S-1/A 1 y86057a3sv1za.htm FORM S-1/A sv1za
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As filed with the Securities and Exchange Commission on January 30, 2012.
Registration No. 333-173690
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 3
 
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Party City Holdings Inc.
(Exact name of registrant as specified in its charter)
 
         
Delaware   5900   20-1033029
(State or other jurisdiction of
incorporation or organization)
 
(Primary Standard Industrial
Classification Code Number)

(914) 345-2020
  (I.R.S. Employer
Identification No.)
80 Grasslands Road, Elmsford, NY 10523
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
 
Gerald C. Rittenberg
Chief Executive Officer
80 Grasslands Road
Elmsford, NY 10523
(914) 345-2020
(Name, address, including zip code, and telephone number, including area code, of agent for service)
 
Copies to:
 
     
Keith F. Higgins, Esq.
Jane D. Goldstein, Esq.
Andrew J. Terry, Esq.
Ropes & Gray LLP
Prudential Tower, 800 Boylston Street
Boston, MA 02199-3600
Telephone (617) 951-7000
Fax (617) 951-7050
  Marc D. Jaffe, Esq.
Latham & Watkins LLP
885 Third Avenue
New York, NY 10022-4834
Telephone (212) 906-1200
Fax (212) 751-4864
 
Approximate date of commencement of proposed sale to public:  As soon as practicable after this Registration Statement becomes effective.
 
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), check the following box.  o
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o Accelerated filer o Non-accelerated filer þ Smaller reporting company o
(Do not check if a smaller reporting company)
 
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
 


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The information in this preliminary prospectus is not complete and may be changed. Neither we nor the selling stockholders may sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
 
 
Subject to Completion. Dated January 30, 2012
 
Party City Holdings Inc.
 
          Shares
 
     
LOGO   LOGO
Common Stock
 
This is the initial public offering of shares of common stock of Party City Holdings Inc., or “Party City Holdings.”
 
Party City Holdings is offering           shares to be sold in the offering. The selling stockholders identified in this prospectus are offering an additional           shares. Party City Holdings will not receive any of the proceeds from the sale of the shares being sold by the selling stockholders.
 
Prior to this offering, there has been no public market for the common stock. It is currently estimated that the initial public offering price per share will be between $      and $      . Party City Holdings intends to list the common stock on the New York Stock Exchange under the symbol “PRTY”.
 
See “Risk Factors” on page 11 to read about factors you should consider before buying shares of the common stock.
 
 
Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
 
 
                 
    Per Share   Total
 
Initial public offering price
  $                $             
Underwriting discount
  $     $  
Proceeds before expenses to Party City Holdings
  $     $  
Proceeds before expenses to the selling stockholders
  $     $  
 
To the extent the underwriters sell more than           shares of common stock, the underwriters have the option to purchase up to an additional          shares from           at the initial public offering price less the underwriting discount.
 
 
The underwriters expect to deliver the shares against payment in New York, New York on           , 2012.
 
 
     
Goldman, Sachs & Co.
  BofA Merrill Lynch
Barclays Capital
  Deutsche Bank Securities
 
 
         
Credit Suisse
  Morgan Stanley   Wells Fargo Securities
 
             
Baird
  William Blair & Company   RBC Capital Markets   Stifel Nicolaus Weisel
 
Prospectus dated          , 2012


 

 
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Through and including          , 2012 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.
 
We have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.


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MARKET, RANKING AND OTHER INDUSTRY DATA
 
The market, ranking and other industry data included in this prospectus, including the size of certain markets and our position and the position of our competitors within these markets, are based on published industry sources, our own research and estimates based on our management’s knowledge and experience in the markets in which we operate. Our estimates have been based on information obtained from our trade and business organizations and other contacts in the markets in which we operate. We note that our estimates, in particular as they relate to general expectations concerning our industry, involve risks and uncertainties and are subject to change based on various factors, including those discussed under the heading “Risk Factors” in this prospectus.


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PROSPECTUS SUMMARY
 
This summary highlights information contained elsewhere in this prospectus. This summary may not contain all of the information that is important to you in considering an investment in our common stock. You should read this entire prospectus carefully, especially the “Risk Factors” section of this prospectus and our consolidated financial statements and related notes appearing at the end of this prospectus, before making an investment decision.
 
When we use the terms “we,” “us,” “our” or the “Company,” we mean Party City Holdings Inc., a Delaware corporation, formerly known as “AAH Holdings Corporation,” and its consolidated subsidiaries, including Amscan Holdings, Inc. (“Amscan Holdings” or “Amscan”), taken as a whole, unless the context otherwise indicates.
 
Our Company
 
We are a global leader in decorated party supplies. We make it easy and fun to enhance special occasions with a wide assortment of innovative and exciting merchandise at a compelling value. With the 2005 acquisition of Party City Corporation (“Party City”), we created a vertically integrated business combining the leading product design, manufacturing and distribution platform, Amscan, with the largest U.S. retailer of party supplies. We believe we have the industry’s broadest selection of decorated party supplies, which we distribute to over 100 countries, and a party superstore retail network that is approximately 15 times larger than that of our next largest party superstore competitor. Our business model and scale differentiate us from other party supply companies and allow us to capture the manufacturing-to-retail margin on a significant portion of the products sold in our stores. We believe our widely recognized brands, broad product offering, low-cost global sourcing model and category-defining retail concept are significant competitive advantages. We believe these characteristics, combined with our vertical business model and scale, position us for continued organic and acquisition-led growth in the United States and internationally.
 
Founded in 1947, we started as a wholesaler and have grown to become one of the largest global designers, manufacturers and distributors of decorated party supplies. Today, our broad selection of decorated party supplies, with approximately 37,000 SKUs, includes paper and plastic tableware, decorations, metallic and latex balloons, novelties, costumes, party kits, stationery and gifts for everyday, themed and seasonal events. Our products are available in over 40,000 retail outlets worldwide, including our own retail network, independent party supply stores, dollar stores, mass merchants, grocery retailers and gift shops. We believe that through our extensive offering as well as industry-leading innovation, customer service levels and value, we will continue to win with our customers.
 
The acquisition of Party City represented an important step in our evolution. Over the last five years, we have established the largest network of party supply stores in the United States with over 1,200 locations consisting of approximately 800 party superstores (including approximately 230 franchised stores), principally under the Party City banner, and a temporary Halloween network of approximately 400 locations, principally under the Halloween City banner. We also operate PartyCity.com, our primary e-commerce site. Underscored by our slogan “Nobody Has More Party for Less,” we believe we offer a superior one-stop shopping experience with a broad selection, consistently high in-stock positions and compelling value, making us the favored destination for all of our customers’ party-supply needs.
 
Through a combination of organic growth and strategic acquisitions, we increased our consolidated revenues from $1,015 million in 2006 to $1,599 million in 2010, representing a compounded annual growth rate of 12.0%. During this same period, we grew our Adjusted EBITDA from $122 million to $226 million, representing a compounded annual growth rate of 16.7%. For a discussion of our use of Adjusted EBITDA and a reconciliation to net income, please refer to “— Summary Financial Data” and “Selected Consolidated Financial Data.”


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Evolution of Our Business
 
Over the last 60 years, we have grown to become a global, vertically integrated designer, manufacturer, distributor and retailer of decorated party supplies. Key strategic initiatives that are important to our evolution include:
 
  •  Enhancing our wholesale platform through targeted acquisitions that added key product capabilities while investing in state-of-the-art distribution facilities and developing a strong Asian-based sourcing and sales organization.
 
  •  Establishing retail leadership in our industry and our vertically integrated model through the acquisitions of Party City, Party America Corporation (“Party America”) and Factory Card and Party Outlet (“FCPO”). Following each acquisition, we capitalized on our vertically integrated model by increasing the percentage of Amscan products sold at our retail stores, allowing us to capture the manufacturing-to-retail margin on a growing portion of our retail sales.
 
  •  Re-launching our e-commerce platform in 2009 provided us with an additional direct-to-consumer channel.
 
  •  Broadening our product offering and channel reach by acquiring valuable character licenses and costume capabilities in addition to improving our access to grocery and mass merchant retailers.
 
  •  Growing our international presence by building relationships with local retailers to develop party supply store-in-store concepts as well as targeted acquisitions that extended our geographic reach.
 
As a result of these investments, we have created a differentiated, vertically integrated business model. We believe that our superior selection of party supplies, scale, innovation and service position us for future growth across all of our channels.
 
Competitive Strengths
 
We are well-positioned to continue to attract customers who celebrate life’s memorable events as a result of the following competitive strengths:
 
Leading Market Position with Industry Defining Brands.  We believe we are the largest vertically integrated provider of decorated party supplies in the world. Through our category-defining brands, Amscan and Party City, we offer what we believe is the broadest selection of continuously updated and innovative merchandise at a compelling value. We distribute products globally and, with approximately 800 party superstores in 41 states, our domestic retail footprint is approximately 15 times larger than that of our next largest party superstore competitor.
 
Unique Vertically Integrated Operating Model.  We manufacture, source and distribute party supplies, acting as a one-stop shop for decorated party goods to both wholesale and retail customers. Our vertically integrated model provides us with a number of advantages including the ability to (i) realize the manufacturing-to-retail margin on a significant portion of our retail sales, (ii) leverage a global sourcing network to reinforce our position as a low-cost provider of quality party supplies and (iii) effectively respond to changes in consumer trends through our in-house design and innovation team.
 
Broad and Innovative Product Offering.  We offer a broad and deep product assortment with over 37,000 SKUs available in wholesale and an average of 25,000 SKUs offered at any one time in our Party City superstores. Our extensive selection offers customers a single source for all of their party needs. Over the last three years, our in-house design team has introduced an average of 3,500 new products annually, driving newness in our product offering and supporting increased sales across our channels.
 
Category Defining Retail Concept.  With our extensive selection, consistently high in-stock positions, convenient locations and compelling value proposition, we believe customers associate Party City with successful celebrations, and, as a result, our stores will continue to be seen as the favored destination for party supplies and innovative ideas.


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Highly Efficient Global Sourcing and Distribution Capabilities.  Over the last 60 years, we have developed a global network of owned and third-party manufacturers that we believe optimizes speed to market, quality and cost. We also have warehousing and distribution facilities around the world, including our state-of-the-art distribution center in Chester, New York, which has nearly 900,000 square feet under one roof. Our global sourcing and distribution capabilities offer our customers best-in-class service levels, rapid fulfillment and competitive prices, and have capacity for continued growth with our business.
 
World-Class Management Team with a Proven Track Record.  Our senior management team averages approximately 20 years of industry experience and possesses a unique combination of management skills and experience in the party goods sector. Our team has successfully grown our sales and profits during various economic cycles and through several business transformations. Additionally, our team has a strong track record of successful acquisitions and integrations, which continue to be an important part of our overall strategy.
 
Despite these strengths, we continue to face competition in the marketplace, particularly in our retail business. We compete with a variety of retailers, including independent party goods supply stores, specialty stores, dollar stores, warehouse/merchandise clubs, drug stores, mass merchants, grocery retailers and catalogue and Internet merchandisers. In order to maintain and grow our market position, we need to remain competitive with respect to quality, price, breadth of selection, customer service and convenience. See “Risk Factors” and “Business — Competition.”
 
Growth Strategy
 
We believe we have significant opportunities to enhance our leadership position in the party goods industry and improve profitability. Key elements of our growth strategy include:
 
Growing Market Share and Earnings.  We will continue to broaden our product assortment by adding new party themed events and licenses, which, combined with our enhanced in-house capabilities, will enable us to continue to increase our market share and grow the percentage of our own products sold at retail, including in our company-owned and franchised stores. Since the acquisition of Party City in 2005, we have increased the selection of Amscan merchandise offered in Party City stores from approximately 25% to over 60%, with a target of 70% to 75% over the long term. Our ability to create new and enhance existing celebration opportunities will continue to be a consistent driver of our growth.
 
Expand Our Retail Store Base.  We believe there is an opportunity to open more than 400 additional Party City stores in North America. In 2011, we opened 16 Party City stores, acquired eight Party City stores from franchisees and closed seven locations. Starting in 2012, we plan to open 25 to 35 Party City stores per year. Based on historical performance and the margin generated from our vertically integrated model, we expect our new stores to have a payback period of approximately three years and to generate an average pre-tax cash-on-cash return of approximately 50% in their fourth year.
 
Drive Additional Growth and Productivity From Existing Retail Stores.  We plan to grow our comparable store sales by continuing to improve our brand image and awareness, offering new, innovative party ideas and by converting FCPO stores to the Party City banner.
 
Increase International Presence.  We believe international growth will be driven, in part, by increasing customization of our products to local tastes and holidays and the expansion of our retail presence, particularly through our store-within-a-store concept with selected international retailers. We believe international sales, which represented 6.9% of total revenues in 2010, are likely to grow to 10% to 15% of our total revenues over the next three to five years through organic and acquisition-led growth.
 
Grow Our E-commerce Platform.  In August 2009, we re-launched our primary e-commerce platform PartyCity.com, providing us with an additional direct-to-consumer sales channel. We expect e-commerce will continue to experience significant growth as we increase online content for party products and ideas, invest in additional online advertising and target customers through the three million email addresses that we have captured through our stores and website.


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Pursue Accretive Acquisitions.  Over the past 15 years, we have successfully integrated nine acquisitions, strengthening our manufacturing, distribution and retail platforms. We have also acquired, and will continue to acquire, franchised stores as such opportunities emerge. We believe our significant experience in identifying attractive acquisition targets, proven integration process and global infrastructure create a strong platform for future acquisitions.
 
Industry Overview
 
We operate in the broadly defined $10 billion retail party goods industry (including decorative paper and plastic tableware, decorations, accessories and balloons), which is supported by a range of suppliers from commodity paper goods producers to party goods specialty retailers. The retail landscape is comprised primarily of party superstores, dollar stores, mass merchants, grocery retailers and craft stores. Party superstores have emerged as a preferred destination for party goods shoppers because they offer a wide variety of merchandise at more compelling prices in a convenient setting. Other retailers that cater to the party goods market typically offer a limited assortment of party supplies and seasonal items. Sales of party goods are fueled by everyday events such as birthdays, baby showers, weddings and anniversaries, as well as seasonal events such as holidays and other special occasions. As a result of numerous and diverse occasions, the U.S. party goods market enjoys broad demographic appeal. We also operate in the Halloween market, which represents a $6 billion retail opportunity and includes costumes, candy and makeup.
 
Risks That We Face
 
Our business is subject to a number of risks of which you should be aware before making an investment decision. The risks are discussed more fully in the “Risk Factors” section of this prospectus immediately following this prospectus summary. These risks include, but are not limited to, the following:
 
  •  we operate in a competitive industry, and our failure to compete effectively could cause us to lose our market share, revenues and growth prospects;
 
  •  our business may be adversely affected by fluctuations in commodity prices;
 
  •  our failure to appropriately respond to changing merchandise trends and consumer preferences could significantly harm our customer relationships and financial performance;
 
  •  we may not be able to successfully implement our store growth strategy;
 
  •  a decrease in our Halloween sales could have a material adverse effect on our operating results for the year;
 
  •  our substantial indebtedness and lease obligations could adversely affect our financial flexibility and our competitive position; and
 
  •  investment funds affiliated with Advent International Corporation (“Advent”), Berkshire Partners LLC (“Berkshire Partners”) and Weston Presidio (together with Advent and Berkshire Partners, the “Sponsors”) will have the ability to control the outcome of matters submitted for stockholder approval and may have interests that differ from those of our other stockholders. Our third amended and restated certificate of incorporation (the “third amended and restated certificate of incorporation”) provides that we renounce any interest or expectancy in, or in being offered an opportunity to participate in, any business opportunity that may from time to time be presented to our directors who are not our employees or employees of our subsidiaries and the Sponsors or any of their officers, directors, agents, stockholders, members, partners, affiliates and subsidiaries (other than us and our subsidiaries). In addition, our third amended and restated certificate of incorporation includes a provision that relieves these directors and the Sponsors’ representatives from any breach of fiduciary duty to us if these investment funds pursue for their benefit opportunities such as acquisitions that might otherwise be appropriate for us.


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The Sponsors
 
On April 30, 2004, our business was acquired by an entity jointly controlled by funds affiliated with Berkshire Partners and Weston Presidio. On August 19, 2008, certain of our stockholders, in a secondary transaction, sold Class B common stock representing approximately 38% of our outstanding common stock to an entity controlled by funds managed by Advent. As a result of these transactions, the Sponsors collectively own approximately 91% of our common stock as of December 31, 2011. Upon completion of this offering, the Sponsors will continue to beneficially own approximately     % of our outstanding common stock.
 
Corporate Information
 
Party City Holdings Inc. is the parent company of our collective businesses. Our address is 80 Grasslands Road, Elmsford, NY 10523. Our direct subsidiary, Amscan Holdings, is currently a public debt issuer and comprises 100% of Party City Holdings Inc.’s operations. Our telephone number is (914) 345-2020. Our primary website addresses are www.amscan.com and www.partycity.com. Information contained in, and that can be accessed through, our websites is not incorporated into and does not form a part of this prospectus.
 
We own a number of trademarks and service marks registered with the United States Patent and Trademark Office, including Party City®, The Discount Party Super Store®, Halloween Costume Warehouse®, Party America®, The Paper Factory®, The Factory Card & Party Outlet® and Halloween City®.


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THE OFFERING
 
Common stock offered by us           shares
 
Common stock to be offered by selling stockholders           shares
 
Common stock to be outstanding after this offering           shares
 
Option to purchase additional shares offered to underwriters We, along with some of our stockholders, have granted the underwriters an option to purchase up to           additional shares. If this option is exercised in full, we will issue and sell           shares and the selling stockholders will sell           shares.
 
Use of proceeds Assuming an initial public offering price of $      , which is the midpoint of the range listed on the cover page of this prospectus, we estimate that the net proceeds to us from this offering will be approximately $      million. We intend to use the net proceeds from this offering to repay indebtedness, to terminate the management agreement with the Sponsors and for working capital and other general corporate purposes. See “Use of Proceeds.”
 
We will not receive any proceeds from the shares sold by the selling stockholders.
 
Risk factors You should read the “Risk Factors” section of this prospectus beginning on page 11 for a discussion of factors to consider carefully before deciding whether to purchase shares of our common stock.
 
Conflicts of interest Merrill Lynch, Pierce, Fenner & Smith Incorporated and certain of its affiliates act as Joint Bookrunner, Joint Lead Arranger, Syndication Agent, Issuing Bank and Lender under our new senior secured asset-based revolving credit facility; certain affiliates of Wells Fargo Securities, LLC act as Administrative Agent, Collateral Agent, Joint Bookrunner, Joint Lead Arranger, Swingline Lender and Lender under our new senior secured asset-based revolving credit facility; and an affiliate of Credit Suisse Securities (USA) LLC is a Lender under our new senior secured asset-based revolving credit facility. Because of these relationships and the manner in which the proceeds of this offering may be used, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Wells Fargo Securities, LLC and Credit Suisse Securities (USA) LLC may receive proceeds from this offering in addition to their underwriting compensation. None of Merrill Lynch, Pierce, Fenner & Smith Incorporated, Wells Fargo Securities, LLC, or Credit Suisse Securities (USA) LLC will receive 5% or more of the net proceeds from this offering. See “Underwriting — Conflicts of Interest.”
 
Proposed New York Stock Exchange symbol PRTY
 
The number of shares of our common stock to be outstanding after this offering is based on 32,180.52 shares of common stock outstanding as of December 31, 2011 and excludes:
 
  •  3,698.27 shares of Class A common stock issuable upon the exercise of stock options issued under our 2004 Equity Incentive Plan with a weighted average exercise price of $17,021.00 per share;
 
  •            additional shares of Class A common stock reserved for future issuance under our 2004 Equity Incentive Plan; and


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  •            additional shares of common stock reserved for future issuance under our 2012 Omnibus Incentive Plan.
 
Unless otherwise indicated, all information in this prospectus assumes:
 
  •  A           -for-one stock split on our Class A common stock and Class B common stock effected as a stock dividend on     , 2012;
 
  •  The conversion of all outstanding shares of our Class B common stock into shares of our Class A common stock on a one-for-one basis, which will occur automatically upon the closing of this offering pursuant to our current certificate of incorporation (the “existing certificate of incorporation”), and renaming the Class A common stock as “Common Stock”, which will occur upon the filing of our third amended and restated certificate of incorporation upon the closing of this offering (the “Common Stock Conversion”);
 
  •  The adoption of our third amended and restated certificate of incorporation and our amended and restated bylaws (“bylaws”), to be effective upon the closing of this offering; and
 
  •  No exercise by the underwriters of their option to purchase up to           additional shares of our common stock from us and the selling stockholders in this offering.


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SUMMARY FINANCIAL DATA
 
The following table sets forth our summary historical and pro forma consolidated financial and other data as of the dates and for the periods presented. The historical consolidated statements of income data are derived from our audited consolidated financial statements included elsewhere in this prospectus. You should read the following tables together with “Selected Consolidated Financial Data,” “Unaudited Pro Forma Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes appearing elsewhere in this prospectus.
 
                                                         
                                  Pro Forma,
 
                                  As Adjusted(1)  
                                        Nine
 
                                  Fiscal Year
    Months
 
    Fiscal Year Ended
    Nine Months Ended
    Ended
    Ended
 
    December 31,     September 30,     December 31,     September 30,  
    2008     2009     2010     2010     2011     2010     2011  
    (dollars in thousands, except per share data)              
 
Income Statement Data:
                                                       
Revenues:
                                                       
Net sales
  $ 1,537,641     $ 1,467,324     $ 1,579,677     $ 1,015,856     $ 1,200,188                          
Royalties and franchise fees
    22,020       19,494       19,417       12,333       12,193                  
                                                         
Total revenues
    1,559,661       1,486,818       1,599,094       1,028,189       1,212,381                  
Cost of sales
    966,426       899,041       943,058       637,100       760,947                  
Operating expenses
    479,317       445,904       528,600       329,469       380,529                  
                                                         
Income from operations
    113,918       141,873       127,436       61,620       70,905                  
Interest expense, net
    50,915       41,481       40,850       28,261       60,252                  
Other (income) expense, net
    (818 )     (32 )     4,208       758       950                  
                                                         
Income before income taxes
    63,821       100,424       82,378       32,601       9,703                  
Income tax expense
    24,188       37,673       32,945       11,766       3,438                  
                                                         
Net income
    39,633       62,751       49,433       20,835       6,265                  
Less: net (loss) income attributable to noncontrolling interests
    (877 )     198       114       184       219                  
                                                         
Net income attributable to Party City Holdings Inc. 
  $ 40,510     $ 62,553     $ 49,319     $ 20,651     $ 6,046                  
                                                         
Per Share Data:
                                                       
Net income (loss) per share
                                                       
Basic
                                                       
Diluted
                                                       
Pro forma basic(2)
                                                       
Pro forma diluted(2)
                                                       
Weighted Average
                                                       
Outstanding basic
                                                       
Diluted
                                                       
Pro forma outstanding basic(2)
                                                       
Pro forma diluted(2)
                                                       
                                                         
Statement of Cash Flow Data:
                                                       
Net cash provided by (used in):
                                                       
Operating activities
  $ 79,929     $ 123,942     $ 61,168     $ (1,500 )   $ 26,589                  
Investing activities
    (51,199 )     (54,358 )     (102,766 )     (71,583 )     (131,844 )                
Financing activities
    (23,033 )     (70,157 )     46,515       79,746       105,918                  
                                                         
Other Financial Data:
                                                       
Net revenues by segment:
                                                       
Wholesale (after intercompany eliminations)
  $ 438,505     $ 411,359     $ 470,892     $ 347,606     $ 445,896                  
Retail
    1,121,156       1,075,459       1,128,202       680,583       766,485                  
Consolidated
    1,559,661       1,486,818       1,599,094       1,028,189       1,212,381                  


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                                  Pro Forma,
 
                                  As Adjusted(1)  
                                        Nine
 
                                  Fiscal Year
    Months
 
    Fiscal Year Ended
    Nine Months Ended
    Ended
    Ended
 
    December 31,     September 30,     December 31,     September 30,  
    2008     2009     2010     2010     2011     2010     2011  
    (dollars in thousands, except per share data)              
 
EBITDA(3)
    162,014       186,287       172,646       97,538       113,039                  
Adjusted EBITDA(3)
    186,040       190,479       226,114       103,990       117,207                  
Number of company-owned and franchised retail stores (at end of period)(4)
    916       851       828       825       843                  
Number of Party City superstores
    385       382       439       423       486                  
Party City comparable store sales growth(5)
    0.5 %     (3.3 )%     1.4 %     0.9 %     4.0 %                
Capital expenditures including assets under capital leases (excluding acquisitions)
    53,701       26,254       50,242       36,100       36,694                  
Working capital (excluding cash)
    63,846       146,823       169,539       136,229       122,253                  
Ratio of debt to Adjusted EBITDA(3)(6)
    3.9x       3.4x       4.4x       3.6x       4.6x                  
                                                         
Balance Sheet Data (at period end):
                                                       
Cash and cash equivalents
  $ 13,058     $ 15,420     $ 20,454     $ 22,743     $ 19,484                  
Working capital
    76,904       162,243       189,993       158,972       141,737                  
Total assets
    1,507,977       1,480,501       1,653,151       1,719,507       1,866,771                  
Total debt
    721,635       651,433       1,000,256       730,983       1,107,153                  
Total equity
    412,117       479,122       256,422       524,328       257,792                  
 
 
(1) The pro forma as adjusted income statement and other financial data for the fiscal year ended December 31, 2010 and the nine months ended September 30, 2011 gives effect to: (i) this offering and the use of proceeds therefrom; and (ii) the refinancing of Amscan Holdings’ revolving and term debt credit facilities in 2010, assuming in each case such event occurred on January 1, 2010. The pro forma as adjusted balance sheet data at September 30, 2011 gives effect to this offering and the use of proceeds therefrom, assuming such events occurred on September 30, 2011. The pro forma as adjusted financial data do not necessarily represent what our financial position and results of operations would have been if the transactions had actually been completed on the dates indicated, and are not intended to project our financial position or results of operations for any future period. See “Use of Proceeds” and “Unaudited Pro Forma Consolidated Financial Data.”
 
(2) The pro forma earnings per share calculations give effect to the issuance and sale of a number of shares the proceeds of which would be used to pay the amount of the 2010 cash dividend that exceeded our 2010 earnings.
 
(3) We present Adjusted EBITDA as a supplemental measure of our performance. We define Adjusted EBITDA, per the terms of the credit agreement for our revolving and term debt, as net income (loss) plus (i) interest expense, (ii) provision for taxes and (iii) depreciation and amortization, as further adjusted to eliminate the impact of certain items that we do not consider indicative of our ongoing operating performance. These further adjustments are itemized below. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. The reconciliation from net income to EBITDA and Adjusted EBITDA for the periods presented is as follows:
 

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    Fiscal Year Ended
    Nine Months Ended
 
    December 31,     September 30,  
    2008     2009     2010     2010     2011  
    (dollars in thousands)  
 
Net Income
  $ 39,633     $ 62,751     $ 49,433     $ 20,835     $ 6,265  
Interest expense, net
    50,915       41,481       40,850       28,261       60,252  
Income tax
    24,188       37,673       32,945       11,766       3,438  
Depreciation and amortization
    47,278       44,382       49,418       36,676       43,084  
                                         
EBITDA
    162,014       186,287       172,646       97,538       113,039  
Equity based compensation and other charges
    4,546       882       6,019       514       1,076  
Non-cash purchase accounting adjustments
    2,329       (344 )     2,533       1,825       556  
Management fee
    1,248       1,248       1,248       936       936  
Gain from joint venture
    (538 )     (632 )     (678 )     (382 )     (589 )
Impairment charges
    17,376 (a)           27,997 (a)     197        
Restructuring, retention and severance
          2,670       1,780       1,729        
Payment in lieu of dividend
                9,395 (b)           355  
Refinancing charges
                2,448              
Acquisition related expenses
          270       1,660       557       1,613  
Other
    (935 )     98       1,066       1,076       221  
                                         
Adjusted EBITDA
  $ 186,040     $ 190,479     $ 226,114     $ 103,990     $ 117,207  
                                         
 
(a) During 2008 and 2010, we implemented plans to convert and rebrand our company-owned and franchised Party America stores and our FCPO stores to Party City stores, respectively. As a result, we recorded charges for the impairment of the Party America trade name and the FCPO trade name of $17.4 million and $27.4 million in the fourth quarters of 2008 and 2010, respectively.
 
(b) Represents payment to holders of vested time-based options in connection with a one-time cash dividend paid in 2010. This payment is included as stock-based compensation expense in general and administrative expenses in 2010.
 
We present Adjusted EBITDA because we believe it assists investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. In addition, we use Adjusted EBITDA: (i) as a factor in determining incentive compensation, (ii) to evaluate the effectiveness of our business strategies and (iii) because the credit facility agreements use Adjusted EBITDA to measure compliance with certain covenants.
 
Adjusted EBITDA has limitations as an analytical tool. Some of these limitations are:
 
  •  Adjusted EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;
 
  •  Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
 
  •  Adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our indebtedness;
 
  •  although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements;
 
  •  non-cash compensation is and will remain a key element of our overall long-term incentive compensation package, although we exclude it as an expense when evaluating our ongoing operating performance for a particular period;
 
  •  Adjusted EBITDA does not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations; and
 
  •  other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.
 
Because of these limitations, Adjusted EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA only supplementally.
 
(4) Excludes temporary locations, principally under our Halloween City banner, and includes Party City superstores.
 
(5) Party City comparable store sales exclude FCPO store conversions, as presented here.
 
(6) The ratio of debt to Adjusted EBITDA is based on Adjusted EBITDA for the previous twelve months.

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RISK FACTORS
 
Investing in our common stock involves a certain degree of risk. You should carefully consider the following risk factors, as well as the other information in this prospectus, before deciding to invest in our common stock. The occurrence of any of the following risks could harm our business, financial condition, results of operations or prospects. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment. Certain statements in “Risk Factors” are “forward-looking statements.” See “Special Note Regarding Forward-Looking Statements” elsewhere in this prospectus.
 
Risks Related to Our Business
 
We operate in a competitive industry, and our failure to compete effectively could cause us to lose our market share, revenues and growth prospects.
 
We compete with many other manufactures and distributors, including smaller, independent specialty manufacturers and divisions or subsidiaries of larger companies with greater financial and other resources than we have. Some of our competitors control licenses for widely recognized images and have broader access to mass market retailers that could provide them with a competitive advantage.
 
The party goods retail industry is large and highly fragmented. Our retail stores compete with a variety of smaller and larger retailers, including specialty retailers, warehouse/merchandise clubs, drug stores, supermarkets, dollar stores, mass merchants, and catalogue and online merchants. Our stores compete, among other ways, on the basis of location and store layout, product mix and availability, customer convenience and price. We may not be able to continue to compete successfully against existing or future competitors in the retail space. Expansion into markets served by our competitors and entry of new competitors or expansion of existing competitors into our markets could materially adversely affect our business, results of operations, cash flows and financial performance.
 
We must remain competitive in the areas of quality, price, breadth of selection, customer service and convenience. Competing effectively may require us to reduce our prices or increase our costs, which could lower our margins and adversely affect our revenues and growth prospects.
 
Our business may be adversely affected by fluctuations in commodity prices.
 
The costs of our key raw materials (paper, petroleum-based resin and cotton) fluctuate. In general, we absorb movements in raw material costs that we consider temporary or insignificant. However, cost increases that are considered other than temporary may require us to increase our prices to maintain our margins. Raw material prices may increase in the future and we may not be able to pass on these increases to our customers. A significant increase in the price of raw materials that we cannot pass on to customers could have a material adverse effect on our results of operations and financial performance. In addition, the interruption in supply of certain key raw materials essential to the manufacturing of our products may have an adverse impact on our and our suppliers’ abilities to manufacture the products necessary to maintain our existing customer relationships.
 
Although not used in the actual manufacture of our products, helium gas is currently used to inflate the majority of our metallic balloons. Although adequate quantities of helium are currently available for this purpose, we will rely upon future exploration and refining of natural gas to assure continued adequate supply.
 
Our failure to appropriately respond to changing merchandise trends and consumer preferences could significantly harm our customer relationships and financial performance.
 
As a manufacturer, distributor and retailer of consumer goods, our products must appeal to a broad range of consumers whose preferences are constantly changing. We also sell certain licensed products, with images such as cartoon or motion picture characters, which are in great demand for short time periods, making it difficult to project our inventory needs for these products. In addition, if consumers’ demand for single-use, disposable party goods were to diminish in favor of reusable products for environmental or other reasons, our sales could decline.


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The success of our business depends upon many factors, such as our ability to accurately predict the market for our products and our customers’ purchasing habits, to identify product and merchandise trends, to innovate and develop new products, to manufacture and deliver our products in sufficient volumes and in a timely manner and to differentiate our product offerings from those of our competitors. We may not be able to continue to offer assortments of products that appeal to our customers or respond appropriately to consumer demands. We could misinterpret or fail to identify trends on a timely basis. Our failure to anticipate, identify or react appropriately to changes in consumer tastes could, among other things, lead to excess inventories and significant markdowns or a shortage of products and lost sales. Our failure to do so could harm our customer relationships and financial performance.
 
We may not be able to successfully implement our store growth strategy.
 
If we are unable to increase the number of retail stores we operate and increase the productivity and profitability of existing retail stores, our ability to increase sales, profitability and cash flow could be impaired. To the extent we are unable to open new stores as we planned, our sales growth would come primarily from increases in comparable store sales. We may not be able to increase our comparable store sales, improve our margins or reduce costs as a percentage of sales. Growth in profitability in that case would depend significantly on our ability to increase margins or reduce costs as a percentage of sales. Further, as we implement new initiatives to reduce the cost of operating our stores, sales and profitability may be negatively impacted.
 
Our ability to successfully open and operate new stores depends on many factors including, among others, our ability to:
 
  •  identify suitable store locations, including temporary lease space for our Halloween City locations, the availability of which is largely outside of our control;
 
  •  negotiate and secure acceptable lease terms, desired tenant allowances and assurances from operators and developers that they can complete the project, which depend in part on the financial resources of the operators and developers;
 
  •  obtain or maintain adequate capital resources on acceptable terms, including the availability of cash for rent outlays under new leases;
 
  •  manufacture and source sufficient levels of inventory at acceptable costs;
 
  •  hire, train and retain an expanded workforce of store managers and other personnel;
 
  •  successfully integrate new stores into our existing control structure and operations, including information system integration;
 
  •  maintain adequate manufacturing and distribution facilities, information system and other operational system capabilities;
 
  •  identify and satisfy the merchandise and other preferences of our customers in new geographic areas and markets; and
 
  •  address competitive, merchandising, marketing, distribution and other challenges encountered in connection with expansion into new geographic areas and markets, including geographic restrictions on the opening of new stores based on certain agreements with our franchisees and other business partners.
 
In addition, as the number of our stores increases along with our online sales, we may face risks associated with market saturation of our product offerings. To the extent our new store openings are in markets where we have existing stores, we may experience reduced net sales in existing stores in those markets. Finally, there can be no assurance that any newly opened stores will be received as well as, or achieve net sales or profitability levels comparable to those of, our existing stores in the time periods estimated by us, or at all. If our stores fail to achieve, or are unable to sustain, acceptable net sales and profitability levels, our business may be materially harmed and we may incur significant costs associated with closing those stores. Our failure to effectively address challenges such as these could adversely affect our


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ability to successfully open and operate new stores in a timely and cost-effective manner, and could have a material adverse effect on our business, results of operations and financial condition.
 
A decrease in our Halloween sales could have a material adverse effect on our operating results for the year.
 
Our retail business, including our Party City stores, online sales from our e-commerce website and our temporary Halloween City locations, realizes a significant portion of its revenues, net income and cash flow in September and October, principally due to our Halloween sales. We believe this general pattern will continue in the future. An economic downturn during this period could adversely affect us to a greater extent than if such downturn occurred at other times of the year. Any unanticipated decrease in demand for our products during the Halloween season could require us to maintain excess inventory or sell excess inventory at a substantial markdown, which could have a material adverse effect on our business, profitability, ability to repay any indebtedness and our brand image. In addition, our sales during the Halloween season could be affected if we are not able to find sufficient and adequate lease space for our temporary Halloween City locations or if we are unable to hire temporary personnel to adequately staff these stores and our distribution facility during the Halloween season. Failure to have proper lease space and adequate personnel could hurt our business, financial condition and results of operations.
 
Disruption to the transportation system or increases in transportation costs may negatively affect our operating results.
 
We rely upon various means of transportation, including shipments by air, sea, rail and truck, to deliver products to our distribution centers from vendors and manufacturers and from other distribution centers to our stores, as well as for direct shipments from vendors to stores. Independent third parties with whom we conduct business may employ personnel represented by labor unions. Labor stoppages, shortages or capacity constraints in the transportation industry, disruptions to the national and international transportation infrastructure, fuel shortages or transportation cost increases could adversely affect our business, results of operations, cash flows and financial performance.
 
Product recalls and/or product liability may adversely impact our business, merchandise offerings, reputation, results of operations, cash flow and financial performance.
 
We may be subject to product recalls if any of the products that we manufacture or sell are believed to cause injury or illness. In addition, as a retailer of products manufactured by third parties, we may also be liable for various product liability claims for products we do not manufacture. Indemnification provisions that we may enter into are typically limited by their terms and depend on the creditworthiness of the indemnifying party and its insurer and the absence of significant defenses. We may be unable to obtain full recovery from the insurer or any indemnifying third party in respect of any claims against us in connection with products manufactured by such third party. In addition, if our vendors fail to manufacture or import merchandise that adheres to our quality control standards or standards established by applicable law, our reputation and brands could be damaged, potentially leading to an increase in customer litigation against us. Furthermore, to the extent we are unable to replace any recalled products, we may have to reduce our merchandise offerings, resulting in a decrease in sales, especially if a recall occurs near or during a peak seasonal period. If our vendors are unable or unwilling to recall products failing to meet our quality standards, we may be required to recall those products at a substantial cost to us.
 
Our business is sensitive to consumer spending and general economic conditions, and an economic slowdown could adversely affect our financial performance.
 
In general, our retail sales, and the retail sales of our business partners to whom we sell, represent discretionary spending by our customers and our business partners’ customers. Discretionary spending is affected by many factors, such as general business conditions, interest rates, availability of consumer credit, unemployment levels, taxation, weather and consumer confidence in future economic conditions. Our customers’ and our business partners’ customers’ purchases of discretionary items, including our products,


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often decline during periods when disposable income is lower or during periods of actual or perceived unfavorable economic conditions. If this occurs, our revenues and profitability will decline. In addition, economic downturns may make it difficult for us to accurately forecast future demand trends, which could cause us to purchase excess inventories, resulting in increases in our inventory carrying cost, or insufficient inventories, resulting in our inability to satisfy our customer demand and potential loss of market share.
 
Our business may be adversely affected by the loss or actions of our third-party vendors, and the loss of the right to use licensed material could harm our business and our results of operations.
 
Our ability to find new qualified vendors who meet our standards and supply products in a timely and efficient manner can be a significant challenge, especially for goods sourced from outside the United States. Many of our vendors currently provide us with incentives such as volume purchasing allowances and trade discounts. If our vendors were to reduce or discontinue these incentives, costs would increase. Should we be unable to pass cost increases to consumers, our profitability would be reduced.
 
Additionally, certain of our suppliers may control various product licenses for widely recognized images, such as cartoon or motion picture characters. The loss of these suppliers, or the termination of our ability to use certain licensed material, would prevent us from manufacturing and distributing the licensed products and could cause our customers to purchase these products from our competitors. This could materially adversely affect our business, results of operations, financial performance and cash flow.
 
Because we rely heavily on our own manufacturing operations, disruptions at our manufacturing facilities could adversely affect our business, results of operations, cash flows and financial performance.
 
In 2010, we manufactured items representing approximately 40% of our net sales at wholesale. Any significant disruption in our manufacturing facilities, in the United States or abroad, for any reason, including regulatory requirements, the loss of certifications, power interruptions, fires, hurricanes, war or other force of nature, could disrupt our supply of products, adversely affecting our business, results of operations, cash flows and financial performance. The occurrence of one or more natural disasters, or other disruptive geo-political events, could also result in increases in fuel (or other energy) prices or a fuel shortage, the temporary or permanent closure of one or more of manufacturing or distribution centers, the temporary lack of an adequate work force in a market, the temporary or long-term disruption in the supply of products from some local and overseas suppliers, the temporary disruption in the transport of goods from overseas or delays in the delivery of goods to our distribution centers or stores or to third parties who purchase from us. If one or more of these events occurred, our revenues and profitability would be reduced.
 
Our business and results of operations may be harmed if our suppliers or third-party manufacturers fail to follow acceptable labor practices or to comply with other applicable laws and guidelines.
 
Many of the products sold in our stores and on our website are manufactured outside of the United States, which may increase the risk that the labor, manufacturing safety and other practices followed by the manufacturers of these products may differ from those generally accepted in the United States as well as those with which we are required to comply under many of our image or character licenses. Although we require each of our vendors to sign a purchase order and vendor agreement that requires adherence to accepted labor practices and compliance with labor, manufacturing safety and other laws and we test merchandise for product safety standards, we do not supervise, control or audit our vendors or the manufacturers that produce the merchandise we sell to our customers. The violation of labor, manufacturing safety or other laws by any of our vendors or manufacturers, or the divergence of the labor practices followed by any of our vendors or manufacturers from those generally accepted in the United States could interrupt or otherwise disrupt the shipment of finished products to us, damage our brand image, subject us to boycotts by our customers or activist groups or cause some of our licensors of popular images to terminate their licenses to us. Our future operations and performance will be subject to these factors, which are beyond our control and could materially hurt our business, financial condition and results of operations or require us to modify our current business practices or incur increased costs.


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Our international operations subject us to additional risks, which risks and costs may differ in each country in which we do business and may cause our profitability to decline.
 
We conduct our business in a number of foreign countries, including contracting with manufacturers and suppliers located outside of the United States, many of which are located in Asia. We recently expanded our international operations through the acquisitions of the Christy’s Group in September 2010, Riethmüller in January 2011 and Party Packagers in July 2011. Our operations and financial condition may be adversely affected if the markets in which we compete or source our products are affected by changes in political, economic or other factors. These factors, over which we have no control, may include:
 
  •  recessionary or expansive trends in international markets;
 
  •  changes in foreign currency exchange rates, principally fluctuations in the Euro, British pound sterling, Mexican peso, Canadian dollar and Chinese renminbi;
 
  •  hyperinflation or deflation in the foreign countries in which we operate;
 
  •  work stoppages or other employee rights issues;
 
  •  the imposition of restrictions on currency conversion or the transfer of funds;
 
  •  transportation delays and interruptions;
 
  •  increases in the taxes we pay and other changes in applicable tax laws;
 
  •  legal and regulatory changes and the burdens and costs of our compliance with a variety of laws, including trade restrictions and tariffs; and
 
  •  political and economic instability.
 
We may face risks associated with litigation and claims.
 
From time to time, we are involved in class actions and other lawsuits, claims and other proceedings relating to the conduct of our business, including but not limited to employee-related and consumer matters. Additionally, as a retailer and manufacturer of decorated party goods, we have been and may continue to be subject to product liability claims if the use of our products, whether manufactured by us or our third party manufacturers, is alleged to have resulted in injury or if our products include inadequate instructions or warnings. Due to the uncertainties of litigation, we can give no assurance that we will prevail on all claims made against us in the lawsuits that we currently face or that additional claims will not be made against us in the future. While it is not feasible to predict the outcome of pending lawsuits and claims, we do not believe that any such matters are material or that the disposition thereof is likely to have a material adverse effect on our business, financial condition and results of operations, although the resolution in any reporting period of any matter could have an adverse effect on our operating results for that period. Also, we can give no assurance that any other lawsuits or claims brought in the future will not have a material adverse effect on our business, financial condition and results of operations.
 
We may require additional capital to fund our business, which may not be available to us on satisfactory terms or at all.
 
We currently rely on cash generated by operations and borrowings available under our credit facilities to meet our working capital needs. However, if we are unable to generate sufficient cash from operations or if borrowings available under our credit facilities are insufficient, we may be required to adopt one or more alternatives to raise cash, such as incurring additional indebtedness, selling our assets, seeking to raise additional equity capital or restructuring. Additionally, Amscan Holdings’ new senior secured asset-based revolving credit facility (the “New ABL Facility”) matures in August 2015. If we cannot renew or refinance this facility upon its maturity or, more generally, if adequate financing is unavailable or is unavailable on acceptable terms, we may be unable to maintain, develop or enhance our operations, products and services, take advantage of future opportunities, service our current debt costs or respond to competitive pressures.


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Our success depends on key personnel whom we may not be able to retain or hire.
 
The success of our business depends, to a large extent, on the continued service of our senior management team. Gerald C. Rittenberg, our Chief Executive Officer, and James M. Harrison, our President and Chief Operating Officer, have been with the Company for approximately 20 and 15 years, respectively. The loss of the services and leadership of either of these individuals could have a negative impact on our business, as we may not be able to find management personnel with similar experience and industry knowledge to replace either of them on a timely basis. We do not maintain key life insurance on any of our senior officers.
 
As our business expands, we believe that our future success will depend greatly on our continued ability to attract, motivate and retain highly skilled and qualified personnel. Although we generally have been able to meet our staffing requirements in the past, our ability to meet our labor needs while controlling costs is subject to external factors, such as unemployment levels, minimum wage legislation and changing demographics. Our inability to meet our staffing requirements in the future at costs that are favorable to us, or at all, could impair our ability to increase revenue, and our customers could experience lower levels of customer service.
 
Additionally, we rely upon qualified personnel to staff our temporary Halloween City locations during the Halloween season. Our failure to attract qualified temporary personnel to adequately staff these stores could negatively impact our business.
 
We are subject to risks associated with leasing substantial amounts of space.
 
We lease all of our company-owned stores, our corporate headquarters and most of our distribution facilities. Our continued growth and success depends in part on our ability to renew leases for successful stores and negotiate leases for new stores, including temporary leases for our Halloween City stores. There is no assurance that we will be able to negotiate leases at similar or favorable terms, and we may decide not to enter a market or be forced to exit a market if a favorable arrangement cannot be made. If an existing or future store is not profitable and we decide to close it, we may nonetheless be committed to perform our obligations under the applicable lease, including, among other things, paying the base rent for the balance of the lease term. Moreover, even if a lease has an early cancellation clause, we may not satisfy the contractual requirements for early cancellation under the lease.
 
Our business could be harmed if our existing franchisees do not conduct their business in accordance with the standards that we have agreed to.
 
Our success depends, in part, upon the ability of our franchisees to operate their stores and promote and develop our store concept. Although our franchise agreements include certain operating standards, all franchisees operate independently and their employees are not our employees. We provide certain training and support to our franchisees, but the quality of franchise store operations may be diminished by any number of factors beyond our control. Consequently, franchisees may not successfully operate stores in a manner consistent with our standards and requirements, or may not hire and train qualified managers and other store personnel. If they do not, our image, brand and reputation could suffer.
 
Our information systems, order fulfillment and distribution facilities may prove inadequate or may be disrupted.
 
We depend on our management information systems for many aspects of our business. We will be materially adversely affected if our management information systems are disrupted or we are unable to improve, upgrade, maintain and expand our systems. In particular, we believe our perpetual inventory, automated replenishment and weighted average cost stock ledger systems are necessary to properly forecast, manage and analyze our inventory levels, margins and merchandise ordering quantities. We may fail to properly optimize the effectiveness of these systems, or to adequately support and maintain the systems. Moreover, we may not be successful in developing or acquiring technology that is competitive and responsive to our customers and might lack sufficient resources to make the necessary investments in technology needs


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and to compete with our competitors, which could have a material adverse impact on our business, results of operations, cash flows and financial performance.
 
In addition, we may not be able to prevent a significant interruption in the operation of our electronic order entry and information systems, e-commerce platform or manufacturing and distribution facilities due to natural disasters, accidents, systems failures or other events. Any significant interruption in the operation of these facilities, including an interruption caused by our failure to successfully expand or upgrade our systems or manage our transition to utilizing the expansions or upgrades, could reduce our ability to receive and process orders and provide products and services to our stores, third-party stores, and other customers, which could result in lost sales, cancelled sales and a loss of loyalty to our brand.
 
We may fail to adequately maintain the security of our electronic and other confidential information.
 
We have become increasingly centralized and dependent upon automated information technology processes. In addition, a portion of our business operations is now conducted over the Internet. We could experience operational problems with our information systems and e-commerce platform as a result of system failures, viruses, computer “hackers” or other causes. Any material disruption or slowdown of our systems could cause information, including data related to customer orders, to be lost or delayed, which could — especially if the disruption or slowdown occurred during a peak sales season — result in delays in the delivery of merchandise to our stores and customers or lost sales, which could reduce demand for our merchandise and cause our sales to decline.
 
In addition, in the ordinary course of our business, we collect and store certain personal information from individuals, such as our customers and suppliers, and we process customer payment card and check information, including via our e-commerce platform. Computer hackers may attempt to penetrate our computer system and, if successful, misappropriate personal information, payment card or check information or confidential Company business information. In addition, a Company employee, contractor or other third party with whom we do business may attempt to circumvent our security measures in order to obtain such information and may purposefully or inadvertently cause a breach involving such information. Any failure to maintain the security of our customers’ confidential information, or data belonging to us or our suppliers, could put us at a competitive disadvantage, result in deterioration in our customers’ confidence in us, subject us to potential litigation and liability, and fines and penalties, resulting in a possible material adverse impact on our business, results of operations, cash flows and financial performance.
 
Our intellectual property rights may be inadequate to protect our business.
 
We hold a variety of United States trademarks, service marks, patents, copyrights, and registrations and applications therefor, as well as a number of foreign counterparts thereto and/or independent foreign intellectual property asset registrations. In some cases, we rely solely on unregistered trademarks and copyrights under United States common law rights to distinguish and/or protect our products, services and branding from the products, services and branding of our competitors. We cannot assure you that no one will challenge our intellectual property rights in the future. In the event that our intellectual property rights are successfully challenged by a third party, we could be forced to re-brand, re-design or discontinue the sale of certain of our products or services, which could result in loss of brand recognition and/or sales and could require us to devote resources to advertising and marketing new branding or re-designing our products. Further, we cannot assure you that competitors will not infringe our intellectual property rights, or that we will have adequate resources to enforce these rights. We also permit our franchisees to use a number of our trademarks and service marks, including Party City®, The Discount Party Super Store®, Halloween Costume Warehouse®, Party America®, The Paper Factory®, The Factory Card & Party Outlet® and Halloween City®. Our failure to properly control our franchisees’ use of such trademarks could adversely affect our ability to enforce them against third parties. A loss of any of our material intellectual property rights could have a material adverse effect on our business, financial condition and results of operations.
 
We license from many third parties and do not own the intellectual property rights necessary to sell products capturing many popular images, such as cartoon or motion picture characters. While none of these


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licenses is individually material to our aggregate business, a large portion of our business depends on the continued ability to license the intellectual property rights to these images in the aggregate. Any injury to our reputation or our inability to comply with, in many cases, stringent licensing guidelines in these agreements may adversely affect our ability to maintain these relationships. A large loss of these licensed rights in the aggregate could have a material adverse effect on our business, financial condition and results of operations.
 
We also face the risk of claims that we have infringed third parties’ intellectual property rights, which could be expensive and time consuming to defend, cause us to cease using certain intellectual property rights or selling certain products or services, result in our being required to pay significant damages or require us to enter into costly royalty or licensing agreements in order to obtain the rights to use third parties’ intellectual property rights, which royalty or licensing agreements may not be available at all, any of which could have a negative impact on our operating profits and harm our future prospects.
 
Risks Related to Our Indebtedness
 
Our substantial indebtedness and lease obligations could adversely affect our financial flexibility and our competitive position.
 
We have, and will continue to have, a significant amount of indebtedness. As of September 30, 2011, we had $1,107 million of outstanding indebtedness. As of September 30, 2011, we had $84.1 million excess availability under the New ABL Facility. Our substantial level of indebtedness increases the risk that we may be unable to generate cash sufficient to pay amounts due in respect of our indebtedness. We also have, and will continue to have, significant lease obligations. As of September 30, 2011, our minimum annual rental obligations under long-term operating leases for 2012 and 2013 were $116.0 million and $85.5 million, respectively, not including temporary locations. Our substantial indebtedness and lease obligations could have other important consequences to you and significant effects on our business. For example, they could:
 
  •  increase our vulnerability to adverse changes in general economic, industry and competitive conditions;
 
  •  require us to dedicate a substantial portion of our cash flow from operations to make payments for our indebtedness and leases, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;
 
  •  limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
 
  •  restrict us from exploiting business opportunities;
 
  •  make it more difficult to satisfy our financial obligations, including payments on our indebtedness;
 
  •  place us at a disadvantage compared to our competitors that have less debt and lease obligations; and
 
  •  limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions, debt service requirements, execution of our business strategy or other general corporate purposes.
 
Restrictions under our existing and future indebtedness may prevent us from taking actions that we believe would be in the best interest of our business.
 
The agreements governing our existing indebtedness contain and the agreements governing our future indebtedness will likely contain customary restrictions on us or our subsidiaries, including covenants that, among other things and subject to certain exceptions, restrict us or our subsidiaries, as the case may be, from:
 
  •  incurring additional indebtedness or issuing disqualified stock;
 
  •  paying dividends or distributions on, redeeming, repurchasing or retiring our capital stock;
 
  •  making payments on, or redeeming, repurchasing or retiring indebtedness;
 
  •  making investments, loans, advances or acquisitions;
 
  •  entering into sale and leaseback transactions;


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  •  engaging in transactions with affiliates;
 
  •  creating liens;
 
  •  transferring or selling assets;
 
  •  guaranteeing indebtedness;
 
  •  creating restrictions on the payment of dividends or other amounts to us from our subsidiaries; and
 
  •  consolidating, merging or transferring all or substantially all of our assets and the assets of our subsidiaries.
 
In addition, we are required to maintain compliance with a fixed charge coverage ratio if excess availability under the New ABL Facility on any day is less than (a) 15% of the lesser of the aggregate commitments or the then borrowing base under the New ABL Facility or (b) $25 million. These restrictions may prevent us from taking actions that we believe would be in the best interest of our business. Our ability to comply with these restrictive covenants will depend on our future performance, which may be affected by events beyond our control. If we violate any of these covenants and are unable to obtain waivers, we would be in default under the applicable agreements and payment of the indebtedness could be accelerated. The acceleration of our indebtedness under one agreement may permit acceleration of indebtedness under other agreements that contain cross-default or cross-acceleration provisions, including the New ABL Facility, Amscan Holdings’ senior secured term loan facility (the “New Term Loan Credit Agreement”) and the indenture governing Amscan Holdings’ senior subordinated notes (the “senior subordinated notes”). If our indebtedness is accelerated, we may not be able to repay that indebtedness or borrow sufficient funds to refinance it. Even if we are able to obtain new financing, it may not be on commercially reasonable terms or on terms that are acceptable to us. Furthermore, we and our subsidiaries may still be able to incur substantially more debt. This could further exacerbate the risks associated with our substantial leverage. If we are for any reason in default under any of the agreements governing our indebtedness, our business could be materially and adversely affected. In addition, complying with our covenants may also cause us to take actions that are not favorable to holders of the common stock and may make it more difficult for us to successfully execute our business strategy and compete against companies that are not subject to such restrictions.
 
Significant interest rate changes could affect our profitability and financial performance.
 
Our earnings are affected by changes in interest rates as a result of our variable rate indebtedness under the New ABL Facility and New Term Loan Credit Agreement. The interest rate swap agreements that we use to manage the risk associated with fluctuations in interest rates may not be able to fully eliminate our exposure to these changes.
 
Risks Related to This Offering
 
An active public market for our common stock may not develop following this offering.
 
Prior to this offering, there has been no public market for our common stock. We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market in our common stock or how liquid that market might become. An active market for our common stock may not develop or be sustained after the offering. If an active public market does not develop or is not sustained, it may be difficult for you to sell your shares of common stock at a price that is attractive to you, or at all. In addition, an inactive market may impair our ability to raise capital by selling shares and may impair our ability to acquire other companies by using our shares as consideration, which, in turn, could materially adversely affect our business.
 
The Sponsors will have the ability to control the outcome of matters submitted for stockholder approval and may have interests that differ from those of our other stockholders.
 
Investment funds affiliated with the Sponsors own a majority of our capital stock, on a fully-diluted basis, as of December 31, 2011. After the completion of this offering, the Sponsors will own approximately     % of our common stock, or     % on a fully-diluted basis. The Sponsors have significant influence over corporate transactions. So long as investment funds associated with or designated by the Sponsors continue to


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own a significant amount of the outstanding shares of our common stock, even if such amount is less than 50%, the Sponsors will continue to be able to strongly influence or effectively control our decisions, regardless of whether or not other stockholders believe that the transaction is in their own best interests. Such concentration of voting power could also have the effect of delaying, deterring or preventing a change of control or other business combination that might otherwise be beneficial to our stockholders.
 
Our third amended and restated certificate of incorporation contains a provision renouncing our interest and expectancy in certain corporate opportunities, which could adversely affect our business or future prospects.
 
Our third amended and restated certificate of incorporation provides that we renounce any interest or expectancy in, or in being offered an opportunity to participate in, any business opportunity that may from time to time be presented to our directors who are not our employees or employees of our subsidiaries (“Non-Employee Directors”) and the Sponsors or any of their respective officers, directors, agents, shareholders, members, partners, affiliates and subsidiaries (other than us and our subsidiaries) (collectively with Non-Employee Directors, the “Exempted Persons”) and that may be a business opportunity for such Exempted Person, even if the opportunity is one that we might reasonably have pursued or had the ability or desire to pursue if granted the opportunity to do so. No such Exempted Person will be liable to us for breach of any fiduciary or other duty, as a director or officer or otherwise, by reason of the fact that such person, acting in good faith, pursues or acquires any such business opportunity, directs any such business opportunity to another person or fails to present any such business opportunity, or information regarding any such business opportunity, to us. None of the Exempted Persons or their representatives has any duty to refrain from engaging directly or indirectly in the same or similar business activities or lines of business as us or any of our subsidiaries.
 
As a result, the Non-Employee Directors the Sponsors and their affiliates may become aware, from time to time, of certain business opportunities, such as acquisition opportunities, and may direct such opportunities to other businesses in which they or their affiliates have invested, in which case we may not become aware of or otherwise have the ability to pursue such opportunity. Furthermore, the Sponsors may acquire interests in businesses that directly or indirectly compete with certain portions of our business. As a result, the Sponsors could have differing interests than our other stockholders and our business or future prospects could be adversely affected if attractive business opportunities are procured by such parties for their own benefit. See “Description of Capital Stock — Anti-takeover Effects of the Delaware General Corporation Law and our Third Amended and Restated Certificate of Incorporation and Bylaws — Renouncement of Corporate Opportunity.”
 
Our stock price may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at a price at or above the initial public offering price.
 
The initial public offering price for the shares of our common stock sold in this offering will be determined by negotiation between the representatives of the underwriters and us. This price may not reflect the market price of our common stock following this offering. In addition, the market price of our common stock is likely to be highly volatile and may fluctuate substantially in response to a number of factors, most of which we cannot control, including:
 
  •  actual or anticipated fluctuations in our results of operations;
 
  •  variance in our financial performance from the expectations of equity research analysts;
 
  •  changes in consumer preferences or merchandise trends;
 
  •  announcements of new products or significant price reductions by our competitors;
 
  •  additions or changes to key personnel;
 
  •  the timing of releases of new merchandise or promotional events;
 
  •  the level of customer service that we provide in our stores;


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  •  our ability to source and distribute products effectively;
 
  •  weather conditions (particularly during the holiday season);
 
  •  the number of stores we open, close or convert in any period;
 
  •  the commencement or outcome of litigation;
 
  •  changes in market valuation or earnings of our competitors;
 
  •  the trading volume of our common stock;
 
  •  future sale of our equity securities; and
 
  •  economic, legal and regulatory factors unrelated to our performance.
 
The initial public offering price of our common stock will be determined by negotiations between us and the underwriters based upon a number of factors and may not be indicative of prices that will prevail following the completion of this offering. Volatility in the market price of our common stock may prevent investors from being able to sell their common stock at or above the initial public offering price. As a result, you may suffer a loss on your investment.
 
In addition, the stock markets in general have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance or the particular companies affected. These broad market and industry factors may materially harm the market price of our common stock irrespective of our operating performance. As a result of these factors, you might be unable to resell your shares at or above the initial public offering price after this offering. In addition, in the past, following periods of volatility in the overall market and the market price of a company’s securities, securities class action litigation has often been instituted against the affected company. This type of litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.
 
We do not expect to pay any cash dividends for the foreseeable future and, consequently, your only opportunity to achieve a return on your investment is if the price of our common stock appreciates.
 
Following this offering, we do not anticipate that we will pay any cash dividend on shares of our common stock for the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon results of operations, financial performance, contractual restrictions, restrictions imposed by applicable law and other factors our board of directors deems relevant. Additionally, the New ABL Facility, the New Term Loan Credit Agreement and the indenture governing the senior subordinated notes contain restrictive covenants which have the effect of limiting our ability to pay cash dividends. Accordingly, if you purchase shares in this offering, realization of a gain on your investment will depend on the appreciation of the price of our common stock, which may never occur. Investors seeking cash dividends in the foreseeable future should not purchase our common stock.
 
Future sales of our common stock, or the perception in the public markets that these sales may occur, may depress our stock price.
 
Sales of substantial amounts of our common stock in the public market after this offering, or the perception that these sales could occur, could adversely affect the price of our common stock and could impair our ability to raise capital through the sale of additional shares. Upon completion of this offering, we will have           million shares of common stock outstanding, much of which will be concentrated in the hands of the Sponsors. This concentration, commonly referred to as a market overhang, could depress the price at which our stock trades.


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Upon expiration of lock-up agreements between the underwriters and our officers, directors, the selling stockholders and certain other holders of our common stock, a substantial number of shares of our common stock could be sold into the public market shortly after this offering, which could depress our stock price.
 
Our officers, directors, the selling stockholders and holders of substantially all of our common stock have entered into lock-up agreements with our underwriters which prohibit, subject to certain limited exceptions, the disposal or pledge of, or the hedging against, any of their common stock or securities convertible into or exchangeable for shares of common stock for a period through the date 180 days after the date of this prospectus, subject to extension in certain circumstances. See “Shares Eligible for Future Sale” for a more detailed description of the restrictions on selling shares of our common stock after this offering. The market price of our common stock could decline as a result of sales by our existing stockholders in the market after this offering and after the expiration of these lock-up periods, or the perception that these sales could occur. Once a trading market develops for our common stock, and after these lock-up periods expire, many of our stockholders will have an opportunity to sell their stock for the first time. These factors could also make it difficult for us to raise additional capital by selling stock.
 
If you purchase shares of common stock in this offering, you will incur immediate and substantial dilution.
 
If you purchase shares of common stock in this offering, you will incur immediate and substantial dilution in the amount of $      per share because the initial public offering price of $      per share is substantially higher than the pro forma net tangible book value per share of our common stock. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares. In addition, you may also experience additional dilution upon future equity issuances or the exercise of stock options to purchase common stock granted to our employees, consultants and directors under our equity incentive plans.
 
We may undertake acquisitions to expand our business, which may pose risks to our business and dilute the ownership of our existing shareholders.
 
We continuously seek to expand our business through strategic acquisitions, both domestically and internationally. Our recent acquisitions include the March 2010 acquisition of the Designware party goods division from American Greetings, the September 2010 acquisition of the Christy’s Group, a U.K.-based costume company, the January 2011 acquisition of Riethmüller, a German balloon and party goods producer and the July 2011 acquisition of Party Packagers, a Canadian retailer of party goods and outdoor toys. See “Business — Evolution of Our Business” for a more detailed description of recent acquisitions and the growth of our business.
 
We will continue to selectively pursue acquisitions of businesses, technologies or services. Based on our previous experiences, integrating any newly acquired business, technology or service is an expensive and time consuming task. To finance any future acquisitions, it may be necessary for us to raise additional funds through public or private financings. Additional funds may not be available on terms that are favorable to us, and, in the case of equity financings, would result in dilution to our shareholders. We may be unable to operate any newly acquired businesses profitably or otherwise implement our strategy successfully. If we are unable to integrate any newly acquired entities, technologies or services effectively, our business and results of operations will suffer.
 
The time and expense associated with finding suitable and compatible businesses, technologies or services could also disrupt our ongoing business and divert our management’s attention. Future acquisitions by us could also result in large and immediate write-offs or assumptions of debt and contingent liabilities, any of which could substantially harm our business and results of operations.


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Our management will have broad discretion over the use of the proceeds we receive in this offering and might not apply the proceeds in ways that increase the value of your investment.
 
If the underwriters exercise their option to purchase additional shares in this offering in full, we estimate that net proceeds of the sale of the common stock that we are offering will be approximately $      million. Our management will have broad discretion to use our net proceeds from this offering, and you will be relying on the judgment of our management regarding the application of these proceeds. Our management might not apply the net proceeds of this offering in ways that increase the value of your investment. Our management might not be able to yield any return on the investment and use of these net proceeds. You will not have the opportunity to influence our decisions on how to use the proceeds.
 
If securities or industry analysts do not publish research or reports or publish unfavorable research or reports about our business, our stock price and trading volume could decline.
 
The trading market for our common stock will depend in part on the research and reports that securities and industry analysts publish about us, our business, our market or our competitors. We may not obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our company, the trading price of our stock could be negatively impacted. In the event we obtain securities or industry analyst coverage, if one or more of the analysts who covers us publishes unfavorable research or reports or downgrades our stock, our stock price would likely decline. If one or more of these analysts ceases to cover us or fails to regularly publish reports on us, interest in our stock could decrease, which could cause our stock price or trading volume to decline.
 
Anti-takeover provisions in our charter documents and Delaware law might discourage, delay or prevent a change in control of our company.
 
Our third amended and restated certificate of incorporation or bylaws contain provisions that may make the acquisition of our company more difficult without the approval of our board of directors. These provisions include:
 
  •  the division of our board of directors into three classes and the election of each class for three-year terms;
 
  •  advance notice requirements for stockholder proposals and director nominations;
 
  •  the sole ability of the board of directors to fill a vacancy created by the expansion of the board of directors;
 
  •  the required approval of holders of at least a majority of our outstanding shares of capital stock entitled to vote generally at an election of the directors to remove directors only for cause;
 
  •  the required approval of holders of at least 662/3% of our outstanding shares of capital stock entitled to vote at an election of directors to adopt, amend or repeal our bylaws, or amend or repeal certain provisions of our third amended and restated certificate of incorporation once the Sponsors cease to collectively own at least 50% of our outstanding common stock;
 
  •  limitations on the ability of stockholders to call special meetings and, when the Sponsors cease to collectively own 50% of our outstanding common stock, to take action by written consent; and
 
  •  provisions that reproduce much of the provisions that limit the ability of “interested stockholders” (other than the Sponsors and certain of their transferees) from engaging in specified business combinations with us absent prior approval of the board of directors or holders of 662/3% of our voting stock.
 
The existence of the foregoing provisions and anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that you could receive a premium for your common stock in the acquisition.


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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This prospectus contains forward-looking statements that convey our current expectations or forecasts of future events. All statements in this prospectus other than statements of historical fact are forward-looking statements. Forward-looking statements include statements about our future financial position, business strategy, budgets, projected costs, plans and objectives of management for future operations. The words “may,” “might,” “should,” “predict,” “potential,” “continue,” “estimate,” “intend,” “plan,” “will,” “believe,” “project,” “expect,” “seek,” “anticipate” and similar expressions may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking.
 
Any or all of our forward-looking statements in this prospectus may turn out not to occur as contemplated. They are based largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements. These factors include the effects of competition in the industry, the failure by us to anticipate changes in tastes and preferences of party goods retailers and consumers, the inability to increase store growth, the inability to increase prices to recover fully future increases in commodity prices, the loss of key employees, changes in general business conditions and other factors which are beyond our control. In particular, you should consider the numerous risks described in the “Risk Factors” section of this prospectus.
 
Although we believe the expectations reflected in the forward-looking statements are reasonable, in light of these risks and uncertainties, the forward-looking events and circumstances discussed in this prospectus may not occur as contemplated and actual results could differ materially from those anticipated or implied by the forward-looking statements.
 
You should not unduly rely on these forward-looking statements, which speak only as of the date of this prospectus. Unless required by law, we undertake no obligation to publicly update or revise any forward-looking statements to reflect new information or future events or otherwise. You should, however, review the factors and risks we describe in the reports we will file from time to time with the SEC after the date of this prospectus. See “Where You Can Find Additional Information.”


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USE OF PROCEEDS
 
We estimate that the net proceeds of the sale of the common stock that we are offering will be approximately $           million, or $           million if the underwriters exercise their option to purchase additional shares in full, assuming an initial public offering price of $      per share, which is the midpoint of the range listed on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of shares of common stock by the selling stockholders.
 
We expect to use approximately $           million of the net proceeds from this offering received by us to repurchase or redeem our senior subordinated notes, of which $175.0 million were outstanding at September 30, 2011, and approximately $3.7 million to terminate the management agreement.
 
We may also use any remaining portion of the net proceeds to repay amounts borrowed under the New ABL Facility, for working capital and other general corporate purposes. At September 30, 2011, approximately $250.6 million was outstanding under the New ABL Facility due 2015 at interest rates ranging from 2.72% to 4.75%. Certain of the underwriters and their affiliates serve in various capacities, including as lenders, under the New ABL Facility and, accordingly, may receive a portion of the net proceeds from this offering through repayment of such indebtedness. See “Underwriting — Conflicts of Interest.”
 
For additional information on our liquidity and outstanding indebtedness, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”
 
This expected use of net proceeds from this offering represents our intentions based upon our current plans and business conditions. The amounts and timing of our actual expenditures may vary significantly depending on numerous factors and any unforeseen cash needs. As a result, our management will retain broad discretion over the allocation of the net proceeds from this offering. Pending our use of the net proceeds from this offering as described above, we intend to invest the net proceeds in a variety of capital preservation investments, including short-term, investment-grade, interest-bearing instruments and U.S. government securities.


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DIVIDEND POLICY
 
We currently intend to retain all of our future earnings, if any, to finance operations, development and growth of our business, and repay debt. Most of our indebtedness contains restrictions on our activities, including paying dividends on our capital stock and restricting dividends or other payments to us. Any future determination relating to our dividend policy will be made at the discretion of our board of directors and will depend on a number of factors, including future earnings, capital requirements, financial conditions, future prospects, contractual restrictions and covenants and other factors that our board of directors may deem relevant.
 
In December 2010, in connection with the refinancing of our term loan agreement, Amscan Holdings’ board of directors declared and paid to us a one-time cash dividend totaling approximately $311.2 million. We used the aggregate proceeds from this dividend to pay a one-time cash dividend to our holders of common stock and to make a cash payment in lieu of a dividend to certain option and warrant holders (such dividend and payments, the “2010 Dividend”). In addition, holders of unvested options at the date such dividend was declared will receive a comparable distribution, if and when the options vest. The 2010 Dividend was the only dividend that we have paid on our common stock during the past four years.


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CAPITALIZATION
 
The following table sets forth our cash and cash equivalents and capitalization as of September 30, 2011:
 
  •  on an actual basis; and
 
  •  on an as adjusted basis to give effect to the issuance and sale by us of           shares of our common stock in the offering at an assumed initial public offering price of $      per share, the mid-point of the range set forth on the cover of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us and the application of the net proceeds from this offering as described in “Use of Proceeds.”
 
You should read this table in conjunction with “Use of Proceeds,” “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes thereto included elsewhere in this prospectus.
 
                 
    September 30, 2011  
    Actual     As Adjusted  
    (dollars in thousands)  
 
Cash and cash equivalents
  $ 19,484                   
                 
Debt:
               
Revolving credit facilities(1)
  $ 263,398          
Term loan due 2017
    662,337          
Mortgage obligation
    3,646          
Capital lease obligations
    2,772          
8.75% senior subordinated notes
    175,000          
                 
Total debt
    1,107,153          
Stockholders’ Equity:
               
Class A common stock, $0.01 par value, 80,000,000 shares authorized,          shares issued and outstanding, actual;          shares authorized, and          shares issued and outstanding, as adjusted(2)
               
Class B common stock, $0.01 par value, 30,400,000 shares authorized,          shares issued and outstanding, actual; no shares authorized, and no          shares issued and outstanding, as adjusted(2)
               
Preferred stock, $0.01 par value, 10,000 shares authorized, no shares issued and outstanding, actual;          shares authorized, and no shares issued and outstanding, as adjusted
               
Additional paid-in capital
    286,257          
Retained (deficit) earnings
    (21,512 )        
Accumulated other comprehensive loss
    (9,345 )        
                 
Party City Holdings Inc. stockholders’ equity(3)
    255,400          
Noncontrolling interests
    2,392          
                 
Total stockholders’ equity
    257,792          
                 
Total capitalization
  $ 1,364,945          
                 
 
 
(1) At September 30, 2011, there were $263.4 million of outstanding borrowings under the secured revolving credit facilities, a total of $15.3 million of outstanding letters of credit and excess availability of $84.1 million.
 
(2) The Class B common stock will convert into Class A common stock upon completion of the offering. At that time, the Class A common stock will be renamed “Common Stock.”
 
(3) A $1.00 increase (decrease) in the assumed initial public offering price of $      per share would (decrease) increase our total long-term obligations and would increase (decrease) stockholders’ equity by $      and $     , respectively, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us. To the extent we raise more proceeds in this offering, we may repay additional indebtedness. To the extent we raise less proceeds in this offering, we may reduce the amount of indebtedness that will be repaid.


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DILUTION
 
If you purchase our common stock in this offering, you will experience an immediate dilution of net tangible book value per share from the initial public offering price. Dilution in net tangible book value per share of our common stock represents the difference between the initial public offering price per share and the net tangible book value per share immediately after this offering. We calculate net tangible book value per share of our common stock by dividing the net tangible book value (total consolidated tangible assets less total consolidated liabilities) by the number of outstanding shares of our common stock
 
At September 30, 2011, the net tangible book value of our common stock was approximately $(609.0) million, or approximately $           per share of our common stock. After giving effect to (1) the sale of shares of our common stock in this offering at an assumed initial public offering price of $      per share, and after deducting estimated underwriting discounts and commissions and the estimated offering expenses of this offering, and (2) the Common Stock Conversion, the as adjusted net tangible book value at September 30, 2011 attributable to common stockholders would have been approximately $      million, or approximately $      per share of our common stock. This represents a net increase in net tangible book value of $      per existing share and an immediate dilution in net tangible book value of $      per share to new stockholders. The following table illustrates this per share dilution to new stockholders:
 
                 
Assumed initial public offering price per share
                   $             
Net tangible book value per share as of September 30, 2011
  $            
Increase in net tangible book value per share attributable to this offering
  $            
As adjusted net tangible book value per share after this offering
          $    
                 
Dilution in net tangible book value per share to new stockholders
          $    
                 
 
The table below summarizes, as of September 30, 2011, the differences for (1) our existing stockholders, and (2) investors in this offering, with respect to the number of shares of common stock purchased from us, the total consideration paid, and the average price per share paid before deducting fees and expenses.
 
                                                 
                            Average
       
    Shares Issued     Total Consideration     Price per
       
    Number     Percentage     Amount     Percentage     Share        
 
Existing stockholders
                                %                                 %   $                     
New stockholders in this offering
                                               
                                                 
Total
            100 %             100 %   $            
                                                 
 
Of the shares issued to and total consideration paid by existing stockholders in the table above, our directors and officers were issued a total of           shares in connection with the exercise of options for a total consideration of $10,000, or $           per share.
 
The foregoing discussion and tables assume no exercise of stock options to purchase           shares of our common stock subject to outstanding stock options with a weighted average exercise price of $           per share as of September 30, 2011 and excludes           shares of our common stock available for future grant or issuance under our stock plans. To the extent that any options having an exercise price that is less than the offering price of this offering are exercised, new investors will experience further dilution.


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UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
 
The following unaudited pro forma consolidated financial data sets forth our unaudited historical and pro forma consolidated statements of operations for the year ended December 31, 2010 and the nine months ended September 30, 2011 and our unaudited historical and pro forma balance sheet at September 30, 2011. Such information is based on the historical consolidated financial statements of the Company appearing elsewhere in this prospectus.
 
The unaudited pro forma consolidated income statement data for the year ended December 31, 2010 gives effect to the following as if each had occurred on January 1, 2010:
 
  •  Refinancing.  On August 13, 2010, we entered into the New ABL Facility for an aggregate principal amount, as amended, of up to $350 million. Proceeds from the New ABL Facility were used to refinance Amscan Holdings’ prior senior secured asset-based revolving credit facility and the Party City Franchise Group (“PCFG”) revolving credit facility and term loan agreement, in an aggregate amount equal to $157 million. In addition, on December 2, 2010, we entered into the $675 million New Term Loan Credit Agreement. The proceeds from the New Term Loan Credit Agreement were used to terminate our previously existing $342 million term loan guaranty credit agreement and to pay a one time cash dividend to common stockholders and a cash payment in lieu of a dividend to certain option and warrant holders aggregating $311.2 million.
 
  •  Initial Public Offering.  The issuance of           shares of common stock by us in this offering (the “IPO”) at a price equal to $      per share, the midpoint of the price range set forth on the cover of this prospectus, and the impact of using the proceeds to us, net of transaction fees and expenses, to (1) repurchase or redeem all of our senior subordinated notes, (2) terminate the management agreement with the Sponsors and (3) repay a portion of our borrowings under the New ABL Facility.
 
The unaudited pro forma consolidated statement of operations for the nine months ended September 30, 2011 and the unaudited pro forma consolidated balance sheet at September 30, 2011 give effect to the IPO and the application of net proceeds therefrom as if each had occurred on January 1, 2010 and September 30, 2011, respectively.
 
The unaudited pro forma adjustments are based on available information and certain assumptions that we believe are reasonable. The unaudited pro forma consolidated financial information was prepared on a basis consistent with that used in preparing our audited consolidated financial statements and includes all adjustments, consisting of normal and recurring items, that we consider necessary for a fair presentation of our financial position and results of operations for the unaudited periods.
 
The unaudited pro forma consolidated financial information should be read in conjunction with “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our historical consolidated financial statements and related notes included elsewhere in this prospectus. The unaudited pro forma consolidated financial information is for informational purposes only and is not intended to represent or be indicative of the consolidated results of operations or financial position that we would have reported had the refinancing transactions and this offering been completed on the dates indicated and should not be taken as representative of our future consolidated results of operations or financial position.


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PARTY CITY HOLDINGS INC.
 
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2010
 
                                 
          Pro Forma Adjustments     Pro
 
    Historical     Refinancing     IPO     Forma  
    (dollars in thousands, except per share amounts)  
 
Revenues:
                               
Net sales
  $ 1,579,677     $       $       $             
Royalties and franchise fees
    19,417                          
                                 
Total revenues
    1,599,094                          
Expenses:
                               
Cost of sales
    943,058                          
Wholesale selling expenses
    42,725                          
Retail operating expenses
    296,891                          
Franchise expenses
    12,269                          
General and administrative expenses
    134,392       (9,370 )(a)                (e)        
Art and development costs
    14,923                          
Impairment of trade name
    27,400                          
                                 
Income from operations
    127,436       9,370                  
Interest expense, net
    40,850       35,426  (b)     (f)        
Other expense, net
    4,208       (2,448 )(c)                
                                 
Income before income taxes
    82,378       (23,608 )                
Income tax expense
    32,945       (8,853 )(d)      (d)        
                                 
Net income
    49,433       (14,755 )                
Less: net income attributable to noncontrolling interests
    114                          
                                 
Net income attributable to Party City Holdings Inc. 
  $ 49,319     $ (14,755 )   $       $  
                                 
Net income per share
                               
Basic
                               
Diluted
                               
Weighted Average
                               
Outstanding basic
                               
Diluted
                               


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PARTY CITY HOLDINGS INC.
 
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011
 
                         
          Pro Forma
       
          IPO
    Pro
 
    Historical     Adjustments     Forma  
    (dollars in thousands, except per share amounts)  
 
Revenues:
                       
Net sales
  $ 1,200,188     $       $             
Royalties and franchise fees
    12,193                  
                         
Total revenues
    1,212,381                  
Expenses:
                       
Cost of sales
    760,947                  
Wholesale selling expenses
    42,970                  
Retail operating expenses
    216,956                  
Franchise expenses
    10,294                  
General and administrative expenses
    98,055                  (g)        
Art and development costs
    12,254                  
                         
Income from operations
    70,905                  
Interest expense, net
    60,252       (h)        
Other expense, net
    950                  
                         
Income before income taxes
    9,703                  
Income tax expense
    3,438        (i)        
                         
Net income
    6,265                  
Less: net income attributable to noncontrolling interests
    219                  
                         
Net income attributable to Party City Holdings Inc. 
  $ 6,046     $       $  
                         
Net income per share
                       
Basic
                       
Diluted
                       
Weighted Average
                       
Outstanding basic
                       
Diluted
                       


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PARTY CITY HOLDINGS INC.
 
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AT SEPTEMBER 30, 2011
                         
          Pro Forma
    Pro
 
    Historical     Adjustments     Forma  
    (dollars in thousands, except share and per share amounts)  
 
ASSETS
Current assets:
                       
Cash and cash equivalents
  $ 19,484     $           $        
Accounts receivable, net of allowances
    143,971                  
Inventories, net of allowances
    523,135                  
Prepaid expenses and other current assets
    78,756                  
                         
Total current assets
    765,346                  
Property, plant and equipment, net
    208,148                  
Goodwill
    685,448                  
Trade names
    133,370                  
Other intangible assets, net
    47,931                  
Other assets, net
    26,528       (j)        
                         
Total assets
  $ 1,866,771     $       $  
                         
 
LIABILITIES, REDEEMABLE COMMON SECURITIES AND STOCKHOLDERS’ EQUITY
                         
Current liabilities:
                       
Loans and notes payable
  $ 263,398     $ (k)   $    
Accounts payable
    187,258                  
Accrued expenses
    131,694       (k)        
Income taxes payable
    32,414       (l)        
Redeemable warrants
                     
Current portion of long-term obligations
    8,845                  
                         
Total current liabilities
    623,609                  
Long-term obligations, excluding current portion
    834,910       (k)        
Deferred income tax liabilities
    93,947                  
Deferred rent and other long-term liabilities
    20,748                  
                         
Total liabilities
    1,573,214                  
Redeemable common securities (including 1,172.56 common shares issued and outstanding at September 30, 2011)
    35,765                  
Commitments and contingencies
                       
Stockholders’ equity:
                       
Class A common stock, $0.01 par value, 80,000,000 shares authorized, 19,051.31 shares issued and outstanding at September 30, 2011;          shares issued and outstanding pro forma
                     
Class B common stock, $0.01 par value, convertible into Class A common stock, 30,400,000 shares authorized, 11,918.71 shares issued and outstanding at September 30, 2011; no shares issued and outstanding pro forma
                     
Preferred stock, $0.01 per value, 10,000 shares authorized, no shares issued and outstanding at September 30, 2011; no shares issued and outstanding pro forma
                     
Additional paid-in capital
    286,257        (m)        
Retained deficit
    (21,512 )     (n)        
Accumulated other comprehensive loss
    (9,345 )                
                         
Party City Holdings Inc. stockholders’ equity
    255,400                  
Noncontrolling interests
    2,392                  
                         
Total stockholders’ equity
    257,792                  
                         
Total liabilities, redeemable common securities and stockholders’ equity
  $ 1,866,771     $       $  
                         


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NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
(dollars in thousands except share and per share data)
 
Unaudited Pro Forma Consolidated Statement of Income for the Year ended December 31, 2010
 
(a) Reflects the elimination of the one-time cash distribution paid to stock option holders and charged to general and administrative expenses during 2010, in connection with the New Term Loan Credit Agreement and dividend refinancing.
 
(b) Reflects the change in interest expense arising from:
 
i. our use of the proceeds from the New ABL Facility to refinance the prior asset-based revolving facility and the PCFG revolving credit facility and term loan agreement; and
 
ii. our use of the net proceeds from the $675,000 New Term Loan Credit Agreement to terminate the previously existing term loan guaranty credit agreement and to pay a one-time cash dividend to common stockholders and a cash payment in lieu of a dividend to certain option and warrant holders aggregating $311,200.
 
During the periods prior to the refinancing, interest rates ranged from 1.2% to 3.3% for the prior asset-based revolving facility, the interest rate was 10% for the PCFG revolving credit facility and term loan agreement and interest rates ranged from 2.5% to 4.5% for the previously existing term loan guaranty credit agreement.
 
During the periods prior to the refinancing, interest rates ranging from 2.7% to 3.8% were assumed for the New ABL Facility and a 6.8% interest rate was assumed for the New Term Loan Credit Agreement.
 
The increase includes cash interest expense of $33,463 and the amortization of deferred finance charges and the New Term Loan Credit Agreement original issue discount totaling $1,963.
 
(c) Reflects the elimination of the non-recurring write-off of deferred finance charges during 2010 associated with the refinancing of the prior asset-based revolving facility and the PCFG revolving credit facility and term loan agreement.
 
(d) Reflects the tax effect of the pro forma adjustments, based upon a statutory federal income tax rate of 35% and an estimated state income tax rate, net of federal tax benefit, of 2.5%.
 
(e) Reflects the elimination of management fees paid to the Sponsors during the year under the terms of the management agreement, which will be terminated in connection with the IPO.
 
(f) Reflects the decrease in interest expense as a result of the proposed use of the net proceeds from the IPO to redeem the $175,000 aggregate principal amount of 83/4% senior subordinated notes and to reduce borrowings under the New ABL Facility. The decrease includes cash interest expense of $15,499 and deferred finance charges of $754.
 
Unaudited Pro Forma Consolidated Statement of Operations for the Nine Months ended September 30, 2011
 
(g) Reflects the elimination of management fees of $   paid to the Sponsors during the nine months ended September 30, 2011 under the terms of the management agreement, which will be terminated in connection with the IPO.
 
(h) Reflects the decrease in interest expense as a result of the proposed use of IPO proceeds to repay the $175,000 aggregate principal amount of 83/4% senior subordinated notes and to reduce borrowings under the New ABL Facility. The decrease includes cash interest expense of $      and deferred finance charges of $  .
 
(i) Reflects the tax effect of the pro forma adjustments, based upon a statutory federal income tax rate of 35% and an estimated state income tax rate, net of federal income tax benefit, of 2.5%.
 
Unaudited Pro Forma Consolidated Balance Sheet as of September 30, 2011
 
(j) Reflects the write off of deferred finance charges of $      associated with the redemption of the $175,000 aggregate principal amount of 83/4% senior subordinated notes.


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(k) Reflects the use of the net proceeds from the IPO to repurchase or redeem the $175,000 aggregate principal amount of 83/4% senior subordinated notes at     %, or $     , together with accrued interest of $     , to pay a management agreement cancellation fee of $      and to repay a portion of the borrowings under the New ABL facility.
 
(l) Reflects the income tax benefits arising from the     % premium paid to repurchase or redeem the $175,000 aggregate principal amount of 83/4% senior subordinated notes, the write off of deferred finance charges of $      associated with the repurchase or redemption of the $175,000 aggregate principal amount of 83/4 senior subordinated notes and the payment of the management agreement cancellation fee of $     , based on a statutory federal income tax rate of 35% and an estimated state income tax rate, net of federal income tax benefit, of 2.5%.
 
(m) Reflects the proceeds from the issuance of           shares of common stock in connection with the IPO, net of discounts of $     .
 
(n) Reflects the payment of the     % premium related to the repurchase or redemption of the $175,000 aggregate principal amount of 83/4% senior subordinated notes, the write off of deferred finance charges of $      associated with the repurchase or redemption and the payment of the management agreement cancellation fee of $     , net of income tax benefits based upon a statutory federal income tax rate of 35% and an estimated state income tax rate, net of federal income tax benefit, of 2.5%.


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SELECTED CONSOLIDATED FINANCIAL DATA
 
The selected consolidated financial data presented below are derived from our audited consolidated financial statements. The consolidated financial data as of December 31, 2009 and 2010 and for the years ended December 31, 2008, 2009 and 2010 were derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated financial data as of December 31, 2006, 2007 and 2008 and for the years ended December 31, 2006 and 2007 have been derived from our audited consolidated financial statements for such years, which are not included in this prospectus. The condensed consolidated financial data as of September 30, 2010 and 2011 and for the nine months ended September 30, 2010 and 2011 were derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. Our unaudited condensed consolidated financial statements for the nine months ended September 30, 2010 and 2011 have been prepared on the same basis as the annual consolidated financial statements and include all adjustments, which include only normal recurring adjustments, necessary for fair presentation of this data in all material respects.
 
Our historical results are not necessarily indicative of future operating performance, and our results for any interim period are not necessarily indicative of results for a full fiscal year. The information set forth below should be read in conjunction with, and is qualified in its entirety by reference to, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus.
 
                                                         
    Year Ended December 31,     Nine Months Ended September 30,  
    2006(1)     2007(2)     2008     2009     2010(3)     2010     2011(4)  
    (dollars in thousands)  
 
Income Statement Data:
                                                       
Revenues:
                                                       
Net sales
  $ 993,342     $ 1,221,516     $ 1,537,641     $ 1,467,324     $ 1,579,677     $ 1,015,856     $ 1,200,188  
Royalties and franchise fees
    21,746       25,888       22,020       19,494       19,417       12,333       12,193  
                                                         
Total revenues
    1,015,088       1,247,404       1,559,661       1,486,818       1,599,094       1,028,189       1,212,381  
Expenses:
                                                       
Cost of sales
    676,527       777,586       966,426       899,041       943,058       637,100       760,947  
Wholesale selling expenses
    39,449       41,899       41,894       39,786       42,725       31,759       42,970  
Retail operating expenses
    126,224       191,423       273,627       261,691       296,891       191,161       216,956  
Franchise expenses
    13,009       12,883       13,686       11,991       12,269       9,203       10,294  
General and administrative expenses
    84,836       105,707       120,272       119,193       134,392       86,302       98,055  
Art and development costs
    10,338       12,149       12,462       13,243       14,923       11,044       12,254  
Impairment of trade name(5)
                17,376             27,400              
                                                         
Income from operations
    64,705       105,757       113,918       141,873       127,436       61,620       70,905  
Interest expense, net
    54,887       54,590       50,915       41,481       40,850       28,261       60,252  
Other (income) expense, net(6)
    (1,000 )     18,214       (818 )     (32 )     4,208       758       950  
                                                         
Income before income taxes
    10,818       32,953       63,821       100,424       82,378       32,601       9,703  
Income tax expense
    4,295       13,246       24,188       37,673       32,945       11,766       3,438  
                                                         
Net income
    6,523       19,707       39,633       62,751       49,433       20,835       6,265  
Less: net income (loss) attributable to noncontrolling interests
    83       446       (877 )     198       114       184       219  
                                                         
Net income attributable to Party City Holdings Inc. 
  $ 6,440     $ 19,261     $ 40,510     $ 62,553     $ 49,319     $ 20,651     $ 6,046  
                                                         
Per Share Data
                                                       
Net income per share
                                                       
Basic
                                                       
Diluted
                                                       
Pro forma basic(7)
                                                       
Pro forma diluted(7)
                                                       
Weighted average
                                                       
Outstanding basic
                                                       
Diluted
                                                       
Pro forma outstanding basic(7)
                                                       
Pro forma diluted(7)
                                                       
Cash dividends, per share(8)
                            9,400              
                                                         
Statement of cash flow data
                                                       
Net cash provided by (used in)
                                                       
Operating activities
  $ 31,005     $ 9,644     $ 79,928     $ 123,942     $ 61,168     $ (1,500 )   $ 26,589  
Investing activities
    (40,119 )     (133,406 )     (51,199 )     (54,358 )     (102,766 )     (71,583 )     (131,844 )
Financing activities
    3,542       134,576       (23,033 )     (70,157 )     46,515       79,746       105,918  


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    Year Ended December 31,     Nine Months Ended September 30,  
    2006(1)     2007(2)     2008     2009     2010(3)     2010     2011(4)  
    (dollars in thousands)  
 
Other Financial Data:
                                                       
Net revenues by segment:
                                                       
Wholesale (after intercompany eliminations)
  $ 432,534     $ 453,333     $ 438,505     $ 411,359     $ 470,892     $ 347,606     $ 445,896  
Retail
    582,554       794,071       1,121,156       1,075,459       1,128,202       680,583       766,485  
                                                         
Consolidated
    1,015,088       1,247,404       1,559,661       1,486,818       1,599,094       1,028,189       1,212,381  
EBITDA(9)
    104,324       125,636       162,014       186,287       172,646       97,538       113,039  
Adjusted EBITDA(9)
    121,926       152,045       186,040       190,479       226,114       103,990       117,207  
Number of company-owned and franchised retail superstores (at end of period)(10)
    768       955       916       851       828       825       843  
Number of Party City superstores
    339       392       385       382       439       423       486  
Party City comparable store sales growth(11)
    6.5 %     5.8 %     0.5 %     (3.3 )%     1.4 %     0.9 %     4.0 %
Capital expenditures including assets under capital leases (excluding acquisitions)
    40,904       36,648       53,701       26,254       50,242       36,100       36,694  
Working capital (excluding cash)
    162,595       91,100       63,846       146,823       169,539       136,229       122,253  
Ratio of debt to Adjusted EBITDA(9)(12)
    4.7 x     4.9 x     3.9 x     3.4 x     4.4 x     3.6 x     4.6 x
 
                                                         
    Year Ended December 31,     Nine Months Ended September 30,  
    2006(1)     2007(2)     2008     2009     2010(3)     2010     2011(4)  
    (dollars in thousands)  
 
Balance Sheet Data (at period end):
                                               
Cash and cash equivalents
  $ 4,966     $ 17,274     $ 13,058     $ 15,420     $ 20,454     $ 22,743     $ 19,484  
Working capital
    167,561       108,374       76,904       162,243       189,993       158,972       141,737  
Total assets
    1,217,371       1,498,845       1,507,977       1,480,501       1,653,151       1,719,507       1,866,771  
Total debt
    567,005       746,126       721,635       651,433       1,000,256       730,983       1,107,153  
Total equity
    361,891       378,074       412,117       479,122       256,422       524,328       257,792  
 
 
(1) Party America is included in the balance sheet data beginning with December 31, 2006, and the income statement and other financial data from its acquisition date (September 29, 2006).
 
(2) FCPO and PCFG are included in the balance sheet data as of December 31, 2007, and the income statement and other financial data from their respective acquisition dates (PCFG- November 2, 2007 and FCPO-November 16, 2007).
 
(3) The acquisitions of Designware and the Christy’s Group are included in the balance sheet data as of December 31, 2010, and the income statement and other financial data from their respective acquisition dates (March 1, 2010 and September 30, 2010).
 
(4) The acquisitions of Riethmüller and Party Packagers are included in the financial statements from their respective acquisition dates (January 30, 2011 and July 29, 2011).
 
(5) During 2008 and 2010, we implemented plans to convert and rebrand our company-owned and franchised Party America stores and our FCPO stores to Party City stores, respectively. As a result, we recorded charges for the impairment of the Party America trade name and the FCPO trade name of $17.4 million and $27.4 million in the fourth quarters of 2008 and 2010, respectively.
 
(6) In connection with the refinancing of debt in May 2007, we recorded non-recurring expenses of $16.2 million, including $6.2 million of debt retirement costs, $6.3 million write off of deferred finance costs, and a $3.7 million write-off of original issue discount associated with the repayment of debt. In connection with the refinancing of the Company and its subsidiaries’ revolving and term debt credit facilities in August and December 2010, we wrote off $2.4 million of deferred finance charges.
 
(7) The pro forma earnings per share calculations give effect to the issuance and sale of a number of shares the proceeds of which would be used to pay the amount of the 2010 cash dividend that exceeded our 2010 earnings.
 
(8) For a discussion of our dividend payment in 2010 and our dividend policy generally, please refer to “Dividend Policy.”

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(9) For a discussion of our use of Adjusted EBITDA, please refer to “Prospectus Summary — Summary Financial Data.” The reconciliation from net income to EBITDA and Adjusted EBITDA for the period presented is as follows:
 
                                                         
                                  Nine Months Ended September 30,  
    2006     2007     2008     2009     2010     2010     2011  
    (dollars in thousands)  
 
Net Income
  $ 6,523     $ 19,707     $ 39,633     $ 62,751     $ 49,433     $ 20,835     $ 6,265  
Interest expense, net
    54,887       54,590       50,915       41,481       40,850       28,261       60,252  
Income taxes
    4,295       13,246       24,188       37,673       32,945       11,766       3,438  
Depreciation and amortization
    38,619       38,093       47,278       44,382       49,418       36,676       43,084  
                                                         
EBITDA
    104,324       125,636       162,014       186,287       172,646       97,538       113,039  
Equity based compensation and other charges
    1,208       1,928       4,546       882       6,019       514       1,076  
Non-cash purchase accounting adjustments
    2,509       1,332       2,329       (344 )     2,533       1,825       556  
Management fee
    1,248       1,248       1,248       1,248       1,248       936       936  
Gain from joint venture
          (628 )     (538 )     (632 )     (678 )     (382 )     (589 )
Impairment charges
          2,115       17,376 (a)           27,997 (a)     197        
Restructuring, retention and severance
    2,114       2,504             2,670       1,780       1,729        
Payment in lieu of dividend
                            9,395 (b)           355  
Refinancing charges
          16,360                   2,448              
Acquisition related expenses
                      270       1,660       557       1,613  
Intercompany gross profit elimination(c)
    10,901                                      
Other
    (378 )     1,550       (935 )     98       1,066       1,076       221  
                                                         
Adjusted EBITDA
  $ 121,926     $ 152,045     $ 186,040     $ 190,479     $ 226,114     $ 103,990     $ 117,207  
                                                         
 
 
(a) During 2008 and 2010, we implemented plans to convert and rebrand our company-owned and franchised Party America stores and our FCPO stores to Party City stores, respectively. As a result, we recorded charges for impairment of the Party America trade and the FCPO trade name of $17.4 million and $27.4 million in the fourth quarters of 2008 and 2010, respectively.
 
(b) Represents payment to holders of vested time-based options in connection with a one-time cash dividend payment in 2010. This payment is included as stock-based compensation expense in general and administrative expenses in 2010.
 
(c) Prior to our May 2007 refinancing, the definition of Adjusted EBITDA under our credit agreement provided for the add-back of intercompany gross profit on sales from our wholesale operations to our retail stores.
 
(10) Excludes temporary locations, principally under our Halloween City banner, and includes Party City superstores.
 
(11) Party City comparable store sales exclude FCPO store conversions, as presented here.
 
(12) The ratio of debt to Adjusted EBITDA is based on Adjusted EBITDA for the previous twelve months.


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes to those consolidated financial statements appearing elsewhere in this prospectus. This discussion contains forward-looking statements that involve significant risks and uncertainties. As a result of many factors, such as those set forth under “Risk Factors” and elsewhere in this prospectus, our actual results may differ materially from those anticipated in these forward-looking statements.
 
Business Overview
 
Our Company
 
We are a global leader in decorated party supplies. We make it easy and fun to enhance special occasions with a wide assortment of innovative and exciting merchandise at a compelling value. With the 2005 acquisition of Party City, we created a vertically integrated business combining the leading product design, manufacturing and distribution platform, Amscan, with the largest U.S. retailer of party supplies. We believe we have the industry’s broadest selection of decorated party supplies, which we distribute to over 100 countries. Our party superstore retail network consists of approximately 800 locations in the United States and approximately 25 locations in Canada and is approximately 15 times larger than that of our next largest party superstore competitor. Our vertically integrated business model and scale differentiate us from other party supply companies and allow us to capture the manufacturing-to-retail margin on a significant portion of the products sold in our stores. We believe our widely recognized brands, broad product offering, low-cost global sourcing model and category-defining retail concept are significant competitive advantages. We believe these characteristics, combined with our vertical business model and scale, position us for continued organic and acquisition-led growth in the United States and internationally.
 
How We Assess the Performance of Our Company
 
In assessing the performance of our company, we consider a variety of performance and financial measures for our two operating segments, Retail and Wholesale. These key measures include revenues and gross profit, comparable retail same-store sales and operating expenses. We also review other metrics such as EBITDA and Adjusted EBITDA. For a discussion of our use of Adjusted EBITDA and a reconciliation to net income, please refer to “Prospectus Summary— Summary Financial Data”.
 
Segments
 
Our Wholesale segment generates revenues globally through sales of our Amscan, Designware, Anagram and other party supplies to party goods superstores, including our company-owned and franchised stores, independent party supply stores, dollar stores, mass merchants, grocery retailers and gift shops. Domestic and international sales accounted for 86% and 14%, respectively, of our total wholesale sales in 2010 and 77% and 23%, respectively, during the first nine months of 2011. International wholesale sales are expected to increase as a result of our recent acquisitions and the further maturation of international party supply markets.
 
Our Retail segment generates revenues from the sale of merchandise to the end consumer through our chain of company-owned party goods stores, online through our e-commerce websites, including PartyCity.com, and through our chain of temporary Halloween locations. Franchise revenues include royalties on franchise retail sales and franchise fees charged for the initial franchise award and subsequent renewals. Our retail sales of party goods are fueled by everyday events such as birthdays, various seasonal events and other special occasions occurring throughout the year. In addition, through Halloween City, our temporary Halloween business, we seek to maximize our Halloween seasonal opportunity. As a result, in the year ended 2010, our Halloween business represented approximately 25% of our total annual retail sales, generally occurring in a five-week selling season ending on October 31. We expect to continue to generate a significant portion of our retail sales during the Halloween selling season.
 
Intercompany sales between the Wholesale and the Retail segment are eliminated, and the profits on intercompany sales are deferred and realized at the time merchandise is sold to the consumer. For segment


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reporting purposes, certain general and administrative expenses and art and development costs are allocated based on total revenues.
 
Financial Measures
 
Revenues.  Revenues from retail operations are recognized at point of sale. We estimate future retail sales returns and record a provision in the period in which the related sales are recorded based on historical information. Retail revenues include shipping revenue related to e-commerce sales. Retail sales are reported net of taxes collected. Franchise royalties are recognized based on reported franchise retail sales. Revenues from our wholesale operations represent the sale of our products to third parties, less rebates, discounts and other allowances. The terms of our wholesale sales are generally FOB shipping point, and revenue is recognized when goods are shipped. We estimate reductions to revenues for volume-based rebate programs and subsequent credits at the time sales are recognized. Intercompany sales from our wholesale operations to our retail stores are eliminated in our consolidated total revenues.
 
Comparable Retail Same-Store Sales.  The growth in same-store sales represents the percentage change in same-store sales in the period presented compared to the prior year. Same-store sales exclude the net sales of a store for any period if the store was not open during the same period of the prior year. Comparable sales are calculated based upon stores that were open at least thirteen full months as of the end of the applicable reporting period. When a store is reconfigured or relocated within the same general territory, the store continues to be treated as the same store. If, during the period presented, a store was closed, sales from that store up to and including the closing day are included as same-store sales as long as the store was open during the same period of the prior year. FCPO stores that are in the process of being converted have not been included in Party City same store-sales and will not be included until the thirteenth month following conversion.
 
Cost of Sales.  Cost of sales at wholesale reflects the production costs (i.e., raw materials, labor and overhead) of manufactured goods and the direct cost of purchased goods, inventory shrinkage, inventory adjustments, inbound freight to our manufacturing and distribution facilities, distribution costs and outbound freight to get goods to our wholesale customers. At retail, cost of sales reflects the direct cost of goods purchased from third parties and the production or purchase costs of goods acquired from our wholesale operations. Retail cost of sales also includes inventory shrinkage, inventory adjustments, inbound freight, occupancy costs related to store operations (such as rent and common area maintenance, utilities and depreciation on assets) and all logistics costs associated with our e-commerce business.
 
Our cost of sales increases in higher volume periods as the direct costs of manufactured and purchased goods, inventory shrinkage and freight are generally tied to sales. However, other costs are largely fixed or vary based on other factors and do not necessarily increase as sales volume increases. Changes in the mix of our products, such as changes in the proportion of company manufactured goods, which have higher margins, may also impact our overall cost of sales. The direct costs of manufactured and purchased goods are influenced by raw material costs (principally paper, petroleum-based resins and cotton), domestic and international labor costs in the countries where our goods are purchased or manufactured and logistics costs associated with transporting our goods. We monitor our inventory levels on an on-going basis in order to identify slow-moving goods and generally use our outlet stores to clear such goods.
 
Wholesale Selling Expenses.  Selling expenses include the costs associated with our wholesale sales and marketing efforts, including licensing, merchandising and customer service. Costs include the salaries and benefits of the related work force, including sales-based bonuses and commissions. Other costs include catalogues, showroom rent, travel and other operating costs. Certain selling expenses, such as sales-based bonuses and commissions, vary in proportion to sales, while other costs vary based on other factors, such as our marketing efforts, or are largely fixed and do not necessarily increase as sales volume increases.
 
Retail Operating Expenses.  Retail operating expenses include all of the costs associated with retail store operations, excluding occupancy-related costs included in the cost of sales. Costs include store payroll and


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benefits, advertising, supplies and credit card costs. Retail expenses are largely variable but do not necessarily vary in proportion to sales.
 
Franchise Expenses.  Franchise expenses include the costs associated with operating our franchise network, including salaries and benefits of the administrative work force and other administrative costs. These expenses generally do not vary proportionally with net sales or franchise-related income.
 
General and Administrative Expenses.  General and administrative expenses include all operating costs not included elsewhere. These expenses include payroll and other expenses related to operations at our corporate offices including occupancy costs, related depreciation and amortization, legal and professional fees and data-processing costs. These expenses generally do not vary proportionally with net sales.
 
Art and Development Costs.  Art and development costs include the costs associated with art production, creative development and product management. Costs include the salaries and benefits of the related work force. These expenses generally do not vary proportionally with net sales.
 
EBITDA and Adjusted EBITDA.  We define EBITDA as net income (loss) before interest expense, income taxes, depreciation and amortization. We define Adjusted EBITDA as EBITDA further adjusted to exclude certain cash and non-cash, non-recurring items. We caution investors that amounts presented in accordance with our definitions of EBITDA and Adjusted EBITDA may not be comparable to similar measures disclosed by other issuers, because not all issuers and analysts calculate EBITDA or Adjusted EBITDA in the same manner. We present EBITDA in this prospectus because we consider it an important supplemental measure of our performance and believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry. We present Adjusted EBITDA in this prospectus as a further supplemental measure of our performance and in connection with our annual cash incentive plan.
 
Executive Overview
 
Our recent financial results demonstrate continued growth and profitability enhancements during a difficult economic environment. For the year ended December 31, 2010, we posted revenue growth of 7.6% and Adjusted EBITDA growth of 18.7% as compared to the same period in 2009. The revenue growth reflects the impact of our acquisitions as well as increased purchases from our customers across all channels after the decline in consumer demand experienced in 2009. In addition to the higher sales, the Adjusted EBITDA growth also reflects an increase in the percentage of Amscan products sold through our company-owned stores allowing us to capture the manufacturing- or wholesale-to-retail margin on a growing share of our sales. For a discussion of our use of Adjusted EBITDA and a reconciliation to net income, please refer to “Prospectus Summary— Summary Financial Data.”
 
In 2010, we completed two acquisitions that expanded our product line and channel reach and, combined, contributed $41.4 million to our revenue. The March 2010 acquisition of the Designware party division of American Greetings strengthens our juvenile licensed character portfolio while increasing our reach into the grocery retail and mass merchant channels. The September 2010 acquisition of the U.K.-based Christy’s Group provides costume-design and sourcing capabilities as well as additional resources in the U.K. and European markets. In January 2011, we acquired Germany-based Riethmüller, including the Malaysian operations of latex balloon manufacturer Everts Balloon. This acquisition expanded our reach in Europe while also enabling us to directly supply a significant portion of our latex balloon requirements previously sourced from third-party vendors. We expect these acquisitions to enhance our distribution capabilities and product line and increase our profits as we continue to capitalize on our vertical model by increasing the percentage of our products sold through Party City. In July 2011, we acquired Party Packagers, a Canadian retailer of party goods and outdoor toys. The acquisition further expanded our vertical business model, giving us a significant retail presence in Canada.
 
We also experienced growth in our retail business driven by increases in our same-store sales combined with the addition of new locations. We increased our company-owned Party City store count by 57 locations in 2010, including FCPO conversions and stores acquired from our franchisees. Our extensive product selection combined with the new advertising strategy launched in late 2009 resulted in higher traffic which drove an improvement in same-store sales during the year with 0.6%, 0.2%, 1.6% and 2.6% growth in each of


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the first, second, third and fourth quarters. Same-store sales at our Party City stores, excluding FCPO conversions, increased 1.4% in 2010. The FCPO stores converted to the Party City format in 2010 have experienced a 13.8% increase in sales over 2009. We have also increased our number of temporary Halloween locations from 247 in 2009 to 414 in 2011. While revenue resulting from the increased store count contributed over $35.0 million to our sales in 2011 versus 2009, average sales per location in 2011 were lower than in 2009. Our e-commerce platform, re-launched in 2009, experienced strong growth during 2010 and 2011, and we expect it will continue to provide attractive growth opportunities for us.
 
Other Factors Affecting Our Results
 
Important events that have impacted or will impact the results presented in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” include:
 
Christy’s Group.  On September 30, 2010, we acquired the Christy’s Group for total consideration of approximately $30.4 million. The Christy’s Group designs and distributes costumes and other garments and accessories through its operations in Asia and the U.K. The results of operations of the Christy’s Group are included in our consolidated financial statements from the date of acquisition and included revenues of $11.4 million for 2010 and $38.9 million for the nine months ended September 30, 2011. The Christy’s Group has historically had a lower gross margin than we have and this acquisition is expected to reduce our consolidated gross margin in 2011.
 
Riethmüller GmbH.  On January 30, 2011, we acquired Riethmüller for total consideration of approximately $47.1 million. Riethmüller is a 150-year-old German balloon producer and the pre-eminent brand for party and carnival items in Germany, Austria and Switzerland. The acquisition expands our vertical business model into the latex balloon category and gives us a significant presence in Germany, Poland and Malaysia. The results of operations of Riethmüller are included in our consolidated financial statements from the date of acquisition and included revenues of $40.8 million for the nine months ended September 30, 2011. Similar to the Christy’s Group, the historical gross margin of Riethmüller has been lower than the margins generated by our wholesale operations. As a result, we expect the inclusion of Riethmüller in our 2011 results of operations to reduce our consolidated gross margin.
 
Party Packagers.  On July 29, 2011, we acquired Party Packagers for total consideration of approximately $31.8 million. Party Packagers is a Canadian retailer of party goods and outdoor toys. The acquisition expands our vertical business model, giving us a significant retail presence in Canada. The results of operations of Party Packagers are included in our consolidated financial statements from the date of acquisition and included revenues of $8.2 million for the nine months ended September 30, 2011.
 
Refinancing.  On August 13, 2010, we entered into the New ABL Facility for an aggregate principal amount of up to $350 million, as amended, for working capital, general corporate purposes and the issuance of letters of credit. The New ABL Facility, which matures in August 2015, was used to refinance our prior asset-based revolver and certain other term debt.
 
On December 2, 2010, we entered into the $675.0 million New Term Loan Credit Agreement and used the proceeds to refinance our existing $342.0 million term loan facility, pay a one-time cash dividend to common stockholders and make a cash dividend equivalent payment to vested time-based option holders and warrant holders aggregating approximately $311.2 million and to pay $18.1 million of related fees and expenses. The New Term Loan Credit Agreement matures in December 2017.
 
As a result of higher interest rates and debt following these refinancings, our interest expense will increase in future periods.
 
Public Company Costs.  As a result of the initial public offering of our common stock we will incur additional legal, accounting and other expenses that we did not previously incur, including costs associated with public company reporting and corporate governance requirements. These requirements


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include compliance with the Sarbanes-Oxley Act of 2002 as well as other rules implemented by the SEC and New York Stock Exchange.
 
Termination of Management Agreement.  We have a management agreement with our Sponsors. Pursuant to the management agreement, we pay annual management fees of approximately $1.2 million and an advisory fee of 1% of the value of specified transactions they assist us with. We intend to pay a termination fee of approximately $3.7 million to terminate the agreement in connection with this offering. This amount was determined through negotiations between the Company and the Sponsors.
 
Equity Based Compensation.  In December 2010, in connection with the refinancing of our term loan agreement (see “— Liquidity and Capital Resources”), our board of directors declared a one-time cash dividend totaling $311.2 million, which included $9.4 million to holders of vested time-based options, which was included in stock compensation expense in 2010. In addition, holders of unvested options at the date such dividend was declared will receive a comparable distribution, if and when the options vest. At December 31, 2010, the aggregate potential distribution associated with unvested options was $18.5 million, which could be paid out within 12 months following completion of this offering and would result in a charge to stock compensation expense.
 
Results of Operations
 
Nine Months Ended September 30, 2011 Compared To Nine Months Ended September 30, 2010
 
The following tables set forth our operating results and operating results as a percentage of total revenue for the nine months ended September 30, 2011 and 2010.
 
                                 
    Nine Months Ended September 30,  
    2011     2010  
    (dollars in thousands)  
 
Revenues:
                               
Net sales
  $ 1,200,188       99.0 %   $ 1,015,856       98.8 %
Royalties and franchise fees
    12,193       1.0       12,333       1.2  
                                 
Total revenues
    1,212,381       100.0       1,028,189       100.0  
Expenses:
                               
Cost of sales
    760,947       62.8       637,100       62.0  
Wholesale selling expenses
    42,970       3.5       31,759       3.1  
Retail operating expenses
    216,956       17.9       191,161       18.6  
Franchise expenses
    10,294       0.8       9,203       0.9  
General and administrative expenses
    98,055       8.1       86,302       8.4  
Art and development costs
    12,254       1.0       11,044       1.1  
                                 
Total expenses
    1,141,476       94.1       966,569       94.1  
                                 
Income from operations
    70,905       5.9       61,620       5.9  
Interest expense, net
    60,252       5.0       28,261       2.7  
Other expense, net
    950       0.1       758       0.1  
                                 
Income before income taxes
    9,703       0.8       32,601       3.1  
Income tax expense
    3,438       0.3       11,766       1.1  
                                 
                                 
                                 
Net income
    6,265       0.5       20,835       2.0  
Less net income attributable to noncontrolling interests
    219       0.0       184       0.0  
                                 
Net income attributable to Party City Holdings Inc. 
  $ 6,046       0.5 %   $ 20,651       2.0 %
                                 


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Revenues
 
Total revenues for the nine months ended September 30, 2011 were $1,212.4 million, or 17.9% higher than for the nine months ended September 30, 2010. The following table sets forth our total revenues for the nine months ended September 30, 2011 and 2010, respectively.
 
                                 
    Nine Months Ended September 30,  
    2011     2010  
    Dollars in
    Percentage of
    Dollars in
    Percentage of
 
    Thousands     Total Revenue     Thousands     Total Revenue  
 
Revenues
                               
Sales
                               
Wholesale
  $ 707,478       58.4 %   $ 564,400       54.9 %
Eliminations
    (261,582 )     (21.6 )%     (216,794 )     (21.1 )%
                                 
Net wholesale
    445,896       36.8 %     347,606       33.8 %
Retail
    754,292       62.2 %     668,250       65.0 %
                                 
Total net sales
    1,200,188       99.0 %     1,015,856       98.8 %
Royalties and franchise fees
    12,193       1.0 %     12,333       1.2 %
                                 
Total revenues
  $ 1,212,381       100.0 %   $ 1,028,189       100.0 %
                                 
 
Wholesale
 
Net wholesale sales for the first nine months of 2011 of $445.9 million were $98.3 million, or 28.3%, higher than net sales for the first nine months of 2010. During the first nine months of 2011, net sales to domestic party goods retailers, including our franchisee network, and to other domestic party goods distributors totaled $222.1 million and were $8.8 million, or 4.1%, higher than during the corresponding period of 2010. The increase in sales was principally attributable to an increase in Halloween products shipped directly to our franchise stores under a distribution center bypass program including $3.1 million of synergistic sales of Christy’s Halloween and other costumes. In addition, sales for the nine months ended September 30, 2011 benefited from nearly three additional months of Designware product sales or $0.4 million compared to 2010. Net sales of metallic balloons of $77.8 million were $5.8 million, or 8.1%, higher than in the first nine months of 2010, with the sales growth occurring across most channels, including domestic and international balloon distributors, dollar stores and custom. International sales totaled $146.0 million and were $83.7 million higher than in the first nine months of 2010, principally reflecting the acquisition of the Christy’s Group in September 2010 and Riethmüller in late January 2011, which added sales of $38.9 million and $40.8 million, respectively, in the first nine months of 2011. In addition, changes in foreign currency exchange rates resulted in a 7.7% increase in international sales over 2010.
 
Intercompany sales to our retail affiliates of $261.6 million were $44.8 million, or 20.7%, higher than during the first nine months of 2010 and represented 37.0% of total wholesale sales in the first nine months of 2011, compared to 38.4% in the first nine months of 2010. The increase in intercompany sales also reflects an increase in Halloween products shipped under the distribution center bypass program, including $8.1 million of synergistic sales of Christy’s Halloween and other costumes and the re-merchandising, during the past twelve months, of an additional 34 FCPO retail stores to the Party City format, as such stores carry a greater percentage of our wholesale products. The increase in intercompany sales also reflects the benefit from nearly three additional months of Designware product sales compared to 2010, which represented an increase of $0.6 million in the nine months of 2011. During the first nine months of 2011, our wholesale sales to our permanent retail stores represented 62.1% of the retail stores’ total purchases, compared to 61.0% in 2010. The intercompany sales of our wholesale segment are eliminated against the intercompany purchases of our retail segment in the consolidated financial statements.


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Retail
 
Retail sales for the first nine months of 2011 of $754.3 million were $86.0 million, or 12.9%, higher than retail sales in the first nine months of 2010. The retail sales at our Party City stores (including converted FCPO stores) totaled $610.9 million and were $62.1 million, or 11.3%, higher than in 2010. Party City same-store sales increased 4.0% during the nine months ended September 30, 2011, driven by a 2.5% increase in average transaction dollar size and a 1.5% increase in transaction count. The increase in sales is partially attributable to the successful shift in our principal advertising strategy from free standing newspaper inserts to a national broadcasting campaign. The increase in Party City store sales also reflects the net addition of 29 new stores during the twelve months ended September 30, 2011, including the net acquisition of 23 stores from franchisees, and the conversion of 34 FCPO stores to the Party City format during that time period. During the first nine months of 2011, sales at stores converted from the FCPO format to Party City during the last twelve months were 17.4% higher than sales at these same stores during the first nine months of 2010. Converted FCPO stores will be included in Party City’s same-store sales beginning with the thirteenth month following conversion. Our e-commerce sales totaled $44.4 million in the first nine months of 2011 and were $23.4 million, or 118.2%, higher than in the first nine months of 2010 driven, in part, by our shift to the national broadcast advertising campaign coupled with other successful online initiatives implemented since our re-launch of the PartyCity.com website in August 2009. Net sales at our temporary Halloween City stores of $13.4 million were $2.1 million higher than the nine months ended September 30, 2010. The Party Packagers stores acquired at the end of July 2011 added net sales of $8.2 million during the nine months of 2011. Sales at all other store formats, including unconverted FCPO and outlet stores, totaled $77.4 million and were $9.8 million or 11.3% lower than in 2010. The decrease principally reflects the net closure of 19 stores during the twelve months ended September 30, 2011.
 
Royalties and franchise fees
 
Royalties and franchise fees of $12.2 million for the first nine months of 2011 were comparable to the first nine months of 2010, as the negative impact on royalty income from our acquisition of 23 franchise stores, net, during the twelve months ended September 30, 2011 was offset by the impact of increased same-store sales at the remaining franchise stores.
 
Gross Profit
 
Our total margin on net sales for the nine months ended September 30, 2011 was 36.6% or 70 basis points lower than for the nine months ended September 30, 2010. The following table sets forth our gross profit on net sales for the nine months ended September 30, 2011 and 2010.
 
                                 
    Nine Months Ended September 30,  
    2011     2010  
          Percentage of
          Percentage of
 
    Dollars in
    Associated
    Dollars in
    Associated
 
    Thousands     Net Sales     Thousands     Net Sales  
 
Wholesale
  $ 154,906       34.7 %   $ 128,210       36.9 %
Retail
    284,335       37.7 %     250,546       37.5 %
                                 
Total
  $ 439,241       36.6 %     378,756       37.3 %
                                 
 
The gross profit margin on net sales at wholesale for the first nine months of 2011 was 34.7%, or 220 basis points, lower than for the first nine months of 2010. The decrease in wholesale gross profit margin reflects the dilutive impact of our recent international acquisitions, the Christy’s Group and Riethmüller, which have lower gross profit margins relative to our historical wholesale operations. The impact of the Christy’s Group and Riethmüller on wholesale gross profit margin was 200 basis points of the decline in the first nine months of 2011. The remaining 20 basis points of the decline reflected a combination of increased sales of lower margin products, including distribution center bypass sales, and increases in certain raw material, product and freight costs.


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Retail gross profit margin for the first nine months of 2011 was 37.7%, or 20 basis points, higher than in the first nine months of 2010, as the impact of a greater percentage of our wholesale products sold at retail and the realization of higher previously deferred manufacturing and distribution margin in the first nine months of 2011 compared to the first nine months of 2010 were partially offset by the inclusion of lower margin Party Packager sales and the timing of temporary Halloween City store occupancy expenses. During the nine months ended September 30, 2011, 64.3% of our domestic retail store sales were products supplied by our wholesale operations, compared to 63.6% for 2010.
 
Operating expenses
 
Wholesale selling expenses of $43.0 million for the first nine months of 2011 were $11.2 million, or 35.3%, higher than the first nine months of 2010. The increase in wholesale selling expenses principally reflects the additional expenses of the Christy’s Group and Riethmüller of $5.4 million and $3.6 million, respectively, as well as inflationary increases in compensation and employee benefits. Wholesale selling expenses were 6.1% of total wholesale sales in the first nine months of 2011, compared to 5.6% in the first nine months of 2010.
 
Retail operating expenses for the first nine months of 2011 of $217.0 million, were $25.8 million higher than for the first nine months of 2010. The increase in retail operating expenses reflects the growth in our retail store base, including $2.8 million of expenses related to the acquisition of Party Packagers, and the growth in our e-commerce operations. E-commerce costs reflect additional distribution, website and customer service costs. The increase in retail operating expenses also reflects additional costs associated with a national broadcasting campaign and inflationary increases in retail expenses. As a percent of retail sales, retail operating expenses were 28.8% for the first nine months of 2011, compared to 28.6% for the first nine months of 2010. Franchise expenses for the first nine months of 2011 of, $10.3 million, were $1.1 million, or 11.9%, higher than for the first nine months of 2010, principally due to an increase in commissions paid to franchisees on e-commerce sales originating in their territories.
 
As a percentage of total revenues, general and administrative expenses decreased to 8.1% for the first nine months of 2011, compared to 8.4% for the first nine months of 2010. General and administrative expenses for the nine months ended September 30, 2011 of $98.1 million were $11.8 million, or 13.6%, higher than for the first nine months of 2010, principally due to additional expenses from the acquisitions of the Christy’s Group, Riethmüller and Party Packagers of $2.0 million, $5.2 million and $0.9 million, respectively, as well as the timing of certain costs related to the Company’s temporary Halloween City store operations. The increase in general and administrative expenses for the third quarter of 2011 also reflects inflationary compensation and employee benefit cost increases, which were substantially offset by nonrecurring costs incurred in the nine months ended September 30, 2010 relating to the restructuring of the FCPO corporate offices.
 
Art and development costs of $12.3 million for the nine months ended September 30, 2011 were $1.2 million, or 11.0%, higher than the first nine months of 2010, principally reflecting increases in personnel, compensation and employee benefits. As a percentage of total revenues, art and development costs were 1.0% and 1.1% in the first nine months of 2011 and 2010, respectively.
 
Interest expense, net
 
Interest expense of $60.3 million for the nine months ended September 30, 2011 was $32.0 million higher than for the first nine months of 2010. The increase was principally due to higher interest rates and the $326.6 million increase in our term loan borrowings following the New ABL Facility refinancing in August 2010 and the New Term Loan Credit Agreement refinancing in December 2010, the proceeds of which were used to make a dividend distribution.
 
Other expense, net
 
Other expense, net, was $1.0 million for the first nine months of 2011 compared to $0.8 million for the first nine months of 2010. Other expense, net, principally consists of our share of (income) loss from an


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unconsolidated balloon distribution joint venture in Mexico, foreign currency (gains) losses and acquisition related expenses.
 
Income tax expense
 
The income tax expense for the nine months ended September 30, 2011 and 2010 were determined based upon the Company’s estimated consolidated effective income tax rates of 36.2% and 36.4% for the years ending December 31, 2011 and 2010, respectively. The differences between the estimated consolidated effective income tax rate and the U.S. federal statutory rate are primarily attributable to state income taxes and available domestic manufacturing deductions.
 
In addition, the income tax expense for the nine months ended September 30, 2011 reflects the settlement of the audits of the Company’s 2008 and 2009 federal tax returns and the settlement of the audits of several 2007 and 2008 state income tax returns. Also, the income tax expense for the nine months ended September 30, 2010 reflects the settlement of the audit of the Company’s 2007 federal tax return and the expiration of state statutes of limitations resolving previously unrecognized tax benefits.
 
Years Ended December 31, 2010, 2009 and 2008
 
The following information presented for 2010, 2009 and 2008 was derived from our audited consolidated financial statements and related notes which are included elsewhere in this prospectus.
 
                                                 
    Year Ended December 31,  
    2010     2009     2008  
    (dollars in thousands)  
 
Revenues:
                                               
Net sales
  $ 1,579,677       98.8 %   $ 1,467,324       98.7 %   $ 1,537,641       98.6 %
Royalties and franchise fees
    19,417       1.2       19,494       1.3       22,020       1.4  
                                                 
Total revenues
    1,599,094       100.0       1,486,818       100.0       1,559,661       100.0  
Expenses:
                                               
Cost of sales
    943,058       59.0       899,041       60.5       966,426       62.0  
Wholesale selling expenses
    42,725       2.7       39,786       2.7       41,894       2.7  
Retail operating expenses
    296,891       18.6       261,691       17.6       273,627       17.5  
Franchise expenses
    12,269       0.8       11,991       0.8       13,686       0.9  
General and administrative expenses
    134,392       8.4       119,193       8.0       120,272       7.7  
Art and development costs
    14,923       0.9       13,243       0.9       12,462       0.8  
Impairment of trade name
    27,400       1.7             0.0       17,376       1.1  
                                                 
Total expenses
    1,471,658       92.0       1,344,945       90.5       1,445,743       92.7  
                                                 
Income from operations
    127,436       8.0       141,873       9.5       113,918       7.3  
Interest expense, net
    40,850       2.6       41,481       2.8       50,915       3.3  
Other expense (income), net
    4,208       0.3       (32 )     0.0       (818 )     (0.1 )
                                                 
Income before income taxes
    82,378       5.2       100,424       6.7       63,821       4.1  
Income tax expense
    32,945       2.1       37,673       2.5       24,188       1.6  
                                                 
Net income
    49,433       3.1       62,751       4.2       39,633       2.5  
Less: net income (loss) attributable to noncontrolling interest
    114             198             (877 )     (0.1 )
                                                 
Net income attributable to Party City Holdings Inc.
  $ 49,319       3.1 %   $ 62,553       4.2 %   $ 40,510       2.6 %
                                                 


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Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
 
Revenues
 
Total revenues for 2010 were $1,599.1 million, or 7.6%, higher than in 2009 reflecting growth in both reporting segments. The following table sets forth the composition of our total revenues for 2010 and 2009.
 
                                 
    Year Ended December 31,  
    2010     2009  
    Dollars in
    Percentage of
    Dollars in
    Percentage of
 
 
  Thousands     Total Revenue     Thousands     Total Revenue  
 
Revenues:
                               
Sales:
                               
Wholesale
  $ 769,247       48.1 %   $ 633,006       42.6 %
Eliminations
    (298,355 )     (18.7 )     (221,647 )     (14.9 )
                                 
Net wholesale
    470,892       29.4       411,359       27.7  
Retail
    1,108,785       69.3       1,055,965       71.0  
                                 
Total net sales
    1,579,677       98.8       1,467,324       98.7  
Royalties and franchise fees
    19,417       1.2       19,494       1.3  
                                 
Total revenues
  $ 1,599,094       100.0 %   $ 1,486,818       100.0 %
                                 
 
Wholesale
 
Net sales for 2010 of $470.9 million were $59.5 million, or 14.5%, higher than net sales for 2009. Net sales to domestic party goods retailers, including our franchisee network, and to other domestic party goods distributors totaled $281.2 million and were $35.3 million, or 14.4%, higher than 2009 sales. The increase in sales principally reflects the acquisition of Designware in March 2010, which added sales of approximately $11.1 million, as well as a return to near normal purchasing patterns and inventory levels by retailers, following their reduction in purchasing during the economic downturn in 2009. Net sales of metallic balloons were $96.4 million, or 14.1%, higher than in 2009 and also reflect the normalization of purchasing patterns by domestic balloon distributors. International sales totaled $93.3 million and were $12.3 million, or 15.2%, higher than in 2009, primarily the result of the acquisition of the Christy’s Group in September 2010. Changes in foreign currency exchange rates resulted in a 2.1% increase in the international sales over 2009.
 
Intercompany sales to our retail affiliates of $298.4 million were $76.7 million, or 34.6%, higher than in 2009 and represented 38.8% of total wholesale sales in 2010 compared to 35.0% in 2009. The increase in intercompany sales principally reflects the impact of the acquisition of Designware and the growth of our products as a percentage of the total products sold in our retail stores, particularly at our rebranded and re-merchandised FCPO stores. During 2010, our wholesale sales to our retail stores represented 61.3% of the retail segment’s total purchases, compared to 53.7% in 2009. The intercompany sales of our wholesale segment are eliminated against the intercompany purchases of our retail segment in the consolidated financial statements.
 
Retail
 
Retail sales for 2010 at our company-owned stores of $1,108.8 million were $52.8 million, or 5.0%, higher than retail sales for 2009. The retail sales of our company-owned Party City stores (excluding FCPO conversions) totaled $770.7 million and were $15.8 million, or 2.1%, higher than in 2009. Party City same-store sales increased 1.4% during 2010, driven by a 2.0% increase in transaction count, partially offset by a 0.6% decrease in average sale price per transaction. Party City same-store sales accelerated during 2010, with growth of 0.6%, 0.2%, 1.6% and 2.6% for the first, second, third and fourth quarters, respectively, driven in part by the successful shift in our principal advertising strategy from free standing newspaper inserts to a national broadcasting campaign. The increase in Party City store sales also reflects the addition of 33 stores (excluding FCPO conversions), including the acquisition of 20 stores from franchisees, partially offset by the


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sale or closure of 16 stores in 2010. Additionally, we converted 40 FCPO stores to the Party City format, which generated sales of $28.6 million in 2010, a $3.5 million or 13.8% increase over 2009. Prior to this conversion to the Party City format, these 40 FCPO stores generated comparable sales of $25.1 million in 2009. Converted FCPO stores will be included in Party City’s same-store sales beginning with the thirteenth month following conversion. Net sales at our temporary Halloween City locations totaled $101.4 million and were $33.4 million, or 49.1%, higher than in 2009, reflecting an increase in the number of locations to 404 in 2010 from 247 in 2009, partially offset by an 8.8% decrease in average sales per location compared to 2009. The decrease in average Halloween City sales per location is primarily attributable to the expansion in 2010 into several new territories with existing competition. Our e-commerce sales totaled $40.2 million in 2010 compared to $13.4 million in 2009, reflecting the successful re-launch of the PartyCity.com website. Sales at all other store formats, including unconverted FCPO and outlet stores, totaled $167.8 million and were $26.7 million or 13.7% lower than in 2009. The decrease reflects the closure of six FCPO and 17 outlet stores during 2010 and the impact of liquidating non-conforming FCPO inventories prior to the stores’ remerchandising and rebranding.
 
Royalties and franchise fees
 
Royalties and franchise fees for 2010 totaled $19.4 million and were $0.1 million lower than in 2009 principally as a result of a net decrease of 18 franchise stores that occurred primarily during the fourth quarter of 2010.
 
Gross profit
 
Our total margin on net sales for 2010 was 40.3%, or 160 basis points higher, than in 2009. The following table sets forth our consolidated gross profit and gross margin on net sales for 2010 and 2009.
 
                                 
    Year Ended December 31,  
    2010     2009  
    Dollars in
    Percentage of
    Dollars in
    Percentage of
 
    Thousands     Associated Net Sales     Thousands     Associated Net Sales  
 
Net Wholesale
  $ 174,507       37.1 %   $ 148,424       36.1 %
Retail
    462,112       41.7 %     419,859       39.8 %
                                 
Total
  $ 636,619       40.3 %   $ 568,283       38.7 %
                                 
 
The gross margin on net sales at wholesale for 2010 was 37.1%, or 100 basis points higher than in 2009. The increase in wholesale gross margin principally reflects changes in product mix, including a greater percentage of higher margin decorated tableware and accessories due, in part, to the acquisition of Designware, the impact of product price increases and the continued leveraging of our distribution infrastructure, partially offset by increases in input costs.
 
Retail gross profit margin for 2010 was 41.7%, or 190 basis points higher than in 2009, principally due to a greater percentage of products sold at retail that were manufactured or sourced by us, including Designware products, resulting in a higher margin.
 
Operating expenses
 
Wholesale selling expenses totaled $42.7 million and were $2.9 million, or 7.4%, higher than in 2009. The increase in 2010 wholesale selling expenses, as compared to 2009, principally reflects increases in compensation and employee benefits and $0.8 million of expenses related to the Christy’s Group. Wholesale selling expenses were 2.7% of total revenue in both 2010 and 2009.
 
Retail operating expenses of $296.9 million for 2010 were $35.2 million, or 13.5%, higher than 2009, principally reflecting additional costs associated with the growth in our temporary Halloween and e-commerce businesses. E-commerce costs reflect higher distribution, website and customer service costs. The increase in retail operating expenses also reflects the addition of 18 stores in 2010. In addition, during 2010, we implemented a national broadcast-based advertising program, the costs of which were partially offset by a


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reduction in advertising through free standing newspaper inserts. Retail operating expenses were 26.8% of retail sales in 2010 and 24.8% of retail sales in 2009. Franchise expenses for 2010 of $12.3 million were $0.3 million, or 2.3%, higher than in 2009. Franchise expenses were 63.2% of franchise-related revenue in 2010 compared to 61.5% in 2009.
 
General and administrative expenses for 2010 totaled $134.4 million and were $15.2 million, or 12.8%, higher than in 2009. The increase in general and administrative expenses reflects increased equity-based expenses, an additional $4.2 million to support our expanding temporary Halloween operations and $1.9 million of additional expenses related to the Christy’s Group in 2010. In 2010, equity-based expenses included $9.4 million of stock compensation expense arising from the payment of the December 2010 dividend distribution to vested time-based option holders and a $5.3 million non-cash charge related to certain redeemable options and warrants held by employees that were marked to market.
 
These increases in general and administrative expense were partially offset by a lower provision for bad debts in 2010 as compared to 2009 and the continued implementation of cost reductions that began in 2009, including the consolidation of FCPO’s former corporate office operations in Naperville, Illinois into those of Party City. As a percentage of total revenues, general and administrative expenses were 8.4% for 2010 compared to 8.0% for 2009.
 
Art and development costs for 2010 totaled $14.9 million and were $1.7 million higher than in 2009, principally reflecting an increase in personnel and compensation and employee benefits. As a percentage of total revenues, art and development costs were 0.9% in 2010, comparable to 2009.
 
During 2010, we instituted a program to convert substantially all of our FCPO stores to either Party City stores or to an outlet format and recorded a $27.4 million non-cash charge for the impairment of the Factory Card & Party Outlet trade name.
 
Interest expense, net
 
Interest expense of $40.9 million for 2010 was comparable to 2009. Despite increases in our revolving and term loan interest rates in August and December of 2010, respectively, and a $326.6 million increase in our term debt following our December 2010 dividend distribution, our average debt and effective interest rate for 2010 were comparable to those of 2009.
 
Other expense, net
 
Other expense, net, for 2010 totaled $4.2 million. Other expense, net, includes costs of $2.4 million associated with the refinancing of our revolving and term debt credit facilities in 2010 and $1.6 million of acquisition-related costs. These costs were partially offset by our share of income from an unconsolidated balloon distribution joint venture located in Mexico.
 
Income tax expense
 
Income tax expense for 2010 and 2009 reflected consolidated effective income tax rates of 40.0% and 37.5%, respectively. The increase in the 2010 effective income tax rate is primarily attributable to certain adjustments related to deferred tax accounts recorded in the current year related to activities associated with previous acquisitions and non-deductible, non-cash stock option and warrant related charges, partially offset by an increased domestic manufacturing deduction, a lower average state income tax rate, the expiration of certain states’ statutes of limitations that resulted in the recognition of previous unrecognized tax benefits and the favorable settlement of the audit of our 2007 federal tax return. We expect our effective tax rate for 2011 to be approximately 35.8%.


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Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
 
Revenues
 
Total revenues for 2009 were $1,486.8 million, or 4.7%, lower than in 2008. The following table sets forth our total revenues for 2009 and 2008.
 
                                 
    Year Ended December 31,  
    2009     2008  
    Dollars in
    Percentage of
    Dollars in
    Percentage of
 
    Thousands     Total Revenue     Thousands     Total Revenue  
 
Revenues:
                               
Sales:
                               
Wholesale
  $ 633,006       42.6 %   $ 653,403       41.9 %
Eliminations
    (221,647 )     (14.9 )     (214,898 )     (13.8 )
                                 
Net wholesale
    411,359       27.7       438,505       28.1  
Retail
    1,055,965       71.0       1,099,136       70.5  
                                 
Total net sales
    1,467,324       98.7       1,537,641       98.6  
Royalties and franchise fees
    19,494       1.3       22,020       1.4  
                                 
Total revenues
  $ 1,486,818       100.0 %   $ 1,559,661       100.0 %
                                 
 
Wholesale
 
Net sales for 2009 of $411.4 million were $27.1 million, or 6.2%, lower than net sales for 2008, principally as a result of the downturn in the United States economy. Net sales to domestic party goods retailers, including our franchise network, and to other domestic party goods distributors totaled $245.9 million and were $16.4 million, or 6.3%, lower than 2008 sales, as the negative impact of the economy was partially offset by a large seasonal direct import program for one of our retailers. Net sales of metallic balloons were $84.5 million, or 8.9%, lower than in 2008, as wholesale distributors and retailers rationalized stock inventory levels in light of the economic downturn. International sales totaled $81.0 million and were $2.5 million, or 3.0%, lower than in 2008. Fluctuations in foreign currency account for an $11.0 million decrease in international sales, more than offsetting volume-related growth in local currency sales, principally at European national accounts.
 
Intercompany sales to our retail affiliates of $221.6 million were $6.7 million, or 3.1%, higher than in 2008 and represented 35.0% of the total wholesale sales in 2009 compared to 32.9% in 2008. The increase in intercompany sales principally reflects the growth of our manufactured and sourced products as a percentage of the total products sold in company-owned retail stores, particularly the FCPO stores acquired in November 2007. During 2009, our wholesale sales to our retail segment represented 53.7% of the retail segment’s total purchases compared to 50.4% in 2008. The intercompany sales of our wholesale segment are eliminated against the intercompany purchases of our retail segment in the consolidated financial statements.
 
Retail
 
Retail sales for 2009 at our company-owned stores of $1,056.0 million were $43.2 million, or 3.9%, lower than retail sales for 2008, reflecting the downturn in the United States economy, the operation of fewer FCPO and outlet stores during 2009 and the inclusion of a 53rd week in our 2008 fiscal year. Retail sales of our company-owned Party City stores totaled $754.9 million and were $35.3 million, or 4.5%, lower than in 2008. Party City same-store sales during 2009 decreased 3.3% compared to 2008 as the result of a decrease in transaction count, as the average dollar per transaction remained consistent between 2009 and 2008. Retail sales at our temporary Halloween locations totaled $68.0 million and were $28.6 million, or 72.3%, higher than in 2008 due to a 7.5% increase in average sales per location and a 65.7% increase in location count compared to 2008. During 2009, we generated $13.4 million in e-commerce sales compared to $5.9 million in 2008. The increase in e-commerce sales was driven by the re-launch of the PartyCity.com website in August


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2009. Sales at all other store formats, including unconverted FCPO and outlet stores, totaled $219.6 million and were $43.9 million or 16.7% lower than in 2008.
 
Royalties and franchise fees
 
Franchise-related revenue for the year ended December 31, 2009, consisting of royalties and franchise fees, totaled $19.5 million, or 11.5%, lower than in 2008, as our franchise store count decreased by 23 stores or 8.4% and the stores experienced a same-store net sales decrease of 2.3% compared to 2008.
 
Gross profit
 
The following table sets forth our consolidated gross profit and gross margin on net sales for 2009 and 2008;
 
                                 
    Year Ended December 31,  
    2009     2008  
    Dollars in
    Percentage of
    Dollars in
    Percentage of
 
    Thousands     Associated Net Sales     Thousands     Associated Net Sales  
 
Net Wholesale
  $ 148,424       36.1 %   $ 142,438       32.5 %
Retail
    419,859       39.8 %     428,777       39.0 %
                                 
Total Gross Profit
  $ 568,283       38.7 %   $ 571,215       37.1 %
                                 
 
The gross margin on net sales at wholesale for 2009 was 36.1%, or 360 basis points higher than in 2008. The increase in wholesale gross profit margin principally reflects cost reducing initiatives including reductions in distribution costs, and changes in product mix.
 
Retail gross profit margin for 2009 was 39.8%, or 80 basis points higher than in 2008, primarily the result of favorable variances in inventory shrink and damage reserves as compared to 2008.
 
Operating expenses
 
Wholesale selling expenses totaled $39.8 million and were $2.1 million, or 5.0%, lower than in 2008, reflecting a decrease in variable wholesale selling expenses, consistent with the decrease in wholesale sales, a reduction in the size of our sales force and a $1.2 million reduction in expenses as a result of changes in foreign currency exchange rates partially offset by inflationary increases principally in compensation and employee benefits. Wholesale selling expenses were 2.7% of total revenue in both 2009 and 2008.
 
Retail operating expenses of $261.7 million for 2009 were $11.9 million, or 4.4%, lower than 2008, principally reflecting a reduction in store count. Retail operating expenses were 24.8% of retail sales in 2009 and comparable to 2008. Franchise expenses for 2009 of $12.0 million were $1.7 million, or 12.4%, lower than in 2008, also reflecting a reduction in store count. Franchise expenses were 61.5% of franchise-related revenue in 2009 compared to 62.2% in 2008.
 
General and administrative expenses for 2009 totaled $119.2 million and were $1.1 million, or 0.9%, lower than in 2008. The decrease in general and administrative expenses reflects a management-directed cost reduction program, which included reductions in work force, travel and other expenses, the reduction of a prior year purchase accounting reserve of $2.4 million and a $1.3 million reduction in expenses as a result of changes in foreign currency exchange rates. These decreases were partially offset by inflationary increases, particularly in base compensation and employee benefits, an additional $2.4 million to support our expanding temporary Halloween operations, a one-time consulting fee of $2.0 million and a $2.9 million increase in the provision for bad debts principally due to the bankruptcy of a national account in Europe. As a percentage of total revenues, general and administrative expenses were 8.0% for 2009 compared to 7.7% for 2008.
 
Art and development costs of $13.2 million for 2009 were comparable to 2008 expenses. As a percentage of total revenues, art and development costs were 0.9% and 0.8% of total revenues for 2009 and 2008, respectively.


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Interest expense, net
 
Interest expense of $41.5 million for 2009 was $9.4 million lower than for 2008, reflecting the impact of lower average debt balances and LIBOR rates.
 
Other income, net
 
Other income, net, in 2009 primarily includes our share of income from an unconsolidated balloon distribution joint venture located in Mexico partially offset by foreign currency transaction losses and other expenses.
 
Income tax expense
 
Income tax expense for 2009 and 2008 reflected consolidated effective income tax rates of 37.5% and 37.9%, respectively. The decrease in the 2009 effective income tax rate is primarily attributable to a lower average state income tax rate caused by earnings mix shift among subsidiaries and the expiration of state statutes of limitations for certain states that resulted in the recognition of previous unrecognized tax benefits and the favorable settlement of the audits of our 2006 and 2005 federal tax returns. These tax rate reductions were partially offset by a lower domestic manufacturing deduction, as a percentage of pre-tax income.
 
Liquidity and Capital Resources
 
Capital Structure
 
On August 13, 2010, Amscan Holdings entered into the New ABL Facility for an aggregate principal amount, as amended, of up to $350 million for working capital, general corporate purposes and the issuance of letters of credit. The New ABL Facility was principally used to refinance the then existing asset-based revolving loans.
 
On December 2, 2010, Amscan Holdings entered into the $675 million New Term Loan Credit Agreement. Amscan Holdings used the proceeds from this facility to refinance the then existing $342 million term loan facility and to pay to us a one-time cash dividend. We used the aggregate proceeds from this dividend to pay a one-time cash dividend to common stockholders and a cash payment in lieu of a dividend to certain option and warrant holders aggregating approximately $311.2 million and to pay related fees and expenses. The term loan under the New Term Loan Credit Agreement was issued at a 1%, or $6.8 million, discount that is being amortized by the effective interest method over the life of the loan.
 
New ABL Facility
 
The New ABL Facility provides for (a) revolving loans in an aggregate principal amount at any time outstanding not to exceed $350 million, subject to a borrowing base described below, (b) swing-line loans in an aggregate principal amount at any time outstanding not to exceed 10% of the aggregate commitments under the facility and (c) letters of credit, in an aggregate face amount at any time outstanding not to exceed $50 million, to support payment obligations incurred in the ordinary course of business by Amscan Holdings and its subsidiaries.
 
Under the New ABL Facility, the borrowing base at any time equals (a) 85% of eligible trade receivables plus (b) 85% of eligible inventory at its net orderly liquidation value and (c) 90% of eligible credit card receivables, less (d) certain reserves.
 
Amounts borrowed under the New ABL Facility bear interest at a rate per annum equal to an applicable margin plus, at our option, either (a) an alternate base rate determined by reference to the highest of (1) the prime rate of Wells Fargo Bank, N.A., (2) the federal funds rate in effect on such date plus 1/2 of 1.00% and (3) the LIBOR rate for a three-month interest period plus 1.0% or (b) the LIBOR rate determined by reference to the LIBOR cost of funds for U.S. dollar deposits for the relevant interest period adjusted for certain additional costs. The applicable margin percentage ranges from 1.25% to 1.75% for alternate base rate loans and from 2.25% to 2.75% for loans based on the LIBOR rate, in each case based on average historical excess


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availability (as defined in the New ABL Facility agreement). The applicable margin at September 30, 2011 was 1.5% for alternate base rate loans and 2.5% for loans based on the LIBOR rate.
 
In addition to paying interest on outstanding principal under the New ABL Facility, Amscan Holdings is required to pay a commitment fee of between 0.375% and 0.50% per annum in respect of the unutilized commitments thereunder. Amscan Holdings must also pay customary letter of credit fees and agency fees.
 
The New ABL Facility also provides that Amscan Holdings has the right from time to time to request additional commitments, of which $100 million remains available. The lenders under the New ABL Facility are not under any obligation to provide any such additional commitments, and any increase in commitments is subject to several conditions precedent and limitations. If Amscan Holdings were to request any additional commitments, and the existing lenders or new lenders were to agree to provide such commitments, the facility size could be increased to up to $450 million, but Amscan Holdings’ ability to borrow under this facility would still be limited by the amount of the borrowing base under this facility and limitations on incurring additional indebtedness under the New Term Loan Credit Agreement and the indenture governing the senior subordinated notes.
 
In connection with the New ABL Facility, we incurred $3.9 million in finance costs that have been capitalized and will be amortized over the life of the loan.
 
On December 2, 2010, Amscan Holdings entered into an amendment to the New ABL Facility to, among other things, permit transactions related to paying the 2010 Dividend and amend the maturity date under the New ABL Facility to provide for a maturity date of August 13, 2015 or, if still outstanding, the date that is 120 days prior to the scheduled maturity of the senior subordinated notes or any indebtedness that refinances the senior subordinated notes.
 
In September 2011, Amscan Holdings entered into amendments to the New ABL Facility to, among other things, increase the commitment by $25 million, amend the defined term “Change of Control” to provide for a different definition following the consummation of an initial public offering that meets certain conditions and amend the restriction on the payment of dividends or other amounts by Amscan Holdings to allow for, among other things, payments of dividends used to satisfy costs we incur as a public company.
 
All obligations under the New ABL Facility are jointly and severally guaranteed by us and each existing and future domestic subsidiary of Amscan Holdings. Amscan Holdings and each guarantor has secured its obligations, subject to certain exceptions and limitations, including obligations under its guaranty, as applicable, by a first-priority lien on its accounts receivable, inventory, cash and proceeds and assets related thereto and a second-priority lien on substantially all of its other assets, including a pledge of all of the capital stock held by Amscan Holdings and each guarantor (which, in the case of capital stock of any foreign subsidiary, is limited to 65% of the voting stock of such foreign subsidiary and 100% of the non-voting stock of such foreign subsidiary).
 
The New ABL Facility contains negative covenants that, among other things and subject to certain exceptions, restrict our ability, and the ability of Amscan Holdings and any of its restricted subsidiaries to:
 
  •  incur additional indebtedness;
 
  •  pay dividends or distributions on capital stock or redeem, repurchase or retire capital stock of Amscan Holdings, us or any restricted subsidiary or make payments on, or redeem, repurchase or retire any indebtedness;
 
  •  make certain investments, loans, advances and acquisitions;
 
  •  enter into sale and leaseback transactions;
 
  •  engage in transactions with affiliates;
 
  •  create liens;
 
  •  transfer or sell assets;
 
  •  guarantee debt;


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  •  create restrictions on liens or the payment of dividends or other amounts to us from our restricted subsidiaries;
 
  •  consolidate, merge or transfer all or substantially all of our assets and the assets of our subsidiaries; and
 
  •  engage in unrelated businesses.
 
In addition, Amscan Holdings must comply with a fixed charge coverage ratio if our excess availability under the New ABL Facility on any day is less than (a) 15% of the lesser of the aggregate commitments and the then borrowing base under the New ABL Facility or (b) $25 million. The fixed charge coverage ratio is the ratio of (i) Adjusted EBITDA minus the unfinanced portion of consolidated capital expenditures (as defined in the New ABL Facility) to (ii) fixed charges (as defined in the New ABL Facility). Amscan Holdings has not been subjected to the fixed charge coverage ratio as its excess availability has not fallen below the amounts specified above.
 
The New ABL Facility also contains certain customary affirmative covenants and events of default, including a change in control provision and a cross-default provision in the case of a default according to the terms of any indebtedness with an aggregate principal amount of $20 million or more.
 
Borrowings under the New ABL Facility at September 30, 2011 totaled $250.6 million at interest rates ranging from 2.72% to 4.75%. Outstanding standby letters of credit totaled $15.3 million and Amscan Holdings had $84.1 million of excess availability under the terms of the New ABL Facility at September 30, 2011.
 
For additional information on the New ABL Facility, please refer to “Description of Certain Debt.”
 
New Term Loan Credit Agreement
 
Amounts borrowed under the New Term Loan Credit Agreement bear interest at a rate per annum equal to an applicable margin plus, at Amscan Holdings’ option, either (a) an alternate base rate determined by reference to the highest of (1) the prime rate of Credit Suisse AG, (2) the federal funds rate in effect on such date plus 1/2 of 1.00% and (3) the LIBOR rate for a one-month interest period plus 1.0% or (b) a LIBOR rate determined by reference to the cost of funds for U.S. dollar deposits for the relevant interest period, adjusted for certain additional costs. The applicable margin percentage is 4.25% for alternate base rate loans and 5.25% for loans based on the LIBOR rate.
 
In addition to paying interest on outstanding principal under the New Term Loan Credit Agreement, Amscan Holdings must also pay customary agency fees.
 
The New Term Loan Credit Agreement also provides that Amscan Holdings has the right from time to time to request an amount of additional term loans up to $175 million and to refinance, replace or extend the maturity date of all or a portion of the then existing term loans thereunder. The lenders under the New Term Loan Credit Agreement are not under any obligation to provide any such additional term loans, provide such refinancing or replacement term loans or agree to extend the maturity date of existing term loans held by them, and transactions to effect any additional, refinancing, replacement or extended term loans are subject to several conditions precedent and limitations.
 
The New Term Loan Credit Agreement provides that the term loans are subject to a 1.0% prepayment premium if voluntarily repaid under certain circumstances before December 2, 2011. Otherwise, Amscan Holdings may voluntarily prepay the term loans at any time without premium or penalty, other than customary breakage costs with respect to loans based on the LIBOR rate. The term loans are subject to mandatory prepayment, subject to certain exceptions, with (i) 100% of net proceeds arising from all non-ordinary course asset sales or other dispositions of property (including casualty events) by Amscan Holdings or by its subsidiaries, subject to reinvestment rights and certain other exceptions, (ii) 100% of the net cash proceeds of any incurrence of debt other than debt permitted under the New Term Loan Credit Agreement, (iii) commencing with the fiscal year ended December 31, 2011, 50% (which percentage will be reduced to 25% if Amscan Holdings’ total leverage ratio is less than 3.50 to 1.00, but greater than 2.50 to 1.00, and 0% if Amscan Holdings’ total leverage ratio is less than 2.50 to 1.00) of Amscan Holdings’ annual excess cash flow (as defined in the New Term Loan Credit Agreement). The total leverage ratio is the ratio of our consolidated total debt (as defined in the New Term Loan Credit Agreement) to Adjusted EBITDA.


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The term loans under the New Term Loan Credit Agreement mature on December 2, 2017 (or January 30, 2014, if Amscan Holdings’ senior subordinated notes are not refinanced with indebtedness permitted to be incurred under the New Term Loan Credit Agreement that matures at least 91 days after the maturity date of the term loans). Amscan Holdings is required to repay installments on the term loans in quarterly principal amounts of 0.25%, with the remaining amount payable on the maturity date.
 
All obligations under the New Term Loan Credit Agreement are jointly and severally guaranteed by us and each existing and future domestic subsidiary of Amscan Holdings. Amscan Holdings and each guarantor has secured its obligations, subject to certain exceptions and limitations, including obligations under its guaranty, as applicable, by a first-priority lien on substantially all of its assets (other than accounts receivable, inventory, cash and proceeds and assets related thereto), including a pledge of all of the capital stock held by Amscan Holdings and each guarantor (which, in the case of capital stock of any foreign subsidiary, is limited to 65% of the voting stock of such foreign subsidiary and 100% of the non-voting stock of such foreign subsidiary), and a second-priority lien on its accounts receivable, inventory, cash and proceeds and assets related thereto.
 
The New Term Loan Credit Agreement also contains certain customary affirmative covenants and events of default, including a change in control provision and a cross-default provision in the case of a default according to the terms of any indebtedness with an aggregate principal amount of $20 million or more. The New Term Loan Credit Agreement contains negative covenants that, among other things and subject to certain exceptions, restrict our ability, and the ability of Amscan Holdings and any of its restricted subsidiaries, to:
 
  •  incur additional indebtedness;
 
  •  pay dividends or distributions on capital stock or redeem, repurchase or retire capital stock of Amscan Holdings, us, or any restricted subsidiary or make payments on, or redeem, repurchase or retire any subordinated indebtedness;
 
  •  make certain investments, loans, advances and acquisitions;
 
  •  enter into sale and leaseback transactions;
 
  •  engage in transactions with affiliates;
 
  •  create liens;
 
  •  transfer or sell assets;
 
  •  guarantee debt;
 
  •  create restrictions on liens or the payment of dividends or other amounts to us from our restricted subsidiaries;
 
  •  consolidate, merge or transfer all or substantially all of our assets and the assets of our subsidiaries; and
 
  •  engage in unrelated businesses.
 
In connection with the New Term Loan Credit Agreement, we incurred $13.0 million in finance costs that have been capitalized and will be amortized over the life of the loan.
 
At September 30, 2011, the outstanding principal amount of term loans under the New Term Loan Credit Agreement was $662.3 million, which reflects an original issue discount of $6.8 million, net of $0.8 million of accumulated amortization, and the interest rate on borrowings ranged from 6.75% to 7.50%.
 
Other Credit Agreements
 
In connection with the acquisitions of the Christy’s Group, Riethmüller and Party Packagers, during the nine months ended September 30, 2011, the Company, through its subsidiaries, entered into several foreign asset-based and overdraft credit facilities that provide the Company with borrowing capacity of GBP 19.0 million, CDN 4.0 million, EUR 1.8 million and MYR 5.0 million. At September 30, 2011, borrowings under the foreign facilities totaled $12.8 million. Borrowings under the foreign facilities generally bear interest at prime plus margins ranging from 1.0% to 1.75%. In connection with one of the facilities, at September 30, 2011, the Company maintained a compensating cash balance of $4.3 million to secure outstanding standby letters of credit.


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Long-term borrowings at September 30, 2011 include a mortgage note with the New York State Job Development Authority of $3.6 million. The mortgage note was amended on December 18, 2009, extending the fixed monthly payments of principal and interest for a period of 60 months up to and including December 31, 2014. The note bears interest at the rate of 2.22% and is subject to review and adjustment semi-annually based on the New York State Job Development Authority’s confidential internal protocols. The mortgage note is collateralized by our Chester, New York distribution facility.
 
8.75% Senior Subordinated Notes due 2014
 
In connection with its acquisition by Berkshire Partners and Weston Presidio on April 30, 2004, Amscan Holdings issued and sold $175.0 million in principal amount of 8.75% senior subordinated notes due 2014. Interest on the notes is payable semi-annually in arrears on May 1 and November 1 of each year. The senior subordinated notes are guaranteed, jointly and severally, on an unsecured subordinated basis by each of Amscan Holdings’ existing and future domestic subsidiaries.
 
The indenture governing the senior subordinated notes contains certain covenants limiting, among other things and subject to certain exceptions, Amscan Holdings’ ability and the ability of Amscan Holdings’ restricted subsidiaries, to:
 
  •  incur additional indebtedness or issue preferred stock;
 
  •  pay dividends or distributions on capital stock or redeem, repurchase or retire capital stock of Amscan Holdings or any restricted subsidiary or make payments on, or redeem, repurchase or retire any indebtedness subordinated to the senior subordinated notes;
 
  •  make certain investments, loans, advances and acquisitions;
 
  •  enter into sale and leaseback transactions;
 
  •  engage in transactions with affiliates;
 
  •  create liens;
 
  •  guarantee debt;
 
  •  create restrictions on the payment of dividends or other amounts to us from our restricted subsidiaries;
 
  •  consolidate, merge or transfer all or substantially all of our assets and the assets of our subsidiaries; and
 
  •  engage in unrelated businesses.
 
The indenture governing the senior subordinated notes also contains certain customary affirmative covenants and events of default, including a cross-payment default provision and cross-acceleration provision in the case of a payment default or acceleration according to the terms of any indebtedness with an aggregate principal amount of $15 million or more.
 
Amscan Holdings may redeem the senior subordinated notes, in whole or in part, at the redemption prices (expressed as percentages of principal amount of senior subordinated notes to be redeemed) set forth below, plus accrued and unpaid interest thereon, if redeemed during the twelve-month period beginning on May 1 of each of the years indicated below:
 
         
Year
  Percentage
 
2011
    101.458 %
2012 and thereafter
    100.000 %
 
If Amscan Holdings experiences certain kinds of change in control, it must offer to purchase the senior subordinated notes at 101% of their principal amount, plus accrued and unpaid interest.
 
If Amscan Holdings or its restricted subsidiaries engage in certain asset sales, it generally must either invest the net cash proceeds from such sales in its business within a period of time, prepay senior debt or make an offer to purchase a principal amount of the outstanding senior subordinated notes equal to the excess


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net cash proceeds, subject to certain exceptions. The purchase price of the outstanding senior subordinated notes will be 100% of their principal amount, plus accrued and unpaid interest.
 
We intend to use net proceeds from this offering to redeem or repurchase all of the outstanding senior subordinated notes.
 
Other
 
As of September 30, 2011, Amscan Holdings has entered into various capital leases for machinery and equipment and automobiles with implicit interest rates ranging from 3.24% to 17.40% which extend to 2016. Amscan Holdings has numerous non-cancelable operating leases for its retail store sites as well as several leases for offices, distribution and manufacturing facilities, showrooms and equipment. These leases expire on various dates through 2024 and generally contain renewal options and require Amscan Holdings to pay real estate taxes, utilities and related insurance costs.
 
Restructuring costs
 
Restructuring costs associated with the FCPO Acquisition of $9.1 million were accrued as part of net assets acquired. Through December 31, 2009, we spent $6.7 million, including $3.8 million in 2009. Through December 31, 2010, we spent $7.6 million, including $0.9 million spent in the year ended December 31, 2010. We expect to spend $0.6 million in 2011.
 
During October 2009, we communicated our plan to close the FCPO corporate office in Naperville, Illinois and to consolidate our retail corporate office operations into those of Party City in Rockaway, New Jersey. In connection with the closing, we recorded severance costs of $1.8 million during 2009, all of which were paid by December 2010. We continue to utilize the Naperville facility as a distribution center for greeting cards and other products.
 
Liquidity
 
We expect that cash generated from operating activities and availability under our credit agreements will be our principal sources of liquidity. Based on our current level of operations, we believe these sources will be adequate to meet our liquidity needs for at least the next twelve months. We cannot assure you, however, that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under the New ABL Facility and the New Term Loan Agreement in an amount sufficient to enable us to repay our indebtedness, including the notes, or to fund our other liquidity needs.
 
Cash Flow Data — Nine Months Ended September 30, 2011 Compared To Nine Months Ended September 30, 2010
 
Net cash provided by (used in) operating activities totaled $26.6 million during the nine months ended September 30, 2011, as compared to $(1.5) million during the comparable nine months ended September 30, 2010. Net cash flow provided by operating activities before changes in operating assets and liabilities was $59.2 million during the nine months ended September 30, 2011 and $62.9 million during the comparable nine months ended September 30, 2010. Changes in operating assets and liabilities during the first nine months of 2011 and 2010 resulted in uses of cash of $32.6 million and $64.4 million, respectively, principally due to increases in inventories for both our permanent and temporary stores in preparation for the Halloween selling season.
 
Net cash used in investing activities totaled $131.8 million during the nine months ended September 30, 2011, as compared to $71.6 million during the comparable nine month period of 2010. Investing activities during the nine months ended September 30, 2011 included $47.1 million paid in connection with the acquisition of Riethmüller, $31.8 million paid in connection with the acquisition of Party Packagers, $4.0 million paid in connection with the acquisition of the Christy’s Group, and $12.7 million paid in connection with the purchase of retail franchise stores. Capital expenditures totaled $36.3 million during the nine months ended September 30, 2011 compared to $36.1 million in the nine months ended September 30,


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2010. Retail capital expenditures totaled $26.6 million in 2011 and were principally for new stores and store renovations, while wholesale capital expenditures, principally for printing plates and dyes and distribution equipment, totaled $9.7 million.
 
Net cash provided by financing activities was $105.9 million during the nine months ended September 30, 2011, compared to $79.7 million in the nine months ended September 30, 2010 and principally reflects borrowings under our revolving credit facility, net of scheduled term debt repayment.
 
Required repayments under our term debt for the remainder of 2011 will be $1.7 million. At September 30, 2011, we had $84.1 million of excess availability under the New ABL Facility.
 
Cash Flow Data — Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
 
Net cash provided by operating activities totaled $61.2 million during 2010, as compared to $123.9 million during 2009. Net cash flow provided by operating activities before changes in operating assets and liabilities was $133.4 million during 2010 and $124.2 million during 2009. Changes in operating assets and liabilities during 2010 resulted in the use of cash of $72.2 million and principally reflect an increase in inventories to support the replenishment of inventories across the channels we serve from the intentionally low levels reached in 2009, growth in Halloween City locations and additional inventory build related to the Designware acquisition. Changes in operating assets and liabilities resulted in the use of cash of $0.2 million during 2009.
 
Net cash used in investing activities totaled $102.8 million during 2010 and $54.4 million during 2009. Investing activities for 2010 included $30.4 million paid in connection with the purchase of the Christy’s Group and $21.5 million paid in connection with the purchase of retail franchise stores. Capital expenditures totaled $49.6 million in 2010 compared to $26.2 million in 2009. Retail capital expenditures totaled $37.2 million in 2010 and were principally for FCPO conversions, store renovations and updated information systems, while wholesale capital expenditures totaled $12.4 million.
 
Net cash provided from financing activities was $46.5 million in 2010, compared to $70.2 million used in financing activities in 2009. During 2010, net cash provided by financing activities included $160.6 million from the refinancing of our asset based revolving credit facility and $675.0 million from the refinancing of our term loan credit facility. Cash provided by the refinancing of the revolving credit facility was principally used to pay off the $137.6 million balance on the prior revolving credit facility and the $19.2 million balance of the prior PCFG term loan. The remaining cash from financing under the revolving credit facility was principally used to pay down trade payables. Cash provided by the refinancing of the term loan credit facility was used to pay off the $341.6 million balance on the prior term loan credit facility and to pay a $301.8 million dividend to stockholders (excluding the $9.4 million stock compensation expense). Additionally, cash used in financing activities included scheduled payments on our long-term obligations that totaled $2.6 million compared to $11.0 million 2009.
 
Cash Flow Data — Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
 
Net cash provided by operating activities totaled $123.9 million in 2009, as compared to $79.9 million in 2008. Net cash provided by operating activities before changes in operating assets and liabilities was $124.2 million for 2009 and $102.6 million for 2008. Changes in operating assets and liabilities resulted in the use of cash of $0.2 million in 2009 and $22.7 million in 2008. The increase in cash provided by operating activities during 2009 principally reflects an increase in income from operations and decreases in interest expense and inventory levels, partially offset by an increase in other assets.
 
Net cash used in investing activities totaled $54.4 million in 2009 and $51.2 million in 2008. Investing activities for 2009 included $24.9 million paid in escrow in connection with the acquisition of Designware. Retail capital expenditures, principally for store renovations and updated information systems, totaled $16.3 million in 2009, while wholesale capital expenditures totaled $9.9 million.
 
Net cash used in financing activities was $70.2 million in 2009 and $23.0 million in 2008. During 2009, the majority of cash used in financing activities was used to reduce borrowings under our revolving credit facility. Additionally, cash used in financing activities included scheduled payments on our long-term obligations that totaled $11.0 million in 2009 compared to $8.9 million during 2008. Scheduled payments


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during 2009 included an additional $2.5 million for payments on the PCFG term loan in connection with the amended credit agreement.
 
Tabular Disclosure of Contractual Obligations
 
Our contractual obligations at December 31, 2010 are summarized by the year in which the payments are due in the following table (in thousands):
 
                                                         
    Total     2011     2012     2013     2014     2015     Thereafter  
 
Long-term debt obligations(a)
  $ 846,183     $ 6,810     $ 6,835     $ 6,860     $ 181,982     $ 5,737     $ 637,959  
Capital lease obligations(a)
    3,975       2,236       1,446       147       131       15        
Operating lease obligations(b)
    425,164       112,172       95,026       67,314       45,510       33,369       71,773  
Merchandise purchase commitments(c)
    45,000       9,000       9,000       9,000       9,000       9,000        
Minimum product royalty obligations
    19,765       8,271       7,320       1,724       800       550       1,100  
                                                         
Total contractual obligations
  $ 1,340,087     $ 138,489     $ 119,627     $ 85,045     $ 237,423     $ 48,671     $ 710,832  
                                                         
 
 
(a) See Note 8 to our audited consolidated financial statements which are included elsewhere in this prospectus.
 
(b) We are also an assignor with continuing lease liability for sixteen stores sold to franchisees that expire through 2016. The assigned lease obligations continue until the applicable leases expire. The maximum amount of the assigned lease obligations may vary, but is limited to the sum of the total amount due under the lease. At December 31, 2010, the maximum amount of the assigned lease obligations was approximately $7.4 million and is not included in the table above.
 
The operating lease obligations included above do not include contingent rent based upon sales volume (which represented less than 1% of minimum lease obligations in 2010), or other variable costs such as maintenance, insurance and taxes. See Note 17 to our audited consolidated financial statements which are included elsewhere in this prospectus.
 
(c) We have a product purchase agreement with a vendor requiring minimum purchase commitments through 2015.
 
At December 31, 2010 there were no non-cancelable purchase orders related to capital expenditures.
 
At December 31, 2010, there were $150.1 million of borrowings under the New ABL Facility and standby letters of credit totaling $12.9 million.
 
Not included in the above table are $0.7 million of net potential cash obligations associated with unrecognized tax benefits due to the high degree of uncertainty regarding the timing of future cash outflows associated with such obligations. See Note 16 to our audited consolidated financial statements for further information related to unrecognized tax benefits.
 
Additionally, not included in the above table are expected term debt interest payments, which includes payments on the New Term Loan Credit Agreement, the senior subordinated notes, capital lease obligations and mortgage obligations, of approximately $63.0 million in 2011, $60.0 million in 2012, $58.8 million in 2013, $43.5 million in 2014, $28.9 million in 2015 and $35.2 million thereafter. Interest payments are estimates based on our term debt’s scheduled maturities and stated interest rates including, where applicable, LIBOR rates as of March 31, 2011. Our estimates do not reflect interest payments on the New ABL Facility or the possibility of additional interest from the refinancing of our term debt at maturity as such amounts are not determinable.
 
Off-Balance Sheet Arrangements
 
We do not have any off-balance sheet arrangements.


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Effects of Inflation
 
Although we expect that our operating results will be influenced by general economic conditions, we do not believe that inflation has had a material effect on our results of operations during the periods presented. However, there can be no assurance that our business will not be affected by inflation in the future.
 
Critical Accounting Policies and Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the appropriate application of certain accounting policies, many of which require estimates and assumptions about future events and their impact on amounts reported in the financial statements and related notes. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our estimates. Such differences could be material to the consolidated financial statements included herein.
 
We believe our application of accounting policies, and the estimates inherently required by these policies, are reasonable. These accounting policies and estimates are constantly re-evaluated and adjustments are made when facts and circumstances dictate a change. Historically, we have found the application of accounting policies to be reasonable, and actual results generally do not differ materially from those determined using necessary estimates.
 
Revenue Recognition
 
Our terms of sale to retailers and other distributors for substantially all of our sales is FOB shipping point and, accordingly, title and the risks and rewards of ownership are transferred to the customer, and revenue is recognized, when goods are shipped. We estimate reductions to revenues for volume-based rebate programs at the time sales are recognized. Should customers earn rebates higher than estimated by us, additional reductions to revenues may be required.
 
Revenue from retail operations is recognized at the point of sale. We estimate future retail sales returns and, when material, record a provision in the period that the related sales are recorded based on historical information. Should actual returns differ from our estimates, we would be required to revise estimated sales returns. Retail sales are reported net of taxes collected.
 
Store Closure Costs
 
We record estimated store closure costs, estimated lease commitment costs net of estimated sublease income and other miscellaneous store closing costs when the liability is incurred. Such estimates, including sublease income, may be subject to change.
 
Product Royalty Agreements
 
We enter into product royalty agreements that allow us to use licensed designs on certain of our products. These contracts require us to pay royalties, generally based on the sales of such product, and may require guaranteed minimum royalties, a portion of which may be paid in advance. We match royalty expense with revenue by recording royalties at the time of sale, at the greater of the contractual rate or an effective rate calculated based on the guaranteed minimum royalty and our estimates of sales during the contract period. If a portion of the guaranteed minimum royalty is determined to be unrecoverable, the unrecoverable portion is charged to expense at that time.
 
Doubtful Accounts
 
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers and franchisees to make required payments. A considerable amount of judgment is required in assessing the ultimate realization of these receivables, including consideration of our history of receivable write-offs, the level of past due accounts and the economic status of our customers. In an effort to identify adverse trends relative to customer economic status, we assess the financial health of the markets we operate


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in and perform periodic credit evaluations of our customers and ongoing reviews of account balances and aging of receivables. Amounts are considered past due when payment has not been received within the time frame of the credit terms extended. Write-offs are charged directly against the allowance for doubtful accounts and occur only after all collection efforts have been exhausted. Because we cannot predict future changes in economic conditions and in the financial stability of our customers, actual future losses from uncollectible accounts may differ from our estimates and could impact our allowance for doubtful accounts.
 
Inventories
 
Our policy requires that we state our inventories at the lower of cost or market value. In assessing the ultimate realization of inventories, we are required to make judgments regarding, among other things, future demand and market conditions, current inventory levels and the impact of the possible discontinuation of product designs. If actual conditions are less favorable than those projected by us, additional inventory write-downs to market value may be required and future period merchandise margin rates may be unfavorably or favorably affected.
 
We estimate retail inventory shortage, for the period from the last inventory date to the end of the reporting period, on a store-by-store basis. Our inventory shortage estimate can be affected by changes in merchandise mix and changes in actual shortage trends. The shrinkage rate from the most recent physical inventory, in combination with historical experience, is the basis for estimating shrinkage.
 
Long-Lived and Intangible Assets
 
We review the recoverability of our long-lived assets, including definite-lived intangible assets other than goodwill, whenever facts and circumstances indicate that the carrying amount may not be fully recoverable. For purposes of recognizing and measuring impairment, we evaluate long-lived assets other than goodwill based upon the lowest level of independent cash flows ascertainable to evaluate impairment. If the sum of the undiscounted future cash flows expected over the remaining asset life is less than the carrying value of the assets, we may recognize an impairment loss. The impairment related to long-lived assets is measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. When fair values are not readily available, we estimate fair values using expected discounted future cash flows. Such estimates of fair value require significant judgment, and actual fair value could differ due to changes in the expectations of cash flows or other assumptions including discount rates.
 
During 2010 and 2008, we instituted programs to convert our FCPO stores and our company-owned and franchised Party America stores to Party City stores and recorded fourth quarter non-cash charges of $27.4 million and $17.4 million, respectively, for the impairment of the FCPO and Party America trade names.
 
In the evaluation of the fair value and future benefits of finite long-lived assets attached to retail stores, we perform our cash flow analysis on a store-by-store basis. Various factors including future sales growth and profit margins are included in this analysis. To the extent these future projections or strategies change, the conclusion regarding impairment may differ from the current estimates.
 
Goodwill is reviewed for potential impairment, on an annual basis or more frequently if circumstances indicate a possible impairment, by comparing the fair value of a reporting unit with its carrying amount, including goodwill. Reporting units are determined by evaluating for individual components within our organization which constitute a business for which descrete financial information is available and is reviewed by management. Components within a segment are aggregated to the extent that they have similar economic characteristics. Based on this evaluation, we have determined that our operating segments, wholesale and retail, represent our reporting units for the purposes of our goodwill impairment test.
 
We estimate the fair value of each reporting unit using expected discounted cash flows. If the carrying amount of a reporting unit exceeds its fair value, the excess, if any, of the fair value of the reporting unit over amounts allocable to the unit’s other assets and liabilities is the implied fair value of goodwill. If the carrying amount of a reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss will be recognized in an amount equal to that excess. The fair value of a reporting unit refers to the amount at


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which the unit as a whole could be sold in a current transaction between willing parties. The determination of such fair value is subjective, and actual fair value could differ due to changes in the expectations of cash flows or other assumptions including discount rates.
 
Insurance Accruals
 
Our consolidated balance sheet includes significant liabilities with respect to self-insured workers’ compensation, medical and general liability claims. We estimate the required liability for such claims based upon various assumptions, which include, but are not limited to, our historical loss experience, projected loss development factors, actual payroll and other data. The required liability is also subject to adjustment in the future based upon changes in claims experience, including changes in the number of incidents (frequency) and changes in the ultimate cost per incident (severity). Adjustments to earnings resulting from changes in historical loss trends have been insignificant. Further, we do not anticipate any significant change in loss trends, settlements or other costs that would cause a significant change in our earnings.
 
Income Taxes
 
Temporary differences arising from differing treatment of income and expense items for tax and financial reporting purposes result in deferred tax assets and liabilities that are recorded on the balance sheet. These balances, as well as income tax expense, are determined through management’s estimations, interpretation of tax law for multiple jurisdictions and tax planning. However, inherent in the measurement of deferred balances are certain judgments and interpretations of enacted tax laws and published guidance with respect to applicability to our operations. If our actual results differ from estimated results due to changes in tax laws or tax planning, our effective tax rate and tax balances could be affected. As such, these estimates may require adjustment in the future as additional facts become known or as circumstances change.
 
During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. A valuation allowance is established against deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. These provisions prescribe a comprehensive model of how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. In accordance with these provisions, we recognize a tax benefit when a tax position is more-likely-than-not to be sustained upon examination, based solely on its technical merits. We measure the recognized tax benefit as the largest amount of tax benefit that has greater than a 50% likelihood of being realized upon the ultimate settlement with a taxing authority. We reverse previously recognized tax benefits if we determine that the tax position no longer meets the more-likely-than-not threshold of being sustained. We accrue interest and penalties related to unrecognized tax benefits in income tax expense.
 
Stock-Based Compensation
 
Accounting for stock-based compensation requires measurement of compensation cost for all stock-based awards at fair value on the date of grant and recognition of compensation over the service period for awards expected to vest. We use the Black-Scholes-Merton option pricing model to determine the fair value of our stock options. This model uses assumptions that include the risk free interest rate, expected volatility, expected dividend yield and expected life of the options. The value of our stock-based awards is recognized as expense over the service period, net of estimated forfeitures. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. Actual results and future estimates may differ substantially from our current estimates.
 
Recently Issued Accounting Pronouncements
 
In September 2011, the Financial Accounting Standards Board issued ASU 2011-05, Comprehensive Income (Topic 220), Presentation of Comprehensive Income. The new US GAAP guidance gives two choices of how to present items of net income, items of other comprehensive income (OCI) and total comprehensive


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income: one continuous statement of comprehensive income or two separate consecutive statements can be presented. OCI is no longer allowed to be presented in the statement of stockholder’s equity. The guidance also requires the reclassification adjustments for each component of OCI to be displayed in both net income and OCI. For public companies, these amendments are effective for fiscal year and interim periods beginning after December 15, 2011 and should be applied retrospectively. Since the update only requires a change in presentation, we do not expect that the adoption of this will have a material impact on our results of operations, cash flows or financial condition.
 
In May 2011, the Financial Accounting Standards Board issued ASU 2011-04, Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards, or IFRS. The ASU amends the fair value measurement and disclosure guidance in ASC 820, Fair Value Measurement, to converge US GAAP and IFRS requirements for measuring amounts at fair value as well as disclosures about these measurements. Many of the amendments clarify existing concepts and are generally not expected to result in significant changes to application of fair value principles. In certain instances, however, the FASB changed a principle to achieve convergence, and while limited, these amendments have the potential to significantly change practice. These amendments are effective during interim and annual periods beginning after December 15, 2011. Although we continue to review this update, we do not believe it will have a material impact on our financial statements or the notes thereto.
 
In April 2011, the Financial Accounting Standards Board issued ASU 2011-02, Receivables (Topic 310), A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring. The FASB believes there has been diversity in practice related to identifying and disclosing troubled debt restructurings, and this diversity has been amplified over the last several years given the economic conditions. The amendments in this ASU clarify the accounting guidance for all banks and other creditors that make concessions to borrowers who are experiencing financial difficulties. The changes clarify the guidance on determining whether a concession has been granted and whether a borrower is considered to be experiencing financial difficulty. The amendments are effective for the first interim or annual period beginning on or after September 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after September 15, 2011. We do not anticipate any material impact from this update.
 
Quarterly Results
 
Despite a concentration of holidays in the fourth quarter of the year, as a result of our expansive product lines and wholesale customer base and increased promotional activities, the impact of seasonality on the quarterly results of our wholesale operations in recent years has been limited. Promotional activities, including special dating terms, particularly with respect to Halloween and Christmas products sold to retailers and other distributors in the third quarter, and the introduction of our new everyday products and designs during the fourth quarter generally result in higher accounts receivables and inventory balances. Our retail operations are subject to substantial seasonal variations. Historically, our retail stores have realized a significant portion of their net sales, net income and cash flow in the fourth quarter of the year, principally due to the sales in October for the Halloween season and, to a lesser extent, due to sales for end of year holidays.


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The following table sets forth our historical revenues, gross profit, income from operations and net income (loss), by quarter, for 2011, 2010 and 2009.
 
                                 
    For the Three Months Ended,  
    March 31,     June 30,     September 30,     December 31,  
    (Dollars in thousands)  
 
2011
                               
Revenues:
                               
Net sales
  $ 352,501     $ 411,502     $ 436,186          
Royalties and franchise fees
    3,681       4,550       3,962          
Gross profit
    127,486       163,715       148,039          
Income from operations
    16,608       43,022       11,276          
Net (loss) income attributable to Party City Holdings Inc. 
    (2,563 )     14,532       (5,922 )        
                                 
2010
                               
Revenues:
                               
Net sales
  $ 304,379     $ 352,705     $ 358,772     $ 563,821  
Royalties and franchise fees
    3,844       4,453       4,035       7,085  
Gross profit
    104,479       141,840       132,437       257,863  
Income from operations
    8,288       35,367       17,963       65,818 (a)
Net (loss) income attributable to Party City Holdings Inc. 
    (412 )     16,460       4,603       28,668 (a)
                                 
2009
                               
Revenues:
                               
Net sales
  $ 309,046     $ 337,536     $ 336,944     $ 483,798  
Royalties and franchise fees
    3,694       4,536       4,164       7,100  
Gross profit
    103,629       128,425       121,453       214,776  
Income from operations
    12,201       27,818       14,937       86,917  
Net income attributable to Party City Holdings Inc. 
    2,403       10,952       3,079       46,119  
 
 
(a) During the fourth quarter of 2010, we recorded a pre-tax charge of $27,400 to write off the FCPO trade name.
 
Quantitative and Qualitative Disclosures about Market Risk
 
Our earnings are affected by changes in interest rates as a result of our variable rate indebtedness. However, we utilize interest rate swap agreements to manage the market risk associated with fluctuations in interest rates. If market interest rates for our variable rate indebtedness averaged 2% more than the interest rate actually paid for the years ended December 31, 2010, 2009 and 2008, our interest expense, after considering the effects of our interest rate swap agreements, would have increased, and income before income taxes would have decreased, by $7.1 million, $6.7 million, and $7.3 million, respectively. If market interest rates for our variable rate indebtedness averaged 2% more than the interest rate actually paid for the nine months ended September 30, 2011 and 2010, our interest expense, after considering the effects of our interest rate swap agreements, would have increased and income before income taxes would have decreased by $11.8 million and $4.8 million, respectively. These amounts are determined by considering the impact of the hypothetical interest rates on our borrowings and interest rate swap agreements. This analysis does not consider the effects of the reduced level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management would likely take actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that we would take and their possible effects, the sensitivity analysis assumes no changes in our financial structure.
 
Our earnings are also affected by fluctuations in the value of the U.S. dollar as compared to foreign currencies, predominately in European countries, as a result of the sales of our products in foreign markets. Although we periodically enter into foreign currency forward contracts to hedge against the earnings effects of such fluctuations, we (1) may not be able to achieve hedge effectiveness to qualify for hedge-accounting treatment and, therefore, would record any gain or loss on the fair value of the derivative in other expense


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(income) and (2) may not be able to hedge such risks completely or permanently. A uniform 10% strengthening in the value of the U.S. dollar relative to the currencies in which our foreign sales are denominated would have resulted in a decrease in gross profit of $6.7 million, $5.5 million, and $5.6 million for the years ended December 31, 2010, 2009 and 2008, respectively. A uniform 10% strengthening in the value of the U.S. dollar relative to the currencies in which our foreign sales are denominated would have resulted in a decrease in gross profit of $11.6 million and $4.3 million for the nine months ended September 30, 2011 and 2010, respectively. These calculations assume that each exchange rate would change in the same direction relative to the U.S. dollar. In addition to the direct effects of changes in exchange rates, which could change the U.S. dollar value of the resulting sales, changes in exchange rates may also affect the volume of sales or the foreign currency sales price as competitors’ products become more or less attractive. Our sensitivity analysis of the effects of changes in foreign currency exchange rates does not factor in a potential change in sales levels or local currency prices.


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