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 subsidiaries as of December 29, 2007 and
December 30, 2006, 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 29, 2007.
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 audit 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 subsidiaries at December 29, 2007 and December 30,
2006, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 29, 2007, in
conformity with U.S. generally accepted accounting principles.
On January 1, 2006, the Company adopted SFAS No. 123
(Revised 2004),
Share Based Payments
. On December 31,
2006, the Company adopted Financial Accounting Standards Board (FASB)
Interpretation No. 48,
Accounting for Uncertainty
in Income Taxes
, an interpretation of FASB Statement No. 109.
|
/s/
Ernst & Young LLP
|
|
|
|
|
Boston,
Massachusetts
|
|
March 7,
2008
|
|
The
accompanying notes are an integral part of these Consolidated Financial
Statements.
F-2
iPARTY CORP.
CONSOLIDATED BALANCE SHEETS
|
|
Dec 29, 2007
|
|
Dec 30, 2006
|
|
ASSETS
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
71,532
|
|
$
|
760,376
|
|
Restricted cash
|
|
862,536
|
|
706,066
|
|
Accounts receivable
|
|
1,105,807
|
|
1,116,042
|
|
Inventory, net
|
|
13,639,531
|
|
12,264,737
|
|
Prepaid expenses and other assets
|
|
996,779
|
|
752,172
|
|
Total current assets
|
|
16,676,185
|
|
15,599,393
|
|
Property and equipment, net
|
|
4,360,123
|
|
4,817,993
|
|
Intangible assets, net
|
|
1,756,800
|
|
2,015,750
|
|
Other assets
|
|
183,978
|
|
264,237
|
|
Total assets
|
|
$
|
22,977,086
|
|
$
|
22,697,373
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS
EQUITY
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable
|
|
$
|
4,723,370
|
|
$
|
5,516,406
|
|
Accrued expenses
|
|
2,503,752
|
|
3,070,003
|
|
Current portion of capital lease obligations
|
|
30,473
|
|
343,761
|
|
Current notes payable
|
|
620,706
|
|
551,515
|
|
Borrowings under line of credit
|
|
2,613,511
|
|
1,162,719
|
|
Total current liabilities
|
|
10,491,812
|
|
10,644,404
|
|
|
|
|
|
|
|
Long-term liabilities:
|
|
|
|
|
|
Capital lease obligations, net of current portion
|
|
9,213
|
|
42,456
|
|
Notes payable, net of discount of $340,917
|
|
3,271,632
|
|
3,736,309
|
|
Other liabilities
|
|
1,113,522
|
|
929,199
|
|
Total long-term liabilities
|
|
4,394,367
|
|
4,707,964
|
|
|
|
|
|
|
|
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; 465,401 and 471,401 shares issued and outstanding at
December 29, 2007 and December 30, 2006, respectively (aggregate
liquidation value of $9,308,024 at December 29, 2007)
|
|
6,925,170
|
|
7,014,450
|
|
Series C convertible preferred stock - 100,000 shares
authorized, issued and outstanding (aggregate liquidation value of $2,000,000
at December 29, 2007)
|
|
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 29, 2007)
|
|
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 29, 2007)
|
|
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 29, 2007)
|
|
500,000
|
|
500,000
|
|
Total convertible preferred stock
|
|
13,682,167
|
|
13,771,447
|
|
|
|
|
|
|
|
Common stock - $.001 par value; 150,000,000 shares authorized;
22,700,655 and 22,603,877 shares issued and outstanding at December 29,
2007 and December 30, 2006, respectively
|
|
22,701
|
|
22,604
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
51,894,481
|
|
51,671,087
|
|
Accumulated deficit
|
|
(57,508,442
|
)
|
(58,120,133
|
)
|
Total stockholders equity
|
|
8,090,907
|
|
7,345,005
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
22,977,086
|
|
$
|
22,697,373
|
|
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 29, 2007
|
|
Dec 30, 2006
|
|
Dec 31, 2005
|
|
|
|
(52 weeks)
|
|
(52 weeks)
|
|
(53 weeks)
|
|
Revenues
|
|
$
|
81,798,634
|
|
$
|
78,458,329
|
|
$
|
72,537,998
|
|
Operating costs:
|
|
|
|
|
|
|
|
Cost of products sold
|
|
46,465,441
|
|
44,942,542
|
|
41,395,193
|
|
Marketing and sales
|
|
26,181,504
|
|
25,625,547
|
|
24,116,050
|
|
General and administrative
|
|
7,553,869
|
|
6,736,197
|
|
6,762,583
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
1,597,820
|
|
1,154,043
|
|
264,172
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
1,597,820
|
|
1,154,043
|
|
264,172
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
17,806
|
|
10,217
|
|
801
|
|
Interest expense
|
|
(857,612
|
)
|
(772,334
|
)
|
(532,649
|
)
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
758,014
|
|
391,926
|
|
(267,676
|
)
|
|
|
|
|
|
|
|
|
Income taxes
|
|
146,323
|
|
17,279
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
611,691
|
|
$
|
374,647
|
|
$
|
(267,676
|
)
|
|
|
|
|
|
|
|
|
Income (loss) per share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.02
|
|
$
|
0.01
|
|
$
|
(0.01
|
)
|
Diluted
|
|
$
|
0.02
|
|
$
|
0.01
|
|
$
|
(0.01
|
)
|
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 25, 2004
|
|
1,268,411
|
|
$
|
14,307,999
|
|
22,092,717
|
|
$
|
22,093
|
|
$
|
50,448,103
|
|
$
|
(58,227,104
|
)
|
$
|
6,551,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
common stock upon conversion of Series B convertible preferred stock
|
|
(33,058
|
)
|
(491,901
|
)
|
425,546
|
|
426
|
|
491,475
|
|
|
|
|
|
Stock based
compensation
|
|
|
|
|
|
|
|
|
|
28,500
|
|
|
|
28,500
|
|
Exercise of stock
options
|
|
|
|
|
|
18,374
|
|
18
|
|
3,581
|
|
|
|
3,599
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
(267,676
|
)
|
(267,676
|
)
|
Balance
December 31, 2005
|
|
1,235,353
|
|
13,816,098
|
|
22,536,637
|
|
22,537
|
|
50,971,659
|
|
(58,494,780
|
)
|
6,315,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
common stock upon conversion of Series B convertible preferred stock
|
|
(3,000
|
)
|
(44,651
|
)
|
39,925
|
|
40
|
|
44,611
|
|
|
|
|
|
Stock based
compensation
|
|
|
|
|
|
|
|
|
|
35,592
|
|
|
|
35,592
|
|
Exercise of stock
options
|
|
|
|
|
|
27,315
|
|
27
|
|
5,574
|
|
|
|
5,601
|
|
Issuance of
warrants
|
|
|
|
|
|
|
|
|
|
613,651
|
|
|
|
613,651
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
374,647
|
|
374,647
|
|
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
|
|
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
|
|
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 29, 2007
|
|
Dec 30, 2006
|
|
Dec 31, 2005
|
|
|
|
(52 weeks)
|
|
(52 weeks)
|
|
(53 weeks)
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
611,691
|
|
$
|
374,647
|
|
$
|
(267,676
|
)
|
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
1,705,948
|
|
1,343,857
|
|
1,093,221
|
|
Deferred rent
|
|
184,323
|
|
260,196
|
|
197,244
|
|
Non cash stock based compensation expense
|
|
129,628
|
|
35,592
|
|
|
|
Non cash warrant expense
|
|
204,550
|
|
68,183
|
|
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
Accounts receivable
|
|
10,235
|
|
130,503
|
|
(545,584
|
)
|
Inventory
|
|
(1,374,794
|
)
|
1,283,983
|
|
(1,850,336
|
)
|
Prepaid expenses and other assets
|
|
(351,302
|
)
|
(149,766
|
)
|
120,637
|
|
Accounts payable
|
|
(793,036
|
)
|
821,312
|
|
1,273,899
|
|
Accrued expenses and other liabilities
|
|
(566,251
|
)
|
243,529
|
|
(281,312
|
)
|
Net cash provided by (used in) operating
activities
|
|
(239,008
|
)
|
4,412,036
|
|
(259,907
|
)
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of retail store and non-compete
agreement
|
|
|
|
(1,869,115
|
)
|
|
|
Purchase of property and equipment
|
|
(802,174
|
)
|
(709,892
|
)
|
(1,663,647
|
)
|
Net cash used in investing activities
|
|
(802,174
|
)
|
(2,579,007
|
)
|
(1,663,647
|
)
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net borrowings (repayments) under line of
credit
|
|
1,450,792
|
|
(5,473,155
|
)
|
1,378,184
|
|
Proceeds from notes payable
|
|
|
|
4,319,373
|
|
|
|
Principal payments on notes payable
|
|
(600,036
|
)
|
(86,081
|
)
|
|
|
Increase in restricted cash
|
|
(156,470
|
)
|
(54,449
|
)
|
(90,210
|
)
|
Principal payments on capital lease
obligations
|
|
(346,531
|
)
|
(483,136
|
)
|
(425,982
|
)
|
Proceeds from exercise of stock options
|
|
4,583
|
|
5,601
|
|
3,599
|
|
Net cash provided by (used in) financing
activities
|
|
352,338
|
|
(1,771,847
|
)
|
865,591
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash
equivalents
|
|
(688,844
|
)
|
61,182
|
|
(1,057,963
|
)
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of
year
|
|
760,376
|
|
699,194
|
|
1,757,157
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
71,532
|
|
$
|
760,376
|
|
$
|
699,194
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash
financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Series B convertible
preferred stock to common stock
|
|
$
|
89,280
|
|
$
|
44,651
|
|
$
|
491,901
|
|
|
|
|
|
|
|
|
|
Conversion of accounts payable to notes
payable
|
|
$
|
|
|
$
|
1,819,373
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Acquisition of assets under capital lease
|
|
$
|
|
|
$
|
|
|
$
|
132,968
|
|
The
accompanying notes are an integral part of these Consolidated Financial
Statements.
F-6
iPARTY CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
December 29, 2007
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
2007, the Company had 45 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 29, 2007 and December 30, 2006
consisted of 52 weeks while fiscal year December 31, 2005 consisted of 53
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 believes, based on its current operating plan, that anticipated
revenues from operations and borrowings available under the existing line of
credit will be sufficient to fund its operations and working capital
requirements through the next twelve months
.
In the event that the Companys operating
plan changes or proves inaccurate due to decreased revenues, unanticipated
expenses, increased competition, unfavorable economic conditions or other
unforeseen circumstances, the Companys liquidity may be negatively
impacted. Accordingly, the Company would
be required to adjust its expenditures in 2008 to conserve working capital or
raise additional capital to fund operations.
There can be no assurance that, should the Company seek or require
additional financing, such financing will be available, if at all, on terms and
conditions acceptable to it
2. SIGNIFICANT
ACCOUNTING POLICIES:
Principles of Consolidation
The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries 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.
Six suppliers account for approximately 46% of the Companys purchases
of merchandise, 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, which obligates the Company to purchase increased levels of merchandise
until 2012. The Supply Agreement
provides for a ramp-up period during 2006 and 2007 and, for five years
beginning with calendar year 2008, 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. The Company is not aware of any reason or
circumstance that would prevent the minimum purchase amount commitments under
the Supply Agreement from being met.
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 financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could
differ from these estimates.
Cash and Cash Equivalents and Restricted Cash
The
Company considers all highly liquid investments with an original maturity date
of three months or less to be cash equivalents.
Cash equivalents consist primarily of store cash funds and daily store
receipts in transit to our concentration bank and are carried at cost.
The Company uses controlled disbursement banking
arrangements as part of its cash management program. Outstanding checks, which were included in
accounts payable, totaled $329,756 at December 29, 2007 and $2,316,026 at December 30,
2006. The decrease in outstanding checks
as of December 29, 2007 is due to the timing of store lease payments.
Restricted cash represents funds on deposit
established for the benefit of and under the control of Wells Fargo Retail
Finance II, LLC, the Companys lender under its line of credit, and constitutes
collateral for amounts outstanding under this line.
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 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
F-8
carrying
value. The fair value of the common
stock warrant issued in 2006 was determined by using the Black-Scholes model
(volatility of 108%, interest of 4.73% and expected life of five years).
Inventories
Inventories
consist of party supplies and are valued at the lower of moving
weighted-average cost or market.
Inventory has been reduced by an allowance for obsolete and excess
inventory, which is based on managements review of inventories on hand
compared to estimated future sales. The
Company records vendor rebates, discounts and certain other adjustments to
inventory, including freight costs, and these amounts are recognized in the
income statement as the related goods are sold.
The
activity in the allowance for obsolete and excess inventory is as follows:
|
|
2007
|
|
2006
|
|
Beginning balance
|
|
$
|
1,079,814
|
|
$
|
1,098,972
|
|
Increases to reserve
|
|
263,847
|
|
524,550
|
|
Write-offs against reserve
|
|
(373,802
|
)
|
(543,708
|
)
|
Ending balance
|
|
$
|
969,859
|
|
$
|
1,079,814
|
|
Advertising
Advertising
costs are expensed upon first showing.
Advertising costs amounted to $3,721,516, $3,659,743, and $3,439,403 for
the years ended December 29, 2007, December 30, 2006, and December 31,
2005, 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
sheet. Deferred rent was $1,113,522 at December 29,
2007 and $929,199 at December 30, 2006.
Net Income (Loss) per Share
Net
income (loss) per basic share is computed by dividing net income available to
common shareholders by the weighted-average number of common shares
outstanding. The common share
equivalents of Series B-F are required to be excluded in the calculation
of net income (loss) per basic share in accordance with EITF Consensus 03-6,
Participating
Securities and the Two-Class Method
under SFAS No. 128
, which supersedes EITF Topic D-95,
Effect of Participating Convertible Securities on the Computation of
Basic Earnings Per Share.
Since the preferred stockholders are
entitled to participate in dividends when and if declared by the Board of
Directors on the same basis as if the shares of Series B-F were converted
to common stock, the application of EITF 03-6 has no effect on the amount of
income (loss) per basic share of common stock.
For periods with net losses, the Company does not allocate losses to Series B-F
preferred stock.
Net
income (loss) per diluted share under EITF 03-6 is computed by dividing net
income (loss) by the weighted average number of common shares outstanding, plus
the common share equivalents of Series B-F preferred stock on an
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.
F-9
The
following table sets forth the computation of net income (loss) per basic and
diluted share available to common stockholders:
|
|
2007
|
|
2006
|
|
2005
|
|
Common shares
|
|
$
|
362,525
|
|
$
|
223,203
|
|
$
|
(267,676
|
)
|
Convertible preferred Series B-F
|
|
249,166
|
|
151,444
|
|
|
|
Net income (loss)
|
|
$
|
611,691
|
|
$
|
374,647
|
|
$
|
(267,676
|
)
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.02
|
|
$
|
0.01
|
|
$
|
(0.01
|
)
|
Diluted
|
|
$
|
0.02
|
|
$
|
0.01
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
Common sharesbasic
|
|
22,642,564
|
|
22,557,436
|
|
22,186,581
|
|
Common share equivalents of Series B-F
convertible preferred stock
|
|
15,561,810
|
|
15,305,492
|
|
|
|
If-converted weighted-average shares
outstanding
|
|
38,204,374
|
|
37,862,928
|
|
22,186,581
|
|
|
|
|
|
|
|
|
|
Common share equivalents of in the money
stock options
|
|
1,708,900
|
|
1,672,946
|
|
|
|
Common share equivalents of in the money
warrants
|
|
|
|
|
|
|
|
Diluted weighted-average shares outstanding
|
|
39,913,274
|
|
39,535,874
|
|
22,186,581
|
|
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 4,654,753 and 2,611,544 in 2007,
respectively, 3,858,769 and 2,611,544 in 2006, respectively, 10,340,841 and
528,210 in 2005, respectively.
Stock Option Compensation Expense
On
January 1, 2006, the Company adopted the Financial Accounting Standards Board
(FASB) Statement No. 123(R),
Share-Based Payments
,
using the modified prospective method.
Under this method, stock based compensation expense is recognized for
new grants beginning in 2006 and any unvested grants prior to the adoption of
Statement No. 123(R). Prior to
fiscal 2006, the Company accounted for share-based payments to employees using
the 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
.
Because the Company granted stock options to employees at exercise
prices equal to fair market value on the date of grant, no stock based
compensation cost was recognized for option grants in periods prior to fiscal
2006.
In
response to Statement No. 123(R), on September 21, 2005, the Companys
Board of Directors approved an acceleration of the vesting of certain unvested
and out-of-the-money stock options previously awarded to employees and
officers with exercise prices equal to or greater than $0.69 per share. Options held by non-employee directors were
excluded from the vesting acceleration.
As a result, options to purchase approximately 1.0 million shares of
iParty stock became exercisable immediately.
Based upon the Companys closing stock price of $0.46 on September 21,
2005, none of these options had intrinsic value on the date of acceleration.
In
making the decision to accelerate these options, the Companys Board of
Directors considered the interest of the stockholders as it would reduce the
Companys reported stock based compensation expense in future periods following
the effectiveness of Statement No. 123(R). The future stock based
compensation expense that was eliminated was approximately $508,000 on a
pre-tax basis and is reflected in the pro forma footnote disclosure for the
year ended December 31, 2005.
Under
Statement No. 123(R), 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
F-10
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 on the consolidated statement of operations. Under the modified prospective method, stock
based compensation expense is recognized for new grants beginning in the fiscal
year ended December 30, 2006 and any unvested grants prior to the adoption
of Statement No. 123(R). The Company recognizes stock based compensation
expense on a straight-line basis over the vesting period of each grant.
The
stock based compensation expense recognized by the Company was:
|
|
2007
|
|
2006
|
|
Stock Based Compensation Expense
|
|
$
|
129,628
|
|
$
|
35,592
|
|
|
|
|
|
|
|
|
|
Stock
based compensation expense is included in general and administrative
expense. The adoption of Statement No. 123(R) had
no impact on cash flow from operations and cash flow from financing activities
for the years ended December 29, 2007 and December 30, 2006.
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 as required by Statement No. 123(R).
In
accordance with Statement No. 123(R), the results for the year ended December 31,
2005 have not been restated. If the
stock based compensation expense for the Companys stock option plan had been
determined based upon the fair value at the grant date for awards made prior to
fiscal 2006 under the plan consistent with the methodology prescribed under
Statement No. 123, the Companys net loss would have been increased by
$1,033,342 for the year ended December 31, 2005. Basic and diluted loss per share would have
increased by $0.05 for the year ended December 31, 2005.
|
|
2005
|
|
Net income (loss):
|
|
|
|
Reported
|
|
$
|
(267,676
|
)
|
Deduct: Total stock based compensation
expense determined under fair value based method for all awards
|
|
(1,033,342
|
)
|
Pro forma
|
|
$
|
(1,301,018
|
)
|
|
|
|
|
Net income (loss) per basic share:
|
|
|
|
Reported
|
|
$
|
(0.01
|
)
|
Pro forma
|
|
$
|
(0.06
|
)
|
|
|
|
|
Net income (loss) per diluted share:
|
|
|
|
Reported
|
|
$
|
(0.01
|
)
|
Pro forma
|
|
$
|
(0.06
|
)
|
Under the Companys Amended and Restated 1998
Incentive and Nonqualified Stock Option Plan (the 1998 Plan) options to
acquire 11,000,000 shares of common stock may be granted to officers,
directors, key employees and consultants.
The exercise price for qualified incentive options cannot be less than
the fair market value of the
F-11
stock on the grant date and
the exercise price of nonqualified options can be fixed by the Board. Options
to purchase the Companys common stock under the 1998 Plan have been granted to
employees, directors and consultants of the Company at fair market value at the
date of grant. Generally, the options
become exercisable over periods of up to four years, and expire ten years from
the date of grant.
The
Company granted options for the purchase of 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. Similarly, the Company granted options for
the purchase of 25,000 shares of common stock to each of the four independent
members of the Board of Directors on June 7, 2006 at an exercise price of
$0.36 per share. The weighted-average
fair market value using the Black-Scholes option-pricing model of the options
granted was $0.33 per share for options granted during the twelve months ended December 29,
2007, and was $0.30 per share for options granted during the twelve months
ended December 30, 2006. The fair
market value of the stock options at the date of the grant was estimated using
the Black-Scholes option-pricing model with the following weighted average
assumptions:
|
|
2007
|
|
2006
|
|
2005
|
|
Risk-free interest rate
|
|
4.94
|
%
|
5.18
|
%
|
3.76
|
%
|
Expected volatility
|
|
102.6
|
%
|
115.6
|
%
|
111.5
|
%
|
Weighted average expected life (in years)
|
|
5.0
|
|
5.0
|
|
5.0
|
|
Expected dividends
|
|
0.00
|
%
|
0.00
|
%
|
0.00
|
%
|
The
total fair value of shares vested during 2007 was $2,462. The remaining unrecognized stock based
compensation expense related to unvested awards at December 29, 2007, was
$360,697 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
Intangible assets consist
primarily of the value of a five-year non-compete agreement from Party City
Corporation and its affiliates that covers Massachusetts, Maine, New Hampshire,
Vermont, Rhode Island, and Windsor and New London counties in Connecticut which
expires in 2011. This asset has an
estimated life of 60 months. Also
included is the value related to the retail store lease that the Company
acquired from Party City in Peabody, Massachusetts. This asset has an estimated life of 90
months. Also, intangible assets
includes legal and other transaction costs incurred before the end of our 2007 fiscal year related to the purchase
of two Party City franchise stores located in Rhode Island. The Rhode Island
stores transaction was completed on January 2, 2008, shortly after the
period covered by this report. These amounts will be included in the
consideration allocated to the value of intangible assets accounted for in
connection with store acquisitions.
F-12
Intangible
assets as of December 29, 2007 and December 30, 2006 were:
|
|
Dec 29, 2007
|
|
Dec 30, 2006
|
|
Non-compete agreement
|
|
$
|
1,688,346
|
|
$
|
1,725,069
|
|
Lease valuation
|
|
449,716
|
|
460,000
|
|
Other
|
|
182,049
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
2,320,111
|
|
2,185,069
|
|
|
|
|
|
|
|
Less: accumulated amortization
|
|
(563,310
|
)
|
(169,319
|
)
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
1,756,800
|
|
$
|
2,015,750
|
|
Amortization
expense for these intangible assets was $393,991 in 2007, $169,319 in 2006 and
$0 in 2005, 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 29,
2007:
Year
|
|
Amount
|
|
2008
|
|
$
|
434,042
|
|
2009
|
|
434,041
|
|
2010
|
|
434,041
|
|
2011
|
|
293,346
|
|
Thereafter
|
|
161,330
|
|
Total
|
|
$
|
1,756,800
|
|
Accounting for the Impairment of Long-Lived Assets
In
accordance with SFAS No. 144,
Accounting for the
Impairment or Disposal of Long-Lived Assets
, the Company reviews
each store for impairment indicators whenever events and changes in
circumstances suggest that the carrying amounts may not be recoverable from
estimated future store cash flows. The Companys review considers store
operating results, future sales growth and cash flows. During the fourth
quarter of 2006, the Company decided to close its store in East Providence,
Rhode Island effective November 4, 2006 due to underperforming sales. As a result of this closing, the Company
incurred a charge in the fourth quarter of 2006 of approximately $140,000
related to remaining lease payments and other closing costs. In addition, 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 29, 2007,
the Company does not believe that any of its remaining assets are impaired.
New Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157,
Fair Value
Measurements
(SFAS 157). SFAS 157 defines fair value, establishes
a framework for measuring fair value in accordance with generally accepted
accounting principles and expands disclosures about fair value measurements.
SFAS 157 emphasizes that fair value is a market-based measurement which should
be evaluated based on applicable assumptions for pricing an asset or liability
as well as consideration of ongoing performance. The provisions of SFAS 157
are effective for the fiscal year beginning after November 15, 2007 or for
the Company the fiscal year ending December 27, 2008, and should be
applied prospectively as of the beginning of the fiscal year in which the
statement is adopted. In February 2008, the FASB decided to defer the
effective date of SFAS 157 for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least
F-13
annually). The Company
will adopt SFAS 157 for its fiscal year ending December 27, 2008. The
Company believes that SFAS 157 will not have a material effect on its financial
position or results of operations.
In
February 2007, the Financial Accounting Standards Board (FASB) issued
SFAS No. 159,
The Fair Value Option for
Financial Assets including an amendment of FASB Statement No. 115 (SFSA
159)
. SFAS 159 permits entities to measure certain eligible
financial instruments and certain other items at fair value. Unrealized gains
and losses in items for which the fair value option has been elected must be
reported in earnings in periods subsequent to adoption.
SFAS
159 will be effective as of the beginning of an entitys first fiscal year that
begins after November 15, 2007, or for the Company the fiscal year ending December 27,
2008. The Company does not expect the adoption of SFAS 159 to have a material
effect on its financial statements.
In
December 2007, the Financial Accounting Standards Board (FASB) issued
SFAS No. 160,
Non-controlling Interests
in Consolidated Financial Statements an amendment of ARB No. 51 (SFSA
160).
SFAS 160 establishes accounting and reporting standards
related to minority interests held in consolidated subsidiaries. Among other
things, it requires that:
·
The
ownership interests in subsidiaries held by parties other than the parent be
identified separately within the equity section of the statement of financial
position.
·
The
amount of net income attributable to the minority interest be presented on the
face of the consolidated statement of income.
·
Entities
provide sufficient disclosures that clearly identify and distinguish between
the interests of the parent and the interests of the minority owners.
SFAS
160 will be effective for fiscal years beginning on or after December 15,
2008, or for the Company the fiscal year ending December 26, 2009. The
Company does not have any minority interests and does not expect the adoption
of SFAS 160 to have a material effect on its financial statements.
In
December 2007, the Financial Accounting Standards Board (FASB) issued
SFAS No. 141 (Revised 2007),
Business Combinations (SFAS
141(R)).
SFAS 141(R) restates the requirement of SFAS No. 141
that the purchase method of accounting be used for business combinations
achieved through the transfer of consideration, and extends that requirement to
business combinations that previously used the pooling of interests method of
accounting, such as those achieved by contract alone or through the lapse of
minority rights. In addition, SFAS 141(R) requires that acquisition
related costs be expensed in the period in which they are incurred. SFAS 141(R) applies
prospectively to business combinations with acquisition dates on or after the
beginning of the first annual reporting period beginning on or after December 15,
2008, or for the Company the fiscal year ending December 26, 2009. The
Company does not expect the adoption of SFAS 141(R) to have a material
effect on its financial statements.
In
December 2007, the U.S. Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 110 (SAB 110). SAB 110 authorizes the
continued use of the simplified method, as discussed in SAB No. 107, in
developing an estimate of expected term of plain vanilla share options in
accordance with Statement of Financial Accounting Standards No. 123(R),
Share Based Payment.
SAB 110 is effective January 1,
2008. The Company does not expect its adoption to have a material effect on its
financial statements.
Reclassifications
Certain reclassifications have been made
to prior years amounts to conform to the current year presentation.
F-14
3. PROPERTY AND EQUIPMENT:
Property
and equipment consist of the following:
|
|
Dec 29, 2007
|
|
Dec 30, 2006
|
|
Leasehold improvements
|
|
$
|
3,138,079
|
|
$
|
2,755,807
|
|
Furniture and fixtures
|
|
2,635,838
|
|
2,531,579
|
|
Equipment under capital leases
|
|
1,416,334
|
|
1,454,129
|
|
Computer hardware and software
|
|
1,841,359
|
|
1,531,870
|
|
Equipment
|
|
656,445
|
|
612,496
|
|
|
|
|
|
|
|
Property and equipment
|
|
9,688,055
|
|
8,885,881
|
|
Less accumulated depreciation
|
|
(5,327,932
|
)
|
(4,067,888
|
)
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
4,360,123
|
|
$
|
4,817,993
|
|
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
at December 29, 2007 and December 30, 2006 was $1,416,334 and
$1,454,129, respectively. The accumulated depreciation of assets under capital
leases at December 29, 2007 and December 30, 2006 was $987,425 and
$705,551, respectively. The amortization
related to those assets under capital lease is included in depreciation
expense.
At December 29, 2007, the minimum rental
commitments under all non-cancelable capital and operating leases with initial
or remaining terms of more than one year were as follows:
Year
|
|
Capital
|
|
Operating
|
|
2008
|
|
$
|
37,636
|
|
$
|
8,551,099
|
|
2009
|
|
7,295
|
|
8,240,998
|
|
2010
|
|
|
|
7,353,041
|
|
2011
|
|
|
|
6,519,214
|
|
2012
|
|
|
|
4,924,343
|
|
Thereafter
|
|
|
|
9,278,426
|
|
Total future minimum lease payments
|
|
44,931
|
|
$
|
44,867,121
|
|
|
|
|
|
|
|
Less amount representing interest
|
|
5,245
|
|
|
|
|
|
|
|
|
|
Present value of minimum lease payments
|
|
39,686
|
|
|
|
Less current portion of obligation under capital
leases
|
|
30,473
|
|
|
|
|
|
|
|
|
|
Long-term obligation under capital leases
|
|
$
|
9,213
|
|
|
|
F-15
The
Companys rental expense under operating leases amounted to $8,857,650 in 2007,
$8,699,501 in 2006, and $7,725,856 in 2005.
Included in these amounts are contingent rentals totaling $50,643 in
2007, $47,334 in 2006, and $30,695 in 2005.
5. INCOME TAXES:
A reconciliation of the
effective rate with the federal statutory rate is as follows:
|
|
2007
|
|
2006
|
|
2005
|
|
Federal statutory rate
|
|
34.0
|
%
|
34.0
|
%
|
-34.0
|
%
|
State income taxes, net of federal benefit
|
|
9.5
|
%
|
1.9
|
%
|
0.0
|
%
|
Permanent differences
|
|
7.2
|
%
|
4.9
|
%
|
4.8
|
%
|
Change in valuation allowance
|
|
-31.3
|
%
|
-36.4
|
%
|
29.2
|
%
|
Effective tax rate
|
|
19.4
|
%
|
4.4
|
%
|
0.0
|
%
|
The Companys provision for 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
note payable amortization.
Deferred tax assets consist of the
following:
|
|
2007
|
|
2006
|
|
Net operating loss carryforwards
|
|
$
|
7,200,000
|
|
$
|
7,829,000
|
|
Inventory reserves
|
|
385,000
|
|
428,000
|
|
Deferred rent
|
|
441,000
|
|
368,000
|
|
Accrued vacation/compensation
|
|
61,000
|
|
69,000
|
|
Accrued expenses
|
|
9,000
|
|
29,000
|
|
Intangible assets
|
|
143,000
|
|
43,000
|
|
Other
|
|
|
|
4,000
|
|
Book versus tax depreciation and
amortization
|
|
99,000
|
|
(26,000
|
)
|
|
|
8,338,000
|
|
8,744,000
|
|
Less valuation allowance
|
|
(8,338,000
|
)
|
(8,744,000
|
)
|
Net deferred tax asset
|
|
$
|
|
|
$
|
|
|
The
Company has recorded a valuation allowance against its deferred tax assets
because of the uncertainty regarding the realizability of these assets against
future taxable income.
The
Company used approximately $1,436,844 and $621,692 of net operating loss
carryforwards in 2007 and 2006, respectively.
As
of December 29, 2007, the Company has estimated net operating loss
carryforwards of approximately $21.2 million, which begin to expire in 2018. 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 $56,478 in 2007, $33,509
in 2006 and $73,005 in 2005. The Company
made cash payments for federal income taxes of $0 in 2007, $0 in 2006 and $0 in
2005.
The
Company 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 December 29, 2007, the Company had no material unrecognized tax
benefits and no adjustments to liabilities, retained earnings or operations
were required.
The
Company recognizes interest and penalties related to uncertain tax positions in
income tax expense which were zero for the year ended December 29, 2007.
F-16
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.
6.
CONTRACTUAL ARRANGEMENTS:
License
Arrangement
On July 8,
2003 the Company signed 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. In return,
Taymark pays the Company a 15% royalty on all net sales realized through its
operation of www.iparty.com. The term of
this agreement is for a period of two (2) years, unless sooner
terminated. If this agreement is not
terminated, it automatically renews for successive one-year periods. On July 8, 2005, July 8, 2006 and July 8,
2007, the Company entered into one-year renewal periods.
7. RELATED PARTY TRANSACTIONS:
On September 7,
1999, the Company and Mr. Stuart Moldaw, who served as a Director of the
Company from 1999 to 2003, entered into a consulting agreement that had a term
of three years. Upon the expiration of
this agreement, the Company and Mr. Moldaw entered into an oral agreement
that Mr. Moldaw would continue to provide consulting services to the
Company. On November 6, 2003, the
Compensation Committee of the Companys Board of Directors approved a stock
option grant to Mr. Moldaw, vesting immediately, with an exercise price
set at the closing price of the Companys common stock on that day, to purchase
50,000 shares of common stock, for consulting services performed by Mr. Moldaw
in 2003. The fair value of the options
granted to Mr. Moldaw on November 6, 2003 was $25,000. On January 31, 2005, the Compensation
Committee of the Companys Board of Directors approved a stock option grant to Mr. Moldaw,
vesting immediately, with an exercise price set at the closing price of the
Companys common stock on that day, to purchase 50,000 shares of common stock,
for consulting services performed by Mr. Moldaw in 2004. The fair value of the options granted on January 31,
2005 was $28,500.
On June 8,
2005, 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 30,
2006, this amount had been earned and paid.
On June 7, 2006, 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 29,
2007, this amount had been earned and paid.
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 29,
2007, $30,000 had been earned and paid.
8.
LINE OF CREDIT:
On December 21, 2006, the Company amended
and restated its 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 the Company may increase its line
of credit up to a maximum level of $15,000,000, upon 15 days written notice, as
long as it is in compliance with all debt covenants and the other provisions of
the loan agreement. The new agreement
also adjusts the interest rate applicable to the Companys borrowings and
permits the Company at its option, to use the London Interbank Offered Rate (LIBOR)
rate for certain of its borrowings.
Inventory and accounts receivable secure the Companys line.
The amended line includes
a financial covenant requiring the Company 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
F-17
$625,000. At December 29, 2007, 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 our fiscal
year 2007 totaled $802,174, or 116% of our business plan amount. On December 28,
2007, Wells Fargo waived compliance with the capital expenditure covenant for
2007. The line generally prohibits the
payment of any dividends or other distributions to any of the Companys classes
of capital stock.
On January 17, 2006,
the Company amended its prior agreement to allow for a $500,000 term loan which
increased its borrowing base, but did not increase the $12.5 million credit
limit. The Company borrowed the full
$500,000 on that date. The interest rate
on the term loan was the banks base rate plus 125 basis points. During the time in which the term loan
remained outstanding, the interest rate on the line of credit was the banks
base rate plus 75 basis points. On October 30,
2006, the Company further amended its agreement to extend the maturity date of
its outstanding term loan in the amount of $500,000 from October 31, 2006
to January 2, 2007. On December 21,
2006, the Company further amended its agreement to extend the maturity date of its
outstanding term loan in the amount of $500,000 to October 31, 2007. The amendment entered into on January 17,
2006 also waived a default as a consequence of the fact that the principal
balance of the line of credit exceeded availability on January 12,
2006. The term loan was paid in full on March 2,
2007.
On August 7, 2006,
the Company further amended its prior agreement with Wells Fargo to permit it
to enter into a Supply Agreement with Amscan and an Asset Purchase Agreement
with Party City. The amendment also
allows for the Company to incur the indebtedness represented by the Amscan Note
and the Party City Note, and to incur other unsecured subordinated indebtedness
consented to by Wells Fargo.
The amounts outstanding
under the line as of December 29, 2007 and December 30, 2006 were
$2,613,511 and $1,162,719, respectively.
The interest rate on these borrowings was 8.2% at December 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 the Company is required to
apply daily lock box receipts to reduce the amount outstanding. At December 29, 2007, the Company had
approximately $4,354,468 of additional availability under the line. In the third quarter of fiscal 2004, the
Company established a letter of credit for $356,000 with Wells Fargo Bank, N.A.
associated with the leasing of its new point-of-sale system. On May 22, 2007, this letter of credit
was released.
The Company made cash
payments for interest due under the line of $645,392 in 2007, $748,656 in 2006
and $501,826 in 2005.
9. NOTES PAYABLE:
Notes payable consist of
three notes entered into in fiscal 2006.
The Highbridge Note is
a subordinated note in the stated principal amount of $2,500,000 that bears
interest at the rate of prime plus one percent.
The note matures on September 15, 2009. Interest only is payable quarterly in arrears
and the entire principal balance is due at the maturity date. The original
discount associated with the warrant issued in conjunction with the Highbridge
Note (original discount amount $613,651) is being amortized using the effective
interest method over the life of the note payable. The note payable balance of
$2,159,083 as of December 29, 2007 is presented net of the remaining
unamortized discount.
The Amscan Note is a
subordinated promissory note in the original principal amount of $1,819,373,
with a balance as of December 29, 2007 of $1,133,255. The note bears
interest at the rate of 11.0% per annum and is payable in thirty-six (36) equal
monthly installments of principal and interest of $59,562 beginning on November 1,
2006, and on the first day of each month thereafter until October 1, 2009,
when the entire remaining principal balance and all accrued interest are due
and payable.
The Party City Note is
a subordinated promissory note in the principal amount of $600,000. The note bears interest at the rate of
12.25% per annum and is payable by quarterly interest-only payments over four
years, with the full principal amount due at the notes maturity on August 7,
2010.
F-18
On August 7, 2006,
the Company entered into a Supply Agreement with Amscan Inc. (Amscan), the
largest supplier in the party goods industry.
The Company purchased approximately 18.4% and 16.0% of its merchandise
from Amscan in each of fiscal 2007 and 2006, respectively making Amscan its
largest supplier.
The Supply Agreement with
Amscan gives the Company the right to receive certain additional rebates and
more favorable pricing terms over the term of the agreement than generally were
available to the Company under its previous terms with Amscan. The right to receive additional rebates, and
the amount of such rebates, are subject to the 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 provides for a 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. The Supply
Agreement provides for penalties in the event the Company fails to attain the
annual purchase commitment.
The Supply Agreement also
provided for Amscan to extend, until October 31, 2006, approximately
$1,150,000 of certain currently due Amscan payables 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 elected to convert $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).
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 (the Party City Note) and $1,850,000 in
cash.
10. PREFERRED STOCK:
The
following table summarizes the changes in the number of shares of convertible
preferred stock during the past two years:
|
|
Shares
Issued
and
Outstanding
as of 12/29/07
|
|
Conversions
to
Common
Stock
|
|
Shares
Issued
and
Outstanding
as of 12/30/06
|
|
Conversions
to
Common
Stock
|
|
Shares
Issued
and
Outstanding
as of 12/31/05
|
|
Series B convertible preferred stock
|
|
465,401
|
|
(6,000
|
)
|
471,401
|
|
(3,000
|
)
|
474,401
|
|
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
|
|
1,226,353
|
|
(6,000
|
)
|
1,232,353
|
|
(3,000
|
)
|
1,235,353
|
|
Series B Convertible
Preferred Stock
The shares of Series B
convertible preferred stock are immediately convertible into 6,234,512 shares
of common stock on a 1.000 to 13.396 ratio at December 29, 2007, and carry
an aggregate liquidation value of $9,308,024 ($1.49 per common share issuable
upon conversion) at December 29, 2007.
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
F-19
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.
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 (the Highbridge Warrant) is exercisable for 2,083,334 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
preferred stock convert increased by 249,254 additional shares.
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 29, 2007, and carry
an aggregate liquidation value of $2,000,000 ($1.47 per common share issuable
upon conversion) at December 29, 2007.
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.
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 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 C preferred stock convert increased
by 54,600 additional shares.
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.
F-20
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 29, 2007, and carry
an aggregate liquidation value of $5,000,000 ($1.37 per common share issuable
upon conversion) at December 29, 2007.
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.
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 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 D preferred stock convert increased
by 138,500 additional shares.
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 29, 2007, and carry
an aggregate liquidation value of $1,112,497 ($0.36 per common share issuable
upon conversion) at December 29, 2007.
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.
F-21
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 29, 2007, and carry
an aggregate liquidation value of $500,000 ($0.42 per common share issuable
upon conversion) at December 29, 2007.
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.
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, which
the Company allocated value to 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 $4,238,354 on December 29, 2007.
11. WARRANTS:
On August 26,
2005, warrants issued in connection with the issuance of Series B and Series C
convertible preferred stock which were exercisable for 9,157,619 shares of
common stock expired without being exercised.
On September 10, 2005, warrants issued in connection with the
issuance of Series B and Series C convertible preferred stock which
were exercisable for 1,487,886 shares of common stock expired without being exercised. On December 20, 2005, warrants issued
in connection with the issuance of Series D convertible preferred stock
which were exercisable for 1,837,500 shares of common stock expired without
being exercised.
At December 29,
2007, there were warrants outstanding which were exercisable for 2,611,544
shares of the Companys common stock.
These warrants were issued in connection with certain preferred stock
and subordinated debt financings.
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 our 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 is being amortized using the effective interest method over the life of
the Highbridge Note. The agreements
entered into in connection with the financing provide 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.
F-22
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. The weighted average
exercise price of these warrants at December 29, 2007 was $3.79 per share.
These warrants expire between April and August 2009.
The following table summarizes the Companys
outstanding warrants at December 29, 2007:
Total
Common
Shares
Issuable
|
|
Exercise
Price per
Common
Share
Issuable
|
|
Expiration
Date
|
|
146,341
|
|
$
|
5.13
|
|
04/16/09
|
|
121,212
|
|
4.13
|
|
05/13/09
|
|
44,444
|
|
2.81
|
|
06/15/09
|
|
47,619
|
|
2.63
|
|
06/22/09
|
|
40,816
|
|
3.06
|
|
07/15/09
|
|
44,444
|
|
2.81
|
|
07/22/09
|
|
83,334
|
|
3.00
|
|
08/15/09
|
|
2,083,334
|
|
0.48
|
|
09/15/11
|
|
2,611,544
|
|
$
|
1.14
|
|
|
|
12. STOCK OPTION PLAN:
Under
the Companys Amended and Restated 1998 Incentive and Nonqualified Stock Option
Plan (the 1998 Plan) options to acquire 11,000,000 shares of common stock may
be granted to officers, directors, key employees and consultants. The exercise price for qualified incentive
options cannot be less than the fair market value of the stock on the grant
date and the exercise price of nonqualified options can be fixed by the
Board. Incentive and Nonqualified
options to purchase the Companys common stock under the 1998 Plan have been
granted to employees, directors and consultants of the Company at fair market
value at the date of grant. Generally,
the options become exercisable over periods of up to four years, and expire ten
years from the date of grant.
On January 1,
2006, the Company adopted the Financial Accounting Standards Board (FASB)
Statement No. 123(R),
Share-Based Payments
,
using the modified prospective method.
Under this method, stock based compensation expense is recognized for
new grants beginning in fiscal 2006 and any unvested grants prior to the
adoption of Statement No. 123(R).
Prior to fiscal 2006, the Company accounted for share-based payments to
employees using the 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
. Because the
Company granted stock options to employees at exercise prices equal to fair
market value on the date of grant, no stock based compensation cost was
recognized for option grants in periods prior to fiscal 2006.
F-23
A
summary of the Companys stock options is as follows:
|
|
Number of
Shares of
Common Stock
Underlying
Stock Options
|
|
Weighted
Average
Exercise
Price
|
|
Price Range
|
|
Outstanding - December 25, 2004
|
|
10,015,127
|
|
0.96
|
|
0.13
|
|
|
|
5.38
|
|
Granted
|
|
495,578
|
|
0.54
|
|
0.45
|
|
|
|
0.70
|
|
Expired/Forfeited
|
|
(151,490
|
)
|
0.45
|
|
0.18
|
|
|
|
1.33
|
|
Exercised
|
|
(18,374
|
)
|
0.20
|
|
0.18
|
|
|
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding - December 31, 2005
|
|
10,340,841
|
|
0.95
|
|
0.13
|
|
|
|
5.38
|
|
Granted
|
|
100,000
|
|
0.36
|
|
0.36
|
|
|
|
0.36
|
|
Expired/Forfeited
|
|
(1,491,086
|
)
|
2.91
|
|
0.13
|
|
|
|
5.38
|
|
Exercised
|
|
(27,315
|
)
|
0.20
|
|
0.16
|
|
|
|
0.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding - December 30, 2006
|
|
8,922,440
|
|
0.62
|
|
0.13
|
|
|
|
4.25
|
|
Granted
|
|
1,350,000
|
|
0.42
|
|
0.42
|
|
|
|
0.42
|
|
Expired/Forfeited
|
|
(125,444
|
)
|
0.54
|
|
0.20
|
|
|
|
0.69
|
|
Exercised
|
|
(16,402
|
)
|
0.28
|
|
0.23
|
|
|
|
0.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding - December 29, 2007
|
|
10,130,594
|
|
0.59
|
|
0.13
|
|
|
|
4.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable - December 29, 2007
|
|
8,799,073
|
|
$
|
0.62
|
|
$
|
0.13
|
|
|
|
$
|
4.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information for
options outstanding and exercisable at December 29, 2007:
|
|
Outstanding
|
|
Exercisable
|
|
Price Range
|
|
Number of
Shares of
Common Stock
Underlying
Stock Options
|
|
Weighted
Average
Remaining
Life
(Years)
|
|
Weighted
Average
Exercise
Price
|
|
Number
of
Stock
Options
|
|
Weighted
Average
Exercise
Price
|
|
|
$
|
0.13
|
-
|
$
|
0.20
|
|
139,250
|
|
3.6
|
|
$
|
0.18
|
|
139,250
|
|
$
|
0.18
|
|
0.21
|
-
|
0.30
|
|
3,788,682
|
|
2.8
|
|
0.25
|
|
3,788,682
|
|
0.25
|
|
0.31
|
-
|
0.50
|
|
2,474,527
|
|
7.3
|
|
0.39
|
|
1,151,953
|
|
0.36
|
|
0.51
|
-
|
1.00
|
|
3,086,935
|
|
4.7
|
|
0.77
|
|
3,077,988
|
|
0.78
|
|
1.01
|
-
|
3.50
|
|
541,200
|
|
1.6
|
|
2.33
|
|
541,200
|
|
2.33
|
|
3.51
|
-
|
4.25
|
|
100,000
|
|
2.0
|
|
4.14
|
|
100,000
|
|
4.14
|
|
Total
|
|
|
|
10,130,594
|
|
4.4
|
|
$
|
0.59
|
|
8,799,073
|
|
$
|
0.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has reserved
28,252,066 shares of common stock for issuance in connection with the
conversion of convertible preferred stock (15,509,928 shares), the exercise of
warrants (2,611,544 shares) and the exercise of stock options (10,130,594
shares).
F-24
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 rights plan to clarify that the issuance of the
Highbridge Warrant did not constitute a triggering event under the rights 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 $120,084 in 2007, $108,863 in 2006 and $113,127 in
2005.
15. SEGMENT REPORTING:
SFAS No. 131,
Disclosures
about Segments of an Enterprise and Related Information
, establishes
standards for the way business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to stockholders. The
Company reports one operating segment as revenues from the other segment are
not material.
16. SUBSEQUENT EVENTS:
On January 2,
2008, the Company completed the purchase from the franchisees of two franchised
Party City Corporation (Party City) retail stores in Lincoln, Rhode Island
and Warwick, Rhode Island. The purchase was made pursuant to the
Asset Purchase Agreement entered into on August 15, 2007 (the Asset
Purchase Agreement). The aggregate consideration for the assets purchased and
related non-competition covenants was $1,350,000, plus approximately $195,000
for associated inventory, paid in cash at closing, on terms and conditions
specified in the Asset Purchase Agreement.
Funding for the purchase was obtained from the Companys existing line
of credit with Wells Fargo Retail Finance. Both locations were converted into
iParty stores immediately following the closing.
The Asset Purchase
Agreement also provides that the selling Party City franchisees and their
affiliates will not compete with iParty in Rhode Island for a period of five
years from closing, and will not compete with iParty within a three-and-one-half
mile radius anywhere in Massachusetts, Rhode Island, New Hampshire, Vermont,
Maine, or Connecticut for a three-year period from closing, subject to certain
terms specified more fully in the Asset Purchase Agreement.
F-25
17. QUARTERLY FINANCIAL DATA (UNAUDITED):
QUARTERLY FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mar 31, 2007
|
|
Jun 30, 2007
|
|
Sep 29, 2007
|
|
Dec 29, 2007
|
|
Revenues
|
|
$
|
15,599,159
|
|
$
|
20,411,919
|
|
$
|
18,208,760
|
|
$
|
27,578,796
|
|
Cost of products sold (1), (2)
|
|
9,371,315
|
|
11,554,475
|
|
10,638,322
|
|
14,901,329
|
|
Operating income (loss)
|
|
(1,241,087
|
)
|
788,549
|
|
(878,851
|
)
|
2,929,209
|
|
Net income (loss)
|
|
(1,467,397
|
)
|
558,537
|
|
(1,092,267
|
)
|
2,612,818
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.06
|
)
|
$
|
0.01
|
|
$
|
(0.05
|
)
|
$
|
0.07
|
|
Diluted
|
|
$
|
(0.06
|
)
|
$
|
0.01
|
|
$
|
(0.05
|
)
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
22,614,544
|
|
38,199,738
|
|
22,642,280
|
|
38,210,588
|
|
Diluted
|
|
22,614,544
|
|
40,054,445
|
|
22,642,280
|
|
39,411,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Apr 1, 2006
|
|
Jul 1, 2006
|
|
Sep 30, 2006
|
|
Dec 30, 2006
|
|
Revenues
|
|
$
|
13,545,799
|
|
$
|
18,587,169
|
|
$
|
17,240,535
|
|
$
|
29,084,826
|
|
Cost of products sold (1), (2)
|
|
8,429,170
|
|
10,803,021
|
|
10,178,878
|
|
15,531,473
|
|
Operating income (loss)
|
|
(1,931,745
|
)
|
386,720
|
|
(1,162,116
|
)
|
3,861,184
|
|
Net income (loss)
|
|
(2,089,273
|
)
|
216,727
|
|
(1,384,401
|
)
|
3,631,594
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.09
|
)
|
$
|
0.01
|
|
$
|
(0.06
|
)
|
$
|
0.10
|
|
Diluted
|
|
$
|
(0.09
|
)
|
$
|
0.01
|
|
$
|
(0.06
|
)
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
22,544,257
|
|
37,728,932
|
|
22,555,333
|
|
38,191,009
|
|
Diluted
|
|
22,544,257
|
|
39,283,126
|
|
22,555,333
|
|
40,186,640
|
|
(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 2007 included an estimated reduction of $123,249 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.
(2) The fourth quarter
of 2006 included an estimated reduction of $251,806 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-26
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.
|
10.10
|
(22)
|
##
|
|
Employment Agreement
between iParty Corp. and Dorice Dionne, dated March 22, 2007.
|
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.
|
10.13
|
(23)
|
##
|
|
Written Summary of
Renewed One-Year Part-time Consulting Arrangement with Joseph Vassalluzzo
dated June 7, 2007.
|
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.
|
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.
|
F-27
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
|
21.1
|
**
|
|
|
Subsidiaries 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.
|
(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.
|
F-28
(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.
|
F-29
Iparty (AMEX:IPT)
Historical Stock Chart
From Jun 2024 to Jul 2024
Iparty (AMEX:IPT)
Historical Stock Chart
From Jul 2023 to Jul 2024