UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
FORM
10-Q
þ
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the Quarterly Period Ended June 27, 2009
OR
¨
TRANSITION REPORT
PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the Transition Period from _______________ to _______________
Commission
File Number 1-15611
iPARTY
CORP.
(Exact
Name of Registrant as Specified in Its Charter)
|
Delaware
|
|
76-0547750
|
|
(State
or Other Jurisdiction of
|
|
(I.R.S.
Employer
|
|
Incorporation
or Organization)
|
|
Identification
No.)
|
|
|
|
|
|
270
Bridge Street, Suite 301,
|
|
|
|
Dedham,
Massachusetts
|
|
02026
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|
(Address
of Principal Executive Offices)
|
|
(Zip
Code)
|
(781)
329-3952
(Registrant’s
Telephone Number, Including Area Code)
Indicate
by check mark whether the registrant: (1) has 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
þ
No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes
o
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
|
Large
accelerated filer
o
|
|
Accelerated
filer
o
|
|
|
|
|
|
Non-accelerated
filer
o
(Do
not check if smaller reporting company)
|
|
Smaller
reporting company
þ
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act.) Yes
o
No
þ
As of July
30, 2009, there were 22,731,667 shares of common stock, $.001 par value,
outstanding.
iPARTY
CORP.
QUARTERLY
REPORT ON FORM 10-Q
TABLE
OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
iPARTY
CORP.
|
|
CONSOLIDATED BALANCE SHEETS (unaudited)
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Jun 27, 2009
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Dec 27, 2008
|
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ASSETS
|
|
|
|
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Current
assets:
|
|
|
|
|
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Cash
and cash equivalents
|
|
$
|
59,750
|
|
|
$
|
60,250
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|
Restricted
cash
|
|
|
608,048
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|
|
|
775,357
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|
Accounts
receivable
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877,824
|
|
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730,392
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|
Inventories,
net
|
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13,557,515
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13,022,142
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Prepaid
expenses and other assets
|
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327,608
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279,185
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|
Total
current assets
|
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15,430,745
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14,867,326
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Property
and equipment, net
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3,197,971
|
|
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3,646,481
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Intangible
assets, net
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1,955,139
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2,303,692
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Other
assets
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266,066
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177,774
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Total
assets
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|
$
|
20,849,921
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$
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20,995,273
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LIABILITIES
AND STOCKHOLDERS' EQUITY
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Current
liabilities:
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Accounts
payable and book overdrafts
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$
|
6,421,906
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$
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4,048,833
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Accrued
expenses
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2,294,169
|
|
|
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2,495,955
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Current
portion of capital lease obligations
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9,228
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|
|
|
6,444
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Current
notes payable, net of discount $34,092
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2,698,730
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2,876,182
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Borrowings
under line of credit
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515,916
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|
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1,950,019
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Total
current liabilities
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11,939,949
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11,377,433
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Long-term
liabilities:
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Capital
lease obligations, net of current portion
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18,455
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-
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Notes
payable
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600,000
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|
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600,000
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Other
liabilities
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1,448,490
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1,200,174
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Total
long-term liabilities
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2,066,945
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1,800,174
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Commitments
and contingencies
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Stockholders'
equity:
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Convertible
preferred stock - $.001 par value; 10,000,000 shares
authorized,
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Series
B convertible preferred stock - 1,150,000 shares authorized; 464,173
shares issued
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|
and
outstanding (aggregate liquidation value of $9,261,724 at June 27,
2009)
|
|
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6,890,723
|
|
|
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6,890,723
|
|
Series
C convertible preferred stock - 100,000 shares authorized, issued and
outstanding
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(aggregate
liquidation value of $2,000,000 at June 27, 2009)
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1,492,000
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1,492,000
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|
Series
D convertible preferred stock - 250,000 shares authorized, issued and
outstanding
|
|
|
|
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(aggregate
liquidation value of $5,000,000 at June 27, 2009)
|
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3,652,500
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3,652,500
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Series
E convertible preferred stock - 296,666 shares authorized, issued and
outstanding
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(aggregate
liquidation value of $1,112,497 at June 27, 2009)
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1,112,497
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|
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1,112,497
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Series
F convertible preferred stock - 114,286 shares authorized, issued and
outstanding
|
|
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(aggregate
liquidation value of $500,000 at June 27, 2009)
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500,000
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500,000
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Total
convertible preferred stock
|
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13,647,720
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13,647,720
|
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Common
stock - $.001 par value; 150,000,000 shares
authorized; 22,731,667
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shares
issued and outstanding at June 27, 2009 and December 27,
2008
|
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22,732
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|
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|
22,732
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Additional
paid-in capital
|
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52,167,475
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|
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52,095,711
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Accumulated
deficit
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(58,994,900
|
)
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|
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(57,948,497
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)
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Total
stockholders' equity
|
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|
6,843,027
|
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|
7,817,666
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Total
liabilities and stockholders' equity
|
|
$
|
20,849,921
|
|
|
$
|
20,995,273
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|
The accompanying notes are
an integral part of these Consolidated Financial Statements.
iPARTY
CORP.
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|
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
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For the three months ended
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For the six months ended
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Jun 27, 2009
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Jun 28, 2008
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Jun 27, 2009
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Jun 28, 2008
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Revenues
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$
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19,569,009
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$
|
20,103,668
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$
|
34,137,416
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|
|
$
|
36,247,756
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|
Operating
costs:
|
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|
|
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Cost
of products sold and occupancy costs
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11,691,950
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11,612,587
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21,074,016
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21,595,934
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Marketing
and sales
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5,441,459
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6,176,460
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10,420,777
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12,026,212
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General
and administrative
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1,638,221
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1,946,634
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3,423,991
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3,909,799
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|
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|
|
|
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Operating
income (loss)
|
|
|
797,379
|
|
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|
367,987
|
|
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|
(781,368
|
)
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|
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(1,284,189
|
)
|
|
|
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|
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Interest
income
|
|
|
17
|
|
|
|
244
|
|
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|
45
|
|
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|
1,920
|
|
Interest
expense
|
|
|
(128,528
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)
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|
(184,625
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)
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(265,080
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)
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(398,653
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)
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|
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|
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|
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Net
income (loss)
|
|
$
|
668,868
|
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|
$
|
183,606
|
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|
$
|
(1,046,403
|
)
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|
$
|
(1,680,922
|
)
|
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Income
(loss) per share:
|
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|
|
|
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|
|
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Basic
|
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$
|
0.02
|
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|
$
|
0.00
|
|
|
$
|
(0.05
|
)
|
|
$
|
(0.07
|
)
|
Diluted
|
|
$
|
0.02
|
|
|
$
|
0.00
|
|
|
$
|
(0.05
|
)
|
|
$
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Weighted-average
shares outstanding:
|
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|
|
|
|
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|
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|
|
|
|
|
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|
Basic
|
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38,222,344
|
|
|
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38,210,583
|
|
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22,731,667
|
|
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22,713,989
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Diluted
|
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|
38,222,344
|
|
|
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38,319,767
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22,731,667
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|
|
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22,713,989
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|
The accompanying notes are
an integral part of these Consolidated Financial Statements.
iPARTY
CORP.
|
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
(unaudited)
|
|
|
|
|
|
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For the six months ended
|
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Jun 27, 2009
|
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|
Jun 28, 2008
|
|
Operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,046,403
|
)
|
|
$
|
(1,680,922
|
)
|
Adjustments
to reconcile net loss to net cash (used in) provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,075,655
|
|
|
|
1,026,102
|
|
Deferred
rent
|
|
|
(1,659
|
)
|
|
|
38,665
|
|
Non
cash stock based compensation expense
|
|
|
77,517
|
|
|
|
80,949
|
|
Loss
on disposal of assets
|
|
|
1,430
|
|
|
|
-
|
|
Non
cash warrant expense
|
|
|
96,522
|
|
|
|
106,407
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
102,543
|
|
|
|
214,522
|
|
Inventories
|
|
|
(535,373
|
)
|
|
|
(406,404
|
)
|
Prepaid
expenses and other assets
|
|
|
(162,540
|
)
|
|
|
476,352
|
|
Accounts
payable
|
|
|
2,373,073
|
|
|
|
1,735,179
|
|
Accrued
expenses and other liabilities
|
|
|
(201,786
|
)
|
|
|
456,399
|
|
Net
cash provided by operating activities
|
|
|
1,778,979
|
|
|
|
2,047,249
|
|
|
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of retail stores and non-compete agreement
|
|
|
-
|
|
|
|
(1,350,000
|
)
|
Purchase
of property and equipment
|
|
|
(224,207
|
)
|
|
|
(568,183
|
)
|
Net
cash used in investing activities
|
|
|
(224,207
|
)
|
|
|
(1,918,183
|
)
|
|
|
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
repayments under line of credit
|
|
|
(1,434,103
|
)
|
|
|
(22,523
|
)
|
Principal
payments on notes payable
|
|
|
(279,727
|
)
|
|
|
(302,119
|
)
|
Decrease
in restricted cash
|
|
|
167,309
|
|
|
|
205,457
|
|
Principal
payments on capital lease obligations
|
|
|
(8,751
|
)
|
|
|
(16,621
|
)
|
Net
cash used in financing activities
|
|
|
(1,555,272
|
)
|
|
|
(135,806
|
)
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(500
|
)
|
|
|
(6,740
|
)
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of period
|
|
|
60,250
|
|
|
|
71,532
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of period
|
|
$
|
59,750
|
|
|
$
|
64,792
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of Series B convertible preferred stock to common stock
|
|
$
|
-
|
|
|
$
|
34,447
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of assets under capital lease
|
|
$
|
29,990
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Disposal
of assets
|
|
$
|
28,168
|
|
|
$
|
-
|
|
The accompanying notes are
an integral part of these Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June
27, 2009
(Unaudited)
1. BASIS OF PRESENTATION
AND SIGNIFICANT ACCOUNTING POLICIES
:
Interim
Financial Information
The
interim consolidated financial statements as of June 27, 2009 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 U.S. generally accepted accounting
principles. The consolidated balance sheet at December 27, 2008 has
been derived from the audited consolidated financial statements at that
date. Operating results for the Company on a quarterly basis may not
be indicative of the results for the entire year due, in part, to the
seasonality of the party goods industry. Historically, higher
revenues and operating income have been experienced in the second and fourth
fiscal quarters, while the Company has generated losses in the first and third
quarters. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with U.S. 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-K, for the year ended December 27, 2008.
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiary after elimination of all significant intercompany
transactions and balances.
Revenue
Recognition
Revenues
include the selling price of party goods sold, net of returns and discounts, and
are recognized at the point of sale. The Company estimates returns based upon
historical return rates and such amounts have not been significant to
date.
Concentrations
The
Company purchases its inventory from a diverse group of vendors. Five suppliers
account for approximately 50% of the Company’s purchases of merchandise for the
six months ended June 27, 2009, but the Company does not believe that it is
overly dependent upon any single source for its merchandise, often using more
than one vendor for similar kinds of products. The Company entered
into a Supply Agreement with its largest supplier on August 7, 2006. Beginning
with calendar year 2008, the Supply Agreement requires the Company to purchase
on an annual basis merchandise equal to the total number of stores open during
such calendar year, multiplied by $180,000. The Supply Agreement
provides for penalties in the event the Company fails to attain the annual
purchase commitment that would require the Company to pay the difference between
the purchases for that year and the annual purchase commitment for that
year. Under the terms of the Supply Agreement, the annual purchase
commitment for any individual year can be reduced for orders placed by the
Company but not filled within a specified time period by the
supplier. During 2008, the supplier experienced difficulty in filling
completely certain orders sourced out of China. Accordingly, the
supplier agreed to reduce the Company’s purchase commitment for 2008 to 90% of
the contractual minimum for that year. The Company met the contractual minimum
purchase requirement, as amended, for 2008. The Company is not aware
of any reason or circumstance that would prevent the full minimum purchase
amount commitments for 2009 under the Supply Agreement from being
met.
Accounts
receivable primarily represent amounts due from credit card companies and
vendors for inventory rebates. Management does not provide for
doubtful accounts as such amounts have not been significant to date; the Company
does not require collateral to secure the payment obligations for these
accounts.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these
estimates.
Cash
and Cash Equivalents and Restricted Cash
The
Company considers all highly liquid investments with an original maturity date
of three months or less to be cash equivalents. Cash equivalents
consist primarily of store cash funds and daily store receipts in transit to our
concentration bank and are carried at cost, which approximates market
value.
The
Company uses controlled disbursement banking arrangements as part of its cash
management program. Outstanding checks, which were included in
accounts payable and book overdrafts, totaled $1,069,797 at June 27, 2009 and
$194,381 at December 27, 2008. The increase in outstanding checks as
of June 27, 2009 is due to the timing of payments made in June 2009, principally
related to occupancy costs, compared to the timing of payments made in December
2008.
Restricted
cash represents funds on deposit established for the benefit of and under the
control of Wells Fargo Retail Finance, LLC (“Wells Fargo”), the Company’s lender
under its line of credit, and constitutes collateral for amounts outstanding
under the Company’s line of credit.
Fair
Value of Financial Instruments
The
carrying values of cash and cash equivalents, accounts receivable and accounts
payable approximate fair value because of the short-term nature of these
instruments. The fair value of borrowings under the Company’s line of
credit approximates carrying value because the debt bears interest at a variable
market rate. The fair value of the notes payable approximates the
carrying value based on the principal bearing interest at a variable market rate
and based on their short term maturity. The fair value of the
warrants issued in 2006 was determined by using the Black-Scholes model
(volatility of 108%, interest of 4.73% and expected life of five
years). The fair value of the warrants issued in 2008 was also
determined by using the Black-Scholes model (volatility of 101%, risk free rate
of 2.58% and expected life of five years).
As
permitted by Financial Accounting Standards Board (“FASB”) Staff Position
("FSP") SFAS No. 157-2,
Effective Date of FASB Statement
No. 157
("FSP SFAS 157-2"), the Company elected to defer the
adoption of SFAS No. 157 for all non-financial assets and non-financial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis, until December 28, 2008. The adoption
of FSP SFAS 157-2 in fiscal 2009 has not had a material impact on the Company's
financial position, results of operations or cash flows.
Inventories
Inventories
consist of party supplies and are valued at the lower of moving weighted-average
cost or market. Inventory has been reduced by an allowance for
obsolete and excess inventory, which is based on management’s review of
inventories on hand compared to estimated future sales. The Company
records vendor rebates, discounts and certain other adjustments to inventory,
including freight costs, and these amounts are recognized in the income
statement as the related goods are sold.
The
activity in the allowance for obsolete and excess inventory is as
follows:
|
|
Six
months ended
|
|
|
Twelve
months ended
|
|
|
|
Jun 27, 2009
|
|
|
Dec 27, 2008
|
|
Beginning
balance
|
|
$
|
942,587
|
|
|
$
|
969,859
|
|
Increases
to reserve
|
|
|
175,000
|
|
|
|
405,000
|
|
Write-offs
against reserve
|
|
|
-
|
|
|
|
(432,272
|
)
|
Ending
balance
|
|
$
|
1,117,587
|
|
|
$
|
942,587
|
|
Income
Taxes
The
Company adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109
(“FIN 48”) on December
31, 2006. At the adoption date and as of June 27, 2009, the Company had no
material unrecognized tax benefits and upon adoption on December 31, 2006 no
adjustments to liabilities, retained earnings or operations were
required.
Net
Income (Loss) per Share
Net income
(loss) per basic share is computed by dividing net income (loss) available to
common shareholders by the weighted-average number of common shares
outstanding. The common share equivalents of Series B-F preferred
stock are required to be included in the calculation of net income per basic
share in accordance with EITF Consensus 03-6,
Participating
Securities and the Two-Class Method
under SFAS No. 128
, which supersedes EITF Topic D-95,
Effect of Participating Convertible
Securities on the Computation of Basic Earnings Per Share.
Since the
preferred stockholders are entitled to participate in dividends when and if
declared by the Board of Directors on the same basis as if the shares of Series
B-F preferred stock were converted to common stock, the application of EITF 03-6
has no effect on the amount of income (loss) per basic share of common
stock. For periods with net losses, the Company does not allocate
losses to Series B-F preferred stock.
Net income
(loss) per diluted share under EITF 03-6 is computed by dividing net income
(loss) by the weighted average number of common shares outstanding, plus the
common share equivalents of Series B-F preferred stock on an as if-converted
basis, plus the common share equivalents of the “in the money” stock options and
warrants as computed by the treasury method. For the periods with net
losses, the Company excludes these common share equivalents since their impact
would be anti-dilutive.
As of June
27, 2009, there were 28,172,251 potential additional common share equivalents
outstanding, which were not included in the calculation of diluted net loss per
share for the six months then ended because their effect would be
anti-dilutive. These included 15,493,478 shares upon the conversion
of immediately convertible preferred stock, 2,083,334 shares upon the exercise
of a warrant with an exercise price of $0.475 per share, 168,594 shares upon the
exercise of warrants with a weighted average exercise price of $2.97 per share,
100,000 shares upon the exercise of warrants with a weighted average exercise
price of $1.50 per share and 10,326,845 shares upon the exercise of stock
options with a weighted average exercise price of $0.50 per share.
Stock
option compensation expense
The
Company accounts for stock based compensation under Statement No. 123(R) and
uses the Black-Scholes option pricing model to determine the fair value of stock
based compensation. The Black-Scholes model requires the Company to
make several subjective assumptions, including the estimated length of time
employees will retain their vested stock options before exercising them
(“expected term”), and the estimated volatility of the Company’s common stock
price over the expected term, which is based on historical volatility of the
Company’s common stock over a time period equal to the expected
term. The Black-Scholes model also requires a risk-free interest
rate, which is based on the U.S. Treasury yield curve in effect at the time of
the grant, and the dividend yield on the Company’s common stock, which is
assumed to be zero since the Company does not pay dividends and has no current
plans to do so in the future. Changes in these assumptions can
materially affect the estimate of fair value of stock based compensation and
consequently, the related expense recognized on the consolidated statement of
operations. Under the modified prospective method, stock based
compensation expense is recognized for new grants beginning in the fiscal year
ended December 30, 2006 and any unvested grants prior to the adoption of
Statement No. 123(R). The Company recognizes stock based compensation expense on
a straight-line basis over the vesting period of each grant.
The stock
based compensation expense recognized by the Company was:
|
|
For the three months ended
|
|
|
For the six months ended
|
|
|
|
Jun 27, 2009
|
|
|
Jun 28, 2008
|
|
|
Jun 27, 2009
|
|
|
Jun 28, 2008
|
|
Stock
Based Compensation Expense
|
|
$
|
39,523
|
|
|
$
|
38,843
|
|
|
$
|
77,517
|
|
|
$
|
80,949
|
|
Stock
based compensation expense is included in general and administrative expense and
had no impact on cash flow from operations and cash flow from financing
activities for the six months ended June 27, 2009.
On May 27,
2009, the Company’s stockholders approved a new equity incentive plan entitled
the 2009 Stock Incentive Plan (the “2009 Plan”). The Company will no
longer grant equity awards under its former equity incentive
plan, the Amended and Restated 1998 Incentive and Nonqualified Stock
Option Plan (the “1998 Plan” and with the 2009 Plan, the “Plans”).
Under the
Company’s Plans, options to acquire shares of common stock may be granted to
officers, directors, key employees and consultants. Under the
2009 Plan, the exercise price for qualified incentive options and non-qualified
options cannot be less than the fair market value of the stock on the grant
date, as determined by the Board. In addition, under the 2009 Plan, other stock
based and performance awards may be granted to officers, directors, key
employees and consultants, including stock appreciation rights, restricted
stock, and restricted stock units. Under the Plans, a combined total of
11,000,000 shares of common stock or other stock based awards may be
granted. To date, the Company has only issued options under its
Plans, which have been granted to employees, directors and
consultants of the Company at fair market value at the date of
grant. Generally, the options become exercisable over periods of up
to four years, and expire ten years from the date of grant.
The
Company granted options for the purchase of an aggregate of 1,085,000 shares of
common stock to key employees, including its executive officers, and each of the
four independent members of the Board of Directors on May 27, 2009 at an
exercise price of $0.11 per share. In addition, the Company granted
options for the purchase of an aggregate of 200,000 shares of common stock to
its Chief Financial Officer on March 4, 2009 at an exercise price of $0.07 per
share. In 2008, the Company granted options for the purchase of an
aggregate of 200,000 shares of common stock to its Chief Financial Officer and
each of the four independent members of the Board of Directors on June 4, 2008
at an exercise price of $0.29 per share. The weighted-average fair market value
using the Black-Scholes option pricing model of the options granted on May 27,
2009 was $0.09 per share, was $0.06 per share for the options granted on March
4, 2009 and was $0.22 per share for the options granted on June 4, 2008. The
fair market value of the options at the date of the grant was estimated using
the Black-Scholes option-pricing model with the following weighted average
assumptions:
|
|
For the three months ended
|
|
|
For the six months ended
|
|
|
|
Jun 27, 2009
|
|
|
Jun 28, 2008
|
|
|
Jun 27, 2009
|
|
|
Jun 28, 2008
|
|
Risk-free
interest rate
|
|
|
2.30
|
%
|
|
|
3.21
|
%
|
|
|
2.23
|
%
|
|
|
3.21
|
%
|
Expected
volatility
|
|
|
110.09
|
%
|
|
|
101.20
|
%
|
|
|
109.52
|
%
|
|
|
101.20
|
%
|
Weighted
average expected life (in years)
|
|
|
6.25
|
|
|
|
5.00
|
|
|
|
6.25
|
|
|
|
5.00
|
|
Expected
dividends
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
A summary
of the Company's stock options is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Number
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
of
|
|
|
Average
|
|
|
|
|
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Stock
|
|
|
Exercise
|
|
|
Price
|
|
|
Life
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Range
|
|
|
(Years)
|
|
|
Value
|
|
Outstanding
- December 27, 2008
|
|
|
9,082,198
|
|
|
$
|
0.55
|
|
|
|
$
|
0.13
|
-
|
$
|
4.25
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,285,000
|
|
|
|
0.10
|
|
|
|
|
0.07
|
-
|
|
0.11
|
|
|
|
|
|
|
|
|
Expired/Forfeited
|
|
|
(40,353
|
)
|
|
|
0.39
|
|
|
|
|
0.18
|
-
|
|
0.65
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
-
|
|
-
|
|
|
|
|
|
|
|
|
Outstanding
- June 27, 2009
|
|
|
10,326,845
|
|
|
$
|
0.50
|
|
|
|
$
|
0.07
|
-
|
$
|
4.25
|
|
|
|
4.4
|
|
|
$
|
60,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
- June 27, 2009
|
|
|
8,426,446
|
|
|
$
|
0.57
|
|
|
|
$
|
0.13
|
-
|
$
|
4.25
|
|
|
|
3.3
|
|
|
$
|
725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for grant - June 27, 2009
|
|
|
237,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table summarizes information for options outstanding and exercisable
at June 27, 2009:
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
Exercisable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Average
|
|
|
Weighted
|
|
|
Number
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
of
|
|
|
Remaining
|
|
|
Average
|
|
|
of
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Life
|
|
|
Exercise
|
|
|
Stock
|
|
|
Exercise
|
|
Price Range
|
|
|
Options
|
|
|
(Years)
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
$
|
0.07
|
|
|
|
-
|
|
|
$
|
0.20
|
|
|
|
1,415,350
|
|
|
|
9.2
|
|
|
$
|
0.11
|
|
|
|
|
130,350
|
|
|
$
|
0.18
|
|
|
|
0.21
|
|
|
|
-
|
|
|
|
0.30
|
|
|
|
3,412,797
|
|
|
|
2.2
|
|
|
|
0.25
|
|
|
|
|
3,337,797
|
|
|
|
0.25
|
|
|
|
0.31
|
|
|
|
-
|
|
|
|
0.50
|
|
|
|
2,435,620
|
|
|
|
5.8
|
|
|
|
0.39
|
|
|
|
|
1,895,221
|
|
|
|
0.38
|
|
|
|
0.51
|
|
|
|
-
|
|
|
|
1.00
|
|
|
|
2,674,778
|
|
|
|
3.8
|
|
|
|
0.77
|
|
|
|
|
2,674,778
|
|
|
|
0.77
|
|
|
|
1.01
|
|
|
|
-
|
|
|
|
3.50
|
|
|
|
288,300
|
|
|
|
0.8
|
|
|
|
2.51
|
|
|
|
|
288,300
|
|
|
|
2.51
|
|
|
|
3.51
|
|
|
|
-
|
|
|
|
4.25
|
|
|
|
100,000
|
|
|
|
0.5
|
|
|
|
4.14
|
|
|
|
|
100,000
|
|
|
|
4.14
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
10,326,845
|
|
|
|
4.4
|
|
|
$
|
0.50
|
|
|
|
|
8,426,446
|
|
|
$
|
0.57
|
|
|
The
remaining unrecognized stock based compensation expense related to unvested
awards at June 27, 2009 was $283,541 and the period of time over which this
expense will be recognized is 3.92 years.
Property
and Equipment
Property
and equipment are stated at cost less accumulated depreciation and are
depreciated on the straight-line method over the estimated useful lives of the
assets. Expenditures for maintenance and repairs are charged to
operations as incurred. A listing of the estimated useful 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
|
Intangible
Assets
On August
15, 2007, the Company entered into an Asset Purchase Agreement to purchase two
franchised Party City Corporation retail stores in Lincoln, Rhode Island and
Warwick, Rhode Island, in exchange for aggregate consideration of $1,350,000
plus up to $400,000 for associated inventory. On January 2, 2008, the
Company completed the purchase of the two stores. The aggregate consideration
paid was $1,350,000 plus approximately $195,000 for associated inventory.
Funding for the purchase was obtained from the Company’s existing line of credit
with Wells Fargo. The stores were converted into iParty stores immediately
following the closing of the transaction.
Intangible
assets consist primarily of (i) the values of two non-compete agreements
acquired in conjunction with the purchase of retail stores in 2006 and 2008, and
(ii) the values of retail store leases acquired in those transactions. These
assets have been accounted for at fair value as of their respective acquisition
dates using significant other observable inputs, or Level 2 criteria, specified
by SFAS No. 157 (see Fair Value Measurements section below).
The first
non-compete agreement, from Party City Corporation and its affiliates, covers
Massachusetts, Maine, New Hampshire, Vermont, Rhode Island, and Windsor and New
London counties in Connecticut, and expires in 2011. The second
non-compete agreement was acquired in connection with the Company’s purchase in
January 2008 of the two party supply stores in Lincoln and Warwick, Rhode Island
described above. It covers Rhode Island for five years from the date of closing
and within a certain distance from the Company’s stores in the rest of New
England for three years. Both non-compete agreements have an estimated life of
60 months and are subject to certain terms and conditions in their respective
acquisition agreements.
The
occupancy valuations relate to acquired retail store leases for stores in
Peabody, Massachusetts (estimated life of 90 months), Lincoln, Rhode Island
(estimated life of 79 months) and Warwick, Rhode Island (estimated life of 96
months). Intangible assets also include legal and other transaction costs
incurred related to the purchase of the Peabody, Lincoln and Warwick
stores.
Intangible
assets as of June 27, 2009 and December 27, 2008 were:
|
|
Jun 27, 2009
|
|
|
|
Dec 27, 2008
|
|
Non-compete
agreements
|
|
$
|
2,358,540
|
|
|
|
$
|
2,358,540
|
|
Occupancy
valuations
|
|
|
944,716
|
|
|
|
|
944,716
|
|
Other
|
|
|
157,855
|
|
|
|
|
157,855
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets
|
|
|
3,461,111
|
|
|
|
|
3,461,111
|
|
|
|
|
|
|
|
|
|
|
|
Less:
accumulated amortization
|
|
|
(1,505,972
|
)
|
|
|
|
(1,157,419
|
)
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets, net
|
|
$
|
1,955,139
|
|
|
|
$
|
2,303,692
|
|
Amortization
expense for these intangible assets was:
|
|
For the three months ended
|
|
|
For the six months ended
|
|
|
|
Jun 27, 2009
|
|
|
Jun 28, 2008
|
|
|
Jun 27, 2009
|
|
|
Jun 28, 2008
|
|
Amortization
expense
|
|
|
$
174,277
|
|
|
|
$
162,394
|
|
|
|
$
348,554
|
|
|
|
$
315,154
|
|
The
amortization expense for the non-compete agreements and other intangible assets
is included in general and administrative expense in the Consolidated Statements
of Operations. The amortization expense for occupancy valuation is
included in cost of products sold and occupancy costs in the Consolidated
Statements of Operations.
Future
amortization expense related to these intangible assets as of June 27, 2009
is:
Year
|
|
Amount
|
|
2009
|
|
$
|
348,554
|
|
2010
|
|
|
672,108
|
|
2011
|
|
|
467,412
|
|
2012
|
|
|
242,438
|
|
2013
|
|
|
127,029
|
|
Thereafter
|
|
|
97,598
|
|
Total
|
|
$
|
1,955,139
|
|
Accounting
for the Impairment of Long-Lived Assets
In
accordance with SFAS No. 144,
Accounting for the Impairment or
Disposal of Long-Lived Assets
, the Company reviews each store for
impairment indicators whenever events and changes in circumstances suggest that
the carrying amounts may not be recoverable from estimated future store cash
flows. The Company’s review considers store operating results, future
sales growth and cash flows. During the third quarter of 2007,
the Company decided to close its stores in North Providence, Rhode Island and
Auburn, Massachusetts
at the end of their
lease terms, which expired on January 31, 2008. No material
impairment costs were incurred as a result of that decision. As of
June 27, 2009, the Company does not believe that any of its assets are
impaired.
Notes
Payable
Notes
payable consist of three notes entered into in fiscal 2006.
The
“Highbridge Note” is a subordinated note in the stated principal amount of
$2,500,000 that bears interest at the prime rate plus one
percent. The note matures on September 15, 2009, at which time we owe
the full principal amount of $2,500,000, inclusive of the fully amortized
discount. Interest only is payable quarterly in arrears and the
entire principal balance is due at the maturity date. The Highbridge Note was
part of a financing transaction that raised $2.5 million through a combination
of the issuance of the Highbridge Note and a warrant exercisable for 2,083,334
shares of common stock at an exercise price of $0.475 per share. The original
discount associated with the warrant issued in conjunction with the Highbridge
Note (original discount amount $613,651) is being amortized using the effective
interest method over the life of the note payable. The note payable balance of
$2,465,908 as of June 27, 2009 is presented net of the remaining unamortized
discount.
The
“Amscan Note” is a subordinated promissory note in the original principal amount
of $1,819,373, with a balance as of June 27, 2009 of $232,822. The note bears
interest at the rate of 11.0% per annum and is payable in thirty-six (36) equal
monthly installments of principal and interest of $59,562 beginning on November
1, 2006, and on the first day of each month thereafter until October 1, 2009,
when the entire remaining principal balance and all accrued interest are due and
payable.
The “Party
City Note” is a subordinated promissory note in the principal amount of
$600,000. The note bears interest at the rate of 12.25% per
annum and is payable by quarterly interest-only payments over four years, with
the full principal amount due at the note’s maturity on August 7,
2010.
On August
7, 2006, the Company entered into a Supply Agreement with Amscan Inc.
(“Amscan”), the largest supplier in the party goods industry. The
Supply Agreement with Amscan gives the Company the right to receive certain
additional rebates and more favorable pricing terms over the term of the
agreement than generally were available to the Company under its previous terms
with Amscan. The right to receive additional rebates, and the amount
of such rebates, are subject to the Company’s achievement of increased levels of
purchases and other factors provided for in the Supply Agreement. In
exchange, the Supply Agreement obligates the Company to purchase increased
levels of merchandise from Amscan until 2012. The Supply Agreement
provided for an initial ramp-up period during 2006 and 2007 and, beginning with
calendar year 2008, requires the Company to purchase on an annual basis
merchandise equal to the total number of its stores open during such calendar
year, multiplied by $180,000 until 2012. The Supply Agreement
provides for penalties in the event the Company fails to attain the annual
purchase commitment. Under the terms of the Supply Agreement, the
annual purchase commitment for any individual year can be reduced for orders
placed by the Company but not filled by the supplier within a specified time
period. During 2008, the supplier experienced difficulty in filling
completely certain orders sourced out of China. Accordingly, the
supplier agreed to reduce the Company’s purchase commitment for 2008 to 90% of
the contractual minimum for that year. The Company is not aware of
any reasons why the purchase commitment for 2009 will not be met.
The Supply
Agreement also provided for Amscan to extend, until October 31, 2006,
approximately $1,150,000 of certain currently due amounts owed by the Company to
Amscan which would otherwise have been payable on August 8, 2006 (the “extended
payables”) and gave the Company the right, at its option, to convert the
extended payables into a subordinated promissory note. On October 24, 2006, the
Company converted $1,143,896 of extended payables originally due to Amscan as of
August 8, 2006 as well as an additional $675,477 of payables due to Amscan as of
September 28, 2006 into a single subordinated promissory note in the total
principal amount of $1,819,373, which is the Amscan Note defined
above.
On August
7, 2006, the Company also entered into and simultaneously closed an Asset
Purchase Agreement with Party City, an affiliate of Amscan, pursuant to which
the Company acquired a Party City retail party goods store in Peabody,
Massachusetts and received a five-year non-competition covenant from Party City,
for aggregate consideration of $2,450,000, payable by a subordinated note in the
principal amount of $600,000, which is the Party City Note defined above, and
$1,850,000 in cash.
Stockholders’
Equity
During the
six months ended June 27, 2009, there were no exercises of stock options or
warrants, and no conversions of convertible preferred stock.
On May 27,
2009, the Company’s stockholders authorized an amendment to the
Company's Restated Certificate of Incorporation to effect a reverse stock split,
pursuant to which the existing shares of the Company's common stock would be
combined into new shares of the Company's common stock at an exchange ratio
ranging between one-for-five and one-for-thirty, with the exchange ratio to be
determined by the Board of Directors (the "Reverse Stock
Split"). With the approval of the Reverse Stock Split, the Board of
Directors will have the authority, but not the obligation, to effect the Reverse
Stock Split at any time prior to the date of the 2010 Annual Meeting of
Stockholders, without further approval or authorization of
stockholders. The Reverse Stock Split will be effected, if at
all, only upon a determination by the Board of Directors that implementing a
Reverse Stock Split is in the best interest of the Company and its stockholders
and after the filing of an amendment to the Company’s Restated Certificate of
Incorporation with the Secretary of State of the State of Delaware.
Fair
Value Measurements
Effective
December 30, 2007, the Company adopted SFAS No. 157,
Fair Value Measurements.
SFAS
No. 157 defines fair value as the price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. SFAS No. 157 also describes three
levels of inputs that may be used to measure the fair value:
Level 1 –
quoted prices in active markets for identical assets or liabilities
Level 2 –
observable inputs other than quoted prices in active markets for identical
assets or liabilities
Level 3 –
unobservable inputs in which there is little or no market data available, which
require the reporting entity to develop its own assumptions
The only
assets and liabilities subject to SFAS No. 157 at June 27, 2009 and December 27,
2008 are cash equivalents and restricted cash which are based on Level 1
inputs.
On July 1,
2009, iParty Corp. (the “
Company
”) and its wholly-owned
subsidiary, iParty Retail Stores Corp., as borrowers (together, the “
Borrowers
”), and Wells Fargo ,
as Administrative Agent, Collateral Agent, Swing Line Lender and Lender, entered
into a Second Amended and Restated Credit Agreement (the “
Agreement
”).
The Agreement amended and restated the
previous revolving credit facility with Wells Fargo, continued the revolving
line of credit with Wells Fargo in the amount of up to $12,500,000 and extended
the maturity date of the revolving line of credit for three years to July 2,
2012. In addition, the Agreement includes an option whereby the Borrowers
may increase the revolving line of credit up to a maximum level of $15,000,000,
at any time until July 2, 2011. The amount of credit that is available
from time to time under the Agreement is determined as a percentage of the value
of eligible inventory plus a percentage of the value of eligible credit card
receivables, as reduced by certain reserve amounts that may be required by the
Wells Fargo.
Borrowings under the Agreement will
generally accrue interest at a margin ranging from 3.00% to 3.50% (determined
according to the average daily excess availability during the fiscal quarter
immediately preceding the adjustment date) over, at the Borrowers’ election,
either the London Interbank Offered Rate (“
LIBOR
”) or a base rate
determined by Wells Fargo from time to time. The credit facility also
provides for letters of credit and includes an unused line fee on the unused
portion of the revolving credit line.
Subject to conditions set forth in the
Agreement, which the Company expects to meet, the Agreement continues to allow
proceeds from the revolving line of credit to be used to repay the Company’s
$2.5 million loan from Highbridge International LLC, the Highbridge Note, when
it becomes due on September 15, 2009.
The obligations of the Borrowers under
the Agreement and the other loan documents are secured by a lien on
substantially all of the personal property of the Borrowers.
The Agreement has financial covenants
that are limited to minimum availability and capital expenditures and contains a
number of restrictive covenants, such as incurrence, payment or entry into
certain indebtedness, liens, investments, acquisitions, mergers, dispositions
and dividends. The Agreement generally contains customary events of default for
credit facilities of this type. Upon an event of default that is not
cured or waived within any applicable cure periods, in addition to other
remedies that may be available to Wells Fargo, the obligations under the
Agreement may be accelerated, outstanding letters of credit may be required to
be cash collateralized and the lenders may exercise remedies to collect the
balance due, including to foreclose on the collateral. Should the
Agreement be prepaid or the maturity accelerated for any reason, the Borrowers
would be responsible for an early termination fee in the amount of (i) 1.50% of
the revolving credit facility ceiling then in effect within the first year of
the term of the facility, (ii) 1.00% of the revolving credit facility ceiling
then in effect within the second year of the term of the facility and (ii) 0.50%
thereafter.
The
disclosure of the subsequent event described above is based on our evaluation of
events through August 6, 2009, the date of this report on Form
10-Q.
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
The
following discussion should be read in conjunction with the unaudited
Consolidated Financial Statements and related Notes included in Item 1 of this
Quarterly Report on Form 10-Q and the audited Consolidated Financial Statements
and related Notes and Item 7, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations”, contained in our Annual Report on Form
10-K for the fiscal year ended December 27, 2008.
Certain
statements in this Quarterly Report on Form 10-Q, particularly statements
contained in this Item 2, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” constitute “forward-looking statements”
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended. The words “anticipate”, “believe”, “estimate”, “expect”,
“plan”, “intend” and other similar expressions are intended to identify these
forward-looking statements, but are not the exclusive means of identifying
them. Forward-looking statements included in this Quarterly Report on
Form 10-Q or hereafter included in other publicly available documents filed with
the Securities and Exchange Commission (“SEC”), 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) or 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, the forward-looking
statements contained in this Quarterly Report on Form 10-Q. These
include, but are not limited to, those described below under the heading
“Factors That May Affect Future Results” and in Part II, Item 1A, “Risk Factors”
as well as under Item 1A, “Risk Factors” of our most recently filed Annual
Report on Form 10-K for the year ended December 27, 2008. We assume no
obligation to update these forward looking statements contained in this report,
whether as a result of new information, future events or otherwise.
Overview
We are a
leading brand in the party industry in the markets we serve and a leading
resource in those markets for consumers seeking party goods, party planning
advice and relevant information. We are a party goods retailer
operating stores throughout New England, where 45 of our 50 retail stores are
located. We also license the name “iparty.com” (at www.iparty.com) to
a third party in exchange for royalties, which to date have not been
significant.
Our 50
retail stores are located predominantly in New England with 25 stores in
Massachusetts, 7 in Connecticut, 6 in New Hampshire, 3 in Rhode Island, 3 in
Maine and 1 in Vermont. We also operate 5 stores in
Florida. Our stores range in size from approximately 8,000 square
feet to 20,500 square feet and average approximately 10,300 square feet in
size. We lease our properties, typically for 10 years and usually
with options from our landlords to renew our leases for an additional 5 or 10
years.
The
following table shows the number of stores in operation (not including temporary
stores):
|
|
For the six months ended
|
|
|
|
Jun 27, 2009
|
|
|
Jun 28, 2008
|
|
Beginning
of period
|
|
|
50
|
|
|
|
50
|
|
Openings
/ Acquisitions
|
|
|
-
|
|
|
|
2
|
|
Closings
|
|
|
-
|
|
|
|
(2
|
)
|
End
of period
|
|
|
50
|
|
|
|
50
|
|
Our stores
feature over 20,000 products ranging from paper party goods, Halloween costumes,
greeting cards and balloons to more unique merchandise such as piñatas, tiny
toys, masquerade and Hawaiian Luau items. Our sales are driven by the
following holiday and party events: Halloween, Christmas, Easter,
Valentine’s Day, New Year’s, Independence Day, St. Patrick’s Day, Thanksgiving,
Hanukkah and professional sports playoff events. We also focus our
business closely on lifetime events such as anniversaries, graduations,
birthdays, and bridal or baby showers.
In
addition to the stores discussed in the paragraphs above, we opened two
temporary Halloween stores in the greater Boston area in September
2008. These stores featured a strategically selected assortment of
Halloween related merchandise and were closed in early November
2008.
Trends
and Quarterly Summary
Our
business has a seasonal pattern. In the past three years, we have
realized approximately 34.7% of our annual revenues in our fourth quarter, which
includes Halloween and Christmas, and approximately 24.5% of our revenues in the
second quarter, which includes school graduations and usually includes
Easter. Also, during the past three years, we have had net income in
our second and fourth quarters and generated losses in our first and third
quarters.
For the
second quarter of 2009, our consolidated revenues were $19.6 million, compared
to $20.1 million for the second quarter of 2008. The decrease in second quarter
revenues from the year-ago period included a 2.6% decrease in comparable store
sales. The decrease in consolidated revenue was primarily due to a decrease in
customer traffic and an increase in promotional markdowns, both of which are
related to the continuing recession in the U.S. and world
economies. Consolidated gross profit margin was 40.3% for the second
quarter of 2009 compared to a margin of 42.2% for the same period in
2008. The decline in gross profit margin was substantially due to increases
in occupancy costs as well as the decreased leveraging of those costs related to
lower sales. The consolidated net income for the second quarter of
2009 was $668,868 or $0.02 per share, compared to a consolidated net income of
$183,606, or $0.00 per share, for the second quarter in 2008, an improvement of
$485,262. Despite the decline in revenues as compared to the second quarter of
2008, we were able to report a significant improvement in our net income as
compared to the second quarter of 2008, due primarily to the cost cutting
initiatives we undertook at the end of 2008. As a result of those initiatives,
we estimate that we eliminated $3 million in annualized expenses throughout the
Company for 2009.
Acquisition
and Growth Strategy
We operate
in a largely un-branded market that has many small businesses. As a
result, we have considered, and may continue to consider, growing our business
through acquisitions of other entities. Any determination to make an
acquisition will be based upon a variety of factors, including, without
limitation, the purchase price and other financial terms of the transaction, the
business prospects, geographical location and the extent to which any
acquisition would enhance our prospects. G
iven the current state of the economy and our focus on
maintaining liquidity, we do not expect to acquire
or open
any new
stores in 2009
, except for temporary
Halloween stores
.
On January
2, 2008, we completed the purchase of two stores in Rhode Island. The aggregate
consideration paid was $1,350,000 plus approximately $195,000 for associated
inventory. Funding for the purchase was obtained from our line of credit with
Wells Fargo Retail Finance, LLC (“Wells Fargo”). The stores were
converted into iParty stores immediately following the closing of the
transaction. The consideration paid for the assets acquired in the
transaction was allocated based upon an independent appraisal to the following,
based on their fair values on the date of purchase:
|
|
Fair Value at
|
|
|
|
Jan 2, 2008
|
|
Non-compete
agreement
|
|
$
|
781,000
|
|
Occupancy
valuation
|
|
|
495,000
|
|
Equipment
and other
|
|
|
74,000
|
|
|
|
$
|
1,350,000
|
|
Results
of Operations
Fiscal
year 2009 has 52 weeks and ends on December 26, 2009. Fiscal year
2008 had 52 weeks and ended on December 27, 2008.
The second
quarter of fiscal year 2009 had 13 weeks and ended on June 27,
2009. The second quarter of fiscal year 2008 had 13 weeks and ended
on June 28, 2008.
Expense
Management Actions for Fiscal 2009
In 2008,
the US economy entered into a recessionary period combined with a systematic
lack of financial liquidity. During that year, the housing crisis
deepened, the stock market declined dramatically, and unemployment rose
steeply. All of these factors contributed to a difficult retail
environment. Many economists anticipated a difficult 2009.
Although we fared better than many of our competitors in 2008, we have taken
significant steps in response to the economic crisis. We reviewed and
revamped our headquarters and store expenses, which included reducing our
headcount and decreasing our advertising and other administrative costs. We
expect to save up to $3 million through reduced operating expenses in 2009 from
these actions. We continue to monitor sales performance, customer
buying patterns and consumer confidence, and we are prepared to make further
adjustments to our cost structure as needed to manage our way through this
recession.
Three
Months Ended June 27, 2009 Compared to Three Months Ended June 28,
2008
Revenues
Revenues
include the selling price of party goods sold, net of returns and discounts, and
are recognized at the point of sale. Our consolidated revenues for
the second quarter of fiscal 2009 were $19,569,009, a decrease of $534,659, or
2.7% from the second quarter of the prior fiscal year. The decline was primarily
due to the decreased level of consumer demand and increased level of promotional
markdowns, both of which are related to the U.S.
recession.
|
|
For the three months ended
|
|
|
|
Jun 27, 2009
|
|
|
Jun 28, 2008
|
|
Revenues
|
|
$
|
19,569,009
|
|
|
$
|
20,103,668
|
|
|
|
|
|
|
|
|
|
|
Decrease
in revenues
|
|
|
-2.7
|
%
|
|
|
-1.5
|
%
|
Comparable
store sales for the quarter decreased by 2.6%.
Cost
of products sold and occupancy costs
Cost of
products sold and occupancy costs consist of the cost of merchandise sold to
customers and the occupancy costs for our stores. Our cost of
products sold and occupancy costs for the second quarter of fiscal 2009 were
$11,691,950, or 59.7% of revenues, an increase of $79,363 or 1.9 percentage
points, as a percentage of revenues, from the second quarter of the prior fiscal
year.
|
|
For the three months ended
|
|
|
|
Jun 27, 2009
|
|
|
Jun 28, 2008
|
|
Cost
of products sold and occupancy costs
|
|
$
|
11,691,950
|
|
|
$
|
11,612,587
|
|
|
|
|
|
|
|
|
|
|
Percentage
of revenues
|
|
|
59.7
|
%
|
|
|
57.8
|
%
|
As a
percentage of revenues, the increase in cost of products sold and occupancy
costs was primarily attributable to increased occupancy costs and the decreased
leveraging of these occupancy costs related to lower sales in the second quarter
of 2009 compared to the second quarter of 2008.
Marketing
and sales expense
Marketing
and sales expense consists primarily of advertising and promotional
expenditures, all store payroll and related expenses for personnel engaged in
marketing and selling activities and other non-payroll expenses associated with
operating our stores. Our consolidated marketing and sales expense
for the second quarter of fiscal 2009 was $5,441,459, or 27.8% of revenues, a
decrease of $735,001 or 2.9 percentage points, as a percentage of revenues, from
the second quarter of the prior fiscal year.
|
|
For the three months ended
|
|
|
|
Jun 27, 2009
|
|
|
Jun 28, 2008
|
|
Marketing
and sales
|
|
$
|
5,441,459
|
|
|
$
|
6,176,460
|
|
|
|
|
|
|
|
|
|
|
Percentage
of revenues
|
|
|
27.8
|
%
|
|
|
30.7
|
%
|
As a
percentage of revenues, the decrease in marketing and sales expense was
primarily the result of our cost reduction actions related to store payroll and
advertising expenses, as described above.
General
and administrative expense
General
and administrative (“G&A”) expense consists of payroll and related expenses
for executive, merchandising, finance and administrative personnel, as well as
information technology, professional fees and other general corporate
expenses. Our consolidated G&A expense for the second quarter of
fiscal 2009 was $1,638,221, or 8.4% of revenues, a decrease of $308,413 or 1.3
percentage points, as a percentage of revenues, from the second quarter of the
prior fiscal year.
|
|
For the three months ended
|
|
|
|
Jun 27, 2009
|
|
|
Jun 28, 2008
|
|
General
and administrative
|
|
$
|
1,638,221
|
|
|
$
|
1,946,634
|
|
|
|
|
|
|
|
|
|
|
Percentage
of revenues
|
|
|
8.4
|
%
|
|
|
9.7
|
%
|
The
decrease in general and administrative expense as a percentage of revenues from
the second quarter of the prior fiscal year was a result of the cost reduction
initiatives implemented in 2009.
Operating
income
Our
operating income for the second quarter of fiscal 2009 was $797,379, or 4.1% of
revenues, compared to an operating income of $367,987, or 1.8% of revenues for
the second quarter of the prior fiscal year.
Interest
expense
Our
interest expense in the second quarter of fiscal 2009 was $128,528, a decrease
of $56,097 from the second quarter of the prior fiscal year. The
decrease in the second quarter of fiscal 2009 was primarily due to a lower
effective rate on our Highbridge Note and lower interest expense on our Amscan
Note due to principal amortization of that indebtedness.
Income
taxes
We have
not provided for income taxes for the second quarter of fiscal 2009 or fiscal
2008 due to losses in the six month period ended June 27, 2009 and
for fiscal 2008 and the availability of net operating loss (NOL) carryforwards
to eliminate federal taxable income on an annual basis. No benefit has been
recognized with respect to current losses or NOL carryforwards due to the
uncertainty of future taxable income.
At the end
of fiscal 2008, we had estimated federal net operating loss carryforwards of
approximately $20.3 million, which begin to expire in 2019. In
accordance with Section 382 of the Internal Revenue Code of 1986, as amended,
the use of these carryforwards will be subject to annual limitations based upon
certain ownership changes of our stock that have occurred or that may
occur.
Net
income
Our net
income in the second quarter of fiscal 2009 was $668,868, or $0.02 per basic and
diluted share, compared to a net income of $183,606, or $0.00 per basic and
diluted share, in the second quarter of the prior fiscal year. The increase in
net income was mainly attributable to lower advertising expenditures and
decreased general and administrative costs resulting primarily from our cost
cutting initiatives.
Six
Months Ended June 27, 2009 Compared to Six Months Ended June 28,
2008
Revenues
Revenues
include the selling price of party goods sold, net of returns and discounts, and
are recognized at the point of sale. Our consolidated revenues for
the first six months of fiscal 2009 were $34,137,416, a decrease of $2,110,340
or 5.8% from the first six months of the prior fiscal year.
|
|
For the six months ended
|
|
|
|
Jun 27, 2009
|
|
|
Jun 28, 2008
|
|
Revenues
|
|
$
|
34,137,416
|
|
|
$
|
36,247,756
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in revenues
|
|
|
-5.8
|
%
|
|
|
0.7
|
%
|
Comparable
store sales for the first six months decreased by 5.9%.
Cost
of products sold and occupancy costs
Cost of
products sold and occupancy costs consist of the cost of merchandise sold to
customers and the occupancy costs for our stores. Our cost of
products sold and occupancy costs for the first six months of fiscal 2009 were
$21,074,016, or 61.7% of revenues, a decrease of $521,918 or an increase of 2.1
percentage points, as a percentage of revenues, from the first six months of the
prior fiscal year.
|
|
For the six months ended
|
|
|
|
Jun 27, 2009
|
|
|
Jun 28, 2008
|
|
Cost
of products sold and occupancy costs
|
|
$
|
21,074,016
|
|
|
$
|
21,595,934
|
|
|
|
|
|
|
|
|
|
|
Percentage
of revenues
|
|
|
61.7
|
%
|
|
|
59.6
|
%
|
As a
percentage of revenues, the increase in cost of products sold and occupancy
costs was primarily attributable to increased occupancy costs and the decreased
leveraging of these occupancy costs related to lower sales in the first six
months of 2009 compared to the first six months of the prior fiscal
year.
Marketing and sales
expense
Marketing
and sales expense consists primarily of advertising and promotional
expenditures, all store payroll and related expenses for personnel engaged in
marketing and selling activities and other non-payroll expenses associated with
operating our stores. Our consolidated marketing and sales expense
for the first six months of fiscal 2009 was $10,420,777, or 30.5% of revenues, a
decrease of $1,605,435 or a decrease of 2.7 percentage points, as a percentage
of revenues, from the first six months of the prior fiscal year.
|
|
For the six months ended
|
|
|
|
Jun 27, 2009
|
|
|
Jun 28, 2008
|
|
Marketing
and sales
|
|
$
|
10,420,777
|
|
|
$
|
12,026,212
|
|
|
|
|
|
|
|
|
|
|
Percentage
of revenues
|
|
|
30.5
|
%
|
|
|
33.2
|
%
|
As a
percentage of revenues, the decrease in marketing and sales expense was
primarily the result of our cost reduction actions related to store payroll and
advertising expenses, as described above.
General
and administrative expense
General
and administrative (“G&A”) expense consists of payroll and related expenses
for executive, merchandising, finance and administrative personnel, as well as
information technology, professional fees and other general corporate
expenses. Our consolidated G&A expense for the first six months
of fiscal 2009 was $3,423,991, or 10.0% of revenues, a decrease of $485,808, or
0.8 percentage points, as a percentage of revenues, from the first six months of
the prior fiscal year.
|
|
For the six months ended
|
|
|
|
Jun 27, 2009
|
|
|
Jun 28, 2008
|
|
General
and administrative
|
|
$
|
3,423,991
|
|
|
$
|
3,909,799
|
|
|
|
|
|
|
|
|
|
|
Percentage
of revenues
|
|
|
10.0
|
%
|
|
|
10.8
|
%
|
General
and administrative expense decreased as a percentage of revenues from the second
quarter of the prior fiscal year as a result of the cost reduction initiatives
implemented in 2009.
Operating
loss
Our
operating loss for the first six months of fiscal 2009 was $781,368, or 2.3% of
revenues, compared to an operating loss of $1,284,189, or 3.5% of revenues for
the first six months of the prior fiscal year.
Interest
expense
Our
interest expense in the first six months of fiscal 2009 was $265,080, a decrease
of $133,573 from the first six months of the prior fiscal year. The
decrease in the first six months of fiscal 2009 was primarily due to a lower
effective rate on our Highbridge Note and lower interest expense on our Amscan
Note, due to amortization of that indebtedness.
Income
taxes
We have
not provided for income taxes for the first six months of fiscal 2009 or fiscal
2008 due to availability of net operating loss (NOL) carryforwards to eliminate
federal taxable income during those periods. No benefit has been recognized with
respect to NOL carryforwards due to the uncertainty of future taxable
income.
At the end
of fiscal 2008, we had estimated federal net operating loss carryforwards of
approximately $20.3 million, which begin to expire in 2019. In
accordance with Section 382 of the Internal Revenue Code, the use of these
carryforwards will be subject to annual limitations based upon certain ownership
changes of our stock that have occurred or that may occur.
Net
Loss
Our net
loss in the first six months of fiscal 2009 was $1,046,403, or $0.05 per basic
and diluted share, compared to a net loss of $1,680,922, or $0.07 per basic and
diluted share, in the first six months of the prior fiscal year. The decrease in
net loss was mainly attributable to lower store payroll expenses, lower
advertising costs and decreased general and administrative
expenses.
Liquidity
and Capital Resources
Our
primary uses of cash are:
|
·
|
purchases
of inventory, including purchases under our Supply Agreement with Amscan,
as described more fully below;
|
|
·
|
occupancy
expenses of our stores;
|
|
·
|
new
store openings, including
acquisitions.
|
Our
primary sources of cash are:
|
·
|
cash
from operating activities; and
|
|
·
|
debt,
including our line of credit and notes
payable.
|
Our
prospective cash flows are subject to certain trends, events and uncertainties,
including demands for capital to support growth, improve our infrastructure,
respond to economic conditions, and meet contractual commitments. Based on our
current operating plan, we believe that anticipated revenues from operations and
borrowings available under our line of credit, which was amended and restated on
July 1, 2009, will be sufficient to fund our operations, working capital
requirements, scheduled note payments as discussed below, and capital
expenditures through
the next twelve
months.
In the event that our operating plan changes due to
changes in our strategic plans, lower-than-expected revenues, unanticipated
expenses, increased competition, unfavorable economic conditions or other
unforeseen circumstances, including the continued uncertainty in the credit
markets, and further weakening of consumer confidence and spending, our
liquidity may be negatively impacted. If so, we could be
required to
further
adjust our expenditures
for 2009 to conserve working capital or raise additional capital, possibly
including debt or equity financing, to fund operations and our business strategy
and to refinance our outstanding debt. Given the current state of the
debt and equity markets, this could be more difficult and
expensive.
Notes
Payable
We currently have three notes payable outstanding with
principal balances totaling $3,298,730 at June 27, 2009.
We refer to these notes as the Highbridge Note, the
Amscan Note and the Party City Note. For a
more detailed
description of these notes, we refer you to the section
titled “
Notes Payable”
in the Notes to Consolidated Financial Statements for
the quarter
ended June 27, 2009 included in
Item 1 of this Quarterly Report on Form 10-Q. The Amscan Note bears
interest at the rate of 11.0% per annum and is payable in thirty-six (36) equal
monthly installments of principal and interest of $59,562 commencing on
No
v
ember 1, 2006, and on the first day of each month
thereafter until October 1, 2009. The Party City Note, which has a
principal amount of $600,000, is payable by quar
terly interest-only payments over four years, with the
full principal amount due at the n
o
te
’
s maturity on
August 7, 2010.
In September 2006, we closed a financing transaction
with an institutional accredited investor whereby we issued a three-year $2.5
million subordinated note, the Highbridge Note, that bears interest at an
interest rate of
prime plus one percent and
a warrant, the Highbridge Warrant, exercisable for 2,083,334 shares of our
common stock at an exercise price of $0.475 per share, or 125% of the closing
price of our common stock on the day immediately prior to the closing of
th
e
transaction. The Highbridge Note matures on September 15,
2009. The agreements entered into in connection with the financing
provide for certain restrictions and covenants consistent with
Highbridge
’
s status as a subordinated lender, and also grant
Hig
h
bridge resale registration rights with respect to the
shares of common stock underlying the Highbridge Warrant.
The issuance of the Highbridge Warrant triggered certain
anti-dilution provisions of our Series B, C, and D convertible preferred
stock.
We exp
ect to repay the Highbridge loan when it becomes due on
September 15, 2009, with proceeds from our Wells Fargo revolving line of
credit.
Line of
Credit
On July 1, 2009, we entered into a Second Amended and
Restated Credit Agreement (the “
new
line”
) with
Wells Fargo , which amended and restated the previous
revolving credit facility with Wells Fargo. The new line continues
the revolving line of credit in the amount of up to $12,500,000 and extends the
maturity date for three years to July 2, 2012. As wi
t
h the previous
line with Wells Fargo, the new line includes an option whereby we may increase
the revolving line of credit up to a maximum level of $15,000.000 at any time
prior to July 2, 2011. The amount of credit that is available from time to time
und
e
r
the Agreement is determined as a percentage of the value of eligible inventory
plus a percentage of the value of eligible credit card receivables, as reduced
by certain reserve amounts that may be required by Wells
Fargo.
Borrowings under the new line
will generally accrue interest at a margin ranging from
3.00% to 3.50% (determined according to the average daily excess availability
during the fiscal quarter immediately preceding the adjustment date) over, at
our election, either the London Interbank
O
ffered Rate
(“
LIBOR”
) or a base rate determined by Wells Fargo from time to
time. The new line margins are an increase over the previous
line, and may result in an increase in overall borrowing cost under the new
line. The new line also provides for le
t
ters of credit for
up to a sublimit of $2 million to be used in connection with inventory purchases
and includes an unused line fee on the unused portion of the revolving credit
line
. The new line also provided for a
closing fee of $125,000, which was paid
to
Wells Fargo at closing.
Subject to conditions set forth in the new line, which
we expect to meet, the new line continues to allow proceeds from the revolving
line of credit to be used to repay our $2.5 million loan from Highbridge
International LLC whe
n it becomes due on
September 15, 2009
, which is the Highbridge
Note discussed above
.
Our
obligations under the new line continue to be secured by a lien on substantially
all of our personal property.
Our
inventory consists of party supplies which are valued at the lower of
weighted-average cost or market and are reduced by an allowance for obsolete and
excess inventory and are further reduced or increased by other adjustments,
including vendor rebates and discounts and freight costs. Our line of
credit availability calculation allows us to borrow against “acceptable
inventory at cost”, which is based on our inventory at cost and applies
adjustments that our lender has approved, which may be different than
adjustments we use for valuing our inventory in our financial statements, such
as the adjustment to reserve for inventory shortage. The amount of
“acceptable inventory at cost” was approximately $14,079,914 at June 27,
2009.
Our
accounts receivable consist primarily of credit card receivables and vendor
rebate receivables. Our line of credit availability calculation
allows us to borrow against “eligible credit card receivables”, which are the
credit card receivables for the previous two to three days of
business. The amount of “eligible credit card receivables” was
approximately $358,169 at June 27, 2009.
Our total
borrowing base is determined by adding the “acceptable inventory at cost” times
an agreed upon advance rate plus the “eligible credit card receivables” times an
agreed upon advance rate but not to exceed our established credit limit, which
was $12,500,000 at June 27, 2009. Under the terms of our line of
credit, our $12,500,000 credit limit was further reduced by (1) a minimum
availability block, (2) customer deposits, (3) gift certificates, (4)
merchandise credits and (5) outstanding letters of credit. The amounts
outstanding under our line were $515,916 at June 27, 2009 and $1,950,019 as of
December 27, 2008, a decrease of $1,434,103. Our additional availability was
$7,058,844 at June 27, 2009 and $4,694,603 at December 27, 2008.
The
outstanding balances under our line are classified as current liabilities in the
accompanying consolidated balance sheets since we are required to apply daily
lock-box receipts to reduce the amount outstanding.
As with
the previous line, the new line has financial covenants that are limited to
minimum availability and capital expenditures and contains various restrictive
covenants, such as incurrence, payment or entry into certain indebtedness,
liens, investments, acquisitions, mergers, dispositions and dividends. Under the
new line, we are required to maintain a minimum availability of 7.5%
of the credit limit , which is an increase from the previous requirement of 5%
and, consistent with the previous line, to limit our capital expenditures to
within 110% of those amounts included in our business plan, which may be updated
from time to time. At June 27, 2009 and at July 1, 2009, the
inception of the new line, we were in compliance with these financial
covenants.
The new
line generally contains customary events of default for credit facilities of
this type. Upon an event of default that is not cured or waived
within any applicable cure periods, in addition to other remedies that may be
available to Wells Fargo, the obligations under the new line may be accelerated,
outstanding letters of credit may be required to be cash collateralized and the
lenders may exercise remedies to collect the balance due, including to foreclose
on the collateral. Should the new line be prepaid or the maturity
accelerated for any reason, we would be responsible for an early termination fee
in the amount of (i) 1.50% of the revolving credit facility ceiling then in
effect within the first year of the term of the facility, (ii) 1.00% of the
revolving credit facility ceiling then in effect within the second year of the
term of the facility and (ii) 0.50% thereafter.
Supply Agreement with Amscan
Our Supply
Agreement with Amscan gives us the right to receive certain additional rebates
and more favorable pricing terms over the term of the agreement than generally
were available to us under our previous terms with Amscan. The right
to receive additional rebates, and the amount of such rebates, are subject to
our achievement of increased levels of purchases and other factors provided for
in the Supply Agreement. In exchange, the Supply Agreement obligates
us to purchase increased levels of merchandise from Amscan until
2012. Beginning with calendar year 2008, the Supply Agreement
requires us to purchase on an annual basis merchandise equal to the total number
of our stores open during such calendar year, multiplied by
$180,000. The Supply Agreement provides for penalties in the event we
fail to attain the annual purchase commitment that would require us to pay to
Amscan the difference between the purchases for that year and the annual
purchase commitment for that year. Under the terms of the Supply Agreement, the
annual purchase commitment for any individual year can be reduced for orders
placed by us but not filled by the supplier. During 2008, the
supplier experienced difficulty in fulfilling certain of our orders sourced out
of China. Accordingly, the supplier agreed to reduce our purchase
commitment for 2008 to 90% of the contractual minimum for that year. Our
purchases for 2008 exceeded the minimum purchase amount commitments, as
adjusted, under the Supply Agreement. We are not aware of any reason or
circumstance that would prevent us from meeting the full minimum purchase
commitments for 2009. Although we do not expect to incur any penalties under
this Supply Agreement, if they were to occur, there could be a material adverse
effect on our uses and sources of cash.
Operating, Investing and Financing
Activities
Our operating act
ivities provided $1,778,979 during the six months of
2009 compared to $2,047,249 during the first six months of 2008, a decrease of
$268,270.
The decrease in cash
provided by operating activities was primarily due to lower accrued expenses
resulting from
lower advertising and
incentive based compensation accruals for the six months of 2009 compared to the
first six months of 2008.
We used $224,207 in investing activities during the six
months of 2009 compared to $1,918,183 during the first six months of
2008 a decrease of $1,693,976. The cash
invested in the first six months of 2009 was primarily due to the modification
of our internal systems to improve our compliance with payment card industry
data security standards and the relocation of our
Walpole
store to a
new, larger location.
The cash
invested in the first six months of 2008 was primarily due to the acquisition in
January 2008 of two retail stores located in Rhode Island and the related
non-compete agreement (see discussion below).
Our financ
ing
activities used $1,555,272 during the six months of 2009 compared to using
$135,806 during the first six months of 2008, an increase of
$1,419,466. The increase was primarily related to increased payments
on our line of credit during the first six mo
n
ths of 2009 as
compared to the first six months of 2008.
As mentioned above, on January 2, 2008, we completed the
purchase of two franchised Party City Corporation retail stores in
Lincoln
,
Rhode Island
and
Warwick
,
Rhode Island
. The aggregate considerat
ion for the assets purchased and related non-competition
covenants was $1,350,000, plus approximately $195,000 for associated inventory,
paid in cash at closing, on terms and conditions specified in the particular
asset purchase agreement. Funding for th
e
purchase was
obtained from our existing line of credit with Wells Fargo.
Contractual Obligations
Contractual
obligations at June 27, 2009 were as follows:
|
|
Payments Due By Period
|
|
|
|
|
|
|
Within
|
|
|
Within
|
|
|
|
|
|
|
|
|
|
Within
|
|
|
2
- 3
|
|
|
4
- 5
|
|
|
After
|
|
|
|
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
Total
|
|
Line
of credit
|
|
$
|
516,035
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
516,035
|
|
Capital
lease obligations
|
|
|
11,400
|
|
|
|
22,800
|
|
|
|
-
|
|
|
|
-
|
|
|
|
34,200
|
|
Notes
payable
|
|
|
2,860,654
|
|
|
|
607,652
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,468,306
|
|
Supply
agreement
|
|
|
8,644,881
|
|
|
|
18,000,000
|
|
|
|
4,500,000
|
|
|
|
-
|
|
|
|
31,144,881
|
|
Operating
leases (including retail space leases)
|
|
|
4,587,648
|
|
|
|
16,421,355
|
|
|
|
11,137,731
|
|
|
|
10,621,343
|
|
|
|
42,768,077
|
|
Total
contractual obligations
|
|
$
|
16,620,618
|
|
|
$
|
35,051,807
|
|
|
$
|
15,637,731
|
|
|
$
|
10,621,343
|
|
|
$
|
77,931,499
|
|
In
addition, at June 27, 2009, we had outstanding purchase orders totaling
approximately $8,619,926 for the acquisition of inventory and non-inventory
items that were scheduled for delivery after June 27, 2009.
Seasonality
Due to the
seasonality of our business, sales and operating income are typically higher in
our second and fourth quarters. Our business is highly dependent upon
sales of Easter, graduation and summer merchandise in the second quarter and
sales of Halloween and Christmas merchandise in the fourth
quarter. We have typically operated at a loss during the first and
third quarters.
Geographic
Concentration
As of June
27, 2009, we operated a total of 50 stores, 45 of which are located in New
England
and 5 of which are located in
Florida
. As a result, a severe or
prolonged regional recession or regional changes in demographics, employment
levels, population, weather patterns, real estate market conditions, consumer
confidence and spending patterns or other factors specific to the New England
region
or in
Florida
may adversely affect us more than a
company that is more geographically diverse.
Effects
of Inflation
While we
do not view the effects of inflation as having a direct material effect upon our
business, we believe that volatility in oil and gasoline prices impacts the cost
of producing petroleum-based/plastic products, which are a key raw material in
much of our merchandise, and also impacts prices of shipping products made
overseas in foreign countries, such as China, which includes much of our
merchandise. Volatile oil and gasoline prices also impact freight
costs, consumer confidence and spending patterns. These and other
issues directly or indirectly affecting our vendors and us could adversely
affect our business and financial performance.
Off-Balance
Sheet Arrangements
We do not
have any off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that are material to investors.
Factors
That May Affect Future Results
Our
business is subject to certain risks that could materially affect our financial
condition, results of operations, and the value of our common stock. These risks
include, but are not limited to, the ones described under Item 1A, “Risk
Factors” of our Annual Report on Form 10-K for the fiscal year ended December
27, 2008, and Part II, Item 1A, “Risk Factors” contained in our Quarterly
Reports on Form 10-Q, including this one, and in our periodic reports filed with
the Commission. Additional risks and uncertainties that we are
unaware of, or that we may currently deem immaterial, may become important
factors that harm our business, financial condition, results of operations, or
the value of our common stock.
Critical
Accounting Policies
Our
financial statements are based on the application of significant accounting
policies, many of which require our management to make significant estimates and
assumptions (see Note 2 to our consolidated financial statements for the fiscal
year ended December 27, 2008 included in Item 8 of our Annual Report on Form
10-K for that fiscal year, as filed with the SEC on March 23,
2009). We believe the following accounting policies to be those most
important to the portrayal of our financial condition and operating results and
those that require the most subjective judgment. If actual results
differ significantly from management’s estimates and projections, there could be
a material effect on our financial statements.
Inventories
and Related Allowance for Obsolete and Excess Inventory
Inventories
consist of party supplies and are valued at the lower of moving weighted-average
cost or market. We record vendor rebates, discounts and certain other
adjustments to inventory, including freight costs, and we recognize these
amounts in the income statement as the related goods are sold.
During
each interim reporting period, we estimate the impact on cost of products sold
associated with inventory shortage. The actual inventory shortage is
determined upon reconciliation of the annual physical inventory, which occurs
shortly before and after our year end, and an adjustment to cost of products
sold is recorded at the end of the fourth quarter to recognize the difference
between the estimated and actual inventory shortage for the full
year. The adjustment in the fourth quarter of 2008 included an
estimated reduction of $261,915 to the cost of products sold during the previous
three quarters. The adjustment in the fourth quarter of 2007 included
an estimated reduction of $123,249 to the cost of products sold during the
previous three quarters. The adjustment in the fourth quarter of 2006
included an estimated reduction of $251,806 to the cost of products sold during
the previous three quarters.
We also
make adjustments to reduce the value of our inventory for an allowance for
obsolete and excess inventory, which is based on our review of inventories on
hand compared to estimated future sales. We conduct reviews periodically
throughout the year on each stock keeping unit (“SKU”). As we identify obsolete
and excess inventory, we take immediate measures to reduce our inventory risk on
these items and we adjust our allowance accordingly. Thus, actual results could
differ from our estimates.
Revenue
Recognition
Revenues
include the selling price of party goods sold, net of returns and discounts, and
are recognized at the point of sale. We estimate returns based upon historical
return rates and such amounts have not been significant.
Property
and Equipment
Property
and equipment are stated at cost less accumulated depreciation and are
depreciated on the straight-line method over the estimated useful lives of the
assets. Expenditures for maintenance and repairs are charged to operations as
incurred.
Intangible
Assets
Intangible
assets consist primarily of the values of two non-compete agreements acquired in
conjunction with the purchase of retail stores in 2006 and 2008, and the values
of retail store leases acquired in those transactions.
The first
non-compete agreement, from Party City Corporation and its affiliates, covers
Massachusetts, Maine, New Hampshire, Vermont, Rhode Island, and Windsor and New
London counties in Connecticut, and expires in 2011. The second
non-compete agreement was acquired in connection with our purchase in January
2008 of two franchised party supply stores in Lincoln and Warwick, Rhode
Island. The acquired Rhode Island stores had been operated as
Party City franchise stores, and were converted to iParty stores
immediately following the closing. The second non-compete agreement covers Rhode
Island for five years from the date of closing and within a certain distance
from our stores in the rest of New England for three years. Both non-compete
agreements have an estimated life of 60 months and are subject to certain terms
and conditions in their respective acquisition agreements.
The
occupancy valuations related to acquired retail store leases are for stores in
Peabody, Massachusetts (estimated life of 90 months), Lincoln, Rhode Island
(estimated life of 79 months) and Warwick, Rhode Island (estimated life of 96
months). Intangible assets also include legal and other transaction costs
incurred related to the purchase of the Peabody, Lincoln and Warwick
stores.
Non-compete
agreements are amortized based on the pattern of their expected cash flow
benefits. Occupancy valuations are amortized over the terms of the related
leases.
Impairment
of Long-Lived Assets
In
accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, we perform a review of each store for impairment indicators
whenever events and changes in circumstances suggest that the carrying amounts
may not be recoverable from estimated future store cash flows. Our
review considers store operating results, future sales growth and cash
flows. The conclusion regarding impairment may differ from current
estimates if underlying assumptions or business strategies change. We
closed two stores in early January 2008, at the end of their lease
terms. No impairment charges were required for these stores, as the
assets related to them have been fully amortized, except for immaterial amounts,
and no liability existed for future lease costs. We are not aware of any
impairment indicators for any of our remaining stores at June 27,
2009.
Income
Taxes
Historically,
we have not recognized an income tax benefit for our losses. Accordingly, we
record a valuation allowance against our deferred tax assets because of the
uncertainty of future taxable income and the realizability of the deferred tax
assets. In determining if a valuation allowance against our deferred
tax asset is appropriate, we consider both positive and negative
evidence. The positive evidence that we considered included (1) we
were profitable in 2007 and 2006, and were able to use a portion of our net
operating loss carryforwards in those years and expect to do so in connection
with filing our 2008 return, (2) we have achieved positive comparable store
sales growth for six out of the last seven years and (3) we had improved
merchandise margins in 2007. The negative evidence that we considered
included (1) we realized a net loss in 2005 and 2008, (2) our merchandise
margins decreased in 2008, 2006 and 2005, (3) our future profitability is
vulnerable to certain risks, including (a) the risk that we may not be able to
generate significant taxable income to fully utilize our net operating loss
carryforwards of approximately $20.3 million at December 27, 2008, (b) the risk
of unseasonable weather and other factors in a single geographic region, New
England, where our stores are concentrated, (c) the risk of being so dependent
upon a single season, Halloween, for a significant amount of annual sales and
profitability and (d) the risk of fluctuating prices for petroleum products,
which are a key raw material for much of our merchandise and which affect our
freight costs and those of our suppliers and affect our customers’ spending
levels and patterns, (4) the risk that opening or acquiring new stores will put
pressure on our profit margins until these stores reach maturity, (5) the
expected costs of increased regulatory compliance, including, without
limitation, professional fees in 2009 associated with Section 404 of the
Sarbanes-Oxley Act, which will likely have a negative impact on our
profitability, (6) the risk that a general or perceived slowdown in the U.S.
economy, or uncertainty as to the economic outlook, which the U.S. and world
economies are experiencing, could reduce discretionary spending or cause a shift
in consumer
discretionary spending to other
products.
The
negative evidence is strong enough for us to conclude 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 against our deferred tax assets until
we have a longer track record of profitability and we can reduce our exposure to
the risks described above. Should we determine that we will be able
to realize our deferred tax assets in the future, an adjustment to our deferred
tax assets would increase income in the period in which we made such a
determination.
Stock
Option Compensation Expense
On January
1, 2006, we adopted Statement No. 123(R) using the modified prospective method
in which compensation cost is recognized beginning with the effective date (a)
based on the requirements of Statement No. 123(R) for all share-based payments
granted after the effective date and (b) based on the requirements of
Statement No. 123 for all awards granted to employees prior to the effective
date of Statement No. 123(R) that remain unvested on the effective
date. Prior to January 1, 2006, we accounted for our stock option
compensation agreements with employees under the provisions of Accounting
Principles Board (“APB”) Opinion No. 25,
Accounting for Stock Issued to
Employees
and the disclosure-only provisions of Statement No. 123,
Accounting for Stock-Based
Compensation
, as amended by SFAS No. 148,
Accounting for S
tock-Based Compensation
–
Transition and Disclosure, an
amendment of Financial Accounting Standards Board (“
FASB”
) Statement No.
123
.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Our actual results could differ from our
estimates.
New
Accounting Pronouncements
In
April 2008, the FASB issued a FASB Staff Position on SFAS No. 142-3,
“Determination of the Useful Life of Intangible Assets” (“FSP SFAS 142-3”). FSP
SFAS 142-3 amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized
intangible asset under SFAS No. 142, “Goodwill and Other Intangible
Assets”. The intent of this FSP is to improve the consistency between the useful
life of a recognized intangible asset under Statement 142 and the period of
expected cash flows used to measure the fair value of the asset under SFAS
No. 141 (revised 2007), “Business Combinations”, and other U.S. generally
accepted accounting principles. The Company adopted the provisions of
FSP SFAS 142-3 on December 28, 2008, and the adoption did not have a material
impact on its financial position, results of operations or cash
flows.
As
permitted by FASB Staff Position SFAS No. 157-2, Effective Date of FASB
Statement No. 157 ("FSP SFAS 157-2"), the Company elected to defer the
adoption of SFAS No. 157 for all non-financial assets and non-financial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis, until December 28, 2008. The adoption
of FSP SFAS 157-2 in fiscal 2009 has not had a material impact on the Company's
financial position, results of operations or cash flows.
In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”), which
provides guidance to establish general standards of accounting for and
disclosures of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. SFAS 165 also
requires entities to disclose the date through which subsequent events were
evaluated as well as the rationale for why that date was selected. SFAS 165 is
effective for interim and annual periods ending after June 15, 2009. SFAS 165 is
effective for us during our fiscal year ending December 26, 2009. We do not
believe that the adoption of SFAS 165 has had a material impact on our financial
condition, results of operations, and disclosures.
Item 3. Quantitative and Qualitative Disclosures about
Market Risk
There has
been no material change in our market risk exposure since the filing of our
Annual Report on Form 10-K for the period ended December 27, 2008, which was
filed with the SEC on March 23, 2009.
Item 4. Controls and Procedures
(a)
Evaluation of Disclosure Controls
and Procedures.
The Chief Executive Officer and the Chief
Financial Officer of iParty (its principal executive officer and principal
financial officer, respectively) have concluded, based on their evaluation as of
June 27, 2009, the end of the fiscal quarter to which this report relates, that
iParty's disclosure controls and procedures: are effective to ensure that
information required to be disclosed by iParty in the reports filed or submitted
by it under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms; and include controls and procedures designed to ensure
that information required to be disclosed by iParty in such reports is
accumulated and communicated to iParty's management, including the Chief
Executive Officer and the Chief Financial Officer, to allow timely decisions
regarding required disclosure. iParty’s disclosure controls and
procedures were designed to provide a reasonable level of assurance of reaching
iParty’s disclosure requirements and are effective in reaching that level of
assurance.
(b)
Changes
in Internal
Controls
. No change in our internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities
Exchange Act of 1934, as amended) occurred during the fiscal quarter ended June
27, 2009 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
We are not
a party to any material pending legal proceedings, other than ordinary routine
matters incidental to our business, which we do not expect, individually or in
the aggregate, to have a material effect on our financial position or results of
operations.
Item 1A. Risk Factors
There have
been no material changes to the risk factors disclosed in the “Risk Factors”
section of our Annual Report on Form 10-K for the fiscal year ended
December 27, 2008, as filed with the SEC on March 23, 2009, except as set
forth below:
Our
failure to generate sufficient cash to meet our liquidity needs may affect our
ability to service our indebtedness and grow our business.
Our
business requires access to capital to support growth, improve our
infrastructure, respond to economic conditions, and meet contractual
commitments. In the event that our current operating plan or long term
goals change due to changes in our strategic plans, lower-than-expected
revenues, unanticipated expenses, increased competition, unfavorable economic
conditions, other risk factors discussed in this report, or other unforeseen
circumstances, our liquidity may be negatively impacted. Our ability to
make payments on and to refinance our indebtedness, principally the amounts
borrowed under our bank line of credit and notes payable, and to fund any
capital expenditures for systems upgrades and new store openings, if any, we may
make in the future will depend in large part on our current and future ability
to generate cash. This, to a certain extent, is subject to general
economic, financial, competitive and other factors that are beyond our
control. We cannot assure you that our business will generate sufficient
cash flow from operations in the future, that our currently anticipated growth
in revenues and cash flow will be realized on schedule, or that future
borrowings will be available to us under our line of credit in an amount
sufficient to enable us to service indebtedness, undertake store openings and
replace and upgrade our technology systems to grow our business, or to fund
other liquidity needs. If we need to refinance all or a portion of our
indebtedness from other sources, we cannot assure you that we will be able to do
so on terms and conditions acceptable to us.
We
currently have three notes payable outstanding with principal balances totaling
$3,332,822 at June 27, 2009. The principal amount of one of these notes is
paid monthly in installments. The principal amounts of the other two notes are
due in full in the amounts of $2,500,000 and $600,000 on September 15, 2009
and August 7, 2010, respectively. On July 1, 2009, we amended and
restated our credit facility with Wells Fargo. In addition to certain
other changes, the new credit facility continues the revolving line of credit in
the amount of up to $12,500,000, subject to certain limitations described below,
with an option to increase that level to $15,000,000 at any time prior to July
2, 2011, extends the maturity date for three years to July 2, 2012, and
increases the applicable margins under which the Company may borrow
funds. Subject to conditions set forth in the new credit
facility, which the Company expects to meet, the new credit facility continues
to allow the revolving line of credit to repay the $2,500,000 note payable on
September 15, 2009.
If we need
to refinance all or a portion of our indebtedness from other sources, including
the $2,500,000 note payable due September 15, 2009 in the event we do not
satisfy the availability conditions set forth in the credit facility, we cannot
assure you that we will be able to do so on commercially reasonable terms.
In addition, to the extent we use our existing line of credit to refinance
existing debt, we could have less availability under the line for working
capital and acquisition needs, which could adversely impact our results of
operations, liquidity and growth opportunities. As noted above, our new
bank line of credit with Wells Fargo allows us to borrow up to $12,500,000,
subject to a limitation based on qualified inventory, receivables levels and
other reserves set by Wells Fargo, with an option to increase that limit up to
$15 million. As of June 27, 2009, there was $515,916 outstanding
under our line of credit with additional availability of $7,058,844. Borrowings
under our line of credit are secured by substantially all of our assets,
including our inventory and accounts receivable. We borrow against our inventory
and accounts receivable at agreed upon advance rates, which vary at different
times of the year.
Our
Stockholders have authorized our Board of Directors, at their discretion, to
effect a Reverse Stock Split at an exchange ratio between one-for-five and
one-for-thirty at any time prior to the 2010 Annual Meeting of Stockholders,
which Reverse Stock Split, may not have the intended effect and could negatively
affect your liquidity.
At our
2009 Annual Meeting of Stockholders held on May 27, 2009, our stockholders
authorized an amendment to our Restated Certificate of Incorporation to effect a
reverse stock split, pursuant to which the existing shares of our common stock
would be combined into new shares of our common stock at an exchange
ratio ranging between one-for-five and one-for-thirty (the “Exchange Ratio”),
with the exchange ratio to be determined by the Board of Directors (the "
Reverse Stock Split
"). In
accordance with the stockholders’approval of the Reverse Stock Split, the Board
of Directors has the authority, but not the obligation, to effect the Reverse
Stock Split at any time prior to the date of the 2010 Annual Meeting of
Stockholders, without further approval or authorization of
stockholders. The Reverse Stock Split will be effected, if at
all, only upon a determination by the Board of Directors that implementing a
Reverse Stock Split is in the best interests of iParty and its
stockholders. The determination as to whether the Reverse Stock Split will
be effected and, if so, pursuant to which Exchange Ratio, will be based upon
those market or business factors deemed relevant by the Board of Directors at
that time, including, but not limited to: (i) existing and expected
marketability and liquidity of our common stock; (ii) prevailing
stock market conditions; (iii) business developments affecting us;
(iv) our actual or forecasted results of operations;
(v) listing standards under NYSE Amex; and (vi) the likely effect on
the market price of our common stock. If the Board of Directors
determines to effect the Reverse Stock Split, the price per share of our Common
Stock after the Reverse Stock Split may not reflect the Exchange Ratio
implemented by the Board of Directors and the price per share following the
effective time of the Reverse Stock Split may not be maintained for any period
of time following the Reverse Stock Split. In addition, following the
Reverse Stock Split, we may still run the risk of being considered a low priced
stock under the listing standards of the NYSE Amex, which could cause the
Company to be delisted, we may not attract institutional or other potential
investors, and the trading liquidity of our common stock could be adversely
affected by the reduced number of shares outstanding.
Item 2. Unregistered Sales of Equity and Securities and Use of
Proceeds
Not
applicable
Item 3. Defaults upon Senior Securities
Not
applicable.
Item 4. Submission of Matters to a Vote of Security
Holders
On May 27,
2009, we held our Annual Meeting of Stockholders. At the Annual
Meeting, our stockholders:
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·
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elected
six (6) directors to our Board of Directors, including the designee of the
holders of the Series C Convertible Preferred
Stock,
|
|
·
|
approved
the 2009 Stock Incentive Plan,
|
|
·
|
authorized
an amendment to the Company's Restated Certificate of Incorporation to
effect a reverse stock split, pursuant to which the existing shares of the
Company's common stock would be combined into new shares of the
Company's common stock at an exchange ratio ranging between one-for-five
and one-for-thirty, with the exchange ratio to be determined by the Board
of Directors (the "Reverse Stock Split");
and
|
|
·
|
approved
the proposal to ratify the appointment of Ernst & Young LLP as our
independent registered public accountants for the fiscal year ended
December 26, 2009.
|
Each
director nominee, other than the Series C Convertible Preferred director
nominee, was approved by a plurality of the votes cast. The Series C
Convertible Preferred director nominee was approved by a majority of the votes
cast by the holders of the Series C Convertible Preferred Stock. The approval of
the 2009 Stock Incentive Plan and the ratification of the appointment of our
independent registered public accountants were approved by the requisite
affirmative vote of a majority of the total votes cast by stockholders. The
approval of the proposal to authorize the Reverse Stock Split was approved by
the requisite affirmative vote of a majority of the outstanding shares of our
common stock and convertible preferred stock, voting together as a single class,
on an as converted basis.
Proposal
1. Election of the Board of Directors, including the Series C Convertible
Preferred director nominee
Directors
|
|
Votes
For
|
|
|
Withheld
|
|
|
|
|
|
|
|
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Sal
Perisano
|
|
|
28,416,158
|
|
|
|
1,652,345
|
|
Daniel
DeWolf
|
|
|
29,165,190
|
|
|
|
903,313
|
|
Frank
Haydu
|
|
|
29,164,190
|
|
|
|
904,313
|
|
Eric
Schindler
|
|
|
29,169,490
|
|
|
|
899,013
|
|
Joseph
Vassalluzzo
|
|
|
28,909,065
|
|
|
|
1,159,438
|
|
Robert
Jevon*
|
|
|
1,300,000
|
|
|
|
-
|
|
*
Series C Convertible Preferred Director
|
|
|
|
|
|
|
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|
Proposal
2. Approval of the 2009 Stock Incentive Plan
Votes
For
|
|
|
Against
|
|
|
Abstain
|
|
|
Broker
Non
Votes
|
|
|
|
|
|
|
|
|
|
|
|
|
18,011,941
|
|
|
1,949,620
|
|
|
12,400
|
|
|
10,094,542
|
|