NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 29, 2012
1. THE COMPANY:
Background
The Company's efforts are devoted to the sale of party goods through its retail stores and through its e-commerce web site. At the end of fiscal 2012, the Company had 49 retail stores located throughout New England, with 5 additional stores located in Florida. In the third and fourth quarters of fiscal 2012, the Company opened new retail stores in Plaistow, NH and Waltham, MA, respectively. In January 2012, the Company reopened its store in West Lebanon, New Hampshire, which had been closed since August 28, 2011 due to Tropical Storm Irene. The Company licensed its e-commerce business to a third party in exchange for royalties under a license agreement which was terminated in August 2010. The Company continued to operate an informational web site only thereafter until July 2011, when the Company re-launched its newly redesigned e-commerce site with a full assortment of costume and related merchandise for purchase and shipping via the Internet. In fiscal 2012, the Company expanded its product offerings on the e-commerce site to include adult birthday, kids birthday, graduation and other merchandise categories. The Company also uses its Internet site to highlight the changing store product assortment and to feature sales flyers, promotions and coupons to increase customer visits to its retail stores.
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 Company’s 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 and sports championships. The Company also focuses its business closely on lifetime events such as anniversaries, graduations, birthdays, and bridal or baby showers. The Company’s business has a seasonal pattern with higher revenues in the second and fourth quarters, reflecting school graduations and Halloween, respectively.
The Company’s fiscal years ended December 29, 2012, December 31, 2011 and December 25, 2010
,
consisted of 52 weeks, 53 weeks and 52 weeks, respectively.
Management’s 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 entity’s prospects.
In the third and fourth quarters of fiscal 2012, the Company opened new retail stores in Plaistow, NH and Waltham, MA.
The Company temporarily closed its West Lebanon, New Hampshire store on August 28, 2011 due to damage from severe flooding of the Connecticut River caused by Tropical Storm Irene. The Company repaired the flood damage and reopened the store in January 2012.
On December 30, 2010, iParty and its wholly-owned subsidiary, iParty Retail Stores Corp., agreed with Party City Corporation, an affiliate of Amscan, Inc. (“
Amscan
”) the Company’s largest supplier, to take over a location previously operated by Party City Corporation in Manchester, CT on March 1, 2011. As part of the store takeover, the Company and Party City Corporation entered into an amendment to the Asset Purchase Agreement dated August 7, 2006, to extend the term of the non-compete provisions with Party City Corporation and its affiliates contained in the Asset Purchase Agreement from August 7, 2011 until December 31, 2013 and to include a three mile radius around the Manchester, CT location as part of the restricted area in the non-compete provisions.
On October 14, 2011, the Company and its wholly-owned subsidiary, iParty Retail Stores Corp., as borrowers, and Wells Fargo Bank, National Association (successor by merger to Wells Fargo Retail Finance, LLC) (“
Wells Fargo
”), as administrative agent and collateral agent, entered into the First Amendment (the “
Amendment
”) to the Second Amended and Restated Credit Agreement (the “
Facility
”).
The Amendment continues the Facility in the amount of up to $12,500,000 and extends the maturity date of the Facility to October 14, 2016. The Facility also allows the Company to increase the Facility up to a maximum level of $15,000,000. The amount of credit that is available from time to time under the Facility continues to be determined as a percentage of the value of eligible inventory plus a percentage of the value of eligible credit card receivables, as reduced by certain reserve amounts that may be required by Wells Fargo. The Company’s obligations under the Facility, as amended, continue to be secured by a lien on substantially all of the personal property of the Company and its wholly owned subsidiary. As of December 29, 2012, there was $5,764,312 outstanding under the line of credit with additional availability of $2,936,324, which, combined with cash flow from operations, the Company believes to be sufficient to fund its operations, working capital requirements, and capital expenditures for the next twelve months.
2. SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary after elimination of all significant intercompany transactions and balances.
Revenue Recognition
Revenues include the selling price of party goods sold, net of sales tax, 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. Seven suppliers accounted for approximately 48.9% of the Company’s purchases of merchandise for 2012, 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, Amscan, Inc. (“Amscan”) on August 7, 2006. Beginning with calendar year 2008, the Supply Agreement requires the Company to purchase on an annual basis merchandise equal to the total number of stores open, excluding temporary stores, during such calendar year, multiplied by $180,000. The Supply Agreement provides for penalties in the event the Company fails to attain the annual purchase commitment that would require the Company to pay the difference between the purchases for that year and the annual purchase commitment for that year. Under the terms of the Supply Agreement, the annual purchase commitment for any individual year can be reduced for orders placed by the Company but not filled within a specified time period by the supplier. The Company’s purchases for 2009 fell short of the required annual commitment by approximately $368,000. The supplier agreed to allow the Company to roll over any shortfall for the year 2009 into future years’ requirements. The Company’s purchases in 2010 exceeded the minimum purchase requirements for that year in addition to the 2009 shortfall. The Company’s purchases in 2012 and 2011 exceeded the minimum purchase requirements for those years. The Company is not aware of any reason that would prevent it from meeting the minimum purchase requirements during the remaining term of the Supply Agreement.
On December 30, 2010, the Company and Amscan agreed to extend the original expiration date of the Supply Agreement from the original expiration date of December 31, 2012 to December 31, 2013. In addition, on December 30, 2010, the Company agreed with Party City Corporation to take over a location previously operated by Party City Corporation in Manchester, Connecticut on March 1, 2011. As part of the store takeover, the Company entered into an amendment to the Asset Purchase Agreement dated August 7, 2006 with Party City Corporation to extend the term of the non-compete provisions with Party City Corporation and its affiliates contained in the Asset Purchase Agreement from August 7, 2011 until December 31, 2013 and to include a three mile radius around the Manchester, Connecticut location as part of the restricted area in the non-compete provisions.
Accounts Receivable
Accounts receivable primarily represent amounts due from credit card companies and from vendors for inventory rebates. Management does not provide for doubtful accounts as such amounts have not been significant to date; the Company does not require collateral.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Cash and Restricted Cash
The Company uses controlled disbursement banking arrangements as part of its cash management program. Outstanding checks, which were included in accounts payable and book overdrafts, totaled $2,378,404 at December 29, 2012 and $2,000,025 at December 31, 2011.
Restricted cash represents funds on deposit established for the benefit of and under the control of Wells Fargo, the Company’s 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 , accounts receivable and accounts payable approximate fair value because of the short-term nature of these instruments. The fair value of borrowings under the Company’s Facility approximates the carrying value because the debt bears interest at a variable market rate. The fair value of the capital lease obligations approximates the carrying value. The fair value at December 25, 2010 of the warrants issued in 2006 was determined by using the Black-Scholes model (implied volatility of 40%, risk free rate of 0.2388% and expected life of 0.7233 years) after considering a probability weighted scenario in which the warrant exercise price adjustment scenario was deemed remote. These warrants expired on September 15, 2011. The fair value at December 29, 2012 of the warrants issued in 2008 was determined by using the Black-Scholes model (implied volatility of 142.39%, risk free rate of 0.01% and expected life of 0.16 years).
Inventories
Inventories consist of party supplies and are valued at the lower of moving weighted-average cost or market which approximates FIFO (first-in, first-out). The Company records vendor rebates, discounts and certain other adjustments to inventories, including freight costs, and these amounts are recognized in the income statement as the related goods are sold.
Advertising
Advertising costs are expensed upon first showing. Advertising costs amounted to $2,231,810, $2,377,742 and $2,471,391, for the years ended December 29, 2012, December 31, 2011, and December 25, 2010, 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. Deferred rent was $1,507,732 at December 29, 2012, and $1,504,973 at December 31, 2011.
Net Income (Loss) per Share
Net income (loss) per basic share is computed by dividing net income (loss) available to common shareholders by the weighted-average number of common shares outstanding. The common share equivalents of Series B-F convertible preferred stock are required to be included in the calculation of net income (loss) per basic share in accordance with ASC 260-10-45,
Earnings Per Share – Other Presentation Matters.
Since the preferred stockholders are entitled to participate in dividends when and if declared by the Board of Directors on the same basis as if the shares of Series B-F convertible preferred stock were converted to common stock, the application of ASC 260-10-45 has no effect on the amount of net income (loss) per basic share of common stock. For periods with net losses, the Company does not allocate losses to Series B-F convertible preferred stock.
Net income (loss) per diluted share under ASC 260-10-45 is computed by dividing net income (loss) by the weighted-average number of common shares outstanding, plus, if dilutive, the common share equivalents of Series B-F convertible preferred stock on an as if-converted basis, plus the common share equivalents of the “in the money” stock options and warrants as computed by the treasury method. For the periods with net losses, the Company excludes those common share equivalents since their impact would be anti-dilutive.
The following table sets forth the computation of net income (loss) per basic and diluted share available to common stockholders:
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Common shares
|
|
$
|
(1,536,430
|
)
|
|
$
|
(1,314,638
|
)
|
|
$
|
154,126
|
|
Convertible preferred Series B-F
|
|
|
-
|
|
|
|
-
|
|
|
|
100,323
|
|
Net income (loss)
|
|
$
|
(1,536,430
|
)
|
|
$
|
(1,314,638
|
)
|
|
$
|
254,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.06
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
0.01
|
|
Diluted
|
|
$
|
(0.06
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares - basic
|
|
|
24,418,004
|
|
|
|
24,386,220
|
|
|
|
23,170,174
|
|
Common share equivalents of Series B-F convertible preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
15,081,714
|
|
If - converted weighted-average shares outstanding
|
|
|
24,418,004
|
|
|
|
24,386,220
|
|
|
|
38,251,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common share equivalents of "in the money" stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
1,029,364
|
|
Common share equivalents of "in the money" warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Diluted weighted-average shares outstanding
|
|
|
24,418,004
|
|
|
|
24,386,220
|
|
|
|
39,281,252
|
|
The common stock equivalents of Series B-F convertible preferred stock calculated on an if converted basis totaled 14,499,077 shares for the fiscal year ended December 29, 2012. These share amounts have been excluded from net loss per share since their impact would have been anti-dilutive.
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 6,047,818 and 100,000 in 2012, 5,727,819 and 100,000 in 2011, 4,643,536 and 2,183,334 in 2010, respectively.
Stock Option Compensation Expense
The Company uses the Black-Scholes option pricing model to determine the fair value of stock based compensation. The Black-Scholes model requires the Company to make several subjective assumptions, including the estimated length of time employees will retain their vested stock options before exercising them (“expected term”), and the estimated volatility of the Company’s common stock price over the expected term, which is based on historical volatility of the Company’s common stock over a time period equal to the expected term. The Black-Scholes model also requires a risk-free interest rate, which is based on the U.S. Treasury yield curve in effect at the time of the grant, and the dividend yield on the Company’s common stock, which is assumed to be zero since the Company does not pay dividends and has no current plans to do so in the future. 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:
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Stock Based Compensation Expense
|
|
$
|
173,957
|
|
|
$
|
198,478
|
|
|
$
|
250,423
|
|
Stock based compensation expense is included in general and administrative expense and had no impact on cash flow from operations or cash flow from financing activities for the years ended December 29, 2012, December 31, 2011, or December 25, 2010.
On May 27, 2009, the Company’s stockholders approved a new equity incentive plan entitled the 2009 Stock Incentive Plan (the “2009 Plan”). The Company no longer grants equity awards under its former equity incentive plan, the Amended and Restated 1998 Incentive and Nonqualified Stock Option Plan (the “1998 Plan” and with the 2009 Plan, the “Plans”).
Under the Company’s Plans, options to acquire shares of common stock may be granted to officers, directors, key employees and consultants. Under the 2009 Plan, the exercise price for qualified incentive options and non-qualified options cannot be less than the fair market value of the stock on the grant date, as determined by the Company’s Board of Directors. In addition, under the 2009 Plan, other stock-based and performance awards may be granted to officers, directors, key employees and consultants, including stock appreciation rights, restricted stock, and restricted stock units. Under the Plans, a combined total of 11,000,000 shares of common stock or other stock based awards may be granted. To date, the Company has only issued options for shares under its Plans, which have been granted to employees, directors and consultants of the Company at fair market value at the date of grant. Of the options that have been issued, options for 1,548,751 shares have been exercised and options for 7,631,745 shares remain outstanding at December 29, 2012. Generally, employee options become exercisable over periods of up to four years, and expire ten years from the date of grant.
At the annual Board of Directors meeting following the Company’s stockholders meeting in 2012, the Company granted options to its independent directors for the purchase of 120,000 shares of common stock at an exercise price of $0.20 per share. At the annual Board of Directors meetings following the Company’s annual stockholders meetings in 2011 and 2010, the Company granted options to its key employees, including its CEO and CFO, and independent directors in the following total amounts: (i) 817,100 options for the purchase of shares of common stock on June 10, 2011 at an exercise price of $0.28 per share, and (ii) 502,320 options for the purchase of shares of common stock on June 2, 2010 at an exercise price of $0.30 per share. Also, the Company granted options for the purchase of an aggregate of (i) 633,400 shares of common stock to key employees on January 18, 2012 at an exercise price of $0.14 per share, and (ii) 165,000 shares of common stock to key employees on March 11, 2010 at an exercise price of $0.41 per share. The fair values using the Black-Scholes option pricing model of the options granted were as follows: June 6, 2012, $0.17 per share; January 18, 2012, $0.12 per share; June 10, 2011, $0.23 per share; June 2, 2010, $0.25 per share; and March 11, 2010, $0.34 per share. The exercise price for each of the option grants made in 2010, 2011 and 2012 was equal to the grant date closing price of the Company’s common stock as reported on the NYSE MKT.
On April 1, 2010, in accordance with the related provisions of new employment contracts executed as of that date, options to purchase 720,000 shares of common stock granted on May 27, 2009 to the Company’s Chief Executive Officer and Senior Vice President – Merchandising and Marketing were accelerated and became fully vested. The acceleration of the options resulted in immediate recognition of expense in the amount of $48,204. In addition, on July 1, 2010, the Company granted options for the purchase of 675,000 shares of common stock to these two executives, pursuant to their new employment contracts, at an exercise price of $0.27 per share. One
-
third of each of these executives’ options vested on July 1, 2010, the grant date, with the remaining options vesting as to one third on each of the next two grant date anniversaries. The fair value using the Black-Scholes option pricing model of the July 1, 2010 executive options was $0.22 per share.
The weighted average fair value of the options at the date of the grant was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions:
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Risk-free interest rate
|
|
|
0.98
|
%
|
|
|
0.76
|
%
|
|
|
2.00
|
%
|
Expected volatility
|
|
|
118.6
|
%
|
|
|
114.2
|
%
|
|
|
109.2
|
%
|
Weighted average expected life (in years)
|
|
|
5.70
|
|
|
|
5.27
|
|
|
|
6.00
|
|
Expected dividends
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
The total fair value of shares vested during 2012 was $191,692. The remaining unrecognized stock based compensation expense related to unvested awards at December 29, 2012 was $168,572 and the period of time over which this expense will be recognized is 1.49 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 (i) the values of two non-compete agreements acquired in conjunction with the purchase of retail stores in 2006 and 2008, and (ii) the values of retail store leases acquired in those transactions.
The first non-compete agreement, from Party City Corporation and its affiliates, originally covered Massachusetts, Maine, New Hampshire, Vermont, Rhode Island, and Windsor and New London counties in Connecticut, and was to expire in 2011. This non-compete agreement had an original estimated life of 60 months. On December 30, 2010, the Company executed an agreement with Party City Corporation to take over a location previously operated by Party City Corporation in Manchester, Connecticut. Under that agreement, the term of the earlier non-compete was extended to December 31, 2013 and the non-compete area was amended to include a three mile radius around the Manchester store. The second non-compete agreement was acquired in connection with the Company’s purchase in January 2008 of the two franchised party supply stores in Lincoln and Warwick, Rhode Island. This non-compete, which has expired, covered Rhode Island for five years from the date of closing and within a certain distance from the Company’s stores in the rest of New England for three years. The second non-compete agreement had an estimated life of 60 months. Both non-compete agreements are subject to certain terms and conditions in their respective acquisition agreements.
The occupancy valuations relate to acquired retail store leases for stores in Peabody, Massachusetts (estimated life of 90 months), Lincoln, Rhode Island (estimated life of 79 months) and Warwick, Rhode Island (estimated life of 108 months). Intangible assets also include legal and other transaction costs incurred related to the purchase of the Peabody, Lincoln and Warwick stores.
Intangible assets as of December 29, 2012 and December 31, 2011 were:
|
|
Dec 29, 2012
|
|
|
Dec 31, 2011
|
|
Non-compete agreement
|
|
$
|
2,358,540
|
|
|
$
|
2,358,540
|
|
Lease valuation
|
|
|
944,716
|
|
|
|
944,716
|
|
Other
|
|
|
157,855
|
|
|
|
157,855
|
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
3,461,111
|
|
|
|
3,461,111
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated amortization
|
|
|
(3,133,782
|
)
|
|
|
(2,834,211
|
)
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
327,329
|
|
|
$
|
626,900
|
|
Non-compete agreements are amortized based on the pattern of their expected cash flow benefits. Occupancy valuations are amortized on a straight line basis over the terms of the related leases. Amortization expense for these intangible assets was $299,571 in 2012, $307,577 in 2011, and $672,108 in 2010, respectively. The non-compete agreement amortization expense is included in general and administrative expense on the Consolidated Statements 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, 2012:
Year
|
|
Amount
|
|
2013
|
|
|
204,566
|
|
2014
|
|
|
55,653
|
|
2015
|
|
|
33,555
|
|
2016
|
|
|
33,555
|
|
Total
|
|
$
|
327,329
|
|
Accounting for the Impairment of Long-Lived Assets
The Company reviews each store for impairment indicators whenever events and changes in circumstances suggest that the carrying amounts may not be recoverable from estimated future store cash flows. The Company’s review considers store operating results, future sales growth and cash flows. In 2011, the Company determined that one of its retail stores was impaired due to underperforming sales. As a result of this impairment, a charge of approximately $26,000 was recorded to reduce to fair value ($0) the remaining carrying value of the property and equipment utilized in this store. In 2012, the Company determined that another one of its retail stores was impaired due to underperforming sales. As a result of this impairment, a charge of approximately $20,000 was recorded to reduce to fair value ($0) the remaining carrying value of the property and equipment utilized in this store. The Company is not aware of any impairment indicators for any of its remaining stores at December 29, 2012.
Fair Value Measurements
The Company follows the provisions of Accounting Standards Codification (ASC) 820,
Fair Value Measurements and Disclosures.
ASC 820 defined fair value as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also described three levels of inputs that may be used to measure the fair value:
Level 1 – quoted prices in active markets for identical assets or liabilities
Level 2 – observable inputs other than quoted prices in active markets for identical assets or liabilities
Level 3 – unobservable inputs in which there is little or no market data available, which require the reporting entity to develop its own assumptions
The only assets and liabilities subject to fair value measurement standards at December 29, 2012 and December 31, 2011 are cash and restricted cash which are based on Level 1 inputs, and the warrant liability which was based on Level 2 inputs.
New Accounting Pronouncements
In January 2013, the Financial Accounting Standards Board (“FASB”) issued Update No. 2013-01
Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.
Update No. 2013-01 is effective for financial statements issued for fiscal years and interim periods beginning on or after January 1, 2013. The Company does not expect the adoption of Update No. 2013-01 (Topic 210) to have a material effect on their consolidated financial statements.
In February 2013, FASB issued Update No. 2013-02
Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.
Update No. 2013-02 is effective for financial statements issued for fiscal years and interim periods beginning on or after December 15, 2012. Early adoption is permitted. The Company does not expect the adoption of Update No. 2013-02 (Topic 220) to have a material effect on their consolidated financial statements.
Reclassifications
Certain amounts within the consolidated financial statements have been reclassified in the prior years to conform to the current year presentation.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
|
|
Dec 29, 2012
|
|
|
Dec 31, 2011
|
|
Leasehold improvements
|
|
$
|
4,733,569
|
|
|
$
|
4,257,533
|
|
Furniture and fixtures
|
|
|
3,706,029
|
|
|
|
3,438,953
|
|
Equipment under capital leases
|
|
|
1,270,794
|
|
|
|
1,308,665
|
|
Computer hardware and software
|
|
|
2,714,950
|
|
|
|
2,480,328
|
|
Equipment
|
|
|
806,116
|
|
|
|
757,579
|
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
13,231,458
|
|
|
|
12,243,058
|
|
Less accumulated depreciation
|
|
|
(10,537,467
|
)
|
|
|
(9,578,972
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
2,693,991
|
|
|
$
|
2,664,086
|
|
The depreciation expense related to property and equipment at December 29, 2012, December 31, 2011 and December 25, 2010 was $1,022,685, $1,213,062, $1,105,188, respectively.
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 Company’s landlords to renew the Company’s leases for an additional 5 or 10 years.
The original cost of assets under capital leases was $1,270,794 at December 29, 2012 and $1,308,665 at December 31, 2011. The accumulated amortization of assets under capital leases at December 29, 2012 and December 31, 2011 was $1,270,794 and $1,304,164 , respectively. Upon expiration of a lease for office equipment, the company disposed of leased equipment in 2012 in the amount of $37,871. The amortization related to those assets under capital lease is included in depreciation expense.
At December 29, 2012, the minimum rental commitments under all non-cancelable operating leases with initial or remaining terms of more than one year were as follows:
Year
|
|
Operating
|
|
2013
|
|
$
|
10,280,103
|
|
2014
|
|
|
9,097,165
|
|
2015
|
|
|
7,641,594
|
|
2016
|
|
|
6,259,384
|
|
2017
|
|
|
5,307,144
|
|
Thereafter
|
|
|
8,301,669
|
|
Total future minimum lease payments
|
|
$
|
46,887,059
|
|
The Company’s rental expense under operating leases amounted to $10,578,723 in 2012, $10,276,490 in 2011 and $9,910,881 in 2010. Included in these amounts are contingent rentals totaling $111,695 in 2012, $84,145 in 2011 and $96,235 in 2010.
5. INCOME TAXES:
A reconciliation of the effective income tax rate with the federal statutory rate is as follows:
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Federal statutory rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State income taxes, net of federal benefit
|
|
|
-9.4
|
%
|
|
|
1.5
|
%
|
|
|
25.8
|
%
|
Permanent differences
|
|
|
-6.9
|
%
|
|
|
-5.7
|
%
|
|
|
33.8
|
%
|
Charge for valuation allowance
|
|
|
-79.6
|
%
|
|
|
-4.6
|
%
|
|
|
-52.7
|
%
|
Net operating loss deduction and other
|
|
|
0.0
|
%
|
|
|
-26.7
|
%
|
|
|
-41.9
|
%
|
Effective tax rate
|
|
|
-61.9
|
%
|
|
|
-1.5
|
%
|
|
|
-1.0
|
%
|
The Company’s provision for state taxes differs from the average statutory rate net of federal tax benefit because of permanent and temporary differences, for which valuation allowances have been provided, between taxable and book income, including amounts associated with stock based compensation expense, depreciation, and note payable discount amortization.
Deferred tax assets consist of the following:
|
|
2012
|
|
|
2011
|
|
Net operating loss carryforwards
|
|
$
|
5,534,750
|
|
|
$
|
5,669,978
|
|
Inventory
|
|
|
887,618
|
|
|
|
534,002
|
|
Deferred rent
|
|
|
591,488
|
|
|
|
590,413
|
|
Accrued compensation
|
|
|
68,779
|
|
|
|
70,840
|
|
Alternative minimum credit carryforward
|
|
|
25,101
|
|
|
|
|
|
Accrued expenses
|
|
|
-
|
|
|
|
1,468
|
|
Intangible assets
|
|
|
692,403
|
|
|
|
665,410
|
|
Deferred compensation
|
|
|
64,277
|
|
|
|
55,737
|
|
Charitable contribution carryforward
|
|
|
4,315
|
|
|
|
-
|
|
Gift cards and store credits
|
|
|
68,409
|
|
|
|
60,634
|
|
Property and equipment
|
|
|
959,481
|
|
|
|
732,295
|
|
Total deferred tax asset
|
|
|
8,896,621
|
|
|
|
8,380,777
|
|
Less valuation allowance
|
|
|
(8,896,621
|
)
|
|
|
(7,793,174
|
)
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
587,603
|
|
A valuation allowance is required to reduce the deferred tax assets reported if, based on the weight of the evidence , it is more likely than not that some portion of the deferred tax assets will not be realized. After consideration of the available evidence, both positive and negative, the Company has determined that a full valuation allowance at December 29, 2012 of $8.9 million is necessary to reduce the net deferred tax assets to the amount that will more likely than not be realized. The Company provided a partial valuation allowance at December 29, 2011 of $7.8 million based on the weight of the evidence available at that time. The Company’s determination of a full valuation allowance at December 29, 2012 was impacted by the Company’s cumulative three year pre-tax loss position as of December 29, 2012.
The significant components of income tax expense (benefit) are as follows:
|
|
Year Ended
|
|
|
|
Dec 29, 2012
|
|
|
Dec 31, 2011
|
|
|
Dec 25, 2010
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
6,057
|
|
|
$
|
19,224
|
|
State
|
|
|
147
|
|
|
|
29,372
|
|
|
|
134,993
|
|
Total current tax expense
|
|
|
147
|
|
|
|
35,429
|
|
|
|
154,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(412,258
|
)
|
|
|
(352,548
|
)
|
|
|
161,393
|
|
State
|
|
|
(103,587
|
)
|
|
|
(100,803
|
)
|
|
|
(64,799
|
)
|
Total deferred tax expense
|
|
|
(515,845
|
)
|
|
|
(453,351
|
)
|
|
|
96,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in valuation allowance
|
|
|
1,103,448
|
|
|
|
437,265
|
|
|
|
(253,424
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax expense (benefit)
|
|
|
587,603
|
|
|
|
(16,086
|
)
|
|
|
(156,830
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income taxes (benefit)
|
|
$
|
587,750
|
|
|
$
|
19,343
|
|
|
$
|
(2,613
|
)
|
In 2012, the Company generated approximately $387,270 of net operating loss carryforwards and generated approximately $99,316 in 2011.
As of December 29, 2012, the Company has estimated federal net operating loss carryforwards of approximately $16.2 million, which begin to expire in 2020. 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 Company’s stock which may have occurred or that may occur.
The Company made cash payments for state income taxes of $30,007 in 2012, $203,182 in 2011, and $361,300 in 2010. The Company did not make any cash payments for federal income taxes in 2012. The Company made cash payments for federal income taxes of $23,766 in 2011, and $49,584 in 2010.
At December 29, 2012 and December 31, 2011, the Company had no material unrecognized tax benefits and no adjustments to liabilities or operations were required.
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense which were $2,466 for the year ended December 25, 2010.
Tax years 2009 through 2012 are subject to examination by the federal and state taxing authorities. The 2007 federal income tax examination has been completed.
6. RELATED PARTY TRANSACTIONS:
On June 2, 2010, the Company’s Board of Directors approved the payment of up to $61,800 to Joseph Vassalluzzo, a Director of the Company, for services as a part-time consultant for a one-year period. As of December 31, 2011, the full amount had been earned and paid.
On June 10, 2011, the Company’s Board of Directors approved the payment of up to $61,800 to Joseph Vassalluzzo, a Director of the Company, for services as a part-time consultant for a one-year period. As of December 31, 2011, the full amount had been earned and paid.
On June 6, 2012, the Company’s Board of Directors approved the payment of up to $61,800 to Joseph Vassalluzzo, a Director of the Company, for services as a part-time consultant for a one-year period. As of December 29, 2012, $46,350 had been earned and paid.
7.
LINE OF CREDIT:
On October 14, 2011, the Company and its wholly owned subsidiary, as borrowers, entered into the First Amendment (the “
Amendment
”) to the Second Amended and Restated Credit Agreement by and among the Company, its wholly owned subsidiary, and Wells Fargo Bank, National Association, as administrative agent and collateral agent, (the “
Facility
”). The Amendment continues the Facility in the amount of up to $12,500,000 and extends the maturity date of the Facility to October 14, 2016. The Facility also allows the Company to increase the Facility up to a maximum level of $15,000,000. The amount of credit that is available from time to time under the Facility continues to be determined as a percentage of the value of eligible inventory plus a percentage of the value of eligible credit card receivables, reduced by certain reserve amounts that may be required by Wells Fargo.
On February 28, 2013, the Company and its wholly owned subsidiary entered into the Second Amendment to the Facility. Under the Facility, the Company must maintain a minimum excess availability of 7.5% of the credit limit. The Second Amendment allows the Company to request that the minimum excess availability be reduced to zero for a period of not more than sixty days in the aggregate during the period beginning February 28, 2013 and ending April 30, 2014. The Company may make the request twice during this period.
The Facility, as amended, provides for interest of 0.25% above Wells Fargo’s base rate, or, at the Company’s election, 2.00% above the London Interbank Offered Rate (“
LIBOR
”). The Facility also provides for letters of credit for up to a sublimit of $2 million to be used in connection with inventory purchases and includes an unused line fee on the unused portion of the revolving credit line. The obligations of the Company under the Facility are secured by a lien on substantially all its personal property.
The Facility contains a number of restrictive covenants, such as incurrence, payment or entry into certain indebtedness, liens, investments, acquisitions, mergers, dispositions and dividends. The Facility contains events of default customary for credit facilities of this type. Upon an event of default that is not cured or waived within any applicable cure periods, in addition to other remedies that may be available to Wells Fargo, the obligations under the Facility may be accelerated, outstanding letters of credit may be required to be cash collateralized and Wells Fargo may exercise remedies to collect the balance due, including to foreclose on the collateral.
The Facility includes a financial covenant requiring the Company to maintain a minimum availability under the line of 7.5% of the credit limit, except for the period from January 1, 2012 through April 30, 2012, during which period the minimum availability was zero, and, under the terms of the Second Amendment to the Facility, for up to a sixty day period for the period February 28, 2013 through April 30, 2014 during which sixty day period the minimum availability is zero. At the current credit limit of $12,500,000, the minimum availability is $937,500. The Facility 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. For fiscal years ended December 29, 2012 and December 31, 2011, the Company was in compliance with all debt covenants. The Agreement also includes a 0.375% unused line fee. The line generally prohibits the payment of any dividends or other distributions to any of the Company’s classes of capital stock.
The amounts outstanding under the Facility as of December 29, 2012 and December 31, 2011 were $5,764,312 and $5,366,512, respectively. The interest rate on these borrowings was 2.8% at December 29, 2012 and 2.8% at December 31, 2011. The outstanding balances under the Facility 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, 2012, the Company had $2,936,324 of additional availability under the Facility.
8. PREFERRED STOCK:
The following table summarizes the changes in the number of shares of convertible preferred stock during the past two years:
|
|
Shares
|
|
|
|
|
|
Shares
|
|
|
|
|
|
Shares
|
|
|
|
Issued
|
|
|
Conversions
|
|
|
Issued
|
|
|
Conversions
|
|
|
Issued
|
|
|
|
and
|
|
|
to
|
|
|
and
|
|
|
to
|
|
|
and
|
|
|
|
Outstanding
|
|
|
Common
|
|
|
Outstanding
|
|
|
Common
|
|
|
Outstanding
|
|
|
|
as of 12/29/12
|
|
|
Stock
|
|
|
as of 12/31/11
|
|
|
Stock
|
|
|
as of 12/25/10
|
|
Series B convertible preferred stock
|
|
|
418,658
|
|
|
|
(1,750
|
)
|
|
|
420,408
|
|
|
|
(810
|
)
|
|
|
421,218
|
|
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
|
|
|
1,179,610
|
|
|
|
(1,750
|
)
|
|
|
1,181,360
|
|
|
|
(810
|
)
|
|
|
1,182,170
|
|
Series B Convertible Preferred Stock
The shares of Series B convertible preferred stock are immediately convertible into 5,409,061 shares of common stock on a 1.000 to 12.920 ratio at December 29, 2012, and carry an aggregate liquidation value of $8,373,160 (equivalent to $1.548 per common share issuable upon conversion) at December 29, 2012. 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 Company’s Certificate of Incorporation, as amended, at a price below the conversion price. The Series B convertible preferred stock will automatically convert into common stock at the conversion price then in effect in the event the Company consummates a secondary public offering resulting in gross proceeds to the Company of at least $10,000,000.
In the event of liquidation, the holders of Series B convertible preferred stock have preference to holders of the Company's common stock, and are
pari passu
with the Company's 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 Company's 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 1,315,800 shares of common stock on a 1.000 to 13.158 ratio at December 29, 2012, and carry an aggregate liquidation value of $2,000,000 (equivalent to $1.520 per common share issuable upon conversion) at December 29, 2012. 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 Company’s Certificate of Incorporation, as amended, at a price below the conversion price. The Series C convertible preferred stock will automatically convert into common stock at the conversion price then in effect in the event the Company consummates a secondary public offering resulting in gross proceeds to the Company of at least $10,000,000.
In the event of liquidation, the holders of Series C convertible preferred stock have preference to holders of the Company's common stock, and are
pari passu
with the Company's 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 Company's stockholders and are entitled to participate in dividends when and if declared by the Board of Directors.
Series D Convertible Preferred Stock
The shares of Series D convertible preferred stock are immediately convertible into 3,516,250 shares of common stock on a 1.000 to 14.065 ratio at December 29, 2012, and carry an aggregate liquidation value of $5,000,000 (equivalent to $1.422 per common share issuable upon conversion) at December 29, 2012. 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 Company’s 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.
In the event of liquidation, the holders of Series D convertible preferred stock have preference to holders of the Company's common stock, and are
pari passu
with the Company's 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 Company's 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, 2012, and carry an aggregate liquidation value of $1,112,497 (equivalent to $0.362 per common share issuable upon conversion) at December 29, 2012. 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 Company’s 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 Company's common stock, and are
pari passu
with the Company's 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 Company's stockholders and are entitled to participate in dividends when and if declared by the Board of Directors.
Series F Convertible Preferred Stock
The shares of Series F convertible preferred stock are immediately convertible into 1,184,803 shares of common stock on a 1.000 to 10.367 ratio at December 29, 2012, and carry an aggregate liquidation value of $500,000 (equivalent to $0.422 per common share issuable upon conversion) at December 29, 2012. 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 Company’s 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 Company's common stock, and are
pari passu
with the Company's 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 Company's stockholders and are entitled to participate in dividends when and if declared by the Board of Directors.
Highbridge Warrant Anti-Dilution Shares
On September 15, 2006, the Company entered into a Securities Purchase Agreement pursuant to which it raised $2.5 million through a combination of subordinated debt and warrant issued on September 15, 2006 to Highbridge, an institutional accredited investor. Under the terms of the financing, the Company issued Highbridge a warrant (the “
Highbridge Warrant
”) exercisable through September 15, 2011 for 2,083,334 shares of its common stock at an exercise price of $0.475 per share, or 125% of the closing price of the Company’s common stock on the day immediately prior to the closing of the transaction. The issuance of the Highbridge Warrant triggered certain anti-dilution adjustment provisions of the Company’s Series B, C, and D convertible preferred stock. Upon the expiration of the Highbridge Warrant on September 15, 2011, the conversion prices of the Series B, C, and D convertible preferred stock were recomputed to reflect the reversal of the anti-dilution adjustment calculated at the warrant’s issuance in 2006. As a result, the outstanding shares of these series of preferred stock are now convertible into approximately 385,514 fewer shares of common stock. The expiration of the Highbridge Warrant had no impact on the Series E or F convertible preferred stock or any of the other outstanding warrants.
Accretion of Dividends in the Event of Liquidation
The carrying values of Series B through F convertible preferred stock have been determined based on their fair market values at the original dates of issuance. In certain cases, warrants were issued to which the Company allocated value and included in additional paid in capital. Should such a liquidation event occur, the difference between the carrying value of the convertible preferred stock and their liquidation value will be accreted. This amount was $3,999,029 on December 29, 2012.
9. WARRANTS:
At December 29, 2012, there were warrants outstanding which were exercisable for 100,000 shares of the Company’s common stock. These warrants were issued in connection with a professional service contract. On September 15, 2011, the Highbridge Warrant expired unexercised.
Each of these warrants is described below.
Highbridge Warrant
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 terms of the financing included the issuance of the Highbridge Warrant. The Company allocated approximately $613,651 of value to the Highbridge Warrant using the Black-Scholes model with volatility of 108%, interest of 4.73% and expected life of five years. The Highbridge Warrant was amortized using the effective interest method over the life of the Highbridge Note. The Highbridge Warrant was fully amortized as of December 26, 2009. In connection with the issuance of the Warrant, which expired unexercised on September 15, 2011, the Company was required to file with the SEC a Registration Statement on Form S-3 covering the resale of all of the shares of common stock underlying the Highbridge Warrant and maintain the effectiveness of the Registration Statement. In the event that the Company failed to maintain the effectiveness of the Registration Statement, it would be subject to certain cash penalties in the amount of 1% of the face amount of the Highbridge Note on the initial day of such a failure and an additional 1% for each 30 days thereafter, up to a maximum of 10% of the face amount of the Highbridge Note. The Company incurred no penalty related to the registration rights agreement.
From the time of its issuance through the Company’s third fiscal quarter in 2010 (the period ended September 25, 2010), the Company accounted for the Highbridge Warrant as equity, having credited the value of $613,651 assigned to it at the date of issuance to “Additional Paid In Capital”. During the fourth fiscal quarter of 2010, the Company concluded that the anti-dilution rights provided for in the Warrant could result in the reduction of the exercise price of the Warrant due to the issuance of shares at a price lower than the Warrant exercise price. Because of this feature, the settlement amount may not equal the difference between the fair value of a fixed number of the Company’s equity shares and a fixed strike price as contemplated by ASC 815-40-15-7C and 7D. Consequently, the Company concluded that the Warrant, effective December 28, 2008 (the first day of the Company’s fiscal 2009 year and the effective date for the provisions of ASC 815-40-15) would not be considered indexed to the Company’s own stock and therefore should have been classified as a liability. As a result of liability classification, the Warrant should have been marked-to-market through operations as of each reporting date in the Company’s previously filed financial statements commencing with the Company’s report on Form 10-Q for the three months ended March 28, 2009 and for each subsequent interim reporting period thereafter and in the Company’s Annual Report on Form 10-K for the year ended December 26, 2009.
The Company evaluated the effect of making such a reclassification as of the date of adoption on its financial condition as of December 28, 2008 (the first day of fiscal 2009) and the effect of recognizing the change in the value of the Warrant in its operating results as of each quarterly and annual reporting period for fiscal 2009 and 2010. As a result, the Company concluded that the effects of the reclassification upon adoption, to be effected as an adjustment to retained earnings, and the effect upon each quarterly and annual reporting period, was not material. Consequently, the Company recognized the cumulative effects of these adjustments in the Company’s fourth quarter of 2010 as an immaterial correction of an error, which is reflected in the accompanying consolidated financial statements for the year ended December 25, 2010.
Upon the expiration of the Highbridge Warrant on September 15, 2011, the conversion prices of the Series B, C, and D convertible preferred stock were recomputed to reflect the reversal of the anti-dilution adjustment calculated at the warrant’s issuance in 2006. The expiration of the Highbridge Warrant had no impact on the conversion prices of the the Series E or F convertible preferred stock or any of the other outstanding warrants.
Booke and Company Warrant
On February 28, 2008, the Company entered into an agreement with Booke and Company, Inc. for investor relations services. In connection with that agreement, the Company issued warrants to purchase 100,000 shares of its common stock at an exercise price of $1.50 per share. The warrants expire on February 28, 2013. The Company determined the fair value of the 2008 warrants to be $0.00 at December 29, 2012 by using the Black-Scholes model (volatility of 142.39%, risk free rate of 0.01% and expected life of 0.16 years). The fair value of the 2008 warrants was amortized over their vesting period of one year.
The following table summarizes the Company’s outstanding warrants at December 29, 2012:
Shares
Issuable
|
|
Exercise Price
|
Expiration Date
|
|
100,000
|
|
|
$
|
1.50
|
|
02/28/13
|
10. STOCK OPTION PLANS:
Under the Plans, a combined total of 11,000,000 shares of common stock or other stock based awards may be granted. To date, the Company has only issued options under its Plans, which have been granted to employees, directors and consultants of the Company
at fair market value at the date of grant, as determined by the Company’s Board of Directors. Generally, employee options become exercisable over periods of up to four years, and expire ten years from the date of grant
.
Following the stockholder approval of the 2009 Plan on May 27, 2009, the Company stopped granting awards under its 1998 Plan.
A summary of the Company’s stock options is as follows:
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Underlying
|
|
|
Exercise
|
|
|
Price
|
|
|
|
Stock Options
|
|
|
Price
|
|
|
Range
|
|
Outstanding - December 31, 2011
|
|
|
7,542,459
|
|
|
$
|
0.41
|
|
|
$
|
0.07
|
|
-
|
|
$
|
1.33
|
|
Granted
|
|
|
753,400
|
|
|
|
0.15
|
|
|
|
0.14
|
|
-
|
|
|
0.20
|
|
Expired/Forfeited
|
|
|
(664,114
|
)
|
|
|
0.33
|
|
|
|
0.21
|
|
-
|
|
|
1.06
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding - December 29, 2012
|
|
|
7,631,745
|
|
|
|
0.39
|
|
|
|
0.07
|
|
-
|
|
|
1.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable - December 29, 2012
|
|
|
6,627,301
|
|
|
$
|
0.42
|
|
|
$
|
0.07
|
|
-
|
|
$
|
1.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for grant - December 29, 2012
|
|
|
1,819,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information for options outstanding and exercisable at December 29, 2012:
|
|
|
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of
|
|
|
Average
|
|
|
Weighted
|
|
|
Number
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Remaining
|
|
|
Average
|
|
|
of
|
|
|
Average
|
|
|
|
|
|
|
|
|
Underlying
|
|
|
Life
|
|
|
Exercise
|
|
|
Stock
|
|
|
Exercise
|
|
Price Range
|
|
|
Stock Options
|
|
|
(Years)
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
$
|
0.07
|
|
-
|
|
|
$
|
0.20
|
|
|
|
2,038,760
|
|
|
|
7.32
|
|
|
$
|
0.12
|
|
|
|
1,500,813
|
|
|
$
|
0.11
|
|
|
0.21
|
|
-
|
|
|
|
0.30
|
|
|
|
2,157,507
|
|
|
|
4.95
|
|
|
|
0.28
|
|
|
|
1,737,927
|
|
|
|
0.28
|
|
|
0.31
|
|
-
|
|
|
|
0.50
|
|
|
|
1,640,570
|
|
|
|
4.36
|
|
|
|
0.42
|
|
|
|
1,593,653
|
|
|
|
0.42
|
|
|
0.51
|
|
-
|
|
|
|
1.00
|
|
|
|
1,761,908
|
|
|
|
1.58
|
|
|
|
0.81
|
|
|
|
1,761,908
|
|
|
|
0.81
|
|
$
|
1.01
|
|
-
|
|
|
$
|
1.33
|
|
|
|
33,000
|
|
|
|
0.99
|
|
|
|
1.13
|
|
|
|
33,000
|
|
|
|
1.13
|
|
Total
|
|
|
|
|
|
|
|
|
|
7,631,745
|
|
|
|
4.66
|
|
|
$
|
0.39
|
|
|
|
6,627,301
|
|
|
$
|
0.42
|
|
The Company has reserved 22,230,822 shares of common stock for issuance in connection with the conversion of convertible preferred stock (14,499,077 shares), the exercise of warrants (100,000 shares) and the exercise of stock options (7,631,745 shares).
11. STOCKHOLDER RIGHTS PLAN:
On October 7, 2011, the Board of Directors of the Company adopted a new shareholder rights plan (the “
Rights Plan
”). The Rights Plan replaced the Company’s then existing shareholder rights plan which expired on November 9, 2011. Under the Plan, each share of the Company’s capital stock outstanding at the close of business on November 9, 2011 and each share of the Company’s 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 Company’s outstanding voting stock, or if a party announces an offer to acquire 15 percent or more of the Company’s outstanding voting stock, not previously approved by the Board. The rights expire on November 9, 2021.
When exercisable, each right entitles the holder to purchase from the Company, one one-hundredth of a share of a new series of Series H 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 Company 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 tenth day following the acquisition by any person or group of 10 percent or more of the Company’s outstanding voting stock. 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.
12. 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 Company’s expense, including matching contributions and any discretionary amounts, was $27,875 in 2012, $193,869 in 2011, and $174,584 in 2010.
13. SEGMENT REPORTING:
ASC Subtopic 280-10,
Disclosures about Segments of an Enterprise and Related Information
, establishes standards for the way business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to stockholders. The Company has concluded based upon the nature of its products, customers and retail store operations,that the Company operates in a single segment as a retailer of party goods.
14. SUBSEQUENT EVENTS:
On February 28, 2013, the Company and its wholly owned subsidiary, iParty Retail Stores Corp., as borrowers (together, the “
Borrowers
”), entered into that certain Second Amendment (the “
Amendment
”) to the Second Amended and Restated Credit Agreement (the “
Credit Facility
”) by and among the Borrowers and Wells Fargo Bank, National Association, as administrative agent and collateral agent (“
Wells Fargo
”) dated February 28, 2013. Under the Credit Facility, the Company must maintain a minimum excess availability of 7.5%. The Amendment allows the Company to request that the minimum excess availability be reduced to zero for a period of not more than sixty days in the aggregate during the period beginning February 28, 2013 and ending April 30, 2014. The Company may make the request twice during this period.
On March 1, 2013, the Company entered into an Agreement and Plan of Merger (the “
Merger Agreement
”) by and among the Company, Party City Holdings Inc., a Delaware corporation (“
Party City
”), and Confetti Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of Party City (“
Merger Sub
”).
Pursuant to the terms of the Merger Agreement, Merger Sub will be merged with and into the Company, with the Company being the surviving corporation, becoming a wholly-owned subsidiary of Party City (the "
Merger
") and (i) each share of Common Stock of the Company (the "
Common Stock
") will be converted into the right to receive $0.45; (ii) each share of Series B Convertible Preferred Stock of the Company (the "
Series B Stoc
k") will be converted into the right to receive 100% of its liquidation preference of $20.00 per share; (iii) each share of Series C Convertible Preferred Stock of the Company (the "
Series C Stock
") will be converted into the right to receive 100% of its liquidation preference of $20.00 per share; (iv) each share of Series D Convertible Preferred Stock of the Company (the "
Series D Stock
") will be converted into the right to receive 100% of its liquidation preference of $20.00 per share; (v) each share of Series E Convertible Preferred Stock of the Company (the "
Series E Stock
") will be converted into the right to receive the greater of: (A) 100% of its liquidation preference of $3.75 per share and (B) $0.45 per each Series E Common Equivalent Share, which is currently set at 10.359 shares of Common Stock for each share of Series E Stock or $4.66 per share of Series E Stock, and; (vi) each share of Series F Convertible Preferred Stock of the Company (the "
Series F Stock
", and collectively with the Series B Stock, Series C Stock, Series D Stock and Series E Stock, the "
Preferred Stock
") will be converted into the right to receive the greater of (A) 100% of its liquidation preference of $4.375 per share and (B) $0.45 per each Series F Common Equivalent Share, which is currently set at 10.367 shares of Common Stock for each share of Series F Stock or $4.67 per share of Series F Stock (collectively, the "
Merger Consideration
"), in each case, payable net to the selling stockholders in cash, without interest thereon, and less any required withholding taxes.
In addition, at the effective time, each outstanding and unexercised option under the Company’s equity incentive plans (the “Company Options”) will become fully vested, and will be terminated and converted into the right to receive a cash payment equal to (i) the positive difference, if any, between $0.45 and their respective exercise prices multiplied by (ii) the total number of shares of Common Stock subject to such option or other right.
The Merger Agreement contains certain termination rights for the Company and Party City, including if the Merger is not consummated by 12:00 a.m. (Eastern Time) on August 1, 2013. Upon termination of the Merger Agreement under specified circumstances, the Company will be required to pay Party City a termination fee and/or expenses that are reasonably documented and actually incurred, in an amount that is reasonable in the circumstances of the transaction, and that, in any event, does not exceed $750,000 or $1,000,000 (depending upon the circumstances of termination). If the termination fee becomes payable as a result of (i) the Company terminating the Merger Agreement in order to enter into a definitive acquisition agreement with respect to a superior proposal or (ii) by Party City terminating the Merger Agreement as a result of the Company’s entry into such an agreement or the Board changing its recommendation with respect to the Merger, the amount of the termination fee will be $1,750,000, provided however that if the Merger Agreement is terminated prior to the end of the Compan’s go-shop period (March 31, 2013) or during the go-shop extension period (April 10, 2013), the amount of the termination fee (with certain exceptions) will be $1,000,000. The Company may be required to pay a termination fee and/or Party City expenses in certain other circumstances as more fully described in the Merger Agreement.
The Merger Agreement has customary representations and warranties and covenants, including without limitation covenants regarding: (i) the conduct of the business of the Company prior to the consummation of the Merger, (ii) the calling and holding of a meeting of the Company’s stockholders for the purpose of obtaining the company stockholder approval of the Merger Agreement and the other transactions contemplated thereby, including the Merger, and (iii) the use of commercially reasonable efforts to cause the Merger to be consummated.
The consummation of the Merger is subject to customary conditions to closing, including the approval of the Company’s stockholders. The Merger is expected to close in the Company’s second fiscal quarter.
On March 1, 2013, the Company amended its Rights Plan with the purpose and intent of rendering the Rights Plan inapplicable to the the Merger Agreement, the Merger, and any other transaction with Party City and its affiliates contemplated by the Merger Agreement, and to cause the Rights Plan to terminate immediately prior to the effective time of the Merger.
15. QUARTERLY FINANCIAL DATA (UNAUDITED):
|
|
Mar 31, 2012
|
|
|
Jun 30, 2012
|
|
|
Sep 29, 2012
|
|
|
Dec 29, 2012
|
|
Revenues
|
|
$
|
15,753,745
|
|
|
$
|
19,562,979
|
|
|
$
|
16,888,248
|
|
|
$
|
26,889,345
|
|
Cost of products sold and occupancy costs
1, 2
|
|
|
10,026,180
|
|
|
|
12,052,375
|
|
|
|
11,004,882
|
|
|
|
15,703,830
|
|
Operating income (loss)
|
|
|
(1,185,720
|
)
|
|
|
124,225
|
|
|
|
(2,115,279
|
)
|
|
|
2,412,878
|
|
Net income (loss)
|
|
|
(1,235,266
|
)
|
|
|
81,153
|
|
|
|
(2,163,455
|
)
|
|
|
1,781,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.05
|
)
|
|
$
|
0.00
|
|
|
$
|
(0.09
|
)
|
|
$
|
0.05
|
|
Diluted
|
|
$
|
(0.05
|
)
|
|
$
|
0.00
|
|
|
$
|
(0.09
|
)
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
24,408,594
|
|
|
|
38,930,281
|
|
|
|
24,414,432
|
|
|
|
38,930,285
|
|
Diluted
|
|
|
24,408,594
|
|
|
|
39,422,446
|
|
|
|
24,414,432
|
|
|
|
39,388,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mar 26, 2011
|
|
|
Jun 25, 2011
|
|
|
Sep 24, 2011
|
|
|
Dec 31, 2011
4
|
|
Revenues
|
|
$
|
15,092,128
|
|
|
$
|
19,617,207
|
|
|
$
|
16,462,631
|
|
|
$
|
29,710,785
|
|
Cost of products sold and occupancy costs
1, 3
|
|
|
9,600,871
|
|
|
|
11,819,894
|
|
|
|
10,813,669
|
|
|
|
16,912,576
|
|
Operating income (loss)
|
|
|
(1,428,686
|
)
|
|
|
110,693
|
|
|
|
(2,741,645
|
)
|
|
|
3,052,626
|
|
Net income (loss)
|
|
|
(1,510,911
|
)
|
|
|
43,253
|
|
|
|
(2,830,663
|
)
|
|
|
2,983,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.06
|
)
|
|
$
|
0.00
|
|
|
$
|
(0.12
|
)
|
|
$
|
0.08
|
|
Diluted
|
|
$
|
(0.06
|
)
|
|
$
|
0.00
|
|
|
$
|
(0.12
|
)
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
24,319,464
|
|
|
|
39,315,795
|
|
|
|
24,408,594
|
|
|
|
38,930,281
|
|
Diluted
|
|
|
24,319,464
|
|
|
|
39,919,425
|
|
|
|
24,408,594
|
|
|
|
39,201,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 2012 included an estimated reduction of $42,111 to the cost of products sold during the previous three quarters due to the completion of physical inventories, for which shortage had been estimated during the year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
The fourth quarter of 2011 included an estimated reduction of $92,908 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
The fourth quarter of 2011 consisted of 14 weeks compared to 13 weeks for the fourth quarter of 2012.
|
|
|
|
|
|