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| IPT > SEC Filings for IPT > Form 10-Q on 6-Aug-2009 | All Recent SEC Filings |
6-Aug-2009
Quarterly Report
The following discussion should be read in conjunction with the unaudited Consolidated Financial Statements and related Notes included in Item 1 of this Quarterly Report on Form 10-Q and the audited Consolidated Financial Statements and related Notes and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", contained in our Annual Report on Form 10-K for the fiscal year ended December 27, 2008.
Certain statements in this Quarterly Report on Form 10-Q, particularly
statements contained in this Item 2, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The
words "anticipate", "believe", "estimate", "expect", "plan", "intend" and other
similar expressions are intended to identify these forward-looking statements,
but are not the exclusive means of identifying them. Forward-looking statements
included in this Quarterly Report on Form 10-Q or hereafter included in other
publicly available documents filed with the Securities and Exchange Commission
("SEC"), reports to our stockholders and other publicly available statements
issued or released by us involve known and unknown risks, uncertainties, and
other factors which could cause our actual results, performance (financial or
operating) or achievements to differ from the future results, performance
(financial or operating) or achievements expressed or implied by such forward
looking statements. Such future results are based upon our best estimates based
upon current conditions and the most recent results of operations. Various
risks, uncertainties and contingencies could cause our actual results,
performance or achievements to differ materially from those expressed in, or
implied by, the forward-looking statements contained in this Quarterly Report on
Form 10-Q. These include, but are not limited to, those described below under
the heading "Factors That May Affect Future Results" and in Part II, Item 1A,
"Risk Factors" as well as under Item 1A, "Risk Factors" of our most recently
filed Annual Report on Form 10-K for the year ended December 27, 2008. We assume
no obligation to update these forward looking statements contained in this
report, whether as a result of new information, future events or otherwise.
Overview
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 45 of our 50 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.
Our 50 retail stores are located predominantly in New England with 25 stores in Massachusetts, 7 in Connecticut, 6 in New Hampshire, 3 in Rhode Island, 3 in Maine and 1 in Vermont. We also operate 5 stores in Florida. Our stores range in size from approximately 8,000 square feet to 20,500 square feet and average approximately 10,300 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.
The following table shows the number of stores in operation (not including temporary stores):
For the six months ended
Jun 27, 2009 Jun 28, 2008
Beginning of period 50 50
Openings / Acquisitions - 2
Closings - (2 )
End of period 50 50
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Our stores feature over 20,000 products ranging from paper party goods, Halloween costumes, greeting cards and balloons to more unique merchandise such as piņatas, tiny toys, masquerade and Hawaiian Luau items. Our sales are driven by the following holiday and party events: Halloween, Christmas, Easter, Valentine's Day, New Year's, Independence Day, St. Patrick's Day, Thanksgiving, Hanukkah and professional sports playoff events. We also focus our business closely on lifetime events such as anniversaries, graduations, birthdays, and bridal or baby showers.
In addition to the stores discussed in the paragraphs above, we opened two temporary Halloween stores in the greater Boston area in September 2008. These stores featured a strategically selected assortment of Halloween related merchandise and were closed in early November 2008.
Trends and Quarterly Summary
Our business has a seasonal pattern. In the past three years, we have realized
approximately 34.7% of our annual revenues in our fourth quarter, which includes
Halloween and Christmas, and approximately 24.5% of our revenues in the second
quarter, which includes school graduations and usually includes Easter. Also,
during the past three years, we have had net income in our second and fourth
quarters and generated losses in our first and third quarters.
For the second quarter of 2009, our consolidated revenues were $19.6 million, compared to $20.1 million for the second quarter of 2008. The decrease in second quarter revenues from the year-ago period included a 2.6% decrease in comparable store sales. The decrease in consolidated revenue was primarily due to a decrease in customer traffic and an increase in promotional markdowns, both of which are related to the continuing recession in the U.S. and world economies. Consolidated gross profit margin was 40.3% for the second quarter of 2009 compared to a margin of 42.2% for the same period in 2008. The decline in gross profit margin was substantially due to increases in occupancy costs as well as the decreased leveraging of those costs related to lower sales. The consolidated net income for the second quarter of 2009 was $668,868 or $0.02 per share, compared to a consolidated net income of $183,606, or $0.00 per share, for the second quarter in 2008, an improvement of $485,262. Despite the decline in revenues as compared to the second quarter of 2008, we were able to report a significant improvement in our net income as compared to the second quarter of 2008, due primarily to the cost cutting initiatives we undertook at the end of 2008. As a result of those initiatives, we estimate that we eliminated $3 million in annualized expenses throughout the Company for 2009.
Acquisition and Growth Strategy
We operate in a largely un-branded market that has many small businesses. As a result, we have considered, and may continue to consider, growing our business through acquisitions of other entities. Any determination to make an acquisition will be based upon a variety of factors, including, without limitation, the purchase price and other financial terms of the transaction, the business prospects, geographical location and the extent to which any acquisition would enhance our prospects. Given the current state of the economy and our focus on maintaining liquidity, we do not expect to acquire or open any new stores in 2009, except for temporary Halloween stores.
On January 2, 2008, we completed the purchase of two stores in Rhode Island. The aggregate consideration paid was $1,350,000 plus approximately $195,000 for associated inventory. Funding for the purchase was obtained from our line of credit with Wells Fargo Retail Finance, LLC ("Wells Fargo"). The stores were converted into iParty stores immediately following the closing of the transaction. The consideration paid for the assets acquired in the transaction was allocated based upon an independent appraisal to the following, based on their fair values on the date of purchase:
Fair Value at
Jan 2, 2008
Non-compete agreement $ 781,000
Occupancy valuation 495,000
Equipment and other 74,000
$ 1,350,000
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Results of Operations
Fiscal year 2009 has 52 weeks and ends on December 26, 2009. Fiscal year 2008 had 52 weeks and ended on December 27, 2008.
The second quarter of fiscal year 2009 had 13 weeks and ended on June 27, 2009. The second quarter of fiscal year 2008 had 13 weeks and ended on June 28, 2008.
Expense Management Actions for Fiscal 2009
In 2008, the US economy entered into a recessionary period combined with a
systematic lack of financial liquidity. During that year, the housing crisis
deepened, the stock market declined dramatically, and unemployment rose
steeply. All of these factors contributed to a difficult retail
environment. Many economists anticipated a difficult 2009. Although we fared
better than many of our competitors in 2008, we have taken significant steps in
response to the economic crisis. We reviewed and revamped our headquarters and
store expenses, which included reducing our headcount and decreasing our
advertising and other administrative costs. We expect to save up to $3 million
through reduced operating expenses in 2009 from these actions. We continue to
monitor sales performance, customer buying patterns and consumer confidence, and
we are prepared to make further adjustments to our cost structure as needed to
manage our way through this recession.
Three Months Ended June 27, 2009 Compared to Three Months Ended June 28, 2008
Revenues
Revenues include the selling price of party goods sold, net of returns and
discounts, and are recognized at the point of sale. Our consolidated revenues
for the second quarter of fiscal 2009 were $19,569,009, a decrease of $534,659,
or 2.7% from the second quarter of the prior fiscal year. The decline was
primarily due to the decreased level of consumer demand and increased level of
promotional markdowns, both of which are related to the U.S. recession.
For the three months ended
Jun 27, 2009 Jun 28, 2008
Revenues $ 19,569,009 $ 20,103,668
Decrease in revenues -2.7 % -1.5 %
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Comparable store sales for the quarter decreased by 2.6%.
Cost of products sold and occupancy costs
Cost of products sold and occupancy costs consist of the cost of merchandise sold to customers and the occupancy costs for our stores. Our cost of products sold and occupancy costs for the second quarter of fiscal 2009 were $11,691,950, or 59.7% of revenues, an increase of $79,363 or 1.9 percentage points, as a percentage of revenues, from the second quarter of the prior fiscal year.
For the three months ended
Jun 27, 2009 Jun 28, 2008
Cost of products sold and occupancy costs $ 11,691,950 $ 11,612,587
Percentage of revenues 59.7 % 57.8 %
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As a percentage of revenues, the increase in cost of products sold and occupancy costs was primarily attributable to increased occupancy costs and the decreased leveraging of these occupancy costs related to lower sales in the second quarter of 2009 compared to the second quarter of 2008.
Marketing and sales expense
Marketing and sales expense consists primarily of advertising and promotional expenditures, all store payroll and related expenses for personnel engaged in marketing and selling activities and other non-payroll expenses associated with operating our stores. Our consolidated marketing and sales expense for the second quarter of fiscal 2009 was $5,441,459, or 27.8% of revenues, a decrease of $735,001 or 2.9 percentage points, as a percentage of revenues, from the second quarter of the prior fiscal year.
For the three months ended
Jun 27, 2009 Jun 28, 2008
Marketing and sales $ 5,441,459 $ 6,176,460
Percentage of revenues 27.8 % 30.7 %
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As a percentage of revenues, the decrease in marketing and sales expense was primarily the result of our cost reduction actions related to store payroll and advertising expenses, as described above.
General and administrative expense
General and administrative ("G&A") expense consists of payroll and related
expenses for executive, merchandising, finance and administrative personnel, as
well as information technology, professional fees and other general corporate
expenses. Our consolidated G&A expense for the second quarter of fiscal 2009 was
$1,638,221, or 8.4% of revenues, a decrease of $308,413 or 1.3 percentage
points, as a percentage of revenues, from the second quarter of the prior fiscal
year.
For the three months ended
Jun 27, 2009 Jun 28, 2008
General and administrative $ 1,638,221 $ 1,946,634
Percentage of revenues 8.4 % 9.7 %
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The decrease in general and administrative expense as a percentage of revenues from the second quarter of the prior fiscal year was a result of the cost reduction initiatives implemented in 2009.
Operating income
Our operating income for the second quarter of fiscal 2009 was $797,379, or 4.1% of revenues, compared to an operating income of $367,987, or 1.8% of revenues for the second quarter of the prior fiscal year.
Interest expense
Our interest expense in the second quarter of fiscal 2009 was $128,528, a decrease of $56,097 from the second quarter of the prior fiscal year. The decrease in the second quarter of fiscal 2009 was primarily due to a lower effective rate on our Highbridge Note and lower interest expense on our Amscan Note due to principal amortization of that indebtedness.
Income taxes
We have not provided for income taxes for the second quarter of fiscal 2009 or fiscal 2008 due to losses in the six month period ended June 27, 2009 and for fiscal 2008 and the availability of net operating loss (NOL) carryforwards to eliminate federal taxable income on an annual basis. No benefit has been recognized with respect to current losses or NOL carryforwards due to the uncertainty of future taxable income.
At the end of fiscal 2008, we had estimated federal net operating loss carryforwards of approximately $20.3 million, which begin to expire in 2019. In accordance with Section 382 of the Internal Revenue Code of 1986, as amended, the use of these carryforwards will be subject to annual limitations based upon certain ownership changes of our stock that have occurred or that may occur.
Net income
Our net income in the second quarter of fiscal 2009 was $668,868, or $0.02 per basic and diluted share, compared to a net income of $183,606, or $0.00 per basic and diluted share, in the second quarter of the prior fiscal year. The increase in net income was mainly attributable to lower advertising expenditures and decreased general and administrative costs resulting primarily from our cost cutting initiatives.
Six Months Ended June 27, 2009 Compared to Six Months Ended June 28, 2008
Revenues
Revenues include the selling price of party goods sold, net of returns and
discounts, and are recognized at the point of sale. Our consolidated revenues
for the first six months of fiscal 2009 were $34,137,416, a decrease of
$2,110,340 or 5.8% from the first six months of the prior fiscal year.
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For the six months ended
Jun 27, 2009 Jun 28, 2008
Revenues $ 34,137,416 $ 36,247,756
Increase (decrease) in revenues -5.8 % 0.7 %
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Comparable store sales for the first six months decreased by 5.9%.
Cost of products sold and occupancy costs
Cost of products sold and occupancy costs consist of the cost of merchandise sold to customers and the occupancy costs for our stores. Our cost of products sold and occupancy costs for the first six months of fiscal 2009 were $21,074,016, or 61.7% of revenues, a decrease of $521,918 or an increase of 2.1 percentage points, as a percentage of revenues, from the first six months of the prior fiscal year.
For the six months ended
Jun 27, 2009 Jun 28, 2008
Cost of products sold and occupancy costs $ 21,074,016 $ 21,595,934
Percentage of revenues 61.7 % 59.6 %
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As a percentage of revenues, the increase in cost of products sold and occupancy costs was primarily attributable to increased occupancy costs and the decreased leveraging of these occupancy costs related to lower sales in the first six months of 2009 compared to the first six months of the prior fiscal year.
Marketing and sales expense
Marketing and sales expense consists primarily of advertising and promotional expenditures, all store payroll and related expenses for personnel engaged in marketing and selling activities and other non-payroll expenses associated with operating our stores. Our consolidated marketing and sales expense for the first six months of fiscal 2009 was $10,420,777, or 30.5% of revenues, a decrease of $1,605,435 or a decrease of 2.7 percentage points, as a percentage of revenues, from the first six months of the prior fiscal year.
For the six months ended
Jun 27, 2009 Jun 28, 2008
Marketing and sales $ 10,420,777 $ 12,026,212
Percentage of revenues 30.5 % 33.2 %
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As a percentage of revenues, the decrease in marketing and sales expense was primarily the result of our cost reduction actions related to store payroll and advertising expenses, as described above.
General and administrative expense
General and administrative ("G&A") expense consists of payroll and related
expenses for executive, merchandising, finance and administrative personnel, as
well as information technology, professional fees and other general corporate
expenses. Our consolidated G&A expense for the first six months of fiscal 2009
was $3,423,991, or 10.0% of revenues, a decrease of $485,808, or 0.8 percentage
points, as a percentage of revenues, from the first six months of the prior
fiscal year.
For the six months ended
Jun 27, 2009 Jun 28, 2008
General and administrative $ 3,423,991 $ 3,909,799
Percentage of revenues 10.0 % 10.8 %
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General and administrative expense decreased as a percentage of revenues from the second quarter of the prior fiscal year as a result of the cost reduction initiatives implemented in 2009.
Operating loss
Our operating loss for the first six months of fiscal 2009 was $781,368, or 2.3% of revenues, compared to an operating loss of $1,284,189, or 3.5% of revenues for the first six months of the prior fiscal year.
Interest expense
Our interest expense in the first six months of fiscal 2009 was $265,080, a decrease of $133,573 from the first six months of the prior fiscal year. The decrease in the first six months of fiscal 2009 was primarily due to a lower effective rate on our Highbridge Note and lower interest expense on our Amscan Note, due to amortization of that indebtedness.
Income taxes
We have not provided for income taxes for the first six months of fiscal 2009 or fiscal 2008 due to availability of net operating loss (NOL) carryforwards to eliminate federal taxable income during those periods. No benefit has been recognized with respect to NOL carryforwards due to the uncertainty of future taxable income.
At the end of fiscal 2008, we had estimated federal net operating loss carryforwards of approximately $20.3 million, which begin to expire in 2019. In accordance with Section 382 of the Internal Revenue Code, the use of these carryforwards will be subject to annual limitations based upon certain ownership changes of our stock that have occurred or that may occur.
Net Loss
Our net loss in the first six months of fiscal 2009 was $1,046,403, or $0.05 per basic and diluted share, compared to a net loss of $1,680,922, or $0.07 per basic and diluted share, in the first six months of the prior fiscal year. The decrease in net loss was mainly attributable to lower store payroll expenses, lower advertising costs and decreased general and administrative expenses.
Liquidity and Capital Resources
Our primary uses of cash are:
· purchases of inventory, including purchases under our Supply Agreement with Amscan, as described more fully below;
· occupancy expenses of our stores;
· employee salaries; and
· new store openings, including acquisitions.
Our primary sources of cash are:
· cash from operating activities; and
· debt, including our line of credit and notes payable.
Our prospective cash flows are subject to certain trends, events and
uncertainties, including demands for capital to support growth, improve our
infrastructure, respond to economic conditions, and meet contractual
commitments. Based on our current operating plan, we believe that anticipated
revenues from operations and borrowings available under our line of credit,
which was amended and restated on July 1, 2009, will be sufficient to fund our
operations, working capital requirements, scheduled note payments as discussed
below, and capital expenditures through the next twelve months. In the event
that our operating plan changes due to changes in our strategic plans,
lower-than-expected revenues, unanticipated expenses, increased competition,
unfavorable economic conditions or other unforeseen circumstances, including the
continued uncertainty in the credit markets, and further weakening of consumer
confidence and spending, our liquidity may be negatively impacted. If so, we
could be required to further adjust our expenditures for 2009 to conserve
working capital or raise additional capital, possibly including debt or equity
financing, to fund operations and our business strategy and to refinance our
outstanding debt. Given the current state of the debt and equity markets, this
could be more difficult and expensive.
Notes Payable
We currently have three notes payable outstanding with principal balances totaling $3,298,730 at June 27, 2009. We refer to these notes as the Highbridge Note, the Amscan Note and the Party City Note. For a more detailed description of these notes, we refer you to the section titled "Notes Payable" in the Notes to Consolidated Financial Statements for the quarter ended June 27, 2009 included in Item 1 of this Quarterly Report on Form 10-Q. The Amscan Note bears interest at the rate of 11.0% per annum and is payable in thirty-six (36) equal monthly installments of principal and interest of $59,562 commencing on November 1, 2006, and on the first day of each month thereafter until October 1, 2009. The Party City Note, which has a principal amount of $600,000, is payable by quarterly interest-only payments over four years, with the full principal amount due at the note's maturity on August 7, 2010.
In September 2006, we closed a financing transaction with an institutional accredited investor whereby we issued a three-year $2.5 million subordinated note, the Highbridge Note, that bears interest at an interest rate of prime plus one percent and a warrant, the Highbridge Warrant, exercisable for 2,083,334 shares of our common stock at an exercise price of $0.475 per share, or 125% of the closing price of our common stock on the day immediately prior to the closing of the transaction. The Highbridge Note matures on September 15, 2009. The agreements entered into in connection with the financing provide for certain restrictions and covenants consistent with Highbridge's status as a subordinated lender, and also grant Highbridge resale registration rights with respect to the shares of common stock underlying the Highbridge Warrant. The issuance of the Highbridge Warrant triggered certain anti-dilution provisions of our Series B, C, and D convertible preferred stock. We expect to repay the Highbridge loan when it becomes due on September 15, 2009, with proceeds from our Wells Fargo revolving line of credit.
Line of Credit
On July 1, 2009, we entered into a Second Amended and Restated Credit Agreement (the "new line") with Wells Fargo , which amended and restated the previous revolving credit facility with Wells Fargo. The new line continues the revolving line of credit in the amount of up to $12,500,000 and extends the maturity date for three years to July 2, 2012. As with the previous line with Wells Fargo, the new line includes an option whereby we may increase the revolving line of credit up to a maximum level of $15,000.000 at any time prior to July 2, 2011. The amount of credit that is available from time to time under the Agreement is determined as a percentage of the value of eligible inventory plus a percentage of the value of eligible credit card receivables, as reduced by certain reserve amounts that may be required by Wells Fargo.
Borrowings under the new line will generally accrue interest at a margin ranging from 3.00% to 3.50% (determined according to the average daily excess availability during the fiscal quarter immediately preceding the adjustment date) over, at our election, either the London Interbank Offered Rate ("LIBOR") or a base rate determined by Wells Fargo from time to time. The new line margins are an increase over the previous line, and may result in an increase in overall borrowing cost under the new line. The new line also provides for letters of credit for up to a sublimit of $2 million to be used in connection with inventory purchases and includes an unused line fee on the unused portion of the revolving credit line. The new line also provided for a closing fee of $125,000, which was paid to Wells Fargo at closing.
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