| IPARTY CORP ITEM 1A RISK FACTORS Our business is subject to certain risks that could materially affect our financial condition, results of operations, and the value of our common stock |
| These risks include, but are not limited to, the ones described below |
| Additional risks and uncertainties that we are unaware of, or that we may currently deem immaterial, may become important factors that harm our business, financial condition, results of operations, or the value of our common stock |
| Our success depends on economic and other external factors, particularly in the New England region and during the Halloween season, that affect consumer decisions about whether and when to purchase party goods and supplies |
| Our business success depends in large measure on consumer decisions to buy party goods and supplies and seek party planning advice, particularly in the New England region, where 45 of our 50 stores are located, and particularly during the Halloween season, which is our single most important season |
| Demand for our products and our business results are sensitive to external factors that, directly or indirectly, affect consumer confidence, consumer spending patterns, levels of disposable consumer income, or otherwise lead consumers to host or not host parties or purchase party goods and supplies |
| Examples of such external factors include: unseasonable weather, especially in New England; the timing, duration and effects of adverse changes in overall economic conditions, including rates of job loss or growth, energy prices, and increases or decreases in interest rates, nationally or more locally in the markets we serve; and the competitive success or failure of local sports teams, such as the New England Patriots or Boston Red Sox, particularly in post-season play |
| The precise impact of any of these external factors on consumer spending patterns for party goods and supplies is difficult to predict in advance, but one or more of these factors could adversely affect our business or our operating results, particularly with respect to any given fiscal period, to the extent they adversely impacted the consumer spending patterns most important to our business success |
| 4 ______________________________________________________________________ We face intense competition from many sources |
| The industry we serve is highly competitive and fragmented |
| We face intense competition from other party supply stores and stores that merchandise and market party supplies, including big discount retailers, such as Wal-Mart, retail drug store chains, like CVS and Walgreen, dollar store chains, and temporary Halloween stores |
| Our success thus depends on our ability to be competitive against many different competitors in each local market area we serve |
| If we fail to anticipate evolving innovations and product offerings from our competitors and fail to offer products that appeal to the changing needs and preferences of our customers in the various markets we serve, demand for our products could decline and our operating results would be adversely affected |
| While the competitive importance of product quality, price, service and innovation varies from product to product, price is a factor, and we experience pricing pressures from competitors in our markets |
| We face new competitive threats as a result of consolidation in our industry following Amscan’s acquisition of Party City Corporation |
| The industry in which we operate faces the prospect of increased competition as a result of consolidation |
| In December 2005, Amscan Holdings, Inc, our largest supplier and the largest supplier in our industry, reported that it had completed the acquisition of Party City Corporation |
| Party City Corporation, which operates approximately 500 stores nationwide, is the largest party store chain in the nation, followed by Party America, which operates approximately 280 stores nationwide |
| Neither Party City nor Party America currently have any significant store presence in the New England area |
| An important part of our long-range business plan for 2007 and beyond is to increase our number of stores and enter new geographic markets |
| Any further geographic expansion by either Party City or Party America into the New England market, or any further geographic expansion by us outside of the New England market, could result in greater direct competition with one or both of these party store chains |
| If so, Amscan’s acquisition of Party City and its status as our largest supplier and the largest supplier in our industry could adversely affect our ability to compete favorably or operate successfully in a changed marketplace |
| Price pressures from such new sources of competition, particularly in the event of a strain or rupture in our relationship with Amscan, could erode our margins and cause our financial results of operations to suffer |
| Our success depends on our ability to evaluate and respond to the threats arising from growing consolidation and changing marketplaces and identify ways in which we can competitively operate and strategically grow our store base |
| A major failure of our information systems would harm our business |
| The failure of any of our systems, including, without limitation, the new point-of-sale system we installed beginning in 2004, and our existing merchandise management system, the latter of which was developed by a vendor who is no longer in business and is thus currently unsupported by a third-party, would have a material adverse effect on our business and financial results of operations |
| We depend on these information systems to operate our retail stores, process transactions, respond to customer inquiries, manage inventory, purchase and sell goods on a timely basis, and maintain cost-efficient operations |
| We may experience operational problems with our information systems as a result of system failures or any inability on our part to find qualified personnel to monitor, maintain, and upgrade these systems, particularly with respect to our merchandise management system, or other causes |
| We currently are planning to replace our existing merchandising system beginning in 2007 |
| We can provide no assurance that the new system we are proposing to install will successfully meet our operational and financial requirements or that the transition from our existing system to the new one will occur without any material disruptions in our business or financial results of operations |
| We cannot assure you that our systems will be adequate to support future growth, either as currently configured or as we plan to update them |
| Any material disruption or slowdown of our systems, as currently existing or as proposed to be replaced, would severely interfere with the normal operation of our retail store operations and would have a materially negative impact on our business operations and financial results |
| In particular, our total borrowing base under our line of credit depends, among other things, on our inventory levels, credit card receivables, customer deposits, and merchandise credits |
| Accordingly, any material disruption or problem affecting our point-of-sale or merchandise management systems could materially and adversely affect our borrowing level, our compliance with various covenants under our bank agreement, and our liquidity and cash resources |
| Our quarterly operating results are subject to significant fluctuation |
| 5 ______________________________________________________________________ Our operating results have fluctuated from quarter to quarter in the past, and we expect that they will continue to do so in the future |
| Factors that could cause these quarterly fluctuations, both sequentially and on a year-over-year basis, include the following: extreme weather-related disruptions, particularly in New England; the timing of movable holidays, such as Easter, which typically falls in the second quarter but on occasion falls in the first quarter; the competitive success or failure of local sports teams, such as the New England Patriots or Boston Red Sox, particularly in post-season play, which may result in fluctuations from one year to the next in our sales in the first and fourth quarters; the extent to which sales in new stores result in the loss of sales in existing stores; the mix of products sold; pricing and marketing actions of competitors; the level of advertising and promotional expenses; and seasonality, primarily because the sales and profitability of our stores are typically lower in the first and third quarters, when we have often operated at a loss, and are typically higher in the second quarter, which includes school graduations, and the fourth quarter, which includes Halloween, our single most important selling season, as well as the Christmas holiday season |
| Most of our operating expenses, such as rent expense, advertising expense and employee salaries, do not vary directly with the amount of sales and are difficult to adjust in the short term |
| As a result, if sales in a particular quarter are below expectations for that quarter, we may not proportionately reduce operating expenses for that quarter, and therefore such a sales shortfall would have a disproportionate effect on our net income (or loss) for the quarter |
| Risks associated with recent and possible future new store openings could adversely affect our business |
| An important part of our long-range business plan is to increase our number of stores and, over time, enter new geographic markets |
| We have opened 15 new stores over the past three years, bringing our total number of stores from 35 at the beginning of 2003 to 50 at the end of 2005 |
| While we have no current plans for new store openings in 2006, our current growth goals for 2007 and beyond envision new store openings |
| For our growth strategy to be successful, we must identify and lease favorable store sites, hire and train associates and store managers, and adapt management and operational systems to meet the needs of our expanded operations |
| These tasks may be difficult to accomplish successfully |
| If we are unable to open new stores in locations and on terms acceptable to us as quickly as planned, our future sales and profits may be adversely affected |
| Even if we succeed in opening new stores, these new stores may not achieve the same sales or profit levels as our existing stores |
| Also, our expansion strategy includes opening new stores in markets where we already have a presence so we can take advantage of economies of scale in marketing, distribution and supervision costs |
| However, these new stores may result in the loss of sales in existing stores in nearby areas, which could adversely affect our business and financial performance |
| In addition, future store openings could cause us, among other things, to incur additional debt, increased interest expense, as well as experience dilution in earnings, if any, per share |
| Impairment losses could also occur as a result of new store openings in the event that new store openings prove unsuccessful |
| Our business may be adversely affected by the actions of and risks associated with our third-party vendors |
| The products we sell are sourced from a wide variety of third-party vendors |
| We cannot control the supply, design, function or cost of most of the products that we offer for sale and are dependent on the availability and pricing of various products, including, without limitation, paper-based party goods, Halloween masks, and costumes, many of which are manufactured overseas in foreign countries such as China |
| Global sourcing of many of the products we sell is thus an important factor in our financial performance |
| Our ability to find qualified vendors and access products in a timely and efficient manner is a significant challenge, especially with respect to goods sourced outside the United States |
| Disruptions in the availability of raw materials used in production of these products may adversely affect our sales and result in customer dissatisfaction |
| Political instability, the financial instability of suppliers, merchandise quality issues, trade restrictions, tariffs, currency exchange rates, transport capacity and costs, inflation and other factors relating to foreign trade are beyond our control |
| In particular, rising oil and gas prices impact prices of petroleum-based/plastic products, which are a key raw material in much of our merchandise, affect our freight costs, and affect consumer confidence and spending patterns |
| These and other issues directly or indirectly affecting our vendors could adversely affect our business and financial performance |
| Our failure to generate sufficient cash to meet our liquidity needs may affect our ability to service our indebtedness and grow our business |
| Our business requires access to capital to support growth, improve our infrastructure, respond to economic conditions, and meet contractual commitments |
| In the event that our operating plan changes or proves inaccurate 6 ______________________________________________________________________ due to lower-than-expected revenues, unanticipated expenses, increased competition, unfavorable economic conditions, other factors discussed in this Item 1A, “Risk Factors,” or other unforeseen circumstances, our liquidity may be negatively impacted |
| Our ability to make payments on and to refinance our indebtedness, principally the amounts borrowed under our line of credit, and to fund planned capital expenditures for systems upgrades and new store openings, if any, we may make in the future will depend in large part on our current and future ability to generate cash |
| This, to a certain extent, is subject to general economic, financial, competitive and other factors that are beyond our control |
| We cannot assure you that our business will generate sufficient cash flow from operations in the future, that our currently anticipated growth in revenues and cash flow will be realized on schedule, or that future borrowings will be available to us under our line of credit in an amount sufficient to enable us to service indebtedness, undertake store openings and replace and upgrade our technology systems to grow our business, or to fund other liquidity needs |
| If we need to refinance all or a portion of our indebtedness, we cannot assure you that we will be able to do so on commercially reasonable terms or at all |
| In addition, there can be no assurance, that, should we seek or require additional financing in the form of debt, subordinated debt, equity, convertible securities, or some combination of the above, such financing will be available, if at all, on terms and conditions acceptable to us |
| If so, our ability, among other things, to proceed with our store expansion plans for 2007 and beyond would be negatively affected |
| Our ownership structure includes large investors who own preferred stock and whose interests and rights in our company differ in important respects from those of our common stock investors |
| Our capital structure includes various series of convertible preferred stock and a number of investors who own large concentrations of our shares on an as-converted-into-common basis |
| The ownership rights of these holders of our preferred stock impacts the trading liquidity of our common shares, our corporate governance, and the relative economic stake that our common stock and preferred stock investors have in the enterprise value of our business |
| The large concentration of share ownership that some of our investors have generally has the effect of making our shares more illiquid than if our ownership structure was more widely diffused |
| Our corporate governance is affected by our ownership structure to the extent that certain of our preferred stock investors currently enjoy, among other things, contractual rights to nominate and elect two of the members of our board of directors |
| These rights and the concentration of share ownership enjoyed by certain of our preferred stock investors means that our largest investors can influence our strategic direction and that of our senior management in ways that are different than most of our common stock investors |
| Our preferred stock investors also enjoy certain economic rights that differentiate their ownership rights and interests from those of our common stock investors |
| For instance, upon the occurrence of merger, acquisition or similar transaction involving the acquisition of our company, the holders of our preferred stock would generally be entitled to a “liquidation preference” that would entitle them, collectively, to the first dlra18dtta1 million of net proceeds, unless they decide to convert their shares of preferred stock into common stock |
| This feature of our preferred stock investors’ rights could make the attractiveness of our company as an acquisition target differ materially from what it would be without it |
| In addition, our preferred stock investors enjoy certain “anti-dilution” protections not afforded to our common stock investors, which generally means that investors in shares of our common stock could be adversely affected by subsequent dilutive financings, if any, in ways that are different from some or all of our preferred stock investors |
| Our common stock is thinly traded, may fluctuate based on relatively small levels of trading activity, and may be adversely affected by our capital structure, which makes it more difficult for investors to value our business |
| Investing in shares of our common stock entails a high degree of risk |
| Public trading of our common stock on the American Stock Exchange typically occurs at relatively low sales volumes and very few, if any, security analysts regularly follow our stock |
| Moreover, our common stock price has traded below dlra1dtta00 for significant periods of time |
| In addition, our capital structure, which includes various series of convertible preferred stock with various contractual rights, generally makes it more difficult for investors, or prospective acquirers of our company, to value our business on an aggregate basis or to value our shares of common stock on a trading basis |
| As a result of these factors, speculative investors may have a greater effect on our common stock price than would be the case for a company with a simpler ownership structure, a larger market capitalization, or common shares that are more diffusely held or heavily traded |
| Accordingly, our common stock price could be subject to considerable speculative volatility and may not necessarily follow market expectations regarding our business prospects or financial 7 ______________________________________________________________________ performance |
| In particular, our common stock price may be sensitive to non-financial developments involving our company as well as market rumors disseminated on the Internet or other forms of media regarding our company or our industry |
| If our quarterly financial performance does not meet the expectations of investors that trade in shares of our common stock, our stock price would likely decline |
| If so, the decrease in the stock price may be disproportionate to the shortfall, real or perceived, in our financial performance |
| Our failure to attract, retain, and motivate qualified personnel would adversely affect our business |
| Our success depends in large part on the efforts and abilities of our senior management team |
| Their skills, experience and industry contacts significantly benefit our operations and administration |
| The failure to attract, retain, and properly motivate the members of our senior management team and other key employees, or to find suitable replacements for them in the event of death, ill health, or their desire to pursue other professional opportunities, could have a negative effect on our operating results |
| Our performance is also largely dependent on attracting and retaining quality associates that are able to make the consumer shopping experience at our stores a fun and informative experience |
| We face intense competition for qualified associates, and many of our associates are in entry-level or part-time positions with historically high rates of turnover |
| Our ability to meet our labor needs generally while controlling our labor costs is subject to numerous external factors, including the availability of a sufficient number of qualified persons in the work force, unemployment levels, prevailing wage rates, changing demographics, health and other insurance costs and changes in employment legislation, particularly in the New England region |
| If we are unable to attract and retain qualified associates or our labor costs increase significantly, our business and financial performance may be adversely affected |
| Compliance with changing regulation of corporate governance, public disclosure, and accounting standards may result in additional expenses and risks |
| Changing laws, regulations and standards relating to corporate governance, public disclosure and changes to accounting standards and practices, including the Sarbanes-Oxley Act of 2002, new SEC regulations, corporate law developments in Delaware, and evolving rules applicable to publicly-traded companies on the American Stock Exchange, are creating uncertainty, and hence risks, for companies such as ours |
| These new or changed laws, regulations and standards are subject to varying interpretations due to the fact that they are new and there has not yet emerged a well-developed body of interpretation |
| As a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies |
| This development could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure, governance and accounting practices |
| Our efforts to comply with evolving laws, regulations and standards have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities |
| In particular, we are applying significant management and financial resources to document, test, monitor and enhance our internal control over financial reporting in order to meet the various current requirements of the Sarbanes-Oxley Act of 2002 |
| We cannot be certain that these measures will ensure that our controls will be adequate or effective in preventing fraud or human error |
| Any failure in the effectiveness of our internal control over financial reporting could have a material effect on our financial reporting or cause us to fail to meet reporting obligations, which upon disclosure, could negatively impact the market price of our common stock |
| Our efforts to comply with these types of new regulatory requirements regarding our required assessment of our internal controls over financial reporting and our external auditors’ audit of our financial statements has required the commitment of increasing levels of financial and managerial resources |
| If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies, we could face various material and adverse consequences, including, a decline in our common stock price or a possible delisting of our common stock |
| Forward Looking Statements Certain statements in this Annual Report, particularly statements contained in Item 7, “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 8 ______________________________________________________________________ Exchange Act of 1934, as amended |
| The words “anticipate”, “believe”, “estimate”, “expect”, “plan”, “intend” and other similar expressions are intended to identify these forward-looking statements, but are not the exclusive means of identifying them |
| Forward-looking statements included in this Annual Report or hereafter included in other publicly available documents filed with the 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 Annual Report |
| These include, but are not limited to, those listed above in this Item 1A, “Risk Factors |