S-1/A 1 d839584ds1a.htm AMENDMENT NO.8 TO FORM S-1 Amendment No.8 to Form S-1
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As filed with the Securities and Exchange Commission on April 10, 2015.

Registration No. 333-193466

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 8

to

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Party City Holdco Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   5900   46-0539758

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

(914) 345-2020

80 Grasslands Road, Elmsford, NY 10523

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

James M. Harrison

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:

 

Julie H. Jones, Esq.

Jay J. Kim, 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.

Senet Bischoff, 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.  ¨

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.  ¨

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.  ¨

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.  ¨

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   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    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. We may not 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 April 10, 2015

Party City Holdco Inc.

21,875,000 Shares

 

LOGO

Common Stock

 

 

This is the initial public offering of shares of common stock of Party City Holdco Inc., or “Party City Holdco.”

Party City Holdco is offering 21,875,000 shares to be sold in the offering.

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 $15.00 and $17.00. Party City Holdco intends to list the common stock on the New York Stock Exchange under the symbol “PRTY”.

 

 

See “Risk Factors” on page 15 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 Holdco (1)

   $                    $                

 

(1) See “Underwriting (Conflict of Interest)” on page 135 for additional information regarding underwriting compensation.

We have granted the underwriters the option to purchase up to an additional 3,281,250 shares of our common stock on the same terms and conditions set forth above if the underwriters sell more than 21,875,000 shares of our common stock in this offering.

 

 

The underwriters expect to deliver the shares against payment in New York, New York on                    , 2015.

 

 

 

Goldman, Sachs & Co.   BofA Merrill Lynch
Credit Suisse   Morgan Stanley
Barclays   Deutsche Bank Securities   J.P. Morgan
William Blair   Stephens Inc.   Telsey Advisory Group

 

 

Prospectus dated                    , 2015


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LOGO


Table of Contents

TABLE OF CONTENTS

 

Market, Ranking and Other Industry Data

  ii   

Trademarks

  ii   

Prospectus Summary

  1   

Risk Factors

  15   

Special Note Regarding Forward-Looking Statements

  32   

The Transactions

  34   

Use of Proceeds

  35   

Dividend Policy

  36   

Capitalization

  37   

Dilution

  39   

Selected Consolidated Financial Data

  41   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  46   

Business

  72   

Management

  92   

Executive Compensation

  97   

Principal Stockholders

  114   

Certain Relationships and Related Party Transactions

  116   

Description of Capital Stock

  119   

Description of Certain Debt

  123   

Shares Eligible For Future Sale

  129   

Material U.S. Federal Income Tax Considerations For Non-U.S. Holders of Common Stock

  131   

Underwriting (Conflict of Interest)

  135   

Validity of Common Stock

  141   

Experts

  141   

Where You Can Find Additional Information

  141   

Index to Consolidated Financial Statements of Party City Holdco Inc. and Subsidiaries

  F-1   

 

 

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 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.

TRADEMARKS

We own or have rights to trademarks or trade names that we use in conjunction with the operation of our business. In addition, our name, logo and website name and address are our service marks or trademarks. Some of the more important trademarks and service marks that we use include Party City®, The Discount Party Super Store®, Amscan® and Halloween City®. Solely for convenience, the trademarks, service marks, trade names and copyrights referred to in this prospectus may be listed without the ©, ® and ™ symbols, but we will assert, to the fullest extent under applicable law, our rights to these trademarks, service marks, trade names and copyrights. This prospectus may also include trademarks, service marks or trade names of other companies. Each trademark, trade name or service mark by any other company appearing in this prospectus belongs to its holder.

 

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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.

As part of the transactions described under “The Transactions,” on July 27, 2012 our wholly-owned indirect subsidiary, PC Merger Sub, Inc. (“Merger Sub”), merged with and into Party City Holdings Inc., with Party City Holdings Inc. being the surviving corporation, which we refer to as the “Acquisition.” In this prospectus, the terms “we,” “us,” “our,” “the Company” and other similar terms refer to Party City Holdco Inc. and all its subsidiaries, including Party City Holdings Inc., that are consolidated under United States generally accepted accounting principles (“GAAP”).

Please note that our discussion of certain financial information, specifically net sales, royalties and franchise fees and retail operating expenses, for the year ended December 31, 2012 include data from the “Predecessor” period, which covers the period preceding the Acquisition (January 1, 2012 to July 27, 2012) and data from the “Successor” period, which covers the period following the Acquisition (July 28, 2012 to December 31, 2012), on a combined basis. The Company notes that the change in basis resulting from the Acquisition did not impact such financial information and, although this presentation of financial information on a combined basis does not comply with GAAP, we believe it provides a meaningful method of comparison to the other periods presented in this prospectus. The data is being presented for analytical purposes only. Combined operating results (i) have not been prepared on a pro forma basis as if the Acquisition occurred on the first day of the period, (ii) may not reflect the actual results we would have achieved absent the Acquisition and (iii) may not be predictive of future results of operations.

Our Company

We are the leading party goods retailer by revenue in North America and, we believe, the largest vertically integrated supplier of decorated party goods globally by revenue, with multiple levers to drive future growth across channels, products and geographies. With approximately 900 locations, we have the only coast-to-coast network of party superstores in the U.S. and Canada that make it easy and fun to enhance special occasions with a differentiated shopping experience and an unrivaled assortment of innovative and exciting merchandise offered at a compelling value. Through a series of acquisitions between 2005 and 2010, we built a powerful retail operation that captures the full manufacturing-to-retail margin on a significant portion of the products sold in our stores. We believe we are the largest global designer, manufacturer and distributor of decorated party supplies by revenue with products found in over 40,000 retail outlets worldwide, including our own stores as well as independent party supply stores, mass merchants, grocery retailers, dollar stores and others. Our category-defining retail concept, multi-channel reach, widely recognized brands, broad and deep product offering, and low-cost global sourcing model are, we believe, significant competitive advantages. We believe these characteristics position us for continued organic and acquisition-led growth and margin expansion.

Founded in 1947, we started as an importer and wholesaler and grew to offer a broad selection of decorated party supplies including paper and plastic tableware, metallic and latex balloons, novelties, costumes and other garments, stationery and gifts for everyday, themed and seasonal events. Our products are available in over 100 countries with the U.K., France, Germany and Australia among the largest end markets for us outside North America. We believe that through our extensive assortment, as well as our industry-leading innovation, customer service levels and compelling value proposition, we will continue to win with our customers.

 

 

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The 2005 combination of Amscan Holdings, Inc. (“Amscan”), which focused on the wholesale market, and Party City Corporation (“Party City”), which focused on the retail market, represented an important step in our evolution. Since then, we have established the largest multi-channel party supply business by revenue in North America with approximately 900 party superstores (inclusive of approximately 210 franchised stores) in the United States and Canada, principally under the Party City banner, and 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 proposition, making us the favored destination for all of our customers’ party supply needs. We also operate a network of over 300 temporary Halloween locations under the Halloween City banner.

Through a combination of organic growth and strategic acquisitions, we have been able to generate strong topline performance and margin expansion, including:

 

    Growing revenue from $1,599.1 million for the year ended December 31, 2010 to $2,271.3 million for the year ended December 31, 2014 representing a compounded annual growth rate of 9.2%.

 

    Increasing adjusted EBITDA from $230.6 million, implying an adjusted EBITDA margin of 14.4%, for the year ended December 31, 2010 to $362.1 million for the year ended December 31, 2014, for an implied adjusted EBITDA margin of 15.9%. Net income increased from $49 million for the year ended December 31, 2010 to $56 million for the year ended December 31, 2014. Net income during 2014 was impacted by higher interest expense, resulting from debt incurred in conjunction with the Transactions and the issuance of the $350 million senior PIK toggle notes (“the senior PIK toggle notes”), as well as the impact of non-cash purchase accounting adjustments resulting from the Transactions and the impact of non-recurring charges related to refinancings.

For a discussion of our use of adjusted EBITDA and a reconciliation to net income (loss), please refer to “—Summary Financial Data” and “Selected Consolidated Financial Data.”

Evolution of Our Business

Over the past 60 years, we have grown to become a global, vertically integrated designer, manufacturer, distributor and retailer of decorated party supplies. Key strategic initiatives that were and continue to be important to our evolution include:

 

    Establishing retail leadership in our industry and our vertically integrated model through the acquisitions of Party City, Party America Corporation (“Party America”), Factory Card & Party Outlet (“FCPO”), Party Packagers in Canada and iParty Corp. (“iParty”). Following each acquisition, we capitalized on our vertically integrated model by increasing the percentage of products for sale at such retail stores that are manufactured and/or distributed by us, allowing us to capture the full manufacturing-to-retail margin on a significant portion of the retail sales.

 

    Enhancing our wholesale platform through targeted acquisitions while investing in state-of-the-art distribution facilities and developing a strong Asian-based sourcing and sales organization.

 

    Re-launching our retail e-commerce platform in 2009 provided us with an additional direct-to-consumer channel and was the first step in the development of a global e-commerce platform.

 

    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 wholesale and retail geographic reach.

 

 

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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:

Category Defining Multi-Channel Retailer. We believe we are the premier party supplies retailer, providing a one-stop shopping experience with a broad and deep selection of products offered at a compelling value seamlessly through our retail stores and our e-commerce platform. We keep our assortment current by frequently introducing new products, and we organize our stores by events and themes to make it easy to shop while consistently presenting customers with additional product ideas that will enhance their events and our sales. With our extensive selection, convenient locations, consistently high in-stock positions and compelling value proposition, we believe customers associate Party City with successful celebrations, and, as a result, our physical and online stores will continue to be seen as the favored destination for party supplies and innovative ideas.

Leading Market Position. Based on our revenues, we are the largest retailer of decorated party supplies in the U.S. and Canada. With our network of approximately 860 U.S. party superstores, we are the only party supply retailer with a national store footprint. In addition to our leading retail presence, we believe that our integrated wholesale business is the largest global designer, manufacturer and distributor of decorated party goods by revenue with over 40,000 SKUs found in over 40,000 retail outlets worldwide. Through our category-leading brands, Party City and Amscan, we offer what we believe is the broadest selection of continuously updated and innovative merchandise at a compelling value. We believe that our scale, brand recognition and value proposition underscore our credibility as the destination of choice for party supplies in any channel.

Unique Vertically Integrated Operating Model. We manufacture, source and distribute party supplies, acting as a one-stop shop for decorated party goods to both retail and wholesale customers. Our vertically integrated model provides us with a number of advantages including the ability to (i) enhance our profitability as we realize the full 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 an average of 25,000 SKUs offered at any one time in our Party City superstores, supported by the approximately 35,000 SKUs offered online which can be accessed via our “endless aisle” in-store kiosk system as well as through PartyCity.com. Our extensive selection offers customers a single source for all of their party needs. Our in-house design team introduces approximately 7,000 products annually, driving newness in our licensed and unlicensed product offering and supporting increased sales across our channels.

Highly Efficient Global Sourcing and Distribution Capabilities. Over the past 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 four in the U.S. and seven centers located outside the United States. We have also opened sourcing, quality control and testing offices throughout Asia with over 300 employees in our offices located in China, Vietnam and Hong Kong. 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 over 20 years of industry experience and possesses a unique combination of management skills and experience in the

 

 

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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.

Growth Strategy

We believe we have significant opportunities to enhance our leadership position in the party goods industry and improve profitability through the further implementation of our operating strategy both organically and through strategic acquisitions. Key elements of our growth strategy include:

Expand Our Retail Store Base. Our retail network includes approximately 860 party superstores (inclusive of approximately 210 franchised stores) in the United States and approximately 40 locations in Canada. We believe there is an opportunity to open more than 350 additional Party City stores in North America which is consistent with an independent analysis conducted by a leading, global consulting firm in 2012. We anticipate opening approximately 30 new 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 on invested capital of approximately 50% in year three.

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, executing our merchandising initiatives and converting existing stores to our new more interactive format. We are pursuing various merchandising initiatives to drive increased units per transaction including aligning dress-up and candy products coordinated by color and party themes and broadening the product formats available within existing license arrangements. We also anticipate remodeling or relocating approximately 50 stores per year and converting them to our latest interactive store-within-a-store concept (specialty areas named “Sports City”, “Candy City”, “Color City” and “Favor City”). Based on our historical experience, we expect remodeled or relocated stores to generate sales growth of five to six percentage points higher than non-remodeled or non-relocated stores in the first year following conversion with longer-term sales growth of one to two percentage points higher than non-remodeled or non-relocated stores.

Growing Market Share and Earnings. We believe we have significant opportunities to continue to grow our wholesale business by capitalizing on our leading scale, vertical operating model and strong innovation capabilities as well as through strategic acquisitions. We will also continue to broaden our product assortment by adding new items that coordinate with our party themed events and licenses and broaden our reach by expanding into adjacent business-to-business and alternate consumer channels where we see a compelling opportunity for our products. As we continue to grow, our increased scale will allow us to leverage our costs and drive margin expansion. Since 2005, we have increased the selection of our own merchandise offered in Party City stores (also known as “share of shelf”) from approximately 25% in 2005 to approximately 70% for the year ended December 31, 2014 which allowed us to increase our margins. Our ultimate long-term share of shelf target is 75% to 80%. Our ability to create new and enhance existing celebration opportunities will continue to be a consistent driver of our growth.

Grow Our Global Retail and Wholesale E-commerce Platforms. During 2014, total global e-commerce revenues were approximately $160 million. Our global retail e-commerce business was relaunched in 2009 under the PartyCity.com banner. Global retail e-commerce revenues have grown to approximately $141 million during the year ended December 31, 2014 and we believe that we have become one of the largest e-commerce retailers of decorated party goods and costumes. In 2013, we expanded our retail platform, using the PartyCity.com website, to include a platform for business to business opportunities. Business consumers such as hotel and restaurant chains are capable of purchasing decorations and other party goods directly from us as wholesale customers. We are targeting future e-commerce growth by enhancing our merchandising approach online, as well as launching country specific e-commerce sites, building off the 2013 acquisition of Party Delights Ltd. (“Party

 

 

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Delights”). We have broadened the products and services available to our customers through our retail e-commerce channel. For example, although customers can currently access PartyCity.com through their mobile devices, we have launched a mobile application that ensures a seamless experience between online, mobile and physical interactions and includes functionality to assist customers in coordinating their shopping experience as they plan theme parties. In addition to our retail e-commerce platform, we have developed a wholesale e-commerce platform that provides our party goods and other wholesale customers the opportunity to order our products through our amscan.com website, as well as our other international sites. Wholesale e-commerce orders, which are included in our 2014 wholesale sales, totaled approximately $19 million during 2014 or approximately 35% higher than 2013.

Increase International Presence. Through acquisitions and organic growth, we have increased sales to international customers to represent approximately 15.4% of our total revenues in 2014. The market for party goods outside the United States is less mature due to lower consumer awareness of party products and less developed retail distribution channels. We believe this represents an opportunity as we customize our products to different cultural norms as well as engage in a “party education process” to grow demand for party goods in international markets.

Pursue Accretive Acquisitions. Over the past 16 years, we have successfully integrated numerous acquisitions, such as Christy’s Group (“Christy’s” or “Christy’s Group”), and Party Delights, strengthening our manufacturing, distribution and retail platforms. We have also acquired, and will continue to acquire, our franchised stores and independent party good retailers 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.

During October 2014, we acquired U.S. Balloon Manufacturing Co., Inc. (“U.S. Balloon”), a distributor of metallic balloons. We expect that the acquisition will allow us to capture the full manufacturing-to-retail margin on balloons that we manufacture and sell at company-owned Party City stores.

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. 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 (Halloween, Christmas, New Year’s Eve, graduations, Easter, Super Bowl, Fourth of July). As a result of numerous and diverse occasions, the U.S. party goods market enjoys broad demographic appeal. Additionally, we operate in the $7 billion Halloween market, a portion of which overlaps with the $10 billion retail party goods industry. The Halloween market includes costumes, candy and makeup.

The retail landscape is comprised primarily of party superstores, mass merchants, craft stores, grocery retailers, and dollar stores. The party superstore has emerged as a preferred destination for party goods shoppers, similar to the dominance of specialty retailers in other categories such as home improvement, pet products and sporting goods. This is typically due to the superstore chain’s ability to offer a wider variety of merchandise at more compelling prices in a convenient setting as well as the knowledgeable staff often found at superstores. Other retailers that cater to the party goods market typically offer a limited assortment of party supplies and seasonal items. Mass merchants tend to focus primarily on juvenile and seasonal goods, greeting cards and gift wrap; craft stores on decorations and seasonal merchandise; and dollar stores on general and seasonal party goods items.

The consumable nature and low per-item prices in the party goods market have historically driven demand among consumers seeking to enhance the quality of their gatherings and celebrations. Party goods are an economical means by which to make events and occasions more festive and, as a result, have continued to sell

 

 

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well during economic downturns. Manufacturers and retailers continue to create and market party goods and gifts that celebrate a greater number of holidays and occasions. Additionally, the number and types of products offered for each occasion continues to expand, encouraging add-on and impulse purchases by consumers.

Recent Developments

We estimate that as of and for the quarter ended March 31, 2015:

 

    Consolidated revenues will be between $459 million and $469 million, compared to $433.0 million for the quarter ended March 31, 2014;

 

    Party City brand comp sales will increase between 4.9% and 5.3% as compared to the quarter ended March 31, 2014.

The estimated increase in revenues for the quarter ended March 31, 2015 compared to the quarter ended March 31, 2014 was driven by both our retail and wholesale operations. Estimated retail revenues increased principally due to higher Party City brand comp sales (partially aided by the timing of the Easter selling season) and a higher store count. Party City brand comp sales benefited from an earlier Easter in 2015 than in 2014, allowing us to capture a higher benefit of the Easter selling season in the first quarter of 2015, whereas in 2014 the Easter selling season occurred primarily in the second quarter. These positive factors were partially offset by the timing of our retail calendar. The quarters ended March 31, 2014 and March 31, 2015 began on December 29, 2013 and January 4, 2015, respectively, with respect to our retail operations, resulting in significant New Year’s sales being recorded in the first quarter of 2014, but not in the first quarter of 2015. Estimated wholesale sales, excluding intercompany sales to our retail operations, increased compared to the quarter ended March 31, 2014 principally due to higher sales of metallic balloons (partially due to the October 2014 acquisition of U.S. Balloon), increased contract manufacturing sales, higher sales to other distributors and increased sales of licensed juvenile birthday product.

The preliminary consolidated financial results presented above are subject to the completion of our financial closing procedures for the quarter ended March 31, 2015. Those procedures have not been completed and we do not anticipate completion of those procedures until mid-May 2015. Accordingly, these results may change and those changes may be material. In particular, we have provided ranges for the preliminary consolidated revenue and Party City brand comp sales presented above because we expect that our final results may vary from our preliminary estimates. Party City brand comp sales include e-commerce. Our net income (loss) and other significant financial measures for the quarter ended March 31, 2015 are currently unknown and may reflect different trends than the preliminary results shown above. This preliminary consolidated financial data has been prepared by and is the responsibility of our management. Ernst & Young LLP has not audited, reviewed, compiled or performed any procedures with respect to this preliminary consolidated financial data. Accordingly, Ernst & Young LLP does not express an opinion or any other form of assurance with respect thereto.

The Transactions

On July 27, 2012, Merger Sub, a wholly-owned subsidiary of PC Intermediate Holdings, Inc. (“Holdings”), which is our wholly-owned subsidiary, merged into Party City Holdings Inc. (“PCHI”), with PCHI being the surviving entity. Immediately after the Acquisition, 100% of our common stock was owned by funds affiliated with Thomas H. Lee Partners, L.P. (“THL”), who held approximately 70% ownership, funds affiliated with Advent International Corporation (“Advent” and, together with THL, the “Sponsors”), who held approximately 24% ownership, and other minority investors, including management, who held approximately 6% ownership. To consummate the Acquisition, our subsidiary, PCHI, entered into new debt financing consisting of (i) $1,525 million of senior secured credit facilities (the “Senior Credit Facilities”) consisting of: (a) a $400 million revolving credit facility (the “ABL Facility”), which had $115 million drawn at the closing of the Acquisition and (b) a $1,125 million term loan credit facility (the “Term Loan Facility”), and (ii) $700 million of 8.875% senior notes (the “senior notes”).

We refer to the Acquisition and the related transactions, including the issuance and sale of the senior notes and the borrowings under the Senior Credit Facilities, as the “Transactions.”

 

 

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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 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.

The Sponsors

THL is one of the world’s oldest and most experienced private equity firms. THL invests in growth-oriented companies across three broad sectors: Business & Financial Services, Consumer & Healthcare and Media & Information Services. THL’s investment and operating professionals partner with portfolio company management teams to identify and implement business model improvements that accelerate sustainable revenue and profit growth. The firm focuses on global businesses headquartered primarily in North America. Since the firm’s founding in 1974, THL has raised approximately $20 billion of equity capital and invested in more than 100 portfolio companies with an aggregate value of more than $150 billion. The firm’s two most recent private equity funds comprise more than $14 billion of aggregate committed capital.

Founded in 1984, Advent is one of the largest and most experienced global private equity investors. Since inception, the firm has invested in 300 companies in 40 countries, and today has $34 billion in assets under management. With offices on four continents, Advent has established a globally integrated team of over 180 investment professionals across North America, Europe, Latin America and Asia. The firm focuses on investments across five core sectors, including business and financial services; healthcare; industrial; retail, consumer and leisure; and technology, media and telecoms.

Affiliates of THL, together with affiliates of Advent, own approximately 93% of our common stock, with affiliates of THL owning approximately 69% of our common stock. Upon completion of this offering and assuming no exercise of the underwriters’ option to purchase additional shares, the Sponsors will continue to beneficially own approximately 75% of our outstanding common stock. As a result, we expect to be a “controlled company” within the meaning of the corporate governance standards of the New York Stock Exchange (the “NYSE”) on which we have applied for our shares to be listed. See “Risk Factors—Risks Related to this Offering.”

Corporate Information

Party City Holdco Inc. is a Delaware corporation. Our executive offices are located at 80 Grasslands Road, Elmsford, New York 10523 and our telephone number at that location is (914) 345-2020. Our website address is http://www.PartyCity.com. The information on our website is not a part of this prospectus, and you should not rely on it in connection with your decision whether or not to participate in this offering.

 

 

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THE OFFERING

 

Common stock offered by us

21,875,000 shares

 

Common stock to be outstanding after this offering

115,971,525 shares

 

Option to purchase additional shares offered to underwriters

We have granted the underwriters an option to purchase up to 3,281,250 additional shares.

 

Use of proceeds

Assuming an initial public offering price of $16.00, 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 $326.3 million. We intend to use the net proceeds from this offering to (a) pay a $30.7 million termination fee, in the aggregate, to the Sponsors pursuant to our management agreement with them, which will thereafter be terminated, and (b) to redeem all or a portion of the senior PIK toggle notes. See “Use of Proceeds.”

 

Risk factors

You should read the “Risk Factors” section of this prospectus beginning on page 15 for a discussion of factors to consider carefully before deciding whether to purchase shares of our common stock.

 

Proposed NYSE symbol

PRTY

 

Conflict of Interest

Because Goldman, Sachs & Co. is an underwriter and its affiliates collectively indirectly own approximately 11% of the issuer’s common stock through investments in investment funds affiliated with Thomas H. Lee Partners, L.P. and Advent International Corporation, Goldman, Sachs & Co. is deemed to have a “conflict of interest” under Rule 5121 of the Financial Industry Regulatory Authority. Rule 5121 requires that a “qualified independent underwriter” meeting certain standards participate in the preparation of the registration statement and prospectus and exercise the usual standards of due diligence in respect thereto, subject to certain exceptions which are not applicable here. Merrill Lynch, Pierce, Fenner & Smith Incorporated will serve as a qualified independent underwriter within the meaning of Rule 5121 in connection with this offering. For more information see “Underwriting (Conflicts of Interest).”

The number of shares of our common stock to be outstanding after this offering is based on 94,096,525 shares of common stock outstanding as of December 31, 2014 and excludes:

 

    6,686,400 shares of common stock issuable upon the exercise of stock options issued under our 2012 Omnibus Equity Incentive Plan (the “2012 Plan”) with a weighted average exercise price of $5.33 per share;

 

    3,487,680 additional shares of common stock reserved for future issuance under the 2012 Plan; and

 

 

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    15,316,000 additional shares of common stock reserved for future issuance under the 2012 Plan, as amended, which amendment shall take effect prior to the consummation of this offering.

Unless otherwise indicated, all information in this prospectus assumes:

 

    a 2,800-for-one stock split on our common stock effected on April 2, 2015;

 

    the adoption of our 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 3,281,250 additional shares of our common stock in this offering.

 

 

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SUMMARY FINANCIAL DATA

The following table sets forth summary historical consolidated financial data for the periods ended and at the dates indicated below. Our summary historical consolidated financial data as of December 31, 2013 (Successor) and December 31, 2014 (Successor) and for the period from July 28, 2012 to December 31, 2012 (Successor), the period from January 1, 2012 to July 27, 2012 (Predecessor) and the years ended December 31, 2013 (Successor) and December 31, 2014 (Successor) presented in this table has been derived from our historical audited consolidated financial statements included elsewhere in this prospectus.

The historical results presented below are not necessarily indicative of the results to be expected for any future period. The following information should be read in conjunction with the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the notes thereto contained elsewhere in this prospectus.

 

  Period from
January 1 to
July 27,

2012
     Period from
July 28 to
December 31,

2012
    Fiscal Year
Ended
December 31,

2013 (1)
  Fiscal Year
Ended
December 31,

2014 (2)
 
 
  (Predecessor)      (Successor)     (Successor)   (Successor)  
  (dollars in thousands, except per common share data)   

Income Statement Data:

 

Revenues:

 

Net sales

$ 930,903      $ 964,330    $ 2,026,272    $ 2,251,589   

Royalties and franchise fees

  9,281        9,312      18,841      19,668   
 

 

 

       

 

 

     

 

 

   

 

 

 

Total revenues

  940,184        973,642      2,045,113      2,271,257   

Expenses:

 

Cost of sales (3)

  574,048        636,410      1,259,188      1,375,706   

Wholesale selling expenses

  31,568        28,096      68,102      73,910   

Retail operating expenses

  166,047        172,168      369,996      397,110   

Franchise expenses

  6,579        6,128      13,320      14,281   

General and administrative expenses (4)

  101,502        65,890      146,094      147,718   

Art and development costs

  10,824        8,201      19,311      19,390   

Impairment of trade name (5)

  —          —        7,500      —     
 

 

 

       

 

 

     

 

 

   

 

 

 

Income from operations

  49,616        56,749      161,602      243,142   

Interest expense, net

  41,970        62,062      143,406      155,917   

Other expense, net (6)

  22,245        26,157      18,478      5,891   
 

 

 

       

 

 

     

 

 

   

 

 

 

(Loss) income before income taxes

  (14,599     (31,470   (282   81,334   

Income tax expense (benefit)

  403        (1,322   (4,525   25,211   
 

 

 

       

 

 

     

 

 

   

 

 

 

Net (loss) income

  (15,002     (30,148   4,243      56,123   

Less: net income attributable to noncontrolling interests

  96        60      224      —     
 

 

 

       

 

 

     

 

 

   

 

 

 

Net (loss) income attributable to Party City Holdco Inc.

$ (15,098   $ (30,208 $ 4,019    $ 56,123   
 

 

 

       

 

 

     

 

 

   

 

 

 

Per Share Data:

 

Net (loss) income per share

 

Basic

$ (469.17   $ (0.32 $ 0.04    $ 0.60   

Diluted

$ (469.17   $ (0.32 $ 0.04    $ 0.59   

Weighted Average

 

Outstanding basic

  32,180.51        93,405,004      93,725,721      93,996,355   

Diluted

  32,180.51        93,405,004      93,725,721      94,444,137   
 

Statement of Cash Flow Data:

 

Net cash provided by (used in)

 

Operating activities (7)

$ (18,126   $ (35,508 $ 135,818    $ 136,387   

Investing activities (7)

  (31,824     (1,578,553   (112,522   (89,632

Financing activities (7)

  33,318        1,629,331      (18,373   (23,530
 

Cash dividend per common share

  —          —      $ 3.60   

 

—  

  

 

 

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  Period from
January 1 to
July 27,

2012
     Period from
July 28 to
December 31,

2012
  Fiscal Year
Ended
December 31,

2013 (1)
  Fiscal Year
Ended

December 31,
2014 (2)
 
 
  (Predecessor)      (Successor)   (Successor)  

(Successor)

 
        (dollars in thousands)      

Other Financial Data:

 

Adjusted EBITDA (8)

$ 116,982      $ 175,329    $ 320,775    $ 362,125   

Adjusted EBITDA margin (8)

  12.4     18.0   15.7   15.9

Adjusted net income (8)

$ 22,883      $ 50,920    $ 68,393    $ 86,838   

Number of company-owned Party City stores (9)

    600      674      693   

Capital expenditures

$ 28,864      $ 16,376    $ 61,241    $ 78,241   

Party City brand comp sales (10)

    2.9   5.8

Share of shelf (11)

  64.7     63.7   67.5   70.2
 

Balance Sheet Data (at end of period):

 

Cash and cash equivalents

  $ 20,899    $ 25,645    $ 47,214   

Working capital

    387,858      396,027      463,715   

Total assets

    3,283,319      3,327,534      3,380,863   

Total debt (12)

    1,851,517      2,184,486      2,165,168   

Redeemable common securities

    22,205      23,555      35,062   

Total equity (12)

    787,450      456,757      487,226   

 

(1) The acquisitions of Party Delights and iParty are included in the financial statements from their acquisition dates (March 13, 2013 and May 9, 2013, respectively).
(2) The acquisition of U.S. Balloon is included in the financial statements from the acquisition date (October 24, 2014).
(3) As a result of the Acquisition, the Company applied the acquisition method of accounting and increased the value of its inventory by $89.8 million as of July 28, 2012. Such adjustment increased the Company’s cost of sales during 2014, 2013 and the period from July 28, 2012 to December 31, 2012, by $5.9 million, $25.2 million and $58.6 million, respectively, as the related inventory was sold.
(4) In conjunction with the Transactions, the Company recorded $8.4 million of transaction costs in general and administrative expenses during the period from January 1, 2012 to July 27, 2012. Additionally, the Transactions accelerated the vesting of certain of the Company’s stock options and during the period from January 1, 2012 to July 27, 2012 the Company recorded $2.1 million of expense in general and administrative expenses. Further, due to the vesting of such stock options, the Company made payments in lieu of dividends to the holders of such options and during the period from January 1, 2012 to July 27, 2012, the Company recorded a $16.1 million charge in general and administrative expenses.
(5) In conjunction with the Transactions, the Company applied the acquisition method of accounting and allocated the $2.7 billion acquisition price to various tangible and intangible assets, including the Company’s Halloween City trade name. The value that was ascribed to the trade name was based on the number of Halloween City stores that the Company expected to open during each subsequent Halloween selling season and the expected performance of such stores. The number of stores that the Company opens during a season is driven by many factors, including the availability of suitable locations. During 2013, the Company made a strategic decision to open fewer temporary Halloween City stores. As a result of a change in store performance and the Company’s decision to open fewer Halloween City stores than assumed in 2012, during 2013 the Company lowered the value of its Halloween City trade name by recording a $7.5 million impairment charge.
(6) During February 2014, the Company amended the Term Loan Facility. In conjunction with the refinancing, the Company wrote-off $1.6 million of costs that had been capitalized during the issuance of the debt. Additionally, the Company wrote-off $0.6 million of the net original issuance discount and $0.7 million of the unamortized call premium that existed at the time of the amendment. Also, in conjunction with the refinancing, the Company expensed $1.4 million of banker and legal fees. During February 2013, the Company amended the Term Loan Facility. In conjunction with that amendment, the Company wrote-off $5.9 million of costs that had been capitalized during the initial issuance of the debt. Additionally, the Company wrote-off $2.3 million of the net original issuance discount that existed as of the time of that amendment. Also, in conjunction with that amendment, the Company expensed $2.5 million of a call premium and $1.6 million of investment banking and legal fees. In conjunction with the Transactions, the Company recorded $19.7 million of transaction costs in other expense, net during the period from January 1, 2012 to July 27, 2012 and $24.6 million of transaction costs during the period from July 28, 2012 to December 31, 2012. Additionally, the period from January 1, 2012 to July 27, 2012 included $2.5 million in costs as a result of the termination of an initial public offering.
(7) See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity” for a discussion of cash flows.
(8) We present adjusted EBITDA and adjusted net income as supplemental measures of our operating performance. We define EBITDA as net income (loss) before interest expense, net, income taxes, depreciation and amortization. We define adjusted EBITDA as EBITDA, 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. Adjusted net income represents our net income (loss), adjusted for intangible asset amortization, non-cash purchase accounting adjustments, amortization of deferred financing costs and original issue discount, the Sponsors management fee, refinancing charges, equity-based compensation, payments in lieu of dividend, impairment charges and costs associated with the Transactions. We present adjusted EBITDA and adjusted net income as supplemental measures of our performance. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating adjusted EBITDA and adjusted net income, 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 and adjusted net income should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.

We present adjusted EBITDA and adjusted net income 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 uses adjusted EBITDA to measure compliance with certain covenants. While we have historically not used adjusted net income for internal management reporting and valuation purposes, we believe adjusted net income is a helpful benchmark to evaluate our operating performance.

We also include information concerning adjusted EBITDA margin, which is defined as the ratio of adjusted EBITDA to revenue. We present adjusted EBITDA margin because it is used by management as a performance measurement to judge the level of adjusted EBITDA generated from revenue. We believe its inclusion is appropriate to provide additional information to investors.

 

 

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Adjusted EBITDA, adjusted net income and adjusted EBITDA margin have limitations as analytical tools. Some of these limitations are:

 

    adjusted EBITDA, adjusted net income and adjusted EBITDA margin do not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;

 

    adjusted EBITDA and adjusted net income do 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 and adjusted net income do 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 and adjusted net income do 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 and adjusted net income differently than we do, limiting its usefulness as a comparative measure.

Because of these limitations, adjusted EBITDA, adjusted net income and adjusted EBITDA margin should not be considered in isolation or as substitutes for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using adjusted EBITDA, adjusted net income and adjusted EBITDA margin only on a supplemental basis. The reconciliations from net income (loss) to each of adjusted EBITDA and adjusted net income for the periods presented is as follows:

 

  Period from
January 1 to
July 27,
2012
     Period from
July 28 to
December 31,
2012
  Fiscal Year
Ended
December 31,

2013
  Fiscal Year
Ended
December 31,

2014
 
  (Predecessor)      (Successor)   (Successor)   (Successor)  
  (dollars in thousands)  

Net (loss) income

$ (15,002   $ (30,148 $ 4,243    $ 56,123   

Interest expense, net

  41,970        62,062      143,406      155,917   

Income taxes

  403        (1,322   (4,525   25,211   

Depreciation and amortization

  33,915        49,837      94,624      82,890   
 

 

 

       

 

 

   

 

 

   

 

 

 

EBITDA

  61,286        80,429      237,748      320,141   

Equity based compensation

  3,375        —        2,137      1,583   

Non-cash purchase accounting adjustments

  —          58,626 (a)    25,229 (a)    8,868 (a) 

Management fee

  713 (b)      1,292 (b)    3,000 (b)    3,356 (b) 

Impairment charges

  —          —        7,822 (c)    1,012   

Restructuring, retention and severance

  355        784      4,673      3,391   

Payment in lieu of dividend

  16,533 (d)      —        —        —     

Refinancing charges

  —          —        12,295 (e)    4,396 (e) 

Deferred rent

  3,344        6,335      17,055     
14,418
  

Business interruption

  —          2,000 (f)    500 (f)    (2,435 )(f) 

Transaction costs

  28,582 (g)      24,564 (g)    —        —     

Corporate development expenses

  2,395        351      4,828     
700
  

Foreign currency losses

    148            532        1,581        1,447   

Store closing costs

    305            169        1,498       
1,199
  

Undistributed (income) loss in unconsolidated joint venture

    (128         (297     172       
1,556
  

Other

    74            544        2,237        2,493   
 

 

 

       

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

$ 116,982      $ 175,329    $ 320,775    $ 362,125   
 

 

 

       

 

 

   

 

 

   

 

 

 

 

 

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  Period from
January 1 to
July 27,
2012
     Period from
July 28 to
December 31,
2012
  Fiscal Year
Ended
December 31,

2013
  Fiscal Year
Ended
December 31,
2014
 
  (Predecessor)      (Successor)   (Successor)   (Successor)  
  (dollars in thousands)  

(Loss) income before income taxes

$ (14,599   $ (31,470 $ (282 $ 81,334   

Intangible asset amortization

  5,542 (h)      14,160 (h)    26,997 (h)    22,195 (h) 

Non-cash purchase accounting adjustments

    —              71,755 (a)      39,414 (a)      13,692 (a) 

Amortization of deferred financing costs and original issuance discount

    2,592 (i)          4,605 (i)      20,211 (e)(i)      15,610 (e)(i) 

Management fee

    713 (b)          1,292 (b)      3,000 (b)      3,356 (b) 

Refinancing charges

    —              —          4,068 (e)      1,407 (e) 

Equity based compensation

    3,375            —          2,137        1,583   

Payment in lieu of dividend

    16,533 (d)          —          —          —     

Impairment charges

    —              —          7,822 (c)      1,012   

Transaction costs

    28,582 (g)          24,564 (g)      —          —     
 

 

 

       

 

 

   

 

 

   

 

 

 

Adjusted income before income taxes

  42,738        84,906      103,367      140,189   

Adjusted income tax expense

  19,855 (j)      33,986 (j)    34,974 (j)    53,351 (j) 
 

 

 

       

 

 

   

 

 

   

 

 

 

Adjusted net income

$ 22,883      $ 50,920    $ 68,393    $ 86,838   
 

 

 

       

 

 

   

 

 

   

 

 

 

 

  (a) As a result of the Acquisition, the Company applied the acquisition method of accounting and increased the value of its inventory by $89.8 million as of July 28, 2012. Such adjustment increased the Company’s cost of sales during 2014, 2013, and the period from July 28, 2012 to December 31, 2012 by $5.9 million, $25.2 million and $58.6 million, respectively, as the related inventory was sold. Further, during the application of the acquisition method of accounting, the Company increased the value of certain property, plant and equipment. The impact of such adjustments on depreciation expense increased the Company’s expenses during 2014, 2013, and the period from July 28, 2012 to December 31, 2012, by $4.8 million, $14.2 million and $13.1 million, respectively. These property, plant and equipment depreciation amounts are included in “Non-cash purchase accounting adjustments” for purposes of calculating “adjusted net income,” but are excluded from “Non-cash purchase accounting adjustments” for purposes of calculating adjusted EBITDA since they are included in depreciation expense.
  (b) Represents management fees paid to the Sponsors. The management agreement will terminate upon consummation of this offering. See “Certain Relationships and Related Party Transactions—Management Agreement.”
  (c) In conjunction with the Transactions, the Company applied the acquisition method of accounting and allocated the $2.7 billion acquisition price to various tangible and intangible assets, including the Company’s Halloween City trade name. The value that was ascribed to the trade name was based on the number of Halloween City stores that the Company expected to open during each subsequent Halloween selling season and the expected performance of such stores. The number of stores that the Company opens during a season is driven by many factors, including the availability of suitable locations. During 2013, the Company made a strategic decision to open fewer temporary Halloween City stores. As a result of a change in store performance and the Company’s decision to open fewer Halloween City stores than assumed in 2012, during 2013 the Company lowered the value of its Halloween City trade name by recording a $7.5 million impairment charge.
  (d) In December 2010, a one-time cash dividend was declared. In addition, holders of unvested options at the declaration date would receive a distribution when the options vested. At the time of the Transactions on July 27, 2012, certain outstanding stock options became fully vested and distributions were made in the amount of $16.1 million. Further, prior to the Transactions, during 2012 certain outstanding stock options became fully vested and the Company made distributions in the amount of $0.4 million. The Company recorded charges equal to such amounts in general and administrative expenses during the period from January 1, 2012 to July 27, 2012.
  (e) During February 2014, the Company amended the Term Loan Facility. In conjunction with the refinancing, the Company wrote-off $1.6 million of costs that had been capitalized during the issuance of the debt. Additionally, the Company wrote-off $0.6 million of the net original issuance discount and $0.7 million of the unamortized call premium that existed at the time of the amendment. These amounts are included in “Amortization of deferred financing costs and original issue discount” in this table and in the Company’s consolidated statement of cash flows included elsewhere in this prospectus. Also, in conjunction with the refinancing, the Company expensed $1.4 million of banker and legal fees. During February 2013, the Company amended the Term Loan Facility. In conjunction with that amendment, the Company wrote-off $5.9 million of costs that had been capitalized during the initial issuance of the debt. Additionally, the Company wrote-off $2.3 million of the net original issuance discount that existed as of the time of that amendment. Both amounts are included in “Amortization of deferred financing costs and original issue discount” in this table and in the Company’s consolidated statement of cash flows included elsewhere in this prospectus. Also, in conjunction with that amendment, the Company expensed $2.5 million of a call premium and $1.6 million of investment banking and legal fees.
  (f) During October 2012, the Company’s operations were negatively impacted by Superstorm Sandy and the Company pursued business interruption insurance proceeds. During the fourth quarter of 2012 and the second quarter of 2013, the Company increased Adjusted EBITDA by $2.0 million and $1.0 million, respectively, to reflect its best estimate of the expected business interruption proceeds yet to be reflected in the consolidated statement of operations and comprehensive income (loss). During the fourth quarter of 2013 and during 2014, the Company received business interruption proceeds of $0.5 million and $4.5 million, respectively, and recognized those amounts in its consolidated statements of operations and comprehensive income (loss). To the extent that estimated proceeds were previously included in Adjusted EBITDA, the Company reduced Adjusted EBITDA for 2013 and 2014.
  (g) In conjunction with the Transactions, the Company incurred certain costs. See Note 5 to the audited consolidated financial statements which are included elsewhere in this prospectus.
  (h) Represents the amortization of intangible assets, including those assets recorded in conjunction with the application of the acquisition method of accounting due to the Transactions.
  (i) Represents the amortization of deferred financing costs and original issuance discounts related to debt offerings. Additionally, 2013 includes the write-off of deferred financing costs and net original issuance discounts in conjunction with the February 2013 Term Loan Facility amendment and 2014 includes the write-off of deferred financing costs, net original issue discounts and unamortized call premiums in conjunction with the February 2014 Term Loan Facility amendment. See note (e) for further discussion.
  (j) Represents the income tax expense using the rate in effect after considering the adjustments.

 

 

 

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(9) Data as of December 31, 2014 and December 31, 2013 includes all stores that were acquired from iParty and which were converted to the Party City banner at such dates.
(10) Party City brand comp sales include e-commerce, Canadian store sales and sales for stores converted from the FCPO, Party Packagers and iParty formats to the Party City format.
(11) Represents the percentage of product costs included in cost of goods sold by our domestic permanent stores (including converted iParty stores starting in 2014) and North American e-commerce operations, which relate to products supplied by our wholesale operations.
(12) Excludes redeemable common securities.

 

 

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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 manufacturers and distributors, including smaller, independent manufacturers and distributors 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.

Our business may be adversely impacted by helium shortages.

Although not used in the actual manufacture of our products, helium gas is currently used to inflate the majority of our metallic balloons. We rely upon the exploration and refining of natural gas to ensure adequate supplies of helium as helium is a by-product of the natural gas production process.

During the middle of 2012, helium supplies tightened due to the following factors: (i) new natural gas plants took longer than expected to come on-line, (ii) certain natural gas plants experienced longer than anticipated downtime for maintenance, (iii) helium demand increased due to new technologies and (iv) natural gas production declined due to warmer than usual winters. As a result, our full-year 2012 domestic metallic balloon

 

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sales were $2.6 million lower than 2011 and our full-year 2013 domestic metallic balloon sales were $0.5 million lower than 2012 as balloon distributors and retailers rationalized inventory levels in light of the shortage.

We believe that the shortage is temporary as new natural gas plants came on-line during the second half of 2013, other plants are expected to come online in the near term, and many helium users are implementing conservation programs. However, should the shortage continue, it could have a material impact on our results.

During 2014, net sales of metallic balloons to domestic distributors and others were $5.7 million higher than during 2013 primarily due to the impact of new licenses and improving helium supplies.

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, we may not be able to obtain the licenses for certain popular characters and could lose market share to competitors who are able to obtain those licenses. Additionally, 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.

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;

 

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    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;

 

    gain brand recognition and acceptance in new 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 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. For example, in 2014 our Halloween business represented approximately 25% of our total domestic retail sales. We believe this general pattern will continue in the future. An economic downturn, or adverse weather, during this period could adversely affect us to a greater extent than 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.

 

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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, 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.

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.

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 2014, we manufactured items representing approximately 31% of our net sales at wholesale (including sales to our retail operations). 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.

 

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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.

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, a U.K. based costume company, in September 2010, Riethmüller, a German distributor of party goods, in January 2011, Party City Canada, a Canadian retailer of party goods and outdoor toys, in July 2011 and Party Delights, a U.K. based e-commerce retailer, in March 2013, and we plan to continue to expand our international operations through acquisitions, investments in joint ventures and organic expansion. 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, Australian dollar, Malaysian ringgit 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;

 

    difficulty enforcing our intellectual property and competition against counterfeit goods;

 

    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 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

 

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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 the credit facilities to meet our working capital needs. However, if we are unable to generate sufficient cash from operations or if borrowings available under the 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, which alternatives may not be available to us on satisfactory terms or at all. Any of the foregoing could have a material adverse effect on our business.

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 Executive Chairman, and James M. Harrison, our Chief Executive Officer, have been with the Company for approximately 24 and 18 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.

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. Payments under our leases account for a significant portion of our operating expenses and we expect payment obligations under our leases to account for a significant portion of our future operating expenses. The majority of our store leases contain provisions for base rent and a small number of store leases contain provisions for base rent, plus percentage rent based on sales in excess of an agreed upon minimum annual sales level. 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 agreed upon standards.

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

 

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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 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 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.

 

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Historically we have made a number of acquisitions, and we may make more acquisitions in the future as part of our growth strategy. Future acquisitions or investments could disrupt our ongoing business, distract management and employees, increase our expenses and adversely affect our business. In addition, we may not be able to identify suitable acquisitions.

We have made a number of recent acquisitions which have contributed to our growth. Acquisitions require significant capital resources and can divert management’s attention from our existing business. Acquisitions also entail an inherent risk that we could become subject to contingent or other liabilities, including liabilities arising from events or conduct predating the acquisition, that were not known to us at the time of acquisition. We may also incur significantly greater expenditures in integrating an acquired business than we had anticipated at the time of the acquisition, which could impair our ability to achieve anticipated cost savings and synergies. Acquisitions may also have unanticipated tax and accounting ramifications. Our failure to successfully identify and consummate acquisitions or to manage and integrate the acquisitions we make could have a material adverse effect on our business, financial condition or results of operations.

In addition, we may not be able to:

 

    identify suitable acquisition candidates;

 

    consummate acquisitions on acceptable terms;

 

    successfully integrate any acquired business into our operations or successfully manage the operations of any acquired business; or

 

    retain an acquired company’s significant customer relationships, goodwill and key personnel or otherwise realize the intended benefits of an acquisition.

In the event that the operations of an acquired business do not meet our performance expectations, we may have to restructure the acquired business or write-off the value of some or all of the assets of the acquired business.

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 common law trademark rights and unregistered copyrights under applicable United States law 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, Party America 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 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 termination of any of our significant intellectual property licenses, or any other similarly material limitation on our ability to use certain licensed material may prevent us from

 

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manufacturing and distributing certain licensed products and could cause our customers to purchase these products from our competitors. In addition, we may be unable to renew some of our significant intellectual property licenses on terms favorable to us or at all. A large aggregate loss of our right to use intellectual property under our license agreements 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, redesign certain products or packaging or cease 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.

As of December 31, 2014, we had total indebtedness of $2,178.5 million (exclusive of original issue discount and call premiums) and an additional $356.6 million of borrowing capacity available under the ABL Facility (excluding $19.5 million of letters of credit outstanding as of December 31, 2014). After giving effect to our expected borrowings under our ABL Facility to repay the outstanding balance of the senior PIK toggle notes following the application of the net proceeds from this offering, we would have had approximately $283.6 million of borrowing capacity available under our ABL Facility (excluding $19.5 million of letters of credit outstanding as of December 31, 2014). See “Use of Proceeds” and “Capitalization.”

We also have, and will continue to have, significant lease obligations. As of December 31, 2014, our minimum aggregate rental obligation under operating leases for fiscal 2015 through 2019 totaled $497.9 million.

Our net interest expense for 2014 was approximately $155.9 million. As of December 31, 2014, we had outstanding approximately $1,123.8 million in aggregate principal amount (exclusive of original issue discount and call premiums) of indebtedness under the Senior Credit Facilities that bears interest at a floating rate.

Our substantial level of indebtedness will increase the possibility that we may be unable to generate cash sufficient to pay, when due, the principal of, interest on or other amounts due in respect of our indebtedness. For example, it could:

 

    make it more difficult for us to satisfy our obligations with respect to our indebtedness and any failure to comply with the obligations under any of our debt instruments, including restrictive covenants, could result in an event of default under the agreements governing such other indebtedness;

 

    require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing funds available for working capital, capital expenditures, acquisitions, selling and marketing efforts, product development and other purposes;

 

    increase our vulnerability to adverse economic and industry conditions, which could place us at a competitive disadvantage compared to our competitors that have relatively less indebtedness;

 

    limit our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate;

 

    expose us to the risk of increasing rates as certain of our borrowings, including under the Senior Credit Facilities, will be at variable interest rates;

 

    restrict us from making strategic acquisitions or cause us to make non-strategic divestitures; and

 

    limit our ability to borrow additional funds, or to dispose of assets to raise funds, if needed, for working capital, capital expenditures, acquisitions, product development and other corporate purposes.

 

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The occurrence of any one of these events could have an adverse effect on our business, financial condition, results of operations, prospects and ability to satisfy our obligations under our indebtedness.

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;

 

    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, the ABL Facility requires us to comply, under specific circumstances, including certain types of acquisitions, with a minimum fixed charge coverage ratio (as defined therein) covenant of 1.00 to 1.00. At December 31, 2014, such ratio was 1.5 to 1.00. Our ability to comply with this covenant can be affected by events beyond our control, and we may not be able to satisfy it. A breach of this covenant would be an event of default. If an event of a default occurs under the ABL Facility, the ABL Facility lenders could elect to declare all amounts outstanding under the ABL Facility to be immediately due and payable and/or terminate their commitments to lend additional money, which would also lead to a cross-default and cross-acceleration of amounts owing under the Term Loan Facility and would lead to an event of default under our senior notes and senior PIK toggle notes if any of the Senior Credit Facilities were accelerated. If the indebtedness under the Senior Credit Facilities or our other indebtedness were to be accelerated, our assets may not be sufficient to repay such indebtedness in full. We have pledged a significant portion of our assets as collateral under the Senior Credit Facilities. See “Description of Certain Debt.”

We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.

If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our

 

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business operations. The terms of existing or future debt instruments may restrict us from adopting some of these alternatives. In addition, any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. The Senior Credit Facilities and the indentures governing the senior notes and senior PIK toggle notes will restrict our ability to dispose of assets and use the proceeds from the disposition. We may not be able to consummate those dispositions or to obtain the proceeds that we could realize from them and these proceeds may not be adequate to meet any debt service obligations then due. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations.

Our ability to repay our debt is affected by the cash flow generated by our subsidiaries.

Our subsidiaries own substantially all of our assets and conduct substantially all of our operations. Accordingly, repayment of our indebtedness will be dependent on the generation of cash flow by our subsidiaries and their ability to make such cash available to us, by dividend, debt repayment or otherwise. Our subsidiaries may not be able to, or may not be permitted to, make distributions to enable us to make payments in respect of our indebtedness. Each subsidiary is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries. While the indentures governing the senior notes and the senior PIK toggle notes limit the ability of our subsidiaries to incur consensual restrictions on their ability to pay dividends or make other intercompany payments to us, these limitations are subject to certain qualifications and exceptions.

In addition, under certain circumstances, legal restrictions may limit our ability to obtain cash from our subsidiaries. Under the Delaware General Corporation Law (the “DGCL”), our subsidiaries organized in the State of Delaware may only make dividends (i) out of their “surplus” as defined in the DGCL or (ii) if there is no such surplus, out of their net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. Under fraudulent transfer laws, certain of our subsidiaries may not pay dividends if the relevant entity is insolvent or is rendered insolvent thereby. The measures of insolvency for purposes of these fraudulent transfer laws vary depending upon the law applied in any proceeding to determine whether a fraudulent transfer has occurred. Generally, however, an entity would be considered insolvent if:

 

    the sum of its debts, including contingent liabilities, was greater than the fair saleable value of all of its assets;

 

    the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or

 

    it could not pay its debts as they became due.

While we believe that we and our relevant subsidiaries currently have surplus and are not insolvent, there can otherwise be no assurance that we and these subsidiaries will not become insolvent or will be permitted to make dividends in the future in compliance with these restrictions in amounts needed to service our indebtedness.

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 ABL Facility and Term Loan Facility. 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.

 

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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.

We expect to be a “controlled company” within the meaning of the NYSE rules and, as a result, we will qualify for, and currently intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements.

After completion of this offering, we expect that our Sponsors will hold more than 50% of our common stock. If that occurs, we expect to qualify as a “controlled company” within the meaning of the corporate governance rules of the NYSE. Under these rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including:

 

    the requirement that a majority of the board of directors consist of independent directors;

 

    the requirement that we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

    the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities.

Accordingly, we intend to rely on exemptions from certain corporate governance requirements. As a result, we may not have a majority of independent directors and our compensation committee and nominating and corporate governance committee may not consist entirely of independent directors. Additionally, we are only required to have one independent audit committee member upon the listing of our common stock on the             , a majority of independent audit committee members within 90 days from the date of listing and all independent audit committee members within one year from the date of listing. Consequently, you will not have the same protections afforded to stockholders of companies that are subject to all of the NYSE corporate governance rules and requirements. Our status as a controlled company could make our common stock less attractive to some investors or otherwise harm our stock price.

Investment funds affiliated with 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 beneficially own approximately 93% of our capital stock as of December 31, 2014. After the completion of this offering, assuming the underwriters do not exercise their option to purchase additional shares, the Sponsors will beneficially own approximately 75% of our common stock. The Sponsors have significant influence over corporate transactions. So long as investment funds associated with or designated by the Sponsors continue to 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.

 

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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;

 

    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 will incur increased costs as a result of becoming a public company.

As a public company, we will incur significant legal, accounting, and other expenses that we have not incurred as a private company, including costs associated with public company reporting requirements. We also have incurred and will incur costs associated with the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) and related rules implemented by the Securities and Exchange Commission (“SEC”). The expenses incurred by

 

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public companies generally for reporting and corporate governance purposes have been increasing. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. These laws and regulations could also make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions and other regulatory action and potentially civil litigation.

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 ABL Facility, the Term Loan Facility and the indentures governing the senior notes and the senior PIK toggle 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, assuming no exercise by the underwriters of their option to purchase additional shares, we will have 115,971,525 shares of common stock outstanding, a majority of which we expect will be held by the Sponsors. This concentration, commonly referred to as a market overhang, could depress the price at which our stock trades.

Upon expiration of lock-up agreements between the underwriters and our officers, directors, 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 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.

 

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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 $27.94 per share because the initial public offering price of $16.00 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 2013 acquisition of Party Delights, the May 2013 acquisition of iParty and the October 2014 acquisition of U.S. Balloon. 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.

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.

We estimate that net proceeds of the sale of the common stock that we are offering will be approximately $326.3 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.

 

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Anti-takeover provisions in our charter documents and Delaware law might discourage, delay or prevent a change in control of our company.

Our 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;

 

    certain rights of the Sponsors with respect to the designation of directors for nomination and election to our board of directors;

 

    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 75% of our outstanding shares of capital stock entitled to vote generally at an election of the directors to remove directors only for cause once the Sponsors cease to collectively own at least 50% of our outstanding common stock;

 

    the required approval of holders of at least 66 23% 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 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 66 23% 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.

Our amended and restated certificate of incorporation designates courts in the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our amended and restated certificate of incorporation provides that, subject to limited exceptions, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (iii) any action asserting a claim against us arising pursuant to any provision of the DGCL, our amended and restated certificate of incorporation or our amended and restated bylaws or (iv) any other action asserting a claim against us that is governed by the internal affairs doctrine (each, a “Covered Proceeding”). In addition, our amended and restated certificate of incorporation provides that if any action the subject matter of which is a Covered Proceeding is filed in a court other than the specified Delaware courts without the approval of our board of directors (each, a “Foreign Action”), the claiming party will be deemed to have consented to (i) the personal jurisdiction of the specified Delaware courts in connection with any action brought in any such courts to enforce the exclusive forum provision described above and (ii) having service of process made upon such claiming party in any such

 

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enforcement action by service upon such claiming party’s counsel in the Foreign Action as agent for such claiming party. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and to have consented to these provisions. These provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find these provisions of our amended and restated certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business and financial condition.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

From time to time, including in this prospectus and, in particular, the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we make forward-looking statements that use words such as the company “believes,” “anticipates,” “expects,” “targets,” “estimates,” “intends,” “will,” “may” or “plans” and similar expressions. These forward-looking statements reflect our current expectations and are based upon data available to us at the time the statements were made. Examples of forward-looking statements include, but are not limited to, statements we make regarding (i) our target percentage for the selection of Amscan merchandise offered in Party City stores, (ii) our belief that our cash generated by operating activities, the remaining funds under the credit facilities and existing cash and cash equivalents will be sufficient to meet our liquidity needs over the next 12 months and (iii) anticipated benefits expected to be realized from recent acquisitions.

Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from expectations. These risks, as well as other risks and uncertainties, are detailed in the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. All forward-looking statements in this prospectus are qualified by these cautionary statements and are made only as of the date of this prospectus. Any such forward-looking statements, whether made in this prospectus or elsewhere, should be considered in context with the various disclosures made by us about our business. The following risks related to our business, among others, could cause actual results to differ materially from those described in the forward-looking statements:

 

    our ability to compete effectively in a competitive industry;

 

    fluctuations in commodity prices;

 

    adequacy of helium supplies;

 

    our ability to appropriately respond to changing merchandise trends and consumer preferences;

 

    successful implementation of our store growth strategy;

 

    decreases in our Halloween sales;

 

    disruption to the transportation system or increases in transportation costs;

 

    product recalls or product liability;

 

    economic slowdown affecting consumer spending and general economic conditions;

 

    loss or actions of third party vendors and loss of the right to use licensed material;

 

    disruptions at our manufacturing facilities;

 

    failure by suppliers or third-party manufacturers to follow acceptable labor practices or to comply with other applicable laws and guidelines;

 

    our international operations subjecting us to additional risks;

 

    potential litigation and claims;

 

    lack of available additional capital;

 

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    our inability to retain or hire key personnel;

 

    risks associated with leasing substantial amounts of space;

 

    failure of existing franchisees to conduct their business in accordance with agreed upon standards;

 

    adequacy of our information systems, order fulfillment and distribution facilities;

 

    our ability to adequately maintain the security of our electronic and other confidential information;

 

    our inability to successfully identify and integrate acquisitions;

 

    adequacy of our intellectual property rights;

 

    risks related to our substantial indebtedness; and

 

    the other factors set forth under “Risk Factors.”

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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THE TRANSACTIONS

On June 4, 2012, Party City Holdco Inc., an affiliate of THL, PCHI and Merger Sub entered into an Agreement and Plan of Merger, pursuant to which, on July 27, 2012, Merger Sub merged with and into PCHI, with PCHI being the surviving corporation and a wholly-owned subsidiary of Holdings. The aggregate consideration paid in connection with the Acquisition was approximately $2.7 billion. As a result of the consummation of the Acquisition, each outstanding share of PCHI’s common stock (together with any associated rights), other than those held by PCHI (other than treasury stock), Party City Holdco Inc., or any subsidiary of either PCHI or Party City Holdco Inc., were converted into the right to receive cash consideration. Additionally, all outstanding options to acquire capital stock of PCHI were accelerated and cancelled and, in the case of vested in-the-money options only, was converted into the right to receive a cash payment.

To consummate the Acquisition, our subsidiary, PCHI, entered into new debt financing consisting of (i) the $1,525 million Senior Credit Facilities, consisting of: (a) the $400 million ABL Facility, which had $115 million drawn at the closing of the Acquisition, and (b) the $1,125 million Term Loan Facility, and (ii) $700 million of 8.875% senior notes. Subsequent to the closing of the Acquisition, proceeds from the ABL Facility are available to provide financing for working capital and general corporate purposes. See “Description of Certain Debt” for further details on the Senior Credit Facilities and the senior notes.

 

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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 $326.3 million, assuming an initial public offering price of $16.00 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. If the underwriters exercise their option to purchase additional shares in full, we estimate that the net proceeds will be approximately $375.7 million after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

We intend to use the net proceeds that we receive from this offering (a) to pay a $30.7 million termination fee, in the aggregate, to the Sponsors pursuant to our management agreement with them, which will thereafter be terminated, and (b) to redeem all or a portion of the senior PIK toggle notes, which mature on August 15, 2019. The amount of senior PIK toggle notes we redeem will depend on the amount of net proceeds from this offering remaining after payment of the management agreement termination fee. Assuming an initial offering price of $16.00 per share, which is the midpoint of the range listed on the cover page of this prospectus, we expect to use the remaining $295.6 million of net proceeds (after the payment of the management agreement termination fee) to redeem $280.7 million of the senior PIK toggle notes, pay a $5.6 million penalty due to the prepayment and pay accrued interest on such notes in the amount of $9.3 million. We anticipate redeeming any outstanding PIK toggle notes that are not redeemed with the proceeds from this offering with borrowings under our ABL Facility. See “Capitalization.”

In the event we generate more than $395.0 million of net proceeds, we expect to redeem all outstanding senior PIK toggle notes with the proceeds from this offering and to use any remaining proceeds to repay or repurchase additional indebtedness, including amounts outstanding under the Senior Credit Facilities. The effect of the repayment of the senior PIK toggle notes on net income for the year ended December 31, 2014, had it occurred on January 1, 2014, would have been approximately $18.7 million, net of tax and excluding one-time costs and charges of such debt repayment, including the write-off of net original issue discount and premiums (inclusive of costs for any borrowings under the ABL Facility).

We are required to pay interest in cash at a rate of 8.750% per annum on the senior PIK toggle notes, unless certain conditions are satisfied, in which case we are entitled to pay all or a portion of the interest by increasing the principal amount of the notes or issuing additional notes (“PIK Interest”). PIK Interest is paid at a rate of 9.500%. Under the terms of the indenture governing the senior PIK toggle notes, prior to February 15, 2016, we may redeem the notes at a price equal to 102% of the principal amount thereof plus accrued and unpaid interest thereon up to but not including the date of redemption.

A $1.00 increase or decrease in the assumed initial public offering price of $16.00 per share (the midpoint of the range listed on the cover page of this prospectus) would increase or decrease the net proceeds to us from this offering by $20.6 million assuming the number of shares offered by us remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. An increase or decrease of 1,000,000 shares in the number of shares offered by us would increase or decrease the net proceeds to us by $15.0 million, assuming no change in the assumed initial public offering price of $16.00 per share (the midpoint of the range listed on the cover page of this prospectus) and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

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 August 2013, our wholly-owned subsidiaries, PC Nextco Holdings, LLC (“Nextco Holdings”) and PC Nextco Finance, Inc. (“Nextco Finance”), issued $350.0 million of senior PIK toggle notes. Nextco Holdings distributed the proceeds, net of expenses, to us and we used this cash to pay a one-time cash dividend to holders of our common stock. The total amount of the dividend was $338.0 million.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of December 31, 2014:

 

    on an actual basis; and

 

    on an as adjusted basis to give effect to the issuance and sale by us of 21,875,000 shares of our common stock in the offering at an assumed initial public offering price of $16.00 per share, the midpoint 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.

 

     December 31, 2014  
     Actual     As Adjusted  
     (dollars in thousands)  

Cash and cash equivalents

   $ 47,214      $ 47,214   
  

 

 

   

 

 

 

Debt:

Revolving credit facilities (1)

$ 25,336    $ 98,305   

Term loan (2)

  1,099,854      1,099,854   

Capital lease obligations

  3,274      3,274   

8.875% senior notes

  700,000      700,000   

8.750%/9.500% senior PIK toggle notes (1)(3)

  350,000      —     
  

 

 

   

 

 

 

Total debt

  2,178,464      1,901,433   

Redeemable common stock, $0.01 par value, 3,088,631 shares issued and outstanding, actual; 0 shares issued and outstanding, as adjusted (4)

  35,062      —     

Stockholders’ Equity:

Common stock, $0.01 par value, 300,000,000 shares authorized (including redeemable common stock), 91,007,894 shares issued and outstanding, actual; 300,000,000 shares authorized, and 115,971,525 shares issued and outstanding, as adjusted (4)

  910      1,160   

Additional paid-in capital (4)

  469,117      830,229   

Retained earnings (5)

  29,934      344   

Accumulated other comprehensive loss

  (12,735   (12,735
  

 

 

   

 

 

 

Total stockholders’ equity

  487,226      818,998   
  

 

 

   

 

 

 

Total capitalization

$ 2,700,752    $ 2,720,431   
  

 

 

   

 

 

 

 

(1) At December 31, 2014, there were $24.0 million of outstanding borrowings under the ABL Facility, a total of $19.5 million of outstanding letters of credit and excess availability of $356.6 million after giving effect to borrowing base limitations. Additionally, at December 31, 2014, there was $1.4 million outstanding under various foreign credit facilities. Following this offering, any outstanding senior PIK toggle notes that are not redeemed with proceeds from this offering will be redeemed with borrowings under the ABL Facility shortly after the closing of this offering. “As Adjusted” borrowings for the ABL Facility include $73.0 million borrowed in order to repay the outstanding balance of the senior PIK toggle notes after application of the net proceeds from this offering, accrued interest thereon and a prepayment penalty.
(2) Amounts exclude the impact of a $5.5 million net call premium and a $5.1 million net original issue discount.
(3) Amounts exclude the impact of the net original issue discount in the amount of $2.7 million (actual).

 

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(4) The current stockholders’ agreement terminates in conjunction with the initial public offering and, as a result, employee stockholders will no longer be able to require us to purchase their shares should they die or become disabled. Therefore, at such time, all shares held by employees will be reclassified from Redeemable Common Stock to Stockholders’ Equity.
(5) “As Adjusted” retained earnings includes: (i) the $30.7 million management agreement termination fee paid with the proceeds of this offering, (ii) the write-off of $6.6 million of deferred financing costs related to the senior PIK toggle notes, (iii) the write-off of a $2.7 million original issue discount related to the senior PIK toggle notes, and (iv) a $7.0 million penalty due to the early repayment of the senior PIK toggle notes. All such adjustments have been tax-effected at a 37.0% rate.

Each $1.00 increase or decrease in the assumed initial public offering price of $16.00 per share (the midpoint of the range listed on the cover page of this prospectus) would increase or decrease, as applicable, total stockholders’ equity by $20.6 million, assuming that the number of shares offered by us as set forth on the cover page of this prospectus remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses. Each 1,000,000 share increase or decrease in the number of shares offered by us would increase or decrease, as applicable, total stockholders’ equity by $15.0 million assuming no change in the assumed initial public offering price of $16.00 per share (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.

The table above does not include:

 

    6,686,400 shares of common stock issuable upon the exercise of stock options issued under the 2012 Plan with a weighted average exercise price of $5.33 per share;

 

    3,487,680 additional shares of common stock reserved for future issuance under the 2012 Plan; and

 

    15,316,000 additional shares of common stock reserved for future issuance under the 2012 Plan, as amended, which amendment shall take effect upon consummation of this offering.

 

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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. Redeemable common securities are included in both the numerator and the denominator of the calculation.

At December 31, 2014, the net tangible book value of our common stock was approximately $(1,711.3) million, or approximately $(18.19) per share of our common stock. After giving effect to the sale of 21,875,000 shares of our common stock in this offering at an assumed initial public offering price of $16.00 per share, and after deducting estimated underwriting discounts and commissions and the estimated offering expenses of this offering, the as adjusted net tangible book value at December 31, 2014 attributable to common stockholders would have been approximately $(1,385.0) million, or approximately $(11.94) per share of our common stock, including shares sold in this offering. This represents a net increase in net tangible book value of approximately $6.25 per share and an immediate dilution in net tangible book value of approximately $27.94 per share to new stockholders. The following table illustrates this per share dilution to new stockholders:

 

Assumed initial public offering price per share

$ 16.00   

Net tangible book value per share as of December 31, 2014

$ (18.19

Increase in net tangible book value per share attributable to this offering

$ 6.25   

As adjusted net tangible book value per share after this offering

$ (11.94
     

 

 

 

Dilution in net tangible book value per share to new stockholders

$ (27.94
     

 

 

 

The table below summarizes, as of December 31, 2014, 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.

 

     Shares Issued     Total Consideration    

Average

Price per

Share

 
    

Number

    

Percentage

   

Amount

    

Percentage

   

Existing stockholders

     94,096,525         81     835,802,902         70   $ 8.88   

New stockholders in this offering

     21,875,000         19     350,000,000         30     16.00   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

  115,971,525      100   1,185,802,902      100 $ 10.22   
  

 

 

    

 

 

   

 

 

    

 

 

   

The foregoing discussion and tables assume no exercise of stock options to purchase 6,686,400 shares of our common stock subject to outstanding stock options with a weighted average exercise price of $5.33 per share as of December 31, 2014 and excludes 3,487,680 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.

A $1.00 increase or decrease in the assumed initial offering price of $16.00 per share (the midpoint of the range listed on the cover page of this prospectus) would increase or decrease our net tangible deficit as adjusted to give effect to this offering by $0.18 per share, assuming that the number of shares offered by us set forth on the cover page of this prospectus remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. An increase or decrease of 1,000,000 shares in the number of shares offered by us would increase or decrease our net tangible deficit as adjusted to give effect to this offering by $0.23 per share, assuming the assumed initial offering price of $16.00 per share (the midpoint of the range listed on the cover page of this prospectus) remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

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Table of Contents

If the underwriters exercise their option to purchase additional shares in full, as adjusted net tangible book value at December 31, 2014 will increase to $(1,335.7) million or $(11.20) per share, representing an increase to stockholders of $6.99 per share, and there will be a decrease in the dilution to new investors of $0.74 per share.

The table above does not include:

 

    6,686,400 shares of common stock issuable upon the exercise of stock options issued under the 2012 Plan with a weighted average exercise price of $5.33 per share;

 

    3,487,680 additional shares of common stock reserved for future issuance under the 2012 Plan; and

 

    15,316,000 additional shares of common stock reserved for future issuance under the 2012 Plan, as amended, which amendment shall take effect prior to the consummation of this offering.

 

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Table of Contents

SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth selected historical consolidated financial data for the periods ended and at the dates indicated below. Our selected historical consolidated financial data as of December 31, 2013 (Successor) and December 31, 2014 (Successor) and for the period from July 28, 2012 to December 31, 2012 (Successor), the period from January 1, 2012 to July 27, 2012 (Predecessor) and the years ended December 31, 2013 (Successor) and December 31, 2014 (Successor) presented in this table has been derived from our historical audited consolidated financial statements included elsewhere in this prospectus. Our selected historical consolidated financial data for the years ended December 31, 2010 (Predecessor) and December 31, 2011 (Predecessor) were derived from our audited consolidated financial statements that are not included in this prospectus.

The historical results presented below are not necessarily indicative of the results to be expected for any future period. The following information should be read in conjunction with the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the notes thereto contained elsewhere in this prospectus.

 

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Table of Contents
  Fiscal Year Ended
December 31,
  Period from
January 1 to
July 27,
2012
         Period from
July 28 to
December 31,
2012
  Fiscal Year
Ended
December 31,

2013 (3)
  Fiscal Year
Ended
December 31,
2014 (4)
 
  2010 (1)   2011 (2)  
  (Predecessor)   (Predecessor)   (Predecessor)          (Successor)   (Successor)   (Successor)  
  (dollars in thousands, except per common share data)      

Income Statement Data:

 

Revenues:

 

Net sales

$ 1,579,677    $ 1,852,869    $ 930,903      $ 964,330    $ 2,026,272    $ 2,251,589   

Royalties and franchise fees

  19,417      19,106      9,281        9,312      18,841      19,668   
 

 

 

   

 

 

   

 

 

           

 

 

   

 

 

   

 

 

 

Total revenues

  1,599,094      1,871,975      940,184        973,642      2,045,113      2,271,257   

Expenses:

 

Cost of sales (5)

  943,058      1,118,973      574,048        636,410      1,259,188      1,375,706   

Wholesale selling expenses

  42,725      57,905      31,568        28,096      68,102      73,910   

Retail operating expenses

  296,891      325,332      166,047        172,168      369,996      397,110   

Franchise expenses

  12,269      13,685      6,579        6,128      13,320      14,281   

General and administrative expenses (6)

  134,392      138,074      101,502        65,890      146,094      147,718   

Art and development costs

  14,923      16,636      10,824        8,201      19,311      19,390   

Impairment of trade name (7)

  27,400      —       —         —       7,500      —     
 

 

 

   

 

 

   

 

 

           

 

 

   

 

 

   

 

 

 

Income from operations

  127,436      201,370      49,616        56,749      161,602      243,142   

Interest expense, net

  40,850      77,743      41,970        62,062      143,406      155,917   

Other expense, net (8)

  4,208      1,476      22,245        26,157      18,478      5,891   
 

 

 

   

 

 

   

 

 

           

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

  82,378      122,151      (14,599     (31,470   (282   81,334   

Income tax expense (benefit)

  32,945      45,741      403        (1,322   (4,525   25,211   
 

 

 

   

 

 

   

 

 

           

 

 

   

 

 

   

 

 

 

Net income (loss)

  49,433      76,410      (15,002     (30,148   4,243      56,123   

Less: net income attributable to noncontrolling interests

  114      135      96        60      224      —     
 

 

 

   

 

 

   

 

 

           

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Party City Holdco Inc.

$ 49,319    $ 76,275    $ (15,098   $ (30,208 $ 4,019    $ 56,123   
 

 

 

   

 

 

   

 

 

           

 

 

   

 

 

   

 

 

 

Statement of Cash Flow Data:

 

Net cash provided by (used in)

 

Operating activities (9)

$ 61,168    $ 161,264    $ (18,126   $ (35,508 $ 135,818    $ 136,387   

Investing activities (9)

  (102,766   (138,909   (31,824     (1,578,553   (112,522   (89,632

Financing activities (9)

  46,515      (19,784   33,318        1,629,331      (18,373   (23,530

Per Share Data:

 

Basic

$ 1,600.18    $ 2,385.90    $ (469.17   $ (0.32 $ 0.04    $ 0.60   

Diluted

$ 1,514.72    $ 2,341.07    $ (469.17   $ (0.32 $ 0.04    $ 0.59   

Weighted Average

 

Outstanding basic

  30,820.91      31,969.09      32,180.51        93,405,004      93,725,721      93,996,355   

Diluted

  32,559.78      32,581.22      32,180.51        93,405,004      93,725,721      94,444,137   

Cash dividend per common share

  9,400      —       —         —     $ 3.60     —     

 

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Table of Contents
  Year Ended December 31,   Period from
January 1 to
July 27,
2012
     Period from
July 28 to
December 31,
2012
  Fiscal Year
Ended
December 31,

2013 (3)
  Fiscal Year
Ended
December 31,

2014 (4)
 
  2010 (1)   2011 (2)  
 

(Predecessor)

  (Predecessor)   (Predecessor)      (Successor)   (Successor)   (Successor)  
  (dollars in thousands)      

Other Financial Data:

 

Adjusted EBITDA (10)

$ 230,618    $ 275,466    $ 116,982      $ 175,329    $ 320,775    $ 362,125   

Adjusted EBITDA margin (10)

  14.4   14.7   12.4 %     18.0   15.7   15.9

Adjusted net income (10)

$ 86,430    $ 88,260    $ 22,883      $ 50,920    $ 68,393    $ 86,838   

Number of company-owned Party City stores (11)

  439      487        600      674      693   

Capital expenditures

$ 49,623    $ 44,483    $ 28,864      $ 16,376    $ 61,241    $ 78,241   

Party City brand comp sales (12)

  3.6   9.5     2.9   5.8

Share of shelf (13)

  58.7   60.5   64.7     63.7   67.5   70.2

Balance Sheet Data (at end of period):

 

Cash and cash equivalents

$ 20,454    $ 22,053      $ 20,899    $ 25,645    $ 47,214   

Working capital

  189,993      226,277        387,858      396,027      463,715   

Total assets

  1,653,151      1,750,338        3,283,319      3,327,534      3,380,863   

Total debt (14)

  1,000,256      982,258        1,851,517      2,184,486      2,165,168   

Redeemable common securities

  18,089      36,939        22,205      23,555      35,062   

Total equity (14)

  256,422      326,091        787,450      456,757      487,226   

 

(1) The acquisitions of Designware and the Christy’s Group are included in the financial statements from their acquisition dates (March 1, 2010 and September 30, 2010, respectively).
(2) The acquisitions of Riethmüller and Party City Canada are included in the financial statements from their acquisition dates (January 30, 2011 and July 29, 2011, respectively).
(3) The acquisitions of Party Delights and iParty are included in the financial statements from their acquisition dates (March 13, 2013 and May 9, 2013, respectively).
(4) The acquisition of U.S. Balloon is included in the financial statements from the acquisition date (October 24, 2014).
(5) As a result of the Acquisition, the Company applied the acquisition method of accounting and increased the value of its inventory by $89.8 million as of July 28, 2012. Such adjustment increased the Company’s cost of sales during 2014, 2013, and the period from July 28, 2012 to December 31, 2012 by $5.9 million, $25.2 million and $58.6 million, respectively, as the related inventory was sold.
(6) In conjunction with the Transactions, the Company recorded $8.4 million of transaction costs in general and administrative expenses during the period from January 1, 2012 to July 27, 2012. Additionally, the Transactions accelerated the vesting of certain of the Company’s stock options and during the period from January 1, 2012 to July 27, 2012 the Company recorded $2.1 million of expense in general and administrative expenses. Further, due to the vesting of such stock options, the Company made payments in lieu of dividends to the holders of such options and during the period from January 1, 2012 to July 27, 2012, the Company recorded a $16.1 million charge in general and administrative expenses.
(7) In conjunction with the Transactions, the Company applied the acquisition method of accounting and allocated the $2.7 billion acquisition price to various tangible and intangible assets, including the Company’s Halloween City trade name. The value that was ascribed to the trade name was based on the number of Halloween City stores that the Company expected to open during each subsequent Halloween selling season and the expected performance of such stores. The number of stores that the Company opens during a season is driven by many factors, including the availability of suitable locations. During 2013, the Company made a strategic decision to open fewer temporary Halloween City stores. As a result of a change in store performance and the Company’s decision to open fewer Halloween City stores than assumed in 2012, during 2013 the Company lowered the value of its Halloween City trade name by recording a $7.5 million impairment charge. During 2010, the Company implemented a plan to convert and rebrand its company-owned FCPO stores to Party City stores. As a result, the Company recorded a charge for the impairment of the Factory Card & Party Outlet trade name in the amount of $27.4 million in the fourth quarter of 2010.
(8) During February 2014, the Company amended the Term Loan Facility. In conjunction with the refinancing, the Company wrote-off $1.6 million of costs that had been capitalized during the issuance of the debt. Additionally, the Company wrote-off $0.6 million of the net original issuance discount and $0.7 million of the unamortized call premium that existed at the time of the amendment. Also, in conjunction with the refinancing, the Company expensed $1.4 million of banker and legal fees. During February 2013, the Company amended the Term Loan Facility. In conjunction with that amendment, the Company wrote-off $5.9 million of costs that had been capitalized during the initial issuance of the debt. Additionally, the Company wrote-off $2.3 million of the net original issuance discount that existed as of the time of that amendment. Also, in conjunction with that amendment, the Company expensed $2.5 million of a call premium and $1.6 million of investment banking and legal fees. In conjunction with the Transactions, the Company recorded $19.7 million of transaction costs in other expense, net during the period from January 1, 2012 to July 27, 2012 and $24.6 million of transaction costs during the period from July 28, 2012 to December 31, 2012. Additionally, the period from January 1, 2012 to July 27, 2012 included $2.5 million in costs as a result of the termination of an initial public offering. In connection with the refinancing of the Company’s revolving and term debt credit facilities in August and December 2010, the Company wrote off $2.4 million of deferred finance charges during 2010.
(9) See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity” for a discussion of cash flows.
(10) We present adjusted EBITDA and adjusted net income as supplemental measures of our operating performance. We define EBITDA as net income (loss) before interest expense, net, income taxes, depreciation and amortization. We define adjusted EBITDA as EBITDA, 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. Adjusted net income represents our net income (loss), adjusted for intangible asset amortization, non-cash purchase accounting adjustments, amortization of deferred financing costs and original issue discount, the Sponsors management fee, refinancing charges, equity based compensation, payments in lieu of dividend, impairment charges and costs related to the Transactions. We present adjusted EBITDA and adjusted net income as supplemental measures of our performance. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating adjusted EBITDA and adjusted net income, 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 and adjusted net income should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.

 

     We present adjusted EBITDA and adjusted net income 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 uses adjusted EBITDA to measure compliance with certain covenants. While we have historically not used adjusted net income for internal management reporting and valuation purposes, we believe adjusted net income is a helpful benchmark to evaluate our operating performance.

 

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     We also include information concerning adjusted EBITDA margin, which is defined as the ratio of adjusted EBITDA to revenue. We present adjusted EBITDA margin because it is used by management as a performance measurement to judge the level of adjusted EBITDA generated from revenue. We believe its inclusion is appropriate to provide additional information to investors.

 

     Adjusted EBITDA, adjusted net income and adjusted EBITDA margin have limitations as analytical tools. Some of these limitations are:

 

    adjusted EBITDA, adjusted net income and adjusted EBITDA margin do not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;

 

    adjusted EBITDA and adjusted net income do 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 and adjusted net income do 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 and adjusted net income do 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 and adjusted net income differently than we do, limiting its usefulness as a comparative measure.

 

     Because of these limitations, adjusted EBITDA, adjusted net income and adjusted EBITDA margin should not be considered in isolation or as substitutes for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using adjusted EBITDA, adjusted net income and adjusted EBITDA margin only on a supplemental basis. The reconciliations from net income (loss) to each of adjusted EBITDA and adjusted net income for the periods presented is as follows:

 

  Year Ended December 31,   Period from
January 1 to
July 27,

2012
         Period from
July 28 to
December 31,

2012
  Fiscal Year
Ended
December 31,
2013
  Fiscal Year
Ended
December 31,
2014
 
  2010   2011  
  (Predecessor)   (Predecessor)   (Predecessor)          (Successor)   (Successor)   (Successor)  
  (dollars in thousands)      

Net income (loss)

$ 49,433    $ 76,410    $ (15,002   $ (30,148 $ 4,243    $ 56,123   

Interest expense, net

  40,850      77,743      41,970        62,062      143,406      155,917   

Income taxes

  32,945      45,741      403        (1,322   (4,525   25,211   

Depreciation and amortization

  49,418      59,631      33,915        49,837      94,624      82,890   
 

 

 

   

 

 

   

 

 

            

 

 

   

 

 

   

 

 

 

EBITDA

  172,646      259,525      61,286        80,429      237,748      320,141   

Equity based compensation

  6,019      1,397      3,375        —       2,137      1,583   

Non-cash purchase accounting adjustments

  1,244      —       —         58,626 (a)    25,229 (a)    8,868 (a) 

Management fee

  1,248 (b)    1,248 (b)    713 (b)      1,292 (b)    3,000 (b)    3,356 (b) 

Impairment charges

  27,997 (c)    87      —         —       7,822 (c)    1,012   

Restructuring, retention and severance

  1,780      2,513      355        784      4,673      3,391   

Payment in lieu of dividend

  9,395 (d)    617 (d)    16,533 (d)      —       —        —     

Refinancing charges

  2,448      —       —         —       12,295 (e)    4,396 (e) 

Deferred rent

  4,500      7,467      3,344        6,335      17,055      14,418   

Business interruption

  —       —       —         2,000 (f)    500 (f)    (2,435 )(f) 

Transaction costs

  —       —       28,582 (g)      24,564 (g)   —        —     

Corporate development expenses

  1,660      2,471      2,395        351      4,828      700   

Foreign currency losses (gains)

  354      (280   148        532      1,581      1,447   

Store closing costs

  1,293      664      305        169      1,498      1,199   

Undistributed (income) loss in unconsolidated joint venture

  (678   (463   (128     (297   172      1,556   

Other

  712      220      74        544      2,237      2,493   
 

 

 

   

 

 

   

 

 

            

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

$ 230,618    $ 275,466    $ 116,982      $ 175,329    $ 320,775    $ 362,125   
 

 

 

   

 

 

   

 

 

            

 

 

   

 

 

   

 

 

 

 

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Table of Contents
  Year Ended December 31,   Period from
January 1 to
July 27,

2012
         Period from
July 28 to
December 31,

2012
  Fiscal Year
Ended
December 31,

2013
  Fiscal Year
Ended
December 31,

2014
 
  2010   2011  
  (Predecessor)   (Predecessor)   (Predecessor)        (Successor)   (Successor)   (Successor)  
  (dollars in thousands)      

Income (loss) before income taxes

$ 82,378    $ 122,151    $ (14,599   $ (31,470 $ (282 $ 81,334   

Intangible asset amortization

  10,345 (h)    11,116 (h)    5,542 (h)      14,160 (h)    26,997 (h)    22,195 (h) 

Non-cash purchase accounting adjustments

  1,244      —        —          71,755 (a)    39,414 (a)    13,692 (a) 

Amortization of deferred financing costs and original issuance discount

  2,475 (i)    4,500 (i)    2,592 (i)      4,605 (i)    20,211 (i)(e)    15,610 (i)(e) 

Management fee

  1,248 (b)    1,248 (b)    713 (b)      1,292 (b)    3,000 (b)    3,356 (b) 

Refinancing charges

  2,448      —        —          —        4,068 (e)    1,407 (e) 

Equity based compensation

  6,019      1,397      3,375        —        2,137      1,583   

Payment in lieu of dividend

  9,395 (d)    617 (d)    16,533 (d)      —        —        —     

Impairment charges

  27,997 (c)    87      —          —        7,822 (c)    1,012   

Transaction costs

  —        —        28,582 (g)      24,564 (g)    —        —     
 

 

 

   

 

 

   

 

 

            

 

 

   

 

 

   

 

 

 

Adjusted income before income taxes

  143,549      141,116      42,738        84,906      103,367      140,189   

Adjusted income tax expense

  57,119 (j)    52,856 (j)    19,855 (j)      33,986 (j)    34,974 (j)    53,351 (j) 
 

 

 

   

 

 

   

 

 

            

 

 

   

 

 

   

 

 

 

Adjusted net income

$ 86,430    $ 88,260    $ 22,883      $ 50,920    $ 68,393    $ 86,838   
 

 

 

   

 

 

   

 

 

            

 

 

   

 

 

   

 

 

 

 

  (a) As a result of the Acquisition, the Company applied the acquisition method of accounting and increased the value of its inventory by $89.8 million as of July 28, 2012. Such adjustment increased the Company’s cost of sales during 2014, 2013, and the period from July 28, 2012 to December 31, 2012 by $5.9 million, $25.2 million and $58.6 million, respectively, as the related inventory was sold. Further, during the application of the acquisition method of accounting, the Company increased the value of certain property, plant and equipment. The impact of such adjustments on depreciation expense increased the Company’s expenses during 2014, 2013, and the period from July 28, 2012 to December 31, 2012 by $4.8 million, $14.2 million and $13.1 million, respectively. These property, plant and equipment depreciation amounts are included in “Non-cash purchase accounting adjustments” for purposes of calculating “adjusted net income”, but are excluded from “Non-cash purchase accounting adjustments” for purposes of calculating adjusted EBITDA since they are included in depreciation expense.
  (b) Represents management fees paid to the Sponsors. The management agreement will terminate upon consummation of this offering. See “—Certain Relationships and Related Party Transactions—Management Agreement.”
  (c) In conjunction with the Transactions, the Company applied the acquisition method of accounting and allocated the $2.7 billion acquisition price to various tangible and intangible assets, including the Company’s Halloween City trade name. The value that was ascribed to the trade name was based on the number of Halloween City stores that the Company expected to open during each subsequent Halloween selling season and the expected performance of such stores. The number of stores that the Company opens during a season is driven by many factors, including the availability of suitable locations. During 2013, the Company made a strategic decision to open fewer temporary Halloween City stores. As a result of a change in store performance and the Company’s decision to open fewer Halloween City stores than assumed in 2012, during 2013 the Company lowered the value of its Halloween City trade name by recording a $7.5 million impairment charge. During 2010, the Company implemented a plan to convert and rebrand our company-owned FCPO stores as Party City stores. As a result, the Company recorded a charge for impairment of the FCPO trade name in the amount of $27.4 million in the fourth quarter of 2010.
  (d) In December 2010, a one-time cash dividend was declared. In addition, holders of unvested options at the declaration date would receive a distribution when the options vested. At the time of the Transactions, certain outstanding stock options became fully vested and distributions were made in the amount of $16.1 million. Further, prior to the Transactions, during 2012 certain outstanding stock options became fully vested and the Company made distributions in the amount of $0.4 million. The Company recorded charges equal to such amounts in general and administrative expenses during the period from January 1, 2012 to July 27, 2012.
  (e) During February 2014, the Company amended the Term Loan Facility. In conjunction with the refinancing, the Company wrote-off $1.6 million of costs that had been capitalized during the issuance of the debt. Additionally, the Company wrote-off $0.6 million of the net original issuance discount and $0.7 million of the unamortized call premium that existed at the time of the amendment. These amounts are included in “Amortization of deferred financing costs and original issue discount” in this table and in the Company’s consolidated statement of cash flows included elsewhere in this prospectus. Also, in conjunction with the refinancing, the Company expensed $1.4 million of banker and legal fees. During February 2013, the Company amended the Term Loan Facility. In conjunction with that amendment, the Company wrote-off $5.9 million of costs that had been capitalized during the initial issuance of the debt. Additionally, the Company wrote-off $2.3 million of the net original issuance discount that existed as of the time of that amendment. Both amounts are included in “Amortization of deferred financing costs and original issue discount” in this table and in the Company’s consolidated statement of cash flows included elsewhere in this prospectus. Also, in conjunction with that amendment, the Company expensed $2.5 million of a call premium and $1.6 million of investment banking and legal fees.
  (f) During October 2012, the Company’s operations were negatively impacted by Superstorm Sandy and the Company pursued business interruption insurance proceeds. During the fourth quarter of 2012 and the second quarter of 2013, the Company increased Adjusted EBITDA by $2.0 million and $1.0 million, respectively, to reflect its best estimate of the expected business interruption proceeds yet to be reflected in the consolidated statement of operations and comprehensive income (loss). During the fourth quarter of 2013 and during 2014, the Company received business interruption proceeds of $0.5 million and $4.5 million, respectively, and recognized those amounts in its consolidated statements of operations and comprehensive income (loss). To the extent that estimated proceeds were previously included in Adjusted EBITDA, the Company reduced Adjusted EBITDA for 2013 and 2014.
  (g) In conjunction with the Transactions, the Company incurred certain costs. See Note 5 to the audited consolidated financial statements which are included elsewhere in this prospectus.
  (h) Represents the amortization of intangible assets, including those assets recorded in conjunction with the application of the acquisition method of accounting due to the Transactions.
  (i) Represents the amortization of deferred financing costs and original issuance discounts related to debt offerings. Additionally, 2013 includes the write-off of deferred financing costs and net original issuance discounts in conjunction with the February 2013 Term Loan Facility amendment and 2014 includes the write-off of deferred financing costs, net original issue discounts and unamortized call premiums in conjunction with the February 2014 Term Loan Facility amendment. See note (e) for further discussion.
  (j) Represents the income tax expense using the rate in effect after considering the adjustments.

 

(11) Data as of December 31, 2013 and December 31, 2014 includes all stores that were acquired from iParty and which were converted to the Party City banner at such dates.
(12) Party City brand comp sales include e-commerce, Canadian store sales and sales for stores converted from the FCPO, Party Packagers and iParty formats to the Party City format.
(13) Represents the percentage of product costs included in cost of goods sold by our domestic permanent stores (including converted iParty stores starting in 2014) and North American e-commerce operations, which relate to products supplied by our wholesale operations.
(14) Excludes redeemable common securities.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our results of operations and financial statements in conjunction with the consolidated financial statements, the accompanying notes and the other financial information contained elsewhere in this prospectus. This section contains forward-looking statements, based on current expectations and related to future events and our future financial performance, that involve risks and uncertainties. Our actual results may vary materially from those discussed in the forward-looking statements as a result of various factors, including, without limitation, those set forth in “Risk Factors”, as well as other matters described in this prospectus. See “Special Note Regarding Forward-Looking Statements.”

Effect of the Transactions

On July 27, 2012, Merger Sub, a wholly-owned subsidiary of Holdings, merged into PCHI, with PCHI being the surviving entity. Immediately after the Acquisition, 100% of our common stock was owned by funds affiliated with THL, who held approximately 70% ownership, funds affiliated with Advent, who held approximately 24% ownership, and other minority investors, including management, who held approximately 6% ownership.

As a result of the Transactions, the financial information for the period after July 27, 2012 represents the financial information of the “Successor” company. Prior to, and including, July 27, 2012, the consolidated financial statements include the accounts of the “Predecessor” company. Due to the change in the basis of accounting resulting from the application of the acquisition method of accounting and push-down accounting (see Note 1 to the audited consolidated financial statements, which are included elsewhere in this prospectus, for further discussion), the Predecessor’s consolidated financial statements and the Successor’s consolidated financial statements are not necessarily comparable. The change in basis resulting from the Transactions did not impact net sales, royalties and franchise fees or retail operating expenses and, for those accounts, comparing full-year 2013 results to full-year 2012 results provides meaningful comparison. However, for all other accounts, to the extent that the change in basis had a material impact on our results during the Successor period, we have disclosed such impact in “Results of Operations”. Certain amounts in this prospectus combine the results of the Predecessor and the Successor. Such combination was performed by mathematical addition and does not comply with GAAP, although we believe it provides a meaningful method of comparison for certain accounts. The data is being presented for analytical purposes only. Combined operating results (i) have not been prepared on a pro forma basis as if the Transactions occurred on the first day of the period, (ii) may not reflect the actual results we would have achieved absent the Transactions and (iii) may not be predictive of future results of operations.

Business Overview

Our Company

We are the leading party goods retailer by revenue in North America and, we believe, the largest vertically integrated supplier of decorated party goods globally, based on revenues, with multiple levers to drive future growth across channels, products and geographies. With approximately 900 locations, we have the only coast-to-coast network of party superstores in the U.S. and Canada that make it easy and fun to enhance special occasions with a differentiated shopping experience and an unrivaled assortment of innovative and exciting merchandise offered at a compelling value. Through a series of acquisitions between 2005 and 2010, we built a powerful retail operation that captures the full manufacturing-to-retail margin on a significant portion of the products sold in our stores. We believe we are the largest global designer, manufacturer and distributor of decorated party supplies by revenue with products found in over 40,000 retail outlets worldwide, including our own stores as well as independent party supply stores, mass merchants, grocery retailers, dollar stores and others. Our category-defining retail concept, multi-channel reach, widely recognized brands, broad and deep product offering, and low-cost global sourcing model are, we believe, significant competitive advantages. We believe these characteristics position us for continued organic and acquisition-led growth and margin expansion.

 

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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 adjusted EBITDA, adjusted EBITDA margin and adjusted net income. For a discussion of our use of these measures and a reconciliation of each of adjusted EBITDA and adjusted net income to net income (loss), please refer to “Prospectus Summary—Summary Financial Data” and “Selected Consolidated Financial Data.”

Segments

Our Wholesale segment generates revenues globally through sales of Amscan, Designware, Anagram, Costumes USA and other party supplies to party goods superstores, including our company-owned and franchised stores, other party goods retailers, dollar stores, mass merchants, independent card and gift stores and other retailers and distributors throughout the world. Sales to domestic and international customers accounted for 61% and 39%, respectively, of our net wholesale sales in 2014.

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 City 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 2014, our Halloween business represented approximately 25% of our total domestic 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 the merchandise is sold to the consumer. For segment 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 free-on-board (“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

 

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the prior year. Converted FCPO and Party Packagers stores are included in Party City’s same-store sales immediately following conversion. Same-store sales for the Party City brand include retail e-commerce sales. iParty stores were included in Party City’s same-store sales after the completion of thirteen full months following the acquisition.

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 retail 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 net 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 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.

As a result of the Acquisition, we applied the acquisition method of accounting and increased the value of our inventory by $89.8 million as of July 28, 2012. The adjustment principally reflects the previously deferred wholesale margin on inventory supplied to our retail operations at July 27, 2012. Such adjustment increased our cost of sales during the period from July 28, 2012 to December 31, 2012 by $58.6 million, during 2013 by $25.2 million, and during 2014 by $5.9 million as the related inventory was sold. Further, during the application of the acquisition method of accounting, we increased the values of our property, plant and equipment and certain intangible assets. The impact of such adjustments on depreciation expense and amortization expense increased our cost of sales during the period from July 28, 2012 to December 31, 2012 by $15.4 million, during 2013 by $25.9 million, and during 2014 by $15.2 million.

Wholesale Selling Expenses. Wholesale selling expenses include the costs associated with our wholesale sales and marketing efforts, including 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 volumes increase.

Retail Operating Expenses. Retail operating expenses include all of the costs associated with retail store operations, excluding occupancy-related costs included in cost of sales. Costs include store payroll and benefits, advertising, supplies and credit card costs. Retail expenses are largely variable but do not necessarily vary in proportion to net 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 royalties and franchise fees.

General and Administrative Expenses. General and administrative expenses include all operating costs not included elsewhere in the statement of operations and comprehensive income (loss). These expenses include

 

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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.

In conjunction with the Transactions, we incurred transaction costs that were recorded in general and administrative expenses. Additionally, the Transactions accelerated the vesting of certain stock options and we recorded a charge in general and administrative expenses. Further, due to the vesting of such stock options, we made payments in lieu of dividends to the holders of such options and recorded a charge in general and administrative expenses. See “—Results of Operations” for further discussion of these charges.

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.

Adjusted EBITDA. We define EBITDA as net income (loss) before interest expense, net, income taxes, depreciation and amortization. We define Adjusted EBITDA as EBITDA, as further adjusted to eliminate the impact of certain items that we do not consider indicative of our ongoing operating performance. We caution investors that amounts presented in accordance with our definition of Adjusted EBITDA may not be comparable to similar measures disclosed by other issuers, because not all issuers and analysts calculate Adjusted EBITDA in the same manner. 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 uses Adjusted EBITDA to measure compliance with certain covenants.

Adjusted Net Income. Adjusted net income represents our net income (loss), adjusted for intangible asset amortization, non-cash purchase accounting adjustments, amortization of deferred financing costs and original issue discount, the Sponsors management fee, refinancing charges, equity based compensation, payments in lieu of dividend, impairment charges and costs relating to the Transactions. We present adjusted net income 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. While we have historically not used adjusted net income for internal management reporting and valuation purposes, we believe adjusted net income is a helpful benchmark to evaluate our operating performance.

Executive Overview

Total revenues for the year ended December 31, 2014 were $2,271.3 million and were $226.1 million or 11.1% higher than 2013. Same-store sales for the Party City brand (including domestic and Canadian retail e-commerce sales and sales at acquired stores, to the extent that the stores were converted to the Party City format and included in our sales for the comparable period of the prior year) increased by 5.8% due to a 4.2% increase in average transaction dollar size and a 1.6% increase in transaction count. The revenue increase was also partially due to the 2014 fiscal year of our Retail operations consisting of 53 weeks (fiscal year 2013 had 52 weeks). The 53rd week contributed $34.0 million to Retail net sales. See “—Results of Operations” for further discussion of the increase in revenues.

Additionally, Adjusted EBITDA increased from $320.8 million in 2013 to $362.1 million in 2014. See “—Results of Operations” and “Prospectus Summary—Summary Financial Data” for further detail of the increase in Adjusted EBITDA.

 

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Factors Affecting Our Results

Other 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:

53rd Week. The 2014 fiscal year of our Retail operations consisted of 53 weeks. Fiscal year 2013 had 52 weeks. The 53rd week contributed $34.0 million to Retail net sales. Please see “—Results of Operations” below for further discussion of the impact of the 53rd week on the various accounts in our consolidated statement of operations and comprehensive income.

Acquisition-Related Costs. As a result of the Acquisition, we applied the acquisition method of accounting and increased the value of its inventory by $89.8 million as of July 28, 2012. The adjustment principally reflects the previously deferred wholesale margin on inventory supplied to our retail operations at July 27, 2012. The adjustment increased our cost of sales during the period from July 28, 2012 to December 31, 2012 by $58.6 million, during 2013 by $25.2 million, and during 2014 by $5.9 million, as the related inventory was sold. Such amount was added back to EBITDA when arriving at Adjusted EBITDA. For a discussion of our use of Adjusted EBITDA and a reconciliation to net income (loss), please refer to “Prospectus Summary—Summary Financial Data” and “Selected Consolidated Financial Data.”

Additionally, as a result of the Acquisition, we applied the acquisition method of accounting and recorded our property, plant and equipment and intangible assets at fair value. The impact of such adjustments on depreciation expense and amortization expense increased our cost of sales during the period from July 28, 2012 to December 31, 2012, during 2013, and during 2014 by $15.4 million, $25.9 million and $15.2 million, respectively.

In conjunction with the Transactions, during the period from January 1, 2012 to July 27, 2012, we recorded $8.9 million of compensation-related transaction costs in general and administrative expenses and $19.7 million of additional transaction costs in other expense, net. Also, the Acquisition accelerated the vesting of certain of our stock options and during the period from January 1, 2012 to July 27, 2012, we recorded $2.1 million of expense in general and administrative expenses. Further, due to the vesting of such stock options, we made payments in lieu of dividends to the holders of such options and during the period from January 1, 2012 to July 27, 2012, we recorded a $16.1 million charge in general and administrative expenses. Finally, in conjunction with the Transactions, during the period from July 28, 2012 to December 31, 2012, we recorded $24.6 million of transaction costs in other expense, net. These costs were added back to EBITDA when arriving at Adjusted EBITDA. For a discussion of our use of Adjusted EBITDA and a reconciliation to net income (loss), please refer to “Prospectus Summary—Summary Financial Data” and “Selected Consolidated Financial Data.”

Recent Acquisitions. In March 2013, we completed our acquisition of Party Delights, an online retailer of party goods, fancy dress and similar items for birthdays, weddings, christenings and other celebrations, for $14.8 million. The acquisition broadens our product offering and allows it to enter European retail markets through e-commerce. The acquisition of Party Delights contributed $27.2 million and $16.9 million to net sales during 2014 and 2013, respectively. In May 2013, we completed our acquisition of iParty, a party goods retailer with approximately 50 stores, principally located in the New England region, for $38.4 million (including the repayment of $9.0 million outstanding under iParty’s credit agreement). The acquisition accelerates our growth throughout New England, a densely populated region where we did not have a market presence. The acquisition of iParty contributed $87.7 million and $57.1 million to net sales during 2014 and 2013, respectively.

Refinancings. Amounts outstanding under PCHI’s previous $350.0 million ABL revolving credit facility and previous $675.0 million term loan agreement were repaid in conjunction with the closing of the Transactions. At such time, PCHI entered into the ABL Facility and the Term Loan Facility. Additionally, in conjunction with the Transactions, our subsidiary, PCHI, issued the 8.875% senior notes and completed a cash tender offer for all of its outstanding $175.0 million 8.75% senior subordinated notes.

 

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As a result of the higher debt levels following these refinancings, our interest expense increased during 2012 and 2013.

During February 2013, the Term Loan Facility was amended and the interest rate was lowered. In conjunction with that amendment, we wrote-off $5.9 million of costs that had been capitalized during the initial issuance of the debt. Additionally, we wrote-off $2.3 million of the net original issuance discount that existed as of the time of that amendment. Also, in conjunction with that amendment, we expensed $2.5 million of a call premium and $1.6 million of investment banking and legal fees. All of the charges were recorded in other expense in our consolidated statement of operations and comprehensive loss. For further discussion see the notes to the consolidated financial statements which are included elsewhere in this prospectus.

During February 2014, we amended the Term Loan Facility again. In conjunction with the refinancing, we wrote-off $1.6 million of costs that had been capitalized during the issuance of the debt. Additionally, we wrote-off $0.6 million of the net original issuance discount and $0.7 million of the unamortized call premium that existed at the time of the amendment. Also, in conjunction with the refinancing, we expensed $1.4 million of banker and legal fees. All of these charges were recorded in other expense in our consolidated statement of operations and comprehensive income. For further discussion, see the notes to the consolidated financial statements which are included elsewhere in this prospectus.

Senior PIK Toggle Notes. On August 1, 2013, our wholly-owned subsidiaries, Nextco Holdings and Nextco Finance, issued $350.0 million of 8.750%/9.500% senior PIK toggle notes. The net proceeds were distributed to us by Nextco Holdings and we used this cash to pay a one-time cash dividend to holders of our common stock totaling $338.0 million.

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 include compliance with the Sarbanes-Oxley Act as well as other rules implemented by the SEC and the NYSE.

Termination of Management Agreement. We have a management agreement with our Sponsors. Pursuant to the management agreement, we pay annual management fees of the greater of $3.0 million and 1% of Adjusted EBITDA, as defined in our debt agreements. We intend to pay a termination fee of approximately $30.7 million to terminate the agreement in connection with this offering.

 

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Results of Operations

Year Ended December 31, 2014 Compared To Year Ended December 31, 2013

The following tables set forth our operating results and operating results as a percentage of total revenues for the years ended December 31, 2014 and 2013.

 

    Years Ended December 31,  
    2013     2014  
    Successor     Successor  
    (Dollars in thousands)  

Revenues:

        

Net sales

  $ 2,026,272        99.1   $ 2,251,589         99.1

Royalties and franchise fees

    18,841        0.9        19,668         0.9   
 

 

 

   

 

 

   

 

 

    

 

 

 

Total revenues

  2,045,113      100.0      2,271,257      100.0   

Expenses:

Cost of sales

  1,259,188      61.6      1,375,706      60.6   

Wholesale selling expenses

  68,102      3.3      73,910      3.3   

Retail operating expenses

  369,996      18.1      397,110      17.4   

Franchise expenses

  13,320      0.7      14,281      0.6   

General and administrative expenses

  146,094      7.1      147,718      6.5   

Art and development costs

  19,311      1.0      19,390      0.9   

Impairment of trade name

  7,500      0.3      0      0.0   
 

 

 

   

 

 

   

 

 

    

 

 

 

Total expenses

  1,883,511      92.1      2,028,115      89.3   
 

 

 

   

 

 

   

 

 

    

 

 

 

Income from operations

  161,602      7.9      243,142      10.7   

Interest expense, net

  143,406      7.0      155,917      6.9   

Other expense, net

  18,478      0.9      5,891      0.2   
 

 

 

   

 

 

   

 

 

    

 

 

 

(Loss) income before income taxes

  (282   0.0      81,334      3.6   

Income tax (benefit) expense

  (4,525   (0.2   25,211      1.1   
 

 

 

   

 

 

   

 

 

    

 

 

 

Net income

  4,243      0.2      56,123      2.5   

Less: net income attributable to noncontrolling interests

  224      0.0      0      0.0   
 

 

 

   

 

 

   

 

 

    

 

 

 

Net income attributable to Party City Holdco Inc.

 

$

 

4,019

 

  

 

 

 

0.2

 

 

$

 

56,123

 

  

 

 

 

2.5

 

 

 

 

   

 

 

   

 

 

    

 

 

 

Revenues

Total revenues for the year ended December 31, 2014 were $2,271.3 million and were $226.1 million or 11.1% higher than the corresponding period of 2013. The following table sets forth the Company’s total revenues for the years ended December 31, 2014 and 2013.

 

     Years Ended December 31,  
     2013     2014  
     Dollars in
Thousands
    Percentage of
Total Revenues
    Dollars in
Thousands
    Percentage of
Total Revenues
 

Net Sales:

        

Wholesale

   $ 1,080,740        52.9   $ 1,213,024        53.4

Eliminations

     (487,990     (23.9 )%      (566,663     (24.9 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net wholesale

  592,750      29.0   646,361      28.5

Retail

  1,433,522      70.1   1,605,228      70.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

  2,026,272      99.1   2,251,589      99.1

Royalties and franchise fees

  18,841      0.9   19,668      0.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

$ 2,045,113      100.0 $ 2,271,257      100.0
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Retail

Retail net sales during 2014 were $1,605.2 million and increased $171.7 million or 12.0% over 2013. The increase was partially due to the 2014 fiscal year of our retail operations consisting of 53 weeks (fiscal year 2013 had 52 weeks). The 53rd week contributed $34.0 million to Retail net sales. Retail net sales at our Party City stores (including iParty stores acquired during May 2013) totaled $1,386.4 million and were $148.0 million or 12.0% higher than the corresponding period of 2013, including the impact of the 53rd week. The May 2013 acquisition and subsequent rebranding and remerchandising of iParty stores as Party City stores increased sales during the year by $30.6 million over 2013 (including the impact of positive same-store sales from May 2014 to December 2014). The increase in sales at our Party City stores also reflects the operation of 21 additional stores during 2014 as 23 stores were opened, six stores were acquired and eight stores were closed during 2014. Our global retail e-commerce sales totaled $141.4 million during 2014 and were $23.0 million or 19.4% higher than 2013, including the impact of the 53rd week. Retail net sales were negatively impacted by $1.4 million compared to the corresponding period of 2013 due to the closure of our remaining outlet stores. Same-store sales for the Party City brand (including domestic and Canadian retail e-commerce sales and sales at acquired stores, to the extent that the stores were converted to the Party City format and included in our sales for the comparable period of the prior year) increased by 5.8% during 2014 due to a 4.2% increase in average transaction dollar size and a 1.6% increase in transaction count. Excluding the impact of e-commerce, same-store sales increased by 5.4% due to a 3.9% increase in average transaction dollar size and a 1.5% increase in transaction count. Retail e-commerce sales included in our brand comp increased by 11.3% due to a 5.7% increase in transaction count and a 5.6% increase in average transaction dollar size. Net sales at our temporary Halloween City stores were $77.4 million during 2014 and were $2.1 million higher than 2013. The average sales per Halloween City store increased by 14.3% compared to 2013 and by 13.8% when compared to 2013’s five-week Halloween selling season. We operated 315 Halloween City stores during 2014, as compared to 350 stores during 2013.

Wholesale

Wholesale net sales during 2014 totaled $646.4 million and were $53.6 million or 9.0% higher than the corresponding period of 2013. The fiscal year of our Wholesale operations is the calendar year. During the year, net sales to domestic party goods retailers and distributors, including our franchisee network, totaled $306.3 million and were $15.6 million, or 5.4%, higher than 2013. Sales increased versus 2013 due to an approximately $8 million increase in sales of juvenile birthday product, driven principally by new licenses, an approximately $6 million increase in sales of Halloween-related product, including our Christy’s costumes line, and an approximately $5 million increase in contract manufacturing sales of paper tableware. Sales during 2013 benefitted from approximately $4 million of sales to iParty prior to our acquisition of iParty in May 2013. As a result of the acquisition, sales to iParty are now excluded as intercompany sales. Net sales of metallic balloons to domestic distributors and others totaled $88.8 million and were $5.7 million or 6.9% higher than in 2013 principally due to the impact of new licenses and improving helium supplies. Sales from our international operations and U.S. export sales totaled $251.3 million and were $32.3 million, or 14.7%, higher than 2013. The increase was principally due to higher sales of our Christy’s costumes, approximately $18 million, and increased sales of party goods to a large multi-national company located in the U.S. Additionally, foreign currency translation positively impacted 2014 sales by approximately $3 million.

Intercompany sales to our retail affiliates were $566.7 million during 2014 and were $78.7 million or 16.1% higher than the corresponding period of 2013. The increase was primarily due to sales growth at our retail operations and an increase in our wholesale share of shelf at our retail operations (including the impact of synergies associated with acquired iParty stores). Intercompany sales represented 46.7% of total wholesale sales during 2014, compared to 45.2% during the corresponding period of 2013. 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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Royalties and franchise fees

Royalties and franchise fees for 2014 were $19.7 million and were $0.8 million higher than 2013 principally due to increased sales at franchise stores and the impact of the 53rd week in fiscal year 2014.

Gross Profit

Our total gross profit on net sales during 2014 was 38.9%, compared to 37.9% during the corresponding period of 2013. As a result of the Transaction, we applied the acquisition method of accounting and increased the value of our inventory by $89.8 million as of July 28, 2012. Such adjustment increased our cost of sales during 2014 and 2013 by $5.9 million and $25.2 million, respectively, as the related inventory was sold. Further, during the application of the acquisition method of accounting, we increased the values of certain intangible assets and property, plant and equipment. The impact of such adjustments on depreciation and amortization expense increased our cost of sales during the years ended December 31, 2014 and 2013 by $15.2 million and $25.9 million, respectively. The purchase accounting adjustments to cost of sales negatively impacted our gross profit percentages during 2014 and 2013 by 90 basis points and 250 basis points, respectively.

The following table sets forth the Company’s gross profit for the years ended December 31, 2014 and December 31, 2013.

 

     Year Ended December 31,  
     2013     2014  
     Dollars in
Thousands
     Percentage of
Net Sales
    Dollars in
Thousands
     Percentage of
Net Sales
 

Retail

   $ 582,214         40.6   $ 674,453         42.0

Wholesale

     184,870         31.2        201,430         31.2   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

$ 767,084      37.9 $ 875,883      38.9
  

 

 

    

 

 

   

 

 

    

 

 

 

The gross profit on net sales at retail during the years ended December 31, 2014 and 2013 was 42.0% and 40.6%, respectively. The purchase accounting adjustments to cost of sales negatively impacted retail’s gross profit percentage during 2014 and 2013 by 80 basis points and 250 basis points, respectively. Excluding the impact of purchase accounting, the gross profit percentage during 2014 was slightly lower than during 2013 as changes in product mix was mostly offset by further leveraging of fixed occupancy costs and increased sales of product supplied by our wholesale operations. During 2014, our wholesale operations’ share of shelf at our domestic Party City stores (including stores acquired from iParty) and our North American retail e-commerce operations (i.e., product costs supplied by our wholesale operations) was 70.2%.

The gross profit on net sales at wholesale during each of the years ended December 31, 2014 and 2013 was 31.2%. The purchase accounting adjustments to cost of sales negatively impacted wholesale’s gross profit percentage during 2014 and 2013 by 120 basis points and 250 basis points, respectively. Excluding the impact of purchase accounting, the gross profit percentage during 2014 was lower than during 2013 principally due to changes in sales mix, including higher international sales and increased royalties due to higher sales of licensed product, partially offset by the leveraging of fixed distribution and manufacturing costs.

Operating expenses

Wholesale selling expenses were $73.9 million during 2014 and were $5.8 million or 8.5% higher than 2013 principally due to the increase in sales (see above), inflationary cost increases and the impact of foreign currency translation. Wholesale selling expenses were 11.4% and 11.5% of net wholesale sales during 2014 and 2013, respectively. As a result of the application of the acquisition method of accounting, we increased the values of certain intangible assets. The impact of such adjustments on amortization expense increased wholesale selling expenses during 2014 and 2013 by $7.0 million and $8.3 million, respectively.

 

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Retail operating expenses during 2014 and 2013 were $397.1 million and $370.0 million, respectively. Retail operating expenses during 2014 were $27.1 million or 7.3% higher than in 2013. Approximately $9 million of the increase was due to the May 2013 acquisition of iParty and the March 2013 acquisition of Party Delights. The remainder of the increase was primarily due to the operation of approximately 21 additional stores, the impact of fiscal year 2014 for our Retail operations consisting of 53 weeks, and inflationary cost increases. Such increases were partially offset by lower advertising costs. Retail operating expenses were 24.7% and 25.8% of net retail sales during 2014 and 2013, respectively.

Franchise expenses during 2014 and 2013 were $14.3 million and $13.3 million, respectively. The $1.0 million increase was principally due to the 53rd week.

General and administrative expenses during 2014 and 2013 were $147.7 million and $146.1 million, respectively. Inflationary cost increases, the impact of fiscal year 2014 for our Retail operations consisting of 53 weeks, and the impact of general and administrative costs at Party Delights (which was acquired in March 2013) were offset by the elimination, in 2014, of iParty general and administrative costs which were incurred during 2013, as part of the synergies related to the May 2013 acquisition. General and administrative expenses were 6.5% and 7.1% of total revenues during 2014 and 2013, respectively.

Art and development costs totaled $19.4 million and $19.3 million during 2014 and 2013, respectively. The costs were 0.9% and 1.0% of total revenues during 2014 and 2013, respectively.

In conjunction with the Transactions, we applied the acquisition method of accounting and allocated the $2.7 billion acquisition price to various tangible and intangible assets, including our Halloween City trade name. The value that was ascribed to the trade name was based on the number of Halloween City stores that we expected to open during each subsequent Halloween selling season and the expected performance of such stores. The number of stores that the Company opens during a season is driven by many factors, including the availability of suitable locations. During 2013, we made a strategic decision to open fewer temporary Halloween City stores. As a result of that decision and a change in store performance, during 2013 we lowered the value of the Halloween City trade name by recording a $7.5 million impairment charge.

Interest expense, net

Interest expense, net, totaled $155.9 million during 2014, compared to $143.4 million during 2013. The $12.5 million increase was principally due to the August 2013 issuance of the senior PIK toggle notes. Such impact was partially offset by the February 2013 and February 2014 amendments of the Term Loan Facility, which lowered the interest rate by 150 basis points and 25 basis points, respectively.

Other expense, net

Other expense, net, was $5.9 million during 2014, compared to $18.5 million during 2013.

During February 2014, we amended the Term Loan Facility. In conjunction with the refinancing, we wrote-off $1.6 million of costs that had been capitalized during the issuance of the debt. Additionally, we wrote-off $0.6 million of the net original issuance discount that existed as of the time of the amendment and $0.7 million of the unamortized call premium that existed at the time of the amendment. Also in conjunction with the refinancing, we expensed $1.4 million of banker and legal fees.

During 2014, we received $4.5 million of business interruption insurance proceeds related to the impact of Superstorm Sandy in 2012 and recorded the amount in other expense, net.

Additionally, during February 2013, we amended the Term Loan Facility. In conjunction with the refinancing, we wrote-off $5.9 million of costs that had been capitalized during the initial issuance of the debt. Additionally, we wrote-off $2.3 million of the net original issuance discount that existed as of the time of the amendment. Also in conjunction with the refinancing, we expensed $2.5 million of a call premium and $1.6 million of banker and legal fees.

 

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Other expense, net also includes corporate development expenses, foreign currency losses and losses in unconsolidated joint ventures.

Income tax expense

The difference between the consolidated effective income tax rate for the year ending December 31, 2014 and the U.S. federal statutory rate is primarily attributable to the recording of a tax benefit for certain costs incurred in conjunction with the Transaction, a foreign rate differential and available domestic manufacturing deductions, partially offset by unrecognized foreign tax credits and state income taxes. See Note 13 of the consolidated financial statements for further detail.

Year Ended December 31, 2013 Compared To Period From July 28, 2012 to December 31, 2012 and Period From January 1, 2012 to July 27, 2012

The following tables set forth our operating results and operating results as a percentage of total revenues for the year ended December 31, 2013, the period from July 28, 2012 to December 31, 2012 and the period from January 1, 2012 to July 27, 2012.

 

    

Period from January 1

      to July 27, 2012       

   

Period from July 28

  to December 31, 2012  

    Year Ended
December 31, 2013
 
    

         Predecessor         

   

            Successor             

    Successor  
    

(Dollars in thousands)

 

Revenues:

               

Net sales

   $ 930,903         99.0   $ 964,330         99.0   $ 2,026,272         99.1

Royalties and franchise fees

     9,281         1.0        9,312         1.0        18,841         0.9   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total revenues

  940,184      100.0      973,642      100.0      2,045,113      100.0   

Expenses:

Cost of sales

  574,048      61.1      636,410      65.4      1,259,188      61.6   

Wholesale selling expenses

  31,568      3.4      28,096      2.9      68,102      3.3   

Retail operating expenses

  166,047      17.7      172,168      17.7      369,996      18.1   

Franchise expenses

  6,579      0.7      6,128      0.6      13,320      0.7   

General and administrative expenses

  101,502      10.7      65,890      6.8      146,094      7.1   

Art and development costs

  10,824      1.1      8,201      0.8      19,311      1.0   

Impairment of trade name

  0      0.0      0      0.0      7,500      0.3   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total expenses

  890,568      94.7      916,893      94.2      1,883,511      92.1   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Income from operations

  49,616      5.3      56,749      5.8      161,602      7.9   

Interest expense, net

  41,970      4.5      62,062      6.4      143,406      7.0   

Other expense, net

  22,245      2.4      26,157      2.7      18,478      0.9   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Loss before income taxes

  (14,599)      (1.6)      (31,470)      (3.3)      (282)      0.0   

Income tax expense (benefit)

  403      0.0      (1,322)      (0.1)      (4,525)      (0.2)   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Net (loss) income

  (15,002)      (1.6)      (30,148)      (3.1)      4,243      0.2   

Less: net income attributable to noncontrolling interests

  96      0.0      60      0.0      224      0.0   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Net (loss) income attributable to Party City Holdco Inc.

$ (15,098)      (1.6) $ (30,208)      (3.1) $ 4,019      0.2
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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Revenues

The following table sets forth our total revenues for the year ended December 31, 2013, the period from July 28, 2012 to December 31, 2012 and the period from January 1, 2012 to July 27, 2012.

 

     Period from January 1 to
July 27, 2012
    Period from July 28
to December 31, 2012
    Year Ended
December 31, 2013
 
     Predecessor     Successor     Successor  
     Dollars in
Thousands
    Percentage of
Total Revenues
    Dollars in
Thousands
    Percentage of
Total Revenues
    Dollars in
Thousands
    Percentage of
Total Revenues
 

Net Sales:

        

Wholesale

   $ 512,473        54.5   $ 510,277        52.4   $ 1,080,740        52.9

Eliminations

     (194,659     (20.7 )%      (245,219     (25.2 )%      (487,990     (23.9 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net wholesale

  317,814      33.8   265,058      27.2   592,750      29.0

Retail

  613,089      65.2   699,272      71.8   1,433,522      70.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

  930,903      99.0   964,330      99.0   2,026,272      99.1

Royalties and franchise fees

  9,281      1.0   9,312      1.0   18,841      0.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

$ 940,184      100.0 $ 973,642      100.0 $ 2,045,113      100.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Retail

Retail net sales for the year ended December 31, 2013 totaled $1,433.5 million. Net sales during the periods from July 28, 2012 to December 31, 2012 and January 1, 2012 to July 27, 2012 were $699.3 million and $613.1 million, respectively. The changes in basis resulting from the Transactions did not impact our retail net sales. Retail net sales during the year ended December 31, 2013 increased $121.2 million or 9.2% compared to the corresponding period of 2012. Retail net sales at our Party City stores (excluding iParty stores acquired during May 2013) totaled $1,181.3 million and were $60.8 million or 5.4% higher than the corresponding period of 2012. Additionally, our domestic retail e-commerce sales totaled $101.5 million during 2013 and were $5.4 million or 5.6% higher than the corresponding period of 2012. Retail net sales during 2012 were negatively impacted by approximately $8 million as a result of the timing of New Year’s Eve, as the 2012 fiscal year for our retail operations began on January 1, 2012 and ended on December 29, 2012. The 2013 fiscal year for our retail operations began on December 30, 2012 and ended on December 28, 2013. Same-store sales for the Party City brand (including retail e-commerce sales and sales at acquired stores, to the extent that the stores were converted to the Party City format and included in our sales for the comparable period of the prior year) increased by 2.9% during 2013 due to a 2.7% increase in average transaction dollar size and a 0.2% increase in transaction count. Excluding the impact of e-commerce, same-store sales increased by 2.7% due to a 2.6% increase in average transaction dollar size and a 0.1% increase in transaction count. Domestic retail e-commerce sales increased by 5.6% due to a 4.2% increase in transaction count and a 1.4% increase in average transaction dollar size. The timing of New Year’s Eve positively impacted same-store sales for the Party City brand and Party City stores by 0.7% each. The overall increase in Party City store sales also reflects the operation of 20 additional stores during 2013 as 25 stores were opened and five stores were closed during the year. The May 2013 acquisition of iParty contributed $57.1 million to net sales. All 54 iParty stores were re-branded and re-merchandised as Party City stores prior to the end of 2013. Net sales at our temporary Halloween City stores totaled $75.3 million and were $13.7 million lower than 2012 due to a decrease in the number of temporary stores opened in 2013 (approximately 350 stores) compared to 2012 (approximately 420 stores). The average sales per Halloween City store was 3.0% higher during the five-week period ended November 2, 2013 than during the corresponding period of 2012. The March 2013 acquisition of Party Delights Ltd., our international retail e-commerce operations, contributed $16.9 million to net sales. Sales at all other formats totaled $1.4 million in 2013 and were $5.3 million lower than the corresponding period of 2012 due to the closure of our remaining outlet stores.

 

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Wholesale

Wholesale net sales during the year ended December 31, 2013 totaled $592.8 million. Net sales during the periods from July 28, 2012 to December 31, 2012 and January 1, 2012 to July 27, 2012 were $265.1 million and $317.8 million, respectively. The changes in basis resulting from the Transactions did not impact our wholesale net sales. Wholesale net sales during 2013 were $9.9 million, or 1.7%, higher than during 2012. During 2013, net sales to domestic party goods retailers, including our franchisee network, and to domestic party goods distributors totaled $290.7 million and were $1.2 million or 0.4% higher than during 2012. Sales of Halloween-related product increased by approximately $4 million principally due to higher sales of our Christy’s costume line. In addition, contract manufacturing sales of tableware at our manufacturing operations were approximately $3 million higher than 2012. These increases were partially offset by the elimination of an additional $6.0 million of intercompany sales as a result of our May 2013 acquisition of iParty. Net sales of metallic balloons to domestic distributors and others totaled $83.1 million and were $0.5 million, or 0.6% lower than in 2012, as the impact of the temporary helium shortage was substantially offset by a shift of approximately $2 million of Valentine’s Day sales into December 2013 (the corresponding sales shipped in January 2013 during the prior Valentine’s Day selling season). International net sales, including U.S. export sales, totaled $219.0 million and were $9.2 million or 4.4% higher than in the corresponding period of 2012 despite foreign currency negatively impacting 2013 sales by approximately $1.0 million. International sales of Christy’s costumes and Christy’s garments and accessories increased by approximately $8.0 million and $5.0 million, respectively, in 2013. These favorable variances were partially offset by lower sales in the U.K., primarily due to 2012 benefiting from the Queen’s Jubilee and the London Olympics.

Intercompany sales to our retail affiliates were $488.0 million during 2013. Intercompany sales to our retail affiliates during the periods from July 28, 2012 to December 31, 2012 and January 1, 2012 to July 27, 2012 were $245.2 million and $194.7 million, respectively. Intercompany sales during 2013 were $48.1 million or 10.9% higher than the corresponding period of 2012, reflecting an increase in our wholesale share of shelf at our retail operations (principally additional sales of Christy’s costumes), as well as our acquisition of iParty during May 2013 (which resulted in approximately $28.0 million of subsequent sales to iParty being included in intercompany sales). Intercompany sales represented 45.1% of total wholesale sales during 2013, compared to 43.0% during 2012. The intercompany sales of our wholesale segment are eliminated against the intercompany purchases of our retail segment in the consolidated financial statements.

Royalties and franchise fees

Royalties and franchise fees for the year ended December 31, 2013, which were not affected by the basis changes caused by the Transactions, totaled $18.8 million and were principally consistent with the corresponding period of 2012.

Gross Profit

Our total gross profit on net sales during the year ended December 31, 2013 was 37.9%. The total gross profit on net sales during the periods from July 28, 2012 to December 31, 2012 and January 1, 2012 to July 27, 2012 were 34.0% and 38.3%, respectively. As a result of the Transactions, we applied the acquisition method of accounting and increased the value of its inventory by $89.8 million as of July 28, 2012. Such adjustment increased our cost of sales during the year ended December 31, 2013 and the period from July 28, 2012 to December 31, 2012 by $25.2 million and $58.6 million, respectively, as the related inventory was sold. Further, during the application of the acquisition method of accounting, we increased the values of certain intangible assets and its property, plant and equipment. The impact of such adjustments on depreciation and amortization expense increased our cost of sales during the year ended December 31, 2013 and the period from July 28, 2012 to December 31, 2012 by $25.9 million and $15.4 million, respectively. The purchase accounting adjustments to cost of sales negatively impacted our gross profit percentage during 2013 and the period from July 28, 2012 to December 31, 2012 by 250 basis points and 770 basis points, respectively.

 

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The following table sets forth our gross profit for the year ended December 31, 2013, the period from July 28, 2012 to December 31, 2012 and the period from January 1, 2012 to July 27, 2012.

 

     Period from January 1
to July 27, 2012
    Period from July 28
to December 31, 2012
    Year Ended
December 31, 2013
 
     Predecessor     Successor     Successor  
     Dollars in
Thousands
     Percentage
of Net Sales
    Dollars in
Thousands
     Percentage
of Net Sales
    Dollars in
Thousands
     Percentage
of Net Sales
 

Wholesale

   $ 112,205         35.3   $ 72,415         27.3   $ 184,870         31.2

Retail

     244,650         39.9        255,505         36.5        582,214         40.6   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

$ 356,855      38.3 $ 327,920      34.0 $ 767,084      37.9
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The gross profit on net sales at retail during 2013 was 40.6%. The gross profit on net sales at retail during the periods from July 28, 2012 to December 31, 2012 and January 1, 2012 to July 27, 2012 were 36.5% and 39.9%, respectively. The purchase accounting adjustments to cost of sales negatively impacted retail’s gross profit percentage during 2013 and during the period from July 28, 2012 to December 31, 2012 by 250 basis points and 780 basis points, respectively. During 2013, our wholesale operations’ share of shelf at our domestic Party City stores (excluding acquired iParty stores) and our North American retail e-commerce operations (i.e., product costs supplied by our wholesale operations) was 67.5%.

The gross profit on net sales at wholesale during 2013 was 31.2%. The gross profit on net sales at wholesale during the periods from July 28, 2012 to December 31, 2012 and January 1, 2012 to July 27, 2012 were 27.3% and 35.3%, respectively. The purchase accounting adjustments to cost of sales negatively impacted wholesale’s gross profit percentage during 2013 and during the period from July 28, 2012 to December 31, 2012 by 250 basis points and 730 basis points, respectively. The percentage during 2013 was also impacted by changes in product mix, including greater licensed product sales and the introduction of additional value line tableware products.

Operating expenses

Wholesale selling expenses were $68.1 million during 2013, $28.1 million during the period from July 28, 2012 to December 31, 2012 and $31.6 million during the period from January 1, 2012 to July 27, 2012. As a result of the application of the acquisition method of accounting, we increased the values of certain intangible assets and its property, plant and equipment. The impact of such adjustments on depreciation and amortization expense increased wholesale selling expenses during 2013 and the period from July 28, 2012 to December 31, 2012 by $8.9 million and $3.8 million, respectively. Wholesale selling expenses were 11.5% of net wholesale sales during 2013, 10.6% of net wholesale sales during the period from July 28, 2012 to December 31, 2012 and 9.9% of net wholesale sales during the period from January 1, 2012 to July 27, 2012. Excluding the impact of the adjustments on depreciation and amortization expense, the wholesale selling expense percentage during the period from July 28, 2012 to December 31, 2012 was lower than during the period from January 1, 2012 to July 27, 2012 principally due to the impact of higher Halloween-related sales on fixed selling expenses.

Retail operating expenses during 2013 were $370.0 million. Retail operating expenses during the periods from July 28, 2012 to December 31, 2012 and January 1, 2012 to July 27, 2012 were $172.2 million and $166.0 million, respectively. The changes in basis resulting from the Transactions did not impact retail operating expenses. Retail operating expenses during 2013 were $31.8 million or 9.4% higher than in 2012. The increase was principally due to $21.0 million of retail operating costs related to iParty and Party Delights, which were acquired during 2013. Additionally, during 2013, we operated 20 more Party City stores than during 2012. Retail operating expenses were 25.8% of retail net sales during both 2013 and 2012.

 

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Franchise expenses during 2013 were $13.3 million. Franchise expenses during the periods from July 28, 2012 to December 31, 2012 and January 1, 2012 to July 27, 2012 were $6.1 million and $6.6 million, respectively. Franchise expenses increased subsequent to July 27, 2012 principally due to increased amortization expense caused by the application of the acquisition method of accounting.

General and administrative expenses during 2013 were $146.1 million. General and administrative expenses during the periods from July 28, 2012 to December 31, 2012 and January 1, 2012 to July 27, 2012 were $65.9 million and $101.5 million, respectively. In conjunction with the Transactions, we recorded $8.4 million of transaction costs in general and administrative expenses during the period from January 1, 2012 to July 27, 2012. Additionally, the Transactions accelerated the vesting of certain of our stock options and, as a result, we recorded $2.1 million of expense in general and administrative expenses during the period. Further, due to the vesting of such stock options, we made payments in lieu of dividends to the holders of such options and during the period from January 1, 2012 to July 27, 2012 we recorded a $16.1 million charge in general and administrative expenses. General and administrative expenses were 7.1%, 6.8% and 10.7% of total revenues during full-year 2013, the period from July 28, 2012 to December 31, 2012 and the period from January 1, 2012 to July 27, 2012, respectively. Costs related to the Transactions increased the percentage for the period from January 1, 2012 to July 27, 2012 by 280 basis points. Additionally, the percentage for the period from July 28, 2012 to December 31, 2012 was lower than during the period from January 1, 2012 to July 27, 2012 principally due to the impact of higher Halloween-related sales on fixed expenses.

Art and development costs totaled $19.3 million during 2013. Art and development costs totaled $8.2 million and $10.8 million during the periods from July 28, 2012 to December 31, 2012 and January 1, 2012 to July 27, 2012, respectively. Art and development costs as a percentage of total revenues were 1.0%, 0.8% and 1.1% during full-year 2013, the period from July 28, 2012 to December 31, 2012 and the period from January 1, 2012 to July 27, 2012, respectively.

In conjunction with the Transactions, we applied the acquisition method of accounting and allocated the $2.7 billion acquisition price to various tangible and intangible assets, including our Halloween City trade name. The value that was ascribed to the trade name was based on the number of Halloween City stores that we expected to open during each subsequent Halloween selling season and the expected performance of such stores. The number of stores that the Company opens during a season is driven by many factors, including the availability of suitable locations. During 2013, we made a strategic decision to open fewer temporary Halloween City stores. As a result of a change in store performance and the decision to open fewer Halloween City stores than assumed in 2012, during 2013 we lowered the value of the Halloween City trade name by recording a $7.5 million impairment charge.

Interest expense, net

Interest expense, net, totaled $143.4 million during 2013. Interest expense, net, was $62.1 million during the period from July 28, 2012 to December 31, 2012 and $42.0 million during the period from January 1, 2012 to July 27, 2012. Our interest expense subsequent to July 27, 2012 was higher than during the period from January 1, 2012 to July 27, 2012 due to the debt incurred in conjunction with the Transactions. Additionally, during August 2013, in order to pay a dividend, we issued $350.0 million of 8.75% notes which are due in 2019 (see Note 8 to the consolidated financial statements included elsewhere in this prospectus). The impact of the new notes was partially offset by our February 2013 amendment to the Term Loan Credit Agreement, which lowered the interest rate by 150 basis points (see Note 8 to the audited consolidated financial statements included elsewhere in this prospectus).

Other expense, net

Other expense, net, was $18.5 million during full-year 2013, $26.2 million during the period from July 28, 2012 to December 31, 2012 and $22.2 million during the period from January 1, 2012 to July 27, 2012.

 

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During February 2013, we amended the Term Loan Credit Agreement (see Note 8 to the consolidated financial statements included elsewhere in this prospectus). In conjunction with the refinancing, we wrote-off $5.9 million of costs that had been capitalized during the initial issuance of the debt. Additionally, we wrote-off $2.3 million of the net original issuance discount that existed as of the time of the amendment. Also in conjunction with the refinancing, we expensed $2.5 million of a call premium and $1.6 million of banker and legal fees. Full-year 2013 also included corporate development costs related to the acquisitions of iParty and Party Delights.

In conjunction with the Transactions, we recorded $24.6 million of transaction costs in other expense during the period from July 28, 2012 to December 31, 2012 and $19.7 million of transaction costs in other expense during the period from January 1, 2012 to July 27, 2012. Additionally, the period from January 1, 2012 to July 27, 2012 included $2.4 million in costs as a result of the termination of an initial public offering.

Income tax benefit

In addition to recording an income tax benefit at the statutory rate, during 2013 we recorded a $2.2 million state income tax benefit principally due to the impact of apportionment changes on future state income taxes associated with a deferred income tax liability on trade names. Additionally, we recorded a state income tax credit in the amount of $1.4 million due to a write-off of a deferred tax liability related to state bonus depreciation. See Note 13 to the consolidated financial statements included elsewhere in this prospectus for further discussion.

Liquidity and Capital Resources

Capital Structure

In conjunction with the closing of the Transactions, PCHI entered into the $400.0 million ABL Facility and the $1,125.0 million Term Loan Facility and amounts outstanding under PCHI’s previous $350.0 million ABL revolving credit facility and its previous $675.0 million term loan agreement were repaid. Additionally, in conjunction with the Transactions, on July 27, 2012, PCHI issued $700.0 million 8.875% senior notes and completed a cash tender offer for all of its outstanding $175.0 million 8.75% senior subordinated notes. On August 1, 2013, Nextco Holdings and Nextco Finance issued $350.0 million of 8.750%/9.500% senior PIK toggle notes. The net proceeds were distributed to us by Nextco Holdings and we used this cash to pay a one-time cash dividend to holders of our common stock totaling $338.0 million. We expect to redeem all or a portion of the senior PIK toggle notes with the proceeds from this offering. We anticipate redeeming any outstanding PIK toggle notes that are not redeemed with the proceeds from this offering with borrowings under our ABL Facility. See “Use of Proceeds” and “Capitalization.” See “Description of Certain Debt” for further details on the ABL Facility, Term Loan Facility, the senior notes and the senior PIK toggle notes. For additional information, refer to the credit agreements, indentures and related agreements filed as exhibits to this prospectus.

Other Credit Agreements

The Company has entered into several foreign credit facilities which provide it with additional borrowing capacity. At December 31, 2014 and December 31, 2013, borrowings under the foreign facilities totaled $1.4 million and $1.2 million, respectively.

Other Indebtedness

Additionally, we have entered into various capital leases for machinery and equipment. At December 31, 2014 and December 31, 2013 the balances of such leases were $3.3 million and $2.9 million, respectively. We also have 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 generally contain renewal options and require us to pay real estate taxes, utilities and related insurance costs.

 

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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 12 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 ABL Facility and the Term Loan Facility in amounts sufficient to enable us to repay our indebtedness or to fund our other liquidity needs. See “Risk Factors—Risks Related to Our Indebtedness—We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.”

Cash Flow Data—Year Ended December 31, 2014 Compared to Year Ended December 31, 2013

Net cash provided by operating activities totaled $136.4 million and $135.8 million during the years ended December 31, 2014 and 2013, respectively. Net cash flows provided by operating activities before changes in operating assets and liabilities were $163.5 million during 2014, compared to $121.9 million during 2013, with the variance principally attributable to the increased profitability during 2014. Changes in operating assets and liabilities during 2014 resulted in a use of cash of $27.1 million. Changes in operating assets and liabilities during 2013 resulted in a source of cash of $13.9 million. The variance was due to an increase in inventory in order to support the higher sales levels and new merchandising programs.

Net cash used in investing activities totaled $89.6 million during 2014, as compared to $112.5 million during 2013. Investing activities during 2014 included $10.2 million paid in connection with the acquisition of U.S. Balloon. Investing activities during 2013 included $48.6 million paid in connection with the acquisitions of iParty and Party Delights. Capital expenditures during 2014 and 2013 were $78.2 million and $61.2 million, respectively. Retail capital expenditures totaled $50.6 million during 2014 and principally related to store conversions and new stores. Wholesale capital expenditures totaled $27.6 million during 2014 and primarily related to machinery and equipment at manufacturing operations, as well as printing plates and dies.

Net cash used in financing activities was $23.5 million during 2014, as compared to $18.4 million during 2013. During both February 2014 and February 2013, the Company amended the Term Loan Facility. As all term loans outstanding at the time of the amendments were replaced with new term loans for the same principal amount, the Company included the total principal amounts, $1,111.0 million and $1,122.2 million, respectively, in both the repayment of loans, notes payable and long-term obligations and the proceeds from loans, notes payable and long-term obligations. Additionally, during 2013, the Company issued the senior PIK toggle notes and used the proceeds, net of expenses, to pay a dividend to its shareholders. Excluding the impact of the issuance of the senior PIK toggle notes, net repayments during 2014 were $5.9 million greater than during 2013 as the increased profitability and lower cash used in investing activities more than offset the change in operating assets and liabilities and interest payments on the new senior PIK toggle notes.

At December 31, 2014, we had $356.6 million of excess availability under the ABL Facility, after considering borrowing base restrictions. After giving effect to our expected borrowings under our ABL Facility to repay the outstanding balance of the senior PIK toggle notes following the application of the net proceeds from this offering, we would have had approximately $283.6 million of borrowing capacity available under our ABL Facility. See “Use of Proceeds” and “Capitalization.”

Cash Flow Data—Year Ended December 31, 2013 Compared to Periods from January 1, 2012 to July 27, 2012 and July 28, 2012 to December 31, 2012

Net cash provided by operating activities totaled $135.8 million during 2013. Net cash used in operating activities totaled $35.5 million and $18.1 million during the periods from July 28, 2012 to December 31, 2012 and January 1, 2012 to July 27, 2012, respectively. Net cash flows provided by operating activities before changes in operating assets and liabilities were $121.9 million during 2013. Net cash flows provided by operating activities before changes in operating assets and liabilities, which were impacted by the Transactions, were $9.0 million and $32.5 million during the periods from July 28, 2012 to December 31, 2012 and January 1, 2012 to July 27, 2012, respectively. Changes in operating assets and liabilities during 2013 resulted in a source of cash of

 

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$13.9 million. Changes in operating assets and liabilities during the period from July 28, 2012 to December 31, 2012 and the period from January 1, 2012 to July 27, 2012 resulted in uses of cash in the amounts of $44.5 million and $50.6 million, respectively. The change in accounts payable, accrued expenses and income taxes payable during the period from July 28, 2012 to December 31, 2012 principally related to stock option payments, payments in lieu of dividends and other Transaction-related payments (see Note 5 to our consolidated financial statements included elsewhere in this prospectus for further discussion). The $50.6 million use of cash during the period from January 1, 2012 to July 27, 2012 was due to our seasonal working capital build.

Net cash used in investing activities totaled $112.5 million during 2013, as compared to $1,578.6 million during the period from July 28, 2012 to December 31, 2012 and $31.8 million during the period from January 1, 2012 to July 27, 2012. Investing activities during 2013 included $51.5 million paid in connection with certain acquisitions, including the acquisitions of iParty and Party Delights. Investing activities during the period from July 28, 2012 to December 31, 2012 included $1,562.2 million paid to our former owners in conjunction with the Transactions (see Note 5 to our consolidated financial statements included elsewhere in this prospectus for further discussion). Capital expenditures during 2013 were $61.2 million. Retail capital expenditures totaled $45.4 million during 2013 and principally related to store conversions (including the conversion of iParty stores) and new stores. Wholesale capital expenditures totaled $15.8 million and primarily related to printing plates/dies, machinery/equipment for our manufacturing operations and information technology expenditures.

Net cash used in financing activities was $18.4 million during 2013, as compared to $1,629.3 million provided by financing activities during the period from July 28, 2012 to December 31, 2012 and $33.3 million provided by financing activities during the period from January 1, 2012 to July 27, 2012. During 2013, we issued $350.0 million of notes at a 1% discount and used the proceeds, net of expenses, to pay a $338.0 million dividend. The cash inflow during the period from July 28, 2012 to December 31, 2012 related to the Transactions (see Note 5 to our consolidated financial statements included elsewhere in this prospectus for further discussion).

At December 31, 2013, we had $346.7 million of excess availability under the ABL Facility.

Tabular Disclosure of Contractual Obligations

Our contractual obligations at December 31, 2014 are summarized by the year in which the payments are due in the following table (dollars in thousands):

 

    Total     2015     2016     2017     2018     2019     Thereafter  

Long-term debt obligations (a)

  $ 2,136,558      $ 11,250      $ 11,110      $ 11,110      $ 11,110      $ 1,391,978      $ 700,000   

Capital lease obligations (a)

    3,274        999        1,112        800        240        118        5   

Operating lease obligations (b)

    673,441        130,392        117,342        103,262        83,503        63,353        175,589   

Purchase commitments (c)

    14,000        14,000        —          —          —         —         —    

Minimum product royalty obligations (a)

    33,628        20,582        10,929        2,117        —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total contractual obligations

$ 2,860,901    $ 177,223    $ 140,493    $ 117,289    $ 94,853    $ 1,455,449    $ 875,594   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) See our consolidated financial statements which are included elsewhere in this prospectus for further detail.
(b) We are also an assignor with continuing lease liability for four stores sold to franchisees, and other parties, that expire through 2018. 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, 2014, the maximum amount of the assigned lease obligations was approximately $1.1 million and is not included in the table above.
(c) We have certain purchase commitments requiring minimum purchase commitments. See our consolidated financial statements which are included elsewhere in this prospectus for further detail.

 

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Not included in the above table are borrowings under the ABL Facility and our foreign credit facilities.

Not included in the above table are $0.8 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. Refer to the notes to the consolidated financial statements which are included elsewhere in this prospectus for further information related to unrecognized tax benefits.

Additionally, not included in the above table are expected interest payments associated with the Term Loan Facility, the senior notes, the PIK toggle notes and capital lease obligations, of approximately $136.8 million in 2015, $136.3 million in 2016, $135.8 million in 2017, $135.3 million in 2018, $105.4 million in 2019 and $36.2 million thereafter. Interest payments are estimates based on our debt’s scheduled maturities and stated interest rates or, for variable rate debt, interest rates as of December 31, 2014. Additionally, payments for the PIK toggle notes are assumed to be made in cash. Our estimates do not reflect interest payments on the credit facilities or the possibility of additional interest from the refinancing of our debt as such amounts are not determinable.

The above table also does not reflect net proceeds from this offering and the proposed use of a portion of the proceeds to repay all or a portion of the senior PIK toggle notes. See “Use of Proceeds.”

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

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 Procedures

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.

Wholesale sales returns are not significant as, generally, we only accept the return of goods that were shipped to retailers in error.

 

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Revenue from retail operations is recognized at the point of sale. We estimate future retail sales returns and record a provision in the period that the related sales are recorded based on historical information. Retail sales are reported net of taxes collected.

Franchise fee revenue is recognized upon the completion of our performance requirements and the opening of the franchise store. In addition to the initial franchise fee, we also recognize royalty fees generally ranging from 4% to 6% and advertising fund fees ranging from 1% to 2.25% based upon the franchised stores’ reported gross retail sales. The terms of our franchise agreements also provide for payments to franchisees based on domestic retail e-commerce sales originating from specified areas relating to the franchisees’ contractual territory. The amounts paid vary based on several factors, including the profitability of our e-commerce sales, and are expensed at the time of sale.

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.

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 estimate of sales during the contract period. Guaranteed minimum royalties paid in advance are recorded in the consolidated balance sheets in either prepaid expenses and other current assets or other assets, depending on the nature of the royalties.

Allowance for 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 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

Inventories are valued at the lower of cost or market. 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.

We determine the cost of inventory at our retail stores using the weighted average method. All other inventory cost is determined principally using the first-in, first-out method.

We estimate retail inventory shortage for the period between physical inventory dates 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.

 

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Long-Lived and Intangible Assets (including Goodwill)

We review the recoverability of our long-lived assets, including finite-lived intangible assets, 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.

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.

For purposes of testing goodwill for impairment, reporting units are determined by identifying individual components within our organization which constitute a business for which discrete 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.

If necessary, 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 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

 

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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. 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.

We granted 7,232,400 stock options during 2013, 6,627,600 of which were granted on April 1, 2013. With the assistance of an independent third-party valuation firm, we determined the fair value of the common stock underlying such options by using a market approach and an income approach and taking the average of the two approaches. The market approach involved estimating EBITDA multiples and the income approach involved estimating future cash flows and determining the present value of such cash flows based on a discount rate. The estimates are complex and subjective. Once our shares begin trading, estimates will not be necessary for purposes of determining the value of our stock for future stock option grants. See Note 12 of the consolidated financial statements, included elsewhere in this prospectus, for a discussion of additional inputs which were used for purposes of determining the fair value of our stock options.

Recently Issued Accounting Pronouncements

In January 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-01, “Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items”. The pronouncement will be effective for us during the first quarter of 2016. Although we continue to review this pronouncement, we do not believe that it will have a material impact on our consolidated financial statements.

In June 2014, the FASB issued ASU 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period”. The update clarifies that a performance target in a share-based payment that affects vesting and that could be achieved after the requisite service period should be accounted for as a performance condition. The pronouncement will be effective for us during the first quarter of 2016. We do not believe that the pronouncement will have a material impact on our consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”. The pronouncement contains a five-step model which replaces most existing revenue recognition guidance. The

 

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update will be effective for us during the first quarter of 2017 and can be applied retrospectively to prior reporting periods or through a cumulative-effect adjustment as of the date of adoption. We are in the process of evaluating the impact of the pronouncement on our consolidated financial statements.

In April 2014, the FASB issued ASU 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” The update changes the criteria for reporting discontinued operations and enhances disclosures related to disposals of components of an entity. The pronouncement will be effective for us during the first quarter of 2015. Although we continue to review this pronouncement, we do not believe that it will have a material impact on our consolidated financial statements.

In July 2013, the FASB issued ASU 2013-11, “Income Taxes: Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists”. The update provides guidance on the financial statement presentation of an unrecognized tax benefit, as either a reduction of a deferred tax asset or as a liability, when a net operating loss carryforward, similar tax loss, or a tax credit carryforward exists. We adopted the update during the first quarter of 2014 and such adoption did not have a material impact on our consolidated financial statements.

In March 2013, the FASB issued ASU 2013-05, “Foreign Currency Matters (Topic 830), Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity”. The pronouncement states that a cumulative translation adjustment is attached to the parent’s investment in a foreign entity and should be released in a manner consistent with the derecognition guidance on investments in entities. We adopted the update during the first quarter of 2014 and such adoption did not have a material impact on our consolidated financial statements.

Quarterly Results

Despite a concentration of holidays in the fourth quarter of the year, as a result of our expansive product lines and customer base and increased promotional activities, the impact of seasonality on the quarterly results of our wholesale operations has been limited. However, due to Halloween and Christmas, the inventory balances of our wholesale operations are slightly higher during the third quarter than during the remainder of the year. Additionally, the promotional activities of our wholesale business, including special dating terms, particularly with respect to Halloween products sold to retailers and other distributors, result in slightly higher accounts receivable balances during the third quarter. Our retail operations are subject to significant seasonal variations. Historically, our retail segment has realized a significant portion of its revenues, cash flow and net income in the fourth quarter of the year, principally due to our Halloween sales in October and, to a lesser extent, year-end holiday sales.

As a result of the Transactions, the financial information for the period after July 27, 2012 represents the financial information of the “Successor” company. Prior to, and including, July 27, 2012, the consolidated financial statements include the accounts of the “Predecessor” company. Due to the change in the basis of accounting resulting from the application of the acquisition method of accounting, the Predecessor’s consolidated financial statements and the Successor’s consolidated financial statements are not necessarily comparable. The following table sets forth our historical revenues, gross profit, income (loss) from operations, net income (loss) and net income (loss) attributable to Party City Holdco Inc. for the quarters ended March 31, 2012 (Predecessor), June 30, 2012 (Predecessor), for the periods from July 1, 2012 to July 27, 2012 (Predecessor) and July 28, 2012 to September 30, 2012 (Successor), December 31, 2012 (Successor), March 31, 2013 (Successor), June 30, 2013 (Successor),

 

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September 30, 2013 (Successor), December 31, 2013 (Successor), March 31, 2014 (Successor), June 30, 2014 (Successor), September 30, 2014 (Successor) and December 31, 2014 (Successor) (dollars in thousands):

 

     For the Three Months Ended, (Successor)        
     March 31,     June 30,     September 30,     December 31,  

2014:

        

Revenues:

        

Net sales

   $
429,220
  
  $ 487,182      $ 538,671      $ 796,516   

Royalties and franchise fees

    
3,767
  
    4,392        3,990        7,519   

Gross profit

    
154,839
(a) 
    182,664 (a)      184,146 (a)      354,234 (a) 

Income from operations

     15,906 (a)      40,305 (a)      28,778 (a)      158,153 (a) 

Net (loss) income

     (19,912 )(a)(b)      2,456 (a)      (5,410 )(a)      78,989 (a) 

 

     For the Three Months Ended, (Successor)  
     March 31,     June 30,     September 30,     December 31,  

2013:

        

Revenues:

        

Net sales

   $ 397,655      $ 441,976      $ 483,585      $ 703,056   

Royalties and franchise fees

     3,893        4,253        3,815        6,880   

Gross profit

     130,457 (a)      154,599 (a)      160,902 (a)      321,126 (a) 

Income from operations

     4,171 (a)      14,598 (a)      10,737 (a)      132,096 (a)(c) 

Net (loss) income

     (27,100 )(a)(b)      (12,525 )(a)      (11,875 )(a)      55,743 (a)(c) 

Net (loss) income attributable to Party City Holdco Inc.

     (27,213 )(a)(b)      (12,591 )(a)      (11,920 )(a)      55,743 (a)(c) 

 

    For the Three
Months Ended
March 31,
(Predecessor)
    For the Three
Months Ended
June 30,
(Predecessor)
    For the period
from July 1,
to July 27,
(Predecessor)
         For the period
from July 28,
to
September 30,
(Successor)
    For the Three
Months
Ended
December 31,
(Successor)
 

2012:

             

Revenues:

             

Net sales

  $ 379,281      $ 429,440      $ 122,182          $ 324,525      $ 639,805   

Royalties and franchise fees

    3,796        4,440        1,045            2,797        6,515   

Gross profit

    142,657        169,592        44,606            77,017 (a)      250,903 (a) 

Income (loss) from operations

    21,157        44,729        (16,270 )(d)          (28,676 )(a)      85,425 (a) 

Net income (loss)

    2,084        16,042        (33,128 )(e)          (55,114 )(a)(f)      24,966 (a) 

Net income (loss) attributable to Party City Holdco Inc.

    2,044        15,991        (33,133 )(e)          (55,175 )(a)(f)      24,967 (a) 

 

(a) As a result of the Acquisition, we applied the acquisition method of accounting and increased the value of our inventory by $89.8 million as of July 28, 2012. Such adjustment increased our cost of sales during the periods from July 28, 2012 to September 30, 2012, October 1, 2012 to December 31, 2012, January 1, 2013 to March 31, 2013, April 1, 2013 to June 30, 2013, July 1, 2013 to September 30, 2013, October 1, 2013 to December 31, 2013, January 1, 2014 to March 31, 2014, April 1, 2014 to June 30, 2014, July 1, 2014 to September 30, 2014 and October 1, 2014 to December 31, 2014 by $27.8 million, $30.8 million, $10.8 million, $8.5 million, $2.6 million, $3.3 million, $1.4 million, $1.4 million, $0.6 million and $2.5 million, respectively, as the related inventory was sold. See the notes to the consolidated financial statements for further detail.
(b)

During February 2013, the Term Loan Facility was amended. In conjunction with that amendment, we wrote-off $5.9 million of costs that had been capitalized during the initial issuance of the debt. Additionally, we wrote-off $2.3 million of the net original issuance discount that existed as of the time of that amendment. Also in conjunction with that amendment, we expensed $2.5 million of a call premium and $1.6 million of investment banking and legal fees. All of the charges were recorded in other expense in our consolidated statement of operations and comprehensive loss. During February 2014, we amended the Term Loan

 

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  Facility again. In conjunction with the refinancing, we wrote-off $1.6 million of costs that had been capitalized during the issuance of the debt. Additionally, we wrote-off $0.6 million of the net original issuance discount and $0.7 million of the unamortized call premium that existed at the time of the amendment. Also, in conjunction with the refinancing, we expensed $1.4 million of banker and legal fees. All of these charges were recorded in other expense in our consolidated statement of operations and comprehensive loss. For further discussion, see the notes to the consolidated financial statements which are included elsewhere in this prospectus.
(c) In conjunction with the Transactions, we applied the acquisition method of accounting and allocated the $2.7 billion acquisition price to various tangible and intangible assets, including our Halloween City trade name. The value that was ascribed to the trade name was based on the number of Halloween City stores that we expected to open during each subsequent Halloween selling season and the expected performance of such stores. The number of stores that we open during a season is driven by many factors, including the availability of suitable locations. During 2013, we made a strategic decision to open fewer temporary Halloween City stores. As a result of a change in store performance and our decision to open fewer Halloween City stores than assumed in 2012, during 2013 we lowered the value of our Halloween City trade name by recording a $7.5 million impairment charge.
(d) Includes: $8.4 million of compensation expense related to the Acquisition, $2.1 million of stock-based compensation expense related to the Acquisition and $16.1 million of expense for payments in lieu of dividends. See the notes to the consolidated financial statements for further detail, including a discussion of the income tax impact.
(e) Includes: $28.1 million of costs related to the Acquisition, $2.1 million of stock-based compensation expense related to the Acquisition and $16.1 million of expense for payments in lieu of dividends. See the notes to the consolidated financial statements for further detail, including a discussion of the income tax impact.
(f) Includes: $24.6 million of costs related to the Acquisition.

Quantitative and Qualitative Disclosures about Market Risk

As a result of our variable rate indebtedness, our earnings are affected by changes in interest rates. From time to time we have utilized interest rate swap agreements to manage the risk associated with such changes. As discussed in the notes to the consolidated financial statements included elsewhere in this prospectus, on July 27, 2012 all amounts outstanding under the $675.0 million term loan agreement were repaid and our subsidiary, PCHI, entered into the Term Loan Facility. Assuming that the refinancing had occurred on January 1, 2012, if market interest rates for our variable rate indebtedness averaged 2% more than the actual rates, during 2014, 2013 and 2012 the interest expense amounts in our consolidated financial statements included elsewhere in this prospectus would have increased by $24.4 million, $25.0 million, and $25.3 million during 2014, 2013 and 2012, respectively. The income (loss) before income taxes for the three years would have also been impacted by the same amounts. These amounts are determined by considering the impact of the hypothetical interest rates on our borrowings and considering any 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 could potentially take action to 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.

As a result of the sale of our products in foreign markets, our earnings are affected by fluctuations in the value of the U.S. dollar when compared to the values of foreign currencies. Although we periodically enter into foreign currency forward contracts to hedge against the earnings impact of such fluctuations, we (1) may not be able to achieve hedge effectiveness in order to qualify for hedge-accounting treatment and, therefore, would record any gain or loss on the mark-to-market of the contracts in other expense (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 decreased income from operations, as stated in the consolidated financial statements included elsewhere in this prospectus, by $11.0 million, $9.1 million, $3.9 million and $4.8 million during full-year 2014, full-year 2013, the period from July 28, 2012 to December 31, 2012 and the period from January 1,

 

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2012 to July 27, 2012, respectively. The income (loss) before income taxes for the three years would have also been impacted by the same amounts. In addition to the direct effects of changes in exchange rates, 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 consider a potential change in sales levels or local currency prices.

 

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BUSINESS

Our Company

We are the leading party goods retailer by revenue in North America and, we believe, the largest vertically integrated supplier of decorated party goods globally by revenue with multiple levers to drive future growth across channels, products and geographies. With approximately 900 locations, we have the only coast-to-coast network of party superstores in the U.S. and Canada that make it easy and fun to enhance special occasions with a differentiated shopping experience and an unrivaled assortment of innovative and exciting merchandise offered at a compelling value. Through a series of acquisitions between 2005 and 2010, we built a powerful retail operation that captures the full manufacturing-to-retail margin on a significant portion of the products sold in our stores. Based on our revenues, we believe we are the largest global designer, manufacturer and distributor of decorated party supplies with products found in over 40,000 retail outlets worldwide, including our own stores as well as independent party supply stores, mass merchants, grocery retailers, dollar stores and others. Our category-defining retail concept, multi-channel reach, widely recognized brands, broad and deep product offering and low-cost global sourcing model are, we believe, significant competitive advantages. We believe these characteristics position us for continued organic and acquisition-led growth and margin expansion.

Founded in 1947, we started as an importer and wholesaler and grew to become one of the largest global designers, manufacturers, distributors and retailers of decorated party supplies by revenue. Our broad selection of decorated party supplies includes paper and plastic tableware, metallic and latex balloons, novelties, costumes and other garments, stationery and gifts for everyday, themed and seasonal events. We have a history of driving innovation in the category with an in-house product development team that introduces approximately 7,000 new products annually. Our global network of owned and third-party manufacturers, combined with our state-of-the-art distribution systems, position us to deliver high-quality, cost-competitive products with turnaround times and fill rates that we believe are among the best in the industry. We have long-term relationships with many of our wholesale customers, for whom we provide sales support through in-store signage and planogram support. Our products are available in over 100 countries with the U.K., France, Germany and Australia among the largest end markets for us outside North America. We believe that through our extensive offerings, as well as our industry-leading innovation, customer service levels and compelling value proposition, we will continue to win with our customers.

The 2005 combination of Amscan, which focused on the wholesale market, and Party City, which focused on the retail market, represented an important step in our evolution. Since then, we have established the largest multi-channel party supply business in North America, based on revenues, with approximately 900 party superstores (inclusive of approximately 210 franchised stores) in the United States and Canada, principally under the Party City banner. We believe we are the only party supply retailer with a national footprint. We also operate PartyCity.com, our primary domestic retail 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 proposition, making us the favored destination for all of our customers’ party supply needs. Since the acquisition of Party City in 2005, we have steadily increased the selection of Amscan merchandise offered in Party City stores from approximately 25% to approximately 70% in 2014, allowing us to capture the full manufacturing-to-retail margin on a significant portion of our retail sales. We also operate a network of over 300 temporary Halloween locations under the Halloween City banner.

We believe our scale and scope, extending from our leading retail footprint and e-commerce presence to our design and manufacturing expertise, provide numerous competitive advantages and opportunities for growth. Through a combination of organic growth and strategic acquisitions, we have been able to generate strong topline performance and margin expansion, including:

 

    Growing revenue from $1,599.1 million in 2010 to $2,271.3 million for the year ended December 31, 2014, representing a compounded annual growth rate of 9.2%.

 

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    Increasing adjusted EBITDA from $230.6 million, implying an adjusted EBITDA margin of 14.4%, in 2010 to $362.1 million for the year ended December 31, 2014, for an implied adjusted EBITDA margin of 15.9%. Net income increased from $49 million in 2010 to $56 million for the year ended December 31, 2014. Net income during 2014 was impacted by higher interest expense, resulting from debt incurred in conjunction with the Transactions and the issuance of the $350 million senior PIK toggle notes, as well as the impact of non-cash purchase accounting adjustments resulting from the Transactions and the impact of non-recurring charges related to refinancings.

For a discussion of our use of adjusted EBITDA and a reconciliation to net income (loss), please refer to “Prospectus Summary—Summary Financial Data” and “Selected Consolidated Financial Data.”

Evolution of Our Business

Over the past 60 years, we have grown from a manufacturer and distributor of selected paper goods to a leading vertically integrated retailer of decorated party supplies by revenue with a global wholesale platform. This evolution was accomplished organically and through strategic acquisitions that were successfully integrated over the years. More recently, we completed several strategic initiatives to further strengthen our business and position us for continued growth. Below we summarize some of our key acquisitions and strategic initiatives:

Creating Our Retail Leadership Platform to Leverage Our Vertically Integrated Model

 

    Through the acquisitions of Party City in 2005, Party America in 2006, FCPO in 2007 and Party Packagers in 2011, we have become the largest party goods specialty retailer by revenue in North America. We have since converted all Party America, FCPO and Party Packagers banners to the Party City banner and format.

 

    Subsequent to the acquisition of each party store retailer, we focused on rebranding non-Party City store banners and remerchandising the stores. Following each acquisition, we capitalized on our vertically integrated model by increasing the percentage of products sold by the acquired retail stores that are manufactured and/or distributed by us, allowing us to capture the full manufacturing-to-retail margin on a significant portion of our retail sales.

 

    Our May 2013 acquisition of iParty, a party goods retailer with approximately 50 stores principally located in the New England region, accelerated our growth throughout New England, a region where we previously did not have a large market presence.

 

    In 2007, we acquired Gags & Games Inc., the parent company of Halloween USA, which operated 84 locations, enabling us to enter the growing temporary Halloween business. Since that acquisition, we have grown to over 300 locations and changed the banner to Halloween City.

Enhancing Our Wholesale Platform

 

    We believe that the acquisition of Anagram International in 1998 and the subsequent acquisition of M&D Balloons in 2002 positioned us as the largest manufacturer of metallic balloons by revenue in the world.

 

    In 2001, we opened a new distribution center in Chester, New York, which was significantly expanded in 2005, for an aggregate investment of approximately $60 million. This approximately 900,000 square foot state-of-the-art facility enables us to deliver industry-leading service levels to our third-party customers and network of company-owned stores.

 

    In 2003, we opened a Hong Kong office to support our Asian-based sourcing and sales organization. We have since expanded our operations to include sourcing offices in Hong Kong, China, and Vietnam with over 300 employees. In addition we currently operate seven distribution centers located outside the United States (as well as four located within the United States, including Chester, NY).

 

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    Our September 2010 acquisition of the Christy’s Group, a U.K.-based costume company, provided costume design and sourcing capabilities as well as additional resources in the U.K. and European markets. The Christy’s Group accelerates our entry into the costume wholesale business and enables us to further increase the percentage of our own products sold at Party City, Halloween City and PartyCity.com. Prior to our acquisition, Christy’s Group generated approximately $49 million in sales during 2009. Capitalizing on our vertical model and approach, we have grown Christy’s Group since the acquisition to sales of approximately $209 million for the year ended December 31, 2014 (including sales to our retail affiliates), an example of an accretive acquisition opportunity made possible through our unique vertically integrated platform.

 

    In October 2014, we acquired U.S. Balloon, a distributor of metallic balloons. We expect that the acquisition will allow us to capture the full manufacturing-to-retail margin on balloons that we manufacture and sell at company-owned Party City stores.

Building Upon Our Global E-commerce Platform

 

    In August 2009, we re-launched PartyCity.com with e-commerce capabilities, providing us with an additional direct-to-consumer sales channel and as the first step in the development of a global retail and wholesale e-commerce platform. Since the re-launch, we have grown our global e-commerce revenues, including wholesale revenues, to approximately $160 million for the year ended December 31, 2014 as we continue to capitalize on our competitive advantages, which include a nationwide store base, strong brand recognition driven by a national broadcasting campaign and vertical business model. We have expanded our retail platform, using the PartyCity.com website, to include a platform for business to business opportunities. Business consumers such as hotel and restaurant chains are capable of purchasing decorations and other party goods directly from us as wholesale customers.

 

    Our March 2013 acquisition of Party Delights, an online retailer of party goods, fancy dress, costumes and similar items for birthdays, weddings, christenings and other celebrations, broadened our product offering, provided access to the European retail markets through e-commerce and serves as a platform for expansion.

 

    In addition to our retail e-commerce platform, we have developed a wholesale e-commerce platform that provides our party goods and other wholesale customers the opportunity to order our products through our amscan.com website, as well as our other international sites. Wholesale e-commerce orders, which are included in our 2014 wholesale sales, totaled approximately $19 million during 2014 or approximately 35% higher than 2013.

Broadening Products and Channel Reach

 

    Our March 2010 acquisition of the Designware party goods division from American Greetings strengthened our juvenile licensed character portfolio and enhanced our reach into the grocery retailers and mass merchant channels. In connection with this acquisition, American Greetings granted us rights to manufacture and distribute Designware-branded and licensed character-based products into select retail venues, including the party supply store channel. We also agreed to supply substantially all of American Greetings’ party supply requirements, allowing us to grow our distribution with American Greetings, specifically in the mass market, drug and grocery retail channels.

 

    In 2011 and 2012 we obtained and began manufacturing NFL, MLB, NBA and NHL licensed themed party products.

Growing International Presence

 

    In the past five years, we have grown our international operations, as sales to international customers represented 15.4% of total revenues in 2014.

 

    Our January 2011 acquisition of Riethmüller, which included the Malaysian operations of latex balloon manufacturer Everts Balloon, 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.

 

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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 positions 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:

Category Defining Multi-Channel Retailer. We believe we are the premier party supplies retailer, providing a one-stop shopping experience with a broad and deep selection of products offered at a compelling value seamlessly through our retail stores and our e-commerce platform. We keep our assortment current by frequently introducing new products, and we organize our stores by events and themes to make it easy to shop while consistently presenting customers with additional product ideas that will enhance their events and our sales. Our stores also maintain high in-stock positions of core products and related items, so we are able to address party needs of any size. With our extensive selection, convenient locations, consistently high in-stock positions and compelling value proposition, we believe customers associate Party City with successful celebrations, and, as a result, our physical and online stores will continue to be seen as the favored destination for party supplies and innovative ideas.

Leading Market Position. Based on our revenues, we are the largest retailer of decorated party supplies in the U.S. and Canada. With our network of approximately 860 U.S. party superstores, we are the only party supply retailer with a national store footprint. In addition to our leading retail presence, we believe that our integrated wholesale business is the largest global designer, manufacturer and distributor of decorated party goods by revenue with products found in over 40,000 retail outlets worldwide. Through our category-leading brands, Party City and Amscan, we offer what we believe is the broadest selection of continuously updated and innovative merchandise at a compelling value. Our history of growth and established global relationships have been driven by our broad selection of continuously updated and innovative merchandise at a compelling value which, in turn, we believe underscores our credibility as the destination of choice for party supplies in any channel.

Unique Vertically Integrated Operating Model. We manufacture, source and distribute party supplies, acting as a one-stop shop for party goods to both retail and wholesale customers. Our vertically integrated model provides us with a number of advantages by allowing us to:

 

    enhance our profitability as we realize the full manufacturing-to-retail margin on a significant portion of our retail sales;

 

    leverage our global sourcing network and scale to reinforce our position as the low-cost provider of quality party supplies;

 

    effectively respond to changes in consumer trends through our in-house design and innovation team;

 

    sustain high standards of product quality and safety;

 

    maintain greater control of the design, production, cost and introduction of new products across our multiple channels; and

 

    monitor sell-through at retail in real-time to limit markdowns and excessive promotions.

Broad and Innovative Product Offering. We offer a broad and deep product assortment with an average of 25,000 SKUs offered at any one time in our Party City superstores supported by the approximately 35,000 SKUs offered online which can be accessed via our “endless aisle” in-store kiosk system as well as through PartyCity.com. Our extensive selection offers customers a single source for all of their party needs. The majority of our products are designed and developed by a staff of approximately 110 artists and product developers who keep the product portfolio fresh and exciting. Our vertically integrated model allows our product development

 

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team to test new products and effectively respond to changes in consumer preferences. We introduce approximately 7,000 new products and 50 new party goods ensembles annually, and we believe that this ability to consistently introduce innovative items drives newness in our licensed and non-licensed product offering and supports increased sales across our channels.

Highly Efficient Global Sourcing and Distribution Capabilities. Over the past 60 years, we have developed a global network of owned and third-party manufacturers that we believe optimizes speed to market, quality and cost. In 2014, we manufactured approximately 31% of our wholesale product sales, principally in the United States, with the balance sourced from low-cost, third-party manufacturers primarily in Asia. Our in-house manufacturing is focused on high-volume party essentials that can be manufactured through highly automated processes, such as paper and plastic tableware products and metallic balloons. We believe our manufacturing capabilities are cost-competitive and allow us to offer rapid turnaround times on key product categories. With respect to our third-party supply network, we have over 20-year relationships with many of our vendors and often represent a significant portion of their overall business. We also have warehousing and distribution facilities around the world, including four in the U.S. (including our state-of-the-art distribution center in Chester, New York, which has nearly 900,000 square feet under one roof) and seven centers located outside the United States. We have also opened sourcing, quality control and testing offices throughout Asia with over 300 people in our offices located in China, Vietnam and Hong Kong. Our manufacturing, sourcing and distribution capabilities offer our company-owned stores, third-party retailers, distributors and our retail consumers best-in-class levels of service, 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 over 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. Mr. Rittenberg, our Executive Chairman, and Mr. Harrison, our Chief Executive Officer, have worked together at the Company for approximately 18 years and have grown our business with an almost tenfold increase in revenues during that period. Additionally, our team has a strong track record of successful acquisitions and integrations, which continue to be an important part of our overall strategy.

Growth Strategy

We believe we have significant opportunities to enhance our leadership position in the party goods industry and improve profitability through the further implementation of our operating strategy both organically and through strategic acquisitions. Key elements of our growth strategy include:

Expand Our Retail Store Base. Our retail network includes approximately 860 party superstores (inclusive of approximately 210 franchised stores) in the United States and approximately 40 locations in Canada. We believe based on our own internal research that there is an opportunity to open more than 350 additional Party City stores in North America, which is consistent with an independent analysis conducted by a leading, global consulting firm in 2012. During 2014, we opened 23 Party City stores acquired 6 stores and closed 10 locations. Starting in 2015, we anticipate opening 30 Party City stores per year in the U.S. and Canada, representing annual company-owned party superstore growth of approximately 4%. 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 on invested capital of approximately 50% in year three.

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, executing our merchandising initiatives and converting existing stores to our new format. We are pursuing various merchandising initiatives to drive increased units per transaction including broadening the product formats available within existing license arrangements and adding color coordinated dress-up and candy products to merchandise offerings. We have also implemented a new store management model that increases employee engagement and improves customer

 

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service. In 2006 we began converting our existing superstores into a new, more customer interactive format and expect to have the approximately 200 remaining stores converted by 2018. Based on our historical experience, we expect remodeled or relocated stores to generate sales growth of five to six percentage points higher than non-remodeled or non-relocated stores in the first year following conversion with longer-term sales growth of one to two percentage points higher than non-remodeled or non-relocated stores. We believe the full year impact of integrated operations with a higher share of vertical product will be a meaningful sales and earnings opportunity in 2015.

Growing Market Share and Earnings. We believe we have significant opportunities to continue to grow our wholesale business by capitalizing on our leading scale, vertical operating model and strong innovation capabilities as well as through strategic acquisitions. As we continue to grow, our increased scale will allow us to leverage our costs and drive margin expansion. Over the past five years, we have successfully grown our wholesale revenues at a 12.1% compound annual growth rate to $1,213 million in 2014 (including sales to company-owned superstores). We will continue to broaden our product assortment by adding new party themed events and licenses. In 2012, we began manufacturing and selling NFL licensed themed party products. Additionally, we obtained new juvenile birthday licenses and developed new products for existing juvenile birthday licenses. In 2011, we began manufacturing and selling MLB, NBA and NHL licensed themed party products and, during 2010, we acquired Christy’s Group, which significantly enhanced our in-house costume capabilities. We will also continue to broaden our product assortment by adding new items that coordinate with our party themed events and licenses and broaden our reach by expanding into adjacent business-to-business and alternate consumer channels where we see a compelling opportunity for our products. These and other opportunities will position us to continue to increase our market share and grow the percentage of our own products sold at retail, including our company-owned and franchised stores. Since 2005, we have increased the selection of our own merchandise offered in Party City stores (also known as “share of shelf”) from approximately 25% in 2005 to approximately 70% for the year ended December 31, 2014 which allowed us to increase our margins. Our ultimate long-term share of shelf target is 75% to 80%. Our ability to create new and enhance existing celebration opportunities will continue to be a consistent driver of our growth.

Grow Our Global Retail and Wholesale E-commerce Platforms. During 2014, total global e-commerce revenues were approximately $160 million. Our global retail e-commerce business was relaunched in 2009 under the PartyCity.com banner. Global retail e-commerce revenues have grown to approximately $141 million during 2014 and we believe that we have become one of the largest e-commerce retailers of decorated party goods and costumes. In 2013, we expanded our retail platform, using the PartyCity.com website, to include a platform for business to business opportunities. Business consumers such as hotel and restaurant chains are capable of purchasing decorations and other party goods directly from us as wholesale customers. We are focused on enhancing our customer experience online by creating a seamless interaction across channels through various merchandising and marketing initiatives. We expect e-commerce will continue to experience significant growth as we increase online content for products, party ideas and promotional offerings, invest in additional online advertising to drive traffic, increase customer interactions through social networking interfaces and target customers through the 14 million email addresses that we have captured, as of December 2014, through our stores and website. Our 2013 acquisition of Party Delights, a U.K. retail e-commerce business, provided additional international capabilities that expanded our online platform into continental Europe. Through this platform, we anticipate launching additional country specific e-commerce sites, building off the acquisition of Party Delights. We recently hired a Chief Digital Officer to focus on expanding our mobile and tablet capabilities and optimizing our online merchandising strategy. By working with our existing vendor base, we plan to increase the online only offering of products and services to continue to broaden our product assortment while managing inventory effectively. Although consumers can currently access PartyCity.com through their mobile devices, we have launched a mobile application that ensures a seamless experience between online, mobile and physical interactions and includes functionality to assist customers in coordinating their shopping experience as they plan theme parties. In addition to our retail e-commerce platform, we have developed a wholesale e-commerce platform that provides our party goods and other wholesale customers the opportunity to order our products through our amscan.com website, as well as our other international sites. Wholesale e-commerce orders, which are included in our 2014 wholesale sales, totaled approximately $19 million during 2014 or approximately 35% higher than 2013.

 

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Increase International Presence. Through acquisitions and organic growth, we have increased sales to international customers to represent approximately 15.4% of our total revenues in 2014. The market for party goods outside the United States is less mature due to lower consumer awareness of party products and less developed retail distribution channels. We believe international growth will be driven, in part, through increasing customization of our products to local tastes and holidays and the expansion of our retail concept globally through future franchise and joint venture agreements. Our near-term growth priorities are in Mexico, France, the Netherlands and Brazil. Our acquisitions of Christy’s Group, Riethmüller and Party Packagers also expanded our presence in select markets, including the U.K., Germany, Poland and Canada.

Pursue Accretive Acquisitions. Over the past 16 years, we have successfully integrated numerous acquisitions such as Christy’s and Party Delights, strengthening our manufacturing, distribution and retail platforms. We have also acquired, and will continue to acquire, our 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. Through future acquisitions we can leverage our existing marketing, distribution and production capabilities, expand our presence in various retail distribution channels, further broaden and deepen our product lines and increase penetration in both domestic and international markets.

During October 2014, we acquired U.S. Balloon, a distributor of metallic balloons. We expect that the acquisition will allow us to capture the full manufacturing-to-retail margin on balloons that we manufacture and sell at company-owned Party City stores.

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. 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 (Halloween, Christmas, New Year’s Eve, graduations, Easter, Super Bowl, Fourth of July). As a result of numerous and diverse occasions, the U.S. party goods market enjoys broad demographic appeal. Additionally, we operate in the $7 billion Halloween market, a portion of which overlaps with the $10 billion retail party goods industry. The Halloween market includes costumes, candy and makeup.

The retail landscape is comprised primarily of party superstores, mass merchants, craft stores, grocery retailers and dollar stores. The party superstore has emerged as a preferred destination for party goods shoppers, similar to the dominance of specialty retailers in other categories such as home improvement, pet products and sporting goods. This is typically due to the superstore chain’s ability to offer a wider variety of merchandise at more compelling prices in a convenient setting as well as the knowledgeable staff often found at superstores. Other retailers that cater to the party goods market typically offer a limited assortment of party supplies and seasonal items. Mass merchants tend to focus primarily on juvenile and seasonal goods, greeting cards and gift wrap; craft stores on decorations and seasonal merchandise; and dollar stores on general and seasonal party goods items.

The consumable nature and low per-item prices in the party goods market have historically driven demand among consumers seeking to enhance the quality of their gatherings and celebrations. Party goods are an economical means by which to make events and occasions more festive and, as a result, have continued to sell well during economic downturns. Manufacturers and retailers continue to create and market party goods and gifts that celebrate a greater number of holidays and occasions. Additionally, the number and types of products offered for each occasion continues to expand, encouraging add-on and impulse purchases by consumers.

Business Overview

We believe that we are the leading retailer and largest vertically integrated supplier of decorated party goods by revenue in North America. We have the only national network of party superstores which make it easy and

 

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fun to enhance special occasions with an unrivaled assortment of party supplies offered at a compelling value. We have two primary reporting segments: Retail and Wholesale. In 2014, we generated 71.5% of our total revenues from our retail segment (which includes 0.9% of total revenues from franchising activities) and 28.5% of our total revenues from our wholesale segment. Our retail operations generate revenue primarily through the sale of Amscan, Designware, Anagram, Costumes USA and other party supplies through Party City, Halloween City and PartyCity.com. Our franchising revenues are generated from an initial one-time franchise fee, renewal fees and ongoing franchise royalty payments based on retail sales from the franchised stores. Our wholesale revenues are generated from the sales of party goods for all occasions, including paper and plastic tableware, accessories and novelties, metallic and latex balloons, stationery and gift items. Our products are sold at wholesale to party goods superstores, including our company-owned and franchised retail stores, other party goods retailers, mass merchants, independent card and gift stores, dollar stores and other retailers and distributors throughout the world.

Segments

For segment information please see Note 15 to the audited consolidated financial statements included elsewhere in this prospectus.

Financial Information by Geographic Area

For financial information by geographic area, please see Note 15 to the audited consolidated financial statements included elsewhere in this prospectus.

Retail Operations

Overview

Opening its first company-owned store in 1986, Party City has grown to become what we believe is the largest operator of owned and franchised party superstores by revenue in the United States. At the time of the acquisition in 2005, Party City’s network consisted of 502 stores, including 254 franchised locations. Since the acquisition, we have expanded the Party City network to approximately 860 superstore locations in the United States (inclusive of approximately 210 franchised stores) and approximately 40 locations in Canada. We also operate over 300 temporary Halloween locations, under the Halloween City banner.

The 2005 combination of Party City and Amscan has led to the creation of a vertically integrated business from which we derive a number of competitive advantages. We offer customers a differentiated shopping experience with extensive selection and consistently high in-stock positions of quality products with a compelling value proposition making us the premier destination for party supplies. Through our vertical model, we also enhance our total profitability by capturing the manufacturing-to-retail margin on a significant portion of our retail sales and by leveraging our access to multiple channels to limit mark-downs and excessive promotions. Moreover, we believe that our direct-to-consumer channels enable our product development teams to effectively respond to trends and changes in consumer preferences, which allows us to keep our assortment fresh and exciting.

Party City was founded on the idea that life should be celebrated in monumental ways, with a passion for inspiring celebrations—from Super Bowl to New Year’s Eve parties and all the celebrations and seasons in between. With our brand’s slogan, “Nobody Has More Party for Less,” Party City offers an assortment of party supplies, decorations and costumes perfect for every type of party occasion. With dynamic merchandising displays combined with organized seasonal aisles and hundreds of party themes to match any type of celebration, party planning has never been simpler or more fun.

In recent years, Party City has made substantial investments to enhance the customers’ in-store experience and become the ultimate retail destination for party supplies. Stores now showcase dynamic balloon counters displaying hundreds of balloons to coordinate with any occasion. Additionally, store-within-a-store concepts for sports, candy and party favors are focal points in all new stores. Aptly named “Sports City,” “Candy City”,

 

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“Color City” and “Favor City,” these specialty areas create a fun shopping environment, expand product offering and allow us to better showcase the merchandise.

The following table summarizes our company-owned retail footprint by format as well as our strategy going forward:

 

Format

   # of Stores as
of December 31, 2010
     # of Stores as of
December 31, 2014
    Average Size of
Stores (sq. ft.)
    

Strategy/Focus

Party City U.S.

     439         652 (1)      10,000-12,000       Grow the store base opening 30 new stores per year and update store base to new interactive format by converting or relocating 50 old format stores per year

FCPO

     90         —         10,000-12,000       Converted to Party City banner

The Paper Factory and other outlets

     67         —          3,500-5,000       Product liquidation channel

Party City Canada

     —          41        8,000-10,500       Enter the Canadian market and grow store base

 

(1) Amount includes iParty stores converted to the Party City banner.

We believe that our stores are typically destination shopping locations. We seek to maximize customer traffic and quickly build the visibility of new stores by situating them in high traffic areas. Our stores are predominantly located in strip centers and are generally co-located with other destination retailers. Site selection criteria include population density, demographics, traffic counts, location of complementary retailers, storefront visibility and presence (either in a stand-alone building or in dominant strip shopping centers), competition, lease rates and accessible parking.

The following table shows the change in our company-owned Party City store network:

 

     Full-Year
2014
    Full-Year
2013
    Full-Year
2012
 

Stores open at beginning of period

     674        600        487   

Stores opened

     23        25        24   

FCPO and Party Packagers stores converted to Party City (1)

     —          —          88   

iParty stores acquired

     —          54        —     

Stores acquired from franchisees/other

     6        —          6   

Stores closed

     (10     (5     (5
  

 

 

   

 

 

   

 

 

 

Stores open at end of period

  693      674      600   
  

 

 

   

 

 

   

 

 

 

 

(1) Stores acquired in prior years.

We spent the last seven years integrating our retail acquisitions and rationalizing our store base. We believe there are more than 350 locations in North America that present opportunities for us to expand our party superstore base. In 2014, we opened 23 Party City stores, acquired six stores and closed ten Party City store locations. A new Party City location costs an average of $765,000, which includes $90,000 in pre-opening expenses and $325,000 of net startup inventory. A typical new store reaches approximately 80% maturity in the first year of operation and reaches maturity in its fourth year of operation. We target locations where stores have the potential to generate annual sales of at least $2 million at maturity and achieve consolidated pre-tax store

 

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contribution of approximately 18% to 20%. 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 on invested capital of approximately 50% in year three (including margin generated from our vertical model).

Retail Merchandising

Our merchandising strategy is based on three core principles:

 

    Broad Assortment of Merchandise—We believe we offer a greater assortment of products than our national competitors, including mass merchants. Our products span a wide range of lifestyle events from birthdays to themed parties and sporting events, as well as holidays such as Halloween and New Year’s. A typical retail store offers a wide selection of Amscan and other merchandise consisting of an average of 25,000 SKUs at any one time to satisfy a broad range of styles and tastes.

 

    Deep Merchandise Selection—We maintain high in-stock positions of core products and related items, so we are able to address party needs of any size. These high in-stock positions are enabled by our vertical integration model, which results in a high percentage of Amscan merchandise in our company-owned stores and quick turnaround times.

 

    Compelling Value—Our pricing strategy is to provide the best value to our customers. Our vertically integrated business model enables us to provide our customers with leading prices for most of our product categories. We negotiate pricing with suppliers on behalf of all stores in our network (company-owned and franchised) and believe that our buying power enables us to receive favorable pricing terms and enhances our ability to obtain high demand merchandise. We reinforce our value message through our advertising and marketing campaigns with the “Nobody Has More Party for Less” slogan.

We generally organize the aisles in our stores into four-foot sections based on themed products, which include basic products like plates, cups and napkins and other coordinated accessories that enhance sales and customers’ shopping experiences. This presentation makes it simple and easy for our customers to find all their party needs in one convenient location and allows us to achieve a higher average basket size compared to non-specialty channels. We manage each category by product and by SKU and use planograms to ensure a consistent merchandise presentation across our store base. Our coordinated product offering drives add-on purchases as customers are presented with additional decorations, favors and accessories that match their party theme. Our low individual price points encourage impulse buys by customers resulting in higher unit sales.

We have many product categories that relate to birthdays, making this event the largest non-seasonal occasion at approximately 20% of our sales for our permanent domestic operations. We aim to be the pre-eminent resource for the party goods associated with birthday celebrations. Each birthday product category includes a wide assortment of merchandise to fulfill customer needs, including invitations, thank you cards, tableware, hats, horns, banners, cascades, balloons, novelty gifts, piñatas, favors and candy.

Halloween is our retail segment’s largest seasonal product category in dollars. As a key component of our sales strategy, our stores provide an extensive selection of Halloween products throughout the year to position us as the premier Halloween shopping destination. The stores also carry a broad array of related decorations and accessories for the Halloween season. In 2014, Halloween business represented approximately 25% of our total domestic retail sales. To maximize our seasonal opportunity, we operate a chain of temporary Halloween locations, under the Halloween City banner, during the months of September and October of each year. During 2014, our temporary Halloween locations (including Canadian locations) generated revenues of approximately $77 million.

As a vertically integrated business, our wholesale operation is the largest supplier to our retail operations. During 2014, our wholesale operations’ share of shelf at our domestic Party City stores (excluding iParty stores) and retail e-commerce (i.e., the percentage of total cost of sales which relates to product supplied by our wholesale operations) was approximately 70%. Our target is 75% to 80% over the long term.

 

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We also offer products supplied by other vendors, which include licensed products, candies, greeting cards and costumes.

Retail Seasonality

Our retail operations are subject to significant seasonal variations. Historically, this segment has realized a significant portion of its revenues, cash flow and net income in the fourth quarter of the year, principally due to our Halloween sales in October and, to a lesser extent, year-end holiday sales.

E-commerce

In August 2009, we re-launched global e-commerce capabilities through PartyCity.com, providing us with an additional direct-to-consumer sales channel. We have expanded our retail platform, using the PartyCity.com website, to include a platform for business to business opportunities. Business consumers such as hotel and restaurant chains are capable of purchasing decorations and other party goods directly from us as wholesale customers. Our website offers a convenient, user-friendly and secure online shopping option for new and existing customers. In addition to the ability to order products, we expect our website to provide a substantial amount of content about our party products, party planning ideas and promotional offers. Our website will also be one of our key marketing vehicles, specifically as it relates to social marketing initiatives.

Compared to our Party City superstores, PartyCity.com offers a broader assortment of products with over 35,000 SKUs available online versus an average of 25,000 SKUs at any one time in our party superstores. By seamlessly linking our website to our store network, we intend to offer our customers the option to purchase products online which are not physically available at the store.

In March 2013, we acquired Party Delights, a U.K. retail e-commerce business. The acquisition expanded our e-commerce platform into Europe.

During 2014, sales from global e-commerce, including wholesale sales (which are discussed below), were approximately $160 million. We believe that our website is well positioned to continue to capture market share of online purchases, which represent one of the fastest growing distribution channels for party related goods, as we capitalize on our competitive advantages which include a nationwide store base, strong brand recognition and vertical integration. The average basket size through our e-commerce site is approximately three times as large as the average basket size in our Party City stores. We plan to drive future traffic to our website through the continuation of our pay-per-click advertising strategy, through our mobile site and by utilizing the approximately 14 million e-mail addresses that we have obtained (as of December 2014) from visitors to our stores and visitors to the website. Additionally, we are in the process of rolling out a new online merchandising strategy to present collections of products in a manner consistent with how our customers shop for them in our stores. In addition to our retail e-commerce platform, we have developed a wholesale e-commerce platform that provides our party goods and other wholesale customers the opportunity to order our products through our amscan.com website, as well as our other international sites. Wholesale e-commerce orders, which are included in our 2014 wholesale sales, totaled approximately $19 million during 2014 or approximately 35% higher than 2013.

Retail Advertising and Marketing

Our advertising focuses on promoting specific seasonal occasions and general party themes, with a strong emphasis on our price-value proposition—“Nobody Has More Party for Less”—with the goal of increasing customer traffic and further building our brand. In late 2009, we modified our advertising strategy to minimize our dependency on newspaper inserts and focus instead on a national broadcasting campaign to further develop our customer base. This shift emphasizes brand building and our price-value proposition. As a result, our use of newspaper inserts has decreased from 60% of gross domestic advertising spend in 2009 to 11% in 2014, while the use of broadcasts has increased to 60% of gross domestic advertising spend in 2014.

 

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Competition at Retail

In our retail segment, our stores compete primarily on the basis of product mix and variety, store location and layout, customer convenience and value. Although we compete with a variety of smaller and larger retailers, including, but not limited to, independent party goods supply stores, specialty stores, dollar stores, warehouse/merchandise clubs, drug stores, mass merchants and catalogue and e-commerce merchandisers, we believe that, based on their revenues, our retail stores maintain a leading position in the party goods business by offering a wider breadth of merchandise than most competitors and a greater selection within merchandise classes, at a compelling value. We are one of only a few vertically integrated suppliers of decorated party goods. While some of our competitors in our markets may have greater financial resources, we believe that our significant buying power, which results from the size of our retail store network and the breadth of our assortment, is an important competitive advantage. Many of our retail competitors are also customers of our wholesale business.

Franchise Operations

We have franchised stores throughout the United States and Puerto Rico run by franchisees utilizing our format, design specifications, methods, standards, operating procedures, systems and trademarks. Our wholesale sales to our franchised stores generally mirror, with respect to relative size, mix and category, those to our company-owned stores. The following table shows the change in our franchise-owned store network:

 

     Full-Year
2014
    Full-Year
2013
    Full-Year
2012
 

Stores open at beginning of period

     212        214        221   

Stores opened/acquired by existing franchisees

     —          1        1   

Stores sold to the Company

     (1     —          (6

Stores closed or converted to independent

     (3     (3     (2
  

 

 

   

 

 

   

 

 

 

Stores open at end of period

  208      212      214   
  

 

 

   

 

 

   

 

 

 

We are not currently marketing, nor do we plan to market, new franchise territories in the United States or Canada.

We receive revenue from our franchisees, consisting of an initial one-time fee and ongoing royalty fees generally ranging from 4% to 6%. In exchange for these franchise fees, franchisees receive brand value and company support with respect to planograms, information technology, purchasing and marketing. In addition, each franchisee has a mandated advertising budget, which consists of a minimum initial store opening promotion and ongoing local advertising and promotions. Further, franchisees must pay an additional 1% to 2.25% of net sales to a group advertising fund to cover common advertising materials. The terms of our franchise agreements provide for payments to franchisees based on domestic retail e-commerce sales originating from specified areas relating to the franchisees’ contractual territory. The amounts paid by us vary based on several factors, including the profitability of our e-commerce sales, and are expensed at the time of sale. We do not offer financing to our franchisees for one-time fees or ongoing royalty fees. Our franchise agreements provide us with a right of first refusal should any franchisee look to dispose of its operations.

Current franchise agreements provide for an assigned area or territory that typically equals a three or four-mile radius from the franchisee’s store location and the right to use the Party City® logo and trademark. In addition, certain agreements with our franchisees and other business partners contain geographic limitations on opening new stores. In most stores, the franchisee or the majority owner of a corporate franchisee devotes full time to the management, operation and on-premises supervision of the stores or groups of stores.

Wholesale Operations

Overview

Based on our revenues, we are one of the leading designers, manufacturers and distributors of decorated party goods in the world, offering an extensive selection with over 40,000 SKUs. We currently offer over 400

 

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party goods ensembles, which range from approximately five to 50 design-coordinated items spanning tableware, accessories, novelties, balloons, decorations and gifts. The breadth of these ensembles enables retailers to promote additional sales of related products for every occasion. To enhance our customers’ celebrations of life’s important events, we market party goods ensembles for a wide variety of occasions, including seasonal and religious holidays, special events and themed celebrations.

Our Amscan, Anagram, Costumes USA and Designware branded products are offered in over 40,000 retail outlets worldwide, ranging from party goods superstores, including our company-owned and franchised retail stores, other party goods retailers, mass merchants, independent card and gift stores, dollar stores and other retailers and distributors throughout the world. We have long-term relationships with many of our wholesale customers. Party goods superstores, the Company’s primary channel of distribution, provide consumers with a one-stop source for all of their party needs. Amscan, Anagram, Costumes USA and Designware branded products represent a significant portion of party goods carried by both company-owned and third-party stores with the overall percentage continuing to increase, reflecting the breadth of our product line and, based on our scale, our ability to manufacture and source quality products at competitive prices.

The table below shows the breakdown of our total wholesale sales by channel for the year ended December 31, 2014:

 

Channel

   Sales  
     (dollars in millions)  

Party City and Halloween City—owned stores and e-commerce

   $ 567   

Party City—franchised stores

     163   

Other domestic retailers

     144   

Domestic balloon distributors/retailers

     88   

International balloon distributors

     22   

Other international

     229   
  

 

 

 

Total wholesale sales

$ 1,213   
  

 

 

 

International party supply markets are generally less mature than the U.S. markets. However, we believe this will change over time, and we are making significant investments to ensure we are well positioned to benefit from growth in these markets. Investments include our September 2010 acquisition of Christy’s Group and the January 2011 acquisition of Riethmüller, which provided us with an expanded international platform.

Product Lines

We believe we have the industry’s most extensive selection of party supplies. The following table sets forth the principal products we distribute by product category, and the corresponding percentage of revenue that each category represents:

Wholesale Sales by Product for the Year Ended

December 31, 2014

 

Category

  

Items

   % of Sales  

Tableware

   Plastic Plates, Paper Plates, Plastic Cups, Paper Cups, Paper Napkins, Plastic Cutlery, Tablecovers      24

Favors, Stationery & Other

   Party Favors, Gift Bags, Gift Wrap, Invitations, Bows, Stationery      17

Decorations

   Latex Balloons, Piñatas, Crepes, Flags & Banners, Decorative Tissues, Stickers and Confetti, Scene Setters, Garland, Centerpieces      20

Metallic Balloons

   Bouquets, Standard 18 Inch Sing-A-Tune, SuperShapes, Weights      12

Costumes & Accessories

   Costumes, Other Wearables, Wigs      27

 

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Our products span a wide range of lifestyle events from birthdays to theme parties and sporting events, as well as holidays such as Halloween and New Year’s. In 2014, approximately 71% of our wholesale sales consisted of items designed for everyday occasions, with the remaining 29% comprised of items used for holidays and seasonal celebrations throughout the year. Our product offerings cover the following broad range of occasions and life celebrations:

Current Product Offering

 

Everyday

   Seasonal
Birthdays    New Year’s
Anniversaries    Valentine’s Day
Bar Mitzvahs    St. Patrick’s Day
Bridal/Baby Showers    Easter
Christenings    Passover
Confirmations    Fourth of July
First Communions    Halloween
Graduations    Fall
Theme-oriented*    Thanksgiving
Weddings    Hanukkah
   Christmas

 

* Our theme-oriented ensembles enhance every celebration and include Bachelorette, Card Party, Casino, Chinese New Year, Cocktail Party, Disco, Fiesta, Fifties Rock-and-Roll, Hawaiian Luau, Hollywood, Mardi Gras, Masquerade, Patriotic, Retirement, Sports, Summer Barbeque and Western.

Wholesale Product Development and Design Capabilities

Our in-house design staff continuously develops innovative and contemporary product designs and concepts. Our continued investment in art and design results in a steady supply of fresh ideas and the creation of unique ensembles that appeal to consumers. Our creative staff is constantly in the market identifying trends and new product concepts. We typically introduce approximately 7,000 new products and approximately 50 new party goods ensembles annually. Our proprietary designs and strength in developing new items at attractive prices help differentiate our products from those of our competitors.

Wholesale Sales and Marketing

Our principal wholesale sales and marketing efforts are conducted through an employee sales force servicing approximately 15,000 non-affiliated retail accounts in the United States. In addition to the employee sales team, a select group of manufacturers’ representatives handle specific account situations. International customers are generally serviced by employees of our subsidiaries outside the United States. We have our own sales force of professionals in the U.K., Mexico, Canada, Germany, France, Spain and Hong Kong and operate through third-party distributors elsewhere. Our Anagram subsidiary utilizes independent distributors in the United States to bring our metallic balloons to the grocery, retail gift and floral markets, as well as to third-party party superstores and specialty retailer customers. During October 2014, we acquired U.S. Balloon, a distributor of metallic balloons. We expect that the acquisition will allow us to capture the full manufacturing-to-retail margin on balloons that we manufacture and sell at company-owned Party City stores. Additionally, through our agreement with American Greetings, we are able to leverage American Greetings’ sales force to place our product into other distribution channels, including mass market, drug and grocery retailers.

To support our sales and marketing efforts, we produce five key decorative party product catalogues annually (four catalogues for seasonal products and one catalogue for everyday products), with additional catalogues produced to market our metallic balloons and gift products and for international markets. We have also developed a website which displays and describes our product assortment and capabilities. We utilize this website as a marketing tool, providing us with the ability to announce special product promotions, new program launches and other information in an expeditious manner. To further promote our products, we participate in a variety of industry trade shows throughout the year.

 

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Wholesale Manufactured Products

We are one of the largest manufacturers of decorated party goods products by revenue globally. Our in-house manufacturing capabilities enable us to control costs, monitor product quality, better manage inventory and provide more efficient order fulfillment. Our domestic manufacturing facilities allow us to react rapidly to changing consumer trends and fulfill our customers’ needs for key products with fast turnaround times. In 2014, we manufactured items representing approximately 31% of our net sales at wholesale (including sales to the Company’s retail operations). Our facilities in Rhode Island, Kentucky, Minnesota, Mexico, Malaysia and New York are highly automated and produce paper and plastic plates and cups, paper napkins, metallic and latex balloons and other party and novelty items at a globally competitive cost. State-of-the-art printing, forming, folding and packaging equipment support these manufacturing operations. Given our size and sales volume, we are generally able to operate our manufacturing equipment on the basis of at least two shifts per day, thus lowering production costs per unit. In select cases, we use available capacity to manufacture products for third parties, which allows us to maintain a satisfactory level of equipment utilization.

The table below summarizes our principal manufacturing facilities.

 

Location

  

Principal Products

   Approximate
Square Feet
 

East Providence, Rhode Island

   Plastic plates, cups and bowls      229,230  (1) 

Louisville, Kentucky

   Paper plates      189,175   

Eden Prairie, Minnesota

   Metallic balloons and accessories      115,600   

Tijuana, Mexico

   Piñatas and other party products      135,000   

Melaka, Malaysia

   Latex balloons      100,000   

Harriman, New York

   Paper napkins      74,400   

Newburgh, New York

   Paper napkins and paper cups      52,400   

 

(1) This figure represents an industrial park, which includes a 48,455 square foot office and warehouse.

Complementing our manufacturing facilities, we have a diverse global network of third-party suppliers that supports our strategy of consistently offering a broad selection of high quality, innovative and competitively priced product. We have over 20-year relationships with many of our vendors and often represent a significant portion of their overall business. Third-party manufacturers supplied approximately 69% of products sold at wholesale in 2014. These manufacturers generally produce items designed by and created for us, are located in Asia and are managed by our sourcing office in Hong Kong. We actively work with our third-party suppliers to ensure product cost, quality and safety.

The principal raw materials used in manufacturing our products are paper, petroleum-based resin and cotton. While we currently purchase such raw material from a relatively small number of sources, paper, resin and cotton are available from numerous sources. Therefore, we believe our current suppliers could be replaced without adversely affecting our manufacturing operations in any material respect.

Wholesale Product Safety and Quality Assurance

We are subject to regulatory requirements in the United States and internationally, and we believe that all products that we manufacture comply with the requirements in the markets in which they are sold. Third-party manufactured products are tested both at the manufacturing site and upon arrival at our distribution center. We have a full-time staff of professionals in the United States, Asia and Europe dedicated to product safety and quality assurance.

Wholesale Distribution and Systems

We ship our products directly to retailers and distributors throughout the world from our distribution facilities, as well as on a free-on-board (“FOB”) basis directly from our domestic and international factories. Our electronic order entry and information systems allow us to manage our inventory with minimal obsolescence while maintaining strong fill rates and quick order turnaround time.

 

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Our main distribution facility for domestic party customers is located in Chester, New York, with nearly 900,000 square feet under one roof. This state-of-the-art facility, built in 2001 and expanded in 2005, serves as the main point of distribution for our Amscan-branded products and utilizes paperless, pick-by-light systems, offering superior inventory management and turnaround times as short as 48 hours. Over the last ten years, we have made significant investments in order to customize and upgrade our Chester distribution facility and we believe it has sufficient capacity to support our continued growth.

We utilize a bypass system which allows us to ship products directly from selected third-party suppliers to our company-owned and franchised stores, thus bypassing our distribution facilities. In addition to lowering our distribution costs, this bypass system creates warehouse capacity. We expect to grow the percentage of our products shipped via bypass, which will lead to additional savings.

During October 2014, we acquired U.S. Balloon, a distributor of metallic balloons. We expect that the acquisition will allow us to capture the full manufacturing-to-retail margin on balloons that we manufacture and sell at company-owned Party City stores.

The distribution center for our retail e-commerce platform is located in Naperville, Illinois. We also have other distribution centers in the U.K., Germany, Mexico and Australia, to support our international customers.

Wholesale Customers

We have a diverse third party customer base at wholesale. During 2014, no individual third party customer accounted for more than 10% of our total third-party sales at wholesale.

Competition at Wholesale

In our wholesale segment, we compete primarily on the basis of diversity and quality of our product designs, breadth of product line, product availability, price, reputation and customer service. Although we have many competitors with respect to one or more of our products, we believe that there are no competitors who design, manufacture, source and distribute products with the complexity of design and breadth of product lines that we do. Furthermore, our design and manufacturing processes create efficiencies in manufacturing that few of our competitors can achieve in the production of numerous coordinated products in multiple design types. Competitors include smaller independent manufacturers and distributors, as well as divisions or subsidiaries of large companies. Certain of these competitors control various party goods product licenses for widely recognized images, such as cartoon or motion picture characters, which could provide them with a competitive advantage. However, we control a strong portfolio of character licenses for use in the design and production of our metallic balloons and, as a result of the acquisition of Designware, we have access to a strong portfolio of character and other licenses for party goods.

Information Systems

We continually evaluate and upgrade our information systems to enhance the quantity, quality and timeliness of information available to management and to improve the efficiency of our manufacturing and distribution facilities, as well as our service at the store level. We have implemented merchandise replenishment software to complement our distribution, planning and allocation processes. The system enhances the store replenishment function by improving in-stock positions, leveraging our distribution infrastructure and allowing us to become more effective in our use of store labor. We have implemented a Point of Sale system and upgraded merchandising systems to standardize technology across all of our domestic retail superstores and we have implemented similar systems at our temporary Halloween City locations.

Employees

As of December 31, 2014, the Company had approximately 7,313 full-time employees and 10,714 part-time employees, none of whom is covered by a collective bargaining agreement. We consider our relationship with our employees to be good.

 

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Intellectual Property

We own the copyrights in the designs we create and use on our products and various trademarks and service marks used on or in connection with our products. It is our practice to register our copyrights with the United States Copyright Office and our trademarks and service marks with the United States Patent and Trademark Office, or with other foreign jurisdictions, to the extent we deem necessary. In addition, we rely on unregistered common law trademark rights and unregistered copyrights under applicable U.S. law to distinguish and/or protect our products, services and branding. We do not believe that the loss of copyrights or trademarks with respect to any particular product or products would have a material adverse effect on our business. We hold numerous intellectual property licenses from third parties, allowing us to use various third-party cartoon and other characters and designs on our products, and the images on our metallic balloons and costumes are principally covered by these licenses. None of these licenses is individually material to our aggregate business. We also own patents relating to display racks and balloon weights, none of which is individually material to our aggregate business.

We permit our franchisees to use a number of our trademarks and service marks, including Party City, The Discount Party Super Store, Party America and Halloween City.

Government Regulation

As a franchisor, we must comply with regulations adopted by the Federal Trade Commission, such as the Trade Regulation Rule on Franchising, which requires us, among other things, to furnish prospective franchisees with a franchise offering circular. We also must comply with a number of state laws that regulate the offer and sale of our franchises and certain substantive aspects of franchisor-franchisee relationships. These laws vary in their application and in their regulatory requirements. State laws that regulate the offer and sale of franchises typically require us to, among other things, register before the offer and sale of a franchise can be made in that state and to provide a franchise offering circular to prospective franchisees.

State laws that regulate the franchisor-franchisee relationship presently exist in a substantial number of states. Those laws regulate the franchise relationship, for example, by restricting a franchisor’s rights with regard to the termination, transfer and renewal of a franchise agreement (for example, by requiring “good cause” to exist as a basis for the termination and the franchisor’s decision to refuse to permit the franchisee to exercise its transfer or renewal rights), by requiring the franchisor to give advance notice to the franchisee of the termination and give the franchisee an opportunity to cure most defaults. To date, those laws have not precluded us from seeking franchisees in any given area and have not had a material adverse effect on our operations.

Our wholesale and retail segments must also comply with applicable regulations adopted by federal agencies, including product safety regulations, and with licensing and other regulations enforced by state and local health, sanitation, safety, fire and other departments. Difficulties or failures in obtaining the required licenses or approvals can delay and sometimes prevent the opening of a new store or the shutting down of an existing store.

Our manufacturing operations, stores and other facilities must comply with applicable environmental, health and safety regulations, although the cost of complying with these regulations to date has not been material. More stringent and varied requirements of local governmental bodies with respect to zoning, land use, and environmental factors can delay, and sometimes prevent, development of new stores in particular locations.

Our stores must comply with the Fair Labor Standards Act and various state laws governing various matters such as minimum wages, overtime and other working conditions. Our stores must also comply with the provisions of the Americans with Disabilities Act, which requires that employers provide reasonable accommodation for employees with disabilities and that stores must be accessible to customers with disabilities.

 

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Properties

We maintain the following facilities for our corporate and retail headquarters and to conduct our principal design, manufacturing and distribution operations:

 

Location

 

Principal

Activity

 

Square
Feet

 

Owned or Leased

(With Expiration
Date)

Elmsford, New York

 

Executive and other corporate offices, show rooms, design and art production for party products

  119,469 square feet   Leased (expiration date: December 31, 2021)

Rockaway, New Jersey

 

Party City corporate offices

  106,000 square feet   Leased (expiration date: July 31, 2017)

Eden Prairie, Minnesota

 

Manufacture of metallic balloons and accessories

  115,600 square feet   Owned

Eden Prairie, Minnesota

 

Manufacture of retail, trade show and showroom fixtures

  15,324 square feet   Leased (expiration date: July 31, 2015)

Harriman, New York

 

Manufacture of paper napkins

  74,400 square feet   Leased (expiration date: March 31, 2016)

Louisville, Kentucky

 

Manufacture and distribution of paper plates

  189,175 square feet   Leased (expiration date: March 31, 2018)

Newburgh, New York

 

Manufacture of paper napkins and cups

  52,400 square feet   Leased (expiration date: May 31, 2018)

East Providence, Rhode Island

 

Manufacture and distribution of plastic plates, cups and bowls

  229,230 square feet (1)   Leased (expiration date: April 26, 2016)

Tijuana, Mexico

 

Manufacture and distribution of party products

  135,000 square feet   Leased (2)

Melaka, Malaysia

 

Manufacture and distribution of latex balloons

  100,000 square feet   Leased (expiration date: May 30, 2072)

Chester, New York

 

Distribution of party and gift products

  896,000 square feet   Owned

Edina, Minnesota

 

Distribution of metallic balloons and accessories

  122,312 square feet   Leased (expiration date: December 31, 2015)

Milton Keynes, Buckinghamshire, England

 

Distribution of party products throughout Europe

  130,858 square feet   Leased (expiration date: June 30, 2017)

Naperville, Illinois

 

Distribution of party goods for e-commerce sales

  440,343 square feet   Leased (expiration date: December 31, 2018)

Kircheim unter Teck, Germany

 

Distribution of party goods

  215,000 square feet   Owned

Baulkham Hills, Australia

 

Distribution of party goods

  3,778 square feet   Leased (expiration date: November 14, 2017)

Atlanta, Georgia

 

Office and storage facilities

  15,012 square feet   Leased (expiration date: June 30, 2016)

Livonia, Michigan

 

Office and distribution of party goods for Halloween City

  89,780 square feet   Leased (expiration date: May 31, 2019)

Pleasanton, California

 

Office for retail e-commerce sales

  11,278 square feet   Leased (expiration date: June 18, 2015)

Brooklyn, New York

 

Distribution of balloons

  68,700 square feet   Leased (expiration date: March 31, 2018)

 

(1) This figure represents an industrial park, which includes a 48,455 square foot office and warehouse.
(2) Property is comprised of two buildings with various lease expiration dates through April 1, 2017.

 

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In addition to the facilities listed above, we maintain smaller distribution facilities in the United Kingdom, Canada and Mexico and sourcing offices in China and Hong Kong. We also maintain sales offices in Australia, Canada, Hong Kong and Japan and showrooms in New York, California, Georgia, Texas, Canada and Hong Kong.

As of December 31, 2014, Company-owned and franchised retail stores were located in the following states and Puerto Rico:

 

State

   Company-owned      Franchise      Chain-wide  

Alabama

     1         8         9   

Arizona

     0         17         17   

Arkansas

     0         3         3   

California

     99         15         114   

Colorado

     14         0         14   

Connecticut

     14         2         16   

Delaware

     1         1         2   

Florida

     62         9         71   

Georgia

     30         1         31   

Hawaii

     0         2         2   

Illinois

     53         0         53   

Indiana

     22         0         22   

Iowa

     8         0         8   

Kansas

     2         4         6   

Kentucky

     9         0         9   

Louisiana

     3         8         11   

Maine

     3         0         3   

Maryland

     12         12         24   

Massachusetts

     27         0         27   

Michigan

     29         0         29   

Minnesota

     0         19         19   

Mississippi

     0         3         3   

Missouri

     17         1         18   

Montana

     0         1         1   

Nebraska

     4         0         4   

Nevada

     6         0         6   

New Hampshire

     7         0         7   

New Jersey

     26         2         28   

New Mexico

     0         3         3   

New York

     52         13         65   

North Carolina

     0         19         19   

North Dakota

     0         3         3   

Ohio

     29         0         29   

Oklahoma

     2         0         2   

Oregon

     0         2         2   

Pennsylvania

     14         17         31   

Puerto Rico

     0         5         5   

Rhode Island

     3         0         3   

South Carolina

     3         6         9   

Tennessee

     6         7         13   

Texas

     51         16         67