U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
-
For the quarterly period ended June 30, 2001
--------------
OR
/__/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________________ to ____________________
Commission File No. 0-25507
-------
iPARTY CORP.
------------
(Exact name of registrant as specified in its charter)
Delaware 13-4012236
-------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation of organization)
1457 VFW Parkway West Roxbury, MA 02132
---------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 323-0822
------------------------------------------------------------------------------
(Former name or former address, if changed since last report.)
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes X No ___
Transitional small business disclosure format
Yes No X
On August 8, 2001 there were 13,574,095 shares of the Registrant's
common stock, $.001 par value, issued and outstanding.
--------------------------------------------------------------------------------
Page 1
iPARTY CORP.
Quarterly Report on Form 10-QSB
Table of Contents
PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements 3
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis 11
PART II OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 4. Submission of Matters to vote of Security Holders 15
Item 6. Exhibits 15
SIGNATURES
--------------------------------------------------------------------------------
Page 2
iParty Corp.
Consolidated Balance Sheets
June 30, December 30,
ASSETS 2001 2000
---- ----
(Unaudited)
-----------
Current assets:
Cash and cash equivalents $ 3,354,181 $ 5,002,254
Cash, restricted 155,564 635,000
Accounts receivable 522,357 948,292
Inventory 9,386,749 8,226,560
Prepaid expenses and other current assets 727,688 69,812
------------ ------------
Total current assets 14,146,539 14,881,918
Property and equipment, net 786,377 903,849
Other assets 194,664 557,286
------------ ------------
Total assets $ 15,127,580 $ 16,343,053
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,324,016 $ 2,415,679
Accrued severance and restructuring expenses 99,828 775,137
Accrued expenses 1,858,675 2,434,480
Line of credit 3,459,687 2,800,790
------------ -------------
Total current liabilities 8,742,206 8,426,086
Other liabilities: 614,238 492,465
------------ -------------
Total liabilities 9,356,444 8,918,551
Commitments and contingencies
Stockholders' equity:
Preferred stock - $.001 par value; 10,000,000 shares authorized; Series A
preferred stock - 1,000,000 shares authorized,
issued and outstanding 1,000 1,000
Series B preferred stock - 1,413,352 authorized;
1,291,748 and 1,413,352 shares issued and outstanding as of 1,291 1,414
June 30, 2001 and December 30, 2000, respectively
Series C preferred stock - 145,198 shares authorized,
issued and outstanding 145 145
Series D preferred stock - 362,996 shares authorized,
issued and outstanding 363 363
Series E preferred stock - 533,333 shares authorized,
issued and outstanding 533 533
Series F preferred stock - 114,286 shares authorized,
issued and outstanding 114 114
Common stock - $.001 par value; 150,000,000 shares authorized;
13,390,785 and 12,174,745 shares issued and outstanding as of 13,391 12,175
June 30, 2001 and December 30, 2000, respectively
Additional paid in capital 64,365,522 64,166,987
Accumulated deficit (58,611,223) (56,758,229)
------------ ------------
Total stockholders' equity 5,771,136 7,424,502
------------ ------------
Total liabilities and stockholders' equity $ 15,127,580 $ 16,343,053
============ ============
The accompanying Notes are an interal part of these Consolidated Financial
Statements
--------------------------------------------------------------------------------
Page 3
iParty Corp.
Consolidated Statements of Operations
For the three months For the six months ended
ended June 30, June 30,
2001 2000 2001 2000
---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ---------- ---------- ----------
Revenues $ 12,250,177 $ 259,852 $ 21,198,479 $ 406,685
------------ ------------ ------------ -------------
Operating costs:
Cost of products sold 7,192,259 375,363 12,930,120 492,720
Amortization of partner warrant -- 377,744 -- 755,488
Marketing and sales 3,652,970 2,563,555 6,907,395 4,979,563
Product and technology development 565,032 1,664,788 1,092,472 3,562,532
General and administrative 905,678 549,544 1,851,535 1,078,543
Restructuring income (122,534) -- (122,534) --
Non-cash compensation expense 114,138 88,777 199,628 634,956
------------ ------------ ----------- -----------
Operating loss (57,366) (5,359,919) (1,660,137) (11,097,117)
Interest income 33,980 226,679 87,049 500,133
Interest Expense (146,357) -- (279,904) --
--------- ----------- ----------- ----------
Net loss $ (169,743) $ (5,133,240) $ (1,852,992) $(10,596,984)
============= ============= ============ =============
Loss per share:
Basic and diluted $ (0.01) $ (0.46) $ (0.14) $ (0.95)
============= ============= ============ ============
Weighted Average Shares
Outstanding:
Basic and diluted 13,036,082 11,136,107 12,873,160 11,103,436
============ =========== ============ ============
The accompanying Notes are an interal part of these Consolidated Financial
Statements
--------------------------------------------------------------------------------
Page 4
iParty Corp.
Consolidated Statements of Cash Flows
For the six months ended
June 30,
2001 2000
---- ----
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net loss $ (1,852,992) $(10,596,984)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 283,324 1,498,952
Non-cash compensation expense 199,628 634,596
Decrease (increase) in:
Accounts receivable 425,934 99,476
Inventory (1,160,189) -
Prepaid expenses and other current assets (657,876) 50,128
Other assets 362,622 (6,349)
Increase (decrease) in:
Accounts payable 908,337 826,663
Accrued severance and restructuring expenses (675,309) (138,974)
Accrued expenses (492,622) 458,526
Other liabilities 121,773 -
------------ ------------
Net cash used in operating activities (2,537,370) (7,173,606)
Cash flows from investing activities:
Purchase of property and equipment (126,346) (337,458)
Purchase of marketable securities - (670,436)
Decrease in restricted cash 479,436 51,012
------------ -------------
Net cash provided by (used in) investing activities 353,090 (956,882)
------------ -------------
Cash flows from financing activities:
Net borrowings from line of credit, 658,897 -
Payments on capital lease obligations (122,690) -
Net cash provided by financing activities ----------- ------------
536,207 -
Net decrease in cash and cash equivalents (1,648,07) (8,130,488)
Cash and cash equivalents, beginning of period 5,002,254 18,673,304
Cash and cash equivalents, end of period $ 3,354,181 $ 10,542,816
============ ============
Cash paid for:
Interest expense $ 279,904 $ -
============ =============
Income taxes $ -- $ 28,997
============ =============
Supplemental disclosure of non-cash financing activities:
Conversion of Series B preferred stock to common stock $ 1,215 $ -
============ =============
Acquisition of assets under capital lease $ 184,840 $ 212,880
============ =============
The accompanying Notes are an interal part of these Consolidated Financial
Statements
--------------------------------------------------------------------------------
Page 5
iPARTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
(Unaudited)
1. THE COMPANY:
iParty LLC was created on December 11, 1997 to launch an Internet-based
merchant of party goods and services and commenced operations in January 1998.
On March 12, 1998, iParty Corp. was organized as a wholly owned subsidiary of
iParty LLC and the net assets and operations of iParty LLC were transferred to
iParty Corp. On April 9, 1998, StarGreetings, Inc. ("Star") was incorporated as
a wholly owned subsidiary of iParty Corp. to develop and operate a personalized
celebrity greeting service.
Effective July 2, 1998, iParty Corp. ("iParty" or the "Company") merged
into WSI Acquisition Corp. ("WSI"), an inactive company. The merger was
consummated through an exchange of shares that resulted in iParty LLC receiving
6,000,000 common shares or 54.5% of the outstanding shares of WSI. In connection
with the merger and as a condition thereof, WSI sold, in two private placements,
an aggregate of 4,585,000 shares of its common stock of which 3,624,043 shares
were sold for $.01 per share and 960,957 shares, together with warrants to
purchase 1,000,000 shares of Series A preferred stock, were sold for $1.00 per
share or aggregate proceeds of $997,197 before related expenses. The merger was
treated as a re-capitalization for accounting purposes and iParty's historic
capital accounts were retroactively adjusted to reflect the 6,000,000 shares
issued by WSI in the transaction. In addition, as WSI had no assets before the
merger and the private placements, the 420,421 outstanding common shares of WSI
were recorded at par value with a corresponding charge to additional paid-in
capital. In connection with the merger, WSI changed its name to iParty Corp.
On August 3, 2000, iParty Retail Stores Corp. ("iParty Retail") was
incorporated as a wholly owned subsidiary of iParty Corp. to operate a chain of
retail stores selling party goods. On August 15, 2000, iParty Retail acquired
inventory, fixed assets and the leases of 33 retail stores from The Big Party
Corporation ("The Big Party") in consideration of cash and assumption of certain
liabilities. The Big Party filed for bankruptcy protection during the second
quarter of 2000 and the acquisition was approved by the United States Bankruptcy
Court, District of Delaware.
The Company's efforts are devoted to the sale of party goods and
services through retail stores and the Internet.
2. UNAUDITED INTERIM FINANCIAL INFORMATION:
The interim consolidated financial statements as of June 30, 2001 have
been prepared by the Company pursuant to the rules and regulations of the
Securities and 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 and
accruals) necessary to present fairly the consolidated balance sheets,
consolidated operating results, and consolidated cash flows for the periods
presented in accordance with generally accepted accounting principles. The
consolidated balance sheet at December 30, 2000 has been derived from the
audited consolidated financial statements at that date. Operating results for
the three and six months ended June 30, 2001 may not be indicative of the
results for the year ending December 29, 2001. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted in accordance
with the rules and regulations of the SEC. These consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements, and accompanying notes, included in the Company's Annual Report on
Form 10-KSB for the year ended December 30, 2000.
3. CREDIT ARRANGEMENT:
On August 1, 2000, the Company established a line of credit with a
bank. The agreement permits maximum borrowings equal to the lesser of $7,500,000
--------------------------------------------------------------------------------
Page 6
or the borrowing base, as defined. Interest on the line of credit for the first
$5,000,000 borrowed ("Line Interest Rate") is payable at the greater of the
bank's base rate (6.75% at June 30, 2001) plus 1% or 7.75%. Interest on the
sub-line borrowing, money borrowed between $5,000,000 and $7,500,000, is payable
at the bank rate plus 2%. The agreement also provides for a Commitment Fee of 1%
or $75,000 and an Annual Facility Fee of 0.5% per annum of the maximum amount of
the special sub-line. This agreement expires on July 31, 2003. As of June 30,
2001, the Company had $3,459,687 outstanding and an additional $2.4 million
available under the line of credit
In March 2001, the Company and its lender modified the borrowing
facility by adjusting certain covenants and other provisions based on the
Company's operating plan for 2001. As of June 30, 2001, the Company was in
compliance with the adjusted covenants.
4. SEGMENT REPORTING:
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information." establishes standards for the way business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders.
Operating segments represent components of the Company's business that
are evaluated regularly by management in assessing the performance and resource
allocation. The Company has determined that its reportable segments consist of
retail operations and Internet operations.
The retail operations include the sales and related expenses from 33
retail stores located throughout New England and Florida with the highest
concentration of 18 stores in Massachusetts; five are located in Connecticut,
three in Rhode Island, three in New Hampshire, one in Maine and three in
Florida.
The Internet operations include the sales and related expenses from the
Internet and the Company's off line catalog.
The reporting segments follow the same accounting policies used for the
Company's consolidated financial statements and are described in the Company's
Form 10-KSB. Management evaluates a segment's performance based upon net
revenue, operating income (loss) and net loss. Inter-segment transactions are
uncommon and not material. Therefore, they have not been separately reflected in
the financial table below. The totals of the reportable segments' revenues, net
profits and assets agree with the Company's comparable amounts contained in the
financial statements. Revenues from customers outside of the United States are
not material. No one customer accounts for more than 10% of the Company's
consolidated revenues.
The Company's financial data for segment reporting for the three and
six months ended June 30, 2001 are as follows
Three months ended June 30, Three months ended June 30,
--------------------------- ---------------------------
2001 2000
---- ----
Internet Retail Total Internet Retail Total
-------- ------ ----- -------- ------ -----
Net revenue $ 242,702 $ 12,007,475 $ 12,250,177 $ 259,905 $ 0 $ 259,905
=========== ============= ============= ============== ======= ===========
Operating Loss $ (251,353) $ 193,987 $ (57,366) $ (5,359,845) $ 0 $(5,359,845)
=========== ============= ============= ============== ======= ===========
Net loss $ (222,982) $ 53,239 $ (169,743) $ (5,133,166) $ 0 $(5,133,166)
=========== ============= ============= ============== ======= ===========
Total assets $ 3,447,335 $ 11,313,213 $ 14,760,548 $ 16,343,053 $ 0 $16,343,053
=========== ============= ============= ============== ======= ===========
Deprec/amort $ 120,598 $ 27,860 $ 148,458 $ 763,832 $ 0 $ 763,832
=========== ============= ============= ============== ======= ===========
Capital exp $ -- $ 115,521 $ 115,521 $ 164,495 $ 0 $ 164,495
=========== ============= ============= ============== ======= ===========
--------------------------------------------------------------------------------
Page 7
Six Months ended June 30 Six Months ended June 30
------------------------ ------------------------
2001 2000
---- ----
Internet Retail Total Internet Retail Total
-------- ------ ----- -------- ------ -----
Net revenue $ 489,504 $ 20,708,975 $ 21,198,479 $ 406,685 $ 0 $ 406,685
=========== =========== ============== ============ ============ ===============
Operating Loss $ (666,992)$ (993,145) $ (1,660,137) $ (11,097,117) $ 0 $(11,097,117)
=========== ============ ============== =============== ============ ===============
Net loss $ (593,404)$(1,259,588) $ (1,852,992) $ (10,596,984) $ 0 $(10,596,984)
=========== ============ ============== =============== ============ ===============
Total assets $ 3,447,335 $ 11,313,213 $ 15,127,580 $ 16,343,053 $ 0 $ 16,343,053
=========== ============ ============== =============== ============ ===============
Deprec/amort $ 241,196 $ 42,128 $ 286,324 $ 1,498,952 $ 0 $ 1,498,952
=========== ============ ============== =============== ============ ===============
Capital exp $ 2,025 $ 124,321 $ 126,346 $ 337,458 $ 0 $ 337,458
=========== ============ ============== =============== ============ ===============
5. ACQUISITION:
On August 15, 2000, the Company, through its wholly-owned subsidiary,
iParty Retail, pursuant to an Asset Purchase Agreement, acquired certain assets
from The Big Party. The Company acquired inventory, fixed assets and the leases
of 33 retail stores from The Big Party in consideration of cash and assumption
of certain liabilities. This transaction was accounted for as a purchase in
accordance with APB No. 16, Accounting for Business Combinations and,
accordingly, the results of The Big Party since August 15, 2000 have been
included in the Company's statement of operations. The purchase price was
allocated to the acquired assets as follows:
Purchase price:
Cash paid $ 3,975,000
Payable to seller 650,000
Accrued transaction costs 235,000
-----------
Total purchase price $ 4,860,000
===========
Net tangible assets acquired:
Inventory $ 4,860,000
===========
In addition to acquiring inventory, iParty purchased leasehold
improvements at the acquired stores. The fair value of the acquired inventory
and leaseholds exceeded the purchase price. As a result, due to the fact that
the purchase price approximated the fair value of the inventory, no value could
be assigned to the long-term assets.
Unaudited pro forma results of operations for the three and six months
ended June 30, 2000 as if iParty and The Big Party had been combined as of
January 1, 2000 follow. The pro forma results include estimates and assumptions
which management believes are reasonable. The pro forma financial information is
not necessarily indicative of the operating results that would have occurred had
the acquisition occurred as of the dates indicated, nor are they necessarily
indicative of future operating results.
Three months ended Six months ended
June 30, June 30,
(Proforma) (Proforma)
---------- ----------
2001 2000 2001 2000
---- ---- ---- ----
Revenue $ 12,250,177 $ 11,631,918 $ 21,198,479 $ 21,668,698
Operating loss $ (57,366) $ (6,958,613) $ (1,660,137) $(12,984,685)
------------ ------------ ------------ ------------
Net loss $ (169,743) $ (6,360,734) $ (1,852,992) $(12,484,552)
============ ============ ============ ============
Loss per share:
Basic and diluted $ (0.01) $ (0.57) $ (0.14) $ (1.12)
============ ============ ============ ============
Weighted average shares:
Basic and diluted 13,036,082 11,136,107 12,873,160 11,103,436
============ ============ ============ ============
--------------------------------------------------------------------------------
Page 8
6. EARNINGS PER SHARE:
The Company has computed net income (loss) per share in accordance with
SFAS No. 128, Earnings per Share. Under the provisions of SFAS No. 128, basic
net income (loss) per common share ("Basic EPS") is computed by dividing net
income (loss) by the weighted average number of common shares outstanding.
Diluted net income (loss) per common share ("Diluted EPS") is computed by
dividing net income (loss) by the weighted average number of common shares and
dilutive common share equivalents then outstanding using the treasury-stock
method.
As of June 30, 2001 and June 30, 2000, 49,289,411 and 32,579,193
potential common shares were outstanding, respectively, but not included in
earnings per share calculation as their effect would have been anti-dilutive.
7. RESTRUCTURING COSTS:
In fiscal 2000, the Company decided to close its New York City
headquarters and transfer this operation to its Boston, Massachusetts location.
As part of operating expenses, the Company recorded $1,093,328 of restructuring
expenses related to this facility closure in 2000. These costs were primarily
related to severance for a group of employees and other exit costs related to
closing the New York facility.
Severance Other Total
Balance at December 30, 2000 $ 406,874 $ 368,263 $ 775,137
Amounts paid in 2001 $(406,874) $(145,901) $(552,775)
Excess of amounts provided $ - $(122,534) $(122,534)
--------- ---------- ----------
Balance at June 30 2001 $ - $ 99,828 $ 99,828
========= ========== ==========
During the quarter ended June 30, 2001, due to the substantial
completion of the actions of the 2000 restructuring plan, the Company
reevaluated its 2000 restructuring accrual. As a result of this review certain
costs associated with the close of the New York City headquarters were no longer
required. This resulted from the elimination of certain planned actions as well
as the Company successfully negotiating certain closing costs. As such, the
Company has recognized a restructuring credit of $122,534, which affected the
Internet segment. This credit is reflected in "Restructuring income" in the
Consolidated Statements of Operations.
The remainder of the reserve represents exit costs related to closing
and vacating the facility. Such costs are expected to be incurred during the
second half of 2001.
8. COMMITMENTS AND CONTINGENCIES:
Legal proceedings:
The Company is a defendant in one lawsuit that is being handled in the
ordinary course of business. Pursuant to an Asset Purchase Agreement dated
August 2, 2000, as amended, the Company purchased from The Big Party
Corporation, Debtor and Debtor-in-Possession, 33 retail locations and the assets
located therein, including inventory. The Company and The Big Party are in
disagreement concerning the value and amount due on account of the inventory and
The Big Party is claiming that $625,568 is due. In addition, the parties set up
a $100,000 escrow of funds paid under the agreement as security for rental
payments and other adjustments due, and the parties are in discussions
concerning the portion thereof which belongs to the Company. The Big Party filed
a complaint with the U.S. Bankruptcy Court for the District of Delaware in
January 2001 seeking payment of $625,568 on account of the inventory. The
Company is disputing the amount claimed and intends to file an answer and a
possible counterclaim for amounts due on account of the escrow referred to
above. The Company is also in negotiations with The Big Party seeking to reach
an agreeable compromise. This matter is in the preliminary stages. In the
opinion of the management of the Company, the Company is adequately reserved and
this should not result in final judgement or settlement that would have a
material adverse effect on the Company's financial condition or results of
operations.
--------------------------------------------------------------------------------
Page 9
Safe Harbor Statement:
Certain statements in this Form 10-QSB, including information set forth
under Item 2 "Management's Discussion and Analysis" constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Act"). The words "anticipates," "believes," "estimates,"
"expects," "plans," "intends" and other similar expressions are intended to
identify these forward-looking statements, but are not the exclusive means of
identifying them. We desire to avail ourselves of certain "safe harbor"
provisions of the Act and are therefore including this special note to enable us
to do so. Forward-looking statements included in this Form 10-QSB or hereafter
included in other publicly available documents filed with the Securities and
Exchange Commission, reports to our stockholders and other publicly available
statements issued or released by us involve known and unknown risks,
uncertainties, and other factors which could cause our actual results,
performance (financial or operating) or achievements to differ from the future
results, performance (financial or operating) achievements expressed or implied
by such forward looking statements. Such future results are based upon our best
estimates based upon current conditions and the most recent results of
operations. Various risks, uncertainties and contingencies could cause our
actual results, performance or achievements to differ materially from those
expressed in, or implied by, these statements, including, but not limited to,
the following: the success or failure of our efforts to implement our business
strategy; our inability to obtain additional financing, if required; third-party
suppliers failure to fulfill their obligations to us; intense competition; the
failure of our systems or those of our third-party suppliers; and government
regulation of the Internet.
--------------------------------------------------------------------------------
Page 10
Item 2. Management's Discussion and Analysis
Overview:
The Company intends to become the premier multi-channel party supply
resource with distribution on-line, through catalogs and in retail stores.
The Company's web site was launched in February 1999. On October 12,
1999, the Company launched the new iParty.com site, a destination for party
goods and party planning. From Pokemon costumes to birthday party packs to fog
machines, an online party magazine to party safety tips, iParty.com presents
consumers with what it believes to be a sophisticated, yet fun and
easy-to-navigate online party resource. Offering convenience and an extensive
assortment of merchandise, the Company believes iParty.com is refocusing the
party goods industry back to the needs of the consumer. At the click of a mouse,
party givers can enjoy one-stop shopping and easy-to-find pricing while
purchasing all their party needs for birthday bashes, Super Bowl and Halloween
parties and more.
In April 2000, the Company launched its catalogue operation,
specializing in the seasonal party needs of the consumer.
On August 15, 2000 iParty Retail Stores Corp. purchased assets
consisting of 33 store leases, fixtures and inventory from The Big Party
Corporation. This enabled the Company to set up retail operations and to become
a multi-channel outlet for party supplies.
Results of Operations:
Three months ended June 30, 2001 compared to three months ended June 30, 2000
Revenue includes the selling price of party goods sold, net of returns
and discounts, as well as outbound shipping and handling charges. Revenue is
recognized at the time of sale for retail sales and at the time products are
shipped to customers for Internet sales. Consolidated revenue for the three
months ended June 30, 2001 and 2000 were $12,250,177 and $259,852 respectively.
For the three months ended June 30, 2001 revenue from retail stores totaled
$12,007,475 and revenue from the Internet totaled $242,702. For the three months
ended June 30, 2000 revenue from the retail stores totaled $0 and revenue from
the Internet totaled $259,852. The 7% decrease in Internet sales is due to
decreased traffic and revenue from new customers compared to the three months
ended June 30, 2000. During the period ended June 30, 2000, the Company
aggressively acquired new customers with several coupon promotions. Although
these promotions were successful in acquiring new customers, they resulted in a
negative gross margin of 44% for the quarter.
Cost of products sold consists of the cost of merchandise sold to
customers, store rent, warehousing costs, and outbound shipping and handling
costs charged to the Company by its fulfillment partner, Taymark. Consolidated
cost of products sold for the three months ended June 30, 2001 and 2000 was
$7,192,259 or 59% of revenue and $375,363 or 144% of revenue respectively. For
the three months ended June 30, 2001 cost of products sold from the retail
stores totaled $7,022,264 or 58% of revenue and cost of products sold from the
Internet totaled $169,995 or 70% of revenue. For the three months ended June 30,
2000 cost of products sold from the retail stores totaled $0 and cost of
products sold from the Internet totaled $375,363 or 144% of revenue. During the
period ended June 30, 2000, the Company aggressively acquired new customers with
several coupon promotions. Although these promotions were successful in
acquiring new customers, they resulted in a negative gross margin of 44% for the
quarter.
Amortization of fulfillment partner warrant expense consists of the
amortization of the estimated fair value of the warrant issued to Taymark to
provide inventory and fulfillment services to deliver merchandise ordered on the
site, or directly through a toll-free telephone number, directly to consumers.
On July 8, 1999, the Company entered into a product fulfillment agreement with
Taymark. The initial term of the agreement runs through December 31, 2002. The
agreement contains certain restrictions on competition by the direct marketer.
As additional consideration for such restrictions and services, the Company
issued a warrant to purchase 3,000,000 shares of common stock at an exercise
price of $3.75. The warrant expires on October 1, 2002. The estimated fair value
--------------------------------------------------------------------------------
Page 11
of the warrant on the date of issue was approximately $5.3 million as determined
using the Black-Scholes option pricing model. On December 30, 2000 it was
determined that the Company had not met certain purchase requirements for the
year as outlined in the agreement with Taymark. As a result of this shortfall,
the restrictions on competition by Taymark as outlined in the agreement were
lifted rendering the remaining unamortized value of the warrant worthless.
Therefore, the remaining balance of $3,021,954 was charged to expense. For the
three months ended June 30, 2001 and 2000 amortization of fulfillment partner
warrant expense was $0 and $377,744, respectively.
Marketing and sales expenses consist primarily of advertising, public
relations and promotional expenditures, and all related payroll and related
expenses for personnel engaged in marketing and selling activities, including
store payroll. Consolidated marketing and sales expenses for the three months
ended June 30, 2001 and 2000 were $3,652,970 and $2,563,555 respectively. For
the three months ended June 30, 2001, marketing and sales expenses for retail
stores totaled $3,650,397 and marketing and sales expenses for the Internet
totaled $2,573. For the three months ended June 30, 2000 marketing and sales
expenses for retail stores totaled $0 and marketing and sales expenses for the
Internet totaled $2,563,555. Included in the marketing and sales expenses for
the Internet for 2000 was $135,000 resulting from the amortization of the
Margaritaville warrant. The decrease in marketing spending for the Internet was
related to lower cost per acquisition in 2001.
Product and technology development expenses consist principally of
payroll and related expenses for product development, editorial, systems and
operations personnel and consultants, and systems infrastructure related to the
Company's Internet site. Product and technology development expenses for the
three months ended June 30, 2001 and 2000 were $565,032 and $1,664,788,
respectively. The decrease in product and technology development expenses is due
to the transition from a site development phase in 2000 to a site maintenance
phase in 2001.
General and administrative ("G&A") expenses consist of payroll and
related expenses for executive, finance and administrative personnel,
professional fees and other general corporate expenses. Consolidated G&A
expenses for the three months ended June 30, 2001 and 2000 were $905,678 and
$549,544, respectively. The increase in G&A expenses is due to the additional
staff required to manage the retail stores.
Restructuring income consists of the excess of amounts provided to
close our New York office over actual expenses incurred. During the quarter
ended June 30, 2001, due to the substantial completion of the actions of the
2000 restructuring plan, the Company reevaluated its 2000 restructuring accrual.
As a result of this review certain costs associated with the close of the New
York City headquarters were no longer required. This resulted from the
elimination of certain planned actions as well as the Company successfully
negotiating certain closing costs. As such, the Company has recognized a
restructuring credit of $122,534, which affected the Internet segment. This
credit is reflected in "Restructuring income" in the Consolidated Statements of
Operations.
The non-cash compensation expenses consist of the amortization of stock
options granted to consultants related to the Internet operation. Non-cash
compensation expenses for the three months ended June 30, 2001 and 2000 was
$114,138 and $88,777, respectively.
Interest income on cash and cash equivalents for the three months ended
June 30, 2001 and 2000, was $33,980 and $226,679, respectively. The decrease in
interest income is due to higher cash and investment balance in 2000 resulting
from the Company's financing activities, principally the private placement of
Series B, C, and D Convertible Preferred Stock completed in 1999.
Interest expense for the three months ended June 30, 2001 and 2000, was
$146,357 and $0, respectively. The interest expense in 2001 was related to the
iParty Retail line of credit.
Six months ended June 30, 2001 compared to six months ended June 30, 2000:
Revenue includes the selling price of party goods sold, net of returns
and discounts, as well as outbound shipping and handling charges. Revenue is
--------------------------------------------------------------------------------
Page 12
recognized at the time of sale for retail sales and at the time products are
shipped to customers for Internet sales. Consolidated revenue for the six months
ended June 30, 2001 and 2000 were $21,198,479 and $406,685, respectively, For
the six months ended June 30, 2001 revenue from retail stores totaled
$20,708,975 and revenue from the Internet totaled $489,504. For the six months
ended June 30, 2000 revenue from the retail stores totaled $0 and revenue from
the Internet totaled $406,685. The 20% increase in Internet sales is due to
increased traffic and revenue from repeat customers.
Cost of products sold consists of the cost of merchandise sold to
customers, store rent, warehousing costs, and outbound shipping and handling
costs charged to the Company by its fulfillment partner, Taymark. Consolidated
cost of products sold for the six months ended June 30, 2001 and 2000 was
$12,930,120 or 61% of revenue and $492,720 or 121% of revenue respectively. For
the six months ended June 30, 2001 cost of products sold from retail stores
totaled $12,551,261 or 61% of revenue and cost of products sold from the
Internet totaled $378,859 or 77% of revenue. For the six months ended June 30,
2000 cost of products sold from the retail stores totaled $0 and cost of
products sold from the Internet totaled $492,720 or 121% of revenue.
Amortization of fulfillment partner warrant expense consists of the
amortization of the estimated fair value of the warrant issued to Taymark to
provide inventory and fulfillment services to deliver merchandise ordered on the
site, or directly through a toll-free telephone number, directly to consumers.
On July 8, 1999, the Company entered into a product fulfillment agreement with
Taymark. The initial term of the agreement runs through December 31, 2002. The
agreement contains certain restrictions on competition by the direct marketer.
As additional consideration for such restrictions and services, the Company
issued a warrant to Taymark to purchase 3,000,000 shares of common stock at an
exercise price of $3.75. The warrant expires on October 1, 2002. The estimated
fair value of the warrant on the date of issue was approximately $5.3 million as
determined using the Black-Scholes option pricing model. On December 30, 2000 it
was determined that the Company had not met certain purchase requirements for
the year as outlined in the agreement with Taymark. As a result of this
shortfall, the restrictions on competition by Taymark as outlined in the
agreement were lifted rendering the remaining unamortized value of the warrant
worthless. Therefore, the remaining balance of $3,021,954 was charged to
expense. For the six months ended June 30, 2001 and 2000 amortization of
fulfillment partner warrant expense was $0 and $755,488, respectively.
Marketing and sales expenses consist primarily of advertising, public
relations and promotional expenditures, and all related payroll and related
expenses for personnel engaged in marketing and selling activities, including
store payroll. Consolidated marketing and sales expenses for the six months
ended June 30, 2001 and 2000 were $6,907,395 and $4,979,563, respectively. For
the six months ended June 30, 2001, marketing and sales expenses for retail
stores totaled $6,870,837 and marketing and sales expenses for the Internet
totaled $36,558. For the six months ended June 30, 2000 marketing and sales
expenses for retail stores totaled $0 and marketing and sales expenses for the
Internet totaled $4,979,563. Included in the marketing and sales expenses for
the Internet for 2000 was $270,000 resulting from the amortization of the
Margaritaville warrant. The decrease in marketing spending for the Internet was
related to lower cost per acquisition in 2001.
Product and technology development expenses consist principally of
payroll and related expenses for product development, editorial, systems and
operations personnel and consultants, and systems infrastructure related to the
Company's Internet site. Product and technology development expenses for the six
months ended June 30, 2001 and 2000 were $1,092,472 and $3,562,532,
respectively. The decrease in product and technology development expenses is due
to the transition from a site development phase in 2000 to a site maintenance
phase in 2001.
General and administrative ("G&A") expenses consist of payroll and
related expenses for executive, finance and administrative personnel,
professional fees and other general corporate expenses. Consolidated G&A
expenses for the six months ended June 30, 2001 and 2000 were $1,851,535 and
$1,078,453 respectively. The increase in G&A expenses is due to the additional
staff required to manage the retail stores.
--------------------------------------------------------------------------------
Page 13
Restructuring income consists of the excess of amounts provided to
close our New York office over actual expenses incurred. During the quarter
ended June 30, 2001, due to the substantial completion of the actions of the
2000 restructuring plan, the Company reevaluated its 2000 restructuring accrual.
As a result of this review certain costs associated with the close of the New
York City headquarters were no longer required. This resulted from the
elimination of certain planned actions as well as the Company successfully
negotiating certain closing costs. As such, the Company has recognized a
restructuring credit of $122,534, which affected the Internet segment. This
credit is reflected in "Restructuring income" in the Consolidated Statements of
Operations.
The non-cash compensation expense consists of the amortization of stock
options granted to consultants related to the Internet operation. Non-cash
compensation expense for the six months ended June 30, 2001 and 2000 was
$199,628 and $634,596, respectively. In February 2000, certain employees
exercised stock options on a cash-less basis resulting in $460,000 of non-cash
compensation.
Interest income on cash and cash equivalents for the six months ended
June 30, 2001 and 2000, was $87,049 and $500,133, respectively. The decrease in
interest income is due to higher cash and investment balance in 2000 resulting
from the Company's financing activities, principally the private placement of
Series B, C, and D Convertible Preferred Stock completed in 1999.
Interest expense for the six months ended June 30, 2001 and 2000, was
$279,904 and $0, respectively. The interest expense in 2001 was related to the
iParty Retail line of credit.
Liquidity and Capital Resources:
The Company used cash in operating activities for the six months ended
June 30, 2001 and 2000 totaling $2,537,370 and $7,173,606, respectively. In
addition, the Company invested cash in property and equipment, including web
site development expenditures for the six months ended June 30, 2001 and 2000
totaling $126,346 and $337,458, respectively. The Company also used $658,897 of
its bank line to fund our working capital and capital expenditures in the six
months ended June 30, 2001.
To date, the Company has raised an aggregate of $32.9 million in equity
financing. On August 1, 2000, the Company established a line of credit with a
bank. The agreement permits maximum borrowings equal to the lesser of $7,500,000
or the borrowing base, as defined. Interest on the line of credit for the first
$5,000,000 borrowed ("Line Interest Rate") is payable at the greater of the
bank's base rate (6.75% at June 30, 2001) plus 1% or 7.75%. Interest on the
sub-line borrowing, money borrowed between $5,000,000 and $7,500,000, is payable
at the bank rate plus 2%. The agreement also provides for a Commitment Fee of 1%
or $75,000 and an Annual Facility Fee of 0.5% per annum of the maximum amount of
the special sub-line. This agreement expires on July 31, 2003. As of June 30,
2001, the Company had $3,459,687 outstanding under the line of credit.
In March 2001, the Company and its lender modified the borrowing
facility by adjusting certain covenants and other provisions based on the
Company's operating plan for 2001. As of June 30, 2001, the Company was in
compliance with the adjusted covenants.
The Company believes, based on currently proposed plans and assumptions
relating to its operations, that the net proceeds from the financings and
related interest income, together with anticipated revenues from operations and
the line of credit, will be sufficient to fund its operations and working
capital requirements for at least twelve months. In the event that the Company's
plans or assumptions change or prove inaccurate (due to unanticipated expenses,
increased competition, unfavorable economic conditions, or other unforeseen
circumstances) the Company could be required to seek additional financing sooner
than currently expected. There can be no assurance that such additional funding
will be available to the Company, or if available, that the terms of such
additional financing will be acceptable.
--------------------------------------------------------------------------------
Page 14
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a defendant in one lawsuit that is being handled in the
ordinary course of business. Pursuant to an Asset Purchase Agreement dated
August 2, 2000, as amended, the Company purchased from The Big Party
Corporation, Debtor and Debtor-in-Possession, 33 retail locations and the assets
located therein, including inventory. The Company and The Big Party are in
disagreement concerning the value and amount due on account of the inventory and
The Big Party is claiming that $625,568 is due. In addition, the parties set up
a $100,000 escrow of funds paid under the agreement as security for rental
payments and other adjustments due, and the parties are in discussions
concerning the portion thereof which belongs to the Company. The Big Party filed
a complaint with the U.S. Bankruptcy Court for the District of Delaware in
January 2001 seeking payment of $625,568 on account of the inventory. The
Company is disputing the amount claimed and intends to file an answer and a
possible counterclaim for amounts due on account of the escrow referred to
above. The Company is also in negotiations with The Big Party seeking to reach
an agreeable compromise. This matter is in the preliminary stages. In the
opinion of the management of the Company, the Company is adequately reserved and
this should not result in final judgement or settlement that would have a
material adverse effect on the Company's financial condition or results of
operations.
Item 4. Submission of Matters to a vote of Security Holders
On June 18, 2001 the Company held its Annual Meeting of Stockholders.
The stockholders elected five (5) Director's to the Company's Board of
Directors. Set forth below are (i) the names of the persons elected to serve on
the Company's Board of Directors until the 2002 Annual Meeting of Stockholders
and until their successors are duly elected and qualified and (ii) the results
of the voting for the nominees.
Name For % For Against % Withheld
---- --- ----- ------- ----------
Sal Perisano 24,363,502 99.8% 48,205 0.02%
Robert H. Lessin 24,360,352 99.8% 51,355 0.02%
Stuart G. Moldaw 24,361,877 99.8% 49,830 0.02%
Lorenzo Roccia 24,365,502 99.8% 48,205 0.02%
Christina Weaver 3,629,960 100.0% 0 0.00%
The stockholders also approved an amendment to the Company's Restated
Certificate of Incorporation to effect an increase in the number of authorized
shares of Common Stock from 50,000,000 to 150,000,000.
For % For Against % Against
--- ----- ------- ---------
23,587,312 96.6% 791,525 3.2%
The stockholders also approved an amendment to the 1998 Incentive and
Nonqualified Stock Option Plan to effect an increase in the number of shares
authorized for issuance from 7,000,000 to 11,000,000.
For % For Against % Against
--- ----- ------- ---------
20,031,792 95.4% 916,657 4.4%
The stockholders also ratified the appointment of Arthur Andersen LLP
as independent public accountants for the fiscal year ended December 29, 2001
For % For Against % Against
--- ----- ------- ---------
24,371,997 99.1% 22,355 0.1%
Item 6. Exhibits:
(a) Exhibit 27.1 Financial Data Schedule
--------------------------------------------------------------------------------
Page 15
SIGNATURES
In accordance with requirements of the Securities Exchange Act, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
iPARTY CORP.
Dated: August 10, 2001 By: /s/ Sal Perisano
-----------------------
Sal Perisano
Chief Executive Officer
By: /s/ Patrick Farrell
---------------------------
Patrick Farrell
President & Chief Financial
Officer
--------------------------------------------------------------------------------
Page 16