UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-K
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For The Fiscal Year Ended December 26, 2009
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OR
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o
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TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the Transition Period from
to
Commission
File Number 1-15611
iPARTY
CORP.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE
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76-0547750
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(State or Other
Jurisdiction of
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(IRS Employer
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Incorporation or
Organization)
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Identification
No.)
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270
BRIDGE STREET, SUITE 301
DEDHAM, MASSACHUSETTS
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02026
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(Address of
Principal Executive Offices)
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(Zip Code)
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(781)
329-3952
(Registrants Telephone Number, Including Area Code)
Securities Registered pursuant to Section 12(b) of
the Act:
Title of Each Class
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Name of Each Exchange on Which Registered
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COMMON
STOCK, $.001 PAR VALUE
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NYSE
AMEX
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Securities Registered
pursuant to Section 12(g) of the Act:
None
Indicate by check mark if
the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes
o
No
x
Indicate by check mark if
the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of
the Act. Yes
o
No
x
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
x
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 (229.405 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 if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
o
Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer or smaller reporting company. See definition of large
accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2
of the Exchange Act (Check one).
Large accelerated filer
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Accelerated filer
o
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Non-accelerated filer
o
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Smaller reporting company
x
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell
company as defined in Rule 12b-2 of the Exchange Act.
Yes
o
No
x
On June 27, 2009, the aggregate market value of the
voting common equity of the registrant (consisting of common stock, $.001 par
value (the common stock) held by nonaffiliates of the registrant was
approximately $2,475,565 based on the closing price for such common stock on
said date as reported by the NYSE Amex . On March 17, 2010 there were 22,798,647 shares of common stock,
$.001 par value, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual stockholders
meeting scheduled to be held June 2,2010, which we plan to file with the
SEC no later than 120 days after the end of our fiscal year ended December 26,
2009, are incorporated by reference into Part III.
PART I
ITEM 1. BUSINESS
General
We are a
party goods retailer operating stores throughout New England, where 46 of our
51 retail stores are located, and in Florida.
We believe 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 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. We generated $78.6
million in total revenues and net income of $1.1 million in fiscal 2009.
As of December 26, 2009, we operated 26 stores in
Massachusetts, 7 in Connecticut, 6 in New Hampshire, 3 in Rhode Island, 3 in
Maine, 1 in Vermont and 5 stores in Florida.
During the 2009 Halloween season, we operated four temporary Halloween
stores. This was double the number of
temporary stores we operated in 2008.
In
December 2009, we opened a new store in Boston, Massachusetts. 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. Our stores range in size from approximately 8,000
square feet to 20,295 square feet and average approximately 10,175 square feet
in size.
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 primarily driven by
the following holiday and party events:
Halloween, Christmas, Easter, Valentines Day, New Years, Independence
Day, St. Patricks Day, Thanksgiving and Chanukah. We also focus our business closely on
lifetime events such as anniversaries, graduations, birthdays, and bridal and
baby showers.
Our business has a seasonal pattern. In the past three years, we have realized an
average of approximately 34.3% of our annual revenues in the fourth quarter,
which includes Halloween and Christmas, and an average of approximately 24.9%
of our revenues in the second quarter, which includes school graduations,
and often the
Easter holiday
.
Also, during these past three years, we have had net income in the
second and fourth quarters and generated losses in the first and third
quarters.
Our executive offices are located at 270 Bridge Street, Suite 301,
Dedham, Massachusetts, 02026. Our phone
number is (781) 329-3952. Our licensed
website is located at www.iparty.com.
The information contained on our licensed website does not constitute a
part of this Annual Report, or any other report we file with or furnish to the
SEC.
Where a reference is made in this Annual Report to a
particular year or years, it is a reference to our fiscal year, unless the
context indicates otherwise. For
example, 2009 refers to our 52-week fiscal year ended December 26, 2009,
2008 refers to our 52-week fiscal year ended December 27, 2008, and 2007
refers to our 52-week fiscal year ended December 29, 2007.
Organization
While we
are currently a party goods retail chain operating 51 stores, when we were
first incorporated as iParty Corp. (iParty) on March 12, 1998, we were
an Internet-based merchant of party goods and services. On January 2, 2000, iParty Corp. was
listed on the American Stock Exchange,
which is now known as the NYSE Amex, under the ticker symbol IPT.
In August 2000, iParty Retail Stores Corp. (iParty
Retail) was incorporated as a wholly-owned subsidiary of iParty Corp. to
operate a chain of retail stores selling party goods. On August 15, 2000, iParty Retail
acquired inventory, fixed assets and the leases of 33 retail stores from The
Big Party Corporation (The Big Party), a privately-held company, which was
operating under bankruptcy protection, in exchange for cash and the assumption
of certain liabilities. We have
subsequently opened an additional eighteen stores, acquired three stores, and
closed three stores.
1
Capital Structure
Our capital structure currently consists of common stock
and five outstanding series of convertible preferred stock. We have also issued warrants convertible into
common stock and have stock option plans that offer a broad range of equity
grants to attract and retain executive officers and key employees.
Our common stock has a par value of $0.001 per share. We have 150,000,000 shares of common stock
authorized, 22,798,647 of which were issued and outstanding as of December 26,
2009. These shares are listed on the NYSE Amex, formerly known as the American
Stock Exchange, and trade under
the symbol IPT.
We currently have five outstanding series of convertible
preferred stock, Series B through F (convertible preferred stock). On January 13, 2004, all 1,000,000
shares of our Series A convertible preferred stock were converted into
1,000,000 shares of common stock. As of December 26,
2009, we had a total of 1,220,125 shares of convertible preferred stock
outstanding which were convertible into 15,426,498 shares of common stock on
that date based on the following conversion rates. As of December 26, 2009, each share of Series B
convertible preferred stock is presently convertible into 13.396 shares of
common stock; each share of Series C convertible preferred stock is
presently convertible into 13.652 shares of common stock; each share of Series D
convertible preferred stock is presently convertible into 14.609 shares of
common stock; each share of Series E convertible preferred stock is
presently convertible into 10.359 shares of common stock; and each share of Series F
convertible preferred stock is presently convertible into 10.367 shares of
common stock. Our convertible preferred
stock is presented on our balance sheet at its carrying value, which was
$13,589,491 at December 26, 2009.
We also have a stockholder rights plan (the rights plan),
which expires on November 8, 2011.
The rights plan associates rights to our capital stock, such that each
share of our common stock is entitled to one right and each share of our
preferred stock is entitled to such number of rights equal to the number of
common shares into which it is convertible. The rights will become exercisable
only in the event that, with certain exceptions, an acquiring party accumulates
10 percent or more of our voting stock or if a party announces an offer to
acquire 15 percent or more of our voting stock.
When exercisable, each right entitles the holder to purchase from us one
one-hundredth of a share of a new series of Series G junior preferred
stock at an initial purchase price of $2.00, subject to adjustment. In
addition, upon the occurrence of certain events, holders of the rights would be
entitled to purchase either iParty Corp. stock or shares in an acquiring
entity as defined in the rights plan at half of market value.
The holders of our convertible preferred stock have a
liquidation preference senior to the holders of our common stock. In the event
of liquidation, which is defined in our Restated Certificate of Incorporation
to include a merger, acquisition, or a similar transaction involving the
acquisition of our company, our convertible preferred stockholders would be
entitled to a liquidation value, which was $17,795,957 at December 26,
2009. This amount is in excess of the
carrying value of the convertible preferred stock due to amounts allocated to
warrants, which were issued in connection with the original issuances of our
convertible preferred stock. The difference of approximately $4.2 million will
be accreted when and if a liquidation event occurs. The holders of our
convertible preferred stock are also entitled to anti-dilution protection in
the event we issue common stock, or certain rights, including option grants in excess of certain amounts,
to purchase or convert into common stock, at a price below the applicable
conversion prices for the convertible preferred stock.
The convertible preferred stockholders are entitled to
participate in dividends when and if declared by our Board of Directors.
We have also issued warrants in connection with the issuance
of certain convertible preferred stock, certain licensing, marketing and
financing arrangements, and certain investor relations services. At December 26, 2009, we had a warrant
outstanding with an exercise price of $0.475, which was exercisable for
2,083,334 shares of our common stock, and warrants outstanding with a weighted
average exercise price of $1.50, which were exercisable for 100,000 shares of
our common stock.
In
May of 2009, our stockholders approved our 2009 Stock Incentive Plan. The 2009 Stock Incentive Plan replaces our
Amended and Restated 1998 Incentive and Non-Qualified Plan (the 1998 Plan)
and no new awards
2
will
be issued under the 1998 Plan. Under
our 2009 Stock Incentive Plan
, we are authorized to grant options, stock appreciation rights, restricted stock, restricted stock units and
other equity grants for the purchase of up to 1,322,894 shares of our common
stock plus any shares that expire, terminate or are cancelled without being
exercised under the 1998 Plan (which could increase the pool under the 2009
Stock Incentive Plan by 9,241,845). At
the time our stockholders approved the 2009 Stock Incentive Plan, we did not
seek to increase the number of original shares authorized under our 1998 Plan,
which was 11,000,000 shares of our common stock. At December 26, 2009, we had options
outstanding that were exercisable for the purchase of 8,347,879 shares of
common stock and options
outstanding that were not yet exercisable for the purchase of 1,686,882 shares
of our common stock. As of December 26,
2009, we have issued only options under our 2009 Stock Incentive Plan.
The following chart summarizes our
capital structure at December 26, 2009.
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Number of
Shares/
Warrants/
Options
Outstanding
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Conversion/
Exercise
Ratios
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Total
Common
Shares
Issued
and
Issuable (1)
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Weighted
Average
Exercise
Price per
Common
Share
Issuable
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Liquidation
Value
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Common
stock
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22,798,647
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22,798,647
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$
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Series B
convertible preferred stock
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459,173
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13.396
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6,151,082
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9,183,460
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Series C
convertible preferred stock
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100,000
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13.652
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1,365,200
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2,000,000
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Series D
convertible preferred stock
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250,000
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14.609
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3,652,250
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5,000,000
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Series E
convertible preferred stock
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296,666
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10.359
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3,073,163
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1,112,497
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Series F
convertible preferred stock
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114,286
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10.367
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1,184,803
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500,000
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Total
convertible preferred stock
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1,220,125
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15,426,498
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17,795,957
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Warrant
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2,083,334
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1.000
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2,083,334
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$
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0.48
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Warrants
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100,000
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1.000
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100,000
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1.50
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Stock
options
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10,034,761
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1.000
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10,034,761
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$
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0.45
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Totals
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50,443,240
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$
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17,795,957
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(1)
Includes common stock outstanding and common stock issuable upon conversion of
convertible preferred stock and exercise of outstanding warrants and stock
options.
Competition
The party supplies retailing business is highly competitive
and fragmented. We compete with a
variety of smaller and larger retailers, including single owner-operated party
supply stores, specialty party supplies retailers, discount department stores,
retail drug store chains, general mass merchants and supermarkets, as well as
catalog, Internet merchants and temporary seasonal stores, especially Halloween
stores.
Our success depends in
part on our ability to be competitive against many different competitors
in each local market area we serve. If
we fail to anticipate evolving innovations and product offerings from our
competitors and fail to offer products that appeal to the changing needs and
preferences of our customers in the various markets we serve, demand for our
products could decline and our operating results would be adversely affected.
While the competitive importance of product quality, price, service and
innovation varies from product to product, price is a factor, and we experience
pricing pressures from competitors in our markets.
3
Barriers to
entry are minimal. New competitors can
open new stores and launch new Internet sites at a relatively low cost.
However, we believe that the costs to remain competitive over the longer term
in the party supplies retailing business can be significant. These costs
include the hiring of human resources with industry knowledge and the marketing
costs associated with building a widely recognized brand.
Seasonality
Our
business has a seasonal pattern. In the
past three years, we have realized an average of approximately 34.3% of our
annual revenues in our fourth quarter, which includes Halloween and Christmas,
and an average of approximately 24.9% of our revenues in the second quarter,
which includes school graduations, and often the Easter holiday. Also, during these past three years, we have
had net income in our second and fourth quarters and generated losses in our
first and third quarters.
Suppliers and Inventory
The products we sell are sourced
from a wide variety of third-party vendors.
Many of the products that we offer for sale, such as paper-based party
goods, Halloween masks, and costumes, are manufactured overseas in foreign
countries such as China. Global sourcing
of many of the products we sell is thus an important factor in our financial
performance.
The following represents suppliers from whom
we purchased at least 5% of our merchandise in either 2009 or 2008:
Supplier
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Products supplied
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2009
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2008
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Amscan, Inc.
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Paper party goods
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23.5
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%
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22.2
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%
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Kendall
Confectionery Company
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Candy
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5.5
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%
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5.1
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%
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Hallmark
Marketing Corp.
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Paper party goods
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5.0
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%
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6.7
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%
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Unique
Industries, Inc.
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Paper party goods
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4.3
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%
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5.2
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%
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Total
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38.3
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%
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39.2
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%
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In August 2006, we entered into a Supply Agreement
with Amscan, Inc. (Amscan) which extends to 2012 and obligates us to
purchase increased levels of merchandise from Amscan, our largest supplier, in
exchange for, among other things, the right to receive certain additional
rebates and more favorable pricing terms over the life of the agreement than
were generally available to us under our previous terms with Amscan.
The loss of any of these suppliers could materially
adversely affect our business, results of operations, financial condition and
cash flow. We consider numerous factors
in supplier selection, including, but not limited to, price, credit terms, product
offerings and quality. As is customary
in our industry, we generally do not have long-term contracts with our
suppliers, other than our Supply Agreement, and any supplier may discontinue
selling to us at any time.
Intellectual Property
We
hold trademarks for iParty issued by the U.S. Patent and Trademark
Office. Trademark registrations for iParty
were issued on February 19, 2002 and August 26, 2003 under U.S.
registration No. 2,541,025 and No. 2,756,735.
We own our website
www.iparty.com
, which we have licensed to a third party. We have not received significant revenue from
this license agreement.
Employees
As
of December 26, 2009, we had 241 full-time employees and 659 part-time
employees. None of these employees is
represented by a labor union, and we consider our relationship with our
employees to be good.
4
Available Information
Our licensed Internet website address is
www.iparty.com. Our Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 are available through the investor relations page of our
licensed Internet website as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the SEC. Our licensed Internet website and the
information contained therein or connected thereto are not incorporated into or
a part of this Annual Report on Form 10-K or any other report we file or
furnish to the SEC.
The public may read and copy any materials that we file
with the SEC at the SECs website, www.sec.gov, which contains reports, proxy
and information statements and other information that public companies are
required to file with or furnish to the SEC.
In addition, the public may read and copy any materials we file or
furnish with the SEC at the SECs Public Reference Room at 450 Fifth
Street, N.W., Washington, D.C., 20549
on official business days during the hours of 10:00 am to 3:00 pm. The public
may obtain information about the SECs Public Reference Room by calling
1-800-SEC-0330.
ITEM 1A.
RISK FACTORS
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 below. Additional risks and uncertainties that we are
unaware of, or that we may currently deem immaterial, may become important
factors that may harm our business, financial condition, results of operations,
or the value of our common stock.
Our success depends on economic and other external
factors, particularly in the New England region and during the Halloween
season, that affect consumer decisions about whether and when to purchase party
goods and supplies.
Our
business success depends in large measure on consumer decisions to buy party
goods and supplies and seek party planning advice, particularly in the New
England region, where 46 of our 51 stores are located, and particularly during
the Halloween season, which is our single most important season. Demand for our
products and our business results are sensitive to external factors that,
directly or indirectly, affect consumer confidence, consumer spending patterns,
levels of disposable consumer income, or otherwise lead consumers to host or
not host parties or purchase party goods and supplies. Examples of such external factors include:
unseasonable weather, especially in New England; the timing, duration and
effects of adverse changes in overall economic conditions, including rates of
job loss or growth, energy prices, and increases or decreases in interest
rates, nationally or more locally in the markets we serve; and the competitive
success or failure of local sports teams, such as the New England Patriots or
Boston Red Sox, particularly in post-season play. The precise impact of any of these external
factors on consumer spending patterns for party goods and supplies is difficult
to predict in advance, but one or more of these factors could adversely affect
our business or our operating results, particularly with respect to any given
fiscal period, to the extent they adversely impact the consumer spending
patterns most important to our business success.
The
U.S. economy has recently experienced a severe recession with high levels of
unemployment, declines in housing prices, higher food and gas prices, credit
market turmoil, and a significant decline in the stock market. This has contributed to a loss in consumer
confidence and a decline in consumer spending that has had and may continue to
have an impact on our business, which represents relatively discretionary
spending.
Because
purchases of our merchandise are dependent upon discretionary spending by our
customers, our financial performance is sensitive to changes in overall
economic conditions that affect consumer spending. Consumer spending habits are
affected by, among other things, prevailing economic conditions, levels of
employment, salaries and wage rates, consumer confidence and consumer
perception of economic conditions. The
United States has recently experienced a severe recession, which led to a
decline in consumer spending. Although
we are seeing the initial signs of a recovery, the strength and duration of a
recovery is unpredictable. A renewed
5
economic downturn could further
reduce consumer spending or cause a shift in consumer discretionary spending to
other products, adversely affecting our liquidity and results of operations.
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 $600,000 note payable due August 2010, and to fund
any capital expenditures for systems upgrades, new store openings, if any, and
updating existing stores, 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, update existing stores 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 used our existing line
of credit to pay off in full the $2.5 million Highbridge Note on September 15,
2009, after which we had less availability under the line for working capital
and acquisition needs than we might otherwise have had. Our 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 December 26, 2009, there was $2,526,982 outstanding under our line of
credit with additional availability of $3,450,662, which we believe to be
sufficient to fund our operations, working capital requirements, the scheduled
note repayment in 2010, and capital expenditures for the next twelve months.
Our business may be
adversely affected by the actions of and risks associated with our third-party
vendors.
The products we sell are sourced from a wide variety of third-party
vendors. We cannot control the supply,
design, function or cost of most of the products that we offer for sale and are
dependent on the availability and pricing of various products, including, without
limitation, paper-based party goods, Halloween masks, and costumes, many of
which are manufactured overseas in foreign countries such as China. Global sourcing of many of the products we
sell is thus an important factor in our financial performance. Our ability to find qualified vendors and access
products in a timely and efficient manner is a significant challenge,
especially with respect to goods sourced outside the United States. Disruptions in the availability of raw
materials used in production of these products may adversely affect our sales
and result in customer dissatisfaction.
Political instability, the financial instability of suppliers,
merchandise quality issues, trade restrictions, tariffs, currency exchange
rates, transport capacity and costs, inflation and other factors relating to
foreign trade are beyond our control. In
particular, volatile oil and gasoline prices impact prices of
petroleum-based/plastic products, which are a key raw material in much of our
merchandise, affect our freight costs, and affect consumer confidence and
spending patterns. Additionally, we have
seen shortages in helium supplies affecting the pricing of certain popular
products, such as balloons. These and other issues directly or indirectly
affecting our vendors could adversely affect our business and financial
performance.
In addition, if our overall
performance deteriorates, or if we experience liquidity challenges, our third
party suppliers and vendors may demand accelerated payment of amounts due to
them or require advance payments or letters of credit before goods are shipped
to us. These demands could have a
significant adverse impact on our operating cash flow and on our liquidity. Our third party suppliers and vendors have
also experienced the current impact of the recession. If one or more of our third party suppliers
fails or is unable to supply us with adequate goods, due to their own financial
troubles or the financial troubles of their suppliers, including factories in
China, we may experience an adverse effect on our business and results of
operations.
6
We face intense competition from many sources.
The
industry we serve is highly competitive and fragmented. We face intense
competition from other party supply stores and stores that merchandise and
market party supplies, including big discount retailers, such as Wal-Mart,
retail drug store chains, like CVS and Walgreen, dollar store chains, and
temporary Halloween stores. Our success
thus depends on our ability to be competitive against many different
competitors in each local market area we serve.
If we fail to anticipate evolving innovations and product offerings from
our competitors and fail to offer products that appeal to the changing needs
and preferences of our customers in the various markets we serve, demand for
our products could decline and our operating results would be adversely
affected. While the competitive importance of product quality, price, service
and innovation varies from product to product, price is a factor, and we
experience pricing pressures from competitors in our markets.
In 2008, we
opened two temporary Halloween stores in our home New England market; in 2009,
we increased the number of temporary Halloween stores to four, also in our home
New England market. We intend to expand our temporary Halloween stores in
future years, opening more such stores, some of which may be outside of New
England. In doing so, we will face intense competition from other operators of
temporary Halloween stores, such as Spirit Halloween, Halloween USA and others.
If we fail to secure a sufficient number of appropriate temporary retail
locations, or if sales achieved at those locations fall below planned levels,
our operating results would be adversely affected.
We face new competitive threats as a result of
consolidation in our industry following Amscan Holdings, Inc.s
acquisitions of Party City Corporation, Party America and Factory Card and
Party Outlet.
Amscan
Holdings, Inc. (AHI), the parent company of Amscan, Inc. (Amscan)
our largest supplier and the largest supplier in our industry, or AHIs parent,
AAH Holdings Corporation (AAH), owns Party City Corporation, Party America
and Factory Card & Party Outlet Corp. (Factory Card). Through the acquisitions of these party goods
companies, AHI and AAH own a total of approximately 851 corporate and franchise
party supply stores nationwide. None of these companies currently has a
significant presence in the New England region.
We have
a Supply Agreement with Amscan
which extends to 2012 and obligates us to purchase increased levels of
merchandise from Amscan, in exchange for, among other things, the right to
receive certain additional rebates and more favorable pricing terms over the
life of the agreement than were generally available to us under our previous
terms with Amscan. In addition to the Supply Agreement with
Amscan, we have a five-year non-competition agreement from Party City
and its affiliates that covers Massachusetts, Maine, New Hampshire, Vermont,
Rhode Island, and Windsor and New London counties in Connecticut.
Any further
geographic expansion by us outside of the New England market could result in
greater direct competition with one or all of Party City, Party America and
Factory Card. If so, AAH and AHIs
acquisitions of Party City, Party America and Factory Card, and its status as
our largest supplier and the largest supplier in our industry could adversely
affect our ability to compete favorably or operate successfully in a changed
marketplace. Price pressures from such
new sources of competition, particularly in the event of a strain or rupture in
our relationship with Amscan, could erode our margins and cause our financial
results of operations to suffer. Our
success depends on our ability to evaluate and respond to the threats arising
from growing consolidation and changing marketplaces and identify ways in which
we can competitively operate and strategically grow our store base.
A major failure of our information systems would harm
our business.
The failure
of any of our systems, including, without limitation, our point-of-sale system
and our existing merchandise management system, the latter of which was
developed by a vendor who is no longer in business and is thus currently
unsupported by a third-party, would have a material adverse effect on our
business and financial results of operations.
We depend on these information systems to operate our retail stores, process
transactions, respond to customer inquiries, manage inventory, purchase and
sell goods on a timely basis, and maintain cost-efficient operations. We may experience operational problems with
our information systems as a result of system failures or any inability on our
part to find and retain qualified personnel to monitor, maintain, and upgrade
these systems, particularly with respect to our merchandise management system,
or other causes.
7
We cannot
assure you that our systems will be adequate to support future growth, either
as currently configured or as we plan to possibly update them. Any material disruption or slowdown of our
systems would severely interfere with the normal operation of our retail store
operations and could have a materially negative impact on our business
operations and financial results. In
particular, our total borrowing base under our line of credit depends, among
other things, on our inventory levels, credit card receivables, customer
deposits, and merchandise credits.
Accordingly, any material disruption or problem affecting our
point-of-sale or merchandise management systems could materially and adversely
affect our borrowing level, our compliance with various covenants under our
bank agreement, and our liquidity and cash resources.
Our quarterly operating results are subject to
significant fluctuation.
Our operating results have fluctuated from quarter to
quarter in the past, and we expect that they will continue to do so in the
future. Factors that could cause these
quarterly fluctuations, both sequentially and on a year-over-year basis,
include the following: extreme weather-related disruptions, particularly in New
England; the timing of movable holidays, such as Easter, which typically falls
in the second quarter but on occasion falls in the first quarter; the
competitive success or failure of local sports teams, such as the New England
Patriots or Boston Red Sox, particularly in post-season play, which may result
in fluctuations from one year to the next in our sales in the first and fourth
quarters; the extent to which sales in new stores result in the loss of sales
in existing stores; the mix of products sold; pricing and marketing actions of
competitors; the level of advertising and promotional expenses; and
seasonality, primarily because the sales and profitability of our stores are
typically lower in the first and third quarters, when we have often operated at
a loss, and are typically higher in the second quarter, which includes school
graduations, and the fourth quarter, which includes Halloween, our single most
important selling season, as well as the Christmas holiday season. Most of our operating expenses, such as rent
expense, advertising expense and employee salaries, do not vary directly with
the amount of sales and are difficult to adjust in the short term. As a result, if sales in a particular quarter
are below expectations for that quarter, we may not be able to proportionately
reduce operating expenses for that quarter, and therefore such a sales
shortfall would have a disproportionate effect on our net income (or loss) for
the quarter.
Our failure to attract, retain, and motivate qualified
personnel would adversely affect our business.
Our success
depends in large part on the efforts and abilities of our senior management
team. Their skills, experience and
industry contacts significantly benefit our operations and administration. The failure to attract, retain, and properly
motivate the members of our senior management team and other key employees, or
to find suitable replacements for them in the event of death, ill health, or
their desire to pursue other professional opportunities, could have a negative
effect on our operating results.
Our
performance is also largely dependent on attracting and retaining quality
associates that are able to make the consumer shopping experience at our stores
a fun and informative experience. We
face intense competition for qualified associates, and many of our associates
are in entry-level or part-time positions with historically high rates of
turnover. Our ability to generally meet
our labor needs while controlling our labor costs is subject to numerous
external factors, including the availability of a sufficient number of
qualified persons in the work force, unemployment levels, prevailing wage
rates, changing demographics, health and other insurance costs and changes in
employment legislation, particularly in the New England region. If we are unable to attract and retain
qualified associates or our labor costs increase significantly, our business
and financial performance may be adversely affected.
Risks associated with recent and possible future new
store openings could adversely affect our business.
An
important part of our long-range business plan is to increase our number of
stores, including temporary stores, and, over time, enter new geographic
markets. We have opened 16 new stores,
acquired three stores, closed three stores and operated six temporary Halloween
stores over the past six years, bringing our total number of stores from 35 at
the beginning of 2004 to 51 at the end of 2009.
Going forward into 2010, in
addition to continuing our careful management of expenses, we intend to grow
the company through opening new retail locations, continuing the expansion of
our temporary Halloween store strategy and through sales growth in our existing
retail stores. For a growth
strategy to be successful, we must identify and lease or acquire favorable
store sites, hire and train
8
associates and store managers, and
adapt management and operational systems to meet the needs of our expanded operations. These tasks may be difficult to accomplish
successfully. If we are unable to open
or acquire new or temporary stores in locations and on terms acceptable to us
as quickly as planned, our future sales and profits may be adversely
affected. Even if we succeed in opening
or acquiring new stores or opening temporary stores, these stores may not
achieve the same sales or profit levels as our existing stores. Also, our expansion strategy includes opening
new or temporary stores in markets where we already have a presence so we can
take advantage of economies of scale in marketing, distribution and supervision
costs. However, these new or temporary
stores may result in the loss of sales in existing stores in nearby areas,
which could adversely affect our business and financial performance. In
addition, future store openings could cause us, among other things, to incur
additional debt and increased interest expense, as well as experience dilution
in earnings, if any, per share.
Impairment losses could also occur as a result of new store openings in
the event that new store openings prove unsuccessful.
Our ownership structure includes large investors who
own preferred stock and whose interests and rights in our company may differ in
important respects from those of our common stock investors.
As of December 26,
2009, there were 22,798,647 shares of common stock outstanding, and 27,644,593
potential additional common share equivalents outstanding that may be issued
upon the conversion of outstanding convertible preferred stock, warrants and
options to purchase our common stock.
The average weekly trading volumes in our common stock as reported on
the NYSE Amex for the fifty two
week periods ended December 26, 2009 and December 27, 2008 were
164,371 shares and 51,683 shares, respectively.
Additionally, a number of investors in our company own large
concentrations of our common and convertible preferred stock making our shares
more illiquid than if our ownership structure were more widely distributed. The
ownership rights of these holders of our convertible preferred stock impact the
trading liquidity of our common shares, our corporate governance, and the
relative economic stake that our common stock and convertible preferred stock
investors have in the enterprise value of our business. Although a more active trading market may develop
in the future, the limited market liquidity for our stock may affect your
ability to sell at a price that is satisfactory to you.
Our
corporate governance is affected by our ownership structure to the extent that
certain of our convertible preferred stock investors currently enjoy, among
other things, contractual rights to nominate and elect two of the members of
our board of directors, although neither of these board seats is currently
filled. These rights and the
concentration of share ownership enjoyed by certain of our convertible preferred
stock investors mean that our largest investors can influence our strategic
direction and that of our senior management in ways that are different from
most of our common stock investors. Our
convertible preferred stock investors also enjoy certain economic rights that
differentiate their ownership rights and interests from those of our common
stock investors. For instance, upon the
occurrence of merger, acquisition or a similar transaction involving the acquisition
of our company, the holders of our convertible preferred stock would generally
be entitled to a liquidation preference that would entitle them,
collectively, to the first $17.8 million of net proceeds, unless they decide to
convert their shares of convertible preferred stock into common stock. This feature of our convertible preferred
stock investors rights could make the attractiveness of our company as an
acquisition target differ materially from what it would be without it. In addition, our convertible preferred stock
investors enjoy certain anti-dilution protections not afforded to our common
stock investors, which generally means that investors in shares of our common
stock could be adversely affected by subsequent dilutive financings, if any, in
ways that are different from some or all of our convertible preferred stock
investors.
Shares that may be resold pursuant to our
prospectus on Form S-3 or eligible
for sale in the future could negatively affect our stock price.
Certain securities may be sold in the future pursuant to
registration statements filed with the SEC or without registration under the
Securities Act, to the extent permitted by Rule 144 or other exemptions
under the Securities Act. We may issue
additional shares in the future in connection with acquisitions, compensation
or otherwise, although we cannot ensure that we will be able to identify or
complete any acquisition in the future. The market price of our common stock
could decline as a result of sales of a large number of shares of our common
stock or the perception that these sales could occur. This may also make it more difficult for us
to raise funds through the issuance of debt or the sale of equity securities.
9
As of December 26,
2009, there were 27,644,593 potential additional common share equivalents
outstanding. These included 15,426,498
shares issuable upon the conversion of immediately convertible preferred stock,
2,083,334 shares issuable upon the exercise of a warrant with an exercise price
of $0.475, 100,000 shares issuable upon the exercise of warrants with a
weighted average price of $1.50, and 10,034,761 shares issuable upon the
exercise of stock options with a weighted average exercise price of $0.45.
Our common stock is thinly traded, may fluctuate based
on relatively small levels of trading activity, and may be adversely affected
by our capital structure, which makes it more difficult for investors to value
our business.
Investing
in shares of our common stock entails a high degree of risk. Public trading of our common stock on the NYSE Amex (formerly known as the American
Stock Exchange) typically occurs at relatively low sales volumes and very few,
if any, security analysts regularly follow our stock. Moreover, our common stock price has traded
below $1.00 for significant periods of time.
In addition, our capital structure, which includes various series of
convertible preferred stock with various contractual rights, generally makes it
more difficult for investors, or prospective acquirers of our company, to value
our business on an aggregate basis or to value our shares of common stock on a
trading basis. As a result of these
factors, speculative investors may have a greater effect on our common stock
price than would be the case for a company with a simpler ownership structure,
a larger market capitalization, or common shares that are more diffusely held
or heavily traded. Accordingly, our
common stock price could be subject to considerable speculative volatility and
may not necessarily follow market expectations regarding our business prospects
or financial performance. In particular,
our common stock price may be sensitive to non-financial developments involving
our company as well as market rumors disseminated on the Internet or other
forms of media regarding our company or our industry. If our quarterly
financial performance does not meet the expectations of investors that trade in
shares of our common stock, our stock price would likely decline. If so, the decrease in the stock price may be
disproportionate to the shortfall, real or perceived, in our financial
performance.
Compliance with changing regulation of corporate
governance, public disclosure, and accounting standards may result in
additional expenses and risks.
Changing
laws, regulations and standards relating to corporate governance, public
disclosure and changes to accounting standards and practices, including the
Sarbanes-Oxley Act of 2002, new SEC regulations, corporate law developments in
Delaware, and evolving rules applicable to publicly-traded companies on
the NYSE Amex are creating
uncertainty, and hence risks, for companies such as ours. These new or changed laws, regulations and
standards are subject to varying interpretations due to the fact that they are
new and there has not yet emerged a well-developed body of interpretation. As a result, their application in practice
may evolve over time as new guidance is provided by regulatory and governing
bodies. This development could result in
continuing uncertainty regarding compliance matters and higher costs
necessitated by ongoing revisions to disclosure, governance and accounting
practices.
Our efforts
to comply with evolving laws, regulations and standards have resulted in, and
are likely to continue to result in, increased general and administrative
expenses and a diversion of management time and attention from
revenue-generating activities to compliance activities. In particular, we have applied significant
management and financial resources to document, test, monitor and enhance our
internal controls over financial reporting in order to meet the various current
requirements of the Sarbanes-Oxley Act of 2002. Additional costs may be
required to be incurred in 2010 since current regulations will require our
internal controls to be audited by our external auditors. Currently, only
management is required to certify as to the effectiveness of our internal
controls. Any failure in the effectiveness of our internal controls over
financial reporting could have a material effect on our financial reporting or
cause us to fail to meet reporting obligations, which upon disclosure, could
negatively impact the market price of our common stock. Our efforts to comply with these types of new
regulatory requirements regarding our required assessment of our internal
controls over financial reporting and our external auditors audit of our
financial statements have required the commitment of increasing levels of
financial and managerial resources. If our efforts to comply with new or
changed laws, regulations and standards differ from the activities intended by
regulatory or governing bodies, we could face various material and adverse
consequences, including a decline in our common stock price or a possible
delisting of our common stock.
10
Our stock is listed on the NYSE Amex and subject to a
number of continued listing requirements, the failure to comply with which may
result in the delisting of our common stock.
Our common stock is currently listed on the NYSE Amex. Subject to NYSE Amex rules, we are required
to maintain compliance with a number of continued listing standards, including
but not limited to, the requirement that our stock trade above certain pricing
levels for a continued period. Our common stock price has traded below $1.00
for significant periods of time. If the
exchange considers our common stock to be a low-priced stock, our common stock
could be subject to delisting. A
delisting of our common stock could negatively impact us by reducing further
the liquidity and market price of our common stock, or by reducing the number
of investors willing to hold or acquire our common stock, which could
negatively impact our ability to raise equity capital.
Product liability may adversely impact our operations
and merchandise offerings.
We and our vendors are subject to regulations by a variety of state and
federal regulatory authorities, including the Consumer Product Safety
Commission. If one or more of our vendors fails to adhere to product safety
requirements, our reputation and brands could be damaged and we could be
subject to product liability suits and government fines and penalties, which
could adversely affect our business and results of operations. Furthermore, to the extent we are unable to
replace any non-compliant products, we may have to reduce our merchandise
offerings, resulting in a decrease in sales.
A privacy breach could adversely affect our business.
The protection of customer, employee, and
company data is critical to us. The regulatory environment surrounding
information security and privacy is increasingly demanding, with the frequent
imposition of new and constantly changing requirements. In addition, customers
have a high expectation that we will adequately protect their personal
information. A significant breach of customer,
employee, or company data could damage our reputation and result in lost sales,
fines, or lawsuits.
Forward Looking Statements
Certain
statements in this Annual Report, particularly statements contained in Item 7, Managements
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 Annual Report or hereafter included in other
publicly available documents filed with the 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. Our
forward-looking statements speak only as of the date of this document, and we
do not intend to update these statements to reflect events or circumstances
that occur after that date.
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
Annual Report. These include, but are
not limited to, those listed above in this Item 1A, Risk Factors.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
11
ITEM 2. PROPERTIES
The
following table identifies the number of our stores operating as of December 26,
2009, December 27, 2008, and December 29, 2007, by state:
|
|
Number of Stores, for the fiscal year ended
|
|
|
|
Dec 26, 2009
|
|
Dec 27, 2008
|
|
Dec 29, 2007
|
|
States
|
|
End
of
Period
|
|
Closings
|
|
Acquired/
Openings
|
|
End
of
Period
|
|
Closings
|
|
Acquired/
Openings
|
|
End
of
Period
|
|
Closings
|
|
Acquired/
Openings
|
|
Connecticut
|
|
7
|
|
|
|
|
|
7
|
|
|
|
|
|
7
|
|
|
|
|
|
Florida
|
|
5
|
|
|
|
|
|
5
|
|
|
|
|
|
5
|
|
|
|
|
|
Maine
|
|
3
|
|
|
|
|
|
3
|
|
|
|
|
|
3
|
|
|
|
|
|
Massachusetts
|
|
26
|
|
|
|
1
|
|
25
|
|
1
|
|
|
|
26
|
|
|
|
|
|
New
Hampshire
|
|
6
|
|
|
|
|
|
6
|
|
|
|
|
|
6
|
|
|
|
|
|
Rhode
Island
|
|
3
|
|
|
|
|
|
3
|
|
1
|
|
2
|
|
2
|
|
|
|
|
|
Vermont
|
|
1
|
|
|
|
|
|
1
|
|
|
|
|
|
1
|
|
|
|
|
|
Total
|
|
51
|
|
|
|
1
|
|
50
|
|
2
|
|
2
|
|
50
|
|
|
|
|
|
Our stores range in size from approximately 8,000 square
feet to approximately 20,500 square feet and average approximately 10,300
square feet. We lease all of our retail
stores. The leases generally provide for
fixed minimum rentals, which typically increase periodically during the life of
the lease, and, in some instances, contingent rentals based on a percentage of
sales in excess of specified minimum sales levels, as well as related occupancy
costs, such as property taxes and common area maintenance. 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.
In addition to our 51 stores, we lease office space at 270
Bridge Street, Suite 301, Dedham, Massachusetts, 02026. The lease, which expires November 30,
2011, is for 10,600 square feet of space and the monthly rent is $18,750. We also lease office and retail space at 1457
VFW Parkway, West Roxbury, Massachusetts, 02132. This lease, which expires December 31,
2012, is for 20,500 square feet of space.
The retail store at our West Roxbury location uses 10,688 square feet
and the remainder is used primarily for our corporate training center. The total monthly rent for the retail store
and corporate training center space is $19,937, subject to certain Consumer
Price Index escalation clauses. We believe that these spaces are adequate for
our immediate needs.
We believe that all properties are adequately covered by
insurance.
ITEM 3. 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 adverse effect on
our company.
ITEM 4. (Removed and
Reserved)
12
PART II
ITEM 5. MARKET FOR
REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Market Information
The NYSE Amex
is the principal market for our common stock, where our shares are traded under
the symbol IPT.
The following table sets forth the range of high and low
sales prices on the NYSE Amex for
our common stock for each of the fiscal quarters of 2009 and 2008:
MARKET
PRICE OF COMMON STOCK
Period
|
|
High
|
|
Low
|
|
2009
|
|
|
|
|
|
Fourth
fiscal quarter
|
|
$
|
0.32
|
|
$
|
0.22
|
|
Third
fiscal quarter
|
|
0.34
|
|
0.12
|
|
Second
fiscal quarter
|
|
0.17
|
|
0.06
|
|
First
fiscal quarter
|
|
0.10
|
|
0.03
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
Fourth
fiscal quarter
|
|
$
|
0.20
|
|
$
|
0.06
|
|
Third
fiscal quarter
|
|
0.25
|
|
0.16
|
|
Second
fiscal quarter
|
|
0.30
|
|
0.20
|
|
First
fiscal quarter
|
|
0.34
|
|
0.17
|
|
Holders
The approximate number of record holders of our common
stock as of December 26, 2009 was 117.
The number of record owners was determined from our stockholder records,
and does not include beneficial owners of our common stock whose shares are held
in the names of various security holders, dealers and clearing agencies. We believe that the number of beneficial
owners of our common stock held by others as or in nominee names exceeds 500 in
number.
Dividends
We have never paid a cash dividend on our shares of common
stock and have no expectation of doing so for the foreseeable future. Our existing line of credit agreement with
Wells Fargo Retail Finance, LLC generally prohibits the payment of any dividends
or other distributions to any of our classes of capital stock.
Recent Sales of Unregistered Securities
There were no sales of unregistered securities made during
the fourth quarter of 2009.
Purchases of Equity Securities by the Issuer and Affiliated
Purchasers
There were no stock repurchases made during the fourth
quarter of 2009.
13
ITEM 6.
SELECTED FINANCIAL DATA
The following selected consolidated
financial data is derived from our audited consolidated financial statements
and should be read in conjunction with our audited consolidated financial
statements and related notes, which are included in Item 8 Financial
Statements and Supplementary Data below, and Managements Discussion and
Analysis of Financial Condition and Results of Operations included in Item 7
below.
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2005 (1)
|
|
|
|
52 weeks
|
|
52 weeks
|
|
52 weeks
|
|
52 weeks
|
|
53 weeks
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
78,595,088
|
|
$
|
81,210,999
|
|
$
|
81,798,634
|
|
$
|
78,458,329
|
|
$
|
72,537,998
|
|
Operating
costs:
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of products sold and occupancy costs
|
|
46,557,039
|
|
46,885,215
|
|
46,465,441
|
|
44,942,542
|
|
41,395,193
|
|
Marketing
and sales
|
|
23,703,308
|
|
26,793,885
|
|
26,181,504
|
|
25,625,547
|
|
24,116,050
|
|
General
and administrative
|
|
6,934,478
|
|
7,205,067
|
|
7,553,869
|
|
6,736,197
|
|
6,762,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
1,400,263
|
|
326,832
|
|
1,597,820
|
|
1,154,043
|
|
264,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before interest and taxes
|
|
1,400,263
|
|
326,832
|
|
1,597,820
|
|
1,154,043
|
|
264,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
340
|
|
4,609
|
|
17,806
|
|
10,217
|
|
801
|
|
Interest
expense
|
|
(444,801
|
)
|
(720,891
|
)
|
(857,612
|
)
|
(772,334
|
)
|
(532,649
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before taxes
|
|
955,802
|
|
(389,450
|
)
|
758,014
|
|
391,926
|
|
(267,676
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes (benefit)
|
|
(147,930
|
)
|
50,605
|
|
146,323
|
|
17,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
1,103,732
|
|
$
|
(440,055
|
)
|
$
|
611,691
|
|
$
|
374,647
|
|
$
|
(267,676
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.03
|
|
$
|
(0.02
|
)
|
$
|
0.02
|
|
$
|
0.01
|
|
$
|
(0.01
|
)
|
Diluted
|
|
$
|
0.03
|
|
$
|
(0.02
|
)
|
$
|
0.02
|
|
$
|
0.01
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
38,220,804
|
|
22,722,485
|
|
38,204,374
|
|
37,862,928
|
|
22,186,581
|
|
Diluted
|
|
38,440,489
|
|
22,722,485
|
|
39,913,274
|
|
39,535,874
|
|
22,186,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) operating activities
|
|
$
|
3,256,482
|
|
$
|
3,229,642
|
|
$
|
(239,008
|
)
|
$
|
4,412,036
|
|
$
|
(259,907
|
)
|
Net
cash used in investing activities
|
|
(525,563
|
)
|
(2,027,709
|
)
|
(802,174
|
)
|
(2,579,007
|
)
|
(1,663,647
|
)
|
Net
cash provided by (used in) financing activities
|
|
(2,730,119
|
)
|
(1,213,215
|
)
|
352,338
|
|
(1,771,847
|
)
|
865,591
|
|
Capital
expenditures (2)
|
|
525,563
|
|
2,027,709
|
|
802,174
|
|
709,892
|
|
1,663,647
|
|
|
|
Dec 26, 2009
|
|
Dec 27, 2008
|
|
Dec 29, 2007
|
|
Dec 30, 2006
|
|
Dec 31, 2005
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
Working
capital
|
|
$
|
5,429,194
|
|
$
|
3,489,893
|
|
$
|
6,184,373
|
|
$
|
4,954,989
|
|
$
|
2,091,213
|
|
Total
assets
|
|
20,292,422
|
|
20,995,273
|
|
22,977,086
|
|
22,697,373
|
|
21,717,076
|
|
Total
long-term liabilities
|
|
1,543,098
|
|
1,800,174
|
|
4,394,367
|
|
4,707,964
|
|
1,095,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Fiscal year 2005 refers to a
53-week fiscal year, while fiscal years 2009, 2008, 2007, 2006 refer to 52-week
fiscal years.
(2) Capital expenditures exclude assets
acquired under capital leases.
14
ITEM 7. MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read
in conjunction with our Consolidated Financial Statements and the related Notes
included below.
Certain statements in this Annual Report, particularly statements
contained in this Item 7, Managements 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 Annual Report 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 Annual Report.
These include, but are not limited to, those described above under Item
1A, Risk Factors. Our forward-looking
statements speak only as of the date of this document, and we do not intend to
update these statements to reflect events or circumstances that occur after
that date.
Overview
At the end of 2009, we operated 51 retail stores, including
46 in New England and five in Florida. We also operated four temporary
Halloween stores in 2009, twice as many as in 2008, and opened our first urban
store at the end of the year. After a
slow start in the first half of the year due to the recession, our sales
improved. We ended fiscal 2009 with
approximately $78.6 million in sales, a
decline of 3.2% from the prior year. We
reported net income of approximately $1.1 million as compared to a net loss of $0.4 million in
2008. Comparable store sales in 2009 decreased 4.5% compared to sales in
2008, which was within the range
experienced by many other specialty stores in 2009. Comparable store
sales are defined as sales from those stores open for at least one full year. We offset our same store sales performance
with the successful operation of temporary Halloween stores and through our
strategic cost reductions, initiated at the beginning of 2009. Our cost
reductions achieved savings in almost every area of company operations, including
store payroll, advertising and marketing, non-payroll operating expenses, and
general and administrative expenses
.
For the first quarter of 2009, our consolidated revenues
were $14.6 million, compared to $16.1 million for the first quarter of 2008. The
decrease in first quarter revenues from the year-ago period included a 9.9%
decrease in comparable store sales from stores open more than one year. The
decrease in consolidated revenue was primarily due to decreased customer
traffic, which, we believe, was mostly attributable to a falloff in general
consumer confidence due to the deepening recession in the U.S. and world
economies.
The
consolidated net loss for the first quarter of 2009 was $1,715,271, or $0.08
per share, compared to a consolidated net loss of $1,864,528, or $0.08 per
share, for the first quarter of 2008, an improvement of $149,257.
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 were related to the continuing recession
in the U.S. and world economies. 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 of 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 beginning of 2009.
15
For the third quarter of 2009, our consolidated revenues
were $16.4 million, compared to $17.7 million for the third quarter of 2008.
The decrease in third quarter revenues from the year-ago period included a 7.7%
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 were related to the effects of the continuing
recession. The consolidated net loss for
the third quarter of 2009 was $1,396,982 or $0.06 per share, compared to a
consolidated net loss of $1,322,630, or $0.06 per share, for the third quarter
of 2008, an increase of $74,352.
The year ended with a 0.7% decrease in comparable store
sales in the fourth quarter, which included a 1.8% decrease in comparable store
sales in the five week fiscal month of October, and a 0.1% increase in
comparable store sales in the 31 day calendar month of October. Total company
sales increased 3.1 % in the fourth quarter as compared to the fourth quarter
of 2008. This increase included a 3.3% increase in total company sales for the
five week fiscal month of October, and a 5.4% increase in total company sales
for the 31 day calendar month of October. Total sales for fiscal and calendar October also
included the impact of four temporary Halloween stores opened in mid-September 2009,
compared to two such stores opened in mid-September 2008. For the quarter, our net income was $3.5
million, compared to $2.6 million in the fourth quarter of 2008.
Overview Summary for 2009
In 2009, the US economy endured a
recessionary period combined with a systematic lack of liquidity. During the year, the continuing housing
crisis, volatility in the stock market, and continuing high unemployment all
contributed to a difficult retail environment.
In response to these conditions, we took significant strategic steps,
which resulted in significant reductions in our headquarters and store
expenses, including our advertising and other administrative costs. As a result
of these actions, we were able to achieve improved operating profit and net
income in 2009, and maintain comfortable liquidity levels during the period.
Fiscal 2009 Compared to Fiscal 2008
Revenues
Our consolidated revenues for 2009 were $78,595,088, a
decrease of $2,615,911, or 3.2% from 2008.
Revenues include the selling price of party goods sold, net of returns
and discounts, and are recognized at the point of sale.
|
|
For the year ended
|
|
|
|
Dec 26, 2009
|
|
Dec 27, 2008
|
|
Revenues
|
|
$
|
78,595,088
|
|
$
|
81,210,999
|
|
|
|
|
|
|
|
Decrease
in revenues from prior year
|
|
-3.2
|
%
|
-0.7
|
%
|
|
|
|
|
|
|
|
|
Sales for 2009 included a decrease of 4.5% in comparable
store sales, and sales for several days in early January 2009 from the two
Rhode Island stores that we acquired in the first quarter of 2008, prior to
those stores one year anniversary.
Cost of goods sold and occupancy costs
Our cost of products sold and occupancy costs for 2009 was
$46,557,039, or 59.2% of revenues, a decrease of $328,176 and an increase of
1.5 percentage points, as a percentage of revenues, from 2008. Cost of products sold and occupancy costs
consist of the cost of merchandise sold to customers and the occupancy costs
for our stores.
16
|
|
For the year ended
|
|
|
|
Dec 26, 2009
|
|
Dec 27, 2008
|
|
Cost
of goods sold and occupancy costs
|
|
$
|
46,557,039
|
|
$
|
46,885,215
|
|
|
|
|
|
|
|
Percentage
of revenues
|
|
59.2
|
%
|
57.7
|
%
|
|
|
|
|
|
|
|
|
As a percentage of revenues, the increase in cost of
products sold was primarily attributable to increased occupancy costs due to
scheduled rent escalations and other occupancy related costs.
Marketing and sales expense
Our consolidated marketing and sales expense for 2009 was
$23,703,308 or 30.2% of revenues, a decrease of $3,090,577 and a decrease of
2.8 percentage points, as a percentage of revenues, from 2008. Marketing and sales expenses consist
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.
|
|
For the year ended
|
|
|
|
Dec 26, 2009
|
|
Dec 27, 2008
|
|
Marketing
and sales
|
|
$
|
23,703,308
|
|
$
|
26,793,885
|
|
|
|
|
|
|
|
Percentage
of revenues
|
|
30.2
|
%
|
33.0
|
%
|
|
|
|
|
|
|
|
|
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
Our consolidated general and administrative (G&A)
expenses for 2009 were $6,934,478, or 8.8% of revenues, a decrease of $270,589,
or 0.1 percentage points as a percentage of revenues, from 2008. G&A
expenses consist of payroll and related expenses for executive, merchandising,
finance and administrative personnel, as well as information technology,
professional fees and other general corporate expenses.
|
|
For the year ended
|
|
|
|
Dec 26, 2009
|
|
Dec 27, 2008
|
|
General
and administrative
|
|
$
|
6,934,478
|
|
$
|
7,205,067
|
|
|
|
|
|
|
|
Percentage
of revenues
|
|
8.8
|
%
|
8.9
|
%
|
|
|
|
|
|
|
|
|
As a percentage of revenues, the decrease in general and
administrative expense was primarily attributable to the cost reduction
initiatives implemented in 2009.
Operating income
Our operating income for 2009 was $1,400,263, or 1.8% of revenues,
compared to an operating income of $326,832, or 0.4% of revenues in 2008.
Interest expense
Our interest expense in 2009 was $444,801, a decrease of $276,090 from
2008. The decrease during 2009 was due
primarily to interest expense related to the decrease in notes payable interest
during the year. The effective interest
rate on our borrowings under our line of credit increased to 5.0% during 2009
compared to 4.7% in 2008, which increased interest expense by approximately
$6,941. The interest rate was based on the banks base rate. Our average
revolving loan balance was approximately $2,595,427 during 2009 compared to
$3,656,861 in 2008, which
17
decreased interest expense by
approximately $53,815. Interest expense related to notes payable in 2009 was
$179,602, compared to interest expense in 2008 of $338,630. These decreases were due to lower interest rates on
the Highbridge note, three months less interest on the Highbridge note because
it was paid off on September 15, 2009, and the decreasing principal on the
Amscan note, which were partially offset by the higher principal under our
credit facility due to the pay off of the Highbridge note. Our average notes
payable balance was approximately $2,505,201 during 2009, compared to
$3,689,225 in 2008, which decreased interest expense by approximately $174,329.
The effective interest rate on our notes payable decreased to 12.6% in 2009,
compared to 14.7% in 2008, which decreased interest expense by $52,883.
Additionally, interest expense from capital leases and other sources in 2009
decreased by $2,004 from 2008.
Income taxes
In 2009, our income tax benefit was $147,930, which
included $39,212 for current federal taxes, $227,545 for current state income
taxes, and a deferred tax benefit of $414,687. Our provision for current state
taxes exceeds the average statutory rate net of federal tax benefit because of
permanent and temporary differences between taxable and book income, including
amounts associated with stock based compensation expense, depreciation, and
amortization of intangibles and common stock warrants. The deferred tax benefit
of $414,687 resulted from the release of a portion of our deferred tax
valuation reserves, which was based on our estimates of fiscal 2010 book and
tax income. We were able to utilize approximately $2,566,584 of net operating
loss carryforwards for federal income tax purposes in 2009, which were fully
reserved for in the prior year due to the uncertainty of future taxable income.
In 2008, our provision for income taxes was $50,605, which
included $16,485 for federal alternative minimum taxes and $34,120 for state
income taxes. Our provision for state taxes exceeded the average statutory rate
net of federal tax benefit because of permanent and temporary differences, for
which we provided a valuation allowance, between taxable and book income,
including amounts associated with stock based compensation expense, depreciation,
and amortization of intangibles and common stock warrants. We were able to
utilize approximately $886,387 of net operating loss carryforwards for federal
income tax purposes in 2008, which were fully reserved for in the prior year
due to the uncertainty of future taxable income.
At the end of 2009, we had estimated net operating loss
carryforwards of approximately $17.9 million, which begin to expire in
2019. In accordance with Section 382
of the Internal Revenue Code, the use of these carryforwards may be subject to
annual limitations based upon certain ownership changes of our stock that may
have occurred or that may occur.
Net income (loss)
Our net
income in 2009 was $1,103,732 or $0.03 net income per basic and diluted share,
compared to a net loss of $440,055 or $0.02 net loss per basic and diluted
share in 2008.
Fiscal 2008 Compared to Fiscal 2007
Revenues
Our consolidated revenues for 2008 were $81,210,999, a
decrease of $587,635, or 0.7% from 2007.
Revenues include the selling price of party goods sold, net of returns
and discounts, and are recognized at the point of sale.
|
|
For the year ended
|
|
|
|
Dec 27, 2008
|
|
Dec 29, 2007
|
|
Revenues
|
|
$
|
81,210,999
|
|
$
|
81,798,634
|
|
|
|
|
|
|
|
Increase
(decrease) in revenues from prior year
|
|
-0.7
|
%
|
4.3
|
%
|
|
|
|
|
|
|
|
|
18
Sales for 2008 included a decrease of 2.4% in comparable
store sales, and sales from two stores that we acquired in the first quarter of
2008, but were not included in the comparable stores sales calculation until
the first quarter of 2009, the stores one year anniversary.
Cost of goods sold and occupancy costs
Our cost of products sold and occupancy costs for 2008 was
$46,885,215, or 57.7% of revenues, an increase of $419,774 and an increase of
0.9 percentage points, as a percentage of revenues, from 2007. Cost of products sold and occupancy costs
consist of the cost of merchandise sold to customers and the occupancy costs
for our stores.
|
|
For the year ended
|
|
|
|
Dec 27, 2008
|
|
Dec 29, 2007
|
|
Cost
of goods sold and occupancy costs
|
|
$
|
46,885,215
|
|
$
|
46,465,441
|
|
|
|
|
|
|
|
Percentage
of revenues
|
|
57.7
|
%
|
56.8
|
%
|
|
|
|
|
|
|
|
|
As a percentage of revenues, the increase in cost of
products sold was primarily attributable to increased occupancy costs due to
scheduled rent escalations and other occupancy related costs.
Marketing and sales expense
Our consolidated marketing and sales expense for 2008 was
$26,793,885 or 33.0% of revenues, an increase of $612,381 and an increase of
1.0 percentage point, as a percentage of revenues, from 2007. Marketing and sales expenses consist
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.
|
|
For the year ended
|
|
|
|
Dec 27, 2008
|
|
Dec 29, 2007
|
|
Marketing
and sales
|
|
$
|
26,793,885
|
|
$
|
26,181,504
|
|
|
|
|
|
|
|
Percentage
of revenues
|
|
33.0
|
%
|
32.0
|
%
|
|
|
|
|
|
|
|
|
As a percentage of revenues, the increase in marketing and
sales expense was primarily attributable to store opening costs associated with
the two Rhode Island stores acquired on January 2, 2008 and two temporary
Halloween stores opened in September 2008, plus increased payroll costs.
General and administrative expense
Our consolidated general and administrative (G&A)
expenses for 2008 were $7,205,067, or 8.9% of revenues, a decrease of $348,802,
or 0.3 percentage points as a percentage of revenues, from 2007. G&A
expenses consist of payroll and related expenses for executive, merchandising,
finance and administrative personnel, as well as information technology,
professional fees and other general corporate expenses.
|
|
For the year ended
|
|
|
|
Dec 27, 2008
|
|
Dec 29, 2007
|
|
General
and administrative
|
|
$
|
7,205,067
|
|
$
|
7,553,869
|
|
|
|
|
|
|
|
Percentage
of revenues
|
|
8.9
|
%
|
9.2
|
%
|
|
|
|
|
|
|
|
|
As a percentage of revenues, the decrease in general and
administrative expense was primarily attributable to the reduction in general
and administrative payroll expense and incentive based compensation.
19
Operating income
Our operating income for 2008 was $326,832, or 0.4% of
revenues, compared to an operating income of $1,597,820, or 2.0% of revenues in
2007.
Interest expense
Our
interest expense in 2008 was $720,891, a decrease of $136,721 from 2007. The decrease during 2008 was due primarily to
interest expense related to the decrease in prime rate during the year. The effective interest rate on our borrowings
under our line of credit decreased to 4.7% during 2008 compared to 8.2% in
2007, which decreased interest expense by approximately $126,664. The interest
rate was based on the banks base rate. Our average revolving loan balance was
approximately $3,656,861 during 2008 compared to $2,071,953 in 2007, which
increased interest expense by approximately $129,983. Interest expense related
to notes payable in 2008 was $338,630, compared to interest expense in 2007 of $463,862. These decreases were due
to lower interest rates on the Highbridge note and the decreasing principal on
the Amscan note. Our average notes payable balance was approximately $3,689,225
during 2008, compared to $4,079,132 in 2007, which decreased interest expense
by approximately $63,891. The effective interest rate on our notes payable
decreased to 14.7% in 2008, compared to 16.3% in 2007, which decreased interest
expense by $61,341. Additionally, interest expense from capital leases and
other sources in 2008 decreased by $14,809 from 2007. Interest expense in 2008
was also slightly offset by interest income of $4,609.
Income taxes
In 2008, our provision for income taxes was $50,605, which
included $16,485 for federal alternative minimum taxes and $34,120 for state
income taxes. Our provision for state taxes exceeds the average statutory rate
net of federal tax benefit because of permanent and temporary differences, for
which we provide a valuation allowance, between taxable and book income,
including amounts associated with stock based compensation expense,
depreciation, and amortization of intangibles and common stock warrants. We
were able to utilize approximately $886,387 of net operating loss carryforwards
for federal income tax purposes in 2008, which were fully reserved for in the
prior year due to the uncertainty of future taxable income.
In 2007, our provision for income taxes was $146,323, which
included $19,215 for federal alternative minimum taxes and $127,108 for state
income taxes. Our provision for state taxes exceeds the average statutory rate
net of federal tax benefit because of permanent and temporary differences, for
which we provided a valuation allowance, between taxable and book income,
including amounts associated with stock based compensation expense,
depreciation, and note payable amortization. We were able to utilize approximately
$1,436,844 of net operating loss carryforwards for federal income tax purposes
in 2007, which were fully reserved for in the prior year due to the uncertainty
of future taxable income.
At the end of 2008, we had estimated 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 may be subject to
annual limitations based upon certain ownership changes of our stock that may have
occurred or that may occur.
Net income (loss)
Our net
loss in 2008 was $440,055 or $0.02 net loss per basic and diluted share,
compared to net income of $611,691, or $0.02 net income per basic and diluted
share, in 2007.
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). 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
20
significantly from managements estimates and projections,
there could be a material effect on our financial statements.
Inventory and Related Allowance for Obsolete and Excess Inventory
Our
inventory consists of party supplies and is valued at the lower of moving
weighted-average cost or market which approximates FIFO (first-in,
first-out). 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 2009 included an estimated reduction of
$142,010 to the cost of goods sold during the previous three quarters. 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.
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.
21
Non-compete
agreements are amortized based on the pattern of their expected cash flow
benefits. Occupancy valuations are amortized on a straight line basis over the
terms of the related leases.
Impairment of Long-Lived Assets
In connection with our ongoing long-lived asset assessment,
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 December 26, 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
2009, 2007 and 2006, (2) we have achieved positive comparable store sales
growth for six out of the last eight years, (3) we were able to
significantly reduce store and headquarters operating expenses in 2009, and (4) we
were able to use federal net operating loss deductions in each tax year from
2002 through 2008, and expect to do so for tax year 2009. The negative evidence that we considered
included (1) we realized a net loss in 2005 and 2008, (2) our
merchandise margins decreased in 2009, 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 $17.9 million at December 26,
2009, (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 costs 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, those associated with Section 404
of the Sarbanes-Oxley Act, will likely have a negative impact on our
profitability, (6) the risk that a continued, general or perceived
slowdown in the U.S economy, or uncertainty as to the economic outlook, which
the U.S. and world economies have recently experienced, could continue to
reduce discretionary spending or cause a shift in consumer discretionary
spending to other products
.
The
positive evidence is strong enough for us to conclude that we will realize
sufficient levels of taxable income in 2010 to support the release of a portion
of the related reserves in fiscal 2009. However, we believe that it is prudent
for us to maintain a valuation allowance against our remaining 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 we made such a determination.
Stock Option Compensation Expense
We use the Black-Scholes option pricing model to determine
the fair value of stock based compensation.
The Black-Scholes model requires us 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 our common stock price over the expected term, which is
based on historical volatility of our 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 our
common stock, which is assumed to be zero since we do not pay dividends and
have no current plans to do so in the
22
future. Changes in
these assumptions can materially affect the estimate of fair value of stock
based compensation and consequently, the related expense recognized in the
Consolidated Statements of Operations.
We recognize stock based compensation expense on a straight-line basis
over the vesting period of each grant.
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 December 2009,
the Financial Accounting Standards Board (FASB) issued Update No. 2009-16
Transfers and Servicing (Topic 860); Accounting for
Transfers of Financial Assets
an amendment of FASB
Statement No. 166.
Update No. 2009-16 will be effective
for financial statements issued for fiscal years and interim periods beginning
after November 15, 2009, with early adoption encouraged, or for us the
fiscal year ending December 25, 2010. We do not expect the adoption of
Update No. 2009-16 (Topic 860) to have a material effect on our financial
statements.
In December 2009,
FASB issued Update No. 2009-17
Consolidations (Topic
810); Improvements to Financial Reporting by Enterprises Involved with Variable
Interest Entities an amendment of FASB Statement No. 167.
Update No. 2009-17 will be effective for
financial statements issued for fiscal years and interim periods beginning
after November 15, 2009, with early adoption encouraged, or for us the
fiscal year ending December 25, 2010. We do not expect the adoption of
Update No. 2009-17 (Topic 810) to have a material effect on our financial
statements.
In January 2010,
FASB issued Update No. 2010-01
Equity (Topic 505)
Accounting for Distributions to Shareholders with Components of Stock and Cash
(A Consensus of the FASB Emerging Issues Task Force).
Update No. 2010-01 is
effective for financial statements issued for fiscal years and interim periods
ending on or after December 15, 2009, or for us the fiscal year ending December 26,
2009, and is applied on a retrospective basis. The adoption of Update No. 2010-01
(Topic 505) did not have a material effect on our financial statements.
In January 2010,
FASB issued Update No. 2010-02,
Consolidation (Topic 810);
Accounting and Reporting for Decreases in Ownership of a Subsidiary a Scope
Clarification.
Update No. 2010-02
is effective for financial statements issued for fiscal years and interim
periods ending on or after December 15, 2009, or for us the fiscal year
ended December 26, 2009, and is applied on a retrospective basis. The
adoption of Update No. 2010-02 (Topic 810) did not have a material effect
on our financial statements.
In January 2010,
FASB issued Update No. 2010-06,
Fair Value Measurements
and Disclosures (Topic 820) Improving Disclosures about Fair Value
Measurements.
Update No. 2010-06 is effective for financial
statements issued for fiscal years and interim periods beginning after December 15,
2009, or for us the fiscal year ending December 25, 2010, except for the
disclosure referencing purchases, sales, issuances, and settlements in the roll
forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal
years beginning after December 15, 2010, and for interim periods within
those years with early adoption encouraged.
We do not anticipate that the adoption of Update No. 2010-06 (Topic
820) will have a material effect on our financial statements.
23
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;
·
employee
salaries; and
·
new
and temporary store openings, including acquisitions.
Our primary sources of cash are:
·
cash
from operating activities; and
·
debt,
including our line of credit and note 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 will be sufficient to fund our operations, working capital requirements,
scheduled note payment 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, declines in
consumer confidence and spending, or other unforeseen circumstances, our
liquidity may be negatively impacted. If
so, we could be required to adjust our expenditures for 2010 to conserve
working capital or raise additional capital, possibly including debt or equity
financing and to fund operations and our business strategy. Given the current state of the debt and
equity markets, this could be difficult and expensive, and we might not be able
to do so on terms acceptable to us.
Notes Payable
At the beginning of our fiscal
year 2009, we had three notes payable outstanding. 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 year ended December 26, 2009
included in Item 8 of this Annual Report on Form 10-K. In the third
quarter of 2009, we paid in full the Highbridge Note and the Amscan Note. The
Highbridge note was paid off through additional borrowings under our line of
credit with Wells Fargo. The Amscan Note was payable in monthly installments,
the last of which was paid in September, 2009. At December 26, 2009 only
the Party City Note, with a principal balance of $600,000 remained outstanding.
The full principal amount is due at the notes maturity on August 7, 2010.
In connection with the issuance
of the Highbridge Note, we also issued 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 the transaction. The agreements entered into in connection with
the financing granted Highbridge resale registration rights with respect to the
shares of common stock underlying the Highbridge Warrant and provide for
certain anti-dilution rights and other covenants with respect to the listing of
our common stock.
The issuance of the Highbridge Warrant
triggered certain anti-dilution provisions of our Series B, C, and D
convertible preferred stock.
Line of Credit
On July 1, 2009, we entered
into a Second Amended and Restated Credit Agreement (the new line) with Wells
Fargo Retail Finance, LLC (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 with 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 under the
Agreement is
24
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 Offered 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 letters 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.
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, which approximates FIFO
(first-in, first-out) 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 $12,759,103 at December 26,
2009.
Our accounts receivable consist primarily of credit card
receivables and vendor rebates receivable.
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
$286,640 at December 26, 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 December 26, 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 $2,526,982 at December 26, 2009 and $1,950,019 as of December 27,
2008, an increase of $576,963. Our additional availability was $3,450,662 at December 26,
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 because 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 December 26, 2009, we were in compliance with these financial
covenants.
The new line contains
events of default customary 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 (iii) 0.50%
thereafter.
25
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 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. Our purchases for 2009 fell short of the annual commitment by
approximately $368,000.
The supplier has agreed to allow us to roll over
any shortfall for the year 2009 into future years requirements. We are not
aware of any reason that would prevent us from meeting the minimum purchase
requirements, including the 2009 shortfall,
for the remainder of the term of the Supply Agreement
. 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 activities provided $3,256,482 in 2009 compared to
$3,229,642 in 2008, an increase of $26,840.
The increase in cash provided by operating activities was primarily due
to the increase in net income in 2009, offset by an increase in prepaid
expenses at the end of 2009 compared to 2008. The increase in prepaid expense
at the end of 2009 was the result of the timing of January rent payments
compared to the prior year.
We used $525,563 in investing
activities in 2009 compared to $2,027,709 in 2008, a decrease of
$1,502,146. The cash invested in 2009
was primarily due to the modification of our internal systems to improve our
compliance with payment card industry data security standards, store
improvements and the relocation of our Walpole store to a new, larger
location. The cash invested in 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).
We used $2,730,119 in financing
activities in 2009 compared to $1,213,215 during 2008, an increase of
$1,516,904. The increase was primarily
related to the repayment of the Highbridge note payable in September 2009.
Contractual
Obligations
Contractual obligations at December 26, 2009 were as
follows:
|
|
Payments Due By Period
|
|
|
|
Within
1 Year
|
|
Within
2 - 3
Years
|
|
Within
4 - 5
Years
|
|
After
5 Years
|
|
Total
|
|
Line
of credit
|
|
$
|
2,529,886
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
2,529,886
|
|
Capital
lease obligations
|
|
11,400
|
|
17,100
|
|
|
|
|
|
28,500
|
|
Notes
payable
|
|
662,626
|
|
|
|
|
|
|
|
662,626
|
|
Supply
agreement
|
|
9,548,748
|
|
14,535,000
|
|
|
|
|
|
24,083,748
|
|
Operating
leases (including retail space leases)
|
|
9,406,207
|
|
16,613,936
|
|
11,055,925
|
|
10,019,664
|
|
47,095,732
|
|
Total
contractual obligations
|
|
$
|
22,158,867
|
|
$
|
31,166,036
|
|
$
|
11,055,925
|
|
$
|
10,019,664
|
|
$
|
74,400,492
|
|
26
In addition, at December 26, 2009, we had outstanding
purchase orders totaling approximately $2,088,061 for the acquisition of
inventory and non-inventory items that were scheduled for delivery after December 26,
2009.
Acquisitions
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
On January 2, 2008, we completed the purchase of two
retail stores located in Rhode Island and a related non-compete agreement. The
aggregate consideration paid was $1,350,000 plus approximately $195,000 for
associated inventory. The stores were converted into iParty stores immediately
following the closing of the transaction. We did not complete any other acquisitions in 2008 or 2009, although we
opened two temporary Halloween stores during the fourth quarter of 2008, and
four temporary Halloween stores and one new store during the fourth quarter of
2009.
Stockholder Rights Plan
On November 9, 2001, we announced that our board of
directors adopted a stockholder rights plan (the rights plan). Under the rights plan each share of our
capital stock outstanding at the close of business on November 9, 2001 and
each share of our capital stock issued subsequent to that date has a right
associated with it, such that each share of our common stock is entitled to one
right and each share of our preferred stock is entitled to such number of
rights equal to the number of common shares into which it is convertible. The rights will become exercisable only in
the event that, with certain exceptions, an acquiring party accumulates 10
percent or more of our voting stock or if a party announces an offer to acquire
15 percent or more of our voting stock.
The rights expire on November 9, 2011. When exercisable, each right entitles the
holder to purchase from us one one-hundredth of a share of a new series of Series G
junior preferred stock at an initial purchase price of $2.00, subject to
adjustment. In addition, upon the
occurrence of certain events, holders of the rights will be entitled to
purchase either iParty Corp. stock or shares in an acquiring entity at half
of market value. We generally will be
entitled to redeem the rights at $0.001 per right at any time until the date on
which a 10 percent position in our voting stock is acquired by any person or
group. Until a right is exercised, the
holder of a right will have no rights as a stockholder of iParty solely by virtue
of being a rights holder, including, without limitation, the right to vote or
receive dividends.
On September 15, 2006, we amended the rights plan to
clarify that the issuance of the Highbridge Warrant did not constitute a
triggering event under the rights plan.
Seasonality
Due to the seasonality of our business,
sales and operating income are typically higher in the 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 December 26, 2009, we
operated a total of 51 stores, 46 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
27
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 our 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 arrangement that has or is 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 is material to investors.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
We are exposed
to market risk from changes in interest rates and, indirectly, foreign exchange
rates and commodity price risk with respect to fluctuating oil prices as more
fully described in Item 1A, Risk Factors.
In general, however, we do not believe we have the various market or
price risks that require the quantitative and qualitative disclosures set forth
in Item 305 of Regulation S-K. We have
interest rate risk on our line of credit debt obligation to the extent that if
interest rates were to rise our rate of interest under our line of credit would
also increase. We do not believe that
this interest rate risk is material and we have not entered into any hedging or
similar contractual arrangements with respect to such risk or with respect to
the indirect market risks we face from changes in foreign exchange rates and
oil prices. We do not enter into
contracts for trading purposes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The
response to this item is included in a separate section of this report. See Index
to Consolidated Financial Statements on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. 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 December 26, 2009, the end of the fiscal year to which this report
relates, that iPartys 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 SECs 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 iPartys management, including the Chief
Executive Officer and the Chief Financial Officer, to allow timely decisions
regarding required disclosure. iPartys
disclosure controls and procedures were designed to provide a reasonable level
of assurance of reaching iPartys disclosure requirements and are effective in reaching
that level of assurance.
(b)
Managements Report on Internal Control Over
Financial Reporting.
Our management is responsible for establishing
and maintaining adequate 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.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to risk that
controls may become inadequate because of changes in conditions, or the degree
of compliance with the policies and procedures may deteriorate.
28
Our
management has assessed the effectiveness of its internal control over
financial reporting as of December 26, 2009. This evaluation was based on
the framework in
Internal Control-Integrated
Framework
issued by the Committee of Sponsoring Organizations (COSO).
Based on its assessment, our management concluded that our internal control
over financial reporting was effective as of December 26, 2009 to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles.
This report shall not be deemed to be
filed for purposes of Section 18 of the Securities Exchange Act of 1934 or
otherwise subject to the liability of that Section nor incorporated by
reference into a filing under the Securities Act of 1933 or Securities Exchange
Act of 1934.
(c)
Attestation
Report of the Registered Public Accounting Firm
. We are not an accelerated filer, as such term
is defined in Rule 12b-2 under the Securities Exchange Act of 1934, as
amended. Accordingly, this annual report
does not include an attestation report of our independent registered public
accounting firm regarding internal control over financial reporting as
managements report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the SEC that permit us to
provide only managements report in this annual report.
(d)
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 year ended December 26, 2009 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
ITEM 9A(T).
CONTROLS AND PROCEDURES
The
information required by this Item is included in Item 9A of this report.
ITEM 9B.
OTHER INFORMATION
None.
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The
information required by this Item is contained in our proxy statement for the
annual meeting of stockholders scheduled to be held on June 2, 2010, which
we plan to file with the SEC no later than 120 days after the end of our fiscal
year ended December 26, 2009. Such
information is hereby incorporated by reference.
We have adopted a written code of business conduct and
ethics that applies to all our directors, officers and employees, a copy of
which is located on the Investor Relations page of our website which is
located at www.iparty.com. We intend to
disclose any amendments to, or waivers from, our code of business conduct and
ethics on that same page of our website
.
ITEM 11.
EXECUTIVE COMPENSATION
The
information required by this Item is contained in our proxy statement for the
annual meeting of stockholders scheduled to be held on June 2, 2010, which
we plan to file with the SEC no later than 120 days after the end of our fiscal
year ended December 26, 2009. Such
information is hereby incorporated by reference.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The
information required by this Item is contained in our proxy statement for the
annual meeting of stockholders scheduled to be held on June 2, 2010, which
we plan to file with the SEC no later than 120 days after the end of our fiscal
year ended December 26, 2009. Such
information is hereby incorporated by reference.
29
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The
information required by this Item is contained in our proxy statement for the
annual meeting of stockholders scheduled to be held on June 2, 2010, which
we plan to file with the SEC no later than 120 days after the end of our fiscal
year ended December 26, 2009. Such
information is hereby incorporated by reference.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The
information required by this Item is contained in our proxy statement for the
annual meeting of stockholders scheduled to be held on June 2, 2010, which
we plan to file with the SEC no later than 120 days after the end of our fiscal
year ended December 26, 2009. Such
information is hereby incorporated by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES
(a)
1.
Financial statements:
For a listing of consolidated financial statements which
are included in this document, see page F-1.
2. Financial Statement Schedules:
All schedules for which provision is made under Item 15(a)(2) are
inapplicable and, therefore, have been omitted.
3. Exhibits:
The exhibits listed in the Exhibit Index immediately
preceding the exhibits are filed as part of this Annual Report on Form 10-K
and are incorporated herein by reference.
(b)
Exhibits:
The exhibits listed in the Exhibit Index immediately
preceding the exhibits are filed as part of this Annual Report on Form 10-K
and are incorporated herein by reference.
(c)
Financial
Statement Schedules:
Included in Item 15(a)(2) above.
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
|
iPARTY CORP.
|
|
|
|
By:
|
/s/ SAL PERISANO
|
|
|
|
|
|
Sal Perisano
|
|
|
Chairman of the Board and
|
|
|
Chief Executive Officer
|
Dated: March 23,
2010
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
SIGNATURE
|
|
TITLE
|
|
DATE
|
|
|
|
|
|
/s/ SAL PERISANO
|
|
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
|
|
March 23, 2010
|
|
|
|
|
Sal Perisano
|
|
|
|
|
|
|
|
|
/s/ DAVID ROBERTSON
|
|
Chief Financial Officer
|
|
March 23, 2010
|
David Robertson
|
|
(Principal Financial Officer and Principal
Accounting Officer)
|
|
|
|
|
|
|
|
/s/ DANIEL DE WOLF
|
|
Director
|
|
March 23, 2010
|
|
|
|
|
|
Daniel De Wolf
|
|
|
|
|
|
|
|
|
|
/s/ FRANK HAYDU
|
|
Director
|
|
March 23, 2010
|
|
|
|
|
|
Frank Haydu
|
|
|
|
|
|
|
|
|
|
/s/ ERIC SCHINDLER
|
|
Director
|
|
March 23, 2010
|
|
|
|
|
|
Eric Schindler
|
|
|
|
|
|
|
|
|
|
/s/ JOSEPH VASSALLUZZO
|
|
Director
|
|
March 23, 2010
|
|
|
|
|
|
Joseph Vassalluzzo
|
|
|
|
|
31
iPARTY CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying notes are an
integral part of these Consolidated Financial Statements.
F-1
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
iParty Corp.
We have audited the accompanying
consolidated balance sheets of iParty Corp. and subsidiary as of December 26,
2009 and December 27, 2008, and the related consolidated statements of
operations, convertible preferred stock and stockholders equity (deficit), and
cash flows for each of the three years in the period ended December 26, 2009. These financial statements are the
responsibility of the Companys management.
Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. We were not
engaged to perform an audit of the Companys internal control over financial
reporting. Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Companys
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial
statements referred to above present fairly, in all material respects, the
consolidated financial position of iParty Corp. and subsidiary at December 26,
2009 and December 27, 2008, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 26, 2009, in conformity with U.S. generally accepted accounting
principles.
Boston, Massachusetts
March 23, 2010
The
accompanying notes are an integral part of these Consolidated Financial
Statements.
F-2
iPARTY
CORP.
CONSOLIDATED BALANCE SHEETS
|
|
Dec 26, 2009
|
|
Dec 27, 2008
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
61,050
|
|
$
|
60,250
|
|
Restricted
cash
|
|
1,056,525
|
|
775,357
|
|
Accounts
receivable
|
|
688,506
|
|
730,392
|
|
Inventories,
net
|
|
13,048,104
|
|
13,022,142
|
|
Prepaid
expenses and other assets
|
|
174,752
|
|
279,185
|
|
Deferred
income tax asset - current
|
|
70,997
|
|
|
|
Total
current assets
|
|
15,099,934
|
|
14,867,326
|
|
Property
and equipment, net
|
|
2,892,835
|
|
3,646,481
|
|
Intangible
assets, net
|
|
1,606,585
|
|
2,303,692
|
|
Other
assets
|
|
349,378
|
|
177,774
|
|
Deferred
income tax asset
|
|
343,690
|
|
|
|
Total
assets
|
|
$
|
20,292,422
|
|
$
|
20,995,273
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
Accounts
payable and book overdrafts
|
|
$
|
3,885,062
|
|
$
|
4,048,833
|
|
Accrued
expenses
|
|
2,649,468
|
|
2,495,955
|
|
Current
portion of capital lease obligations
|
|
9,228
|
|
6,444
|
|
Current
notes payable, net of discount of $136,367 at December 27, 2008
|
|
600,000
|
|
2,876,182
|
|
Borrowings
under line of credit
|
|
2,526,982
|
|
1,950,019
|
|
Total
current liabilities
|
|
9,670,740
|
|
11,377,433
|
|
|
|
|
|
|
|
Long-term
liabilities:
|
|
|
|
|
|
Capital
lease obligations, net of current portion
|
|
13,841
|
|
|
|
Notes
payable
|
|
|
|
600,000
|
|
Other
liabilities
|
|
1,529,257
|
|
1,200,174
|
|
Total
long-term liabilities
|
|
1,543,098
|
|
1,800,174
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders
equity:
|
|
|
|
|
|
Convertible
preferred stock - $.001 par value; 10,000,000 shares authorized,
|
|
|
|
|
|
Series B
convertible preferred stock - 1,150,000 shares authorized; 459,173 and
463,086 shares issued and outstanding at December 26, 2009 and
December 27, 2008, respectively (aggregate liquidation value of
$9,183,460 at December 26, 2009)
|
|
6,832,494
|
|
6,890,723
|
|
Series C
convertible preferred stock - 100,000 shares authorized, issued and
outstanding (aggregate liquidation value of $2,000,000 at December 26,
2009)
|
|
1,492,000
|
|
1,492,000
|
|
Series D
convertible preferred stock - 250,000 shares authorized, issued and
outstanding (aggregate liquidation value of $5,000,000 at December 26,
2009)
|
|
3,652,500
|
|
3,652,500
|
|
Series E
convertible preferred stock - 533,333 shares authorized; 296,666 shares
issued and outstanding (aggregate liquidation value of $1,112,497 at
December 26, 2009)
|
|
1,112,497
|
|
1,112,497
|
|
Series F
convertible preferred stock - 114,286 shares authorized, issued and
outstanding (aggregate liquidation value of $500,000 at December 26,
2009)
|
|
500,000
|
|
500,000
|
|
Total
convertible preferred stock
|
|
13,589,491
|
|
13,647,720
|
|
|
|
|
|
|
|
Common
stock - $.001 par value; 150,000,000 shares authorized; 22,798,647 and
22,731,667 shares issued and outstanding at December 26, 2009 and
December 27, 2008, respectively
|
|
22,799
|
|
22,732
|
|
|
|
|
|
|
|
Additional
paid-in capital
|
|
52,311,059
|
|
52,095,711
|
|
Accumulated
deficit
|
|
(56,844,765
|
)
|
(57,948,497
|
)
|
Total
stockholders equity
|
|
9,078,584
|
|
7,817,666
|
|
|
|
|
|
|
|
Total
liabilities and stockholders equity
|
|
$
|
20,292,422
|
|
$
|
20,995,273
|
|
The accompanying notes are
an integral part of these Consolidated Financial Statements.
F-3
iPARTY
CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
For the periods ended
|
|
|
|
Dec 26, 2009
|
|
Dec 27, 2008
|
|
Dec 29, 2007
|
|
|
|
(52 weeks)
|
|
(52 weeks)
|
|
(52 weeks)
|
|
Revenues
|
|
$
|
78,595,088
|
|
$
|
81,210,999
|
|
$
|
81,798,634
|
|
Operating
costs:
|
|
|
|
|
|
|
|
Cost
of products sold and occupancy costs
|
|
46,557,039
|
|
46,885,215
|
|
46,465,441
|
|
Marketing
and sales
|
|
23,703,308
|
|
26,793,885
|
|
26,181,504
|
|
General
and administrative
|
|
6,934,478
|
|
7,205,067
|
|
7,553,869
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
1,400,263
|
|
326,832
|
|
1,597,820
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
1,400,263
|
|
326,832
|
|
1,597,820
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
340
|
|
4,609
|
|
17,806
|
|
Interest
expense
|
|
(444,801
|
)
|
(720,891
|
)
|
(857,612
|
)
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
955,802
|
|
(389,450
|
)
|
758,014
|
|
|
|
|
|
|
|
|
|
Income
taxes (benefit)
|
|
(147,930
|
)
|
50,605
|
|
146,323
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
1,103,732
|
|
$
|
(440,055
|
)
|
$
|
611,691
|
|
|
|
|
|
|
|
|
|
Income
(loss) per share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.03
|
|
$
|
(0.02
|
)
|
$
|
0.02
|
|
Diluted
|
|
$
|
0.03
|
|
$
|
(0.02
|
)
|
$
|
0.02
|
|
The accompanying notes are
an integral part of these Consolidated Financial Statements.
F-4
IPARTY
CORP.
CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS EQUITY (DEFICIT)
|
|
Stockholders Equity (Deficit)
|
|
|
|
Convertible
|
|
|
|
|
|
Additional
|
|
|
|
Total
|
|
|
|
Preferred Stock
|
|
Common Stock
|
|
Paid-In
|
|
Accumulated
|
|
Stockholders
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
Equity (Deficit)
|
|
Balance
December 30, 2006
|
|
1,232,353
|
|
$
|
13,771,447
|
|
22,603,877
|
|
$
|
22,604
|
|
$
|
51,671,087
|
|
$
|
(58,120,133
|
)
|
$
|
7,345,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock upon conversion of Series B convertible preferred stock
|
|
(6,000
|
)
|
(89,280
|
)
|
80,376
|
|
81
|
|
89,199
|
|
|
|
|
|
Stock
based compensation
|
|
|
|
|
|
|
|
|
|
129,628
|
|
|
|
129,628
|
|
Exercise
of stock options
|
|
|
|
|
|
16,402
|
|
16
|
|
4,567
|
|
|
|
4,583
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
611,691
|
|
611,691
|
|
Balance
December 29, 2007
|
|
1,226,353
|
|
13,682,167
|
|
22,700,655
|
|
22,701
|
|
51,894,481
|
|
(57,508,442
|
)
|
8,090,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock upon conversion of Series B convertible preferred stock
|
|
(2,315
|
)
|
(34,447
|
)
|
31,012
|
|
31
|
|
34,416
|
|
|
|
|
|
Stock
based compensation
|
|
|
|
|
|
|
|
|
|
156,484
|
|
|
|
156,484
|
|
Exercise
of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
10,330
|
|
|
|
10,330
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
(440,055
|
)
|
(440,055
|
)
|
Balance
December 27, 2008
|
|
1,224,038
|
|
13,647,720
|
|
22,731,667
|
|
22,732
|
|
52,095,711
|
|
(57,948,497
|
)
|
7,817,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock upon conversion of Series B convertible preferred stock
|
|
(5,000
|
)
|
(74,400
|
)
|
66,980
|
|
67
|
|
74,333
|
|
|
|
|
|
Other
Series B Adjustments
|
|
1,087
|
|
16,171
|
|
|
|
|
|
(16,171
|
)
|
|
|
|
|
Stock
based compensation
|
|
|
|
|
|
|
|
|
|
157,757
|
|
|
|
157,757
|
|
Exercise
of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
(571
|
)
|
|
|
(571
|
)
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
1,103,732
|
|
1,103,732
|
|
Balance
December 26, 2009
|
|
1,220,125
|
|
$
|
13,589,491
|
|
22,798,647
|
|
$
|
22,799
|
|
$
|
52,311,059
|
|
$
|
(56,844,765
|
)
|
$
|
9,078,584
|
|
The accompanying notes are an integral part of these Consolidated
Financial Statements.
F-5
iPARTY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
For the periods ended
|
|
|
|
Dec 26, 2009
|
|
Dec 27, 2008
|
|
Dec 29, 2007
|
|
|
|
(52 weeks)
|
|
(52 weeks)
|
|
(52 weeks)
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
1,103,732
|
|
$
|
(440,055
|
)
|
$
|
611,691
|
|
Adjustments
to reconcile net income (loss) to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
2,039,310
|
|
2,037,108
|
|
1,705,948
|
|
Deferred
rent
|
|
79,108
|
|
86,652
|
|
184,323
|
|
Non
cash stock based compensation expense
|
|
157,757
|
|
156,484
|
|
129,628
|
|
Loss
on disposal of assets
|
|
1,430
|
|
|
|
|
|
Non
cash warrant expense
|
|
135,796
|
|
197,834
|
|
204,550
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
291,861
|
|
375,415
|
|
10,235
|
|
Inventories,
net
|
|
(25,962
|
)
|
617,389
|
|
(1,374,794
|
)
|
Prepaid
expenses and other assets
|
|
(516,292
|
)
|
881,149
|
|
(351,302
|
)
|
Accounts
payable and book overdrafts
|
|
(163,771
|
)
|
(674,537
|
)
|
(793,036
|
)
|
Accrued
expenses and other liabilities
|
|
153,513
|
|
(7,797
|
)
|
(566,251
|
)
|
Net
cash provided by (used in) operating activities
|
|
3,256,482
|
|
3,229,642
|
|
(239,008
|
)
|
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
Acquisition
of retail stores and non-compete agreements
|
|
|
|
(1,350,000
|
)
|
|
|
Purchase
of property and equipment
|
|
(525,563
|
)
|
(677,709
|
)
|
(802,174
|
)
|
Net
cash used in investing activities
|
|
(525,563
|
)
|
(2,027,709
|
)
|
(802,174
|
)
|
|
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
|
|
Net
borrowings (repayments) under line of credit
|
|
576,963
|
|
(663,492
|
)
|
1,450,792
|
|
Principal
payments on notes payable
|
|
(3,012,549
|
)
|
(603,660
|
)
|
(600,036
|
)
|
Decrease
(increase) in restricted cash
|
|
(281,168
|
)
|
87,179
|
|
(156,470
|
)
|
Principal
payments on capital lease obligations
|
|
(13,365
|
)
|
(33,242
|
)
|
(346,531
|
)
|
Proceeds
from exercise of stock options
|
|
|
|
|
|
4,583
|
|
Net
cash provided by (used in) financing activities
|
|
(2,730,119
|
)
|
(1,213,215
|
)
|
352,338
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
800
|
|
(11,282
|
)
|
(688,844
|
)
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of year
|
|
60,250
|
|
71,532
|
|
760,376
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of year
|
|
$
|
61,050
|
|
$
|
60,250
|
|
$
|
71,532
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of Series B convertible preferred stock to common stock
|
|
$
|
74,400
|
|
$
|
34,447
|
|
$
|
89,280
|
|
|
|
|
|
|
|
|
|
Acquisition
of assets under capital lease
|
|
$
|
29,990
|
|
$
|
|
|
$
|
|
|
The accompanying notes are an integral part of these Consolidated
Financial Statements.
F-6
iPARTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 26, 2009
1.
THE COMPANY:
Background
The Companys efforts are devoted to the sale of party
goods and services through its retail stores.
At the end of fiscal 2009, the Company had 46 retail stores located
throughout New England, with five additional stores located in Florida. The
Company licenses its Internet business to a third party in exchange for
royalties under a license agreement, which to date have not been significant.
The stores feature over 20,000 products ranging from
greeting cards and balloons to more unique merchandise such as piñatas, gag
gifts, masquerade and Hawaiian Luau items.
The Companys sales are driven by the following events: Halloween, Christmas, Easter, Valentines
Day, New Years, Independence Day, St. Patricks Day, Thanksgiving, and
Chanukah. The Company also focuses its
business closely on lifetime events such as anniversaries, graduations,
birthdays, and bridal or baby showers.
The Companys business has a seasonal pattern with higher revenues in
the second and fourth quarters, reflecting school graduations and Halloween,
respectively.
The Companys fiscal years ended December 26, 2009, December 27,
2008 and December 29, 2007, each
consisted of 52 weeks.
Managements Plans
The Company operates in a largely un-branded market that
has many small businesses. As a result,
it may consider growing its 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 by iParty would enhance the target entitys prospects.
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. The purchase was
completed on January 2, 2008. The aggregate consideration paid was
$1,350,000 plus approximately $195,000 for associated inventory. Funding for
the purchase was obtained from the Companys existing line of credit with Wells
Fargo Retail Finance. The stores were converted into iParty stores immediately
following the closing of the transaction.
The Company used its existing
line of credit to pay off in full the $2.5 million Highbridge Note on September 15,
2009, after which the Company had less availability under the line for working
capital and acquisition needs than it would otherwise have had. The new bank
line of credit with Wells Fargo, which the Company signed on July 2, 2009,
allows it 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 December 26,
2009, there was $2,526,982 outstanding under the line of credit with additional
availability of $3,450,662, which the Company believes to be sufficient to fund
its operations, working capital requirements, the scheduled note payment in
2010, and capital expenditures for the next twelve months.
2. SIGNIFICANT
ACCOUNTING POLICIES:
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.
F-7
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. Four suppliers account for approximately
38.3% of the Companys purchases of merchandise for 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 Companys 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
purchases for 2009 fell short of the annual commitment by approximately
$368,000. The supplier has agreed to allow the Company to roll over any
shortfall for the year 2009 into future years requirements. The Company is not
aware of any reason that would prevent it from meeting the minimum purchase
requirements, including any 2009 shortfall, during the remainder of the term of
the Supply Agreement.
Accounts
receivable primarily represent amounts due from credit card companies and from
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.
Use of Estimates
The preparation of consolidated 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 consolidated 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.
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 $197,948
at December 26, 2009 and $194,381 at December 27, 2008.
Restricted
cash represents funds on deposit established for the benefit of and under the
control of Wells Fargo Retail Finance LLC, the Companys lender under its line
of credit, and constitutes collateral for amounts outstanding under this line.
F-8
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 Companys line of credit approximates the carrying value
because the debt bears interest at a variable market rate. The fair value of the capital lease
obligations approximates the carrying value.
The fair value of the notes payable approximates the carrying value
based on the short term maturity. The
fair value of the warrants issued in 2006 was determined by using the
Black-Scholes model (volatility of 108%, risk free rate 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 108%, risk free rate of 2.57% and expected life of five
years).
As permitted by Accounting Standards Codification (ASC)
820-10-65-1, Effective Date of ASC 820,
Fair Value Measurements
and Disclosures
, the Company elected to defer the adoption of ASC
820 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 ASC
820-10-65-1in fiscal 2009 has not had a material impact on the Companys
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 which approximates FIFO (first-in, first-out). Inventories have been reduced by an allowance
for obsolete and excess inventory, which is based on managements review of
inventories on hand compared to estimated future sales. The Company records vendor rebates, discounts
and certain other adjustments to inventories, 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 inventories is as follows:
|
|
2009
|
|
2008
|
|
Beginning
balance
|
|
$
|
942,587
|
|
$
|
969,859
|
|
Increases
to reserve
|
|
280,000
|
|
405,000
|
|
Write-offs
against reserve
|
|
(321,670
|
)
|
(432,272
|
)
|
Ending
balance
|
|
$
|
900,917
|
|
$
|
942,587
|
|
Advertising
Advertising costs are expensed upon first showing. Advertising costs amounted to $2,395,358,
$3,638,752, and $3,721,516 for the years ended December 26, 2009, December 27,
2008 and December 29, 2007, respectively.
Deferred Rent
Certain operating lease agreements contain scheduled rent
increases, which are being amortized over the terms of the agreements using the
straight-line method, and are included in other liabilities in the accompanying
consolidated balance sheets. Deferred
rent was $1,529,257 at December 26, 2009 and $1,200,174 at December 27,
2008.
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 (loss) per basic share in accordance
with
ASC 260-10-45, Earnings Per Share Other
Presentation Matters
.
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
F-9
stock, the application of ASC 260-10-45 has no effect on
the amount of net 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 ASC 260-10-45 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 those common share equivalents since their impact would be
anti-dilutive.
The following table sets forth the computation of net
income (loss) per basic and diluted share available to common stockholders:
|
|
2009
|
|
2008
|
|
2007
|
|
Common
shares
|
|
$
|
656,663
|
|
$
|
(440,055
|
)
|
$
|
362,525
|
|
Convertible
preferred Series B-F
|
|
447,069
|
|
|
|
249,166
|
|
Net
income (loss)
|
|
$
|
1,103,732
|
|
$
|
(440,055
|
)
|
$
|
611,691
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.03
|
|
$
|
(0.02
|
)
|
$
|
0.02
|
|
Diluted
|
|
$
|
0.03
|
|
$
|
(0.02
|
)
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares outstanding:
|
|
|
|
|
|
|
|
Common
shares - basic
|
|
22,739,395
|
|
22,722,485
|
|
22,642,564
|
|
Common
share equivalents of Series B-F convertible preferred stock
|
|
15,481,409
|
|
|
|
15,561,810
|
|
If -
converted weighted-average shares outstanding
|
|
38,220,804
|
|
22,722,485
|
|
38,204,374
|
|
|
|
|
|
|
|
|
|
Common
share equivalents of in the money stock options
|
|
219,685
|
|
|
|
1,708,900
|
|
Common
share equivalents of in the money warrants
|
|
|
|
|
|
|
|
Diluted
weighted-average shares outstanding
|
|
38,440,489
|
|
22,722,485
|
|
39,913,274
|
|
The common share equivalents of out of the money stock
options and warrants which were excluded from the computation of net income
(loss) per diluted share available to common stockholders were 8,059,946 and
2,183,334 in 2009, 9,082,198 and 2,711,544 in 2008, respectively, and 4,654,753
and 2,611,544 in 2007, respectively.
Stock Option Compensation Expense
The Company 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 Companys common stock price over
the expected term, which is based on historical volatility of the Companys
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 Companys 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 in the consolidated statements of operations. The Company recognizes stock based
compensation expense on a straight-line basis over the vesting period of each
grant.
F-10
The stock based compensation expense recognized by the
Company was:
|
|
2009
|
|
2008
|
|
2007
|
|
Stock
Based Compensation Expense
|
|
$
|
157,757
|
|
$
|
156,484
|
|
$
|
129,628
|
|
|
|
|
|
|
|
|
|
|
|
|
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 years ended December 26, 2009, December 27,
2008 and December 29, 2007.
On September 26, 2007, the Board of Directors, acting on
the recommendation of the Compensation Committee, extended the expiration date
on options to purchase 970,087 shares of the Companys common stock held by a
former officer for an additional six months following his termination date,
making the expiration date August 15, 2008. As a result, additional stock based
compensation of $14,569, representing the change in the fair value of these
options immediately before and after this modification, was recorded as of September 26,
2007. The options covered by this extension were not exercised, and expired on August 15,
2008.
On May 27, 2009, the Companys
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 Companys 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 Companys Board of Directors. 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 for shares under its Plans, which have been granted to
employees, directors and consultants of the Company
at fair market value at the date of grant. Of the options that have been issued, options
for 435,261 shares have been exercised and options for 10,034,761 shares remain
outstanding at December 26, 2009. Generally, employee 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. On June 4, 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 at an exercise price of $0.29 per share. Similarly,
the Company granted options for the purchase of an aggregate of 1,350,000
shares of common stock to key employees and each of the four independent
members of the Board of Directors on June 6, 2007 at an exercise price of
$0.42 per share. The weighted-average fair market value using the Black-Scholes
option pricing model of the options granted in 2009, 2008 and 2007 was $0.09,
$0.22 and $0.33, respectively.
F-11
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:
|
|
2009
|
|
2008
|
|
2007
|
|
Risk-free
interest rate
|
|
2.23
|
%
|
3.21
|
%
|
4.94
|
%
|
Expected
volatility
|
|
109.5
|
%
|
101.2
|
%
|
102.6
|
%
|
Weighted
average expected life (in years)
|
|
6.3
|
|
5.0
|
|
5.0
|
|
Expected
dividends
|
|
0.00
|
%
|
0.00
|
%
|
0.00
|
%
|
The total fair value of shares vested during 2009 was
$144,022. The remaining unrecognized
stock based compensation expense related to unvested awards at December 26,
2009, was $188,454 and the period of time over which this expense will be
recognized is 3.5 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
|
Equipment
|
|
5 years
|
Computer hardware and
software
|
|
3 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 Companys 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, defined in the 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 Companys 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 Companys 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
F-12
(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 December 26, 2009 and December 27,
2008 were:
|
|
Dec 26, 2009
|
|
Dec 27, 2008
|
|
Non-compete
agreement
|
|
$
|
2,358,540
|
|
$
|
2,358,540
|
|
Lease
valuation
|
|
944,716
|
|
944,716
|
|
Other
|
|
157,855
|
|
157,855
|
|
|
|
|
|
|
|
Intangible
assets
|
|
3,461,111
|
|
3,461,111
|
|
|
|
|
|
|
|
Less:
accumulated amortization
|
|
(1,854,526
|
)
|
(1,157,419
|
)
|
|
|
|
|
|
|
Intangible
assets, net
|
|
$
|
1,606,585
|
|
$
|
2,303,692
|
|
Non-compete agreements are amortized based on the pattern
of their expected cash flow benefits. Occupancy valuations are amortized on a
straight line basis over the terms of the related leases. Amortization expense
for these intangible assets was $697,107 in 2009, $594,109 in 2008 and $393,991
in 2007, respectively. The non-compete
agreement amortization expense is included in general and administrative
expense on the Consolidated Statement of Operations. The lease valuation amortization expense is
included in cost of goods sold and occupancy costs.
Future amortization expense related to these intangible
assets as of December 26, 2009:
Year
|
|
Amount
|
|
2010
|
|
$
|
672,108
|
|
2011
|
|
467,412
|
|
2012
|
|
242,438
|
|
2013
|
|
127,029
|
|
Thereafter
|
|
97,598
|
|
Total
|
|
$
|
1,606,585
|
|
Accounting for the Impairment 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
Companys 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 December 26, 2009, the
Company has not identified any indicators of impairment based on its review of
each of its stores operations and, accordingly, does not believe that any of
its remaining long-lived assets are impaired.
Fair Value Measurements
Effective December 30,
2007, the Company adopted Accounting Standards Codification (ASC) 820,
Fair Value Measurements and Disclosures.
ASC 820 defined
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. ASC 820 also described 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
F-13
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 fair value measurement standards at December 26,
2009 and December 27, 2008 are cash equivalents and restricted cash which
are based on Level 1 inputs.
New Accounting Pronouncements
In December 2009,
the Financial Accounting Standards Board (FASB) issued Update No. 2009-16,
Transfers and Servicing (Topic 860); Accounting for
Transfers of Financial Assets
an amendment of FASB
Statement No. 166.
Update No. 2009-16 will be effective
for financial statements issued for fiscal years and interim periods beginning
after November 15, 2009, with early adoption encouraged, or for us the
fiscal year ending December 25, 2010. The Company does not expect the
adoption of Update No. 2009-16 (Topic 860) to have a material effect on
its financial statements.
In December 2009,
FASB issued Update No. 2009-17,
Consolidations (Topic
810); Improvements to Financial Reporting by Enterprises Involved with Variable
Interest Entities an amendment of FASB Statement No. 167.
Update No. 2009-17 will be effective for
financial statements issued for fiscal years and interim periods beginning
after November 15, 2009, with early adoption encouraged, or for the
Company the fiscal year ending December 25, 2010. The Company does not
expect the adoption of Update No. 2009-17 (Topic 810) to have a material
effect on its financial statements.
In January 2010,
FASB issued Update No. 2010-01,
Equity (Topic 505)
Accounting for Distributions to Shareholders with Components of Stock and Cash
(A Consensus of the FASB Emerging Issues Task Force).
Update No. 2010-01 is
effective for financial statements issued for fiscal years and interim periods
ending on or after December 15, 2009, or for the Company the fiscal year
ending December 26, 2009, and is applied on a retrospective basis. The
adoption of Update No. 2010-01 (Topic 505) did not have a material effect
on the financial statements.
In January 2010,
FASB issued Update No. 2010-02,
Consolidation (Topic 810);
Accounting and Reporting for Decreases in Ownership of a Subsidiary a Scope
Clarification.
Update No. 2010-02 is effective for financial
statements issued for fiscal years and interim periods ending on or after December 15,
2009, or for the Company the fiscal year ended December 26, 2009, and is
applied on a retrospective basis. The adoption of Update No. 2010-02
(Topic 810) did not have a material effect on the financial statements.
In January 2010,
FASB issued Update No. 2010-06,
Fair Value Measurements
and Disclosures (Topic 820) Improving Disclosures about Fair Value
Measurements.
Update No. 2010-06 is effective for financial
statements issued for fiscal years and interim periods beginning after December 15,
2009, or for the Company the fiscal year ending December 25, 2010, except
for the disclosure referencing purchases, sales, issuances, and settlements in
the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal
years beginning after December 15, 2010, and for interim periods within
those years with early adoption encouraged.
The Company does not anticipate that the adoption of Update No. 2010-06
(Topic 820) will have a material effect on its financial statements.
F-14
3. PROPERTY AND
EQUIPMENT:
Property and equipment consist of the following:
|
|
Dec 26, 2009
|
|
Dec 27, 2008
|
|
Leasehold
improvements
|
|
$
|
3,665,211
|
|
$
|
3,557,500
|
|
Furniture
and fixtures
|
|
2,948,324
|
|
2,822,854
|
|
Equipment
under capital leases
|
|
1,313,356
|
|
1,416,334
|
|
Computer
hardware and software
|
|
2,056,926
|
|
1,888,592
|
|
Equipment
|
|
776,363
|
|
680,484
|
|
|
|
|
|
|
|
Property
and equipment
|
|
10,760,180
|
|
10,365,764
|
|
Less
accumulated depreciation
|
|
(7,867,345
|
)
|
(6,719,283
|
)
|
|
|
|
|
|
|
Property
and equipment, net
|
|
$
|
2,892,835
|
|
$
|
3,646,481
|
|
4. LEASES:
The Company
conducts its operations in leased facilities with certain leased equipment
accounted for as operating and capital leases.
Real estate leases generally provide for fixed minimum rentals, which
typically increase periodically during the life of the lease, and, in some
instances, contingent rentals based on a percentage of sales in excess of
specified minimum sales levels, as well as occupancy costs, such as property
taxes and common area maintenance. The
leases are typically for 10 years, usually with options from the Companys
landlords to renew the Companys leases for an additional 5 or 10 years.
The
original cost of assets under capital leases was $1,313,356 at December 26,
2009 and $1,416,334 at December 27, 2008. The accumulated amortization of
assets under capital leases at December 26, 2009 and December 27,
2008 was $1,304,048 and $1,271,391, respectively. The amortization related to those assets
under capital lease is included in depreciation expense.
At December 26,
2009, the minimum rental commitments under all non-cancelable operating leases
with initial or remaining terms of more than one year were as follows:
Year
|
|
Operating
|
|
2010
|
|
$
|
9,406,207
|
|
2011
|
|
9,140,802
|
|
2012
|
|
7,473,134
|
|
2013
|
|
6,209,099
|
|
2014
|
|
4,846,826
|
|
Thereafter
|
|
10,019,664
|
|
Total
future minimum lease payments
|
|
$
|
47,095,732
|
|
The Companys rental expense under operating leases
amounted to $9,471,472 in 2009, $9,114,774 in 2008 and $8,857,650 in 2007. Included in these amounts are contingent
rentals totaling $91,526 in 2009, $65,425 in 2008 and $50,643 in 2007.
F-15
5. INCOME TAXES:
A reconciliation of the effective rate
with the federal statutory rate is as follows:
|
|
2009
|
|
2008
|
|
2007
|
|
Federal
statutory rate
|
|
34.0
|
%
|
34.0
|
%
|
34.0
|
%
|
State
income taxes, net of federal benefit
|
|
8.3
|
%
|
-13.1
|
%
|
9.5
|
%
|
Permanent
differences
|
|
10.8
|
%
|
-33.1
|
%
|
7.2
|
%
|
Release
of valuation allowance
|
|
-36.0
|
%
|
0.0
|
%
|
0.0
|
%
|
Net
operating loss deduction and other
|
|
-32.6
|
%
|
-0.8
|
%
|
-31.3
|
%
|
Effective
tax rate
|
|
-15.5
|
%
|
-13.0
|
%
|
19.4
|
%
|
The Companys provision for state taxes exceeds the average
statutory rate net of federal tax benefit because of permanent and temporary
differences, for which valuation allowances have been provided, between taxable
and book income, including amounts associated with stock based compensation
expense, depreciation, and note payable amortization.
Deferred tax assets consist of the following:
|
|
2009
|
|
2008
|
|
Net
operating loss carryforwards
|
|
$
|
6,079,339
|
|
$
|
6,908,962
|
|
Inventory
allowances
|
|
260,286
|
|
231,669
|
|
Deferred
rent
|
|
602,194
|
|
477,844
|
|
Accrued
compensation
|
|
60,403
|
|
63,217
|
|
Intangible
assets
|
|
469,033
|
|
283,309
|
|
Deferred
compensation
|
|
36,816
|
|
29,884
|
|
Property
and equipment
|
|
515,949
|
|
285,112
|
|
|
|
8,024,020
|
|
8,279,997
|
|
Less
valuation allowance
|
|
(7,609,333
|
)
|
(8,279,997
|
)
|
Net
deferred tax asset
|
|
$
|
414,687
|
|
$
|
|
|
The Company
has historically recorded a valuation allowance against its deferred tax assets
because of the uncertainty regarding the realizability of these assets against
future taxable income. In fiscal 2009, the Company reduced the valuation
allowance based on its judgment of the likelihood of sufficient pretax
accounting income and taxable income in fiscal 2010. However, the Company believes
that it is prudent to maintain a valuation allowance against its remaining
deferred tax assets until establishment of a longer track record of
profitability.
The Company used approximately $2,566,584 and $886,387 of
net operating loss carryforwards in 2009 and 2008, respectively.
As of December 26, 2009, the Company has estimated
federal net operating loss carryforwards of approximately $17.9 million, which
begin to expire in 2019. In accordance
with Section 382 of the Internal Revenue Code, the use of some of these
carryforwards may be subject to annual limitations based upon ownership changes
of the Companys stock which may have occurred or that may occur.
The Company made cash payments for state income taxes of
$90,900 in 2009, $159,386 in 2008 and $56,478 in 2007. The Company made cash payments for federal
income taxes of $8,400 in 2009, $5,000 in 2008 and $0 in 2007.
At December 26, 2009, the Company had no material
unrecognized tax benefits and no adjustments to liabilities or operations were
required.
F-16
The Company recognizes interest and penalties related to
uncertain tax positions in income tax expense which were $2,910 and $2,248 for
the year ended December 26, 2009 and the year ended December 27,
2008, respectively.
Tax years 2006 through 2008 are subject to examination by
the federal and state taxing authorities. There is a 2007 federal income tax
examination currently in process.
6. CONTRACTUAL ARRANGEMENTS:
License Arrangement
The
Company has an agreement with
Taymark, a direct marketer of party supplies, to license the iParty.com name to
Taymark, which now operates the website at www.iparty.com. Under
the agreement, Taymark pays the Company a 15% royalty on all net sales
realized through its operation of www.iparty.com. Royalties have not been material in 2007,
2008 or 2009. The original term
of this agreement was for a period of two (2) years. If this agreement is not terminated, it
automatically renews for successive one-year periods. On July 8, 2009, the Company entered
into its fifth consecutive one-year
renewal period.
7. RELATED PARTY TRANSACTIONS:
On June 6, 2007, the Companys Board of Directors
approved the payment of up to $60,000 to Joseph Vassalluzzo, a Director of the
Company, for services as a part-time consultant for a one-year period. As of December 26, 2009, this amount had
been earned and paid.
On June 4, 2008, the Companys Board of Directors
approved the payment of up to $60,000 to Joseph Vassalluzzo, a Director of the
Company, for services as a part-time consultant for a one-year period. As of December 26, 2009, this amount had
been earned and paid.
On May 27, 2009, the Companys Board of Directors
approved the payment of up to $60,000 to Joseph Vassalluzzo, a Director of the
Company, for services as a part-time consultant for a one-year period. As of December 26, 2009, $15,000 had
been earned and paid.
8.
LINE OF CREDIT:
On July 1, 2009, 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 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.
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.
F-17
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 contains
events of default customary 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 line includes a financial covenant requiring the
Company to maintain a minimum availability under the line of 7.5% of the credit
limit. At the current credit limit of
$12,500,000, the minimum availability is $937,500. At December 26, 2009, the Company was in
compliance with this financial covenant.
The amended Agreement also has a covenant that requires the Company to
limit its capital expenditures to within 110% of those amounts included in its
business plan, which may be updated from time to time. Actual capital expenditures for fiscal year
2007 totaled $802,174, or 116% of the Companys business plan amount. On December 28,
2007, Wells Fargo waived compliance with the capital expenditure covenant for
2007. For fiscal years ended December 26,
2009 and December 27, 2008, the Company was in compliance with all debt
covenants. The Agreement also includes a
0.5% unused line fee. The line generally
prohibits the payment of any dividends or other distributions to any of the
Companys classes of capital stock.
The amounts outstanding under the line as of December 26,
2009 and December 27, 2008 were $2,526,982 and $1,950,019,
respectively. The interest rate on these
borrowings was 5.0% at December 26, 2009 and 4.7% at December 27,
2008. The Agreement also includes a
0.25% unused line fee. The outstanding
balances under the line are classified as current liabilities in the
accompanying consolidated balance sheets since the Company is required to apply
daily lock box receipts to reduce the amount outstanding. At December 26, 2009, the Company had
approximately $3,450,662 of additional availability under the line.
9. NOTES PAYABLE:
Notes payable consist of
three notes entered into in fiscal 2006.
The Highbridge Note was
a subordinated note in the stated principal amount of $2,500,000 that bore
interest at the prime rate plus one percent.
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) was
amortized using the effective interest method over the life of the note.
Interest only was payable quarterly in arrears during the term of the note and
the entire principal balance was due at the maturity date. The note matured on September 15,
2009, at which time the Company paid the full principal amount of $2,500,000 plus
all accrued interest.
The Amscan Note was a
subordinated promissory note in the original principal amount of $1,819,373.
The note bore interest at the rate of 11.0% per annum and was payable in
thirty-six (36) equal monthly installments of principal and interest of $59,562
beginning on November 1, 2006. The remaining principal balance and all
accrued interest were paid in full on September 24, 2009.
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 notes 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
F-18
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 Companys 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 Companys purchase commitment for 2008 to 90% of
the contractual minimum for that year.
The Companys purchases for 2009 fell short of the annual commitment by
approximately $368,000. The supplier has agreed to allow the Company to roll
over any shortfall for the year 2009 into future years requirements. The
Company is not aware of any reason that would prevent it from meeting the
minimum purchase requirements, including any 2009 shortfall, for the remainder
of the term of the Supply Agreement.
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 was the
Amscan Note defined above. As noted above, the Company has paid in full the
Amscan Note.
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.
Total cash payments for interest under the Companys line
of credit, notes payable and capital leases totaled $316,692 in 2009, $500,090
in 2008 and $645,392 in 2007.
10. PREFERRED STOCK:
The following table summarizes the changes in the number of
shares of convertible preferred stock during the past two years:
|
|
Shares
|
|
|
|
Shares
|
|
|
|
Shares
|
|
|
|
Issued
|
|
Conversions
|
|
Issued
|
|
Conversions
|
|
Issued
|
|
|
|
and
|
|
to
|
|
and
|
|
to
|
|
and
|
|
|
|
Outstanding
|
|
Common
|
|
Outstanding
|
|
Common
|
|
Outstanding
|
|
|
|
as of 12/26/09
|
|
Stock
|
|
as of 12/27/08
|
|
Stock
|
|
as of 12/29/07
|
|
Series B
convertible preferred stock
|
|
459,173
|
|
(3,913
|
)
|
463,086
|
|
(2,315
|
)
|
465,401
|
|
Series C
convertible preferred stock
|
|
100,000
|
|
|
|
100,000
|
|
|
|
100,000
|
|
Series D
convertible preferred stock
|
|
250,000
|
|
|
|
250,000
|
|
|
|
250,000
|
|
Series E
convertible preferred stock
|
|
296,666
|
|
|
|
296,666
|
|
|
|
296,666
|
|
Series F
convertible preferred stock
|
|
114,286
|
|
|
|
114,286
|
|
|
|
114,286
|
|
Total
|
|
1,220,125
|
|
(3,913
|
)
|
1,224,038
|
|
(2,315
|
)
|
1,226,353
|
|
F-19
Series B Convertible Preferred Stock
The shares of Series B convertible preferred stock are
immediately convertible into 6,151,082 shares of common stock on a 1.000 to
13.396 ratio at December 26, 2009, and carry an aggregate liquidation
value of $9,183,460 ($1.49 per common share issuable upon conversion) at December 26,
2009. With certain exceptions, the
conversion price will be adjusted on a weighted-average basis in the event the
Company issues common stock or certain rights, including option activity in
excess of certain amounts, to purchase or convert into common stock as defined
in the Companys Certificate of Incorporation, as amended, at a price below the
conversion price. The Series B
convertible preferred stock will automatically convert into common stock at the
conversion price then in effect in the event the Company consummates a
secondary public offering resulting in gross proceeds to the Company of at
least $10,000,000.
In the event of liquidation, the holders of Series B
convertible preferred stock have preference to holders of the Companys common stock,
and are
pari passu
with the
Companys Series C, D, E and F convertible preferred stock.
Holders of Series B convertible preferred stock are
entitled to 13 votes per share (i.e., one vote for each whole number of shares
of common stock into which each such share is presently convertible) on all
matters submitted to a vote of the Companys stockholders and are entitled to
participate in dividends when and if declared by the Board of Directors.
Series C Convertible Preferred Stock
The shares of Series C convertible preferred stock are
immediately convertible into 1,365,200 shares of common stock on a 1.000 to
13.652 ratio at December 26, 2009, and carry an aggregate liquidation
value of $2,000,000 ($1.47 per common share issuable upon conversion) at December 26,
2009. With certain exceptions, the
conversion price will be adjusted on a weighted-average basis in the event the
Company issues common stock or certain rights, including option activity in
excess of certain amounts, to purchase or convert into common stock as defined
in the Companys Certificate of Incorporation, as amended, at a price below the
conversion price. The Series C
convertible preferred stock will automatically convert into common stock at the
conversion price then in effect in the event the Company consummates a
secondary public offering resulting in gross proceeds to the Company of at
least $10,000,000.
In the event of liquidation, the holders of Series C
convertible preferred stock have preference to holders of the Companys common
stock, and are
pari passu
with
the Companys Series B, D, E and F convertible preferred stock.
Holders of Series C convertible preferred stock are
entitled to 13 votes per share (i.e., one vote for each whole number of shares
of common stock into which each such share is presently convertible) on all
matters submitted to a vote of the Companys stockholders and are entitled to
participate in dividends when and if declared by the Board of Directors.
Series D Convertible Preferred Stock
The shares of Series D convertible preferred stock are
immediately convertible into 3,652,250 shares of common stock on a 1.000 to
14.609 ratio at December 26, 2009, and carry an aggregate liquidation
value of $5,000,000 ($1.37 per common share issuable upon conversion) at December 26,
2009. With certain exceptions, the
conversion price will be adjusted on a weighted-average basis in the event the
Company issues common stock or certain rights, including option activity in
excess of certain amounts, to purchase or convert into common stock as defined
in the Companys Certificate of Incorporation, as amended, at a price below the
conversion price. The Series D
convertible preferred stock will automatically convert into common stock at the
conversion price then in effect in the event the Company consummates a
secondary public offering resulting in gross proceeds to the Company of at
least $10,000,000.
F-20
In the event of liquidation, the holders of Series D
convertible preferred stock have preference to holders of the Companys common
stock, and are
pari passu
with
the Companys Series B, C, E and F convertible preferred stock.
Holders of Series D convertible preferred stock are
entitled to 14 votes per share (i.e., one vote for each whole number of shares
of common stock into which each such share is presently convertible) on all
matters submitted to a vote of the Companys stockholders and are entitled to
participate in dividends when and if declared by the Board of Directors.
Series E
Convertible Preferred Stock
The shares of Series E convertible preferred stock are
immediately convertible into 3,073,163 shares of common stock on a 1.000 to
10.359 ratio at December 26, 2009, and carry an aggregate liquidation
value of $1,112,497 ($0.362 per common share issuable upon conversion) at December 26,
2009. With certain exceptions, the
conversion price will be adjusted on a weighted-average basis in the event the
Company issues common stock or certain rights, including option activity in
excess of certain amounts, to purchase or convert into common stock as defined
in the Companys Certificate of Incorporation, as amended, at a price below the
conversion price. The Series E
convertible preferred stock will automatically convert into common stock at the
conversion price then in effect in the event the average closing bid price of
the common stock equals or exceeds $10.00 per share for 20 days within any
30-day period.
In the event of liquidation, the holders of Series E
convertible preferred stock have preference to holders of the Companys common
stock, and are
pari passu
with
the Companys Series B, C, D and F convertible preferred stock.
Holders of Series E convertible preferred stock are
entitled to 10 votes per share (i.e., one vote for each whole number of shares
of common stock into which each such share is presently convertible) on all
matters submitted to a vote of the Companys stockholders and are entitled to
participate in dividends when and if declared by the Board of Directors.
Series F Convertible Preferred Stock
The shares of Series F convertible preferred stock are
immediately convertible into 1,184,803 shares of common stock on a 1.000 to
10.367 ratio at December 26, 2009, and carry an aggregate liquidation value
of $500,000 ($0.422 per common share issuable upon conversion) at December 26,
2009. With certain exceptions, the
conversion price will be adjusted on a weighted-average basis in the event the
Company issues common stock or certain rights, including option activity in
excess of certain amounts, to purchase or convert into common stock as defined
in the Companys Certificate of Incorporation, as amended, at a price below the
conversion price. The Series F
convertible preferred stock will automatically convert into common stock at the
conversion price then in effect in the event the average closing bid price of
the common stock equals or exceeds $10.00 per share for 20 days within any
30-day period.
In the event of liquidation, the holders of Series F
convertible preferred stock have preference to holders of the Companys common
stock, and are
pari passu
with
the Companys Series B, C, D and E convertible preferred stock.
Holders of Series F preferred stock are entitled to 10
votes per share (i.e., one vote for each whole number of shares of common stock
into which each such share is presently convertible) on all matters submitted
to a vote of the Companys stockholders and are entitled to participate in
dividends when and if declared by the Board of Directors.
Highbridge Warrant Anti-Dilution Shares
On September 15, 2006, the Company entered into a
Securities Purchase Agreement pursuant to which it raised $2.5 million through
a combination of subordinated debt and warrant issued on September 15,
2006 to Highbridge, an institutional accredited investor. The warrant issued to Highbridge is
exercisable for 2,083,334
F-21
shares of the Companys common stock at an exercise price
of $0.475 per share. The issuance of the
Highbridge Warrant triggered certain anti-dilution provisions of the Companys Series B,
C, and D convertible preferred stock. As
a result, the number of shares of common stock into which the Series B, C
and D preferred stock convert increased by 249,254, 54,600, and 138,500
additional shares, respectively.
Accretion of Dividends in the Event of
Liquidation
The carrying values of Series B through F convertible
preferred stock have been determined based on their fair market values at the
original dates of issuance. In certain
cases, warrants were issued to which the Company allocated value and included
in additional paid in capital. Should
such a liquidation event occur, the difference between the carrying value of
the convertible preferred stock and their liquidation value will be
accreted. This amount was $4,206,466 on December 26,
2009.
11. WARRANTS:
At December 26, 2009, there were warrants outstanding
which were exercisable for 2,183,334 shares of the Companys common stock. These warrants were issued in connection with
subordinated debt financings and professional service contracts.
During the period April 1999 through August 1999,
the Company issued warrants in connection with convertible debt exercisable for
a total of 528,210 shares of its common stock, at exercise prices ranging from
$2.81 to $5.13 per share. These warrants expired between April and August 2009.
On September 15, 2006, the Company entered into a
Securities Purchase Agreement pursuant to which it raised $2.5 million through
a combination of subordinated debt and warrant issued on September 15,
2006 to Highbridge, an institutional accredited investor. Under the terms of
the financing, the Company issued Highbridge a warrant (the Highbridge Warrant)
exercisable for 2,083,334 shares of its common stock at an exercise price of
$0.475 per share, or 125% of the closing price of the Companys common stock on
the day immediately prior to the closing of the transaction. The Company allocated approximately $613,651
of value to the Highbridge Warrant using the Black-Scholes model with
volatility of 108%, interest of 4.73% and expected life of five years. The Highbridge Warrant was amortized using
the effective interest method over the life of the Highbridge Note. The Highbridge Warrant was fully amortized as
of December 26, 2009. The
agreements entered into in connection with the financing provided for certain
restrictions and covenants consistent with Highbridges status as a
subordinated lender, and also grant Highbridge resale registration rights with
respect to the shares of common stock underlying the Highbridge Warrant.
On February 28, 2008, the Company entered into an
agreement with Booke and Company, Inc. for investor relations services. In
connection with that agreement, the Company issued warrants to purchase 100,000
shares of its common stock at an exercise price of $1.50 per share. The
warrants expire on February 28, 2013. The Company determined the fair
value of the 2008 warrants to be $9,759 at December 26, 2009 by using the
Black-Scholes model (volatility of 108%, risk free rate of 2.57% and expected
life of 5.0 years). The fair value of the 2008 warrants was amortized over
their vesting period of one year.
The following table summarizes the Companys outstanding
warrants at December 26, 2009:
Shares
Issuable
|
|
Exercise Price
|
|
Expiration Date
|
|
2,083,334
|
|
0.48
|
|
09/15/11
|
|
100,000
|
|
1.50
|
|
02/28/13
|
|
F-22
12. STOCK OPTION
PLAN:
On May 27, 2009, the Companys
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 Companys 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 Companys Board of Directors. 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, employee options become exercisable over periods of up to
four years, and expire ten years from the date of grant.
A summary of the Companys stock
options is as follows:
|
|
Number of
|
|
|
|
|
|
|
|
Shares of
|
|
Weighted
|
|
|
|
|
|
Common Stock
|
|
Average
|
|
|
|
|
|
Underlying
|
|
Exercise
|
|
Price
|
|
|
|
Stock Options
|
|
Price
|
|
Range
|
|
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
|
|
(332,437
|
)
|
1.94
|
|
0.11 - 3.81
|
|
Exercised
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding
- December 26, 2009
|
|
10,034,761
|
|
0.45
|
|
0.07 - 4.25
|
|
|
|
|
|
|
|
|
|
Exercisable
- December 26, 2009
|
|
8,347,879
|
|
$
|
0.50
|
|
$ 0.11 - $ 4.25
|
|
|
|
|
|
|
|
|
|
Available for grant - December 26, 2009
|
|
529,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table summarizes information for options outstanding and exercisable
at December 26, 2009:
|
|
Outstanding
|
|
Exercisable
|
|
|
|
Number of
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Shares of
|
|
Average
|
|
Weighted
|
|
Number
|
|
Weighted
|
|
|
|
Common Stock
|
|
Remaining
|
|
Average
|
|
of
|
|
Average
|
|
|
|
Underlying
|
|
Life
|
|
Exercise
|
|
Stock
|
|
Exercise
|
|
Price Range
|
|
Stock Options
|
|
(Years)
|
|
Price
|
|
Options
|
|
Price
|
|
$ 0.07- $ 0.20
|
|
1,393,350
|
|
8.66
|
|
$
|
0.11
|
|
178,350
|
|
$
|
0.16
|
|
0.21- 0.30
|
|
3,411,297
|
|
1.67
|
|
0.25
|
|
3,348,798
|
|
0.25
|
|
0.31- 0.50
|
|
2,392,036
|
|
5.10
|
|
0.39
|
|
1,982,653
|
|
0.38
|
|
0.51- 1.00
|
|
2,674,778
|
|
3.22
|
|
0.77
|
|
2,674,778
|
|
0.77
|
|
1.01- 3.50
|
|
88,300
|
|
1.81
|
|
2.40
|
|
88,300
|
|
2.40
|
|
3.51- 4.25
|
|
75,000
|
|
0.02
|
|
4.25
|
|
75,000
|
|
4.25
|
|
Total
|
|
10,034,761
|
|
3.86
|
|
$
|
0.45
|
|
8,347,879
|
|
$
|
0.50
|
|
F-23
The Company
has reserved 27,644,593 shares of common stock for issuance in connection with
the conversion of convertible preferred stock (15,426,498 shares), the exercise
of warrants (2,183,334 shares) and the exercise of stock options (10,034,761
shares).
13.
STOCKHOLDER RIGHTS PLAN:
The Company has a Stockholder
Rights Plan (the Plan) effective November 9, 2001. Under the Plan, each share of the Companys
capital stock outstanding at the close of business on November 9, 2001 and
each share of the Companys capital stock issued subsequent to that date has a
right associated with it, such that each share of its common stock is entitled
to one right and each share of its preferred stock is entitled to such number
of rights equal to the number of common shares into which it is convertible.
The rights are exercisable only in the event, with certain
exceptions, an acquiring party accumulates 10 percent or more of the Companys
voting stock, or if a party announces an offer to acquire 15 percent or more of
the Companys voting stock. The rights
expire on November 9, 2011.
When exercisable, each right entitles the holder to
purchase from the Company, one one-hundredth of a share of a new series of Series G
junior preferred stock at an initial purchase price of $2.00, subject to
adjustment. In addition, upon the
occurrence of certain events, holders of the rights will be entitled to
purchase either iParty Corp. stock or shares in an acquiring entity at half
of market value. The Company generally
will be entitled to redeem the rights at $0.001 per right at any time until the
date on which a 10 percent position in its voting stock is acquired by any
person or group. Until a right is
exercised, the holder thereof, as such, will have no rights as a stockholder of
the Company, including, without limitation, the right to vote or receive dividends.
On September 15, 2006, the Company amended the Plan to clarify that the issuance of
the Highbridge Warrant did not constitute a triggering event under the Plan.
14. PROFIT SHARING
401(k) PLAN:
The iParty
401(k) Plan is a qualified profit sharing plan covering substantially all
of its employees. Contributions to this
plan are at the discretion of the Board of Directors. The Companys expense, including matching
contributions and any discretionary amounts, was $154,427 in 2009, $164,954 in
2008 and $120,084 in 2007.
15. SEGMENT
REPORTING:
Accounting
Standards Codificiation Subtopic 280-10,
Disclosures
about Segments of an Enterprise and Related Information
, establishes
standards for the way business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to stockholders. The Company
reports one operating segment as revenues from the other segment are not
material.
16. SUBSEQUENT
EVENTS:
The Company has evaluated subsequent events
as required by ASC 855,
Subsequent Events
,
and has determined that there were no subsequent events to recognize or
disclose in these financial statements.
F-24
17. QUARTERLY
FINANCIAL DATA (UNAUDITED):
QUARTERLY FINANCIAL DATA
|
|
Mar 28, 2009
|
|
Jun 27, 2009
|
|
Sep 26, 2009
|
|
Dec 26, 2009
|
|
Revenues
|
|
$
|
14,568,407
|
|
$
|
19,569,009
|
|
$
|
16,404,046
|
|
$
|
28,053,626
|
|
Cost
of products sold and occupancy costs(1), (2)
|
|
9,382,066
|
|
11,691,950
|
|
10,282,326
|
|
15,200,697
|
|
Operating
income (loss)
|
|
(1,578,747
|
)
|
797,379
|
|
(1,271,258
|
)
|
3,452,889
|
|
Net
income (loss)
|
|
(1,715,271
|
)
|
668,868
|
|
(1,396,982
|
)
|
3,547,117
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.08
|
)
|
$
|
0.02
|
|
$
|
(0.06
|
)
|
$
|
0.09
|
|
Diluted
|
|
$
|
(0.08
|
)
|
$
|
0.02
|
|
$
|
(0.06
|
)
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
22,731,667
|
|
38,222,344
|
|
22,731,667
|
|
38,225,145
|
|
Diluted
|
|
22,731,667
|
|
38,222,344
|
|
22,731,667
|
|
38,816,993
|
|
|
|
Mar 29, 2008
|
|
Jun 28, 2008
|
|
Sep 27, 2008
|
|
Dec 27, 2008
|
|
Revenues
|
|
$
|
16,144,088
|
|
$
|
20,103,668
|
|
$
|
17,742,315
|
|
$
|
27,220,928
|
|
Cost
of products sold and occupancy costs (1), (3)
|
|
9,905,029
|
|
11,515,061
|
|
10,543,073
|
|
14,922,052
|
|
Operating
income (loss)
|
|
(1,573,858
|
)
|
465,513
|
|
(1,058,738
|
)
|
2,493,915
|
|
Net
income (loss)
|
|
(1,786,210
|
)
|
281,132
|
|
(1,236,559
|
)
|
2,301,582
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.08
|
)
|
$
|
0.01
|
|
$
|
(0.05
|
)
|
$
|
0.06
|
|
Diluted
|
|
$
|
(0.08
|
)
|
$
|
0.01
|
|
$
|
(0.05
|
)
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
22,708,383
|
|
38,210,583
|
|
22,730,295
|
|
38,210,583
|
|
Diluted
|
|
22,708,383
|
|
38,319,767
|
|
22,730,295
|
|
38,212,561
|
|
(1) Cost of products sold consists of the cost of merchandise sold
to customers and the occupancy costs for stores.
(2)
The fourth quarter of 2009 included an estimated reduction of $142,010 to the
cost of products sold during the previous three quarters due to the completion
of physical inventories, for which shortage had been estimated during the year.
(3) The fourth quarter of 2008 included an
estimated reduction of $261,915 to the cost of products sold during the
previous three quarters due to the completion of physical inventories, for
which shortage had been estimated during the year.
F-25
EXHIBIT INDEX
EXHIBIT
NUMBER
|
|
DESCRIPTION
|
3.1
|
(1)
|
|
Restated
Certificate of Incorporation of WSI Acquisition Corp. and Certificate of
Merger by iParty Corp. into WSI Acquisition Corp.
|
3.2
|
(1)
|
|
Certificate
of Designation of Series A Preferred Stock of WSI Acquisitions, Corp.
|
3.3
|
(2)
|
|
Certificate
of Designation of Series B Preferred Stock of iParty Corp.
|
3.4
|
(2)
|
|
Certificate
of Designation of Series C Preferred Stock of iParty Corp.
|
3.5
|
(4)
|
|
Certificate
of Designation of Series D Preferred Stock of iParty Corp.
|
3.6
|
(5)
|
|
Certificate
of Designation of Series E Preferred Stock of iParty Corp.
|
3.7
|
(9)
|
|
Certificate
of Correction to Certificate of Designation of Series E Preferred Stock
of iParty Corp.
|
3.8
|
(6)
|
|
Certificate
of Designation of Series F Preferred Stock of iParty Corp.
|
3.9
|
(8)
|
|
Certificate
of Designation of Series G Junior Preferred Stock of iParty Corp.
|
3.10
|
(20)
|
|
Amended
and Restated By-Laws of iParty Corp.
|
10.1
|
(1)
|
|
Agreement
and Plan of Merger between iParty Corp. and WSI Acquisitions Corp.
|
10.2
|
(9)
|
##
|
Amended
and Restated 1998 Incentive and Non-Qualified Stock Option Plan.
|
10.3
|
(12)
|
##
|
Form of
Non-qualified Stock Option Agreement.
|
10.4
|
(12)
|
##
|
Form of
Incentive Stock Option Agreement.
|
10.5
|
(11)
|
##
|
Form of
Stock Option Agreement granted to Messrs. DeWolf, Haydu, Schindler, and
Vassalluzzo.
|
10.6
|
(16)
|
##
|
Option
Cancellation Agreement between Sal Perisano and iParty Corp., dated
December 8, 2006.
|
10.7
|
(16)
|
##
|
Option
Cancellation Agreement between Patrick Farrell and iParty Corp., dated December 8,
2006.
|
10.8
|
(16)
|
##
|
Option
Cancellation Agreement between Dorice Dionne and iParty Corp, dated
December 8, 2006.
|
10.9
|
(22)
|
##
|
Employment
Agreement between iParty Corp. and Sal Perisano, dated March 22, 2007.
|
10.9a
|
(25)
|
##
|
First
Amendment dated December 30, 2008 to Employment Agreement by and between
iParty Corp. and Sal Perisano.
|
10.10
|
(22)
|
##
|
Employment
Agreement between iParty Corp. and Dorice Dionne, dated March 22, 2007.
|
10.10a
|
(25)
|
##
|
First
Amendment dated December 30, 2008 to Employment Agreement by and between
iParty Corp. and Dorice Dionne.
|
10.11
|
(18)
|
##
|
Amended
and Restated Employment Agreement between iParty Corp. and Patrick Farrell,
dated January 8, 2007.
|
10.12
|
(23)
|
##
|
Compensation
Arrangements dated June 6, 2007 with Messrs. DeWolf, Haydu,
Schindler, and Vassalluzzo.
|
10.12a
|
(24)
|
##
|
Compensation
Arrangements dated June 4, 2008 with Messrs. DeWolf, Haydu,
Schindler, and Vassalluzzo.
|
10.12b
|
(28)
|
##
|
Compensation
Arrangements dated May 27, 2009 with Messrs. DeWolf, Haydu, Schindler and
Vassalluzzo.
|
10.13
|
(23)
|
##
|
Written
Summary of Renewed One-Year Part-time Consulting Arrangement with Joseph
Vassalluzzo dated June 7, 2007.
|
10.13a
|
(24)
|
##
|
Written
Summary of Renewed One-Year Part-time Consulting Arrangement with Joseph
Vassalluzzo dated June 4, 2008.
|
10.13b
|
(28)
|
##
|
Written
Summary of Renewed One-Year Part-time Consulting Arrangement with Joseph
Vassalluzzo dated May 27, 2009.
|
10.14
|
(10)
|
|
Web
Site License Agreement between iParty Corp. and Taymark, Inc.
|
10.15
|
(7)
|
|
Rights
Agreement between iParty Corp. and Continental Stock Transfer &
Trust, as Rights Agent.
|
10.16
|
(14)
|
|
Amendment
to Rights Agreement between iParty Corp. and Continental Stock
Transfer & Trust, as Rights Agent, dated September 15, 2006.
|
F-26
10.17
|
(17)
|
|
Amended
and Restated Loan and Security Agreement by and among iParty Corp., iParty
Retail Stores Corp. and Wells Fargo Retail Finance II, LLC dated
December 21, 2006.
|
10.18
|
(13)
|
|
Supply
Agreement with Amscan Inc., dated August 7, 2006.
|
10.19
|
(13)
|
|
Asset
Purchase Agreement with Party City Corporation, dated August 7, 2006.
|
10.20
|
(14)
|
|
Securities
Purchase Agreement with Highbridge International LLC, dated
September 15, 2006.
|
10.21
|
(19)
|
|
Amendment
Agreement between iParty Corp. and Highbridge International LLC, dated
January 9, 2007.
|
10.22
|
(14)
|
|
Senior
Subordinated Note with Highbridge International LLC, dated September 15,
2006.
|
10.23
|
(19)
|
|
Warrant
to Purchase Common Stock with Highbridge International LLC, issued September 15,
2006, as amended January 9, 2007.
|
10.24
|
(14)
|
|
Registration
Rights Agreement with Highbridge International LLC, dated September 15,
2006.
|
10.25
|
(15)
|
|
Subordinated
Promissory Note of iParty Corp., dated October 24, 2006.
|
10.26
|
(9)
|
|
Trademark
Security Agreement between iParty Corp. and Wells Fargo Retail Finance, LLC.
|
10.27
|
(5)
|
|
Stock
Purchase Agreement by and among iParty Corp., Ajmal Khan and Robert Lessin.
|
10.28
|
(6)
|
|
Stock
Purchase Agreement between iParty Corp. and Patriot Capital Ltd.
|
10.29
|
(3)
|
|
Funding
Agreement among iParty Corp., Robert Lessin and Ajmal Khan.
|
10.30
|
(21)
|
|
Asset
Purchase Agreement by and among Party City of Warwick, Inc. and Party
City of Lincoln, LLC, as Sellers, and iParty Corp. and iParty Retail Stores
Corp., as Buyers, dated as of August 15, 2007.
|
10.31
|
(22)
|
##
|
Letter
Agreement between iParty Corp. and David E. Robertson, dated March 22,
2007
|
10.31a
|
(25)
|
##
|
First
Amendment dated December 30, 2008 to Letter Agreement dated
March 22, 2007 by and between iParty Corp. and David E. Robertson.
|
10.32
|
(26)
|
##
|
2009
Stock Incentive Plan.
|
10.32a
|
(28)
|
##
|
Form of
Director Stock Option Agreement of 2009 Stock Incentive Plan.
|
10.32b
|
(28)
|
##
|
Form of
Incentive Stock Option Agreement for 2009 Stock Incentive Plan.
|
10.34
|
(27)
|
|
Second
Amended and Restated Credit Agreement among iParty Corp. and its wholly owned
subsidiary iParty Retail Stores Corp., as borrowers, and Wells Fargo Retail
Finance, LLC, as Administrative Agent, Swing Line Lender and Lender, dated
July 1, 2009.
|
21.1
|
**
|
|
Subsidiary
of Registrant.
|
23.1
|
**
|
|
Consent
of Ernst & Young LLP, Independent Registered Public Accounting Firm.
|
31.1
|
**
|
|
Certification
of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley
Act.
|
31.2
|
**
|
|
Certification of Chief
Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act.
|
32.1
|
**
|
|
Certification of Chief
Executive Officer pursuant to Section 906 of Sarbanes-Oxley Act.
|
32.2
|
**
|
|
Certification
of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley
Act.
|
**
Filed herewith.
##
Management
contract or compensatory plan or arrangement.
(1)
Filed as an exhibit to iPartys Registration
Statement on Form 10-SB, Registration No. 0-25507, as filed with the
SEC on March 8, 1999 and incorporated herein by reference.
(2)
Filed as an exhibit to Amendment No. 2 to
iPartys Registration Statement on Form 10-SB, Registration No. 0-25507,
as filed with the SEC on October 19, 1999 and incorporated herein by
reference.
(3)
Filed as an exhibit to Amendment No. 1 to
iPartys Registration Statement on Form 10-SB, Registration No. 0-25507,
as filed with the SEC on July 12, 1999 and incorporated herein by
reference.
(4)
Filed as an exhibit to iPartys Annual Report on Form 10-KSB
for the year ended December 31, 1999, as filed with the SEC on April 14,
2000 and incorporated herein by reference.
(5)
Filed as an exhibit to iPartys Current Report on Form 8-K,
filed with the SEC on August 30, 2000 and incorporated herein by
reference.
F-27
(6)
Filed as an exhibit to iPartys Current Report on Form 8-K,
filed with the SEC on September 15, 2000 and incorporated herein by
reference.
(7)
Filed as an exhibit to iPartys Current Report on Form 8-K,
filed with the SEC on November 16, 2001 and incorporated herein by
reference.
(8)
Included as an exhibit (Exhibit C) to Exhibit 99.2
to iPartys Current Report on Form 8-K, filed with the SEC on November 16,
2001 and incorporated herein by reference.
(9)
Filed as an exhibit to iPartys Annual Report on Form 10-KSB
for the year ended December 28, 2002, filed with the SEC on March 28,
2003 and incorporated herein by reference.
(10)
Filed as an exhibit to iPartys Quarterly Report on Form 10-Q,
filed with the SEC on August 12, 2003 and incorporated herein by
reference.
(11)
Filed as an exhibit to iPartys Current Report on Form 8-K,
filed with the SEC on March 30, 2006 and incorporated herein by reference.
(12)
Filed as an exhibit to iPartys Annual Report on Form 10-K,
filed with the SEC on March 30, 2006 and incorporated herein by reference.
(13)
Filed as an exhibit to iPartys Current Report on Form 8-K,
filed with the SEC on August 7, 2006 and incorporated herein by reference.
(14)
Filed as an exhibit to iPartys Current Report on Form 8-K,
filed with the SEC on September 18, 2006 and incorporated herein by
reference.
(15)
Filed as an exhibit to iPartys Current Report on Form 8-K,
filed with the SEC on October 25, 2006 and incorporated herein by
reference.
(16)
Filed as an exhibit to iPartys Current Report on Form 8-K,
filed with the SEC on December 12, 2006 and incorporated herein by
reference.
(17)
Filed as an exhibit to iPartys Current Report on Form 8-K,
filed with the SEC on December 26, 2006 and incorporated herein by
reference.
(18)
Filed as an exhibit to iPartys Current Report on Form 8-K,
filed with the SEC on January 8, 2007 and incorporated herein by
reference.
(19)
Filed as an exhibit to iPartys Current Report on Form 8-K,
filed with the SEC on January 10, 2007 and incorporated herein by
reference.
(20)
Filed as an exhibit to iPartys Current Report on Form 8-K
filed with the SEC on December 10, 2007 and incorporated herein by
reference.
(21)
Filed as an exhibit to iPartys Current Report on Form 8-K
filed with the SEC on August 16, 2007 and incorporated herein by
reference.
(22)
Filed as an exhibit to iPartys Current Report on Form 8-K
filed with the SEC on March 26, 2007 and incorporated herein by reference.
(23)
Filed as an exhibit to iPartys Current Report on Form 8-K
filed with the SEC on June 12, 2007 and incorporated herein by reference.
(24)
Filed as an exhibit to iPartys Quarterly Report on Form 10-Q,
filed with the SEC on August 11, 2008 and incorporated herein by
reference.
(25)
Filed as an exhibit to iPartys Current Report on Form 8-K,
filed with the SEC on January 5, 2009 and incorporated herein by
reference.
(26)
Filed as an exhibit to iPartys Definitive Proxy
Statement filed witht the SEC on April 24, 2009 and incorporated here by
reference.
(27)
Filed as an exhibit to iPartys Current Report on Form 8-K,
filed with the SEC on July 6, 2009 and incorporated here by reference.
(28)
Filed as an exhibit to iPartys Quarterly Report on Form 10-Q
on August 6, 2009 and incorporated here by reference.
F-28
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