**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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# **FORM 10-Q**

 

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

 

**FOR THE QUARTERLY PERIOD ENDED JUNE 28, 2003**

 

**OR**

 

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

 

**FOR THE TRANSITION PERIODFROM        TO        **

 

**COMMISSION FILE NUMBER 0-25507**

 

**iPARTY CORP.**

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 
| **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 markwhether the registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act during the past 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90days.  Yes  ý  No  o

 

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

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock as of thelatest practicable date.

 

The number of shares of theRegistrant’s common stock outstanding as of August 1,2003:  17,562,972.

 

 

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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  – June 28, 2003 and December 28, 2002                                                          |
|           | Consolidated  Statements of Operations – Three months and six months ended June 28, 2003  and June 29, 2002                 |
|           | Consolidated  Statements of Cash Flows – Six months ended June 28, 2003 and June 29, 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  4.       | Submission  of Matters to a Vote of Security Holders                                                                             |
|           |                                                                                                                             |
| Item 6.        | Exhibits  and Reports on Form 8-K                                                                                                |
|           |                                                                                                                             |
| SIGNATURES     |
|           |
|           |
| Exhibit  Index |
|           |
| Ex.  10.1      | Website  License Agreement between iParty Corp. and Taymark, Inc., dated as of July 8,  2003                                     |
|           |                                                                                                                             |
| Ex.  31.1      | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act                                      |
|           |                                                                                                                             |
| Ex.  31.2      | Certification  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act                                      |
|           |                                                                                                                             |
| Ex.  32        | Certification  of Chief Executive Officer and Chief Financial Officer pursuant to Section  906 of the Sarbanes-Oxley Act of 2002 |

 

1

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**PART I - FINANCIAL INFORMATION**

 

Item 1.  FinancialStatements

 

**iPARTY CORP.**

**CONSOLIDATED BALANCE SHEETS**

 
|                                                                                                                                                                                                                      | ** ** | **Jun 28, 2003** | ** ** | **Dec 28, 2002** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|
|                                                                                                                                                                                                                      | ** ** | **(Unaudited)**  | ** ** | **Restated**     | ** ** |
|                                                                                                                                                                                                                      | ** ** | ** **       | ** ** | **(Note 1)**     | ** ** |
| **ASSETS**                                                                                                                                                                                                                |       |             |       |             |       |
| Current assets:                                                                                                                                                                                                           |       |             |       |             |       |
| Cash and cash equivalents                                                                                                                                                                                                 |       | $                | 2,350,707  |             | $          | 2,326,343 |   |
| Restricted cash                                                                                                                                                                                                           |       | 383,618          |       | 371,952          |       |
| Accounts receivable                                                                                                                                                                                                       |       | 349,882          |       | 445,988          |       |
| Inventory, net                                                                                                                                                                                                            |       | 9,106,940        |       | 8,916,664        |       |
| Prepaid expenses and other assets                                                                                                                                                                                         |       | 658,850          |       | 294,370          |       |
| Total current assets                                                                                                                                                                                                      |       | 12,849,997       |       | 12,355,317       |       |
| Property and equipment, net                                                                                                                                                                                               |       | 1,059,139        |       | 1,128,897        |       |
| Other assets                                                                                                                                                                                                              |       | 287,962          |       | 331,669          |       |
| Total assets                                                                                                                                                                                                              |       | $                | 14,197,098 |             | $          | 13,815,883 |   |
|                                                                                                                                                                                                                      |       |             |       |             |       |
| **LIABILITIES,  CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT**                                                                                                                                              |       |             |       |             |       |
| Current liabilities:                                                                                                                                                                                                      |       |             |       |             |       |
| Accounts payable                                                                                                                                                                                                          |       | $                | 3,421,133  |             | $          | 2,752,311 |   |
| Accrued expenses                                                                                                                                                                                                          |       | 2,023,457        |       | 1,867,496        |       |
| Current portion of capital lease obligations                                                                                                                                                                              |       | 126,996          |       | 237,080          |       |
| Borrowings under line of credit                                                                                                                                                                                           |       | 4,221,995        |       | 3,476,738        |       |
| Total current liabilities                                                                                                                                                                                                 |       | 9,793,581        |       | 8,333,625        |       |
|                                                                                                                                                                                                                      |       |             |       |             |       |
| Long-term liabilities:                                                                                                                                                                                                    |       |             |       |             |       |
| Capital lease obligations, net of current portion                                                                                                                                                                         |       | 1,765            |       | 3,173            |       |
| Other liabilities                                                                                                                                                                                                         |       | 412,328          |       | 678,932          |       |
| Total long-term liabilities                                                                                                                                                                                               |       | 414,093          |       | 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 June 28,  2003)                                                                 |       | 1,000,000        |       | 1,000,000        |       |
| Series B convertible preferred stock – 1,150,000 shares authorized;  648,963 and 684,799 shares issued and outstanding in 2003 and 2002,  respectively (aggregate liquidation value of $12,979,260 at June 28, 2003) |       | 9,656,569        |       | 10,189,809       |       |
| Series C convertible preferred stock – 100,000 shares authorized,  issued and outstanding (aggregate liquidation value of $2,000,000 at June 28,  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 June 28,  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  June 28, 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 June  28, 2003)                                                               |       | 500,000          |       | 500,000          |       |
| Total convertible preferred stock                                                                                                                                                                                         |       | 18,051,069       |       | 18,584,309       |       |
|                                                                                                                                                                                                                      |       |             |       |             |       |
| Stockholders’ deficit:                                                                                                                                                                                               |       |             |       |             |       |
| Common stock - $.001 par value; 150,000,000 shares authorized;  17,468,724 and 16,996,570 shares issued and outstanding in 2003 and 2002,  respectively                                                                   |       | 17,469           |       | 16,997           |       |
| Additional paid-in capital                                                                                                                                                                                                |       | 46,702,629       |       | 46,168,101       |       |
| Accumulated deficit                                                                                                                                                                                                       |       | (60,781,743      | )          | (59,969,254      | )          |
| Total stockholders’ deficit                                                                                                                                                                                          |       | (14,061,645      | )          | (13,784,156      | )          |
|                                                                                                                                                                                                                      |       |             |       |             |       |
| Total liabilities, convertible preferred stock and stockholders’  deficit                                                                                                                                            |       | $                | 14,197,098 |             | $          | 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** | ** ** | **For  the six months ended** | ** ** |
|---------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                            | ** ** | **Jun  28, 2003**               | ** ** | **Jun  29, 2002**             | ** ** | **Jun  28, 2003** | ** ** | **Jun  29, 2002** | ** ** |
| Revenues                              |       | $                               | 13,805,555 |                          | $          | 13,084,475 |   | $ | 24,093,132 |   | $ | 23,670,516 |   |
| Operating costs:                      |       |                            |       |                          |       |   |   |   |   |
| Cost of products sold                 |       | 7,849,863                       |       | 7,674,326                     |       | 14,091,559 |   | 14,320,945 |   |
| Marketing and sales                   |       | 4,252,482                       |       | 3,759,517                     |       | 8,025,341 |   | 7,160,525 |   |
| General and administrative            |       | 1,295,272                       |       | 1,327,005                     |       | 2,681,141 |   | 2,711,439 |   |
|                                  |       |                            |       |                          |       |   |   |   |   |
| Operating income/(loss)               |       | 407,938                         |       | 323,627                       |       | (704,909 | ) | (522,393 | ) |
|                                  |       |                            |       |                          |       |   |   |   |   |
| Other income (expense):               |       |                            |       |                          |       |   |   |   |   |
| Interest income                       |       | 713                             |       | 1,949                         |       | 2,099 |   | 6,654 |   |
| Interest expense                      |       | (56,874                         | )          | (53,638                       | )          | (109,679 | ) | (155,261 | ) |
|                                  |       |                            |       |                          |       |   |   |   |   |
| Net income/(loss)                     |       | $                               | 351,777    |                          | $          | 271,938 |   | $ | (812,489 | ) | $ | (671,000 | ) |
|                                  |       |                            |       |                          |       |   |   |   |   |
| Income/(loss) per share:              |       |                            |       |                          |       |   |   |   |   |
| Basic                                 |       | $                               | 0.02       |                          | $          | 0.02 |   | $ | (0.05 | ) | $ | (0.04 | ) |
| Diluted                               |       | $                               | 0.01       |                          | $          | 0.01 |   | $ | (0.05 | ) | $ | (0.04 | ) |
|                                  |       |                            |       |                          |       |   |   |   |   |
| Weighted-average shares  outstanding: |       |                            |       |                          |       |   |   |   |   |
| Basic                                 |       | 17,374,939                      |       | 15,872,019                    |       | 17,187,437 |   | 15,722,147 |   |
| Diluted                               |       | 37,678,891                      |       | 39,851,907                    |       | 17,187,437 |   | 15,722,147 |   |

 

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 six months ended** | ** ** |
|------------------------------------------------------------------------------|--------|-------------------------------|------------|
|                                                                         |   | **Jun  28, 2003**             | ** ** | **Jun  29, 2002** | ** ** |
|                                                                         |   | ** **                    | ** ** | **Restated** | ** ** |
|                                                                         |   | ** **                    | ** ** | **(Note  1)** | ** ** |
| **Operating activities:**                                                    |   |                          |       |   |   |
|                                                                         |   |                          |       |   |   |
| Net loss                                                                     |   | $                             | (812,489   | ) | $ | (671,000 | ) |
| Adjustments to reconcile  net loss to net cash used in operating activities: |   |                          |       |   |   |
| Depreciation and  amortization                                               |   |                          | 254,789    |   |   | 273,959 |   |
| Deferred rent                                                                |   |                          | (16,603    | ) |   | 64,309 |   |
| Changes in operating  assets and liabilities:                                |   |                          |       |   |   |
| Accounts receivable                                                          |   |                          | 96,106     |   |   | 76,137 |   |
| Inventory                                                                    |   |                          | (190,276   | ) |   | 98,814 |   |
| Prepaid expenses and other  assets                                           |   |                          | (320,773   | ) |   | (288,724 | ) |
| Accounts payable                                                             |   |                          | 668,822    |   |   | 642,364 |   |
| Accrued expenses and other  liabilities                                      |   |                          | (94,040    | ) |   | (601,111 | ) |
| Net cash used in operating  activities                                       |   |                          | (414,464   | ) |   | (405,252 | ) |
|                                                                         |   |                          |       |   |   |
| **Investing activities:**                                                    |   |                          |       |   |   |
|                                                                         |   |                          |       |   |   |
| Purchase of property and  equipment                                          |   |                          | (185,031   | ) |   | (302,377 | ) |
| Decrease (increase) in  restricted cash                                      |   |                          | (11,666    | ) |   | 249,190 |   |
| Net cash used in investing  activities                                       |   |                          | (196,697   | ) |   | (53,187 | ) |
|                                                                         |   |                          |       |   |   |
| **Financing activities:**                                                    |   |                          |       |   |   |
|                                                                         |   |                          |       |   |   |
| Net borrowings under line  of credit                                         |   |                          | 745,257    |   |   | 499,063 |   |
| Principal payments on  capital lease obligations                             |   |                          | (111,492   | ) |   | (130,142 | ) |
| Proceeds from exercise of  stock options                                     |   |                          | 1,760      |   |   | 4,688 |   |
| Net cash provided by  financing activities                                   |   |                          | 635,525    |   |   | 373,609 |   |
|                                                                         |   |                          |       |   |   |
| **Net increase (decrease) in cash and cash equivalents**                     |   |                          | 24,364     |   |   | (84,830 | ) |
|                                                                         |   |                          |       |   |   |
| **Cash and cash equivalents, beginning of period**                           |   |                          | 2,326,343  |   |   | 2,399,084 |   |
|                                                                         |   |                          |       |   |   |
| **Cash and cash equivalents, end of period**                                 |   | $                             | 2,350,707  |   | $ | 2,314,254 |   |
|                                                                         |   |                          |       |   |   |
| Supplemental disclosure of  non-cash financing activities:                   |   |                          |       |   |   |
|                                                                         |   |                          |       |   |   |
| Conversion of Series B  convertible preferred stock to common stock          |   | $                             | 533,240    |   | $ | 869,767 |   |
|                                                                         |   |                          |       |   |   |
| 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**

**June 28, 2003**

**(Unaudited)**

 

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

 

*Interim Financial Information*

 

Theinterim consolidated financial statements as of June 28, 2003 have beenprepared by the Company pursuant to the rules and regulations of the Securitiesand Exchange Commission (the “SEC”) for interim financial reporting. These consolidated statements are unaudited and, in the opinion of management,include all adjustments (consisting of normal recurring adjustments andaccruals) necessary to present fairly the consolidated balance sheets,consolidated operating results, and consolidated cash flows for the periodspresented in accordance with generally accepted accounting principles. The consolidated balance sheet at December 28, 2002 has been derived from theaudited consolidated financial statements at that date.  Operating resultsfor the three months and six months ended June 28, 2003 and June 29, 2002 maynot be indicative of the results for the entire year due, in part, to theseasonality of the Company’s business.  Historically, higher revenues andoperating income been experienced in the second and fourth fiscalquarters.  Certain information and footnote disclosures normally includedin financial statements prepared in accordance with generally acceptedaccounting principles have been omitted in accordance with the rules andregulations of the SEC.  These consolidated financial statements should beread in conjunction with the audited consolidated financial statements, andaccompanying notes, included in the Company’s Annual Report on Form 10-KSB/Afor the year ended December 28, 2002.

 

*Restatement of Financial Information*

 

Theaccompanying consolidated balance sheet as of December 28, 2002 has beenreclassified to present the Company’s Series A - F convertible preferred stockoutside of permanent stockholders’ deficit as a result of the application ofEmerging Issues Task Force (“EITF”) Topic No. D-98*, Classification and Measurement of Redeemable Securities.* The effect of this reclassification is to reduce previously reported totalstockholders’ equity by the carrying values of the respective convertiblepreferred shares outstanding of $18,584,309 at December 28, 2002.  Thesupplemental disclosure of non-cash financing activities has been restated onthe accompanying consolidated statements of cash flows for the six months endedJune 29, 2002 to reflect the conversion of convertible preferred stock at theircarrying values.  This reclassification did not impact the Company’sresults of operations or actual cash flows.

 

The Financial Accounting Standards Board (“FASB”)recently issued Statement of Financial Accounting Standards (“SFAS”) No. 150, *Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity*. SFAS No. 150establishes standards for how an issuer classifies and measures certainfinancial instruments with characteristics of both liabilities andequity.  The Company intends to adopt SFAS No. 150, which goes into effectduring its third quarter.  Since the Company’s convertible preferred stockdoes not meet this Statement’s definition of mandatorily redeemable financialinstruments, the Company intends to classify Series A-F convertible preferredstock as permanent equity for the balance sheet as of September 27, 2003 duringthe third quarter of 2003.

 

*Principles of Consolidation*

 

Theconsolidated financial statements include the accounts of the Company and its wholly-ownedsubsidiaries after elimination of all significant intercompany transactions andbalances.

 

*Revenue Recognition*

 

Revenueis recognized at the point of sale for retail sales and upon shipment tocustomers for Internet sales.  Outbound shipping charges billed toInternet customers are included in revenue.  In accordance with EITF IssueNo. 01-9, *Accounting for Consideration Givenby a Vendor to a Customer (Including a Reseller of the Vendor’s Products)*,the Company classifies discounts as a reduction of revenue.  The Companyrecognizes its revenue with

 

5

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respect to the Internetoperation on a gross basis since the Company is the primary obligor to thecustomer and the merchant of record under the arrangement.

 

*Concentrations*

 

TheCompany’s Internet operation relies on a single vendor as its sole provider forservices including inventory, fulfillment and shipping.  While managementof the Company believes it could obtain similar services from other vendors forsimilar terms, a disruption in the services received from this vendor couldmaterially harm the Company’s Internet business.  As discussed more fullyin Note 4, the Company entered into a new arrangement with its fulfillmentprovider effective July 8, 2003.

 

*Use of Estimates*

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenue and expenses during thereporting period.  Actual results could differ from these estimates.

 

*Cash and Cash Equivalents*

 

The Company uses controlled disbursement bankingarrangements as part of its cash management program.  Outstanding checks,which were included in accounts payable, totaled $520,401 at June 28, 2003 and$945,995 at June 29, 2002.  The Company had sufficient funds available tofund the outstanding checks when they were presented for payment.

 

*Inventory and Related Allowancefor Obsolete and Excess Inventory*

 

Inventoryconsists of party supplies and is valued at the lower of market orweighted-average cost, which approximates FIFO (first-in, first-out). Inventory has been reduced by an allowance for obsolete and excess inventory,which is based on management’s review of inventory on hand compared toestimated future sales.

 

*Net Income/(Loss) per Share*

 

Basicnet income/(loss) per share is computed by dividing net income/(loss) by theweighted-average number of common shares outstanding.  Diluted netincome/(loss) per share is computed by dividing net income/(loss) by theweighted average number of common shares and dilutive common share equivalentsthen outstanding using the treasury-stock method.

 

Asof June 28, 2003, there were 42,027,438 potential additional common shareequivalents outstanding, including 20,219,468 shares upon the conversion ofimmediately convertible preferred stock, 13,563,212 shares upon the exercise ofwarrants with a weighted-average exercise price of $1.43 and 8,244,758 sharesupon the exercise of stock options with a weighted-average exercise price of$1.00, but not included in the above calculation as their effect would havebeen anti-dilutive.

 

*Stock Option Compensation Expense*

 

TheCompany accounts for its stock option compensation agreements with employeesunder the provisions of Accounting Principles Board (“APB”) Opinion No. 25, *Accounting for Stock Issued to Employees*. The Company has adopted the disclosure-only provisions of SFAS No. 123, *Accounting for Stock-Based Compensation*.

 

TheCompany has computed the value of options using the Black-Scholes optionpricing model prescribed by SFAS No. 123.  The weighted-average fair valueof the options granted was $0.20 per share during the second quarter of fiscal2003 and $0.27 per share during the second quarter of fiscal 2002, using theBlack-Scholes option-pricing model with the following assumptions: no dividendyield, volatility of 125% in 2003 and 2002, a risk-free interest rate of 4.32%to 4.90% in the second quarter of fiscal 2003 and 5.72% to 5.95% in the secondquarter of

 

6

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fiscal 2002 and an expectedlife of five years from the date of the grant.  Had compensation cost forthe Company’s stock option plan been determined based upon the fair value atthe grant date for awards under the plan consistent with the methodology prescribedunder SFAS 123, the Company’s net loss and net loss per share would have beenthe following pro forma amounts:

 
|                               | ** ** | **For  the three months ended** | ** **    | **For  the six months ended** | ** ** |
|------------------------------------|------------|---------------------------------|---------------|-------------------------------|------------|
|                               | ** ** | **Jun  28, 2003**               | ** **    | **Jun  29, 2002**             | ** ** | **Jun  28, 2003** | ** ** | **Jun  29, 2002** | ** ** |
| Net income/(loss), as  reported    |       | $                               |  351,777 |                          | $          |  271,938 |   | $ |  (812,489 | ) | $ |  (671,000 | ) |
|                               |       |                            |          |                          |       |   |   |   |   |
| Stock option compensation  expense |       | (108,173                        | )             | (123,964                      | )          | (217,196 | ) | (399,973 | ) |
|                               |       |                            |          |                          |       |   |   |   |   |
| Pro forma net  income/(loss)       |       | $                               |  243,604 |                          | $          |  147,974 |   | $ |  (1,029,685 | ) | $ |  (1,070,973 | ) |
|                               |       |                            |          |                          |       |   |   |   |   |
| Income/loss per share:             |       |                            |          |                          |       |   |   |   |   |
| Basic, as reported                 |       | $                               |  0.02    |                          | $          |  0.02 |   | $ |  (0.05 | ) | $ |  (0.04 | ) |
| Diluted, as reported               |       | $                               |  0.01    |                          | $          |  0.01 |   | $ |  (0.05 | ) | $ |  (0.04 | ) |
|                               |       |                            |          |                          |       |   |   |   |   |
| Basic, pro forma                   |       | $                               |  0.01    |                          | $          |  0.01 |   | $ |  (0.06 | ) | $ |  (0.07 | ) |
| Diluted, pro forma                 |       | $                               |  0.01    |                          | $          |  0.00 |   | $ |  (0.06 | ) | $ |  (0.07 | ) |

 

*Accounting for the Impairment of Long-Lived Assets*

 

Inaccordance with SFAS No. 144, *Accounting forthe Impairment or Disposal of Long-Lived Assets*, the Companyperforms 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, *Disclosures about Segments of anEnterprise and Related Information*, establishes standards for theway business enterprises report information about operating segments in annualfinancial statements and requires that those enterprises report selectedinformation about operating segments in interim financial reports issued tostockholders.

 

Operatingsegments represent components of the Company’s business that are evaluatedregularly by management in assessing the performance and resourceallocation.  Management evaluates a segment’s performance based upon netrevenue, operating income/(loss) and net income/(loss).  In the past theCompany had determined that its reportable segments consisted of a retailstores operation and an Internet operation.  In the second quarter offiscal 2003 the Internet operation’s consolidated net revenue was less than 1%of the Company’s consolidated net revenue, its reported income was less than 5%of the Company’s consolidated income and its assets were less than 1% of theCompany’s consolidated assets.  The Company does not expect these amountsto return to over 10% of the respective consolidated totals.  Therefore,the Company has not reported Internet operating segment information during thisquarter.

 

**3.****  ****NEW ACCOUNTINGPRONOUNCEMENTS:**

 

InJune 2002, the FASB issued SFAS No. 146, *Accountingfor Costs Associated with Exit or Disposal Activities*.  SFASNo. 146 addresses financial accounting and reporting for costs associated withexit or disposal activities and rescinds EITF Issue No. 94-3, *Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (including CertainCosts Incurred in a Restructuring)*.  This Statement requiresthat a liability for a cost associated with an exit or disposal activity berecognized when the liability is incurred.  The

 

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provisions of SFAS No. 146are effective for exit and disposal activities that are initiated afterDecember 31, 2002.  The adoption of SFAS No. 146 did not have a materialimpact on the Company’s consolidated financial position or consolidated resultsof operations.

 

InDecember 2002, the FASB issued SFAS No. 148 , *Accountingfor Stock-Based Compensation – Transition and Disclosure, an amendment of FASBStatement No. 123*.  SFAS No. 148 amends SFAS No. 123 to providealternative methods of transition for an entity that voluntarily changes to thefair value based method of accounting for stock-based employeecompensation.  SFAS 148 also amends the disclosure provisions of SFAS No.123 to require prominent disclosure about the effects on reported net income ofan entity’s accounting policy decisions with respect to stock-based employeecompensation.  SFAS No. 148 also amends APB Opinion No. 28*, Interim Financial Reporting,* to requiredisclosure about those effects in interim financial statements.  TheCompany currently does not intend to voluntarily change from the intrinsicvalue method to the fair value method of accounting for stock-based employeecompensation.  The Company is providing the required disclosure about theeffects on reported net income/(loss) of the Company’s accounting policydecisions with respect to stock-based employee compensation commencing with itsinterim financial statements for the three-month and six month periods endedJune 28, 2003 in Note 1 to the interim financial statements.

 

InJanuary 2003, the EITF issued EITF No. 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 isovercome when the consideration is either a reimbursement of specific,incremental, identifiable costs incurred to sell the vendor’s products, or apayment for assets or services delivered to the vendor.  The adoption ofEITF Issue No. 02-16 in 2003 did not have a material impact on the Company’sresults of operations.

 

InJanuary 2003, the FASB issued Interpretation No. 46, *Consolidation of Variable Interest Entities*,("Interpretation No. 46") to clarify the conditions in which assets,liabilities and activities of another entity should be consolidated into avariable interest entity (including a special purpose entity such as thatutilized in an accounts receivable securitization transaction) by a companythat bears the majority of the risk of loss from the variable interest entity'sactivities, is entitled to receive a majority of the variable interest entity'sresidual returns or both.  Interpretation No. 46 is effective for all newvariable interest entities created or acquired after January 31,2003.  For variable interest entities created or acquired prior toFebruary 1, 2003, the provisions of Interpretation No. 46 must be appliedfor the first interim or annual period beginning after June 15,2003.  The Company is currently in the process of evaluating the impact ofInterpretation No. 46 and has not yet determined the impact on the Company’sresults of operations or financial position.

 

**4.****  ****SUBSEQUENT EVENT:**

 

EffectiveJuly 2003, the Company entered into an agreement with its existing websitefulfillment provider whereby the fulfillment provider will operate an internetsales channel under a license with the Company.  In exchange for the rightto use certain of the Company’s “Licensed Intellectual Property,” as defined,in connection with the operation of the internet sales channel, the licenseewill pay a royalty to the Company based on actual amounts collected fromcustomers less taxes, shipping or handling charges, rush charges, refunds,credits, and allowances.  The agreement is for two years and will renew ona yearly basis unless either party provides notice of non-renewal.

 

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

 

Thisinformation should be read in conjunction with the unaudited consolidatedfinancial statements and related notes included in Item 1 of this QuarterlyReport on Form 10-Q and the audited consolidated financial statements andrelated notes and Item 6, Management’s Discussion and Analysis, contained inthe Company’s Annual Report on Form 10-KSB/A for the fiscal year ended December28, 2002.

 

Certainstatements in this Form 10-Q constitute or incorporate “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21Eof the Securities Exchange Act of 1934, as amended (the “statutory safeharbors”).  The words “anticipates,” “believes,” “estimates,” “expects,”“plans,” “intends” and other similar expressions are intended to identify theseforward-looking statements, but are not the exclusive means of identifyingthem.  The Company

 

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desires to avail itself ofthe statutory safe harbors and is therefore including this special note toenable it to do so.  Forward-looking statements included in this Form 10-Qor hereafter included in other publicly available documents filed with theSecurities and Exchange Commission, reports to the Company’s stockholders andother publicly available statements issued or released by the Company involveknown and unknown risks, uncertainties, and other factors which could cause theCompany’s actual results, performance (financial or operating) or achievementsto differ from the future results, performance (financial or operating) orachievements expressed or implied by such forward looking statements. Such future results are based upon the Company’s best estimates based uponcurrent conditions and the most recent results of operations.  Variousrisks, uncertainties and contingencies could cause the Company’s actualresults, performance or achievements to differ materially from those expressedin, or implied by, these statements, including, but not limited to, thefollowing:  the success or failure of the Company’s efforts to implementits business strategy; the Company’s inability to obtain additional financing,if required; 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.

 

**Overview**

 

iPartybelieves it is a leading brand in the party industry in the markets it servesand is a leading resource for consumers in those markets seeking party goods,party planning advice and relevant information.  iParty is a multi-channelretailer that operates 35 retail stores and licenses the operation of anInternet site at www.iparty.com.  The Company’s website was launched inFebruary 1999.  On August 15, 2000 the Company’s wholly-owned subsidiary,iParty Retail Stores Corp., purchased assets consisting of 33 store leases,fixtures and inventory from The Big Party Corporation.  This enabled theCompany to set up a retail stores operation and to become a multi-channelretailer for party goods.  In the second quarter of fiscal 2003 over 99%of the Company’s revenues were derived from its retail stores operation. The Company’s retail stores operation is supplemented by its licensee’sInternet operation, which provides convenience to those customers who choose toshop over the Internet.  Effective July 8, 2003, the Company entered intoan agreement with its existing website fulfillment provider whereby thefulfillment provider will operate an internet sales channel under a licensewith the Company.  In exchange for the right to use certain of the Company’s“Licensed Intellectual Property,” as defined, in connection with the operationof the internet sales channel, the licensee will pay a royalty to the Companybased on actual amounts collected from customers less taxes, shipping orhandling charges, rush charges, refunds, credits, and allowances.

 

**Results of Operations**

 

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

 

Thesecond quarter of fiscal year 2003 had 13 weeks and ended on June 28,2003.  The second quarter of fiscal year 2002 had 13 weeks and ended onJune 29, 2002.

 

**Three months ended June 28, 2003 compared to three monthsended June 29, 2002**

 

*Revenue*

 

Revenuefor the second quarter of fiscal 2003 was $13,805,555, an increase of $721,080,or 5.5% compared to the second quarter of the prior fiscal year.  Revenueincludes the selling price of party goods sold, net of returns and discounts,as well as outbound shipping and handling charges billed.  Revenue isrecognized at the point of sale for retail sales and upon shipment to customersfor Internet sales.

 

Salesfor the second quarter of fiscal 2003 included sales from one store that openedin late March 2002 and one store that opened in early September 2002, as wellas an increase of 3.2% in comparable store sales.  Comparable store salesare defined as sales from those stores open for at least one full year. Due to the strong seasonality of our business, comparable store sales for thesecond quarter of fiscal 2003 were positively affected by Easter falling threeweeks later this year, twenty-two days into the second quarter of fiscal2003.  Last year, Easter occurred on the first day of the second quarterof fiscal 2002.

 

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*Cost of products sold*

 

Costof products sold for the second quarter of fiscal 2003 was 56.9% of revenue, adecrease as a percentage of revenue of 1.8 percentage points from the secondquarter of the prior fiscal year.  Cost of products sold consists of the costof merchandise sold to customers, store occupancy costs, warehousing costs, andoutbound shipping and handling costs charged to the Company by its websitefulfillment partner, Taymark.  This decrease as a percentage of revenueswas largely attributable to improved vendor terms and pricing and a decrease inprovisions for inventory reserves.

 

*Marketing and sales expense*

 

Marketingand sales expense for the second quarter of fiscal 2003 was $4,252,482, or30.8% of revenue, an increase of $492,965 from the second quarter of the priorfiscal year.  As a percentage of revenue, marketing and sales expenseincreased by 2.1 percentage points from the prior fiscal year.  Marketingand sales expense consists primarily of store payroll and related expenses forpersonnel engaged in marketing and selling activities and advertising, publicrelations and promotional expenditures.

 

Theincrease in marketing and sales expense as a percentage of revenue was largelyattributable to increases in advertising and store payroll and other storeselling related expenses.  Spending on advertising as a percentage ofrevenue increased 0.8 percentage points, primarily related to a new TV andradio advertising campaign intended to raise iParty’s name recognition in ourretail markets.  Store payroll costs as a percentage of revenue increased0.4 percentage points, reflecting the Company’s commitment to staffing itsstores to provide superior customer service.  Associated fringe benefitscosts as a percentage of revenue increased 0.2 percentage points due toincreased payroll and health insurance costs.

 

*General and administrative expense*

 

Generaland administrative (“G&A”) expense for the second quarter of fiscal 2003was $1,295,272, or 9.4% of revenue, a decrease of $31,733 and an increase as apercentage of revenue of 0.7 percentage points from the second quarter of theprior fiscal year.  G&A expense consists of payroll and relatedexpenses for executive, merchandising, finance and administrative personnel, aswell as information technology, professional fees and other general corporateexpenses.

 

Theamount spent on G&A was relatively consistent from the second quarter offiscal 2002 to the second quarter of fiscal 2003.

 

*Interest income*

 

Interestincome on cash and cash equivalents in the second quarter of fiscal 2003 was$713, a decrease of $1,236 from the second quarter of fiscal 2002.  Thedecrease in interest income was due to lower cash and investment balances.

 

*Interest expense*

 

Interest expense in the second quarter of fiscal 2003was $56,874, an increase of $3,236 from the second quarter of fiscal2002.  The increase was due to a higher average loan balance on theCompany’s line of credit in the second quarter of fiscal 2003 compared to thesecond quarter of fiscal 2002.

 

*Income taxes*

 

TheCompany has not provided for income taxes for the second quarter of fiscal 2003or the second quarter of fiscal 2002 based upon net operating losscarryforwards available to the Company.

 

Atthe 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.  In accordance with Section 382 of the

 

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Internal Revenue Code, theuse of these carryforwards will be subject to annual limitations based uponcertain ownership changes of the Company’s stock that may occur.

 

*Net income*

 

Netincome in the second quarter of fiscal 2003 was $351,777, or $0.02 per basicshare and $0.01 per diluted share, compared to $271,938, or $0.02 per basic and$0.01 per diluted share, in the second quarter of fiscal 2002.

 

**Six months ended June 28, 2003 compared to six months endedJune 29, 2002**

 

*Revenue*

 

Revenuefor the first six months of fiscal 2003 was $24,093,132, an increase of$422,616, or 1.8% compared to the first six months of the prior fiscalyear.  Revenue includes the selling price of party goods sold, net ofreturns and discounts, as well as outbound shipping and handling chargesbilled.  Revenue is recognized at the point of sale for retail sales andupon shipment to customers for Internet sales.

 

Salesfor the first six months of fiscal 2003 included sales from one store thatopened in late March 2002 and one store that opened in early September 2002,offset by a decrease of 1.6% in comparable store sales.  Comparable storesales are defined as sales from those stores open for at least one fullyear.  Early in the year unusually cold and snowy weather in our keymarkets and the war in Iraq had an adverse affect on our sales. Throughout the first six months of the year low consumer confidence contributedto a weak retail environment.

 

*Cost of products sold*

 

Costof products sold for the first six months of fiscal 2003 was 58.5% of revenue,a decrease as a percentage of revenue of 2.0 percentage points from the firstsix months of the prior fiscal year.  Cost of products sold consists ofthe cost of merchandise sold to customers, store occupancy costs, warehousingcosts, and outbound shipping and handling costs charged to the Company by itswebsite fulfillment partner, Taymark.

 

Thisdecrease as a percentage of revenues was largely attributable to improvedvendor terms and pricing and a decrease in provisions for inventory reservespartially offset by fixed store occupancy costs.

 

*Marketing and sales expense*

 

Marketingand sales expense for the first six months of fiscal 2003 was $8,025,341, or33.3% of revenue, an increase of $864,816 from the first six months of theprior fiscal year.  As a percentage of revenue, marketing and salesexpense increased by 3.1 percentage points from the prior fiscal year. Marketing and sales expense consists primarily of store payroll and relatedexpenses for personnel engaged in marketing and selling activities and advertising,public relations and promotional expenditures.

 

Theincrease in marketing and sales expense as a percentage of revenue was largelyattributable to increases in store payroll and other store selling relatedexpenses and advertising.  Store payroll costs as a percentage of revenueincreased 1.1 percentage points as the Company maintained its commitment toprovide superior customer service by continuing to staff its stores accordinglyeven though comparable store sales declined.  Associated fringe benefitscosts as a percentage of revenue increased 0.4 percentage points due toincreased payroll and health insurance costs.

 

*General and administrative expense*

 

Generaland administrative (“G&A”) expense for the first six months of fiscal 2003was $2,681,141, or 11.1% of revenue, a decrease of $30,298 and a decrease as apercentage of revenue of 0.3 percentage points from the first six months of theprior fiscal year.  G&A expense consists of payroll and relatedexpenses for executive, merchandising, finance and administrative personnel, aswell as information technology, professional fees and other general corporateexpenses.

 

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Theamount spent on G&A was relatively consistent from the first six months offiscal 2002 to the first six months of fiscal 2003.

 

*Interest income*

 

Interestincome on cash and cash equivalents in the first six months of fiscal 2003 was$2,099, a decrease of $4,555 from the first six months of fiscal 2002. The decrease in interest income was due to lower cash and investment balances.

 

*Interest expense*

 

Interest expense in the first six months of fiscal2003 was $109,679, a decrease of $45,582 from the first six months of fiscal2002.  The decrease in interest expense was attributable to the subsequentexpiration of certain capital leases in place during the first six months offiscal 2002 and to lower average daily balances on the line of credit duringthe first six months of 2003 compared to the first six months of 2002.

 

*Income taxes*

 

TheCompany has not provided for a benefit for income taxes for the first sixmonths of fiscal 2003 or the first six months of fiscal 2002 due to theuncertainty of future taxable income.

 

Atthe 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.  In accordance with Section 382 of theInternal Revenue Code, the use of these carryforwards will be subject to annuallimitations based upon certain ownership changes of the Company’s stock thatmay occur.

 

*Net loss*

 

Netloss in the first six months of fiscal 2003 was $812,489, or $0.05 per basicand diluted share, compared to $671,000, or $0.04 per basic and diluted share,in the first six months of fiscal 2002.

 

**Liquidity and Capital Resources**

 

TheCompany’s operating activities used $414,464 in cash in the first six months offiscal 2003.  This use of cash was predominantly due to the net loss, anincrease in prepaid expenses and other assets, including insurance and seasonalprepayments, partially offset by an increase in accounts payable, whichreflected better payment terms on inventory purchases.  The Company’soperating activities used $405,252 in cash in the first six months of fiscal2002, which is consistent with the first six months of fiscal 2003.

 

TheCompany invested cash in property and equipment totaling $185,031 and $302,377in the first six months of fiscal 2003 and 2002, respectively.  The cashinvested in the first six months of fiscal 2003 included the purchase ofpersonal computer software licenses and new fixtures for existing stores. The cash invested in the first six months of fiscal 2002 included certainassets associated with the new store that opened in March 2002.

 

TheCompany provided $635,525 in net cash in financing activities in the first sixmonths of fiscal 2003 and $373,609 in the first six months of fiscal2002.  To fund the cash used in operations, the Company increased the netborrowings under its line of credit to $4,221,995 at June 28, 2003 compared to$3,476,738 at December 28, 2002.

 

TheCompany has a line of credit with Wells Fargo Retail Finance.  On May 23,2002 the Company amended its existing line of credit (the “line”).  Theamendment extended the term of the line through July 31, 2004, reduced theminimum interest rate and eliminated certain financial covenants. Interest on the amended line of credit is payable at the greater of the bank’sbase rate plus 1%, or 6.5%.  Borrowings outstanding at June 28, 2003accrued interest at 6.5%.  The amended line allows for borrowings equal tothe lesser of $7,500,000, or the borrowing base, as defined.  Itsinventory and other assets secure the Company’s line of credit.  Theamended line of credit generally prohibits the payment of any dividends orother distributions to any of the Company’s classes of capital stock.

 

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Theamounts outstanding under the Company’s line of credit as of June 28, 2003 andDecember 28, 2002 were $4,221,995 and $3,476,738, respectively.  Theoutstanding balances under the line of credit are classified as currentliabilities in the accompanying consolidated balance sheets, since the Companyis required to apply daily lock-box receipts to reduce the amountoutstanding.  At June 28, 2003, the Company had approximately $2,479,000of additional availability under the line of credit.

 

Theamended agreement includes a financial covenant, which requires the Company tomaintain a minimum availability under the line of credit in the amount of$300,000 at the end of each month.  At June 28, 2003, the Company was incompliance with this financial covenant.

 

In 2000 the Company purchased inventory, fixedassets and the leases of 33 retail stores from the Big Party, (“the seller”) inconsideration of cash and assumption of certain liabilities.  In addition,the Company agreed to pay the seller, no later than March 31, 2004, an amountequivalent to the greater of $250,000, or a percentage of the aggregate operatingresults of the 33 acquired locations.  In connection with the Company’spurchase accounting in 2000, the Company accrued the guaranteed amount of$250,000.  As of June 28,2003, the Company has $250,000 included inaccrued expenses in the accompanying consolidated balance sheets, whichreflects the Company’s current estimate of the liability.

 

The Company’s prospective cash flows are subject tocertain trends, events and uncertainties, including demands for capital tosupport growth, economic conditions, and contractual matters.  The Companyexpects its capital expenditures for 2003 to be primarily related to newstores, store improvements and technology advancements in support of growth andoperational enhancement.

 

Contractual obligations at June 28, 2003, includingleases signed for four stores yet to open, were as follows:

 
| ** **                                        | ** ** | **Payments  Due By Period** | ** ** |
|---------------------------------------------------|------------|-----------------------------|------------|
| ** **                                        | ** ** | **1  Year**                 | ** ** | **2  - 3  Years** | ** ** | **4  - 5  Years** | ** ** | **After  5 Years** | ** ** | **Total** | ** ** |
| Line of credit                                    |       | $                           | 4,221,995  |   |   |   |   |   |   |   | $ | 4,221,995 |   |
| Capital lease obligations                         |       | 126,996                     |       | 1,764 |   | — |   | — |   | 128,760 |   |
| Operating leases  (including retail space leases) |       | 5,592,887                   |       | 10,384,268 |   | 6,083,489 |   | 7,278,102 |   | 29,338,746 |   |
| Earn-out agreement  included in accrued expenses  |       | 250,000                     |       | — |   | — |   | — |   | 250,000 |   |
| Total contractual  obligations                    |       | $                           | 10,191,878 |   | $ | 10,386,032 |   | $ | 6,083,489 |   | $ | 7,278,102 |   | $ | 33,939,501 |   |
|                                                   |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The Company believes, based on its current operatingplan, that anticipated revenues from operations and borrowings available underthe existing line of credit will be sufficient to fund its operations andworking capital requirements for the next 12 months.  In the event thatthe Company’s operating plan changes or proves inaccurate due to decreasedrevenues, unanticipated expenses, increased competition, unfavorable economicconditions, or other unforeseen circumstances, the Company’s liquidity may benegatively impacted.  Accordingly, the Company would be required to adjustits expenditures to conserve working capital or raise additional capital tofund operations.  There can be no assurance, however, that, should theCompany require additional financing, such financing will be available on termsand conditions acceptable to the Company.

 

**Seasonality**

 

Dueto the seasonality of the Company’s business, sales and operating income aretypically higher in its second and fourth quarters.  The Company’sbusiness is highly dependent upon sales of Easter, graduation and summermerchandise in the second quarter and sales of Halloween and Christmasmerchandise in the fourth quarter.

 

**Geographic Concentration**

 

TheCompany has 32 of its 35 stores located in New England.  As a result, asevere or prolonged economic recession or changes in demographic mix,employment levels, population density, weather, real estate market conditionsor other factors specific to this geographic region may adversely affect theCompany more than certain of its competitors that are more geographicallydiverse.

 

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**Effects of Inflation**

 

TheCompany does not view the effects of inflation to have a material effect uponits business.

 

**Critical Accounting Policies and Estimates**

 

Management’sdiscussion and analysis of the financial condition and results of operations isbased upon the consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the UnitedStates.  The preparation of these financial statements requires managementto make estimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of assets andliabilities.  These estimates and judgments are based on historicalexperience, knowledge of current conditions, and beliefs of what could occur inthe future given available information.  Management considers thefollowing accounting policies to be both those most important to the portrayalof the Company’s financial condition and those that require the most subjectivejudgment.  If actual results differ significantly from management’sestimates and projections, there could be a material effect on the Company’sfinancial statements.

 

*Revenue Recognition*

 

Revenueis recognized at the point of sale for retail sales and upon shipment tocustomers for Internet sales.  Outbound shipping charges billed toInternet customers are included in revenue.  In accordance with EITF IssueNo. 01-9, *Accounting for Consideration Givenby a Vendor to a Customer (Including a Reseller of the Vendor’s Products)*,the Company classifies discounts as a reduction of revenue.  The Companyrecognizes its revenue with respect to the Internet operation on a gross basissince the Company is the primary obligor to the customer and the merchant ofrecord under the arrangement.

 

*Inventory and Related Allowancefor Obsolete and Excess Inventory*

 

Inventoryconsists of party supplies and is valued at the lower of market orweighted-average cost, which approximates FIFO (first-in, first-out). Inventory has been reduced by an allowance for obsolete and excess inventory, whichis based on management’s review of inventory on hand compared to estimatedfuture sales.  If actual market conditions are less favorable than thoseprojected by management, additional reserves may be required.

 

*Stock Option Compensation Expense*

 

TheCompany accounts for its stock option compensation agreements with employeesunder the provisions of APB Opinion No. 25, *Accountingfor Stock Issued to Employees*.  The Company has adopted thedisclosure-only provisions of SFAS No. 123, *Accountingfor Stock-Based Compensation*.

 

*Accounting for the Impairment of Long-Lived Assets*

 

Inaccordance with SFAS No. 144, *Accounting forthe Impairment or Disposal of Long-Lived Assets*, the Companyperforms an impairment review quarterly.  If actual market conditions are lessfavorable than those projected by management, future write-offs may benecessary.

 

*Income Taxes*

 

The Company records a valuation allowance againstits deferred tax assets because of the uncertainty as to theirrealizability.  Should the Company determine that it would be able torealize its deferred tax assets in the future an adjustment to the deferred taxassets would increase income in the period such determination was made.

 

**Factors That May Affect Future Results**

 

Variousrisks, uncertainties and contingencies could cause the Company’s actualresults, performance or achievements to differ materially from those expressedin, or implied by, statements included in this report, including, but notlimited to, the following:  the success or failure of the Company’sefforts to implement its

 

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business strategy; theCompany’s inability to obtain additional financing, if required; third-partysuppliers’ failure to fulfill their obligations to the Company; unseasonableweather; intense competition; the availability of retail store space onreasonable lease terms; the failure of the Company’s systems or those of itsthird-party suppliers; general economic developments affecting consumerconfidence or spending patterns, particularly in the New England region;government regulation of the Internet; and compliance with evolving federalsecurities and accounting regulations applicable to publicly-traded companieslisted on the American Stock Exchange.

 

**Item3.  Quantitative and Qualitative Disclosures About Market Risk**

 

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

 

**Item4.  Controls and Procedures**

 

*(a) Evaluation of Disclosure Controls and Procedures*

 

Asof June 28, 2003, an evaluation was performed under the supervision and withthe participation of the Company’s management, including the Chief ExecutiveOfficer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness ofthe design and operation of the Company’s disclosure controls and procedures,as required by applicable federal securities laws and regulations, includingExchange Act Rules 13a-15(e) and 15d-15(e).   Based on thatevaluation, the Company’s management, including the CEO and CFO, concluded thatthe Company’s disclosure controls and procedures were effective as of June 28,2003.   There have been no significant changes in the Company’sinternal controls or in other factors that could significantly affect internal controlssubsequent to June 28, 2003.

 

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**PART II – OTHER INFORMATION**

 

**Item4.  Submission of Matters to a Vote of Security Holders**

 

OnJune 17, 2003, the Company held its Annual Meeting of Stockholders.  Sharesrepresenting approximately 87% of the total number of votes eligible to be castwere represented at the meeting either in person or by proxy.  At themeeting, the stockholders re-elected four (4) Directors to the Company’s Boardof Directors.  Set forth below are (i) the names of the persons elected toserve on the Company’s Board of Directors until the next Annual Meeting ofStockholders and until their successors are duly elected and qualified and (ii)the results of the voting for the nominees.

 
| **Director**     | ** ** | **Votes  For** | ** ** | **Percentage** | ** ** | **Votes  Against** | ** ** | **Percentage** | ** ** |
|------------------|------------|----------------|------------|----------------|------------|--------------------|------------|----------------|------------|
| Sal Perisano     |       | 31,206,255     |       | 99.8           | %          | 47,506             |       | 0.2            | %          |
| Robert H. Lessin |       | 31,206,755     |       | 99.8           | %          | 47,006             |       | 0.2            | %          |
| Lorenzo Roccia   |       | 31,205,705     |       | 99.8           | %          | 48,056             |       | 0.2            | %          |
| Christina Weaver |       | 3,500,000      |       | 100.0          | %          | —             |       | 0.0            | %          |

 

**Item6.  Exhibits and Reports on Form 8-K**

 

(a) Exhibits

 

10.1 Website LicenseAgreement between iParty Corp. and Taymark, Inc. dated as of July 8, 2003.

31.1 Certification of ChiefExecutive Officer pursuant to Section 302 of the Sarbanes-Oxley Act.

31.2 Certification of ChiefFinancial Officer pursuant to Section 302 of the Sarbanes-Oxley Act.

32    Certification of Chief Executive Officerand Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act.

 

(b) Reports on Form 8-K

 

On May 6, 2003 and August 6,2003 the Company filed Current Reports on Form 8-K under Item 9, Regulation FDDisclosure.

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be 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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