**UNITED STATES SECURITIES ANDEXCHANGE COMMISSION**

**WASHINGTON, D.C.20549**

** **

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**FORM 10-Q**

 

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

 

**FOR THE QUARTERLY PERIOD ENDEDMARCH 29, 2003**

 

**OR**

 

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

** **

**FOR THE TRANSITIONPERIODFROM             TO             **

 

**COMMISSION FILENUMBER 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**                                   |
| (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                                |   | (ZIP CODE)                                  |
|                                                                    |
| **(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 whetherthe registrant: (1) has filed all reports required to be filed by Section 13 or15(d) of the Exchange Act during the past 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes ýNo o

 

Indicate by check mark whetherthe registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).  Yes oNo ý

 

Indicate the number of sharesoutstanding of each of the issuer’s classes of common stock as of the latestpracticable date.

 

The number of shares of theRegistrant’s common stock outstanding as of April 28, 2003:  17,457,724.

 

 

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**iParty Corp.Quarterly Report on Form 10-Q**

**Table of Contents**

 
| PART 1         | FINANCIAL INFORMATION                                                                              |
|----------------|----------------------------------------------------------------------------------------------------|
|           |                                                                                               |
| Item 1.        | Financial Statements (Unaudited)                                                                   |
|           | Consolidated Balance Sheets – March 29, 2003 and December 28, 2002                            |
|           | Consolidated Statements of Income – Three  months ended March 29, 2003 and March 30, 2002     |
|           | Consolidated Statements of Cash Flows –  Three months ended March 29, 2003 and March 30, 2002 |
|           | Notes to Consolidated Financial Statements                                                         |
|           |                                                                                               |
| Item 2.        | Management’s Discussion and Analysis of  Financial Condition and Results of Operations        |
|           |                                                                                               |
| Item 3.        | Quantitative and Qualitative Disclosures  About Market Risk                                        |
|           |                                                                                               |
| Item 4.        | Controls and Procedures                                                                            |
|           |                                                                                               |
| PART II        | OTHER  INFORMATION                                                                                 |
|           |                                                                                               |
| Item 6.        | Exhibits and Reports on Form 8-K                                                                   |
|           |
| SIGNATURES     |
|           |                                                                                               |
| CERTIFICATIONS |
|           |                                                                                               |
| Exhibit  Index |
|           |
| Ex. 99.1       | Certification  of the Chief Executive Officer                                                      |
|           |                                                                                               |
| Ex. 99.2       | Certification  of the Chief Financial Officer                                                      |
|                |                                                                                                    |  |

 

1

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**PARTI - FINANCIAL INFORMATION**

**Item1.  Financial Statements**

 

**iPARTY CORP.**

**CONSOLIDATEDBALANCE SHEETS**

 
|                                                                                                                                                                                                                        |   | **Mar 29, 2003** |       | **Dec 28, 2002** |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|------------|------------------|------------|
|                                                                                                                                                                                                                        |   | **(Unaudited)**  | ** ** | **Note 1**       | ** ** |
| **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 AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                               |   |             |       |             |       |
| 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                                                                                                                                                                                               |   |             |       |             |       |
| Stockholders’ equity:                                                                                                                                                                                                  |   |             |       |             |       |
| 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            |       | 1,000            |       |
| 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) |   | 683              |       | 685              |       |
| Series C Convertible Preferred stock – 100,000  shares authorized, issued and outstanding (aggregate liquidation value of  $2,000,000 at March 29, 2003)                                                               |   | 100              |       | 100              |       |
| Series D Convertible Preferred stock –  250,000 shares authorized, issued and outstanding (aggregate liquidation  value of $5,000,000 at March 29, 2003)                                                               |   | 250              |       | 250              |       |
| 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)                                                       |   | 467              |       | 467              |       |
| Series F Convertible Preferred stock -  114,286 shares authorized, issued and outstanding (aggregate liquidation  value of $500,000 at March 29, 2003)                                                                      |   | 114              |       | 114              |       |
| 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                                                                                                                                                                                                  |   | 64,749,774       |       | 64,749,794       |       |
| Accumulated deficit                                                                                                                                                                                                         |   | (61,133,520      | )          | (59,969,254      | )          |
|                                                                                                                                                                                                                        |   |             |       |             |       |
| Total stockholders’ equity                                                                                                                                                                                             |   | 3,635,886        |       | 4,800,153        |       |
|                                                                                                                                                                                                                        |   |             |       |             |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                             |   | $                | 13,294,996 |             | $          | 13,815,883 |   |

 

The accompanying notes are an integral part of these ConsolidatedFinancial Statements.

 

2

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**iPARTY CORP.**

**CONSOLIDATED STATEMENTS 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 part of these ConsolidatedFinancial Statements.

 

3

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**iPARTY CORP.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
|                                                                         |   | **For the three months ended** |       |
|------------------------------------------------------------------------------|--------|--------------------------------|------------|
|                                                                         |   | **Mar 29, 2003**               |       | **Mar 30, 2002** |   |
| **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 preferred stock to  common stock                      |   | $                              | 21         |   | $ | 693 |   |
|                                                                         |   |                           |       |   |   |
| Acquisition of assets under capital lease                                    |   | $                              | —     |   | $ | 7,881 |   |

 

The accompanying notes are an integral part of these ConsolidatedFinancial Statements.

 

4

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**iPARTY CORP.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**March 29, 2003**

**(Unaudited)**

 

**1.  BASIS OF PRESENTATION AND SIGNIFICANTACCOUNTING 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 financial reporting.  These consolidated statements are unauditedand, in the opinion of management, include all adjustments (consisting ofnormal recurring adjustments and accruals) necessary to present fairly theconsolidated balance sheets, consolidated operating results, and consolidatedcash flows for the periods presented in accordance with generally acceptedaccounting principles.  The consolidatedbalance sheet at December 28, 2002 has been derived from the auditedconsolidated financial statements at that date.  Operating results for the three months ended March 29, 2003 andMarch 30, 2002 may not be indicative of the results for the entire year due, inpart, to the seasonality of the Company’s business.  Certain information and footnote disclosures normally included infinancial statements prepared in accordance with generally accepted accountingprinciples have been omitted in accordance with the rules and regulations ofthe SEC.  These consolidated financialstatements should be read in conjunction with the audited consolidatedfinancial statements, and accompanying notes, included in the Company’s AnnualReport on Form 10-KSB for the year ended December 28, 2002.

 

*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 EmergingIssues Task Force (EITF) Issue No. 00-14, *Accounting for Certain Sales Incentives*,the Company classifies discounts as a reduction of revenue.  The Company recognizes its revenue withrespect to the Internet operation on a gross basis since the Company is theprimary obligor to the customer and the merchant of record under thearrangement.

 

*Concentrations*

 

The Company’s Internetoperation relies on a single vendor as its sole provider for services includinginventory, fulfillment and shipping. While management of the Company believes it could obtain similarservices from other vendors for similar terms, a disruption in the servicesreceived from this vendor could materially harm the Company’s Internetbusiness.

 

*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.

 

5

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*Inventoryand Related Allowance for Obsolete and Excess Inventory*

 

Inventory consists of party supplies and isvalued at the lower of market or weighted-average cost, which approximates FIFO(first-in, first-out).  Inventory hasbeen reduced by an allowance for obsolete and excess inventory, which is basedon management’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 the weighted-averagenumber of common shares outstanding. Diluted loss per share is the same as basic net loss per share for thequarters 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 of FinancialAccounting 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 2003 and2002, a risk-free interest rate of 4.77% to 5.11% in first quarter of fiscal2003 and 4.86% to 5.95% in first quarter of fiscal 2002 and an expected life offive years from date of the grant.  Hadcompensation cost for the Company’s stock option plan been determined basedupon the fair value at the grant date for awards under the plan consistent withthe methodology prescribed under SFAS 123, the Company’s net loss and net lossper 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 | ) |

 

*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.

 

6

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*Reclassifications*

 

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

 

**2.  SEGMENT REPORTING:**

 

SFAS No. 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.

 

Operating segments representcomponents of the Company’s business that are evaluated regularly by managementin assessing the performance and resource allocation.  Management evaluates a segment’s performance based upon netrevenue, operating loss and net loss. In the past the Company had determined that its reportable segmentsconsisted of a retail stores operation and an Internet operation.  In the first quarter of fiscal 2003 theInternet operation’s net revenue was less than 2% of the Company's consolidatednet revenue, its reported loss was less than 5% of the Company’s consolidatedloss and its assets were less than 1% of the Company’s consolidatedassets.  The Company does not expectthese amounts to return to over 10% of the respective consolidated totals.  Therefore, the Company has not reportedInternet operating segment information during this quarter.

 

**3.  NEW ACCOUNTING PRONOUNCEMENTS:**

 

In June 2002, the FASB issued SFAS No. 146, *Accounting for Costs Associated 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 areinitiated after December 31, 2002.  Theadoption of SFAS No. 146 did not have a material impact on the Company’sconsolidated financial position or consolidated results of operations.

 

In December 2002, the FASB issued Statement of Accounting Standards No.148 (“SFAS 148”), *Accounting for Stock-BasedCompensation – Transition and Disclosure, an amendment of FASB Statement No.123*.  SFAS 148 amends FASBStatement No. 123, *Accounting forStock-Based Compensation*, to provide alternative methods oftransition for an entity that voluntarily changes to the fair value basedmethod of accounting for stock-based employee compensation.  SFAS 148 also amends the disclosureprovisions of FASB Statement No. 123 to require prominent disclosure about theeffects on reported net income of an entity’s accounting policy decisions withrespect to stock-based employee compensation. SFAS 148 also amends APB OpinionNo. 28*, Interim Financial Reporting,*to require disclosure 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 Emerging Issues Task Force (“EITF”) issued EITFNo. 02-16, *Accountingby a Customer (Including a Reseller) for Certain Consideration Received from aVendor*, which states that cash consideration received from a vendoris presumed to be a reduction of the prices of the vendor’s products orservices and should, therefore, be characterized as a reduction of cost ofsales when recognized in the statement of operations.  That presumption is overcome when the consideration is either areimbursement of specific, incremental, identifiable costs incurred to sell thevendor’s 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.

 

7

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**Item2.  Management’s Discussion and Analysis**

 

This information should be read inconjunction with the unaudited consolidated financial statements and relatednotes included in Item 1 of this Quarterly Report on Form 10-Q and the auditedconsolidated financial statements and related notes and Item 6, Management’sDiscussion and Analysis, contained in the Company’s Annual Report on Form10-KSB for the fiscal year ended December 28, 2002.

 

Certain statements in this Form 10-Qconstitute or incorporate “forward-looking statements” within the meaning ofthe Private Securities Litigation Reform Act of 1995, Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the Securities ExchangeAct of 1934, as amended (the “statutory safe harbors”).  The words “anticipates,” “believes,”“estimates,” “expects,” “plans,” “intends” and other similar expressions areintended to identify these forward-looking statements, but are not theexclusive means of identifying them. The Company desires to avail itself of the statutory safe harbors and istherefore including this special note to enable it to do so.  Forward-looking statements included in thisForm 10-Q or hereafter included in other publicly available documents filedwith the Securities and Exchange Commission, reports to the Company’sstockholders and other publicly available statements issued or released by theCompany involve known and unknown risks, uncertainties, and other factors whichcould cause the Company’s actual results, performance (financial or operating)or achievements to differ from the future results, performance (financial oroperating) achievements expressed or implied by such forward lookingstatements.  Such future results arebased upon the Company’s best estimates based upon current conditions and themost recent results of operations. Various risks, uncertainties and contingencies could cause the Company’sactual results, performance or achievements to differ materially from thoseexpressed in, or implied by, these statements, including, but not limited to,the following:  the success or failureof the Company’s efforts to implement its business strategy; the Company’sinability to obtain additional financing, if required; third-party suppliers’failure to fulfill their obligations to the Company; unseasonable weather;intense competition; the availability of retail store space on reasonable leaseterms; the failure of the Company’s systems or those of its third-partysuppliers; general economic developments affecting consumer confidence orspending patterns, particularly in the New England region; and governmentregulation of the Internet.

 

**Overview**

 

iParty believes it is aleading brand in the party industry in the markets it serves and is a leadingresource for consumers in those markets seeking party goods, party planningadvice and relevant information.  iPartyis a multi-channel retailer that operates 35 retail stores and an Internet siteat www.iparty.com.  The Company’swebsite was launched in February 1999. On August 15, 2000 the Company’s wholly-owned subsidiary, iParty RetailStores Corp., purchased assets consisting of 33 store leases, fixtures andinventory from The Big Party Corporation. This enabled the Company to set up a retail stores operation and tobecome a multi-channel retailer for party goods.  In the first quarter of fiscal 2003 over 99% of the Company’srevenues were derived from its retail stores operation.  The Company’s retail stores operation issupplemented by its Internet operation, which provides convenience to thosecustomers who choose to shop over the Internet.

 

**Resultsof Operations**

 

Fiscal year 2003 has 52 weeks and ends on December 27, 2003.  Fiscal year 2002 had 52 weeks and ended onDecember 28, 2002.

 

The first quarter of fiscal year 2003 had 13 weeks and ended on March29, 2003.  The first quarter of fiscalyear 2002 had 13 weeks and ended on March 30, 2002.

 

*Revenue*

 

Revenue for the first quarter of fiscal 2003 was $10,287,577, adecrease of $298,464, or 2.8% from the first quarter of the prior fiscalyear.  Revenue includes the sellingprice of party goods sold, net of returns and discounts, as well as outboundshipping and handling charges billed. Revenue is recognized at the point of sale for retail sales and uponshipment to customers for Internet sales.

 

Sales for the first quarter of fiscal 2003 included sales from onestore that opened in late March 2002 and one store that opened in earlySeptember 2002, as well as a decrease of 7.5% in comparable store sales.  Comparable

 

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store sales are defined assales from those stores open for at least one full year.  Due to the strong seasonality of ourbusiness, comparable store sales for the first quarter of fiscal 2003 wereadversely affected by Easter falling three weeks later this year, twenty-twodays into the second quarter of fiscal 2003. Last year, Easter occurred on the first day of the second quarter offiscal 2002.  Year-to-date comparablestore sales through April 20, 2003, which adjusts for the timing shift ofEaster, were down 3.0%.

 

*Cost of products sold*

 

Cost of products sold for the first quarter of fiscal 2003 was 60.7% ofrevenue, a decrease of 2.1 percentage points from the first quarter of theprior fiscal year.  Cost of productssold consists of the cost of merchandise sold to customers, store occupancycosts, warehousing costs, and outbound shipping and handling costs charged tothe Company by its website fulfillment partner, Taymark.

 

This decrease as a percentage of revenues was attributable to improvedvendor terms and pricing, although partially offset by fixed store occupancycosts.

 

*Marketing and sales expense*

 

Marketing and sales expense for the first quarter of fiscal 2003 was$3,772,859, or 36.7% of revenue, an increase of $371,851 from the first quarterof the prior fiscal year.  As apercentage of revenue, marketing and sales expense increased by 4.6 percentagepoints from the prior fiscal year. Marketing and sales expense consists primarily of store payroll and relatedexpenses for personnel engaged in marketing and selling activities andadvertising, public relations and promotional expenditures.

 

The increase in marketing and sales expense as a percentage of revenuewas attributable to increases in store payroll and other store selling relatedexpenses.  Payroll and associated fringebenefits increased 2.9 percentage points as the Company maintained itscommitment to provide superior customer service by continuing to staff itsstores accordingly even though comparable store sales declined.  Retail operations management expenseincreased by 0.7 percentage points due to additions to the field managementstaff.  Store communications expense increasedby 0.5 percentage points due to the installation of a new wide area network(“WAN”) intended to improve performance and reliability and support theimplementation of new store systems. Utilities expense increased by 0.4 percentage points due to higherheating costs associated with the unseasonably cold weather in New Englandduring the first quarter of fiscal 2003.

 

*General and administrative expense*

 

General and administrative (“G&A”) expense for the first quarter offiscal 2003 was $1,385,869, or 13.5% of revenue, an increase of $1,435 and anincrease of 0.4 percentage points from the first quarter of the prior fiscalyear.  G&A expense consists ofpayroll and related expenses for executive, merchandising, finance andadministrative personnel, as well as information technology, professional feesand other general corporate expenses.

 

The amount spent on G&A was relatively consistent from the firstquarter of fiscal 2002 to the first quarter of fiscal 2003 as increases forinsurance and payroll were offset by decreases in spending on support costs forthe Company’s web site.

 

*Interest income*

 

Interest income on cash and cash equivalents in the first quarter offiscal 2003 was $1,386, a decrease of $3,319 from the first quarter of fiscal2002.  The decrease in interest incomewas due to lower cash and investment balances.

 

*Interest expense*

 

Interestexpense in the first quarter of fiscal 2003 was $52,805, a decrease of $48,818from the first quarter of fiscal 2002. The decrease in interest expense was attributable to a reduction fromtwo days to one day in the float on the Company’s daily deposits and areduction in the interest rate on its borrowings on its line of credit, to 6.5%in the first quarter of fiscal 2003 compared to 8.0% in the first quarter offiscal 2002.

 

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*Incometaxes*

 

The Company has not provided a benefit forincome taxes for the first quarter of fiscal 2003 or the first quarter offiscal 2002 due to the uncertainty of future taxable income.

 

At the end of fiscal 2002 the Company had estimated net operating losscarryforwards of approximately $24.6 million, which were fully reserved for,and expire through fiscal 2021.  Inaccordance with Section 382 of the Internal Revenue Code, the use of thesecarryforwards will be subject to annual limitations based upon certainownership changes of the Company’s stock that may occur.

 

*Netloss*

 

Netloss in the first quarter of fiscal 2003 was $1,164,266, or $0.07 per basic anddiluted share, compared to $942,938, or $0.06 per basic and diluted share, inthe first quarter of fiscal 2002.

 

**Liquidityand Capital Resources**

 

The Company’s operatingactivities used $1,115,960 in cash in the first quarter of fiscal 2003.  This use of cash was predominantly due tothe net loss and an increase in inventory, partially offset by an increase inaccounts payable.  The Company’soperating activities used $551,419 in cash in the first quarter of fiscal2002.  This use of cash waspredominantly due to the net loss and an increase in accrued expenses and otherliabilities, partially offset by an increase in accounts payable.

 

The Company invested cash inproperty and equipment totaling $102,447 and $197,172 in the first quarter offiscal 2003 and 2002, respectively.  Thecash invested in the first quarter of fiscal 2003 included the purchase ofpersonal computer software licenses. The cash invested in the first quarter of fiscal 2002 included certainassets associated with the new store that opened in March 2002.

 

The Company provided$305,253 in net cash in financing activities in the first quarter of fiscal2003 whereas the Company used $171,687 in net cash in financing activities inthe first quarter of fiscal 2002.  As aresult of reduced cash flow from operating activities the Company increased thenet borrowings under its line of credit to $3,840,247 at March 29, 2003compared to $3,476,738 at December 28, 2002.

 

The Company has a line of credit with Wells Fargo Retail Finance.  On May 23, 2002 the Company amended itsexisting line of credit (the “line”). The amendment extended the term of the line through July 31, 2004,reduced the minimum interest rate from 8% to 6.5% and eliminated certainfinancial covenants.  The amended lineallows for borrowings equal to the lesser of $7,500,000, or the borrowing base,as defined.  Its inventory and otherassets secure the Company’s line of credit. The amended line of credit generally prohibits the payment of anydividends or other distributions to any of the Company’s classes of capitalstock.

 

The amounts outstanding under the Company’s line of credit as of March29, 2003 and December 28, 2002 were $3,840,247 and $3,476,738,respectively.  The outstanding balancesunder the line of credit are classified as current liabilities in theaccompanying consolidated balance sheets, since the Company is required toapply daily lock-box receipts to reduce the amount outstanding.  At March 29, 2003, the Company hadapproximately $2,308,000 of additional availability under the line of credit.

 

Intereston the amended line of credit is payable at the greater of the bank’s base rateplus 1%, or 6.5%.  Borrowingsoutstanding at March 29, 2003 accrued interest at 6.5%.

 

The amended agreement includes only one financial covenant, whichrequires the Company to maintain a minimum availability under the line ofcredit in the amount of $300,000 at the end of each month.  At March 29, 2003, the Company was incompliance with this financial covenant.

 

In2000 the Company purchased inventory, fixed assets and the leases of 33 retailstores from the Big Party, (“the seller”) in consideration of cash andassumption of certain liabilities.  Inaddition, the Company agreed to pay the seller, no later than March 31, 2004,an amount equivalent to the greater of $250,000, or a percentage of the

 

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aggregateoperating results of the 33 acquired locations.  In connection with the Company’s purchase accounting in 2000, theCompany accrued the guaranteed amount of $250,000.  As of March 29, 2003, the Company has $250,000 included in accruedexpenses in the accompanying consolidated balance sheets, which reflects theCompany’s current estimate of the liability.

 

TheCompany’s prospective cash flows are subject to certain trends, events anduncertainties, including demands for capital to support growth, economicconditions, and contractual matters. The Company expects its capital expenditures for 2003 to be primarilyrelated to new stores, store improvements and technology advancements insupport of growth and operational enhancement.

 

Contractualobligations at March 29, 2003 were as follows:

 
|                                              |   | **Payments Due By Period** |      |
|---------------------------------------------------|--------|----------------------------|-----------|
|                                              |   | **1 Year**                 |      | **2 - 3  Years** |   | **4 - 5  Years** |   | **After  5 Years** |   | **Total** |   |
| Line of credit                                    |   | $                          | 3,840,247 |   |   |   |   |   |   |   | $ |  3,840,247 |   |
| Capital lease obligations                         |   | 179,517                    |      | 2,480 |   | — |   | — |   | 181,997 |   |
| Operating leases (including retail space  leases) |   | 5,313,838                  |      | 9,705,995 |   | 5,785,187 |   | 5,169,542 |   | 25,974,562 |   |
| Earn-out agreement included in accrued  expenses  |   | 250,000                    |      | — |   | — |   | — |   | 250,000 |   |
| Total contractual obligations                     |   | $                          | 9,583,602 |   | $ | 9,708,475 |   | $ | 5,785,187 |   | $ | 5,169,542 |   | $ | 30,246,806 |   |
|                                                   |        |                            |           |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

TheCompany believes, based on its current operating plan, that anticipatedrevenues from operations and borrowings available under the existing line ofcredit will be sufficient to fund its operations and working capitalrequirements for the next 12 months.  Inthe event that the Company’s operating plan changes or proves inaccurate due todecreased revenues, unanticipated expenses, increased competition, unfavorableeconomic conditions, or other unforeseen circumstances, the Company’s liquiditymay be negatively impacted. Accordingly, the Company would be required to adjust its expenditures toconserve working capital or raise additional capital to fund operations.  There can be no assurance, however, that,should the Company require additional financing, such financing will beavailable on terms and conditions acceptable to the Company.

 

**Seasonality**

 

Due to theseasonality of the Company’s business, sales and operating income are typicallyhigher in its second quarter and fourth quarters.  Sales of Easter, graduation and summer merchandise are importantto business in the second quarter and sales of Halloween and Christmasmerchandise are important to business in the fourth quarter.

 

**GeographicConcentration**

 

The Companyhas 32 of its 35 stores located in New England.  As a result, a severe or prolonged economic recession or changesin demographic mix, employment levels, population density, weather, real estatemarket conditions or other factors specific to this geographic region mayadversely affect the Company more than certain of its competitors that are moregeographically diverse.

 

**Effectsof Inflation**

 

The Company does not viewthe effects of inflation to have a material effect upon its business.

 

**Critical Accounting Policies and Estimates**

 

Management’s discussion andanalysis of the financial condition and results of operations is based upon theconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States.  The preparation of these financialstatements requires management to make estimates and judgments that affect thereported amounts of assets, liabilities, revenues and expenses, and relateddisclosure of assets and liabilities. These estimates and judgments are based on historical experience,knowledge of current conditions, and beliefs of what could occur in the futuregiven available information.  Managementconsiders the

 

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following accounting policies to be boththose most important to the portrayal of the Company’s financial condition andthose that require the most subjective judgment.  If actual results differ significantly from management’sestimates and projections, there could be a material effect on the Company’sfinancial statements.

 

*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 EmergingIssues Task Force (EITF) Issue No. 00-14, *Accounting for Certain Sales Incentives*,the Company classifies discounts as a reduction of revenue.  The Company recognizes its revenue withrespect to the Internet operation on a gross basis since the Company is theprimary obligor to the customer and the merchant of record under thearrangement.

 

*Inventory and Related Allowance for Obsolete and ExcessInventory*

 

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 futuresales.  If actual market conditions areless favorable than those projected by management, additional reserves may berequired.

 

*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 thedisclosure-only provisions of Statement of Financial Accounting Standards(“SFAS”) No. 123, *Accounting for Stock-Based Compensation*.

 

*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.  If actual market conditions are less favorable than thoseprojected by management, future write-offs may be necessary.

 

*IncomeTaxes*

 

TheCompany records a valuation allowance against its deferred tax assets becauseof the uncertainty as to their realizability. Should the Company determine that it would be able to realize itsdeferred tax assets in the future an adjustment to the deferred tax assetswould increase income in the period such determination was made.

 

**Factors That May Affect Future Results**

 

Various risks, uncertainties and contingencies could cause theCompany’s actual results, performance or achievements to differ materially fromthose expressed in, or implied by, statements included in this report,including, but not limited to, the following: the success or failure of the Company’s efforts to implement itsbusiness strategy; the Company’s inability to obtain additional financing, ifrequired; third-party suppliers’ failure to fulfill their obligations to theCompany; unseasonable weather; intense competition; the availability of retailstore space on reasonable lease terms; the failure of the Company’s systems orthose of its third-party suppliers; general economic developments affectingconsumer confidence or spending patterns, particularly in the New Englandregion; and government regulation of the Internet.

 

**Item3.  Quantitative and QualitativeDisclosures About Market Risk**

 

Therehas been no material change in the Company’s market risk exposure since thefiling of the Annual Report on Form 10- KSB.

 

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**Item4.  Controls and Procedures**

 

*(a) Evaluation of DisclosureControls and Procedures*

 

Withinthe 90-day period prior to the filing of this report, an evaluation wasperformed under the supervision and with the participation of the Company’smanagement, including the CEO and CFO, of the effectiveness of the design andoperation of the Company’s disclosure controls and procedures.  Based upon that evaluation the Company’s CEOand CFO concluded that the Company’s disclosure controls and procedures aredesigned to ensure the information required to be disclosed by the Company inreports it files or submits under the Securities and Exchange Act is recorded,processed, summarized and reported within the time periods specified in SECrules and forms and are operating in an effective manner.

 

*(b) Changes in InternalControls*

 

Therewere no significant changes in the Company’s internal controls or in otherfactors that could significantly affect those controls subsequent to the dateof their most recent evaluation.

 

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**PARTII**

 

**Item. 6 Exhibits and Reports on Form 8-K**

 

(a) Exhibits

 

99.1 Certification Pursuant to18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-OxleyAct of 2002.

99.2 Certification Pursuant to18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of theSarbanes-Oxley Act of 2002.

 

(b) Reports on Form 8-K

 

None

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned, 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:  May 13, 2003 |   |         |   |
|                           |        |              |  |  |  |  |  |  |  |  |

 

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**CERTIFICATION**

 

I, Sal Perisano, certify that:

 

1.                           Ihave reviewed this quarterly report on Form 10-Q of iParty Corp.;

 

2.                           Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.                           Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.                           Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a) Designed such disclosure controls and procedures to ensure thatmaterial information relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularlyduring the period in which this quarterly report is being prepared;

 

b) Evaluated the effectiveness of the registrant’s disclosure controlsand procedures as of a date within 90 days prior to the filing date of thisquarterly report (the “Evaluation Date”); and

 

c) Presented in this quarterly report our conclusions about theeffectiveness of the disclosure controls and procedures based on our evaluationas of the Evaluation Date;

 

5.                           Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a) All significant deficiencies in the design or operation of internalcontrols which could adversely affect the registrant’s ability to record,process, summarize and report financial data and have identified for theregistrant’s auditors any material weaknesses in internal controls; and

 

b) Any fraud, whether or not material, that involves management orother employees who have a significant role in the registrant’s internalcontrols; and

 

6.                           Theregistrant’s other certifying officer and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 
| Date:  May 13, 2003 | /s/ Sal  Perisano                                  |   |
|--------------------------|----------------------------------------------------|--------|
|                     | Sal Perisano                                       |
|                     | Chairman of  the Board and Chief Executive Officer |

 

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**CERTIFICATION**

 

I, Patrick Farrell, certifythat:

 

1.                           Ihave reviewed this quarterly report on Form 10-Q of iParty Corp.;

 

2.                           Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.                           Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.                           Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a) Designed such disclosure controls and procedures to ensure thatmaterial information relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularlyduring the period in which this quarterly report is being prepared;

 

b) Evaluated the effectiveness of the registrant’s disclosure controlsand procedures as of a date within 90 days prior to the filing date of thisquarterly report (the “Evaluation Date”); and

 

c) Presented in this quarterly report our conclusions about theeffectiveness of the disclosure controls and procedures based on our evaluationas of the Evaluation Date;

 

5.                           Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a) All significant deficiencies in the design or operation of internalcontrols which could adversely affect the registrant’s ability to record,process, summarize and report financial data and have identified for theregistrant’s auditors any material weaknesses in internal controls; and

 

b) Any fraud, whether or not material, that involves management orother employees who have a significant role in the registrant’s internalcontrols; and

 

6.                           Theregistrant’s other certifying officer and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 
| Date:  May 13, 2003 | /s/ Patrick  Farrell                   |   |
|--------------------------|----------------------------------------|--------|
|                     | Patrick  Farrell                       |
|                     | President  and Chief Financial Officer |

 

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