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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-K

 

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

 

For The Fiscal Year Ended December 25, 2004

 

OR

 

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Transition Period from               to               

 

Commission File Number 0-25507

 


 

iPARTY CORP.

(Exact Name of Registrant as Specified in Its Charter)

 

DELAWARE

 

76-0547750

(State or Other Jurisdiction of
Incorporation or Organization)

 

(IRS Employer
Identification No.)

 

 

 

270 BRIDGE STREET, SUITE 301
DEDHAM, MASSACHUSETTS

 

02026

(Address of Principal Executive Offices)

 

(Zip Code)

 

 

 

(781) 329-3952

(Registrant’s Telephone Number, Including Area Code)

 


 

Securities Registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange on Which Registered

COMMON STOCK, $.001 PAR VALUE

 

AMERICAN STOCK EXCHANGE

 

Securities Registered pursuant to Section 12(g) of the Act:  None

 

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý  No o 

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý 

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes o  No ý 

 

On June 26, 2004, the aggregate market value of the voting common equity of the registrant (consisting of common stock, $.001 par value (the “common stock”)) held by nonaffiliates of the registrant was approximately $14,091,685 based on the closing price for such common stock on said date as reported by the American Stock Exchange.  On March 21, 2005 there were 22,115,239 shares of common stock, $.001 par value, issued and outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the proxy statement for the annual stockholders’ meeting to be held June 8, 2005 are incorporated by reference into Part III.

 

 



 

PART I

 

ITEM 1.  BUSINESS

 

General

 

We believe we are a leading brand in the party industry in the markets we serve and a leading resource in those markets for consumers seeking party goods, party planning advice and relevant information.  We are a party goods retailer operating stores throughout New England, where 41 of our 45 retail stores are located.  We also license the name iParty.com (at www.iparty.com) to a third party in exchange for royalties, which to date have not been significant.  We generated $64.3 million in total revenues and $1.0 million of net income in fiscal 2004.

 

Our 45 retail stores are located predominantly in New England with 23 stores in Massachusetts, 7 in Connecticut, 5 in New Hampshire, 3 in Rhode Island, 2 in Maine and 1 in Vermont.  We also operate 4 stores in Florida.  Our stores range in size from approximately 8,000 square feet to 20,300 square feet and average approximately 9,800 square feet in size.  We lease our properties, typically for 10 years and usually with options from our landlords to renew our leases for an additional 5 or 10 years.

 

Our stores feature over 20,000 products ranging from greeting cards and balloons to more unique merchandise such as piñatas, tiny toys, masquerade and Hawaiian Luau items.  Our sales are driven by the following events:  Halloween, Christmas, Easter, Valentine’s Day, New Year’s, Independence Day, St. Patrick’s Day, Thanksgiving and Chanukah.  We also focus our business closely on lifetime events such as anniversaries, graduations, birthdays, and bridal or baby showers.

 

Our business has a seasonal pattern.  In the past two years we have realized approximately 37% of our annual revenues in our fourth quarter, which includes Halloween and Christmas, and approximately 24% of our revenues in the second quarter, which includes school graduations.  Also, during these past two years, we have had net income in our second and fourth quarters and generated losses in our first and third quarters.

 

Our executive offices are located at 270 Bridge Street, Suite 301, Dedham, Massachusetts, 02026.  Our phone number is (781) 329-3952.  Our licensed website is located at www.iparty.com.  The information on our licensed website is not a part of this Annual Report.

 

Where a reference is made in this Annual Report to a particular year or years, it is a reference to our 52-week fiscal year, unless the context indicates otherwise.  For example, “2004” refers to our 52-week fiscal year ended December 25, 2004, “2003” refers to our 52-week fiscal year ended December 27, 2003 and “2002” refers to our 52-week fiscal year ended December 28, 2002.

 

Organization

 

While we are presently a party goods retail chain operating 45 stores, when we were first incorporated as iParty Corp. (“iParty”) on March 12, 1998 we were an Internet-based merchant of party goods and services.  On July 2, 1998, iParty Corp. merged into WSI Acquisitions, Corp. and began trading on the OTC Bulletin Board under ticker symbol “IPTY”.  On January 2, 2000, iParty Corp. was listed on the American Stock Exchange under ticker symbol “IPT”.

 

On August 3, 2000, iParty Retail Stores Corp. (“iParty Retail”) was incorporated as a wholly-owned subsidiary of iParty Corp. to operate a chain of retail stores selling party goods.  On August 15, 2000, iParty Retail acquired inventory, fixed assets and the leases of 33 retail stores from The Big Party Corporation (“The Big Party”), a privately-held company which was operating under bankruptcy protection, in exchange for cash and the assumption of certain liabilities.  This acquisition was approved on August 16, 2000 by the United States Bankruptcy Court for the District of Delaware.  We subsequently opened an additional 11 stores through December 25, 2004 and one store since the end of fiscal 2004.

 

On July 8, 2003, we signed an agreement with Taymark, Inc. (“Taymark) to license the iParty.com name to Taymark.  In return, Taymark pays us 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

 

1



 

agreement is not terminated, it is automatically renewed for successive one-year periods.  Previously, we operated the website with Taymark under a fulfillment agreement.

 

Capital Structure

 

Our capital structure currently consists of common stock and five series of convertible preferred stock.  We have also issued warrants and we have a stock option plan.

 

Our common stock has a par value of $0.001 per share.  We have 150,000,000 shares of common stock authorized, 22,092,717 of which were issued and outstanding as of December 25, 2004.  These shares are listed on the American Stock Exchange and trade under the symbol “IPT”.

 

We currently have five different series of convertible preferred stock, Series B-F.  On January 13, 2004 all 1,000,000 shares of our Series A convertible preferred stock were converted into 1,000,000 shares of common stock.  Each share of Series B convertible preferred stock is presently convertible into 12.870 shares of common stock.  Each share of Series C convertible preferred stock is presently convertible into 13.106 shares of common stock.  Each share of Series D convertible preferred stock is presently convertible into 14.055 shares of common stock.  Each share of Series E convertible preferred stock is presently convertible into 10.359 shares of common stock.  Each share of Series F convertible preferred stock is presently convertible into 10.367 shares of common stock.  We had a total of 1,268,413 shares of convertible preferred stock outstanding as of December 25, 2004, which were convertible into 15,613,426 shares of common stock at that date.  Our convertible preferred stock is presented on our balance sheet at its carrying value, which was $14,308,002 at December 25, 2004.

 

We also have a stockholder rights plan (the “rights plan”).  The rights plan associates rights to our capital stock, such that each share of our common stock is entitled to one right and each share of our preferred stock is entitled to such number of rights equal to the number of common shares into which it is convertible.  The rights will become exercisable only in the event that, with certain exceptions, an acquiring party accumulates 10 percent or more of our voting stock or if a party announces an offer to acquire 15 percent or more of our voting stock.  When exercisable, each right entitles the holder to purchase from us one one-hundredth of a share of a new series of Series G junior preferred stock at an initial purchase price of $2.00, subject to adjustment.  In addition, upon the occurrence of certain events, holders of the rights will be entitled to purchase either iParty Corp. stock or shares in an “acquiring entity” at half of market value.

 

The holders of our convertible preferred stock have a liquidation preference senior to the holders of our common stock.  In the event of liquidation, our convertible preferred stockholders would be entitled to a liquidation value, which was $18,761,700 at December 25, 2004.  This amount is in excess of the carrying value of the preferred stock due to amounts allocated to warrants, which were issued in connection with certain issuances of our convertible preferred stock.  The difference of approximately $4.5 million is being accreted when and if a liquidation event occurs.  The holders of our Series B-F convertible preferred stock are also entitled to anti-dilution protection in the event we issue common stock, or certain rights, including option activity in excess of certain amounts, to purchase or convert into common stock, at a price below their conversion prices.

 

The Series B-F preferred stockholders are entitled to participate in dividends when and if declared by our Board of Directors.

 

We have also issued warrants in connection with the issuance of certain convertible preferred stock and certain licensing and marketing arrangements.  At December 25, 2004 we had 8,431,651 warrants outstanding, which were exercisable for 13,011,215 shares of our common stock.  Substantially all of the warrants contain anti-dilution provisions.  Their conversion prices would be adjusted in the event we issue common stock, or certain rights, including option activity in excess of certain amounts, to purchase or convert into common stock, at a price below their exercise prices.  There are 7,903,441 warrants scheduled to expire in August 2005, representing 94% of the total warrants outstanding at December 25, 2004.

 

Under our stock option plan we are authorized to grant options to purchase up to 11,000,000 shares of our common stock.  At December 25, 2004, we had options outstanding that were exercisable for the purchase of 10,031,817 shares of common stock.

 

2



 

The following chart summarizes our capital structure at December 25, 2004.

 

 

 

Number of
Shares/
Warrants/
Options
Outstanding

 

Conversion/
Exercise
Ratios

 

Total
Common
Shares
Issued and
Issuable (
1)

 

Weighted
Average
Exercise
Price per
Common
Share
Issuable

 

Liquidation
Value

 

Common stock

 

22,092,717

 

 

 

22,092,717

 

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

Series B convertible preferred stock

 

507,460

 

12.870

 

6,531,105

 

 

 

10,149,200

 

Series C convertible preferred stock

 

100,000

 

13.106

 

1,310,600

 

 

 

2,000,000

 

Series D convertible preferred stock

 

250,000

 

14.055

 

3,513,750

 

 

 

5,000,000

 

Series E convertible preferred stock

 

296,667

 

10.359

 

3,073,168

 

 

 

1,112,500

 

Series F convertible preferred stock

 

114,286

 

10.367

 

1,184,803

 

 

 

500,000

 

Total convertible preferred stock

 

1,268,413

 

 

 

15,613,426

 

 

 

18,761,700

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants

 

528,210

 

1.000

 

528,210

 

$

3.79

 

 

Warrants

 

5,223,512

 

1.600

 

8,357,619

 

1.25

 

 

Warrants

 

500,000

 

1.600

 

800,000

 

1.25

 

 

Warrants

 

929,929

 

1.600

 

1,487,886

 

1.25

 

 

Warrants

 

1,250,000

 

1.470

 

1,837,500

 

1.36

 

 

Total warrants

 

8,431,651

 

 

 

13,011,215

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

10,031,817

 

1.000

 

10,031,817

 

$

0.96

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

60,749,175

 

 

 

$

18,761,700

 

 


(1)  Includes common stock outstanding and common stock issuable upon conversion of convertible preferred stock and exercise of outstanding warrants and stock options.

 

Competition

 

The party supplies retailing business is highly competitive.  We compete with a variety of smaller and larger retailers, including single owner-operated party supplies stores, specialty party supplies retailers, discount department stores, general mass merchants and supermarkets, as well as catalog and Internet merchants.

 

Barriers to entry are minimal.  New competitors can open new stores and/or launch new Internet sites at a relatively low cost.  However, we believe that the costs to remain competitive in the party supplies retailing business can be significant.  These costs include the hiring of human resources with industry knowledge and the marketing costs associated with building a widely recognized brand.

 

Certain Risks Associated with the Party Supplies Industry and Our Business

 

Party supplies businesses are often affected by general economic developments affecting consumer confidence or spending patterns, especially the conditions in existence during the Halloween season, which is usually the most important season for the party supplies industry, the availability of retail store space on reasonable lease terms, the cost and availability of labor, availability of products and the type, number and location of competing retailers.  In addition, factors such as increased cost of goods, increased cost of raw materials, such as petroleum based products, which are important components of our vendors’ costs, increased cost of gasoline, which affects freight costs, unseasonable weather and the potential scarcity of experienced management and hourly employees may also adversely affect the party supplies industry in general and our results of operations and

 

3



 

financial condition in particular.  We are subject to all of these risks, particularly as they relate to the New England region, since 41 of our stores are located in this area.  For a more complete list of the risk factors affecting our business, please see the Cautionary Statements and Risk Factors text within Item 7., Management’s Discussion and Analysis of Financial Condition and Results of Operations, within this Annual Report.

 

Intellectual Property

 

We hold trademarks for “iParty” and “iParty.com” issued by the U.S. Patent and Trademark Office.  Trademark registrations for “iParty” were issued on February 19, 2002 and August 26, 2003 under U.S. registration No. 2,541,025 and No. 2,756,735.  The trademark registration for “iParty.com” was issued on November 12, 2002 under U.S. registration No. 2,649,801.

 

Employees

 

As of March 1, 2005 we had 249 full-time employees and 598 part-time employees.  None of these employees are represented by a labor union, and we consider our relationship with our employees to be good.

 

Available Information

 

Our licensed Internet website address is www.iparty.com.  Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available through our licensed Internet website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.  Our licensed Internet website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K.

 

The public may read and copy any materials that we file with the SEC at the SEC’s website, www.sec.gov, which contains reports, proxy and information statements and other information that public companies are required to file with the SEC.  In addition, the public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C., 20549.  The public may obtain information about the SEC’s Public Reference Room by calling 1-800-SEC-0330.

 

ITEM 2.  PROPERTIES

 

The following table identifies the number of our stores operating as of December 25, 2004, December 27, 2003 and December 28, 2002, by state.

 

 

 

Number of Stores, for the fiscal year ended

 

 

 

Dec 25, 2004

 

Dec 27, 2003

 

Dec 28, 2002

 

States

 

End of
Period

 

Closings

 

Openings

 

End of
Period

 

Closings

 

Openings

 

End of
Period

 

Closings

 

Openings

 

Connecticut

 

6

 

 

 

6

 

 

1

 

5

 

 

 

Florida

 

4

 

 

1

 

3

 

 

 

3

 

 

 

Maine

 

2

 

 

1

 

1

 

 

 

1

 

 

 

Massachusetts

 

23

 

 

2

 

21

 

 

2

 

19

 

 

1

 

New Hampshire

 

5

 

 

1

 

4

 

 

 

4

 

 

1

 

Rhode Island

 

3

 

 

 

3

 

 

 

3

 

 

 

Vermont

 

1

 

 

1

 

 

 

 

 

 

 

Total

 

44

 

 

6

 

38

 

 

3

 

35

 

 

2

 

 

Since the end of 2004 we have opened one additional store, bringing our store count up to 45.  Our stores range in size from approximately 8,000 square feet to approximately 20,300 square feet and average approximately 9,800 square feet.  We lease all of our retail stores.  The leases generally provide for fixed minimum rentals, which typically increase periodically during the life of the lease, and, in some instances, contingent rentals based on a

 

4



 

percentage of sales in excess of specified minimum sales levels, as well as related occupancy costs, such as property taxes and common area maintenance.  We lease our properties, typically for 10 years and usually with options from our landlords to renew our leases for an additional 5 or 10 years.

 

In addition to our 45 stores, we lease office space at 270 Bridge Street, Suite 301, Dedham, Massachusetts, 02026.  The lease, which expires November 30, 2011, is for 10,600 square feet of space and the monthly rent is $17,500.  We also lease office and retail space at 1457 VFW Parkway, West Roxbury, Massachusetts, 02132.  This lease, which expires December 31, 2012, is for 20,000 square feet of space.  The retail store at our West Roxbury location uses 10,688 square feet and the remainder is used primarily for our corporate training center.  The total monthly rent for the retail store and corporate office space is $17,100, subject to certain Consumer Price Index escalation clauses.  We believe that these spaces are adequate for our immediate needs.  However, we are currently evaluating whether we need to add approximately 3,000 square feet of office space within the next 12 months to support the growth of our business.

 

We believe that all properties are adequately covered by insurance.

 

ITEM 3.  LEGAL PROCEEDINGS

 

We are not a party to any material pending legal proceedings other than ordinary routine matters incidental to our business.

 

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

No matters were submitted to a vote of our security holders during the fourth quarter of fiscal 2004.

 

PART II

 

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

The American Stock Exchange is the principal market for our common stock, where our shares are traded under the symbol “IPT”.  Our common stock began trading on the American Stock Exchange under the name iParty Corp., symbol “IPT”, on January 2, 2000.  Our common stock was quoted previously on the OTC Electronic Bulletin Board under the name iParty Corp., symbol “IPTY”, commencing July 1998.  Prior to that time, from February 1998 until July 1998, our common stock was quoted on the OTC Bulletin Board under the name of WSI Acquisitions, Inc., symbol “WSIA”.

 

The following table sets forth the range of high and low sales prices on the American Stock Exchange for our common stock for each of the fiscal quarters of 2004 and 2003:

 

MARKET PRICE OF COMMON STOCK

 

Period

 

High

 

Low

 

2004

 

 

 

 

 

Fourth quarter

 

$

0.89

 

$

0.65

 

Third quarter

 

0.97

 

0.58

 

Second quarter

 

1.32

 

0.81

 

First quarter

 

1.63

 

0.78

 

2003

 

 

 

 

 

Fourth quarter

 

$

1.34

 

$

0.53

 

Third quarter

 

0.74

 

0.23

 

Second quarter

 

0.32

 

0.20

 

First quarter

 

0.26

 

0.13

 

 

The approximate number of record holders of our common stock as of March 21, 2005 was 117.  The number of record owners was determined from our stockholder records, and does not include beneficial owners of our

 

5



 

common stock whose shares are held in the names of various security holders, dealers and clearing agencies.  We believe that the number of beneficial owners of our common stock held by others as or in nominee names exceeds 500 in number.

 

We have never paid a cash dividend on our shares of common stock and have no expectation of doing so for the foreseeable future.  Our existing line of credit agreement with Wells Fargo Retail Finance II, LLC generally prohibits the payment of any dividends or other distributions to any of our classes of capital stock.

 

6



 

ITEM 6.  SELECTED FINANCIAL DATA

 

 

 

2004

 

2003

 

2002

 

2001

 

2000

 

Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

64,276,225

 

$

56,697,246

 

$

52,177,923

 

$

47,983,404

 

$

18,619,877

 

Operating costs:

 

 

 

 

 

 

 

 

 

 

 

Cost of products sold

 

35,826,820

 

31,758,625

 

30,420,475

 

28,966,573

 

11,734,011

 

Marketing and sales

 

21,176,925

 

18,363,193

 

16,527,832

 

15,345,744

 

18,456,073

 

General and administrative

 

6,335,067

 

5,516,273

 

5,245,867

 

5,522,688

 

3,502,169

 

Amortization of fulfillment partner warrant

 

 

 

 

 

4,532,930

 

Restructuring expenses

 

 

 

 

 

1,093,328

 

Loss resulting from abandonment of assets

 

 

 

 

 

5,784

 

Special charge

 

 

 

396,465

 

 

 

Stock option compensation expense

 

 

 

 

320,373

 

812,510

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

937,413

 

1,059,155

 

(412,716

)

(2,171,974

)

(21,516,928

)

 

 

 

 

 

 

 

 

 

 

 

 

Other income

 

382,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before interest and taxes

 

1,319,913

 

1,059,155

 

(412,716

)

(2,171,974

)

(21,516,928

)

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

1,354

 

1,262

 

9,045

 

117,431

 

733,163

 

Interest expense

 

(225,074

)

(212,227

)

(280,898

)

(381,763

)

(149,346

)

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before taxes

 

1,096,193

 

848,190

 

(684,569

)

(2,436,306

)

(20,933,111

)

 

 

 

 

 

 

 

 

 

 

 

 

Income taxes

 

105,000

 

97,233

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

991,193

 

$

750,957

 

$

(684,569

)

$

(2,436,306

)

$

(20,933,111

)

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) available to common stockholders

 

$

991,193

 

$

750,957

 

$

(774,719

)

$

(2,436,306

)

$

(23,182,465

)

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.03

 

$

0.02

 

$

(0.04

)

$

(0.18

)

$

(1.85

)

Diluted

 

$

0.02

 

$

0.02

 

$

(0.04

)

$

(0.18

)

$

(1.85

)

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share available to common stockholders

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.03

 

$

0.02

 

$

(0.05

)

$

(0.18

)

$

(2.05

)

Diluted

 

$

0.02

 

$

0.02

 

$

(0.05

)

$

(0.18

)

$

(2.05

)

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

37,649,400

 

36,683,142

 

16,219,436

 

13,411,866

 

11,321,578

 

Diluted

 

41,517,036

 

38,868,484

 

16,219,436

 

13,411,866

 

11,321,578

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Data:

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

$

129,690

 

$

1,368,798

 

$

581,930

 

$

(2,616,844

)

$

(14,159,135

)

Net cash used in investing activities

 

(2,121,134

)

(1,166,258

)

(775,147

)

(210,738

)

(4,086,471

)

Net cash provided by (used in) financing activities

 

1,306,130

 

(86,412

)

120,476

 

224,412

 

4,574,556

 

Capital expenditures (1)

 

2,121,134

 

1,166,258

 

775,147

 

210,738

 

202,059

 

 

 

 

Dec 25, 2004

 

Dec 27, 2003

 

Dec 28, 2002

 

Dec 29, 2001

 

Dec 30, 2000

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

Working capital

 

$

3,236,148

 

$

4,178,436

 

$

4,021,692

 

$

4,841,696

 

$

6,455,832

 

Total assets

 

19,479,937

 

15,151,980

 

13,815,883

 

14,533,218

 

16,343,053

 

Total long-term liabilities and convertible preferred stock (2)

 

1,268,452

 

406,469

 

19,266,414

 

20,929,419

 

23,458,131

 

 


(1)  Capital expenditures exclude assets acquired under capital leases.

 

(2)  The holders of our Series A-F convertible preferred stock have the right to a liquidation preference, which was not considered under our control in 2002, 2001 and 2000.  Therefore their carrying values have been excluded from stockholders’ equity for these periods.  Their carrying values are included in stockholders’ equity in 2004 and 2003 as redemption is deemed to be solely within our control.

 

7



 

ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion should be read in conjunction with our Consolidated Financial Statements and the related Notes included below.

 

Overview

 

At the end of 2004 we operated 44 retail stores, including 40 in New England and 4 in Florida, and for the year we had net income of approximately $1.0 million, our second consecutive year of being profitable.  We opened six new stores in 2004, twice as many as we had opened in 2003.  In 2004 we also achieved a 4.6% increase in comparable stores sales, defined as sales from those stores open for at least one full year.  This marks our third consecutive year of solid comparable store sales growth.

 

The year began positively, with a 10.6% increase in comparable store sales in our first quarter.  The New England Patriots run to the Super Bowl in January 2004 elevated interest in the game within the New England region beyond normal levels and we took advantage of this opportunity by supplementing our regular inventory of party supplies with special New England Patriots and Super Bowl merchandise, all of which sold well.  The year also ended on a positive note, with a 5.1% increase in comparable store sales in the fourth quarter, when most of our Halloween season business occurs.  We were pleased by these results because this year’s Halloween season followed a positive Halloween season in 2003, which led to a 12.6% increase in comparable store sales in the fourth quarter of that year.  Halloween is our most important season and our organization met or exceeded our management’s expectations in order to achieve these positive results.

 

In November 2003, we relocated our headquarters from West Roxbury, Massachusetts to larger office space in Dedham, Massachusetts and in January 2004 we completed the renovation of our previous headquarters into a new corporate training facility.  During 2003 and early 2004 we enhanced our corporate governance by expanding our Board of Directors with the addition of four new independent directors.  Also in January 2004, we concluded negotiations extending the maturity date of our bank line-of-credit agreement until January 2007 and added the option to increase the line in increments of $2,500,000 beyond the present limit of $7,500,000, to a limit of $12,500,000, upon 15 days written notice, as long as we are in compliance of debt covenants and the provisions of the loan agreement.  Our inventory and accounts receivable secure our line of credit.

 

In early 2004 we began the development of a new point-of-sale system.  The new system was rolled out to our stores in the June-July timeframe and the system was in operation for our Halloween season.  The new system is designed to allow us to achieve greater operating efficiencies and improve customer service.  We believe that it allowed us to handle the peak sales volumes we experienced during the Halloween season better than the system it replaced.

 

We believe that all of these accomplishments have positioned us for continued success.  Our goals in 2005 include opening as many as seven new stores during the year, including the one new store that we opened since the end of fiscal 2004.

 

Cautionary Statements and Risk Factors

 

Certain statements in this Annual Report, and particularly this management discussion and analysis, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  The words “anticipate”, “believe”, “estimate”, “expect”, “plan”, “intend” and other similar expressions are intended to identify these forward-looking statements, but are not the exclusive means of identifying them.  Forward-looking statements included in this Annual Report or hereafter included in other publicly available documents filed with the Securities and Exchange Commission (“SEC”), reports to our stockholders and other publicly available statements issued or released by us involve known and unknown risks, uncertainties, and other factors which could cause our actual results, performance (financial or operating) or achievements to differ from the future results, performance (financial or operating) or achievements expressed or implied by such forward looking statements.  Such future results are based upon our best estimates based upon current conditions and the most recent results of operations.

 

8



 

Various risks, uncertainties and contingencies could cause our actual results, performance or achievements to differ materially from those expressed in, or implied by, the forward-looking statements contained in this Annual Report.  These include, but are not limited to, the following:

 

                  the success or failure of our efforts to implement our business strategy

                  our inability to obtain additional financing, if required

                  third-party suppliers’ failure to fulfill their obligations to us

                  unseasonable weather

                  intense competition

                  the availability of retail store space on reasonable lease terms

                  the failure of any of our systems, including, without limitation, our newly-installed point-of-sale system and our merchandise management system, the latter of which was developed by a vendor who is no longer in business

                  any problems affecting our third-party suppliers and

                  general economic and other developments affecting consumer confidence or spending patterns, particularly in the New England region and particularly during the Halloween season, which is our single most important season.

 

Fiscal 2004 Compared to Fiscal 2003

 

Revenues

 

Our consolidated revenues for 2004 were $64,276,225, an increase of $7,578,979, or 13.4% from the prior year.  Revenues include the selling price of party goods sold, net of returns and discounts, and are recognized at the point of sale.  This increase was due to an increase of 4.6% in comparable stores sales, sales from six new stores that opened in 2004 and sales from three new stores that opened in 2003 which were not included in comparable stores sales in 2004 until they had been open for one full year.  The increase in comparable stores sales was largely attributable to a stronger Halloween season compared to the prior year.

 

Cost of products sold

 

In 2004 our consolidated cost of products sold was 55.7% of revenues, a decrease of 0.3 percentage points from the prior year.  Cost of products sold consists of the cost of merchandise sold to customers and the occupancy costs for our stores.  This decrease was primarily attributable to the elimination of costs of products sold for our Internet business, which was licensed to a third party in 2003 in exchange for royalties under a license agreement.

 

Marketing and sales expense

 

Our consolidated marketing and sales expense for 2004 was $21,176,925 or 32.9% of revenues, an increase of $2,813,732, or 0.5 percentage points, as a percentage of revenues, from the prior year.  Marketing and sales expense consists primarily of all store payroll and related expenses for personnel engaged in marketing and selling activities, as well as advertising, public relations and promotional expenditures.

 

This increase, as a percentage of revenues, was due to store payroll and other expenses related to marketing and sales in our new stores, which run at a higher than normal rate until they reach maturity.  Our experience has been that it usually takes about eighteen months after opening for a store to reach maturity.

 

General and administrative expense

 

Our consolidated general and administrative (“G&A”) expense for 2004 was $6,335,067 or 9.9% of revenue, an increase of $818,794, or 0.1 percentage points, as a percentage of revenues, from the prior year.  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.

 

9



 

The increase in G&A costs was attributable to rate increases in payroll-related costs, such as unemployment insurance, health insurance and workers’ compensation insurance, and start-up costs associated with implementing our new point-of-sale system.

 

Other income

 

In 2004 we reached a settlement with a third party in connection with the special charge previously recorded in fiscal year 2002.  We recorded the net settlement of $382,500 as other income.

 

Interest expense

 

Our interest expense was $225,074 in 2004, an increase of $12,847 from the prior year.  This increase was due to higher average borrowings that were largely offset by lower interest rates.

 

Income taxes

 

In 2004 our provision for income taxes was $105,000, which included $20,000 for federal alternative minimum taxes and $85,000 for state income taxes.  We were able to utilize approximately $923,000 of net operating loss carryforwards for federal income tax purposes in 2004, which were fully reserved for in the prior year due to the uncertainty of future taxable income.

 

At the end of 2004 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 may be subject to annual limitations based upon certain ownership changes of our stock that may have occurred or that may occur.

 

Fiscal 2003 Compared to Fiscal 2002

 

Revenues

 

Our consolidated revenues for 2003 were $56,697,246, an increase of $4,519,323, or 8.7% from the prior year.  Revenues include the selling price of party goods sold, net of returns and discounts, and are recognized at the point of sale.  This increase was due to an increase of 4.8% in comparable stores sales, sales from three new stores that opened in 2003 and sales from two new stores that opened in 2002 which were not included in comparable stores sales in 2003 until they had been open for one full year.  The increase in comparable stores sales was largely attributable to a stronger Halloween season compared to the prior year.

 

Cost of products sold

 

In 2003 our consolidated cost of products sold was 56.0% of revenues, a decrease of 2.3 percentage points from the prior year.  Cost of products sold consists of the cost of merchandise sold to customers and the occupancy costs for our stores.  This decrease was primarily attributable to improved vendor pricing and terms.

 

In 2003, we refined our methodology for accounting for vendor rebates, discounts and freight.  We also continued to refine our methodology for estimating an appropriate allowance for obsolete and excess inventory.  The net impact of these adjustments increased 2003 pre-tax income by $141,757, net income by $125,455 and had no impact on basic and diluted earnings per share.

 

Marketing and sales expense

 

Our consolidated marketing and sales expense for 2003 was $18,363,193 or 32.4% of revenues, an increase of $1,835,361, or 0.7 percentage points, as a percentage of revenues, from the prior year.  Marketing and sales expense consists primarily of advertising, public relations and promotional expenditures, as well as all store payroll and related expenses for personnel engaged in marketing and selling activities.

 

As a percentage of revenues, the increase in marketing and sales expense was attributable to the addition of retail store management staff to provide closer supervision of our retail stores, an upgrade to our stores’

 

10



 

telecommunications network to improve reliability and establish the capability to support future systems enhancements, and higher store pre-opening costs as a result of opening three stores in 2003 compared to two stores in 2002.

 

General and administrative expense

 

Our consolidated general and administrative (“G&A”) expense for 2003 was $5,516,273 or 9.7% of revenue, an increase of $270,406 and decrease of 0.3 percentage points, as a percentage of revenues, from the prior year.  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.

 

The increase in G&A costs was attributable to an increase in professional fees associated with information technology, including consulting fees associated with enhancing systems, and increased labor costs for positions added to support growth.

 

Interest expense

 

Our interest expense was $212,227 in 2003, a decrease of $68,671 from the prior year.  This decrease was due to the expiration of capital leases in 2002.

 

Income taxes

 

In 2003 our provision for income taxes was $97,233, which included $30,000 for federal alternative minimum taxes and $67,233 for state income taxes.  When we filed our 2003 Annual Report on Form 10-K we reported that we were able to utilize approximately $997,000 of net operating loss carryforwards for federal income tax purposes in 2003, which were fully reserved for in the prior year due to the uncertainty of future taxable income. This amount was based on preliminary projections of tax liability and it was revised to $792,000 upon subsequent completion of our final tax returns for 2003.

 

When we filed our 2003 Annual Report on Form 10-K we reported that at the end of 2003 we had estimated net operating loss carryforwards of approximately $23.7 million, which begin to expire in 2018.  This amount was based on preliminary projections of tax liability and it was revised to $23.9 million upon subsequent completion of our final tax returns for 2003.  In accordance with Section 382 of the Internal Revenue Code, the use of these carryforwards may be subject to annual limitations based upon certain ownership changes of our stock that may have occurred or that may occur.

 

Critical Accounting Policies

 

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 2 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 after our year ends, and an adjustment to cost of products sold is recorded at the end of the fourth quarter to recognize the difference between the estimated and actual inventory shortage for the full year.  The adjustment in the fourth quarter of 2004 included an estimated reduction of $149,316 to the cost of products sold during the previous three quarters.  The adjustment in the fourth quarter of 2003 included an estimated reduction of $145,983 to the cost of products sold during the previous three quarters.

 

11



 

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.

 

In 2003, we refined our methodology for accounting for vendor rebates, discounts and freight and for estimating an appropriate allowance for obsolete and excess inventory.  The net impact of these adjustments increased pre-tax income by $141,757, net income by $125,455 and had no impact on basic and diluted earnings per share.

 

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.  At the beginning of fiscal 2004 we adopted a new policy for estimating the useful life of fixed assets which extended the useful life of equipment and furniture and fixtures.  Changing the estimated life of the assets in these categories as of the beginning of the year reduced depreciation expense by approximately $130,885.  Net income in 2004 would have been $0.02 per basic and diluted share if this change in estimating the useful life of fixed assets had not been adopted.  Expenditures for maintenance and repairs are charged to operations as incurred.

 

Impairment of Long-Lived Assets

 

We adopted Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets in 2002, which requires that long-lived assets be measured at the lower of carrying amount or fair value less cost to sell.  The adoption of SFAS No. 144 did not have a material impact on our consolidated results of operations in 2002.

 

We review each store for impairment indicators annually, considering operating results and cash flows.  We are not aware of any impairment indicators for any of our stores at December 25, 2004.

 

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.  Should we determine that we will be able to realize our deferred tax assets in the future, an adjustment to our deferred tax assets would increase income in the period we made such a determination.  The value of our deferred tax assets was $9,675,000 at December 25, 2004, which has been fully reserved.

 

Previous Restatement of Financial Information and Balance Sheet Presentation of Series A-F Convertible Preferred Stock

 

The holders of our various series of convertible preferred stock have the right to a liquidation preference, which previously could have been exercised under certain events not within our control.  In accordance with EITF Topic D-98, we have included the respective equity securities outside of permanent stockholders’ deficit in our accompanying table of selected financial data as of December 28, 2002, December 29, 2001 and December 30, 2000 at their respective carrying values.

 

During the fourth quarter of 2003, the composition of our Board of Directors changed such that holders of our convertible preferred stock or the designates of our preferred stockholders no longer constituted a majority of our Board members.  This change in the composition of our Board of Directors has permitted us to present our

 

12



 

convertible preferred stock in equity in the accompanying balance sheets as of December 25, 2004 and December 27, 2003, at their respective carrying values as the redemption is deemed to be solely within our control.

 

We will continue to review and consider the criteria in EITF Topic D-98 at the reporting of each balance sheet.

 

Stock Option Compensation Expense

 

We account 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.  We have adopted the disclosure-only provisions of SFAS 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 revenue and expenses during the reporting period.  Our actual results could differ from our estimates.

 

New Accounting Pronouncements

 

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin (“ARB”) No. 51 (“FIN 46”).  FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties.  FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003.  For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003.  However, in October 2003, the FASB deferred the effective date of FIN 46 to the end of the first interim or annual period ending after December 15, 2003 for those arrangements involving special purpose entities entered into prior to February 1, 2003.  All other arrangements within the scope of FIN 46 are subject to its provisions beginning in 2004.  We adopted FIN 46, as required, with no material impact to our consolidated financial position or results of operations.

 

On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation.  SFAS 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows.  Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS 123.  However, SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values.  Pro forma disclosure is no longer an alternative.

 

We must adopt SFAS 123(R) no later than July 1, 2005.  Early adoption will be permitted in periods in which financial statements have not yet been issued.  We expect to adopt SFAS 123(R) on July 1, 2005.

 

SFAS 123(R) permits public companies to adopt its requirements using one of two methods:

 

                  A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123(R) that remain unvested on the effective date.

 

                  A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

 

13



 

We have not yet determined which method we will use.

 

As permitted by SFAS 123, we currently account for share-based payments to employees using Opinion 25’s intrinsic value method and, as such, generally recognize no compensation cost for employee stock options.  Accordingly, the adoption of SFAS 123(R)’s fair value method will have a significant impact on our results of operations, although it will have no impact on our overall financial position.  The impact of adoption of SFAS 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future.  However, had we adopted SFAS 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS 123 as described in the disclosure of pro forma net loss and net loss per share in Note 2 to the consolidated financial statements.

 

In February 2005, the Chief Accountant of the SEC issued a letter clarifying his staff’s interpretation of certain accounting issues and their application under generally accepted accounting principles (“GAAP”) relating to operating leases.  In summary, their interpretation is that (1) leasehold improvements should be amortized by the lessee over the shorter of their economic lives or the lease term, which could include lease renewal terms when the renewals are “reasonably assured,” (2) free or reduced rents should be recognized by the lessee on a straight-line basis over the lease term (including any free or reduced rent period) and (3) the statement of cash flows should reflect cash received from the lessor that is accounted for as a lease incentive within operating activities and the acquisition of leasehold improvements for cash within investing activities.  These positions are based upon existing accounting literature.  We believe that our present accounting policies are consistent with the positions described by the Chief Accountant and his staff in this letter.  Our policy is to amortize leasehold improvements for 10 years or the life of the lease, whichever period is shorter.  Our policy is to amortize free or reduced rent on a straight-line basis over the lease term (including any free or reduced rent periods).  We generally do not enter into agreements that involve receiving cash from lessors/landlords.

 

Liquidity and Capital Resources

 

Our operating activities provided $129,690 in net cash in 2004 compared to $1,368,798 in 2003, a decrease of $1,239,108, which was due to our growth in inventory, partially offset by an increase in net income.  The increase in net cash used in inventory was primarily for the six new stores we opened in 2004.

 

In 2004, we financed $309,000 of premiums related to property and casualty insurance at a fixed interest rate of 4.25% with a maturity date of May 2005.  During the period we also financed $129,200 of premiums related to directors and officers insurance at a fixed interest rate of 5.62% with a maturity date of January 2005.  The remaining insurance premium payments and annual insurance expenses are recorded in accrued expenses and prepaid expenses.

 

We invested cash in property and equipment, including new store capital expenditures, totaling $2,121,134 in 2004 and $1,166,258 in 2003.  The cash invested in 2004 included approximately $1,587,000 for fixed assets associated with new stores, $347,000 for improvements to other stores and $187,000 for all other capital expenditures.  The increase in capital expenditures was largely due to the addition of six new stores in 2004 compared to three new stores in 2003.

 

During 2004 we also acquired assets under capital leases totaling $1,302,681 for a new point-of-sale system.  The capital lease obligations outstanding at December 25, 2004 were $1,162,367.

 

We generated $1,306,130 in net cash from financing activities in 2004 compared to using $86,412 in net cash in financing activities in 2003.  We increased our borrowings under our line of credit by $1,497,019 in 2004 compared to an increase of $283,933 in 2003, largely to finance capital expenditures for new stores.

 

At December 25, 2004 we had a line of credit (“the line”) with Wells Fargo Retail Finance II, LLC.  The line was amended on January 2, 2004.  The amendment extended the maturity date of our line to January 2, 2007, eliminated the minimum interest rate of 6.5%, established a new interest rate at the bank’s base rate plus 50 basis points and added an option to increase the line in increments of $2,500,000 beyond the previous limit of $7,500,000, to a limit of $12,500,000, upon 15 days written notice, as long as we are in compliance of debt covenants and the provisions of the loan agreement.  Our inventory and accounts receivable secure our line.

 

14



 

The amended agreement includes a financial covenant requiring us to maintain a minimum availability under the line in the amount of 5% of the credit limit, which at the current limit of $7,500,000, is $375,000.  If we adjust the credit limit in the future, the minimum availability would be 5% of the adjusted credit limit.  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 December 25, 2004, 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.

 

The amount outstanding under our line was $5,257,690 as of December 25, 2004 and $3,760,671 on December 27, 2003.  The interest rate on these borrowings was 5.75% at December 25, 2004 and 6.5% at December 27, 2003.  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.  At December 25, 2004, we had approximately $305,000 of additional availability under the line.  In the third quarter of fiscal 2004, we established a letter of credit for $356,000 with Wells Fargo Bank, N.A. associated with the leasing of our new point-of-sale system.  This $356,000 letter of credit was outstanding at December 25, 2004.

 

Our prospective cash flows are subject to certain trends, events and uncertainties, including demands for capital to support growth, economic conditions, and contractual matters.  We expect our capital expenditures for 2005 to be primarily related to new stores, store improvements and other technology advancements in support of growth and operational enhancements.

 

Contractual obligations at December 25, 2004 were as follows:

 

 

 

Payments Due By Period

 

 

 

Within
1 Year

 

Within
2 - 3
Years

 

Within
4 - 5
Years

 

After
5 Years

 

Total

 

Line of credit

 

$

5,257,690

 

$

 

$

 

$

 

$

5,257,690

 

Capital lease obligations

 

365,674

 

796,693

 

 

 

1,162,367

 

Operating leases (including retail space leases)

 

7,223,873

 

12,591,761

 

8,398,162

 

14,601,593

 

42,815,389

 

Total contractual obligations

 

$

12,847,237

 

$

13,388,454

 

$

8,398,162

 

$

14,601,593

 

$

49,235,446

 

 

In addition, at December 25, 2004, we had outstanding purchase orders totaling approximately $216,000 for the acquisition of inventory that was scheduled for delivery after December 25, 2004.

 

We believe, based on our current operating plan, that anticipated cash from operations and borrowings available under the existing line of credit will be sufficient to fund our operations and working capital requirements for the next 12 months.  Our current operating plan includes the opening of up to seven additional new stores in 2005, including the one new store that we opened since the end of fiscal 2004.

 

In the event that our operating plan changes or proves inaccurate due to decreased revenues, unanticipated expenses, increased competition, unfavorable economic conditions, or other unforeseen circumstances, our liquidity may be negatively impacted.  Accordingly, we would be required to adjust our expenditures to conserve working capital or raise additional capital to fund operations.  There can be no assurance, however, that, should we require additional financing, such financing will be available on terms and conditions acceptable to us.

 

Acquisitions

 

We operate in a largely un-branded business arena that has many small players.  As a result, we may consider growing our business through acquisitions of other entities.  Any determination to make an acquisition will be based upon a variety of factors, including, without limitation, the purchase price and other financial terms of the transaction, the business prospects, geographical location and the extent to which any acquisition would enhance our prospects.  We presently have no plans, agreements, understandings, or arrangements with respect to any acquisitions.

 

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Stockholder Rights Plan

 

On November 9, 2001, we announced that our Board of Directors adopted a stockholder rights plan (the “rights plan”).  Under the rights plan each share of our capital stock outstanding at the close of business on November 9, 2001 and each share of our capital stock issued subsequent to that date has a right associated with it, such that each share of our common stock is entitled to one right and each share of our preferred stock is entitled to such number of rights equal to the number of common shares into which it is convertible.  The rights will become exercisable only in the event that, with certain exceptions, an acquiring party accumulates 10 percent or more of our voting stock or if a party announces an offer to acquire 15 percent or more of our voting stock.  The rights expire on November 9, 2011.  When exercisable, each right entitles the holder to purchase from us one one-hundredth of a share of a new series of Series G junior preferred stock at an initial purchase price of $2.00, subject to adjustment.  In addition, upon the occurrence of certain events, holders of the rights will be entitled to purchase either iParty Corp. stock or shares in an “acquiring entity” at half of market value.  We generally will be entitled to redeem the rights at $0.001 per right at any time until the date on which a 10 percent position in our voting stock is acquired by any person or group.  Until a right is exercised, the holder of a right will have no rights as a stockholder of iParty solely by virtue of being a rights holder, including, without limitation, the right to vote or receive dividends.

 

Effects of Inflation

 

We do not view the effects of inflation to have a material effect upon our business.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

 

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We do not believe that we have any material market risk exposure owing to foreign currency risk, exchange rate risk, commodity price risk and other relevant market rate or price risks that require the quantitative and qualitative disclosures set forth in Item 305 of Regulation S-K.  We have interest rate risk on our line of credit debt obligation to the extent that if interest rates were to rise our rate of interest under our line of credit would also increase.  We do not believe that this interest rate risk is material and we have not entered into any hedging or similar contractual arrangements with respect to such risk.  We do not enter into contracts for trading purposes.

 

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

The response to this item is included in a separate section of this report. See “Index to Consolidated Financial Statements on page F–1.

 

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A.  CONTROLS AND PROCEDURES

 

(a)  Evaluation of Disclosure Controls and Procedures.  Our management, with the participation of our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act) as of December 25, 2004.  In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and our management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures.  Based on this evaluation, our CEO and CFO concluded that, as of December 25, 2004, our disclosure controls and procedures were (1) designed to ensure that material information relating to us, including our consolidated subsidiaries, is made known to our CEO and

 

16



 

CFO by others within those entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

 

(b)  Attestation Report of the Registered Public Accounting Firm.  We are not an accelerated filer, as such term is defined in Rule 12b-2 under the Securities Exchange Act.  Accordingly, the attestation report of our independent registered public accounting firm on our management's assessment of our internal control over financial reporting is not required to be included in this Annual Report on Form 10-K.

 

(c)  Changes in Internal Controls.  No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) occurred during the fiscal quarter ended December 25, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

ITEM 9B.  OTHER INFORMATION

 

None.

 

PART III

 

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

 

Information relating to our directors is incorporated herein by reference to the sections entitled “Proposal 1—Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” of our Company’s definitive proxy statement which will be filed no later than 120 days after December 25, 2004.

 

We have adopted a written code of business conduct and ethics that applies to all our directors, officers and employees.  We intend to disclose any amendments to, or waivers from, our code of business conduct and ethics on the Investor Relations page of our website which is located at www.iparty.com.

 

ITEM 11.  EXECUTIVE COMPENSATION

 

Information required by Item 11 is incorporated herein by reference to the Sections entitled “Proposal 1—Election of Directors—Director Compensation” and “Executive Compensation” of our definitive proxy statement which will be filed no later than 120 days after December 25, 2004.

 

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

Information related to security ownership required by Item 12 is incorporated herein by reference to the Section entitled “Stock Ownership” of our definitive proxy statement which will be filed no later than 120 days after December 25, 2004.

 

Securities authorized under equity compensation plans as of December 25, 2004, were as follows:

 

EQUITY COMPENSATION PLAN INFORMATION

 

 

 

Column a

 

Column b

 

Column c

 

Plan Category

 

Number of Securities
to be Issued
upon Exercise of
Outstanding Options

 

Weighted Average
Exercise Price of
Outstanding Options

 

Number of Securities
Remaining Available
for Future Issuances
under Equity
Compensation Plans
(Excluding Securities
Reflected in Column a)

 

Equity compensation plans approved by security holders

 

10,031,817

 

$

0.96

 

595,013

 

Equity compensation plans not approved by security holders

 

 

 

 

Total

 

10,031,817

 

$

0.96

 

595,013

 

 

17



 

Under the iParty. Corp. Amended and Restated 1998 Incentive and Nonqualified Stock Option Plan we are authorized to grant options for the purchase of up to 11,000,000 shares of our common stock.  As of December 25, 2004, 373,170 shares had been issued pursuant to the exercise of previously issued stock options.  As of December 25, 2004, there were options outstanding to purchase 10,031,817 shares of our common stock.  Consequently, as of December 25, 2004, options for the purchase of up to 595,013 common shares remain available for future grants.

 

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

Information required by Item 13 is incorporated herein by reference to the section entitled “Executive Compensation–Certain Relationships and Related Transactions” of our definitive proxy statement which will be filed no later than 120 days after December 25, 2004.

 

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

Information required by Item 14 is incorporated herein by reference to the section entitled “Independent Public Accountants” of our definitive proxy statement which will be filed no later than 120 days after December 25, 2004.

 

PART IV

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

 

(a)                      1. Financial statements:

 

For a listing of consolidated financial statements which are included in this document, see page F–1.

 

2. Financial Statement Schedules:

 

All schedules for which provision is made in the applicable accounting regulation of the SEC are not required under the related instructions or are inapplicable and, therefore, have been omitted.

 

3. Exhibits:

 

The exhibits listed in the Exhibit Index immediately preceding the exhibits are filed as part of this Annual Report on Form 10-K and are incorporated herein by reference.

 

(b)                     Exhibits:

 

The exhibits listed in the Exhibit Index immediately preceding the exhibits are filed as part of this Annual Report on Form 10-K and are incorporated herein by reference.

 

(c)                      Financial Statement Schedules:

 

Included in Item 15(a)(2) above.

 

18



 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

iPARTY CORP.

 

 

 

 

By:

 

/s/ SAL PERISANO

 

 

 

 

Sal Perisano

 

 

 

 

Chairman of the Board and

 

 

 

 

Chief Executive Officer

 

 

 

Dated: March 25, 2005

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

SIGNATURE

 

TITLE

 

DATE

 

 

 

 

 

/s/ SAL PERISANO

 

Chairman of the Board and

 

March 25, 2005

Sal Perisano

 

Chief Executive Officer

 

 

 

 

(Principal Executive Officer)

 

 

 

 

 

 

 

/s/ PATRICK FARRELL

 

President and Chief Financial Officer

 

March 25, 2005

Patrick Farrell

 

(Principal Financial Officer and Principal

 

 

 

 

Accounting Officer)

 

 

 

 

 

 

 

/s/ DANIEL DE WOLF

 

Director

 

March 25, 2005

Daniel De Wolf

 

 

 

 

 

 

 

 

 

 

 

 

 

 

/s/ FRANK HAYDU

 

Director

 

March 25, 2005

Frank Haydu

 

 

 

 

 

 

 

 

 

 

 

 

 

 

/s/ LORENZO ROCCIA

 

Director

 

March 25, 2005

Lorenzo Roccia

 

 

 

 

 

 

 

 

 

 

 

 

 

 

/s/ ERIC SCHINDLER

 

Director

 

March 25, 2005

Eric Schindler

 

 

 

 

 

 

 

 

 

 

 

 

 

 

/s/ JOSEPH VASSALLUZZO

 

Director

 

March 25, 2005

Joseph Vassalluzzo

 

 

 

 

 

 

 

 

 

 

 

 

 

 

/s/ CHRISTINA WEAVER-VEST

 

Director

 

March 25, 2005

Christina Weaver-Vest

 

 

 

 

 

19



 

iPARTY CORP.

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

Report of Independent Registered Public Accounting Firm

 

 

 

Consolidated Balance Sheets

 

 

 

Consolidated Statements of Operations

 

 

 

Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)

 

 

 

Consolidated Statements of Cash Flows

 

 

 

Notes to Consolidated Financial Statements

 

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

F-1



 

Report of Independent Registered Public Accounting Firm

 

Board of Directors and Stockholders

iParty Corp.

 

We have audited the accompanying consolidated balance sheets of iParty Corp. and subsidiaries as of December 25, 2004 and December 27, 2003, and the related consolidated statements of operations, convertible preferred stock and stockholders’ equity (deficit), and cash flows for the years then ended.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with auditing standards generally accepted in the 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 Company’s internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis of designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s 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 25, 2004 and December 27, 2003, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 25, 2004, in conformity with U.S. generally accepted accounting principles.

 

 

/s/ Ernst & Young LLP

 

 

Boston, Massachusetts

February 24, 2005

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

F-2



 

iPARTY CORP.

CONSOLIDATED BALANCE SHEETS

 

 

 

Dec 25, 2004

 

Dec 27, 2003

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

1,757,157

 

$

2,442,471

 

Restricted cash

 

561,407

 

533,284

 

Accounts receivable

 

700,961

 

487,934

 

Inventory, net

 

11,400,971

 

9,423,463

 

Prepaid expenses and other assets

 

476,046

 

483,925

 

Total current assets

 

14,896,542

 

13,371,077

 

Property and equipment, net

 

4,483,705

 

1,694,140

 

Other assets

 

99,690

 

86,763

 

Total assets

 

$

19,479,937

 

$

15,151,980

 

 

 

 

 

 

 

LIABILITIES AND STOCK AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

3,421,195

 

$

3,095,848

 

Accrued expenses

 

2,615,835

 

2,306,902

 

Current portion of capital lease obligations

 

365,674

 

29,220

 

Borrowings under line of credit

 

5,257,690

 

3,760,671

 

Total current liabilities

 

11,660,394

 

9,192,641

 

 

 

 

 

 

 

Long-term liabilities:

 

 

 

 

 

Capital lease obligations, net of current portion

 

796,693

 

260

 

Other liabilities

 

471,759

 

406,209

 

Total long-term liabilities

 

1,268,452

 

406,469

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Convertible preferred stock - $.001 par value; 10,000,000 shares authorized,

 

 

 

 

 

Series A convertible preferred stock - 1,000,000 shares authorized, 0 and 1,000,000 issued and outstanding at December 25, 2004 and December 27, 2003, respectively (aggregate liquidation value of $0 at December 25, 2004)

 

 

1,000,000

 

Series B convertible preferred stock - 1,150,000 shares authorized; 507,460 and 611,080 shares issued and outstanding at December 25, 2004 and December 27, 2003, respectively (aggregate liquidation value of $10,149,200 at December 25, 2004)

 

7,551,002

 

9,092,870

 

Series C convertible preferred stock - 100,000 shares authorized, issued and outstanding (aggregate liquidation value of $2,000,000 at December 25, 2004)

 

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 25, 2004)

 

3,652,500

 

3,652,500

 

Series E convertible preferred stock - 533,333 shares authorized; 296,667 and 389,439 shares issued and outstanding at December 25, 2004 and December 27, 2003, respectively (aggregate liquidation value of $1,112,500 at December 25, 2004)

 

1,112,500

 

1,460,396

 

Series F convertible preferred stock - 114,286 shares authorized, issued and outstanding (aggregate liquidation value of $500,000 at December 25, 2004)

 

500,000

 

500,000

 

Total convertible preferred stock

 

14,308,002

 

17,197,766

 

 

 

 

 

 

 

Common stock - $.001 par value; 150,000,000 shares authorized; 22,092,717 and 18,780,204 shares issued and outstanding at December 25, 2004 and December 27, 2003, respectively

 

22,093

 

18,780

 

 

 

 

 

 

 

Additional paid-in capital

 

50,448,100

 

47,554,621

 

Accumulated deficit

 

(58,227,104

)

(59,218,297

)

Total stockholders’ equity

 

6,551,091

 

5,552,870

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

19,479,937

 

$

15,151,980

 

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

F-3



 

iPARTY CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

For the twelve months ended

 

 

 

Dec 25, 2004

 

Dec 27, 2003

 

Dec 28, 2002

 

Revenues

 

$

64,276,225

 

$

56,697,246

 

$

52,177,923

 

Operating costs:

 

 

 

 

 

 

 

Cost of products sold

 

35,826,820

 

31,758,625

 

30,420,475

 

Marketing and sales

 

21,176,925

 

18,363,193

 

16,527,832

 

General and administrative

 

6,335,067

 

5,516,273

 

5,245,867

 

Special charge

 

 

 

396,465

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

937,413

 

1,059,155

 

(412,716

)

 

 

 

 

 

 

 

 

Other income

 

382,500

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

1,319,913

 

1,059,155

 

(412,716

)

 

 

 

 

 

 

 

 

Interest income

 

1,354

 

1,262

 

9,045

 

Interest expense

 

(225,074

)

(212,227

)

(280,898

)

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

1,096,193

 

848,190

 

(684,569

)

 

 

 

 

 

 

 

 

Income taxes

 

105,000

 

97,233

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

991,193

 

$

750,957

 

$

(684,569

)

 

 

 

 

 

 

 

 

Net income (loss) available to common stockholders

 

$

991,193

 

$

750,957

 

$

(774,719

)

 

 

 

 

 

 

 

 

Income (loss) per share:

 

 

 

 

 

 

 

Basic

 

$

0.03

 

$

0.02

 

$

(0.04

)

Diluted

 

$

0.02

 

$

0.02

 

$

(0.04

)

 

 

 

 

 

 

 

 

Income (loss) per share available to common stockholders:

 

 

 

 

 

 

 

Basic

 

$

0.03

 

$

0.02

 

$

(0.05

)

Diluted

 

$

0.02

 

$

0.02

 

$

(0.05

)

 

 

 

 

 

 

 

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

Basic

 

37,649,400

 

36,683,142

 

16,219,436

 

Diluted

 

41,517,036

 

38,868,484

 

16,219,436

 

 

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
Preferred Stock

 

Convertible
Preferred Stock

 

Common Stock

 

Additional
Paid-In

 

Accumulated

 

Total
Stockholders’

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Deficit

 

Equity (Deficit)

 

Balance December 29, 2001

 

3,274,372

 

$

20,092,667

 

 

$

 

15,122,675

 

$

15,123

 

$

44,395,314

 

$

(59,194,535

)

$

(14,784,098

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock upon conversion of Series B convertible preferred stock

 

(119,786

)

(1,257,886

)

 

 

1,197,860

 

1,198

 

1,256,688

 

 

1,257,886

 

Issuance of common stock upon conversion of Series E convertible preferred stock

 

(66,666

)

(250,000

)

 

 

666,660

 

667

 

249,333

 

 

250,000

 

Series B convertible preferred stock adjustment

 

(313,974

)

(314

)

 

 

 

 

314

 

 

314

 

Series C convertible preferred stock adjustment

 

(45,198

)

(45

)

 

 

 

 

45

 

 

45

 

Series D convertible preferred stock adjustment

 

(112,996

)

(113

)

 

 

 

 

113

 

 

113

 

Equity portion of special charge

 

 

 

 

 

 

 

171,465

 

 

171,465

 

Exercise of stock options

 

 

 

 

 

9,375

 

9

 

4,679

 

 

4,688

 

Convertible preferred stock beneficial conversion dividend

 

 

 

 

 

 

 

90,150

 

(90,150

)

 

Net loss

 

 

 

 

 

 

 

 

(684,569

)

(684,569

)

Balance December 28, 2002

 

2,615,752

 

18,584,309

 

 

 

16,996,570

 

16,997

 

46,168,101

 

(59,969,254

)

(13,784,156

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock upon conversion of Series B convertible preferred stock

 

(73,719

)

(1,096,939

)

 

 

 

 

948,690

 

948

 

1,095,991

 

 

1,096,939

 

Issuance of common stock upon conversion of Series E convertible preferred stock

 

(77,228

)

(289,604

)

 

 

 

 

823,944

 

824

 

288,780

 

 

289,604

 

Reclassification of Series A convertible preferred stock (Note 1)

 

(1,000,000

)

(1,000,000

)

1,000,000

 

1,000,000

 

 

 

 

 

 

 

 

 

1,000,000

 

Reclassification of Series B convertible preferred stock (Note 1)

 

(611,080

)

(9,092,870

)

611,080

 

9,092,870

 

 

 

 

 

 

 

 

 

9,092,870

 

Reclassification of Series C convertible preferred stock (Note 1)

 

(100,000

)

(1,492,000

)

100,000

 

1,492,000

 

 

 

 

 

 

 

 

 

1,492,000

 

Reclassification of Series D convertible preferred stock (Note 1)

 

(250,000

)

(3,652,500

)

250,000

 

3,652,500

 

 

 

 

 

 

 

 

 

3,652,500

 

Reclassification of Series E convertible preferred stock (Note 1)

 

(389,439

)

(1,460,396

)

389,439

 

1,460,396

 

 

 

 

 

 

 

 

 

1,460,396

 

Reclassification of Series F convertible preferred stock (Note 1)

 

(114,286

)

(500,000

)

114,286

 

500,000

 

 

 

 

 

 

 

 

 

500,000

 

Exercise of stock options

 

 

 

 

 

11,000

 

11

 

1,749

 

 

1,760

 

Net income

 

 

 

 

 

 

 

 

750,957

 

750,957

 

Balance December 27, 2003

 

 

 

2,464,805

 

17,197,766

 

18,780,204

 

18,780

 

47,554,621

 

(59,218,297

)

5,552,870

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock upon conversion of Series A convertible preferred stock

 

 

 

(1,000,000

)

(1,000,000

)

1,000,000

 

1,000

 

999,000

 

 

 

 

Issuance of common stock upon conversion of Series B convertible preferred stock

 

 

 

(103,620

)

(1,541,869

)

1,333,693

 

1,333

 

1,540,536

 

 

 

 

Issuance of common stock upon conversion of Series E convertible preferred stock

 

 

 

(92,772

)

(347,895

)

961,025

 

961

 

346,934

 

 

 

 

Exercise of stock options

 

 

 

 

 

17,795

 

19

 

7,009

 

 

 

7,028

 

Net income

 

 

 

 

 

 

 

 

991,193

 

991,193

 

Balance December 25, 2004

 

 

$

 

1,268,413

 

$

14,308,002

 

22,092,717

 

$

22,093

 

$

50,448,100

 

$

(58,227,104

)

$

6,551,091

 

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

F-5



 

iPARTY CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

For the twelve months ended

 

 

 

Dec 25, 2004

 

Dec 27, 2003

 

Dec 28, 2002

 

Operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

991,193

 

$

750,957

 

$

(684,569

)

Adjustments to reconcile net income (loss) to net cash provided by used in operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

634,250

 

601,015

 

633,173

 

Non-cash portion of special charge

 

 

 

171,465

 

Deferred rent

 

65,550

 

(22,723

)

102,518

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

(213,027

)

(41,946

)

95,715

 

Inventory

 

(1,977,508

)

(506,799

)

366,188

 

Prepaid expenses and other assets

 

191,345

 

55,351

 

36,541

 

Accounts payable

 

325,347

 

343,537

 

116,151

 

Accrued expenses and other liabilities

 

112,540

 

189,406

 

(255,252

)

Net cash provided by operating activities

 

129,690

 

1,368,798

 

581,930

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

(2,121,134

)

(1,166,258

)

(775,147

)

Net cash used in investing activities

 

(2,121,134

)

(1,166,258

)

(775,147

)

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net borrowings under line of credit

 

1,497,019

 

283,933

 

121,761

 

Decrease (increase) in restricted cash

 

(28,123

)

(161,332

)

296,005

 

Principal payments on capital lease obligations

 

(169,794

)

(210,773

)

(301,978

)

Proceeds from exercise of stock options

 

7,028

 

1,760

 

4,688

 

Net cash provided by (used in) financing activities

 

1,306,130

 

(86,412

)

120,476

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(685,314

)

116,128

 

(72,741

)

 

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of year

 

2,442,471

 

2,326,343

 

2,399,084

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, end of year

 

$

1,757,157

 

$

2,442,471

 

$

2,326,343

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of Series A convertible preferred stock to common stock

 

$

1,000,000

 

$

 

$