneficial owners of 5% or more of our common stock, the named
executive officers and all of our directors and executive officers as a group.
<TABLE>
<CAPTION>
NUMBER OF COMMON
SHARES BENEFICIALLY
NAME OF BENEFICIAL OWNER(1) OWNED(2) PERCENT OF CLASS
- ------------------------------------------------------------------ --------------------- ----------------
<S> <C> <C>
Sal Perisano...................................................... 206,250(3) 1.84%
Patrick Farrell................................................... 115,000(4) 1.03%
Robert H. Lessin ................................................. 7,348,268(5)(7) 59.48%
c/o WIT Capital
826 Broadway, 6th Floor
New York, NY 10003
James McCann ..................................................... 699,600(6) 6.36%
1-800 Flowers
1000 Stewart Avenue
Westbury, NY 11590r
iParty LLC ....................................................... 6,000,000(7) 54.52%
c/o Robert H. Lessin
826 Broadway, 6th Floor
New York, NY 10003
Ajmal Khan ....................................................... 565,000(8) 4.89%
The Verus Group
1177 West Hastings Street
Vancouver, British Columbia
Canada V6E 2K3
Stuart G. Moldaw ................................................. 125,000(9) 1.12%
700 Airport Boulevard
Burlingame, California 94010
New York, NY 10003
Byron Hero ....................................................... 750,000(10) 6.72%
420 East 54th Street
New York, NY 10022
Roccia Partners, L.P. ............................................ 1,796,000(11) 14.03%
826 Broadway
New York, NY 10003
Robert Jevon ..................................................... 1,000,000(12) 8.33%
Boston Millennia Partners, LP
30 Rowes Wharf
Suite 330
Boston, MA 02110
Hampton Associates Limited ....................................... 703,362(13) 6.01%
1702 Dina House
Ruttonjee Centre
11 Duddell Street
Central Hong Kong
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF COMMON
SHARES BENEFICIALLY
NAME OF BENEFICIAL OWNER(1) OWNED(2) PERCENT OF CLASS
- ------------------------------------------------------------------ --------------- ------
<S> <C> <C>
Michael Levitt ................................................... 2,500,000(14) 18.1%
Hicks Muse, Tate & Furst Incorporated
1325 Avenue of Americas
New York, NY 10019
All Officers and Directors as a Group (7 persons)................. 11,859,518 70.42%
</TABLE>
- ------------------
(1) Unless otherwise indicated, all addresses are c/o iParty Corp., 130 W. 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 and is based on 11,005,421 shares outstanding as of March 28,
2000.
(3) Includes 206,250 shares that may be acquired upon the exercise of presently
exercisable options issued pursuant to our stock option plan. 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, and (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.
(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.
(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 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 500,000 shares that may be
acquired by the exercise of presently exercisable options issued under our
stock option plan.
(11) Includes 1,796,000 shares of common stock which may be acquired upon the
conversion of 179,000 shares of presently convertible Series B convertible
preferred stock.
(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 owned by two entities affiliated with Boston Millennia
Partners, LP. Mr. Jevon disclaims beneficial ownership of such shares
except to the extent of his ownership interest in the entities which own
such shares.
(Footnotes continued on next page)
14
<PAGE>
(Footnotes continued from previous page)
(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 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 owned by an entity affiliated with Hicks Muse, Tate & Furst
Incorporated. Mr. Levitt disclaims beneficial ownership of such shares
except to the extent of his ownership interest in the entity which own such
shares.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information concerning the employment agreements and consulting
agreements between us and certain of our officers and directors see Item 10
"Executive Compensation". Mr. Perisano, and Ms. Dionne are husband and wife.
Star Greetings, Inc. our wholly-owned subsidiary, licenses the
StarGreetings concept 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.
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 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 (the "Funding Agreement"). Pursuant to the terms of the Funding
Agreement each of Mr. Kahn (or his designees) and Mr. Lessin advanced certain
funds to us. 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 ($1,125,000 by
Mr. Lessin and $875,000 by Hampton Associates Limited. Mr. Khan's designee under
the Funding Agreement) and warrants to purchase 528,210 shares of Common Stock
were issued at a weighted-average exercise price of $3.79. In connection with
our private placement of Series B Convertible Preferred Stock and Common Stock
purchase warrants, the $2,000,000 principal amount of the Notes and an aggregate
of $55,850 of interest were converted into the Units offered in the private
placement at the offering price. In addition, Mr. Lessin purchased $841,000 of
Units at the offering price.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(A) 1. Financial Statements
See Index to Financial Statements Attached hereto.
2. Exhibits:
Incorporated by reference to the Exhibit Index at the end of this
Report.
(B) Reports on Form 8-K
During the last quarter of the period covered by this Report, we did not
file any reports on Form 8-K. On January 18, 2000 we filed a report on Form 8-K
with respect to a change in our independent auditors.
15
<PAGE>
SIGNATURES
IN ACCORDANCE WITH SECTION 13 OR 15(D) OF THE EXCHANGE ACT, THE REGISTRANT
CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED.
iPARTY CORP.
By: /s/ SAL PERISANO
----------------------------------
Sal Perisano
Chief Executive Officer and
Principal Executive Officer
Dated: April 7, 2000
IN ACCORDANCE WITH THE EXCHANGE ACT, THIS REPORT HAS BEEN SIGNED BELOW BY
THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON
THE DATES INDICATED.
SIGNATURE TITLE DATE
- ------------------------- ----------------------------------- -------------
/s/ SAL PERISANO Chief Executive Officer, Principal April 7, 2000
- ------------------------- Executive Officer and Director
Sal Perisano
/s/ ROBERT JEVON Director April 7, 2000
- -------------------------
Robert Jevon
/s/ AJMAL KHAN Director April 7, 2000
- -------------------------
Ajmal Khan
/s/ ROBERT LESSIN Director April 7, 2000
- -------------------------
Robert Lessin
/s/ MICHAEL LEVITT Director April 7, 2000
- -------------------------
Michael Levitt
/s/ STUART G. MOLDAW Director April 7, 2000
- -------------------------
Stuart G. Moldaw
/s/ PATRICK FARRELL Chief Financial Officer and April 7, 2000
- ------------------------- Principal Financial Officer
Patrick Farrell
16
<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.**
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)
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.(2)
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)
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)
27.1 -- Financial Data Schedule.**
</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.
** Filed herewith.
17
<PAGE>
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS--1999............................................................. F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS--1998............................................................. F-3
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet--December 31, 1999............................................................ F-4
Consolidated Statements of Operations--Years ended December 31, 1999 and 1998............................ F-5
Consolidated Statements of Stockholders' Equity--Years ended December 31, 1999 and 1998.................. F-6
Consolidated Statements of Cash Flows--Years ended December 31, 1999 and 1998............................ F-7
Notes to Consolidated Financial Statements............................................................... F-8
</TABLE>
F-1
<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
February 24, 2000
F-2
<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
February 26, 1999
F-3
<PAGE>
IPARTY CORP.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1999
------------
<S> <C>
ASSETS
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-4
<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-5
<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-6
<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-7
<PAGE>
IPARTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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
F-8
<PAGE>
IPARTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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 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.
F-9
<PAGE>
IPARTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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.
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.
F-10
<PAGE>
IPARTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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") 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 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.
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.
F-11
<PAGE>
IPARTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
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.
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.
F-12
<PAGE>
IPARTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
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 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
F-13
<PAGE>
IPARTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. STOCKHOLDERS' EQUITY--(CONTINUED)
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 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
F-14
<PAGE>
IPARTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. STOCKHOLDERS' EQUITY--(CONTINUED)
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 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:
1998 1999
----------- ------------
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)
=========== ============
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.
F-15
<PAGE>
IPARTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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. 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.
F-16
<PAGE>
IPARTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. STOCK OPTION PLAN--(CONTINUED)
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:
1998 1999
------------------- -------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
--------- -------- --------- --------
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/Forfeited................... 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
========= ====== ========= ======
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:
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.
F-17
<PAGE>
IPARTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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:
YEAR ENDING PROPERTY OFFICE
DECEMBER 31, LEASE EQUIPMENT TOTAL
- ------------------------------ ---------- ---------- ----------
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
========== ========== ==========
F-18
<PAGE>
CERTIFICATE OF THE DESIGNATIONS, POWERS,
PREFERENCES AND RIGHTS
OF THE
SERIES D CONVERTIBLE PREFERRED STOCK
(par value $.001 per share)
of
iPARTY CORP.
a Delaware Corporation
------------------
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
------------------
The undersigned DOES HEREBY CERTIFY that the following resolution was
duly adopted by the Board of Directors (the "Board of Directors") of iParty
Corp., a Delaware corporation (the "Corporation"), at a meeting held on December
19, 1999:
RESOLVED, that one series of the class of authorized preferred stock,
$.001 par value, of the Corporation is hereby created and that the designations,
powers, preferences and relative, participating, optional or other special
rights of the shares of such series, and qualifications, limitations or
restrictions thereof, are hereby fixed as follows (this instrument hereinafter
referred to as the "Designation"):
1. Number of Shares and Designations. 250,000 shares of the
preferred stock, $.001 par value, of the Corporation are hereby constituted as a
series of preferred stock of the Corporation designated as Series D Convertible
Preferred Stock (the "Series D Preferred Stock").
2. Dividend Provisions. Subject to the rights of any other
series of Preferred Stock that may from time to time come into existence, the
holders of shares of Series D Preferred Stock shall be entitled to receive
dividends, out of any assets legally available therefor, ratably with any
declaration or payment of any dividend with holders of the Common Stock or other
junior securities of this Corporation, when, as and if declared by the Board of
Directors, based on the number of shares of Common Stock into which each share
of Series D Preferred Stock is then convertible.
3. Rank. The Series D Preferred Stock shall rank: (i) junior to
any other class or series of capital stock of the Corporation hereafter created
specifically ranking by its terms senior to the Series D Preferred Stock (the
"Senior Securities"); (ii) prior to all of the Corporation's common stock, $.001
par value per share (the "Common Stock"); (iii) prior to any class or series of
capital stock of the corporation hereafter created not specifically ranking by
its terms senior to or on parity with the Series D Preferred Stock
(collectively, with the Common Stock, "Junior Securities"); and (iv) on parity
with the Series A Preferred Stock of the Corporation, the Series B Preferred
Stock of the Corporation, the Series C Convertible Preferred Stock of the
Corporation, and any class or series of capital stock of the Corporation
hereafter created specifically ranking by its terms on parity with the Series D
Preferred Stock (the "Parity Securities"), in each case as to the distribution
of assets upon liquidation, dissolution or winding up of the Corporation.
<PAGE>
4. Liquidation Preference.
(a) Upon any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary ("Liquidation"), the
holders of record of the shares of the Series D Preferred Stock shall
be entitled to receive, immediately after any distributions to Senior
Securities required by the Corporation's Certificate of Incorporation
and any certificate(s) of designation, powers, preferences and rights,
and before and in preference to any distribution or payment of assets
of the Corporation or the proceeds thereof may be made or set apart for
the holders of Junior Securities, an amount in cash equal to $20.00 per
share (subject to adjustment in the event of stock splits, combinations
or similar events). If, upon such Liquidation, the assets of the
Corporation available for distribution to the holders of Series D
Preferred Stock and any Parity Securities shall be insufficient to
permit payment in full to the holders of the Series D Preferred Stock
and Parity Securities, then the entire assets and funds of the
Corporation legally available for distribution to such holders and the
holders of the Parity Securities then outstanding shall be distributed
ratably among the holders of the Series D Preferred Stock and Parity
Securities based upon the proportion the total amount distributable on
each share upon liquidation bears to the aggregate amount available for
distribution on all shares of the Series D Preferred Stock and of such
Parity Securities, if any.
(b) Upon the completion of the distributions required by
subparagraph (a) of this Paragraph 4, if assets remain in the
Corporation, they shall be distributed to holders of Junior Securities
in accordance with the Corporation's Certificate of Incorporation and
any certificate(s) of designation, powers, preferences and rights.
(c) For purposes of this Paragraph 4, a merger or
consolidation or a sale of all or substantially all of the assets of
the Corporation shall be considered a Liquidation except in the event
that in such a transaction, the holders of the Series D Preferred Stock
receive securities of the surviving corporation having substantially
similar rights as the Series D Preferred Stock. Notwithstanding
Paragraph 7 hereof, such provision may be waived in writing by a
majority of the holders of the then outstanding Series D Preferred
Stock.
5. Redemption. The Series D Preferred Stock is not redeemable.
6. Conversion. The holders of the Series D Preferred Stock
shall have conversion rights as follows (the "Conversion Rights"):
(a) Voluntary Conversion. Each share of Series D Preferred
Stock shall be convertible, at the option of the holder thereof, at any time
after issuance at the office of the Corporation or any transfer agent for such
stock, or if there is none, then at the office of the transfer agent for the
Common Stock, or if there is no such transfer agent, at the principal executive
office of the Corporation, into that number of fully paid and non-assessable
shares of Common Stock of the Corporation equal to $20.00 divided by the
conversion price in effect at the time of conversion (the "Conversion Price"),
determined as hereinafter provided. The Conversion Price shall initially be
$2.00, but shall be subject to adjustment as set forth in Paragraph 6(d). The
number of shares of Common Stock into which each share of Series D Preferred
Stock is convertible is hereinafter collectively referred to as the "Conversion
Rate." For purposes of this Paragraph 6(a), such conversion shall be deemed to
have been made immediately prior to the close of business on the date of such
surrender of the shares of Series D Preferred Stock to be converted, and the
person or persons
2
<PAGE>
entitled to receive the shares of Common Stock issuable upon such conversion
shall be treated for all purposes as the record holder or holders of such shares
of Common Stock as of such date.
(b) Automatic Conversion. In the event the Corporation
completes a public offering of its Common Stock resulting in gross proceeds to
the Corporation of not less than $10,000,000, each share of Series D Preferred
Stock then outstanding shall, by virtue of such conditions and without any
action on the part of the holder thereof, be deemed automatically converted into
that number of shares of Common Stock into which the Series D Preferred Stock
would then be converted at the then effective Conversion Rate.
(c) Mechanics of Conversion. Before any holder of Series D
Preferred Stock shall be entitled to convert the same into shares of Common
Stock, such holder shall surrender the certificate or certificates therefor,
duly endorsed, at the office of the Corporation or of any transfer agent for the
Series D Preferred Stock, and shall give written notice to the Corporation at
its principal corporate office, of the election to convert the same and shall
state therein the name or names in which the certificate or certificates for
shares of Common Stock are to be issued. The Corporation shall, as soon as
practicable thereafter, issue and deliver to such holder of Series D Preferred
Stock, or to the nominee or nominees of such holder, a certificate or
certificates for the number of shares of Common Stock to which such holder shall
be entitled as aforesaid. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of such surrender of the
shares of Series D Preferred Stock to be converted, and the person or persons
entitled to receive the shares of Common Stock issuable upon such conversion
shall be treated for all purposes as the record holder or holders of such shares
of Common Stock as of such date.
(d) Conversion Price Adjustments. The Conversion Price of
the Series D Preferred Stock shall be subject to adjustment from time to time as
set forth below.
(i) In case the Corporation shall, prior to the
conversion of all the Series D Preferred Stock, (a) issue Common Stock
as a dividend or distribution on all shares of Common Stock of the
Corporation, (b) split or otherwise subdivide its outstanding Common
Stock, (c) combine the outstanding Common Stock into a smaller number
of shares, or (d) issue by reclassification of its Common Stock (except
in the case of a merger, consolidation or sale of all or substantially
all of the assets of the Corporation as set forth in subparagraph
6(d)(iii) below) any shares of the capital stock of the Corporation,
the Conversion Price in effect on the record date for any stock
dividend or the effective date of any such other event shall be
decreased (or increased in the case of a reverse stock split) so that
the holder of each share of the Series D Preferred Stock shall
thereafter be entitled to receive, upon the conversion of such share,
the number of shares of Common Stock or other capital stock which it
would own or be entitled to receive immediately after the happening of
any of the events mentioned above had such share of the Series D
Preferred Stock been converted immediately prior to the close of
business on such record date or effective date. The adjustments herein
provided shall become effective immediately following the record date
for any such stock dividend or the effective date of any such other
events. There shall be no reduction in the Conversion Price in the
event that the Corporation pays a cash dividend.
(ii) A. In case the Corporation shall issue shares of Common
Stock or any securities convertible into or exchangeable for Common
Stock, other than "Excluded Securities" (as defined below), for a
consideration per share (the "Offering Price") less than the Conversion
Price, the Conversion Price shall be adjusted immediately thereafter so
that it shall equal the price
3
<PAGE>
determined by multiplying the Conversion Price in effect immediately
prior to the date of issuance by a fraction, the numerator of which
shall be the number of shares of Common Stock outstanding immediately
prior to the issuance of such additional shares plus the number of
shares of Common Stock which the aggregate consideration received for
the issuance of such additional shares would purchase at the Conversion
Price in effect immediately prior to the date of such issuance, and the
denominator of which shall be the number of shares of Common Stock
outstanding immediately after the issuance of such additional shares.
Such adjustment shall be made successively whenever such an issuance is
made. The provisions of this subparagraph 6(d)(ii)(A) shall not apply
retroactively to any Series D Preferred Stock which has been converted
prior to the date of the adjustment.
B. Except as otherwise provided in subparagraph
6(d)(iii) below, in no event shall the Conversion Price be increased
above the initial Conversion Price, as otherwise adjusted pursuant to
this Section 6.
C. Upon each adjustment of the Conversion Price
pursuant to this subparagraph 6(d)(i) the total number of shares of
Common Stock purchasable upon the conversion of each share of Series D
Preferred Stock shall be such number of shares (calculated to the
nearest whole share and pursuant to the terms of subparagraph 6(G)(i);
provided, however, that in no event shall the Conversion Price increase
as a result of such rounding calculation) purchasable at the Conversion
Price in effect immediately prior to such adjustment multiplied by a
fraction, the numerator of which shall be the Conversion Price in
effect immediately prior to such adjustment and the denominator of
which shall be the Conversion Price in effect immediately after such
adjustment.
D. No adjustment in the Conversion Price or the
number of shares of Common Stock into which a share of Series D
Preferred Stock may be converted shall be required unless such
adjustment (plus any adjustments not previously made by reason of this
subparagraph (D) would require an increase or decrease of at least 0.5%
in the number of shares of Common Stock into which each share of the
Series D Preferred Stock is then convertible, provided, however, that
any adjustments which are not required to be made by reason of this
subparagraph (D) shall be carried forward and taken into account in any
subsequent adjustment. All calculations and adjustments shall be made
to the nearest cent or to the nearest whole share, as the case may be.
E. After each adjustment of the Conversion Price the
Corporation shall promptly prepare a certificate signed by its Chief
Executive Officer or Chief Financial Officer and a Secretary or
Assistant Secretary setting forth the Conversion Price, as so adjusted;
the number of shares of Common Stock into which the Series D Preferred
Stock may be converted, and a statement of the facts upon which such
adjustment is based, and such certificate shall forthwith be filed with
the transfer agent, if any, for the Series D Preferred Stock, and the
Corporation shall cause such a copy of statement to be sent by ordinary
first class mail to each holder of Series D Preferred Stock.
F. In the case of the issuance of Common Stock for
cash, the consideration shall be deemed to be the amount of cash paid
therefor before deducting any reasonable discounts, commissions or
other expenses allowed, paid or incurred by this Corporation for any
underwriting or otherwise in connection with the issuance and sale
thereof.
4
<PAGE>
G. In the case of the issuance of the Common Stock
for a consideration in whole or in part other than cash, the
consideration other than cash shall be deemed to be the fair value
thereof as determined in good faith by the Board of Directors.
H. In the case of the issuance after the initial
issuance date of the Series D Preferred Stock of options to purchase or
rights to subscribe for Common Stock, securities by their terms
convertible into or exchangeable for Common Stock or options to
purchase or rights to subscribe for such convertible or exchangeable
securities, the following provisions shall apply for all purposes of
this subparagraph 6(d)(i) and subparagraph 6(d)(ii):
(1) The aggregate maximum number of shares
of Common Stock deliverable upon exercise (assuming the
satisfaction of any conditions to exercisability, including
without limitation, the passage of time, but without taking
into account potential antidilution adjustments) of such
options to purchase or rights to subscribe for Common Stock
shall be deemed to have been issued at the time such options
or rights were issued and for a consideration (determined in
the manner provided in subparagraphs 6(d)(ii)(F) and
6(d)(ii)(G)), if any, received by the Corporation upon the
issuance of such options or rights plus the minimum exercise
price provided in such options or rights (without taking into
account potential antidilution adjustments) for the Common
Stock covered thereby.
(2) The aggregate maximum number of shares
of Common Stock deliverable upon conversion of or in exchange
for (assuming the satisfaction of any conditions to
convertibility or exchangeability, including, without
limitation, the passage of time, but without taking into
account potential antidilution adjustments) any such
convertible or exchangeable securities or upon the exercise of
options to purchase or rights to subscribe for such
convertible or exchangeable securities and subsequent
conversion or exchange thereof, shall be deemed to have been
issued at the time such securities were issued or such options
or rights were issued and for a consideration equal to the
consideration, if any, received by the Corporation for any
such securities and related options or rights (excluding any
cash received on account of accrued interest or accrued
dividends), plus the minimum additional consideration, if any,
to be received by the Corporation (without taking into account
potential antidilution adjustments) upon the conversion or
exchange of such securities or the exercise of any related
options or rights (the consideration in each case to be
determined in the manner provided in subparagraphs 6(d)(ii)(F)
and 6(d)(ii)(G)).
(3) In the event of any change in the number
of shares of Common Stock deliverable or in the consideration
payable to the Corporation upon exercise of such options or
rights or upon conversion of or in exchange for such
convertible or exchangeable securities (excluding a change
resulting solely from the antidilution provisions thereof if
such change results from an event which gives rise to an
antidilution adjustment under this Paragraph 6(d)), the
Conversion Price of the Series D Preferred Stock, to the
extent in any way affected by or computed using such options,
rights or securities, shall be recomputed to reflect such
change, but no further adjustment shall be made for the actual
issuance of Common Stock or any payment of such consideration
upon the exercise of any such options or rights or the
conversion or exchange of such securities.
(4) Upon the expiration of any such options
or rights, the termination of any such rights to convert or
exchange or the expiration of any options or rights related
5
<PAGE>
to such convertible or exchangeable securities, the Conversion
Price of the Series D Preferred Stock, to the extent in any
way affected by or computed using such options, rights or
securities or options or rights related to such securities,
shall be recomputed to reflect the issuance of only the number
of shares of Common Stock (and convertible or exchangeable
securities which remain in effect) actually issued upon the
exercise of such options or rights, upon the conversion or
exchange of such securities or upon the exercise of the
options or rights related to such securities.
(5) The number of shares of Common Stock
deemed issued and the consideration deemed paid therefor
pursuant to subparagraphs 6(d)(ii)(H)(1) and (2) shall be
appropriately adjusted to reflect any change, termination or
expiration of the type described in either subparagraph
6(d)(ii)(H)(3) or (4).
(6) Notwithstanding the provisions of
subparagraphs 6(d)(ii)(H)(1)-(5) above, in the event that on
or after the date hereof the Corporation issues any options to
purchase or rights to subscribe for Common Stock, securities
by their terms convertible into or exchangeable for Common
Stock or options to purchase or rights to subscribe for such
convertible or exchangeable securities, if the conversion or
exercise price is not then determinable or is based on future
events, such shares of Common Stock shall not be deemed to be
issued until the price is determinable or such event has
occurred and the conversion or exercise price shall be subject
to adjustment pursuant to subparagraph 6(d)(ii) above at the
time of such determination or the occurrence of such event
even if the price is determined or such event occurs after
such date.
I. The following issuances of Common Stock
("Excluded Securities") shall be excluded from the adjustments set
forth in this Paragraph 6(d):
(1) shares of capital stock issued pursuant
to a stock dividend or a stock split or other subdivision
or recombination of shares;
(2) Common Stock issued upon exercise of any
warrants, options or other securities outstanding on the date
of the initial issuance of the Series D Preferred Stock;
(3) securities issued by the Corporation
in a public offering pursuant to a firm commitment
underwriting;
(4) securities issued to shareholders of any
corporation which merges into the Corporation in proportion to
their stock holdings of such corporation immediately prior to
such merger, upon such merger; and
6
<PAGE>
(5) Common Stock or options or warrants to
purchase Common Stock issued to officers, directors or employees of or
consultants to the Corporation pursuant to any compensation agreement,
plan or arrangement or the issuance of Common Stock upon the exercise
of any such options or warrants, provided such issuances do not exceed
25% of the Corporation's outstanding Common Stock, on a fully-diluted
basis, on the date of the initial issuance of the Series D Preferred
Stock; and
(iii) In case of any reclassification or similar
change of outstanding shares of Common Stock of the Corporation, or in
case of the consolidation or merger of the Corporation with another
corporation, or the conveyance of all or substantially all of the
assets of the Corporation in a transaction in which holders of the
Common Stock receive shares of stock or other property including cash,
each share of the Series D Preferred Stock shall, after such event and
subject to the other rights of the Series D Preferred Stock as set
forth elsewhere herein, be convertible only into the number of shares
of stock or other securities or property, including cash, to which a
holder of the number of shares of Common Stock of the Corporation
deliverable upon conversion of such shares of the Series D Preferred
Stock would have been entitled upon such reclassification, change,
consolidation, merger or conveyance had such share been converted
immediately prior to the effective date of such event.
(e) Reservation of Shares. The Corporation shall
at all times reserve and keep available, out of its authorized but unissued
shares of Common Stock or out of shares of Common Stock held in its treasury,
solely for the purpose of effecting the conversion of the shares of the Series D
Preferred Stock, the full number of shares of Common Stock deliverable upon the
conversion of all shares of the Series D Preferred Stock from time to time
outstanding.
(f) Fractional Shares.
(i) No fractional shares or scrip representing
fractional shares of Common Stock shall be issued upon the conversion
of the Series D Preferred Stock. In lieu of any fractional shares to
which a holder would otherwise be entitled, the Corporation shall pay
cash, equal to such fraction multiplied by the current market price per
share (determined as provided in subparagraph (ii) of this Paragraph
6(f) of the Common Stock on the day of conversion).
(ii) For the purposes of any computation under
subparagraph 6(f)(i), the current market price per share of Common
Stock on any date shall be deemed to be the average of the daily
closing prices for the 30 consecutive business days prior to the day in
question. The closing price for each day shall be the last sales price
regular way or in case no sale takes place on such day, the average of
the closing high bid and low asked prices regular way, in either case
(a) as officially quoted by the Nasdaq SmallCap Market or the Nasdaq
National Market or such other market on which the Common Stock is then
listed for trading, or (b) if, in the reasonable judgment of the Board
of Directors of the Corporation, the Nasdaq SmallCap Market or the
Nasdaq National Market is no longer the principal United States market
for the Common Stock, then as quoted on the principal United States
market for the Common Stock, as determined by the Board of Directors of
the Corporation, or (c) if, in the reasonable judgment of the Board of
Directors of the Corporation, there exists no principal United States
market for the Common Stock, then as reasonably determined by the Board
of Directors of the Corporation.
7
<PAGE>
(g) Taxes, Etc. The Corporation will pay any taxes
that may be payable in respect of any issue or delivery of shares of Common
Stock on conversion of shares of the Series D Preferred Stock. However, the
Corporation shall not be required to pay any tax which may be payable in respect
to any transfer involved in the issue and delivery of shares of Common Stock
upon conversion in a name other than that in which the shares of the Series D
Preferred Stock so converted were registered, and no such issue or delivery
shall be made unless and until the person requesting such issue or delivery has
paid to the Corporation the amount of any such tax, or has established, to the
satisfaction of the Corporation, that such tax has been paid.
(h) Assurances. The Corporation will not, by
amendment of its Articles of Incorporation, as amended, or through any
reorganization, recapitalization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action, avoid or
seek to avoid the observance or performance of any of the terms to be observed
or performed hereunder by the Corporation, but will at all times in good faith
assist in the carrying out of all the provisions of this Section 6 and in the
taking of all such action as may be necessary or appropriate in order to protect
the conversion rights of the holders of the Series D Preferred Stock against
impairment.
(i) Reissuance. No shares of Series D Preferred
Stock which have been converted to Common Stock shall be reissued by the
Corporation; provided, however, that any such share, upon being converted and
canceled, shall be restored to the status of an authorized but unissued share of
preferred stock without designation as to series, rights or preferences and may
thereafter be issued as a share of preferred stock not designated as Series D
Preferred Stock.
7. Voting Rights.
(a) In addition to any other rights provided for herein or by
law, the holders of Series D Preferred Stock shall be entitled to vote, together
with the holders of Common Stock as one class, on all matters as to which
holders of Common Stock shall be entitled to vote, in the same manner and with
the same effect as such Common Stock holders. In any such vote each share of
Series D Preferred Stock shall entitle the holder thereof to the number of votes
per share that equals the number of whole shares of Common Stock into which each
such share of Series D Preferred Stock is then convertible, calculated to the
nearest whole share.
(b) So long as any shares of the Series D Preferred Stock
remain outstanding, the consent of the holders of one-half of the then
outstanding Series D Preferred Stock, voting as one class, either expressed in
writing or at a meeting called for that purpose, shall be necessary to permit,
effect or validate the creation and issuance of any series of preferred stock or
other security of the Corporation which is senior as to liquidation and/or
dividend rights to the Series D Preferred Stock.
(c) So long as any shares of the Series D Preferred Stock
remain outstanding, the consent of the holders of one-half of the then
outstanding Series D Preferred Stock, voting as one class, either expressed in
writing or at a meeting called for that purpose, shall be necessary to repeal,
amend or otherwise change this Designation or the Articles of Incorporation of
the Corporation, as amended, in a manner which would alter or change the powers,
preferences, rights privileges, restrictions and conditions of the Series D
Preferred Stock so as to adversely affect the Series D Preferred Stock.
8
<PAGE>
(d) Right to Elect Director.
(i) So long as at least 50 percent of the initially issued
shares of Series D Preferred Stock (as adjusted to reflect any
reclassification, combination or similar change affecting the Series D
Preferred Stock) remain outstanding, the holders of the Series D
Preferred Stock shall have the exclusive right, voting as a separate
class at each meeting of stockholders held for the purpose of electing
directors of the Corporation or in writing, to elect one director of
the Corporation.
(ii) If requested, following the initial issuance of the
Series D Preferred Stock, the Corporation shall promptly cause a person
designated in writing by the holders of a majority of the outstanding
shares of Series D Preferred Stock, to be elected a director of the
Corporation to serve until his successor is elected and qualified.
(iii) In the event that the director elected pursuant to the
provisions of subparagraphs (i) and (ii) above vacates his position as
a director as a result of his death, resignation, disqualification,
removal or other cause, the Corporation shall promptly appoint a
successor designated in the manner set forth is subparagraph (ii) above
to serve out the remaining term of such former director.
(e) Each share of the Series D Preferred Stock shall entitle
the holder thereof to one vote on all matters to be voted on by the holders of
the Series D Preferred Stock, as set forth above.
(f) In the event that the holders of the Series D Preferred
Stock are required to vote as a class on any other matter, the affirmative vote
of holders of not less than fifty percent (50%) of the outstanding shares of
Series D Preferred Stock shall be required to approve each such matter to be
voted upon and if any matter is approved by such requisite percentage of holders
of Series D Preferred Stock, such matter shall bind all holders of Series D
Preferred Stock.
8. Miscellaneous.
(a) There is no sinking fund with respect to the Series D
Preferred Stock.
(b) The shares of the Series D Preferred Stock shall not have
any preferences, voting powers or relative, participating, optional, preemptive
or other special rights except as set forth above in this Designation and in the
Articles of Incorporation of the Corporation, as amended.
(c) The holders of the Series D Preferred Stock shall be
entitled to receive all communications sent by the Corporation to the holders of
the Common Stock.
[The remainder of this page has been intentionally left blank.]
9
<PAGE>
IN WITNESS WHEREOF, iParty Corp. has caused this Designation to be
executed this 20th day of December, 1999.
iPARTY CORP.
By:
------------------------------------
Name: Sal Perisano
Title: CEO
Attest:
By:
----------------------------
Name: Daniel DeWolf
Title: Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 DEC-31-1999
<CASH> 346,751 18,673,304
<SECURITIES> 0 973,877
<RECEIVABLES> 0 99,476
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 491,049 20,226,314
<PP&E> 341,441 1,271,393
<DEPRECIATION> 0 410,963
<TOTAL-ASSETS> 842,160 27,256,750
<CURRENT-LIABILITIES> 547,508 2,202,682
<BONDS> 0 0
0 0
0 2,395
<COMMON> 11,006 11,006
<OTHER-SE> 283,646 25,040,667
<TOTAL-LIABILITY-AND-EQUITY> 842,160 27,256,750
<SALES> 0 138,545
<TOTAL-REVENUES> 0 138,545
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 843,087 10,679,630
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 401 714,330
<INCOME-PRETAX> (862,398) (11,255,415)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (862,398) (11,255,415)
<EPS-BASIC> (.08) (2.97)
<EPS-DILUTED> (.08) (2.97)
</TABLE>
