**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

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# **FORM10-Q/A***

**(AmendmentNo. 1)**

 

**ý****QUARTERLY REPORT UNDERSECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

 

**FOR THEQUARTERLY PERIOD ENDED MARCH 29, 2003**

 

**OR**

 

**o****TRANSITION REPORT UNDERSECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

 

**FORTHE TRANSITION PERIOD FROM             TO             **

 

**COMMISSIONFILE NUMBER 0-25507**

 

**iPARTY CORP.**

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITSCHARTER)

 

| **DELAWARE**                                                             |   | **76-0547750**                              |
|--------------------------------------------------------------------------|--------|---------------------------------------------|
| (STATE OR OTHER JURISDICTION OF  INCORPORATION OR ORGANIZATION)          |   | (I.R.S. EMPLOYER  IDENTIFICATION NO.)       |
|                                                                     |   |                                        |
| **1457 VFW PARKWAY  WEST ROXBURY, MASSACHUSETTS**                        |   | **02132**(ZIP CODE)                         |
| (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                                 |   |                                        |
|                                                                     |   |                                        |
| **(617) 323-0822**                                                       |
| (REGISTRANT’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** |

 

Indicate by check mark whether the registrant: (1) has filed allreports required to be filed by Section 13 or 15(d) of the Exchange Act duringthe past 12 months (or for such shorter period that the registrant was requiredto file such reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes ý No o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act).  Yes o No ý

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock as of the latest practicable date.

 

The number of shares of the Registrant’s common stock outstanding as ofAugust 1, 2003:  17,562,972

 

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* Amendment to Part 1, Item 1, as set forth herein.

 

 

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Explanatory Note to Form 10-Q/A

 

We are filing this Amendment No. 1 to ourQuarterly Report on Form 10-Q for the quarterly period ended March 29, 2003 toreclassify the Company’s Series A- F convertible preferred stock outside ofpermanent stockholders’ deficit, as a result of the application of EmergingIssues Task Force (“EITF”) Topic No. D-98, *Classification and Measurement of RedeemableSecurities*.  The effect ofthis reclassification is to reduce previously reported total stockholders’equity by $18,558,998 and $18,584,309 as of March 29, 2003 and December 28,2002, respectively.

 

In accordance with the rules of theSecurities and Exchange Commission, the full text of the affected Item 1 ofPart I is included in this amendment and the certifications mandated under theSarbanes-Oxley Act of 2002 are hereby submitted as of the date hereof.

 

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**PART I - FINANCIAL INFORMATION**

 

**Item 1. Consolidated Financial Statements (Unaudited) and Notes to ConsolidatedFinancial Statements.**

 

**iPARTY CORP.****CONSOLIDATEDBALANCE SHEETSRestated**
|                                                                                                                                                                                                                    |   | **Mar 29, 2003**    |       | **Dec 28, 2002** |       |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|------------|------------------|------------|
|                                                                                                                                                                                                                    |   | **Note 1**          |       | **Note 1**       | ** ** |
|                                                                                                                                                                                                                    |   | **(Unaudited****)** |       |             | ** ** |
| **ASSETS**                                                                                                                                                                                                              |   |                |       |             |       |
| Current assets:                                                                                                                                                                                                         |   |                |       |             |       |
| Cash and cash equivalents                                                                                                                                                                                               |   | $                   | 1,476,997  |             | $          | 2,326,343 |   |
| Restricted cash                                                                                                                                                                                                         |   | 308,144             |       | 371,952          |       |
| Accounts receivable                                                                                                                                                                                                     |   | 295,677             |       | 445,988          |       |
| Inventory, net                                                                                                                                                                                                          |   | 9,497,878           |       | 8,916,664        |       |
| Prepaid expenses and other assets                                                                                                                                                                                       |   | 297,810             |       | 294,370          |       |
| Total current assets                                                                                                                                                                                                    |   | 11,876,506          |       | 12,355,317       |       |
| Property and equipment, net                                                                                                                                                                                             |   | 1,106,455           |       | 1,128,897        |       |
| Other assets                                                                                                                                                                                                            |   | 312,035             |       | 331,669          |       |
| Total assets                                                                                                                                                                                                            |   | $                   | 13,294,996 |             | $          | 13,815,883 |   |
|                                                                                                                                                                                                                    |   |                |       |             |       |
| **LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’  DEFICIT**                                                                                                                                            |   |                |       |             |       |
| Current liabilities:                                                                                                                                                                                                    |   |                |       |             |       |
| Accounts payable                                                                                                                                                                                                        |   | $                   | 3,371,191  |             | $          | 2,752,311 |   |
| Accrued expenses                                                                                                                                                                                                        |   | 1,840,991           |       | 1,867,496        |       |
| Current portion of capital lease obligations                                                                                                                                                                            |   | 179,517             |       | 237,080          |       |
| Borrowings under line of credit                                                                                                                                                                                         |   | 3,840,247           |       | 3,476,738        |       |
| Total current liabilities                                                                                                                                                                                               |   | 9,231,946           |       | 8,333,625        |       |
|                                                                                                                                                                                                                    |   |                |       |             |       |
| Long-term liabilities:                                                                                                                                                                                                  |   |                |       |             |       |
| Capital lease obligations, net of current portion                                                                                                                                                                       |   | 2,480               |       | 3,173            |       |
| Other liabilities                                                                                                                                                                                                       |   | 424,684             |       | 678,932          |       |
| Total long-term liabilities                                                                                                                                                                                             |   | 427,164             |       | 682,105          |       |
|                                                                                                                                                                                                                    |   |                |       |             |       |
| Commitments and contingencies                                                                                                                                                                                           |   |                |       |             |       |
|                                                                                                                                                                                                                    |   |                |       |             |       |
| Convertible preferred stock - $.001 par value;  10,000,000 shares authorized,                                                                                                                                           |   |                |       |             |       |
| Series A convertible preferred stock - 1,000,000  shares authorized, issued and outstanding (aggregate liquidation value of  $1,000,000 at March 29, 2003)                                                              |   | 1,000,000           |       | 1,000,000        |       |
| Series B convertible preferred stock - 1,150,000  shares authorized; 683,098 and 684,799 shares issued and outstanding in 2003  and 2002, respectively, (aggregate liquidation value of $13,661,960 at March  29, 2003) |   | 10,164,498          |       | 10,189,809       |       |
| Series C convertible preferred stock - 100,000  shares authorized, issued and outstanding (aggregate liquidation value of  $2,000,000 at March 29, 2003)                                                                |   | 1,492,000           |       | 1,492,000        |       |
| Series D convertible preferred stock - 250,000  shares authorized, issued and outstanding (aggregate liquidation value of  $5,000,000 at March 29, 2003)                                                                |   | 3,652,500           |       | 3,652,500        |       |
| Series E convertible preferred stock - 533,333  shares authorized; 466,667 issued and outstanding (aggregate liquidation  value of $1,750,000 at March 29, 2003)                                                        |   | 1,750,000           |       | 1,750,000        |       |
| Series F convertible preferred stock - 114,286  shares authorized, issued and outstanding (aggregate liquidation value  of  $500,000 at March 29, 2003)                                                            |   | 500,000             |       | 500,000          |       |
| Total  convertible preferred stock                                                                                                                                                                                      |   | 18,558,998          |       | 18,584,309       |       |
|                                                                                                                                                                                                                    |   |                |       |             |       |
| Stockholders’ deficit:                                                                                                                                                                                             |   |                |       |             |       |
| Common stock - $.001 par value; 150,000,000 shares  authorized; 17,018,442 and 16,996,570 shares issued and outstanding in 2003  and 2002, respectively                                                                 |   | 17,018              |       | 16,997           |       |
| Additional paid-in capital                                                                                                                                                                                              |   | 46,193,390          |       | 46,168,101       |       |
| Accumulated deficit                                                                                                                                                                                                     |   | (61,133,520         | )          | (59,969,254      | )          |
| Total stockholders’ deficit                                                                                                                                                                                        |   | (14,923,112         | )          | (13,784,156      | )          |
|                                                                                                                                                                                                                    |   |                |       |             |       |
| Total liabilities, convertible preferred stock and  stockholders’ deficit                                                                                                                                          |   | $                   | 13,294,996 |             | $          | 13,815,883 |   |

 

The accompanying notes are an integral partof these Consolidated Financial Statements.

 

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**iPARTY CORP.****CONSOLIDATEDSTATEMENTS OF OPERATIONS(Unaudited)**
|                                  |   | **For the three months ended** |       |
|---------------------------------------|--------|--------------------------------|------------|
|                                  |   | **Mar 29, 2003**               |       | **Mar 30, 2002** |   |
| Revenues                              |   | $                              | 10,287,577 |   | $ | 10,586,041 |   |
| Operating  costs:                     |   |                           |       |   |   |
| Cost  of products sold                |   | 6,241,696                      |       | 6,646,619 |   |
| Marketing  and sales                  |   | 3,772,859                      |       | 3,401,008 |   |
| General  and administrative           |   | 1,385,869                      |       | 1,384,434 |   |
|                                  |   |                           |       |   |   |
| Operating  loss                       |   | (1,112,847                     | )          | (846,020 | ) |
|                                  |   |                           |       |   |   |
| Other  income (expense):              |   |                           |       |   |   |
| Interest  income                      |   | 1,386                          |       | 4,705 |   |
| Interest  expense                     |   | (52,805                        | )          | (101,623 | ) |
|                                  |   |                           |       |   |   |
| Net  loss                             |   | $                              | (1,164,266 | ) | $ | (942,938 | ) |
|                                  |   |                           |       |   |   |
| Loss  per share:                      |   |                           |       |   |   |
| Basic  and diluted                    |   | $                              | (0.07      | ) | $ | (0.06 | ) |
|                                  |   |                           |       |   |   |
| Weighted-average  shares outstanding: |   |                           |       |   |   |
| Basic  and diluted                    |   | 16,999,935                     |       | 15,584,885 |   |

 

The accompanying notes are an integral partof these Consolidated Financial Statements.

 

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**iPARTY CORP.****CONSOLIDATEDSTATEMENTS OF CASH FLOWS****Restated(Unaudited)**
|                                                                         |   | **For the three months ended** |       |
|------------------------------------------------------------------------------|--------|--------------------------------|------------|
|                                                                         |   | **Mar 29, 2003**               |       | **Mar 30, 2002** |   |
|                                                                         |   | **Note 1**                     |       | **Note 1** | ** ** |
| **Operating activities:**                                                    |   |                           |       |   |   |
|                                                                         |   |                           |       |   |   |
| Net  loss                                                                    |   | $                              | (1,164,266 | ) | $ | (942,938 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities: |   |                           |       |   |   |
| Depreciation  and amortization                                               |   | 124,889                        |       | 132,825 |   |
| Deferred  rent                                                               |   | (4,248                         | )          | 25,130 |   |
| Changes  in operating assets and liabilities:                                |   |                           |       |   |   |
| Accounts  receivable                                                         |   | 150,311                        |       | 151,750 |   |
| Inventory                                                                    |   | (581,214                       | )          | 173,716 |   |
| Prepaid  expenses and other assets                                           |   | 16,194                         |       | (127,388 | ) |
| Accounts  payable                                                            |   | 618,880                        |       | 789,167 |   |
| Accrued  expenses and other liabilities                                      |   | (276,506                       | )          | (753,681 | ) |
| Net  cash used in operating activities                                       |   | (1,115,960                     | )          | (551,419 | ) |
|                                                                         |   |                           |       |   |   |
| **Investing activities:**                                                    |   |                           |       |   |   |
|                                                                         |   |                           |       |   |   |
| Purchase  of property and equipment                                          |   | (102,447                       | )          | (197,172 | ) |
| Decrease  in restricted cash                                                 |   | 63,808                         |       | 15,116 |   |
| Net  cash used in investing activities                                       |   | (38,639                        | )          | (182,056 | ) |
|                                                                         |   |                           |       |   |   |
| **Financing activities:**                                                    |   |                           |       |   |   |
|                                                                         |   |                           |       |   |   |
| Net  borrowings (repayments) under line of credit                            |   | 363,509                        |       | (112,142 | ) |
| Principal  payments on capital lease obligations                             |   | (58,256                        | )          | (64,233 | ) |
| Proceeds  from exercise of stock options                                     |   | —                         |       | 4,688 |   |
| Net  cash provided by (used in) financing activities                         |   | 305,253                        |       | (171,687 | ) |
|                                                                         |   |                           |       |   |   |
| **Net decrease in cash and cash equivalents**                                |   | (849,346                       | )          | (905,162 | ) |
|                                                                         |   |                           |       |   |   |
| **Cash and cash equivalents, beginning of year**                             |   | 2,326,343                      |       | 2,399,084 |   |
|                                                                         |   |                           |       |   |   |
| **Cash and cash equivalents, end of period**                                 |   | $                              | 1,476,997  |   | $ | 1,493,922 |   |
|                                                                         |   |                           |       |   |   |
| Supplemental  disclosure of non-cash financing activities:                   |   |                           |       |   |   |
|                                                                         |   |                           |       |   |   |
| Conversion  of Series B convertible preferred stock to common stock          |   | $                              | 25,311     |   | $ | 652,212 |   |
|                                                                         |   |                           |       |   |   |
| Acquisition  of assets under capital lease                                   |   | $                              | —     |   | $ | 7,881 |   |

 

The accompanying notes are an integral partof these Consolidated Financial Statements.

 

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** **

**iPARTYCORP.****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS****March 29, 2003****(Unaudited)**

**1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES**:

 

*Interim Financial Information*

 

The interim consolidated financial statements as of March 29, 2003 havebeen prepared by the Company pursuant to the rules and regulations of theSecurities and Exchange Commission (the “SEC”) for interim financialreporting.  These consolidatedstatements are unaudited and, in the opinion of management, include alladjustments (consisting of normal recurring adjustments and accruals) necessaryto present fairly the consolidated balance sheets, consolidated operatingresults, and consolidated cash flows for the periods presented in accordancewith generally accepted accounting principles. The consolidated balance sheet at December 28, 2002 has been derivedfrom the audited consolidated financial statements at that date.  Operating results for the three months endedMarch 29, 2003 and March 30, 2002 may not be indicative of the results for theentire year due, in part, to the seasonality of the Company’s business.  Certain information and footnote disclosuresnormally included in financial statements prepared in accordance with generallyaccepted accounting principles have been omitted in accordance with the rulesand regulations of the SEC.  Theseconsolidated financial statements should be read in conjunction with theaudited consolidated financial statements, and accompanying notes, included inthe Company’s Annual Report on Form 10-KSB/A for the year ended December 28,2002**.**

 

*Restatement of Financial Information*

 

The accompanying consolidated balance sheets as of March 29, 2003 andDecember 28, 2002 have been reclassified to present the Company’s Series A - Fconvertible preferred stock outside of permanent stockholders’ deficit as aresult of the application of EITFTopic No. D-98*, Classification and Measurement of RedeemableSecurities.*  Theeffect of this reclassification is to reduce previously reported totalstockholders’ equity by the carrying values of the respective convertiblepreferred shares outstanding of $18,558,998 and $18,584,309 as of March 29,2003 and December 28, 2002, respectively. The supplemental disclosure of non-cash financing activities has beenrestated on the accompanying consolidated statements of cash flows for thethree months ended March 29, 2003 and March 30, 2002 to reflect the conversionof convertible preferred stock at their carrying values.  These reclassifications did notimpact the Company’s results of operations or actual cash flows.

 

*Principles of Consolidation*

 

The consolidated financial statements include the accounts of theCompany and its wholly-owned subsidiaries after elimination of all significantintercompany transactions and balances.

 

*Revenue Recognition*

 

Revenue is recognized at the point of sale for retail sales and uponshipment to customers for Internet sales. Outbound shipping charges billed to Internet customers are included inrevenue.  In accordance with EITF IssueNo. 01-9, *Accountingfor Consideration Given by a Vendor to a Customer (Including a Reseller of theVendor’s Products),* the Company classifies discounts as a reductionof revenue.  The Company recognizes itsrevenue with respect to the Internet operation on a gross basis since theCompany is the primary obligor to the customer and the merchant of record underthe arrangement.

 

*Concentrations*

 

TheCompany’s Internet operation relies on a single vendor as its sole provider forservices including inventory, fulfillment and shipping.  While management of the Company believes itcould obtain similar services from other vendors for similar terms, adisruption in the services received from this vendor could materially harm theCompany’s Internet business.

 

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*Use of Estimates*

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenue and expensesduring the reporting period.  Actualresults could differ from these estimates.

 

*Inventory andRelated Allowance for Obsolete and Excess Inventory*

 

Inventory consists of party supplies and is valued at the lower ofmarket or weighted-average cost, which approximates FIFO (first-in,first-out).  Inventory has been reducedby an allowance for obsolete and excess inventory, which is based onmanagement’s review of inventory on hand compared to estimated future sales.

 

*Net Loss per Share*

 

Basic net loss per share is computed by dividing net loss by theweighted-average number of common shares outstanding.  Diluted loss per share is the same as basic net loss per sharefor the quarters ended March 29, 2003 and March 30, 2002, since the Company recognizeda net loss in each quarter.

 

As of March 29, 2003, there were 42,518,236 potential additional commonshare equivalents outstanding, including 20,658,786 shares upon the conversionof immediately convertible preferred stock, 13,563,212 shares upon the exerciseof warrants with a weighted-average exercise price of $1.43 and 8,296,238shares upon the exercise of stock options with a weighted-average exerciseprice of $1.00, but not included in the above calculation as their effect wouldhave been anti-dilutive.

 

*Stock Option Compensation Expense*

 

The Company accounts for its stock option compensation agreements withemployees under the provisions of Accounting Principles Board (“APB”) OpinionNo. 25, *Accountingfor Stock Issued to Employees*. The Company has adopted the disclosure-only provisions of Statement ofFinancial Accounting Standards (“SFAS”) No. 123, *Accounting for Stock-Based Compensation*.

 

The Company has computed the value of options using the Black-Scholesoption pricing model prescribed by SFAS No. 123.  The weighted-average fair value of the options granted was $0.17per share during the first quarter of fiscal 2003 and $0.32 per share duringthe first quarter of fiscal 2002, using the Black-Scholes option-pricing modelwith the following assumptions: no dividend yield, volatility of 125% in 2003and 2002, a risk-free interest rate of 4.77% to 5.11% in first quarter offiscal 2003 and 5.56% to 5.75% in first quarter of fiscal 2002 and an expectedlife of five years from date of the grant. Had compensation cost for the Company’s stock option plan beendetermined based upon the fair value at the grant date for awards under theplan consistent with the methodology prescribed under SFAS 123, the Company’snet loss and net loss per share would have been the following pro forma amounts:

 
|                                           |   | **For the three months ended** |       |
|------------------------------------------------|--------|--------------------------------|------------|
|                                           |   | **Mar 29, 2003**               |       | **Mar 30, 2002** |   |
| Net  loss, as reported                         |   | $                              | (1,164,266 | ) | $ | (942,938 | ) |
|                                           |   |                           |       |   |   |
| Stock  option compensation expense             |   | (109,023                       | )          | (276,008 | ) |
|                                           |   |                           |       |   |   |
| Pro  forma net loss                            |   | $                              | (1,273,289 | ) | $ | (1,218,946 | ) |
|                                           |   |                           |       |   |   |
| Basic  and diluted loss per share:             |   |                           |       |   |   |
| Basic  and diluted loss per share, as reported |   | $                              | (0.07      | ) | $ | (0.06 | ) |
|                                           |   |                           |       |   |   |
| Basic  and diluted loss per share, pro forma   |   | $                              | (0.07      | ) | $ | (0.08 | ) |

 

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*Accounting for the Impairment of Long-LivedAssets*

 

In accordance with SFAS No. 144, *Accountingfor the Impairment or Disposed of Long-Lived Assets*,**theCompany performs an impairment review quarterly.

 

*Reclassifications*

 

Certainreclassifications have been made to prior year’s amounts to conform to thecurrent year presentation.

 

**2. SEGMENT REPORTING:**

 

SFASNo. 131, *Disclosuresabout Segments of an Enterprise and Related Information*, establishesstandards for the way business enterprises report information about operatingsegments in annual financial statements and requires that those enterprisesreport selected information about operating segments in interim financialreports issued to stockholders.

 

Operatingsegments represent components of the Company’s business that are evaluatedregularly by management in assessing the performance and resourceallocation.  Management evaluates asegment’s performance based upon net revenue, operating loss and net loss.  In the past the Company had determined thatits reportable segments consisted of a retail stores operation and an Internetoperation.  In the first quarter offiscal 2003 the Internet operation’s consolidated net revenue was less than 2%of the Company’s consolidated net revenue, its reported loss was less than 5%of the Company’s consolidated loss and its assets were less than 1% of theCompany’s consolidated assets.  TheCompany does not expect these amounts to return to over 10% of the respectiveconsolidated totals.  Therefore, theCompany has not reported Internet operating segment information during thisquarter.

 

**3. NEW ACCOUNTING PRONOUNCEMENTS:**

 

In June 2002, the Financial Accounting Standards Board (“FASB”) issuedSFAS No. 146, *Accounting for CostsAssociated with Exit or Disposal Activities*.  SFAS No. 146 addresses financial accountingand reporting for costs associated with exit or disposal activities andrescinds EITF Issue No. 94-3, *LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (including Certain Costs Incurred in a Restructuring)*.  This Statement requires that a liability fora cost associated with an exit or disposal activity be recognized when theliability is incurred.  The provisionsof SFAS No. 146 are effective for exit and disposal activities that are initiatedafter December 31, 2002.  The adoptionof SFAS No. 146 did not have a material impact on the Company’s consolidatedfinancial position or consolidated results of operations.

 

In December 2002, the FASB issued SFAS No. 148, *Accounting for Stock-Based Compensation – Transitionand Disclosure, an amendment of FASB Statement No. 123*.  SFAS 148 amends FASB Statement No. 123, *Accounting for Stock-Based Compensation*,to provide alternative methods of transition for an entity that voluntarilychanges to the fair value based method of accounting for stock-based employeecompensation.  SFAS 148 also amends thedisclosure provisions of FASB Statement No. 123 to require prominent disclosureabout the effects on reported net income of an entity’s accounting policydecisions with respect to stock-based employee compensation.  SFAS 148 also amends APB Opinion No. 28*, Interim Financial Reporting,* to requiredisclosure about those effects in interim financial statements.  The Company currently does not intend tovoluntarily change from the intrinsic value method to the fair value method ofaccounting for stock-based employee compensation.  The Company is providing the required disclosure about theeffects on reported net loss of the Company’s accounting policy decisions withrespect to stock-based employee compensation commencing with its interimfinancial statements for the three-month period ended March 29, 2003 in Note 1to the interim financial statements.

 

In January 2003, the EITF issued EITF No. 02-16, *Accounting by a Customer (Including aReseller) for Certain Consideration Received from a Vendor*, whichstates that cash consideration received from a vendor is presumed to be areduction of the prices of the vendor’s products or services and should,therefore, be characterized as a reduction of cost of sales when recognized inthe statement of operations.  Thatpresumption is overcome when the consideration is either a reimbursement ofspecific, incremental, identifiable costs incurred to sell the vendor’s

 

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products, or a payment for assets or services delivered to thevendor.  The adoption of EITF Issue No.02-16 did not have a material impact on the Company’s results of operations inthe first quarter of fiscal 2003.

 

**4. LiquidationFeature of Series A-F Convertible Preferred Stock**

 

The holders of Series A-F convertible preferred stock have the right toa liquidation preference, which may be exercised by the preferred stockholdersunder certain events outside of the Company’s control.  In accordance with EITF Topic D-98, theCompany has included the respective equity securities outside of permanentstockholders’ equity in the accompanying balance sheets as of March 29, 2003 andDecember 28, 2002 at their respective carrying values.  The carrying values have been determinedbased on their fair market values at the original dates of issuance.  In certain cases, warrants were issued,which the Company allocated value to and included in additional paid incapital.  In the event such aliquidation event occurs, the difference between the carrying value of theconvertible preferred stock and their liquidation value will be accreted.  This amount was $5.4 million on March 29,2003.

 

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**SIGNATURES**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

 
|   |   | iPARTY CORP. |
|--------|--------|--------------|
|   |   |         |
|   |   | By:          | /s/ SAL PERISANO |
|   |   |         | Sal Perisano |
|   |   |         | Chairman of the Board and Chief Executive  Officer |
|   |   |         | (Principal Executive Officer) |
|   |   |         |   |
|   |   | By:          | /s/ PATRICK FARRELL |
|   |   |         | Patrick Farrell |
|   |   |         | President and Chief Financial Officer |
|   |   |         | (Principal Financial and Accounting  Officer) |

 

Dated:  August 12, 2003

 

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