As filed with the Securities and Exchange Commission on June 2, 2011.

Registration No. 333-173690

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Amendment No. 1

 

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

Party City Holdings Inc.

(Exact name of registrant as specified in its charter)

 

80 Grasslands Road, Elmsford, NY 10523

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

 

Gerald C. Rittenberg

Chief Executive Officer

80 Grasslands Road

Elmsford, NY 10523

(914) 345-2020

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Copies to:

 

 

Approximate date of commencement of proposed sale to public:  As soon as practicable after this Registration Statement becomes effective.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), check the following box.  o

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

(Do not check if a smaller reporting company)

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

Subject to Completion. Dated June 2, 2011

 

Party City Holdings Inc.

 

          Shares

 

Common Stock

 

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

 

Party City Holdings is offering           shares to be sold in the offering. The selling stockholders identified in this prospectus are offering an additional           shares. Party City Holdings will not receive any of the proceeds from the sale of the shares being sold by the selling stockholders.

 

Prior to this offering, there has been no public market for the common stock. It is currently estimated that the initial public offering price per share will be between $      and $      . Party City Holdings intends to list the common stock on the New York Stock Exchange under the symbol “PRTY”.

 

See “Risk Factors” on page 11 to read about factors you should consider before buying shares of the common stock.

 

 

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

To the extent the underwriters sell more than           shares of common stock, the underwriters have the option to purchase up to an additional          shares from           at the initial public offering price less the underwriting discount.

 

 

The underwriters expect to deliver the shares against payment in New York, New York on           , 2011.

 

 

 

 

 

 

Prospectus dated          , 2011

 

TABLE OF CONTENTS

 

 

 

Through and including          , 2011 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

We have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

 

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

 

PROSPECTUS SUMMARY

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

	•	Establishing retail leadership in our industry and our vertically integrated model through the acquisitions of Party City, Party America Corporation (“Party America”) and Factory Card and Party Outlet (“FCPO”). Following each acquisition, we capitalized on our vertically integrated model by increasing the percentage of Amscan products sold at our retail stores, allowing us to capture the manufacturing-to-retail margin on a growing portion of our retail sales.

	•	Re-launching our e-commerce platform in 2009 provided us with an additional direct-to-consumer channel.

	•	Broadening our product offering and channel reach by acquiring valuable character licenses and costume capabilities in addition to improving our access to grocery and mass merchant retailers.

	•	Growing our international presence by building relationships with local retailers to develop party supply store-in-store concepts as well as targeted acquisitions that extended our geographic reach.

	•	we operate in a competitive industry, and our failure to compete effectively could cause us to lose our market share, revenues and growth prospects;
	•	our business may be adversely affected by fluctuations in commodity prices;
	•	our failure to appropriately respond to changing merchandise trends and consumer preferences could significantly harm our customer relationships and financial performance;
	•	we may not be able to successfully implement our store growth strategy;
	•	a decrease in our Halloween sales could have a material adverse effect on our operating results for the year;
	•	our substantial indebtedness and lease obligations could adversely affect our financial flexibility and our competitive position; and

	•	investment funds affiliated with Advent International Corporation (“Advent”), Berkshire Partners LLC (“Berkshire Partners”) and Weston Presidio 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. In addition, our third amended and restated certificate of incorporation (the “third amended and restated certificate of incorporation”) includes a provision that relieves their representatives from any breach of fiduciary duty to us if these investment funds pursue for their benefit opportunities such as acquisitions that might otherwise be appropriate for us.

Common stock offered by us		shares
Common stock to be offered by selling stockholders		shares
Common stock to be outstanding after this offering		shares
Option to purchase additional shares offered to underwriters		We, along with some of our stockholders, have granted the underwriters an option to purchase up to           additional shares. If this option is exercised in full, we will issue and sell           shares and the selling stockholders will sell           shares.

Use of proceeds		Assuming an initial public offering price of $      , which is the midpoint of the range listed on the cover page of this prospectus, we estimate that the net proceeds to us from this offering will be approximately $      million. We intend to use the net proceeds from this offering to repay indebtedness, to terminate the management agreement with the Sponsors and for working capital and other general corporate purposes. See “Use of Proceeds.”

		We will not receive any proceeds from the shares sold by the selling stockholders.
Risk factors		You should read the “Risk Factors” section of this prospectus beginning on page 10 for a discussion of factors to consider carefully before deciding whether to purchase shares of our common stock.

Conflicts of interest		Merrill Lynch, Pierce, Fenner & Smith Incorporated and certain of its affiliates act as Joint Bookrunner, Joint Lead Arranger, Syndication Agent, Issuing Bank and Lender under our new senior secured asset-based revolving credit facility; certain affiliates of Wells Fargo Securities, LLC act as Administrative Agent, Collateral Agent, Joint Bookrunner, Joint Lead Arranger, Swingline Lender and Lender under our new senior secured asset-based revolving credit facility; and an affiliate of Credit Suisse Securities (USA) LLC is a Lender under our new senior secured asset-based revolving credit facility. Because of these relationships and the manner in which the proceeds of this offering may be used, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Wells Fargo Securities, LLC and Credit Suisse Securities (USA) LLC may receive proceeds from this offering in addition to their underwriting compensation. None of Merrill Lynch, Pierce, Fenner & Smith Incorporated, Wells Fargo Securities, LLC, or Credit Suisse Securities (USA) LLC will receive 5% or more of the net proceeds from this offering. See “Underwriting — Conflicts of Interest.”

Proposed New York Stock Exchange symbol		PRTY

	•	3,283.47 shares of Class A common stock issuable upon the exercise of stock options issued under our 2004 Equity Incentive Plan with a weighted average exercise price of $15,030.00 per share;
	•	additional shares of Class A common stock reserved for future issuance under our 2004 Equity Incentive Plan; and

	•	additional shares of common stock reserved for future issuance under our 2011 Equity Incentive Plan.

	•	A           -for-one stock split on our Class A common stock and Class B common stock effected as a stock dividend on     , 2011;

	•	The conversion of all outstanding shares of our Class B common stock into shares of our Class A common stock on a one-for-one basis, which will occur automatically upon the closing of this offering pursuant to our current certificate of incorporation (the “existing certificate of incorporation”), and renaming the Class A common stock as “Common Stock”, which will occur upon the filing of our third amended and restated certificate of incorporation upon the closing of this offering (the “Common Stock Conversion”);

	•	The adoption of our third amended and restated certificate of incorporation and our amended and restated bylaws (“bylaws”), to be effective upon the closing of this offering; and

	•	No exercise by the underwriters of their option to purchase up to           additional shares of our common stock from us and the selling stockholders in this offering.

																						Pro Forma,
																						As Adjusted(1)
																										Three
																						Fiscal Year				Months
		Fiscal Year Ended												Three Months Ended								Ended				Ended
		December 31,												March 31,								December 31,				March 31,
		2008				2009				2010				2010				2011				2010				2011
		(dollars in thousands, except per share data)
Income Statement Data:
Revenues:
Net sales		$	1,537,641			$	1,467,324			$	1,579,677			$	304,379			$	352,501
Royalties and franchise fees			22,020				19,494				19,417				3,844				3,681
Total revenues			1,559,661				1,486,818				1,599,094				308,223				356,182
Cost of sales			966,426				899,041				943,058				199,900				225,014
Operating expenses			479,317				445,904				528,600				100,035				114,560
Income from operations			113,918				141,873				127,436				8,288				16,608
Interest expense, net			50,915				41,481				40,850				9,301				20,368
Other (income) expense, net			(818	)			(32	)			4,208				(69	)			62
Income (loss) before income taxes			63,821				100,424				82,378				(944	)			(3,822	)
Income tax (benefit) expense			24,188				37,673				32,945				(575	)			(1,330	)
Net income (loss)			39,633				62,751				49,433				(369	)			(2,492	)
Less: net (loss) income attributable to noncontrolling interests			(877	)			198				114				43				71
Net income (loss) attributable to Party City Holdings Inc.		$	40,510			$	62,553			$	49,319			$	(412	)		$	(2,563	)
Per Share Data:
Net income (loss) per share
Basic
Diluted
Pro forma basic(2)
Pro forma diluted(2)
Weighted Average
Outstanding basic
Diluted
Pro forma outstanding basic(2)
Pro forma diluted(2)
Statement of Cash Flow Data:
Net cash provided by (used in):
Operating activities		$	79,929			$	123,942			$	61,168			$	(17,541	)		$	(12,907	)
Investing activities			(51,199	)			(54,358	)			(102,766	)			(10,455	)			(67,396	)
Financing activities			(23,033	)			(70,157	)			46,515				30,432				75,340
Other Financial Data:
Net revenues by segment:
Wholesale (after intercompany eliminations)		$	438,505			$	411,359			$	470,892			$	105,923			$	132,395
Retail			1,121,156				1,075,459				1,128,202				202,300				223,787
Consolidated			1,559,661				1,486,818				1,599,094				308,223				356,182

																						Pro Forma,
																						As Adjusted(1)
																										Three
																						Fiscal Year				Months
		Fiscal Year Ended												Three Months Ended								Ended				Ended
		December 31,												March 31,								December 31,				March 31,
		2008				2009				2010				2010				2011				2010				2011
		(dollars in thousands, except per share data)
EBITDA(3)			162,014				186,287				172,646				19,931				29,795
Adjusted EBITDA(3)			186,040				190,479				226,114				22,787				31,004
Number of company-owned and franchised retail stores (at end of period)(4)			916				851				828				825				814
Number of Party City superstores			385				382				439				383				457
Party City comparable store sales growth(5)			0.5	%			(3.3	)%			1.4	%			0.6	%			4.5	%
Capital expenditures including assets under capital leases (excluding acquisitions)			53,701				26,254				50,242				6,924				10,977
Working capital (excluding cash)			63,846				146,823				169,539				156,470				150,052
Ratio of debt to Adjusted EBITDA(3)			3.9x				3.4x				4.4x				3.6x				4.6x
Balance Sheet Data (at period end):
Cash and cash equivalents		$	13,058			$	15,420			$	20,454			$	17,054			$	18,221
Working capital			76,904				162,243				189,993				173,524				168,273
Total assets			1,507,977				1,480,501				1,653,151				1,503,152				1,709,328
Total debt			721,635				651,433				1,000,256				681,865				1,075,783
Total equity			412,117				479,122				256,422				499,898				258,451

(1)		The pro forma as adjusted income statement and other financial data for the fiscal year ended December 31, 2010 and the three months ended March 31, 2011 gives effect to: (i) this offering and the use of proceeds therefrom; and (ii) the refinancing of Amscan Holdings’ revolving and term debt credit facilities in 2010, assuming in each case such event occurred on January 1, 2010. The pro forma as adjusted balance sheet data for the fiscal year ended December 31, 2010 and the three months ended March 31, 2011 gives effect to this offering and the use of proceeds therefrom, assuming such events occurred on December 31, 2010 and March 31, 2011, respectively. The pro forma as adjusted financial data do not necessarily represent what our financial position and results of operations would have been if the transactions had actually been completed on the dates indicated, and are not intended to project our financial position or results of operations for any future period. See “Use of Proceeds” and “Unaudited Pro Forma Consolidated Financial Data.”

(2)		The pro forma earnings per share calculations give effect to the issuance and sale of a number of shares the proceeds of which would be used to pay the amount of the 2010 cash dividend that exceeded our 2010 earnings.

(3)		We present Adjusted EBITDA as a supplemental measure of our performance. We define Adjusted EBITDA, per the terms of the credit agreement for our revolving and term debt, as net income (loss) plus (i) interest expense, (ii) provision for taxes and (iii) depreciation and amortization, as further adjusted to eliminate the impact of certain items that we do not consider indicative of our ongoing operating performance. These further adjustments are itemized below. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. The reconciliation from net income to EBITDA and Adjusted EBITDA for the periods presented is as follows:

		Fiscal Year Ended												Three Months Ended
		December 31,												March 31,
		2008				2009				2010				2010				2011
		(dollars in thousands)
Net Income (Loss)		$	39,633			$	62,751			$	49,433			$	(369	)		$	(2,492	)
Interest expense, net			50,915				41,481				40,850				9,301				20,368
Income tax			24,188				37,673				32,945				(575	)			(1,330	)
Depreciation and amortization			47,278				44,382				49,418				11,574				13,249
EBITDA			162,014				186,287				172,646				19,931				29,795
Equity based compensation and other charges			4,546				882				6,019				94				149
Non-cash purchase accounting adjustments			2,329				(344	)			2,533				1,447				115
Management fee			1,248				1,248				1,248				312				312
Gain from joint venture			(538	)			(632	)			(678	)			(288	)			(316	)
Impairment charges			17,376	(a)			—				27,997	(a)			—				—
Restructuring, retention and severance			—				2,670				1,780				—				—
Payment in lieu of dividend			—				—				9,395	(b)			960				174
Refinancing charges			—				—				2,448				—				—
Acquisition related expenses			—				270				1,660				5				892
Other			(935	)			98				1,066				326				(117	)
Adjusted EBITDA		$	186,040			$	190,479			$	226,114			$	22,787			$	31,004

(a)		During 2008 and 2010, we implemented plans to convert and rebrand our company-owned and franchised Party America stores and our FCPO stores to Party City stores, respectively. As a result, we recorded charges for the impairment of the Party America trade name and the FCPO trade name of $17.4 million and $27.4 million in the fourth quarters of 2008 and 2010, respectively.
(b)		Represents payment to holders of vested time-based options in connection with a one-time cash dividend paid in 2010. This payment is included as stock-based compensation expense in general and administrative expenses in 2010.

	•	Adjusted EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;
	•	Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
	•	Adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our indebtedness;
	•	although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements;
	•	non-cash compensation is and will remain a key element of our overall long-term incentive compensation package, although we exclude it as an expense when evaluating our ongoing operating performance for a particular period;
	•	Adjusted EBITDA does not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations; and
	•	other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

(4)		Excludes temporary locations under our Halloween City banner and includes Party City superstores.

(5)		Party City comparable store sales exclude FCPO store conversions, as presented here.

 

Investing in our common stock involves a certain degree of risk. You should carefully consider the following risk factors, as well as the other information in this prospectus, before deciding to invest in our common stock. The occurrence of any of the following risks could harm our business, financial condition, results of operations or prospects. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment. Certain statements in “Risk Factors” are “forward-looking statements.” See “Special Note Regarding Forward-Looking Statements” elsewhere in this prospectus.

 

Risks Related to Our Business

 

We operate in a competitive industry, and our failure to compete effectively could cause us to lose our market share, revenues and growth prospects.

 

We compete with many other manufactures and distributors, including smaller, independent specialty manufacturers and divisions or subsidiaries of larger companies with greater financial and other resources than we have. Some of our competitors control licenses for widely recognized images and have broader access to mass market retailers that could provide them with a competitive advantage.

 

The party goods retail industry is large and highly fragmented. Our retail stores compete with a variety of smaller and larger retailers, including specialty retailers, warehouse/merchandise clubs, drug stores, supermarkets, dollar stores, mass merchants, and catalogue and online merchants. Our stores compete, among other ways, on the basis of location and store layout, product mix and availability, customer convenience and price. We may not be able to continue to compete successfully against existing or future competitors in the retail space. Expansion into markets served by our competitors and entry of new competitors or expansion of existing competitors into our markets could materially adversely affect our business, results of operations, cash flows and financial performance.

 

We must remain competitive in the areas of quality, price, breadth of selection, customer service and convenience. Competing effectively may require us to reduce our prices or increase our costs, which could lower our margins and adversely affect our revenues and growth prospects.

 

Our business may be adversely affected by fluctuations in commodity prices.

 

The costs of our key raw materials (paper, petroleum-based resin and cotton) fluctuate. In general, we absorb movements in raw material costs that we consider temporary or insignificant. However, cost increases that are considered other than temporary may require us to increase our prices to maintain our margins. Raw material prices may increase in the future and we may not be able to pass on these increases to our customers. A significant increase in the price of raw materials that we cannot pass on to customers could have a material adverse effect on our results of operations and financial performance. In addition, the interruption in supply of certain key raw materials essential to the manufacturing of our products may have an adverse impact on our and our suppliers’ abilities to manufacture the products necessary to maintain our existing customer relationships.

 

Although not used in the actual manufacture of our products, helium gas is currently used to inflate the majority of our metallic balloons. Although adequate quantities of helium are currently available for this purpose, we will rely upon future exploration and refining of natural gas to assure continued adequate supply.

 

Our failure to appropriately respond to changing merchandise trends and consumer preferences could significantly harm our customer relationships and financial performance.

 

As a manufacturer, distributor and retailer of consumer goods, our products must appeal to a broad range of consumers whose preferences are constantly changing. We also sell certain licensed products, with images such as cartoon or motion picture characters, which are in great demand for short time periods, making it difficult to project our inventory needs for these products. In addition, if consumers’ demand for single-use, disposable party goods were to diminish in favor of reusable products for environmental or other reasons, our sales could decline.

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:

 

 

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. We believe this general pattern will continue in the future. An economic downturn during this period could adversely affect us to a greater extent than if such downturn occurred at other times of the year. Any unanticipated decrease in demand for our products during the Halloween season could require us to maintain excess inventory or sell excess inventory at a substantial markdown, which could have a material adverse effect on our business, profitability, ability to repay any indebtedness and our brand image. In addition, our sales during the Halloween season could be affected if we are not able to find sufficient and adequate lease space for our temporary Halloween City locations or if we are unable to hire temporary personnel to adequately staff these stores and our distribution facility during the Halloween season. Failure to have proper lease space and adequate personnel could hurt our business, financial condition and results of operations.

 

Disruption to the transportation system or increases in transportation costs may negatively affect our operating results.

 

We rely upon various means of transportation, including shipments by air, sea, rail and truck, to deliver products to our distribution centers from vendors and manufacturers and from other distribution centers to our stores, as well as for direct shipments from vendors to stores. Independent third parties with whom we conduct business may employ personnel represented by labor unions. Labor stoppages, shortages or capacity constraints in the transportation industry, disruptions to the national and international transportation infrastructure, fuel shortages or transportation cost increases could adversely affect our business, results of operations, cash flows and financial performance.

 

Product recalls and/or product liability may adversely impact our business, merchandise offerings, reputation, results of operations, cash flow and financial performance.

 

We may be subject to product recalls if any of the products that we manufacture or sell are believed to cause injury or illness. In addition, as a retailer of products manufactured by third parties, we may also be liable for various product liability claims for products we do not manufacture. Indemnification provisions that we may enter into are typically limited by their terms and depend on the creditworthiness of the indemnifying party and its insurer and the absence of significant defenses. We may be unable to obtain full recovery from the insurer or any indemnifying third party in respect of any claims against us in connection with products manufactured by such third party. In addition, if our vendors fail to manufacture or import merchandise that adheres to our quality control standards or standards established by applicable law, our reputation and brands could be damaged, potentially leading to an increase in customer litigation against us. Furthermore, to the extent we are unable to replace any recalled products, we may have to reduce our merchandise offerings, resulting in a decrease in sales, especially if a recall occurs near or during a peak seasonal period. If our vendors are unable or unwilling to recall products failing to meet our quality standards, we may be required to recall those products at a substantial cost to us.

 

Our business is sensitive to consumer spending and general economic conditions, and an economic slowdown could adversely affect our financial performance.

 

In general, our retail sales, and the retail sales of our business partners to whom we sell, represent discretionary spending by our customers and our business partners’ customers. Discretionary spending is affected by many factors, such as general business conditions, interest rates, availability of consumer credit, unemployment levels, taxation, weather and consumer confidence in future economic conditions. Our customers’ and our business partners’ customers’ purchases of discretionary items, including our products,

often decline during periods when disposable income is lower or during periods of actual or perceived unfavorable economic conditions. If this occurs, our revenues and profitability will decline. In addition, economic downturns may make it difficult for us to accurately forecast future demand trends, which could cause us to purchase excess inventories, resulting in increases in our inventory carrying cost, or insufficient inventories, resulting in our inability to satisfy our customer demand and potential loss of market share.

 

Our business may be adversely affected by the loss or actions of our third-party vendors, and the loss of the right to use licensed material could harm our business and our results of operations.

 

Our ability to find new qualified vendors who meet our standards and supply products in a timely and efficient manner can be a significant challenge, especially for goods sourced from outside the United States. Many of our vendors currently provide us with incentives such as volume purchasing allowances and trade discounts. If our vendors were to reduce or discontinue these incentives, costs would increase. Should we be unable to pass cost increases to consumers, our profitability would be reduced.

 

Additionally, certain of our suppliers may control various product licenses for widely recognized images, such as cartoon or motion picture characters. The loss of these suppliers, or the termination of our ability to use certain licensed material, would prevent us from manufacturing and distributing the licensed products and could cause our customers to purchase these products from our competitors. This could materially adversely affect our business, results of operations, financial performance and cash flow.

 

Because we rely heavily on our own manufacturing operations, disruptions at our manufacturing facilities could adversely affect our business, results of operations, cash flows and financial performance.

 

In 2010, we manufactured items representing approximately 40% of our net sales at wholesale. Any significant disruption in our manufacturing facilities, in the United States or abroad, for any reason, including regulatory requirements, the loss of certifications, power interruptions, fires, hurricanes, war or other force of nature, could disrupt our supply of products, adversely affecting our business, results of operations, cash flows and financial performance. The occurrence of one or more natural disasters, or other disruptive geo-political events, could also result in increases in fuel (or other energy) prices or a fuel shortage, the temporary or permanent closure of one or more of manufacturing or distribution centers, the temporary lack of an adequate work force in a market, the temporary or long-term disruption in the supply of products from some local and overseas suppliers, the temporary disruption in the transport of goods from overseas or delays in the delivery of goods to our distribution centers or stores or to third parties who purchase from us. If one or more of these events occurred, our revenues and profitability would be reduced.

 

Our business and results of operations may be harmed if our suppliers or third-party manufacturers fail to follow acceptable labor practices or to comply with other applicable laws and guidelines.

 

Many of the products sold in our stores and on our website are manufactured outside of the United States, which may increase the risk that the labor, manufacturing safety and other practices followed by the manufacturers of these products may differ from those generally accepted in the United States as well as those with which we are required to comply under many of our image or character licenses. Although we require each of our vendors to sign a purchase order and vendor agreement that requires adherence to accepted labor practices and compliance with labor, manufacturing safety and other laws and we test merchandise for product safety standards, we do not supervise, control or audit our vendors or the manufacturers that produce the merchandise we sell to our customers. The violation of labor, manufacturing safety or other laws by any of our vendors or manufacturers, or the divergence of the labor practices followed by any of our vendors or manufacturers from those generally accepted in the United States could interrupt or otherwise disrupt the shipment of finished products to us, damage our brand image, subject us to boycotts by our customers or activist groups or cause some of our licensors of popular images to terminate their licenses to us. Our future operations and performance will be subject to these factors, which are beyond our control and could materially hurt our business, financial condition and results of operations or require us to modify our current business practices or incur increased costs.

Our international operations subject us to additional risks, which risks and costs may differ in each country in which we do business and may cause our profitability to decline.

 

We conduct our business in a number of foreign countries, including contracting with manufacturers and suppliers located outside of the United States, many of which are located in Asia. We recently expanded our international operations through the acquisitions of the Christy’s Group in September 2010 and Riethmüller in January 2011. Our operations and financial condition may be adversely affected if the markets in which we compete or source our products are affected by changes in political, economic or other factors. These factors, over which we have no control, may include:

 

 

We may face risks associated with litigation and claims.

 

From time to time, we are involved in class actions and other lawsuits, claims and other proceedings relating to the conduct of our business, including but not limited to employee-related and consumer matters. Additionally, as a retailer and manufacturer of decorated party goods, we have been and may continue to be subject to product liability claims if the use of our products, whether manufactured by us or our third party manufacturers, is alleged to have resulted in injury or if our products include inadequate instructions or warnings. Due to the uncertainties of litigation, we can give no assurance that we will prevail on all claims made against us in the lawsuits that we currently face or that additional claims will not be made against us in the future. While it is not feasible to predict the outcome of pending lawsuits and claims, we do not believe that any such matters are material or that the disposition thereof is likely to have a material adverse effect on our business, financial condition and results of operations, although the resolution in any reporting period of any matter could have an adverse effect on our operating results for that period. Also, we can give no assurance that any other lawsuits or claims brought in the future will not have a material adverse effect on our business, financial condition and results of operations.

 

We may require additional capital to fund our business, which may not be available to us on satisfactory terms or at all.

 

Our management currently believes that the cash generated by operations, together with the borrowing availability under our credit facilities, will be sufficient to meet our working capital needs. However, if we are unable to generate sufficient cash from operations, we may be required to adopt one or more alternatives to raise cash, such as incurring additional indebtedness, selling our assets, seeking to raise additional equity capital or restructuring. Additionally, our new senior secured asset-based revolving credit facility (the “New ABL Facility”) matures in August 2015. If we cannot renew or refinance this facility upon its maturity or, more generally, if adequate financing is unavailable or is unavailable on acceptable terms, we may be unable to maintain, develop or enhance our operations, products and services, take advantage of future opportunities, service our current debt costs or respond to competitive pressures.

Our success depends on key personnel whom we may not be able to retain or hire.

 

The success of our business depends, to a large extent, on the continued service of our senior management team. Gerald C. Rittenberg, our Chief Executive Officer, and James M. Harrison, our President and Chief Operating Officer, have been with the Company for approximately 20 and 15 years, respectively. The loss of the services and leadership of either of these individuals could have a negative impact on our business, as we may not be able to find management personnel with similar experience and industry knowledge to replace either of them on a timely basis. We do not maintain key life insurance on any of our senior officers.

 

As our business expands, we believe that our future success will depend greatly on our continued ability to attract, motivate and retain highly skilled and qualified personnel. Although we generally have been able to meet our staffing requirements in the past, our ability to meet our labor needs while controlling costs is subject to external factors, such as unemployment levels, minimum wage legislation and changing demographics. Our inability to meet our staffing requirements in the future at costs that are favorable to us, or at all, could impair our ability to increase revenue, and our customers could experience lower levels of customer service.

 

Additionally, we rely upon qualified personnel to staff our temporary Halloween City locations during the Halloween season. Our failure to attract qualified temporary personnel to adequately staff these stores could negatively impact our business.

 

We are subject to risks associated with leasing substantial amounts of space.

 

We lease all of our company-owned stores, our corporate headquarters and most of our distribution facilities. Our continued growth and success depends in part on our ability to renew leases for successful stores and negotiate leases for new stores, including temporary leases for our Halloween City stores. There is no assurance that we will be able to negotiate leases at similar or favorable terms, and we may decide not to enter a market or be forced to exit a market if a favorable arrangement cannot be made. If an existing or future store is not profitable and we decide to close it, we may nonetheless be committed to perform our obligations under the applicable lease, including, among other things, paying the base rent for the balance of the lease term. Moreover, even if a lease has an early cancellation clause, we may not satisfy the contractual requirements for early cancellation under the lease.

 

Our business could be harmed if our existing franchisees do not conduct their business in accordance with the standards that we have agreed to.

 

Our success depends, in part, upon the ability of our franchisees to operate their stores and promote and develop our store concept. Although our franchise agreements include certain operating standards, all franchisees operate independently and their employees are not our employees. We provide certain training and support to our franchisees, but the quality of franchise store operations may be diminished by any number of factors beyond our control. Consequently, franchisees may not successfully operate stores in a manner consistent with our standards and requirements, or may not hire and train qualified managers and other store personnel. If they do not, our image, brand and reputation could suffer.

 

Our information systems, order fulfillment and distribution facilities may prove inadequate or may be disrupted.

 

We depend on our management information systems for many aspects of our business. We will be materially adversely affected if our management information systems are disrupted or we are unable to improve, upgrade, maintain and expand our systems. In particular, we believe our perpetual inventory, automated replenishment and weighted average cost stock ledger systems are necessary to properly forecast, manage and analyze our inventory levels, margins and merchandise ordering quantities. We may fail to properly optimize the effectiveness of these systems, or to adequately support and maintain the systems. Moreover, we may not be successful in developing or acquiring technology that is competitive and responsive to our customers and might lack sufficient resources to make the necessary investments in technology needs

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.

 

We may be subject to future unionization, work stoppages, slowdowns or increased labor costs.

 

As of December 31, 2010, we had approximately 5,470 full time employees and 7,950 part time employees, none of whom was represented by a union. However, our employees have the right at any time under the National Labor Relations Act to form or affiliate with a union and certain employees have attempted in the past to do so. Furthermore, the Employee Free Choice Act of 2007, which would amend the National Labor Relations Act by streamlining union certification, facilitating initial collective bargaining agreements and strengthening enforcement, could, if enacted, make it easier for employees to unionize and obtain employee favorable bargaining agreements. Given our significant number of employees, if some or all of our workforce were to become unionized and the terms of the collective bargaining agreement were significantly different from our current compensation arrangements, it could increase our costs and adversely impact our profitability.

 

Our intellectual property rights may be inadequate to protect our business.

 

We hold a variety of United States trademarks, service marks, patents, copyrights, and registrations and applications therefor, as well as a number of foreign counterparts thereto and/or independent foreign intellectual property asset registrations. In some cases, we rely solely on unregistered trademarks and copyrights under United States common law rights to distinguish and/or protect our products, services and branding from the products, services and branding of our competitors. We cannot assure you that no one will challenge our intellectual property rights in the future. In the event that our intellectual property rights are

successfully challenged by a third party, we could be forced to re-brand, re-design or discontinue the sale of certain of our products or services, which could result in loss of brand recognition and/or sales and could require us to devote resources to advertising and marketing new branding or re-designing our products. Further, we cannot assure you that competitors will not infringe our intellectual property rights, or that we will have adequate resources to enforce these rights. We also permit our franchisees to use a number of our trademarks and service marks, including Party City^®, The Discount Party Super Store^®, Halloween Costume Warehouse^®, Party America^®, The Paper Factory^®, The Factory Card & Party Outlet^® and Halloween City^®. Our failure to properly control our franchisees’ use of such trademarks could adversely affect our ability to enforce them against third parties. A loss of any of our material intellectual property rights could have a material adverse effect on our business, financial condition and results of operations.

 

We license from many third parties and do not own the intellectual property rights necessary to sell products capturing many popular images, such as cartoon or motion picture characters. While none of these licenses is individually material to our aggregate business, a large portion of our business depends on the continued ability to license the intellectual property rights to these images in the aggregate. Any injury to our reputation or our inability to comply with, in many cases, stringent licensing guidelines in these agreements may adversely affect our ability to maintain these relationships. A large loss of these licensed rights in the aggregate could have a material adverse effect on our business, financial condition and results of operations.

 

We also face the risk of claims that we have infringed third parties’ intellectual property rights, which could be expensive and time consuming to defend, cause us to cease using certain intellectual property rights or selling certain products or services, result in our being required to pay significant damages or require us to enter into costly royalty or licensing agreements in order to obtain the rights to use third parties’ intellectual property rights, which royalty or licensing agreements may not be available at all, any of which could have a negative impact on our operating profits and harm our future prospects.

 

Risks Related to Our Indebtedness

 

Our substantial indebtedness and lease obligations could adversely affect our financial flexibility and our competitive position.

 

We have, and will continue to have, a significant amount of indebtedness. As of March 31, 2011, we had $1,076 million of outstanding indebtedness. As of March 31, 2011, we had $82.1 million excess availability under our New ABL Facility. Our substantial level of indebtedness increases the risk that we may be unable to generate cash sufficient to pay amounts due in respect of our indebtedness. We also have, and will continue to have, significant lease obligations. As of March 31, 2011, our minimum annual rental obligations under long-term operating leases for 2011 and 2012 were $85.4 million and $97.0 million, respectively. Our substantial indebtedness and lease obligations could have other important consequences to you and significant effects on our business. For example, they could:

 

 

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:

 

 

In addition, we are required to maintain compliance with certain financial ratios. These restrictions may prevent us from taking actions that we believe would be in the best interest of our business. Our ability to comply with these restrictive covenants will depend on our future performance, which may be affected by events beyond our control. If we violate any of these covenants and are unable to obtain waivers, we would be in default under the applicable agreements and payment of the indebtedness could be accelerated. The acceleration of our indebtedness under one agreement may permit acceleration of indebtedness under other agreements that contain cross-default or cross-acceleration provisions, including our New ABL Facility, our senior secured term loan facility (the “New Term Loan Credit Agreement”) and the indenture governing our notes. If our indebtedness is accelerated, we may not be able to repay that indebtedness or borrow sufficient funds to refinance it. Even if we are able to obtain new financing, it may not be on commercially reasonable terms or on terms that are acceptable to us. Furthermore, we and our subsidiaries may still be able to incur substantially more debt. This could further exacerbate the risks associated with our substantial leverage. If we are for any reason in default under any of the agreements governing our indebtedness, our business could be materially and adversely affected. In addition, complying with our covenants may also cause us to take actions that are not favorable to holders of the common stock and may make it more difficult for us to successfully execute our business strategy and compete against companies that are not subject to such restrictions.

 

Significant interest rate changes could affect our profitability and financial performance.

 

Our earnings are affected by changes in interest rates as a result of our variable rate indebtedness under our senior secured asset-based revolving facility and senior secured 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.

 

Risks Related to This Offering

 

An active public market for our common stock may not develop following this offering.

 

Prior to this offering, there has been no public market for our common stock. We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market in our common stock or how liquid that market might become. An active market for our common stock may not

develop or be sustained after the offering. If an active public market does not develop or is not sustained, it may be difficult for you to sell your shares of common stock at a price that is attractive to you, or at all. In addition, an inactive market may impair our ability to raise capital by selling shares and may impair our ability to acquire other companies by using our shares as consideration, which, in turn, could materially adversely affect our business.

 

The Sponsors will have the ability to control the outcome of matters submitted for stockholder approval and may have interests that differ from those of our other stockholders.

 

Investment funds affiliated with the Sponsors own a majority of our capital stock, on a fully-diluted basis, as of March 31, 2011. After the completion of this offering, the Sponsors will own approximately     % of our common stock, or     % on a fully-diluted basis. The Sponsors have significant influence over corporate transactions. So long as investment funds associated with or designated by the Sponsors continue to 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.

 

In addition, the Sponsors and their affiliates are in the business of making investments in companies and may, from time to time in the future, acquire interests in businesses that directly or indirectly compete with certain portions of our business. To the extent the Sponsors invest in such other businesses, the Sponsors may have differing interests than our other stockholders. Our third amended and restated certificate of incorporation, however, includes a provision that relieves the Sponsors’ representatives from any breach of fiduciary duty to us if the Sponsors pursue for their benefit opportunities such as acquisitions that might otherwise be appropriate for us.

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

The initial public offering price of our common stock will be determined by negotiations between us and the underwriters based upon a number of factors and may not be indicative of prices that will prevail following the completion of this offering. Volatility in the market price of our common stock may prevent investors from being able to sell their common stock at or above the initial public offering price. As a result, you may suffer a loss on your investment.

 

In addition, the stock markets in general have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance or the particular companies affected. These broad market and industry factors may materially harm the market price of our common stock irrespective of our operating performance. As a result of these factors, you might be unable to resell your shares at or above the initial public offering price after this offering. In addition, in the past, following periods of volatility in the overall market and the market price of a company’s securities, securities class action litigation has often been instituted against the affected company. This type of litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

 

We do not expect to pay any cash dividends for the foreseeable future and, consequently, your only opportunity to achieve a return on your investment is if the price of our common stock appreciates.

 

Following this offering, we do not anticipate that we will pay any cash dividend on shares of our common stock for the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon results of operations, financial performance, contractual restrictions, restrictions imposed by applicable law and other factors our board of directors deems relevant. Additionally, our current credit facilities and the indenture governing our notes contain restrictive covenants which have the effect of limiting our ability to pay cash dividends. Accordingly, if you purchase shares in this offering, realization of a gain on your investment will depend on the appreciation of the price of our common stock, which may never occur. Investors seeking cash dividends in the foreseeable future should not purchase our common stock.

 

Future sales of our common stock, or the perception in the public markets that these sales may occur, may depress our stock price.

 

Sales of substantial amounts of our common stock in the public market after this offering, or the perception that these sales could occur, could adversely affect the price of our common stock and could impair our ability to raise capital through the sale of additional shares. Upon completion of this offering, we will have           million shares of common stock outstanding, much of which will be concentrated in the hands of the Sponsors. This concentration, commonly referred to as a market overhang, could depress the price at which our stock trades.

 

Upon expiration of lock-up agreements between the underwriters and our officers, directors, the selling stockholders and certain other holders of our common stock, a substantial number of shares of our common stock could be sold into the public market shortly after this offering, which could depress our stock price.

 

Our officers, directors, the selling stockholders and holders of substantially all of our common stock have entered into lock-up agreements with our underwriters which prohibit, subject to certain limited exceptions, the disposal or pledge of, or the hedging against, any of their common stock or securities convertible into or exchangeable for shares of common stock for a period through the date 180 days after the date of this prospectus, subject to extension in certain circumstances. See “Shares Eligible for Future Sale” for a more detailed description of the restrictions on selling shares of our common stock after this offering. The market price of our common stock could decline as a result of sales by our existing stockholders in the market after this offering and after the expiration of these lock-up periods, or the perception that these sales could occur. Once a trading market develops for our common stock, and after these lock-up periods expire, many of our

stockholders will have an opportunity to sell their stock for the first time. These factors could also make it difficult for us to raise additional capital by selling stock.

 

If you purchase shares of common stock in this offering, you will incur immediate and substantial dilution.

 

If you purchase shares of common stock in this offering, you will incur immediate and substantial dilution in the amount of $      per share because the initial public offering price of $      per share is substantially higher than the pro forma net tangible book value per share of our common stock. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares. In addition, you may also experience additional dilution upon future equity issuances or the exercise of stock options to purchase common stock granted to our employees, consultants and directors under our equity incentive plans.

 

We may undertake acquisitions to expand our business, which may pose risks to our business and dilute the ownership of our existing shareholders.

 

We continuously seek to expand our business through strategic acquisitions, both domestically and internationally. Our recent acquisitions include the March 2010 acquisition of the Designware party goods division from American Greetings, the September 2010 acquisition of the Christy’s Group, a U.K.-based costume company and the January 2011 acquisition of Riethmüller, a German balloon and party goods producer. 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.

 

If the underwriters exercise their option to purchase additional shares in this offering in full, we estimate that net proceeds of the sale of the common stock that we are offering will be approximately $      million. Our management will have broad discretion to use our net proceeds from this offering, and you will be relying on the judgment of our management regarding the application of these proceeds. Our management might not apply the net proceeds of this offering in ways that increase the value of your investment. Our management might not be able to yield any return on the investment and use of these net proceeds. You will not have the opportunity to influence our decisions on how to use the proceeds.

 

If securities or industry analysts do not publish research or reports or publish unfavorable research or reports about our business, our stock price and trading volume could decline.

 

The trading market for our common stock will depend in part on the research and reports that securities and industry analysts publish about us, our business, our market or our competitors. We may not obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our company, the trading price of our stock could be negatively impacted. In the event we obtain securities

or industry analyst coverage, if one or more of the analysts who covers us publishes unfavorable research or reports or downgrades our stock, our stock price would likely decline. If one or more of these analysts ceases to cover us or fails to regularly publish reports on us, interest in our stock could decrease, which could cause our stock price or trading volume to decline.

 

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

 

Our third amended and restated certificate of incorporation or bylaws contain provisions that may make the acquisition of our company more difficult without the approval of our board of directors. These provisions include:

 

 

 

 

 

The 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.

 

This prospectus contains forward-looking statements that convey our current expectations or forecasts of future events. All statements in this prospectus other than statements of historical fact are forward-looking statements. Forward-looking statements include statements about our future financial position, business strategy, budgets, projected costs, plans and objectives of management for future operations. The words “may,” “might,” “should,” “predict,” “potential,” “continue,” “estimate,” “intend,” “plan,” “will,” “believe,” “project,” “expect,” “seek,” “anticipate” and similar expressions may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking.

 

Any or all of our forward-looking statements in this prospectus may turn out not to occur as contemplated. They are based largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements. These factors include the effects of competition in the industry, the failure by us to anticipate changes in tastes and preferences of party goods retailers and consumers, the inability to increase store growth, the inability to increase prices to recover fully future increases in commodity prices, the loss of key employees, changes in general business conditions and other factors which are beyond our control. In particular, you should consider the numerous risks described in the “Risk Factors” section of this prospectus.

 

Although we believe the expectations reflected in the forward-looking statements are reasonable, in light of these risks and uncertainties, the forward-looking events and circumstances discussed in this prospectus may not occur as contemplated and actual results could differ materially from those anticipated or implied by the forward-looking statements.

 

You should not unduly rely on these forward-looking statements, which speak only as of the date of this prospectus. Unless required by law, we undertake no obligation to publicly update or revise any forward-looking statements to reflect new information or future events or otherwise. You should, however, review the factors and risks we describe in the reports we will file from time to time with the SEC after the date of this prospectus. See “Where You Can Find Additional Information.”

 

We estimate that the net proceeds of the sale of the common stock that we are offering will be approximately $           million, or $           million if the underwriters exercise their option to purchase additional shares in full, assuming an initial public offering price of $      per share, which is the midpoint of the range listed on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of shares of common stock by the selling stockholders.

 

We expect to use approximately $           million of the net proceeds from this offering received by us to repurchase or redeem our senior subordinated notes, of which $175.0 million were outstanding at March 31, 2011, and approximately $3.75 million to terminate the management agreement.

 

We may also use any remaining portion of the net proceeds to repay amounts borrowed under our New ABL Facility, for working capital and other general corporate purposes. At March 31, 2011, approximately $227.6 million was outstanding under our New ABL Facility due 2015 at interest rates ranging from 2.76% to 4.75%. Certain of the underwriters and their affiliates serve in various capacities, including as Lenders, under the New ABL Facility and, accordingly, may receive a portion of the net proceeds from this offering through repayment of such indebtedness. See “Underwriting — Conflicts of Interest.”

 

For additional information on our liquidity and outstanding indebtedness, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

 

This expected use of net proceeds from this offering represents our intentions based upon our current plans and business conditions. The amounts and timing of our actual expenditures may vary significantly depending on numerous factors and any unforeseen cash needs. As a result, our management will retain broad discretion over the allocation of the net proceeds from this offering. Pending our use of the net proceeds from this offering as described above, we intend to invest the net proceeds in a variety of capital preservation investments, including short-term, investment-grade, interest-bearing instruments and U.S. government securities.

 

We currently intend to retain all of our future earnings, if any, to finance operations, development and growth of our business, and repay debt. Most of our indebtedness contains restrictions on our activities, including paying dividends on our capital stock and restricting dividends or other payments to us. Any future determination relating to our dividend policy will be made at the discretion of our board of directors and will depend on a number of factors, including future earnings, capital requirements, financial conditions, future prospects, contractual restrictions and covenants and other factors that our board of directors may deem relevant.

 

In December 2010, in connection with the refinancing of our term loan agreement, Amscan Holdings’ board of directors declared and paid to us a one-time cash dividend totaling approximately $311.2 million. We used the aggregate proceeds from this dividend to pay a one-time cash dividend to our holders of common stock and to make a cash payment in lieu of a dividend to certain option and warrant holders (such dividend and payments, the “2010 Dividend”). In addition, holders of unvested options at the date such dividend was declared will receive a comparable distribution, if and when the options vest. The 2010 Dividend was the only dividend that we have paid on our common stock during the past four years.

 

The following table sets forth our cash and cash equivalents and capitalization as of March 31, 2011:

 

 

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.

 

 

 

 

 

 

If you purchase our common stock in this offering, you will experience an immediate dilution of net tangible book value per share from the initial public offering price. Dilution in net tangible book value per share of our common stock represents the difference between the initial public offering price per share and the net tangible book value per share immediately after this offering. We calculate net tangible book value per share of our common stock by dividing the net tangible book value (total consolidated tangible assets less total consolidated liabilities) by the number of outstanding shares of our common stock

 

At March 31, 2011, the net tangible book value of our common stock was approximately $587.1 million, or approximately $           per share of our common stock. After giving effect to (1) the sale of shares of our common stock in this offering at an assumed initial public offering price of $      per share, and after deducting estimated underwriting discounts and commissions and the estimated offering expenses of this offering, and (2) the Common Stock Conversion, the as adjusted net tangible book value at March 31, 2011 attributable to common stockholders would have been approximately $      million, or approximately $      per share of our common stock. This represents a net increase in net tangible book value of $      per existing share and an immediate dilution in net tangible book value of $      per share to new stockholders. The following table illustrates this per share dilution to new stockholders:

 

 

The table below summarizes, as of March 31, 2011, the differences for (1) our existing stockholders, and (2) investors in this offering, with respect to the number of shares of common stock purchased from us, the total consideration paid, and the average price per share paid before deducting fees and expenses.

 

 

Of the shares issued to and total consideration paid by existing stockholders in the table above, our directors and officers were issued a total of           shares in connection with the exercise of options for a total consideration of $10,000, or $           per share.

 

The foregoing discussion and tables assume no exercise of stock options to purchase           shares of our common stock subject to outstanding stock options with a weighted average exercise price of $           per share as of March 31, 2011 and excludes           shares of our common stock available for future grant or issuance under our stock plans. To the extent that any options having an exercise price that is less than the offering price of this offering are exercised, new investors will experience further dilution.

 

The following unaudited pro forma consolidated financial data sets forth our unaudited pro forma and historical consolidated income statements for the year ended December 31, 2010 and the three months ended March 31, 2011 and our unaudited pro forma and historical balance sheets at December 31, 2010 and March 31, 2011. Such information is based on the historical financial statements of the Company appearing elsewhere in this prospectus.

 

The unaudited pro forma consolidated income statement data for the year ended December 31, 2010 and the three months ended March 31, 2011 give effect to the following as if each had occurred on January 1, 2010:

 

 

 

The unaudited pro forma consolidated balance sheets at December 31, 2010 and March 31, 2011 give effect to the IPO and the application of net proceeds therefrom as if each had occurred on December 31, 2010 and March 31, 2011, respectively.

 

The unaudited pro forma adjustments are based on available information and certain assumptions that we believe are reasonable. The unaudited pro forma consolidated financial information was prepared on a basis consistent with that used in preparing our audited consolidated financial statements and includes all adjustments, consisting of normal and recurring items, that we consider necessary for a fair presentation of our financial position and results of operations for the unaudited periods.

 

The unaudited pro forma consolidated financial information should be read in conjunction with the sections of this prospectus entitled “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our historical consolidated financial statements and related notes thereto included elsewhere in this prospectus. The unaudited pro forma consolidated financial information is for informational purposes only and is not intended to represent or be indicative of the consolidated results of operations or financial position that we would have reported had the structuring transactions and this offering been completed on the dates indicated and should not be taken as representative of our future consolidated results of operations or financial position.

 

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2010

 

 

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AT DECEMBER 31, 2010

 

 

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2011