** **

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

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# **FORM 10-Q**

# ** **

**ý****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended March 26,2005**

 

**or**

 

**o****TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from                  to                  **

 

**Commission File Number 0-25507**

 

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**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.) |
|                                                            |       |                                 |
| **270 Bridge Street, Suite 301, Dedham,  Massachusetts**   | ** ** | **02026**                            |
| (Address of principal executive offices)                        |       | (Zip Code)                           |

** **

**(781) 329-3952**

(Registrant’s telephone number, includingarea code)

 

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Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.
|   | Yes ý  No o |
|--------|------------------|

 

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

 

As of May 2,2005, there were 22,115,239 shares of common stock, $.001 par value,outstanding.

 

 

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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 26, 2005 and  December 25, 2004                                                           |   |
|          | Consolidated Statements of Operations –  Three months ended March 26, 2005 and March 27, 2004                                 |   |
|          | Consolidated Statements of Cash Flows –  Three months ended March 26, 2005 and March 27, 2004                                 |   |
|          | 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 1.       | Legal Proceedings                                                                                                                            |   |
|          |                                                                                                                                         |   |
| Item  2.      | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                 |   |
|          |                                                                                                                                         |   |
| Item 3.       | Defaults upon  Senior Securities                                                                                                             |   |
|          |                                                                                                                                         |   |
| Item  4.      | Submission  of Matters to a Vote of Security Holders                                                                                         |   |
|          |                                                                                                                                         |   |
| Item 5.       | Other Information                                                                                                                            |   |
|          |                                                                                                                                         |   |
| Item 6.       | Exhibits                                                                                                                                     |   |
|          |                                                                                                                                         |   |
| SIGNATURES    |                                                                                                                                         |
|          |                                                                                                                                         |   |
| EXHIBIT INDEX |                                                                                                                                         |
|          |                                                                                                                                         |   |
| Ex. 10.1      | Third Amendment to Loan and Security Agreement by and among iParty  Corp., iParty Retail Stores Corp. and Wells Fargo Retail Finance II, LLC |   |
|          |                                                                                                                                         |   |
| 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. 32.1      | Certification of Chief Executive Officer pursuant to 18 U.S.C.  Section 1350                                                            |   |
|          |                                                                                                                                         |   |
| Ex. 32.2      | Certification of Chief Financial Officer pursuant to 18 U.S.C.  Section 1350                                                            |   |

 

1

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**PART I****- FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

 

**iPARTY CORP.**

**CONSOLIDATEDBALANCE SHEETS**

 
| ** **                                                                                                                                                                                                                                                   | ** ** | **Mar 26, 2005** | ** ** | **Dec 25, 2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                                                                                                                                                                                   | ** ** | **(Unaudited)**  | ** ** | ** **       | ** ** |
| **ASSETS**                                                                                                                                                                                                                                                   |       |             |       |             |       |
| Current assets:                                                                                                                                                                                                                                              |       |             |       |             |       |
| Cash and cash equivalents                                                                                                                                                                                                                                    |       | $                | 1,270,319  |             | $          | 1,757,157 |   |
| Restricted cash                                                                                                                                                                                                                                              |       | 581,101          |       | 561,407          |       |
| Accounts receivable                                                                                                                                                                                                                                          |       | 603,192          |       | 700,961          |       |
| Inventory, net                                                                                                                                                                                                                                               |       | 11,543,180       |       | 11,400,971       |       |
| Prepaid expenses and other assets                                                                                                                                                                                                                            |       | 352,176          |       | 476,046          |       |
| Total current assets                                                                                                                                                                                                                                         |       | 14,349,968       |       | 14,896,542       |       |
| Property and equipment, net                                                                                                                                                                                                                                  |       | 4,598,904        |       | 4,483,705        |       |
| Other assets                                                                                                                                                                                                                                                 |       | 92,643           |       | 99,690           |       |
| Total assets                                                                                                                                                                                                                                                 |       | $                | 19,041,515 |             | $          | 19,479,937 |   |
|                                                                                                                                                                                                                                                         |       |             |       |             |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                                |       |             |       |             |       |
| Current liabilities:                                                                                                                                                                                                                                         |       |             |       |             |       |
| Accounts payable                                                                                                                                                                                                                                             |       | $                | 4,117,059  |             | $          | 3,421,195 |   |
| Accrued expenses                                                                                                                                                                                                                                             |       | 2,012,304        |       | 2,615,835        |       |
| Current portion of capital lease  obligations                                                                                                                                                                                                                |       | 374,251          |       | 365,674          |       |
| Borrowings under line of credit                                                                                                                                                                                                                              |       | 6,497,214        |       | 5,257,690        |       |
| Total current liabilities                                                                                                                                                                                                                                    |       | 13,000,828       |       | 11,660,394       |       |
|                                                                                                                                                                                                                                                         |       |             |       |             |       |
| Long-term liabilities:                                                                                                                                                                                                                                       |       |             |       |             |       |
| Capital lease obligations, net of current  portion                                                                                                                                                                                                           |       | 691,668          |       | 796,693          |       |
| Other liabilities                                                                                                                                                                                                                                            |       | 514,207          |       | 471,759          |       |
| Total long-term liabilities                                                                                                                                                                                                                                  |       | 1,205,875        |       | 1,268,452        |       |
|                                                                                                                                                                                                                                                         |       |             |       |             |       |
| Commitments and contingencies                                                                                                                                                                                                                                |       |             |       |             |       |
|                                                                                                                                                                                                                                                         |       |             |       |             |       |
| Stockholders’ equity:                                                                                                                                                                                                                                   |       |             |       |             |       |
| Convertible preferred stock - $.001 par value;  10,000,000 shares authorized,                                                                                                                                                                                |       |             |       |             |       |
| Series B convertible preferred  stock - 1,150,000 shares authorized; 505,710 and 507,460 shares issued and  outstanding at March 26, 2005 and Dec 25, 2004, respectively (aggregate  liquidation value of $10,114,200 at March 26, 2005) |       | 7,524,962        |       | 7,551,002        |       |
| Series C convertible preferred stock -  100,000 shares authorized, issued and outstanding (aggregate liquidation  value of $2,000,000 at March 26, 2005)                                                                                           |       | 1,492,000        |       | 1,492,000        |       |
| Series D convertible preferred stock -  250,000 shares authorized, issued and outstanding (aggregate liquidation  value of $5,000,000 at March 26, 2005)                                                                                           |       | 3,652,500        |       | 3,652,500        |       |
| Series E convertible preferred stock -  296,667 shares authorized, issued and outstanding (aggregate liquidation  value of $1,112,500 at March 26, 2005)                                                                                           |       | 1,112,500        |       | 1,112,500        |       |
| Series F convertible preferred stock -  114,286 shares authorized, issued and outstanding (aggregate liquidation  value of $500,000 at March 26, 2005)                                                                                             |       | 500,000          |       | 500,000          |       |
| Total convertible preferred stock                                                                                                                                                                                                                            |       | 14,281,962       |       | 14,308,002       |       |
|                                                                                                                                                                                                                                                         |       |             |       |             |       |
| Common stock - $.001 par value; 150,000,000  shares authorized; 22,115,239 and 22,092,717 shares issued and outstanding at  March 26, 2005 and Dec 25, 2004, respectively                                                                               |       | 22,115           |       | 22,093           |       |
|                                                                                                                                                                                                                                                         |       |             |       |             |       |
| Additional paid-in capital                                                                                                                                                                                                                                   |       | 50,502,618       |       | 50,448,100       |       |
| Accumulated deficit                                                                                                                                                                                                                                          |       | (59,971,883      | )          | (58,227,104      | )          |
| Total stockholders’ equity                                                                                                                                                                                                                              |       | 4,834,812        |       | 6,551,091        |       |
|                                                                                                                                                                                                                                                         |       |             |       |             |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                              |       | $                | 19,041,515 |             | $          | 19,479,937 |   |

 

Theaccompanying notes are an integral part of these Consolidated FinancialStatements.

 

2

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**iPARTYCORP.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 

| ** **                                | ** ** | **For the three months ended** | ** ** |
|-------------------------------------------|------------|--------------------------------|------------|
| ** **                                | ** ** | **Mar 26, 2005**               | ** ** | **Mar 27, 2004** | ** ** |
| Revenues                                  |       | $                              | 13,159,763 |   | $ | 12,036,066 |   |
| Operating costs:                          |       |                           |       |   |   |
| Cost of goods sold and occupancy costs    |       | 8,165,569                      |       | 7,017,645 |   |
| Marketing and sales                       |       | 4,835,847                      |       | 4,298,590 |   |
| General and administrative                |       | 1,800,950                      |       | 1,574,906 |   |
|                                      |       |                           |       |   |   |
| Operating loss                            |       | (1,642,603                     | )          | (855,075 | ) |
|                                      |       |                           |       |   |   |
| Interest income                           |       | 172                            |       | 180 |   |
| Interest expense                          |       | (102,348                       | )          | (27,426 | ) |
|                                      |       |                           |       |   |   |
| Loss before income taxes                  |       | (1,744,779                     | )          | (882,321 | ) |
|                                      |       |                           |       |   |   |
| Income taxes                              |       | —                         |       | — |   |
|                                      |       |                           |       |   |   |
| Net loss                                  |       | $                              | (1,744,779 | ) | $ | (882,321 | ) |
|                                      |       |                           |       |   |   |
| Net loss available to common stockholders |       | $                              | (1,744,779 | ) | $ | (882,321 | ) |
|                                      |       |                           |       |   |   |
| Basic and diluted net loss per share      |       | $                              | (0.08      | ) | $ | (0.04 | ) |

 

Theaccompanying notes are an integral part of these Consolidated FinancialStatements.

 

3

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**iPARTY CORP.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                   | ** ** | **For the three months ended** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                   | ** ** | **Mar 26, 2005**               | ** ** | **Mar 27, 2004** | ** ** |
| **Operating activities:**                                                    |       |                           |       |   |   |
|                                                                         |       |                           |       |   |   |
| Net Loss                                                                     |       | $                              | (1,744,779 | ) | $ | (882,321 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |       |                           |       |   |   |
| Depreciation and amortization                                                |       | 233,151                        |       | 98,326 |   |
| Deferred rent                                                                |       | 42,448                         |       | 6,493 |   |
| Changes in operating assets and  liabilities:                                |       |                           |       |   |   |
| Accounts receivable                                                          |       | 97,769                         |       | 52,464 |   |
| Inventory                                                                    |       | (142,209                       | )          | (309,586 | ) |
| Prepaid expenses and other assets                                            |       | 193,672                        |       | (553,408 | ) |
| Accounts payable                                                             |       | 695,864                        |       | 1,454,212 |   |
| Accrued expenses and other liabilities                                       |       | (644,833                       | )          | (537,695 | ) |
| Net cash used in operating activities                                        |       | (1,268,917                     | )          | (671,515 | ) |
|                                                                         |       |                           |       |   |   |
| **Investing activities:**                                                    |       |                           |       |   |   |
|                                                                         |       |                           |       |   |   |
| Purchase of property and equipment                                           |       | (348,350                       | )          | (456,447 | ) |
| Net cash used in investing activities                                        |       | (348,350                       | )          | (456,447 | ) |
|                                                                         |       |                           |       |   |   |
| **Financing activities:**                                                    |       |                           |       |   |   |
|                                                                         |       |                           |       |   |   |
| Net borrowings under line of credit                                          |       | 1,239,524                      |       | 161,107 |   |
| Decrease (increase) in restricted cash                                       |       | (19,694                        | )          | 140,245 |   |
| Principal payments on capital lease  obligations                             |       | (96,448                        | )          | (27,000 | ) |
| Deferred financing costs                                                     |       | 7,047                          |       | (44,869 | ) |
| Proceeds from exercise of stock options                                      |       | —                         |       | 3,256 |   |
| Net cash provided by financing activities                                    |       | 1,130,429                      |       | 232,739 |   |
|                                                                         |       |                           |       |   |   |
| **Net decrease in cash and cash equivalents**                                |       | (486,838                       | )          | (895,223 | ) |
|                                                                         |       |                           |       |   |   |
| **Cash and cash equivalents, beginning of  period**                          |       | 1,757,157                      |       | 2,442,471 |   |
|                                                                         |       |                           |       |   |   |
| **Cash and cash equivalents, end of period**                                 |       | $                              | 1,270,319  |   | $ | 1,547,248 |   |
|                                                                         |       |                           |       |   |   |
| Supplemental disclosure of non-cash  financing activities:                   |       |                           |       |   |   |
|                                                                         |       |                           |       |   |   |
| Conversion of Series A convertible  preferred stock to common stock     |       | $                              | —     |   | $ | 1,000,000 |   |
| Conversion of Series B convertible  preferred stock to common stock     |       | 26,040                         |       | 869,349 |   |
| Conversion of Series E convertible  preferred stock to common stock     |       | —                         |       | 85,396 |   |
| Total conversion of convertible preferred  stock to common stock             |       | $                              | 26,040     |   | $ | 1,954,745 |   |

 

Theaccompanying notes are an integral part of these Consolidated FinancialStatements.

 

4

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** **

**iPARTY CORP.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**March 26, 2005**

**(Unaudited)**

 

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

 

*Interim Financial Information*

 

**Theinterim consolidated financial statements as of March 26, 2005 have beenprepared by the Company pursuant to the rules and regulations of theSecurities and Exchange Commission (the “SEC”) for interim financialreporting.  These consolidated statementsare unaudited and, in the opinion of management, include all adjustments(consisting of normal recurring adjustments and accruals) necessary to presentfairly the consolidated balance sheets, consolidated operating results, andconsolidated cash flows for the periods presented in accordance with generallyaccepted accounting principles.  Theconsolidated balance sheet at December 25, 2004 has been derived from theaudited consolidated financial statements at that date.  Operating results for the three months ended March 26,2005 and March 27, 2004 may not be indicative of the results for theentire year due, in part, to the seasonality of the Company’s business.  Historically, higher revenues and operatingincome have been experienced in the second and fourth fiscal quarters.  Certain information and footnote disclosuresnormally included in financial statements prepared in accordance with generallyaccepted accounting principles have been omitted in accordance with the rules andregulations of the SEC.  These consolidatedfinancial statements should be read in conjunction with the auditedconsolidated financial statements, and accompanying notes, included in theCompany’s Annual Report on Form 10-K for the year ended December 25,2004.**

** **

*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.

 

*RevenuesRecognition*

 

Revenues include the selling price of party goods sold, net of returnsand discounts, and are recognized at the point of sale.  The Company estimates returns based uponhistorical return rates and such amounts have not been significant.

 

*Concentrations*

 

TheCompany purchases its inventory from a diverse group of vendors and is notoverly dependent upon any single source for its merchandise, often using morethan one vendor for similar kinds of products.

 

Accountsreceivable primarily represent amounts due from credit card companies andvendors for inventory rebates. Management does not provide for doubtful accounts as such amounts havenot been significant to date; the Company does not require collateral.

 

*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 revenues and expensesduring the reporting period.  Actualresults could differ from these estimates.

 

5

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*Cash and Cash Equivalents andRestricted Cash*

 

The Company considers all highly liquid investments with an originalmaturity date of three months or less to be cash equivalents.  Cash equivalents consist primarily of moneymarket accounts and are carried at cost plus accrued interest, which approximatesfair value.

 

The Company usescontrolled disbursement banking arrangements as part of its cash managementprogram.  Outstanding checks, which wereincluded in accounts payable, totaled $377,454 at March 26, 2005 and$950,156 at December 25, 2004.  TheCompany had sufficient funds available to fund the outstanding checks when theywere presented for payment.

 

Restricted cashrepresents money deposited in blocked accounts established for the benefit ofand under the control of Wells Fargo Retail Finance II, LLC, the Company’s lender underits line of credit, and constitutes collateral for amounts outstanding underthe Company’s line of credit.

 

*FairValue of Financial Instruments*

 

Thecarrying values of cash and cash equivalents, accounts receivable and accountspayable approximate fair value because of the short-term nature of theseinstruments.  The fair value ofborrowings under its line of credit approximates carrying value because thedebt bears interest at a variable market rate.

 

*Inventories*

 

Inventories consist of party supplies and are valuedat the lower of moving weighted-average cost or market.  Inventory has been reduced by an allowancefor obsolete and excess inventory, which is based on management’s review ofinventories on hand compared to estimated future sales.  The activity in the allowance for obsoleteand excess inventory is as follows:

 

| ** **                 | ** ** | **Mar 26, 2005** | ** ** | **Dec 25, 2004** | ** ** |
|----------------------------|------------|------------------|------------|------------------|------------|
| Beginning balance          |       | $                | 1,296,855  |             | $          | 1,400,262 |   |
| Increases to reserve       |       | 75,000           |       | 200,000          |       |
| Write-offs against reserve |       | (4,232           | )          | (303,407         | )          |
| Ending balance             |       | $                | 1,367,623  |             | $          | 1,296,855 |   |

 

The Company records vendor rebates, discounts andcertain other adjustments to inventory, including freight costs, and theseamounts are recognized in the income statement as the related goods are sold.

 

*NetIncome (Loss) per Share*

 

Net income per basic share is computed by dividing net income by theweighted-average number of common shares outstanding plus the common shareequivalents of all outstanding Series B, C, D, E and F convertiblepreferred stock.  The common shareequivalents of Series B, C, D, E and F convertible preferred stock areincluded in the calculation of net income per basic share in accordance withEITF Topic D-95, Effect of Participating Convertible Securities on theComputation of Basic Earnings Per Share, since these convertible preferredstockholders are entitled to participate in dividends when and if declared bythe Board of Directors.  For the periodswith net losses, the Company excludes those common share equivalents sincetheir impact would be anti-dilutive.

 

Net income per diluted share is computed by dividing net income by theweighted-average number of common shares outstanding, plus the common shareequivalents of all outstanding Series B, C, D, E and F convertiblepreferred stock, plus the common share equivalents of the “in the money” stockoptions and warrants as computed by the treasury method.  For the periods with net losses, the Companyexcludes those common share equivalents since their impact would beanti-dilutive.

 

During the first quarter of fiscal 2005, 1,750 shares of Series Bconvertible stock were converted into 22,522 shares of common stock.  During the first quarter of 2004, 1,000,000shares of Series A, 58,424 shares of Series B and 22,772 shares of Series Econvertible stock were converted into 1,987,802 shares of common stock.  As of March 26, 2005, there were38,677,546 potential additional common share equivalents outstanding, whichwere not

 

6

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included in the above calculation because their effect would beanti-dilutive.  These include 15,590,904shares upon the conversion of immediately convertible preferred stock,13,011,215 shares upon the exercise of warrants with a weighted-averageexercise price of $1.37 and 10,075,427 shares upon the exercise of stockoptions with a weighted-average exercise price of $.96.

 

*StockOption Compensation Expense*

 

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

 

The Company has computed the value of options using the Black-Scholesoption pricing model prescribed by SFAS No. 123.  The weighted-average fair value of theoptions granted was $0.56 per share during the first quarter of fiscal 2005 and$0.82 per share during the first quarter of fiscal 2004, using the followingassumptions:  no dividend yield,volatility of 115-116% in 2005 and 119% in 2004, a risk-free interest rate of3.69-4.16% in the first quarter of fiscal 2005 and 2.71-3.02% in the firstquarter of fiscal 2004 and an expected life of five years from the date of thegrant.  Had compensation cost for theCompany’s stock option plan been determined based upon the fair value at thegrant 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** | ** ** |
|-----------------------------------|------------|--------------------------------|------------|
| ** **                        | ** ** | **Mar 26, 2005**               | ** ** | **Mar 27, 2004** | ** ** |
| Net loss:                         |       |                           |       |   |   |
| Reported                          |       | $                              | (1,744,779 | ) | $ | (882,321 | ) |
| Stock option compensation expense |       | (115,063                       | )          | (148,350 | ) |
| Pro forma                         |       | $                              | (1,859,842 | ) | $ | (1,030,671 | ) |
|                              |       |                           |       |   |   |
| Net loss per share:               |       |                           |       |   |   |
| Reported                          |       |                           |       |   |   |
| Basic and diluted:                |       | $                              | (0.08      | ) | $ | (0.04 | ) |
| Pro forma                         |       |                           |       |   |   |
| Basic and diluted:                |       | $                              | (0.08      | ) | $ | (0.05 | ) |

 

*Property and Equipment*

 

Property and equipment are stated at costless accumulated depreciation and are depreciated on the straight-line methodover the estimated useful lives of the assets. Expenditures for maintenance and repairs are charged to operations asincurred.  A listing of the estimateduseful life of the various categories of property and equipment is as follows:

 

| **Asset  Classification**      | ** ** | **Estimated Useful Life**           |
|--------------------------------|------------|-------------------------------------|
| Leasehold improvements         |       | Lesser of term of lease or 10 years |
| Furniture and fixtures         |       | 7 years                             |
| Computer hardware and software |       | 3 years                             |
| Equipment                      |       | 5 years                             |

 

*Accounting for the Impairment of Long-LivedAssets*

 

In accordance with SFAS No. 144, Accounting for the Impairment orDisposal of Long-Lived Assets, the Company reviews each store for impairmentindicators whenever events and changes in circumstances suggest that thecarrying amounts may not be recoverable from estimated future store cashflows.  Our review considers store operating results, future sales growthand cash flows.

 

7

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

** **

This information should be read in conjunction with the unauditedconsolidated financial statements and related notes included in Item 1 of thisQuarterly Report on Form 10-Q and the audited consolidated financialstatements and related notes and Item 7, Management’s Discussion and Analysis,contained in our Annual Report on Form 10-K for the fiscal year ended December 25,2004.

 

**Forward Looking Statements**

 

This Quarterly Report on Form 10-Q, including this discussion andanalysis by management, contains or incorporates forward-looking statementswithin the meaning of Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, asamended.  These forward-lookingstatements are based on current expectations, estimates, forecasts andprojections about the industry and markets in which we operate and ourmanagement’s beliefs and assumptions.  Inaddition, other written or oral statements that constitute forward-lookingstatements may be made by or on our behalf. Words such as “expect”, “anticipate”, “intend”, “plan”, “believe”, “seek”,estimate”, variations of such words and similar expressions are intended toidentify such forward-looking statements. These statements are not guarantees of future performance and involvecertain risks, uncertainties and assumptions that are difficult topredict.  We have included importantfactors in the cautionary statements below under the heading “Factors That May AffectFuture Results” that we believe could cause our actual results to differmaterially from the forward-looking statements we make.  We do not intend to update publicly anyforward-looking statements, whether as a result of new information, futureevents or otherwise.

 

**Overview**

** **

We believe we are a leading brand in the party industry in the marketswe serve and a leading resource in those markets for consumers seeking partygoods, party planning advice and party-related information.  We are a party goods retailer operatingstores throughout New England, where 41 of our 45 retail stores arelocated.  Our other four stores arelocated in Florida.  One new store wasopened during the first quarter, in East Hartford, Connecticut.  We also license the name “iparty.com” (atwww.iparty.com) to a third party in exchange for royalties from Internet sales,which to date have not been significant. The following table shows the number of stores in operation at March 26,2005 and March 27, 2004.

 

| ** **          | ** ** | **For the three months ended** | ** ** |
|---------------------|------------|--------------------------------|------------|
| ** **          | ** ** | **Mar 26, 2005**               | ** ** | **Mar 27, 2004** | ** ** |
| Beginning of period |       | 44                             |       | 38 |   |
| Openings            |       | 1                              |       | — |   |
| Closings            |       | —                         |       | — |   |
| End of period       |       | 45                             |       | 38 |   |

 

Our stores feature over 20,000 products ranging from greeting cards andballoons to more unique merchandise such as piñatas, tiny toys, masquerade andHawaiian Luau items.  Our sales aredriven by the following events: Halloween, Christmas, Easter, Valentine’s Day, New Year’s, IndependenceDay, St. Patrick’s Day, Thanksgiving and Chanukah.  We also focus our business closely onlifetime events such as anniversaries, graduations, birthdays, and bridal orbaby showers.  The following table showsa summary of our revenues and the increase in revenues from the prior yearperiods.

 

| ** **           | ** ** | **For the three months ended** | ** ** |
|----------------------|------------|--------------------------------|------------|
| ** **           | ** ** | **Mar 26, 2005**               | ** ** | **Mar 27, 2004** | ** ** |
| Revenues             |       | $                              | 13,159,763 |   | $ | 12,036,066 |   |
| Increase in revenues |       | 9.3                            | %          | 17.0 | % |
|                      |            |                                |            |  |  |  |  |

 

Our business has a seasonal pattern. In the past three years we have realized over one-third of our annualrevenues in our fourth quarter, which includes Halloween and Christmas, andapproximately 25% of our revenues in the second quarter, which includes schoolgraduations.  Also, during the past threeyears, we have had net income in our second and fourth quarters and generatedlosses in our first and third quarters.

 

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**Resultsof Operations**

** **

Fiscal year 2005 has 53 weeks and ends on December 31, 2005.  Fiscal year 2004 had 52 weeks and ended on December 25,2004.

 

The first quarter of fiscal year 2005 had 13 weeks and ended on March 26,2005.  The first quarter of fiscal year2004 had 13 weeks and ended on March 27, 2004.

 

**ThreeMonths Ended March 26, 2005 Compared to Three Months Ended March 27,2004**

** **

*Revenues*

 

Our consolidated revenues for the first quarter of fiscal 2005 were$13,159,763, an increase of $1,123,697, or 9.3% from the first quarter of theprior fiscal year.  Revenues include theselling price of party goods sold, net of returns and discounts, and arerecognized at the point of sale.

 

Sales for the first quarter of fiscal 2005 included sales from 7 newstores that opened subsequent to the first quarter of 2004, as well as adecrease of 0.7% in comparable store sales. Comparable store sales are defined as sales from those stores open for atleast one full year.  The decrease incomparable store sales was primarily due to severe weather that impacted ourNew England region stores throughout the quarter. Comparable sales in our NewEngland stores were down 1.3% but in Florida where severe weather was not afactor comparable sales increased by 7.5% during the first quarter.

 

*Cost of goods sold and occupancy costs*

 

Our cost of goods sold and occupancy costs for the first quarter offiscal 2005 was $8,165,569, or 62.0% of revenues, an increase of $1,147,924 andan increase of 3.7 percentage points, as a percentage of revenues, from thefirst quarter of the prior fiscal year. Cost of goods sold and occupancy costs consists of the cost ofmerchandise sold to customers and the occupancy costs for our stores.  As a percentage of revenues, the increase wasattributable to our new stores, which operate at a higher occupancy to salesratio until they reach maturity, and increases in our product costs charged tous by certain key vendors.

 

*Marketing and sales expense*

 

Our consolidated marketing and sales expense for the first quarter offiscal 2005 was $4,835,847, or 36.7% of revenues, an increase of $537,257 andan increase of 1.0 percentage points, as a percentage of revenues, from thefirst quarter of the prior fiscal year. Marketing and sales expense consists primarily of advertising andpromotional expenditures, all store payroll and related expenses for personnelengaged in marketing and selling activities and other non-payroll expensesassociated with operating our stores.  Asa percentage of revenues, the increase in marketing and sales expense wasprimarily due to an increase in depreciation expense related to the acquisitionof fixed assets for new stores and our new point-of-sale system.

 

*General and administrative expense*

 

Our consolidated general and administrative (“G&A”) expense for thefirst quarter of fiscal 2005 was $1,800,950, or 13.7% of revenues, an increaseof $226,044 and an increase of 0.6 percentage points, as a percentage ofrevenues, from the first quarter of the prior fiscal year.  G&A expense consists of payroll andrelated expenses for executive, merchandising, finance and administrativepersonnel, as well as information technology, professional fees and othergeneral corporate expenses.  The increasein G&A expense is largely attributable to increased professional fees,primarily related to Sarbanes-Oxley compliance work that we undertook thisquarter, which will continue throughout the remainder of 2005, and support forour new point-of-sale system implemented in 2004.

 

*Interest expense*

 

Our interest expense in the first quarter offiscal 2005 was $102,348, an increase of $74,922 from the first quarter offiscal 2004.  The increase was due to ahigher average loan balance in the first quarter of 2005 and

 

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additionalinterest expense resulting from capital leases associated with our newpoint-of-sale system that were executed during 2004.

 

*Income taxes*

 

We have not provided a benefit for income taxes for the first quarterof fiscal 2005 or fiscal 2004 due to the uncertainty of future taxable income.

 

At the end of fiscal 2004 we had estimated net operating losscarryforwards of approximately $23.0 million, which begin to expire in2018.  In accordance with Section 382of the Internal Revenue Code, the use of these carryforwards will be subject toannual limitations based upon certain ownership changes of our stock that haveoccurred or that may occur.

 

*Net loss*

 

Ournet loss in the first quarter of fiscal 2005 was $1,744,779, or $0.08 per basicand diluted share, compared to a loss of $882,321, or $0.04 per basic anddiluted share, in the first quarter of fiscal 2004.

 

**Liquidityand Capital Resources**

** **

Ouroperating activities used $1,268,917 in cash in the first quarter of fiscal2005 compared to $671,515 in the first quarter of fiscal 2004, an increase of$597,402.  Our net loss of $1,744,779 inthe first quarter of fiscal 2005 compared to a loss of $882,321 in the firstquarter of fiscal 2004,represented $862,458 of this increase. The increase in net loss was partially offset by the increase indepreciation expense and the change in deferred rent.

 

Weused $348,350 of net cash in investing activities in the first quarter offiscal 2005 compared to $456,447 in the first quarter of 2004.  The cash invested in the first quarter of2005 was primarily for fixed assets associated with our new store that openedduring the period.  The cash invested in thefirst quarter of fiscal 2004 was predominantly for fixed assets associated withtwo new stores that were under construction during the period.

 

Weprovided $1,130,429 in net cash by financing activities in the first quarter of2005 compared to $232,739 in the first quarter of 2004.  We increased our borrowings under our line ofcredit by $1,239,524 in the first quarter of 2005 compared to $161,107 in thefirst quarter of 2004.  This increase wasprimarily used to fund the net operating loss in the first quarter of 2005.

 

We have a line of credit (the “line”) with Wells Fargo Retail FinanceII, LLC, which was amended on January 2, 2004.  The amendment extended the maturity date ofthe line to January 2, 2007, eliminated the minimum interest rate of 6.5%,established a new interest rate at the bank’s base rate plus 50 basis points andadded the option to increase the line in increments of $2,500,000 beyond theprevious limit of $7,500,000, to a limit of $12,500,000, upon 15 days writtennotice, as long as we are in compliance with all debt covenants and the otherprovisions of the loan agreement.  Ourinventory and accounts receivable secure our line of credit. We borrow againstthese assets at agreed upon advance rates, which may vary at different times ofthe year.

 

Our inventory consists of party supplies which are valued at the lowerof weighted-average cost or market and are reduced by an allowance for obsoleteand excess inventory and other adjustments, including vendor rebates, discountsand freight costs.  Our line of creditavailability calculation allows us to borrow against “acceptable inventory atcost,” which takes our inventory at cost and reflects adjustments that ourlender has approved which may be different than adjustments we use for valuingour inventory in our financial statements, such as the adjustment to reserve forinventory shortage.  The amount of “acceptableinventory at cost” was $12,993,992 at March 26, 2005.

 

Our accounts receivable consists primarily of vendor rebatesreceivables and credit card receivables. Our line of credit availability calculation allows us to borrow against “eligiblecredit card receivables,” which are the credit card receivables for theprevious three days of business.  Theamount of “eligible credit card receivables” was $275,121 at March 26,2005.

 

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The total borrowing base is then determined by adding the “acceptableinventory at cost” times an agreed upon advance rate plus the “eligible creditcard receivables” times an agreed upon advance rate but not to exceed ourestablished credit limit.  The totalborrowing base at March 26, 2005 was $7,500,000.  Under the terms of our line of credit, thisamount was then further reduced by (1) a minimum availability block, (2) customerdeposits, (3) gift certificates, (4) merchandise credits and (5) outstandingletters of credit.  Therefore, given ourline of credit limit of $7,500,000 our additional availability at March 26,2005 was approximately $137,327.

 

The amounts outstanding under our line were $6,497,214 as of March 26,2005 and $5,257,690 as of December 25, 2004.  The outstanding balances under our line areclassified as current liabilities in the accompanying consolidated balancesheets since we are required to apply daily lock-box receipts to reduce theamount outstanding.

 

As of April 11, 2005, we increased our line of credit limit to$10,000,000 to help finance our present operations and this year’s storeexpansion plan.

 

Subsequent to the end of the first quarter of fiscal 2005, on April 27,2005, we amended our existing agreement to allow for a “special subline” thatwould increase our borrowing base by $500,000. Upon activation of the “special subline”, the interest rate on the lineof credit will be the bank’s base rate plus 75 basis points through the “specialsublime” termination date.  The “specialsubline” can be activated upon 5 days written notice and terminates as of November 1,2005 or earlier upon written notice.  Asof May 2, 2005, we have not activated the “special subline”.

 

Our prospective cash flows are subject to certaintrends, events and uncertainties, including demands for capital to supportgrowth, economic conditions, and contractual matters.  We expect our capital expenditures for 2005to be primarily related to new stores, store improvements and other technologyadvancements in support of growth and operational enhancement.

 
| ** **                                        | ** ** | **Payments Due By Period** | ** ** |
|---------------------------------------------------|------------|----------------------------|------------|
| ** **                                        | ** ** | **Within  1 Year**         | ** ** | **Within  2 - 3  Years** | ** ** | **Within  4 - 5  Years** | ** ** | **After  5 Years** | ** ** | **Total** | ** ** |
| Line of credit                                    |       | $                          | 6,497,214  |   | $ | — |   | $ | — |   | $ | — |   | $ | 6,497,214 |   |
| Capital lease obligations                         |       | 374,251                    |       | 691,668 |   | — |   | — |   | 1,065,919 |   |
| Operating leases (including retail space  leases) |       | 7,400,302                  |       | 13,489,147 |   | 9,311,205 |   | 16,519,260 |   | 46,719,914 |   |
| Total contractual obligations                     |       | $                          | 14,271,767 |   | $ | 14,180,815 |   | $ | 9,311,205 |   | $ | 16,519,260 |   | $ | 54,283,047 |   |

 

**Seasonality**

** **

**Due tothe seasonality of our business, sales and operating income are typicallyhigher in our second and fourth quarters. Our business is highly dependent upon sales of Easter, graduation andsummer merchandise in the second quarter and sales of Halloween and Christmasmerchandise in the fourth quarter.**

** **

**Geographic Concentration**

** **

**At April 26, 2005 we operated a total of 45stores, 41 of which are located in New England. As a result, a severe or prolonged regional recession or regionalchanges in demographics, employment levels, population, weather patterns, realestate market conditions or other factors specific to the New England regionmay adversely affect us more than a company that is more geographicallydiverse.**

** **

**Effectsof Inflation**

** **

Wedo not view the effects of inflation to have a material effect upon ourbusiness.

 

# **Factors That May Affect Future Results**

# ** **

Various risks, uncertainties and contingencies could cause our actualresults, performance or achievements to differ materially from those expressedin, or implied by, statements contained in this Quarterly Report on Form 10-Q,including, but not limited to, the following:

 

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•                  the success orfailure of our efforts to implement our business strategy

•                  our inability toobtain additional financing, if required

•                  third-partysuppliers’ failure to fulfill their obligations to us

•                  unseasonableweather

•                  intensecompetition

•                  the availabilityof retail store space on reasonable lease terms

•                  the failure ofany of our systems, including, without limitation, our newly-installedpoint-of-sale system and our merchandise management system, the latter of whichwas developed by a vendor who is no longer in business

•                  any problemsaffecting our third-party suppliers

•                  general economicand other developments affecting consumer confidence or spending patterns,particularly in the New England region and particularly during the Halloweenseason, which is our single most important season and

•                  compliance withevolving federal securities, accounting, and stock exchange rules andregulations applicable to publicly-traded companies listed on the AmericanStock Exchange.

 

**Critical AccountingPolicies and Estimates**

 

Our financial statements are based on the application of significantaccounting policies, many of which require management to make significantestimates and assumptions (see Note 1 to the consolidated financialstatements).  We believe the followingaccounting policies to be those most important to the portrayal of ourfinancial condition and those that require the most subjective judgment.  If actual results differ significantly frommanagement’s estimates and projections, there could be a material effect on ourfinancial statements.

 

*Inventory and Related Allowance for Obsolete andExcess Inventory*

 

Our inventory consists of party supplies and isvalued at the lower of moving weighted-average cost or market.  We record vendor rebates, discounts andcertain other adjustments to inventory, including freight costs, and werecognize these amounts in the income statement as the related goods are sold.

 

*RevenuesRecognition*

 

Revenues include the selling price of party goods sold, net of returnsand discounts, and are recognized at the point of sale.  We estimate returns based upon historicalreturn rates and such amounts have not been significant.

 

*Impairment of Long-Lived Assets*

 

In accordance with SFAS No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets*, we perform areview of each store for impairment indicators whenever events and changes incircumstances suggest that the carrying amounts may not be recoverable fromestimated future store cash flows.  Ourreview considers store operating results, future sales growth and cashflows.  The conclusion regardingimpairment may differ from current estimates if underlying assumptions orbusiness strategies change.

 

*Income Taxes*

 

Historically, we have not recognized an incometax benefit for our losses.  Accordinglywe record a valuation allowance against our deferred tax assets because of theuncertainty of future taxable income and the realizability of the deferred taxassets.  In determining if a valuationallowance against our deferred tax asset is appropriate, we consider bothpositive and negative evidence.  Thepositive evidence that we considered included (1) we were profitable forthe last two years due to the success of our Halloween seasons and (2) wehave achieved positive comparable store sales growth and improved merchandisemargins during these two years of profitability.  The negative evidence that we consideredincluded (1) our comparable store sales and merchandise margins decreasedduring the first quarter of 2005, (2) we have been profitable for only twoyears and we have been unprofitable for the first nine months of thoseyears,  (3) our future profitabilityis vulnerable to certain risks, including (a) the risk that we may not beable to generate significant taxable income to fully utilize our net operatingloss carryforwards of approximately $23.0 million, (b) the risk ofunseasonable weather in a single geographic region, New England, where ourstores are concentrated, (c) the risk of being so dependent upon a singleseason, Halloween, for a

 

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significantamount of annual sales and profitability and (d) the risk of rising pricesfor petroleum products, which are a key raw material for much of ourmerchandise and which affect our freight costs, (4) the costs for openingnew stores will put pressure on our profit margins until these stores reachmaturity and (5) the investment in infrastructure required to support ourstore expansion plan will increase our costs.

 

The negative evidence is strong enough for us toconclude that the level of our future profitability is uncertain at this time.We believe that it is prudent for us to maintain a valuation allowance until wehave a longer track record of profitability and we can reduce our exposure tothe risks described above.  Should wedetermine that we will be able to realize our deferred tax assets in thefuture, an adjustment to our deferred tax assets would increase income in theperiod we made such a determination.

 

*StockOption Compensation Expense*

 

We account for our stock option compensation agreements with employeesunder the provisions of Accounting Principles Board (“APB”) Opinion No. 25,*Accounting for Stock Issued to Employees*.  We have adopted the disclosure-onlyprovisions of SFAS No. 123, *Accounting for Stock-BasedCompensation*, as amended by SFAS No. 148, *Accountingfor Stock-Based Compensation – Transition and Disclosure, an amendment ofFinancial Accounting Standards Board (“FASB”) Statement No. 123*.

 

*Property and Equipment*

 

Property and equipment are stated at costless accumulated depreciation and are depreciated on the straight-line methodover the estimated useful lives of the assets. At the beginning of fiscal 2004 we adopted a new policy for estimatingthe useful life of fixed assets which extended the useful life of equipment,furniture and fixtures and point-of-sale specific computer hardware andsoftware.  Expenditures for maintenanceand repairs are charged to operations as incurred.

 

*Use of Estimates*

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States requires us 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 revenues and expensesduring the reporting period.  Our actualresults could differ from our estimates.

 

**New Accounting Pronouncements**

 

On December 16, 2004, the Financial AccountingStandards Board (“FASB”) issued FASB Statement No. 123 (revised 2004), *Share-Based Payment*, which is a revisionof FASB Statement No. 123, *Accountingfor Stock-Based Compensation*. Statement 123(R) supersedes APB Opinion No. 25, *Accounting for Stock Issued to Employees*,and amends FASB Statement No. 95, *Statementof Cash Flows*.  Generally, theapproach in Statement 123(R) is similar to the approach described in Statement123.  However, Statement 123(R) requiresall share-based payments to employees, including grants of employee stockoptions, to be recognized in the income statement based on their fairvalues.  Pro forma disclosure is nolonger an alternative.

 

On April 14, 2005, the SEC announced that itwould provide for a phased-in implementation process for Statement 123(R) for publiccompanies.  As a result, we will not berequired to adopt Statement 123(R) until January 1, 2006 (a delay of sixmonths).  Early adoption will bepermitted in periods in which financial statements have not yet beenissued.  We expect to adopt Statement123(R) on January 1, 2006.

 

Statement 123(R) permits public companies to adoptits requirements using one of two methods:

 

•                  A “modified prospective” method in whichcompensation cost is recognized beginning with the effective date (a) basedon the requirements of Statement 123(R) for all share-based payments grantedafter the effective date and (b) based on the requirements of Statement123 for all awards granted to employees prior to the effective date ofStatement 123(R) that remain unvested on the effective date.

 

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•                  A “modified retrospective” method which includesthe requirements of the modified prospective method described above, but alsopermits entities to restate based on the amounts previously recognized underStatement 123 for purposes of pro forma disclosures either (a) all priorperiods presented or (b) prior interim periods of the year of adoption.

 

We have not yet determined which method we willuse.

 

As permitted by Statement 123, we currently accountfor share-based payments to employees using Opinion 25’s intrinsic value methodand, as such, generally recognize no compensation cost for employee stockoptions.  Accordingly, the adoption ofStatement 123(R)’s fair value method will have a significant impact on ourresults of operations, although it will have no impact on our overall financialposition.  The impact of adoption ofStatement 123(R) cannot be predicted at this time because it will depend onlevels of share-based payments granted in the future.  However, had we adopted Statement 123(R) inprior periods, the impact of that standard would have approximated the impactof Statement 123 as described in the disclosure of pro forma net loss and netloss per share discussed above.

 

In February 2005,the Chief Accountant of the SEC issued a letter clarifying his staff’sinterpretation of certain accounting issues and their application undergenerally accepted accounting principles (“GAAP”) relating to operatingleases.  In summary, their interpretationis that (1) leasehold improvements should be amortized by the lessee overthe shorter of their economic lives or the lease term, which could includelease renewal terms when the renewals are “reasonably assured,” (2) freeor reduced rents should be recognized by the lessee on a straight-line basisover the lease term (including any free or reduced rent period) and (3) thestatement of cash flows should reflect cash received from the lessor that isaccounted for as a lease incentive within operating activities and theacquisition of leasehold improvements for cash within investingactivities.  These positions are basedupon existing accounting literature.  Ourpresent accounting policies are consistent with positions described by theChief Accountant and his staff in this letter. Our policy is to amortize leasehold improvements for 10 years or thelife of the lease, whichever period is shorter. Our policy is to amortize free or reduced rent on a straight-line basisover the lease term (including any free or reduced rent periods).  We generally do not enter into agreementsthat involve receiving cash from lessors/landlords.

 

**Item 3.  Quantitativeand Qualitative Disclosures about Market Risk**

 

Therehas been no material change in our market risk exposure since the filing of ourAnnual Report on Form 10-K.

 

**Item4.  Controls and Procedures**

 

(a) *Evaluationof Disclosure Controls and Procedures.** *Our management, with theparticipation of our Chief Executive Officer, or CEO, and Chief FinancialOfficer, or CFO, evaluated the effectiveness of our disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act) as of March 26, 2005.  In designing and evaluating our disclosurecontrols and procedures, our management recognized that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving their objectives, and our managementnecessarily applied its judgment in evaluating the cost-benefit relationship ofpossible controls and procedures.  Basedon this evaluation, our CEO and CFO concluded that, as of March 26, 2005,our disclosure controls and procedures were (1) designed to ensure thatmaterial information relating to us, including our consolidated subsidiaries,is made known to our CEO and CFO by others within those entities, particularlyduring the period in which this report was being prepared and (2) effective,in that they provide reasonable assurance that information required to bedisclosed by us in the reports that we file or submit under the SecuritiesExchange Act is recorded, processed, summarized and reported within the timeperiods specified in the Securities and Exchange Commission’s rules andforms.

 

(b) *Changes in InternalControls. *No change in ourinternal controls over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Securities Exchange Act) occurred during the fiscalquarter ended March 26, 2005 that has materially affected, or isreasonably likely to materially affect, our internal controls over financialreporting.

 

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PART II –OTHER INFORMATION

 

**Item 1.  Legal Proceedings**

 

Notapplicable.

 

**Item 2.  Unregistered Sales of Equity Securities andUse of Proceeds**

 

Notapplicable.

 

**Item 3.  Defaults upon Senior Securities**

 

Notapplicable.

 

**Item 4.  Submission of Matters to a Vote of SecurityHolders**

 

Notapplicable.

 

**Item 5.  Other Information**

 

Notapplicable.

 

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

 

(a) Exhibits

 

The exhibits listed in the Exhibit Indeximmediately preceding the exhibits are filed as part of this Quarterly Reporton Form 10-Q.

 

(b) Reports on Form 8-K

 

On February 28, 2005, we furnished aCurrent Report on Form 8-K under Item 2.02 containing a press releaseannouncing our financial results for the fourth quarter and fiscal year ended December 25,2004.

 

On April 5, 2005, we furnished a CurrentReport on Form 8-K under Item 8.01 containing a press release announcingour two year sponsorship agreement with the Boston Red Sox to be their officialparty supply store.

 

On April 27, 2005, we furnished aCurrent Report on Form 8-K under Item 2.02 containing a press releaseannouncing our financial results for the fiscal quarter ended March 26,2005.

 

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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 9, 2005 |                                                                                |

 

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**EXHIBIT INDEX**

 
| **EXHIBIT  NUMBER** | ** ** | **DESCRIPTION**                                                                                                                                |
|---------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------|
| Ex. 10.1            |       | Third Amendment to Loan and Security  Agreement by and among iParty Corp., iParty Retail Stores Corp. and Wells  Fargo Retail Finance II, LLC. |
| Ex. 31.1            |       | Certification pursuant to Section 302  of the Sarbanes-Oxley Act (Chief Executive Officer).                                               |
| Ex. 31.2            |       | Certification pursuant to Section 302  of the Sarbanes-Oxley Act (Chief Financial Officer).                                               |
| Ex. 32.1            |       | Certification pursuant to 18 U.S.C.  Section 1350 (Chief Executive Officer).                                                              |
| Ex. 32.2            |       | Certification pursuant to 18 U.S.C.  Section 1350 (Chief Financial Officer).                                                              |

 

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