|
|
For
the three months ended
|
|
|
|
Sep
29, 2007
|
|
|
Sep
30, 2006
|
|
Cost
of products sold and occupancy costs
|
|
$
|
10,679,713
|
|
|
$
|
10,266,805
|
|
|
|
|
|
|
|
|
|
|
Percentage
of revenues
|
|
|
58.7
|
%
|
|
|
59.6
|
%
|
As
a
percentage of revenues, the decrease in cost of products sold and occupancy
costs was primarily attributable to improved leveraging of occupancy costs
resulting from the increased sales in our comparable stores and better pricing
negotiated from vendors.
Marketing
and sales expense
Marketing
and sales expense consists primarily of advertising and promotional
expenditures, all store payroll and related expenses for personnel engaged
in
marketing and selling activities and other non-payroll expenses associated
with
operating our stores. Our consolidated marketing and sales expense
for the third quarter of fiscal 2007 was $6,620,424, or 36.4% of revenues,
an
increase of $36,644 and a decrease of 1.8 percentage points, as a percentage
of
revenues, from the third quarter of the prior fiscal year.
|
|
For
the three months ended
|
|
|
|
Sep
29, 2007
|
|
|
Sep
30, 2006
|
|
Marketing
and sales
|
|
$
|
6,620,424
|
|
|
$
|
6,583,780
|
|
|
|
|
|
|
|
|
|
|
Percentage
of revenues
|
|
|
36.4
|
%
|
|
|
38.2
|
%
|
As
a
percentage of revenues, the decrease in marketing and sales expense was
primarily attributable to better leveraging of store payroll and other store
selling related expenses resulting from the increased sales in our comparable
stores.
General
and administrative expense
General
and administrative (“G&A”) expense consists of payroll and related expenses
for executive, merchandising, finance and administrative personnel, as well
as
information technology, professional fees and other general corporate
expenses. Our consolidated G&A expense for the third quarter of
fiscal 2007 was $1,828,865, or 10.0% of revenues, an increase of $188,872
and an
increase of 0.5 percentage points, as a percentage of revenues, from the
third
quarter of the prior fiscal year.
|
|
For
the three months ended
|
|
|
|
Sep
29, 2007
|
|
|
Sep
30, 2006
|
|
General
and administrative
|
|
$
|
1,828,865
|
|
|
$
|
1,639,993
|
|
|
|
|
|
|
|
|
|
|
Percentage
of revenues
|
|
|
10.0
|
%
|
|
|
9.5
|
%
|
As
a
percentage of revenues, the increase in G&A expense is largely attributable
to executive recruitment costs and professional fees associated with our
compliance activities related to Section 404 of the Sarbanes-Oxley
Act.
Operating
loss
Our
operating loss for the third quarter of fiscal 2007 was $920,242, or 5.1%
of
revenues, compared to an operating loss of $1,250,043, or 7.3% of revenues
for
the third quarter of the prior fiscal year.
Interest
expense
Our
interest expense in the third quarter of fiscal 2007 was $214,614, a decrease
of
$7,671 from the third quarter of the prior fiscal year. The decrease
in the third quarter of fiscal 2007 was primarily due to lower borrowings
under
our line of credit in the third quarter of 2007 versus the third quarter
of
2006.
Income
taxes
We
have
not provided for income taxes for the third quarter of fiscal 2007 or fiscal
2006 due to the availability of net operating loss (NOL) carryforwards to
eliminate taxable income during those periods. No benefit has been recognized
with respect to NOL carryforwards due to the uncertainty of future taxable
income.
At
the end
of fiscal 2006, we had estimated net operating loss carryforwards of
approximately $23.0 million, which begin to expire in 2018. In
accordance with Section 382 of the Internal Revenue Code, the use of these
carryforwards will be subject to annual limitations based upon certain ownership
changes of our stock that have occurred or that may occur.
Net
Loss
Our
net
loss in the third quarter of fiscal 2007 was $1,133,658, or $0.05 per basic
and
diluted share, compared to a net loss of $1,472,328, or $0.07 per basic and
diluted share, in the third quarter of the prior fiscal year.
Nine
Months Ended September 29, 2007 Compared to Nine Months Ended September 30,
2006
Revenues
Revenues
include the selling price of party goods sold, net of returns and discounts,
and
are recognized at the point of sale. Our consolidated revenues for
the first nine months of fiscal 2007 were $54,219,838, an increase of
$4,846,335, or 9.8% from the first nine months of the prior fiscal
year.
|
|
For
the nine months ended
|
|
|
|
Sep
29, 2007
|
|
|
Sep
30, 2006
|
|
Revenues
|
|
$
|
54,219,838
|
|
|
$
|
49,373,503
|
|
|
|
|
|
|
|
|
|
|
Increase
in revenues
|
|
|
9.8
|
%
|
|
|
10.9
|
%
|
Sales
for
the first nine months of fiscal 2007 included sales from 49 comparable stores
(defined as stores open for at least one full year) and one store that was
acquired in August 2006. Comparable store sales for the first nine months
increased by 6.9%.
Cost
of products sold and occupancy costs
Cost
of
products sold and occupancy costs consist of the cost of merchandise sold
to
customers and the occupancy costs for our stores. Our cost of
products sold and occupancy costs for the first nine months of fiscal 2007
were
$31,687,361, or 58.4% of revenues, an increase of $2,024,486 and a decrease
of
1.7 percentage points, as a percentage of revenues, from the first nine months
of the prior fiscal year.
|
|
For
the nine months ended
|
|
|
|
Sep
29, 2007
|
|
|
Sep
30, 2006
|
|
Cost
of products sold and occupancy costs
|
|
$
|
31,687,361
|
|
|
$
|
29,662,875
|
|
|
|
|
|
|
|
|
|
|
Percentage
of revenues
|
|
|
58.4
|
%
|
|
|
60.1
|
%
|
As
a
percentage of revenues, the decrease in cost of products sold and occupancy
costs was primarily attributable to improved leveraging of occupancy costs
resulting from the increased sales in our comparable stores and better pricing
negotiated from vendors.
Marketing
and sales expense
Marketing
and sales expense consists primarily of advertising and promotional
expenditures, all store payroll and related expenses for personnel engaged
in
marketing and selling activities and other non-payroll expenses associated
with
operating our stores. Our consolidated marketing and sales expense
for the first nine months of fiscal 2007 was $18,286,196, or 33.7% of revenues,
an increase of $354,302 and a decrease of 2.6 percentage points, as a percentage
of revenues, from the first nine months of the prior fiscal year.
|
|
For
the nine months ended
|
|
|
|
Sep
29, 2007
|
|
|
Sep
30, 2006
|
|
Marketing
and sales
|
|
$
|
18,286,196
|
|
|
$
|
17,931,894
|
|
|
|
|
|
|
|
|
|
|
Percentage
of revenues
|
|
|
33.7
|
%
|
|
|
36.3
|
%
|
As
a
percentage of revenues, the decrease in marketing and sales expense was
primarily attributable to better leveraging of store payroll and other store
selling related expenses resulting from the increased sales in our comparable
stores.
General
and administrative expense
General
and administrative (“G&A”) expense consists of payroll and related expenses
for executive, merchandising, finance and administrative personnel, as well
as
information technology, professional fees and other general corporate
expenses. Our consolidated G&A expense for the first nine months
of fiscal 2007 was $5,700,919, or 10.5% of revenues, an increase of $963,238
and
an increase of 0.9 percentage points, as a percentage of revenues, from the
first nine months of the prior fiscal year.
|
|
For
the nine months ended
|
|
|
|
Sep
29, 2007
|
|
|
Sep
30, 2006
|
|
General
and administrative
|
|
$
|
5,700,919
|
|
|
$
|
4,737,681
|
|
|
|
|
|
|
|
|
|
|
Percentage
of revenues
|
|
|
10.5
|
%
|
|
|
9.6
|
%
|
As
a
percentage of revenues, the increase in G&A expense is largely attributable
to executive recruitment costs and professional fees associated with our
compliance activities related to Section 404 of the Sarbanes-Oxley
Act.
Operating
loss
Our
operating loss for the first nine months of fiscal 2007 was $1,454,638, or
2.7%
of revenues, compared to an operating loss of $2,958,947, or 6.0% of revenues
for the first nine months of the prior fiscal year.
Interest
expense
Our
interest expense for the first nine months of fiscal 2007 was $674,417, an
increase of $124,019 from the first nine months of the prior fiscal
year. The increase in the first nine months of fiscal 2007 was
primarily due to the interest, including amortization of discount, related
to
notes payable that we entered into in fiscal 2006, offset by the interest
related to lower borrowings under our line of credit in the third quarter
of
2007 versus the third quarter of 2006.
Income
taxes
We
have
not provided for income taxes for the first nine months of fiscal 2007 or
fiscal
2006 due to availability of net operating loss (NOL) carryforwards to eliminate
taxable income during those periods. No benefit has been recognized with
respect
to NOL carryforwards due to the uncertainty of future taxable
income.
At
the end
of fiscal 2006, we had estimated net operating loss carryforwards of
approximately $23.0 million, which begin to expire in 2018. In
accordance with Section 382 of the Internal Revenue Code, the use of these
carryforwards will be subject to annual limitations based upon certain ownership
changes of our stock that have occurred or that may occur.
Net
Loss
Our
net
loss for the first nine months of fiscal 2007 was $2,124,376, or $0.09 per
basic
and diluted share, compared to a net loss of $3,508,753, or $0.16 per basic
and
diluted share, for the first nine months of the prior fiscal year.
Liquidity
and Capital Resources
Our
operating activities used $760,577 in the first nine months of fiscal 2007
compared to $279,980 in cash provided in the first nine months of the prior
fiscal year, a decrease of $1,040,557. The increase in cash used in
operating activities was primarily due to higher purchases of inventory and
to
lower accounts payable growth. The lower accounts payable growth is
primarily related to less extended dating from vendors in the first half
of 2007
than in 2006.
We
used
$650,536 in investing activities in the first nine months of fiscal 2007
compared to $2,301,160 in the first nine months of the prior fiscal
year. The cash invested in the first nine months of fiscal 2007 was
primarily due to fixture and equipment improvements in our existing retail
stores, plus the implementation of a new human resource information and payroll
system. The cash invested in the first nine months of fiscal 2006 was
primarily due to the acquisition in August 2006 of a retail store located
in
Peabody, Massachusetts and a five-year non-compete agreement from Party
City.
Our
financing activities provided $716,324 in the first nine months of fiscal
2007
compared to providing $2,367,200 in the first nine months of the prior fiscal
year, a decrease of $1,650,876. The decrease was primarily related to
the borrowings in 2006 to finance the acquisition of the Peabody retail store
and the Party City non-compete agreement.
On
December 21, 2006, we amended and restated our existing line of credit (the
“line”) with Wells Fargo Retail Finance II, LLC. The amendment
continues the line of credit with Wells Fargo at $12,500,000 and extends it
for three additional years to January 2, 2010. In addition, the new
agreement with Wells Fargo includes an option whereby we may increase our
line
of credit up to a maximum level of $15,000,000, upon 15 days written notice,
as
long as we are in compliance with all debt covenants and the other provisions
of
the loan agreement. Borrowings under the new line bear interest at Wells
Fargo’s
base rate or, at our option, at London Interbank Offered Rate (“LIBOR”) plus
1.75%. Beginning March 30, 2007, these rates can increase by no more than
0.25%
if average availability under the line falls below $3,000,000. Borrowings
under
the line are based on inventory and accounts receivable levels. The line
is
secured by a lien on substantially all of our assets.
The
amended and restated agreement includes a financial covenant requiring us
to
maintain a minimum availability under the line of 5% of the credit
limit. At the current credit limit of $12,500,000, the minimum
availability is $625,000. The amended agreement also has a covenant
that requires us 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 September 29, 2007, we were in compliance with these financial
covenants. The line generally prohibits the payment of any dividends
or other distributions to any of our classes of capital stock.
On
January
17, 2006, we had amended our then-existing agreement with Wells Fargo to
allow
for a $500,000 term loan which increased our borrowing base, but did not
increase the $12.5 million credit limit. We borrowed the full
$500,000 on that date. On October 30, 2006, we further amended our agreement
to
extend the maturity date of our outstanding term loan in the amount of $500,000
from October 31, 2006 to January 2, 2007. On December 21, 2006, in
connection with the amendment described in the preceding paragraphs, we extended
the maturity date of this $500,000 term loan to October 31, 2007. We repaid
the
term loan on March 2, 2007.
The
amount
outstanding under the line was $2,544,679 as of September 29, 2007 and
$1,162,719 as of December 30, 2006. The interest rate on these borrowings
was
7.8% at September 29, 2007 and 8.6% at December 30, 2006. The outstanding
balances under the line are classified as current liabilities in the
accompanying consolidated balance sheets since we are required to apply daily
lock box receipts to reduce the amount outstanding.
Our
inventory consists of party supplies which are valued at the lower of moving
weighted-average cost or market and are reduced by an allowance for obsolete
and
excess inventory and other adjustments, including vendor rebates, 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 from 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
$19,037,895 at September 29, 2007.
Our
accounts receivable consist primarily of vendor rebate receivables and credit
card receivables. Our line of credit availability calculation allows
us to borrow against “eligible credit card receivables,” which are the credit
card receivables for the previous two to three days of business. The
amount of “eligible credit card receivables” was $317,415 at September 29,
2007.
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 September 29, 2007. 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. Therefore,
our availability was $9,115,830 at September 29, 2007 and $5,657,200 at December
30, 2006.
On
August
7, 2006, we entered into and simultaneously closed an asset purchase agreement
with Party City, an affiliate of Amscan Holdings, Inc., pursuant to which
we
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 bears interest at the rate of 12.25% per annum
(the
“Party City Note”) and $1,850,000 in cash. The Party City Note is
payable by quarterly interest-only payments over four years, with the full
principal amount due at the note’s maturity on August 7, 2010.
On
September 15, 2006, we entered into a securities purchase agreement pursuant
to
which we raised $2.5 million through a combination of subordinated debt and
warrant issued on September 15, 2006 to Highbridge International LLC
(“Highbridge”), an institutional accredited investor. Under the terms of the
financing, we issued Highbridge a three-year subordinated note (the “Highbridge
Note”) that bears interest at an interest rate of prime plus one
percent. The note matures on September 15, 2009. In
addition, we issued Highbridge 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. We allocated approximately
$613,651 of value to the warrants using the Black-Scholes model (volatility
of
108%, interest of 4.73% and expected life of five years). The note
discount associated with the warrants is being amortized using the effective
interest method over the life of the note payable.
On
October
24, 2006, we 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 (“the Amscan Note”). The Amscan Note bears
interest at the rate of 11.0% per annum and is payable in thirty-six (36)
equal
monthly installments of principal and interest of $59,562.48 commencing on
November 1, 2006, and on the first day of each month thereafter until October
1,
2009, when the entire remaining principal balance and all accrued interest
are
due and payable.
On
August 15, 2007, we 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. Both locations will be converted into iParty stores
immediately following the closing. The Asset Purchase Agreement
contemplates a closing on or about January 3, 2008.
Our
prospective cash flows are subject to certain trends, events and uncertainties,
including our operating results for the Halloween season, which is our single
most important season, as well as demands for working capital to improve
our
infrastructure, respond to economic conditions, take advantage of strategic
opportunities, support growth, and meet our 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, the planned acquisition of two stores in January 2008 and working
capital requirements through at least the next twelve months.
Contractual
obligations at September 29, 2007 were as follows:
|
|
Payments
Due By Period
|
|
|
|
|
|
|
Within
|
|
|
Within
|
|
|
|
|
|
|
|
|
|
Within
|
|
|
2
- 3
|
|
|
4
- 5
|
|
|
After
|
|
|
|
|
|
|
1
Year
|
|
|
Years
|
|
|
Years
|
|
|
5
Years
|
|
|
Total
|
|
Line
of credit
|
|
$
|
2,544,679
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,544,679
|
|
Capital
lease obligations
|
|
|
30,473
|
|
|
|
17,524
|
|
|
|
-
|
|
|
|
-
|
|
|
|
47,997
|
|
Notes
payable
|
|
|
603,810
|
|
|
|
3,174,049
|
|
|
|
600,000
|
|
|
|
-
|
|
|
|
4,377,859
|
|
Supply
agreement
|
|
|
|
|
|
|
18,000,000
|
|
|
|
18,000,000
|
|
|
|
9,000,000
|
|
|
|
45,000,000
|
|
Asset
purchase agreement
|
|
|
1,750,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,750,000
|
|
Operating
leases (including retail space leases)
|
|
|
8,516,342
|
|
|
|
15,801,576
|
|
|
|
11,748,477
|
|
|
|
10,305,719
|
|
|
|
46,372,114
|
|
Total
contractual obligations
|
|
$
|
13,445,304
|
|
|
$
|
36,993,149
|
|
|
$
|
30,348,477
|
|
|
$
|
19,305,719
|
|
|
$
|
100,092,649
|
|
In
addition, at September 29, 2007, we had outstanding purchase orders totaling
approximately $4,243,478 for the acquisition of inventory and non-inventory
items that are scheduled for delivery after September 29, 2007.
Seasonality
Due
to the
seasonality of our business, sales and operating income are typically higher
in
our second and fourth quarters. Our business is highly dependent upon
sales of Easter, graduation and summer merchandise in the second quarter
and
sales of Halloween and Christmas merchandise in the fourth
quarter. We have historically operated at a loss during the first and
third quarters.
Geographic
Concentration
As
of
September 29, 2007, we operated a total of 50 stores, 45 of which are located
in
New England. 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 may adversely
affect us more than a company that is more geographically diverse.
Effects
of Inflation
While
we
do not view the effects of inflation as having a direct material effect upon
our
business, we believe that volatility in oil and gasoline prices impacts the
cost
of producing petroleum-based/plastic products, which are a key raw material
in
much of our merchandise, and also impacts prices to ship 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, and consumer confidence and spending patterns. These and other
issues directly or indirectly affecting our vendors, our customers and us
could
adversely affect our business and financial performance.
Factors
That May Affect Future Results
Our
business is subject to certain risks that could materially affect our financial
condition, results of operations, and the value of our common stock. These
risks
include, but are not limited to, the ones described under Item 1A, “Risk
Factors” of our Annual Report on Form 10-K for the fiscal year ended December
30, 2006 and Part II, Item 1A, “Risk Factors” of subsequent Quarterly Reports on
Form 10-Q, including this one. Additional risks and uncertainties
that we are unaware of, or that we may currently deem immaterial, may become
important factors that harm our business, financial condition, results of
operations, or the value of our common stock.
Critical
Accounting Policies and Estimates
Our
financial statements are based on the application of significant accounting
policies, many of which require management to make significant estimates
and
assumptions (see Note 1 to the Consolidated Financial Statements). We
believe the following accounting policies to be those most important to the
portrayal of our financial condition and those that require the most subjective
judgment. If actual results differ significantly from management’s estimates and
projections, there could be a material effect on our financial
statements.
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. 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.
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.
Impairment
of Long-Lived Assets
In
accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of
Long-Lived Assets
, we perform a review of each store for impairment
indicators whenever events and changes in circumstances suggest that the
carrying amounts may not be recoverable from estimated future store cash
flows. Our review considers store operating results, future sales
growth and cash flows. The conclusion regarding impairment may differ
from current estimates if underlying assumptions or business strategies
change. During the fourth quarter of 2006, we decided to close our
store in East Providence, Rhode Island effective November 4, 2006 due to
underperforming sales. As a result of this closing, we incurred a
charge in the fourth quarter of 2006 of approximately $120,000 related to
remaining lease payments and other closing costs. In addition, during
the third quarter of 2007, we decided to close our stores in North Providence,
Rhode Island and Auburn, Massachusetts at the end of their lease terms which
expire on January 31, 2008. No material impairment costs were
incurred as a result of that decision.
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 2006, 2004 and 2003 due to
the
success of our Halloween seasons, (2) we have achieved positive comparable
store
sales growth for the last three full years and (3) improved merchandise margins
in 2006, 2004 and 2003. The negative evidence that we considered
included (1) after two years of profitability we realized a net loss in 2005,
(2) our merchandise margins decreased in 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 $23.0 million, (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 rising prices for petroleum products, which are a key
raw
material for much of our merchandise and which affect our freight costs and
those of our suppliers and affect our customers’ spending levels and patterns,
(4) the risk that costs of opening new stores will put pressure on our profit
margins until these stores reach maturity, (5) the risk that investment in
infrastructure will increase our costs and (6) 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.
The
negative evidence is strong enough for us to conclude that the level of our
future profitability is uncertain at this time. We believe that it is prudent
for us to maintain a valuation allowance until we have a longer history of
sustained 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 reduce our deferred tax
asset valuation allowance would increase income in the period we made such
a
determination.
We
adopted
the provisions of Financial Accounting Standards Board (“FASB”) Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB
Statement No. 109” (“FIN 48”) on December 31, 2006. At the adoption date and as
of September 29, 2007, we had no material unrecognized tax benefits and no
adjustments to liabilities, retained earnings or operations were
required.
We
recognize interest and penalties related to uncertain tax positions in income
tax expense which were zero for the nine months ended September 29,
2007.
Tax
years
2004 through 2006 are subject to examination by the federal and state taxing
authorities. There are no income tax examinations currently in
process.
Stock
Option Compensation Expense
On
January
1, 2006, we adopted Statement No. 123(R) using the modified prospective method
in which compensation cost is recognized beginning with the effective date
(a)
based on the requirements of Statement No. 123(R) for all share-based payments
granted after the effective date and (b) based on the requirements of Statement
No. 123 for all awards granted to employees prior to the effective date of
Statement No. 123(R) that remain unvested on the effective
date. Prior to January 1, 2006, we accounted for our stock option
compensation agreements with employees under the provisions of Accounting
Principles Board (“APB”) Opinion No. 25,
Accounting for Stock Issued to
Employees
and the disclosure-only provisions of Statement No. 123,
Accounting for Stock-Based Compensation
, as amended by SFAS No. 148,
Accounting for Stock-Based Compensation – Transition and Disclosure, an
amendment of Financial Accounting Standards Board (“FASB”) Statement No.
123
.
Use
of
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Our actual results could differ from our
estimates.
Fair
Value Measurements
On
December 31, 2006, we adopted SFAS No. 157,
Fair Value Measurements
,
which defines fair value, establishes a framework for measuring fair value
in
generally accepted accounting principles and expands disclosures about fair
value measurements. SFAS No. 157 does not require any new fair value
measurements, but its provisions apply to all other accounting pronouncements
that require or permit fair value measurement. Adoption of SFAS No.
157 does not have a material impact on our financial position or results
of
operations.
New
Accounting Pronouncements
No
new accounting pronouncements were
issued during the quarter ended September 29, 2007 that are expected to have
a
material impact on our financial position or results of operations.
There
has
been no material change in our market risk exposure since the filing of our
Annual Report on Form 10-K.
(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 September 29, 2007, the end of the
fiscal quarter to which this report relates, that iParty's disclosure
controls and procedures: are effective to ensure that information required
to be
disclosed by iParty in the reports filed or submitted by it under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the time periods specified in the SEC’s rules and forms; and
include controls and procedures designed to ensure that information required
to
be disclosed by iParty in such reports is accumulated and communicated
to iParty's management, including the Chief Executive Officer and the Chief
Financial Officer, to allow timely decisions regarding required
disclosure. iParty's disclosure controls and procedures are designed to
provide a reasonable level of assurance of reaching iParty's
disclosure requirements and are effective in reaching that level of
reasonable assurance.
(b)
Changes in Internal Controls.
No change in our internal
controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act of 1934, as amended) occurred during the
fiscal quarter ended September 29, 2007 that has materially affected, or
is
reasonably likely to materially affect, our internal controls over financial
reporting.
The
Company is not a party to any legal proceedings expected to have a material
effect on its financial position or results of operations.
In
addition to the risk factors previously disclosed in Item 1A, “Risk Factors” in
our Annual Report on Form 10-K for the fiscal year ended December 30, 2006,
as
filed with the SEC on March 19, 2007, set forth below are additions and updates
to those risk factors:
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. At the present time our President, Patrick Farrell, is
transitioning his duties to other members of management in connection with
his
relocation to New York for personal family reasons and we will not be extending
the term of his service. As previously disclosed, his regular employment
with us
will terminate on November 15, 2007. Our business performance and operating
results will depend on our ability to successfully execute this transition
process.
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 meet our
labor needs generally 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 and, over time, enter new geographic markets. We have opened
15 new stores, acquired one store and closed one store over the past four
years,
bringing our total number of stores from 35 at the beginning of 2003 to 50
at
the end of 2006. We will be closing two stores when their leases expire in
early
2008 and have entered into an agreement to acquire two stores in January
2008.
While at present we have no current plans for other new store openings, our
growth goals envision a return to opening additional stores beginning in
2008.
Also, from time to time, we have been and expect to continue to be presented
with opportunities to acquire existing party supply stores. We intend
to continue to evaluate such opportunities on a case-by-case basis as they
may
arise to ascertain if they would be a good strategic fit for our business
and
would help us increase shareholder value. For our growth strategy to be
successful, we must identify and lease favorable store sites, hire and train
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 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, these new stores may not
achieve the same sales or profit levels as our existing stores. Also,
our expansion strategy includes opening new 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 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, 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, or
in
the event that we determine to close underperforming stores.
Shares
that are or may be offered for sale pursuant to a prospectus on Form S-3
filed
with the SEC and declared effective on April 4, 2007 or that may
be eligible for sale in the future could negatively affect our stock
price.
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.
As
of
September 29, 2007 there were 28,302,342 potential additional common share
equivalents outstanding. These included 15,550,121 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,
528,210 shares issuable upon the exercise of warrants with a weighted average
exercise price of $3.79 and 10,140,667 shares issuable upon the exercise
of
stock options with a weighted average exercise price of $0.59.
Our
unregistered 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. We have not entered into any
agreements or understanding regarding any future acquisitions not described
herein and cannot ensure that we will be able to identify or complete any
acquisition in the future.
Item
2.
|
|
|
|
Not
applicable.
|
|
|
Item
3.
|
|
|
|
Not
applicable.
|
|
|
Item
4.
|
|
|
|
Not
applicable.
|
|
|
|
|
Item
5.
|
Other
Information
|
|
|
Not
applicable.
|
|
|
Item
6.
|
|
The
exhibits listed in the Exhibit Index immediately preceding the exhibits are
filed as part of this Quarterly Report on Form 10-Q and are incorporated
herein
by reference.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
iPARTY
CORP.
|
|
|
|
|
|
|
By:
|
/s/ SAL
PERISANO
|
|
|
|
SAL
PERISANO
|
|
|
|
Chairman
of the Board and Chief Executive Officer
|
|
|
|
(Principal
Executive Officer)
|
|
|
By:
|
/s/ DAVID
ROBERTSON
|
|
|
|
DAVID
ROBERTSON
|
|
|
|
Chief
Financial Officer
|
|
|
|
(Principal
Financial and Accounting Officer)
|
|
Dated:
October 31, 2007
EXHIBIT
INDEX
Ex.
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act
|
Ex.
32.1
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section
1350
|
Ex.
32.2
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section
1350
|
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