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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                 to                                  

Commission File Number: 001-37344

 

Party City Holdco Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Delaware

46-0539758

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

 

80 Grasslands Road

Elmsford, NY 10523

(Address of Principal Executive Offices)

(914345-2020

(Registrant’s telephone number, including area code)

 

Securities Registered Pursuant to Section 12(b) of the Act:

 

Title of each class 

 

Trading Symbol(s)

 

Name of each exchange on which registered 

Common Stock $0.01 par value

 

PRTY

 

New York Stock Exchange

 

Securities Registered Pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes      No  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes      No  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by a check mark whether the registrant has submitted electronically and posted on its corporate website every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.)    Yes     No  

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

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

The aggregate market value of common stock held by non-affiliates as of June 30, 2020 was $140,692,691. As of February 26, 2021, there were 110,733,170 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement relating to its 2021 annual meeting of stockholders, to be held on June 10, 2021, are incorporated by reference in Part III.

 

 

 

 


 

 

FORM 10-K

TABLE OF CONTENTS

 

 

 

Page

 

 

 

 

PART I

 

 

 

 

Item 1

Business

1

Item 1A

Risk Factors

10

Item 1B

Unresolved Staff Comments

28

Item 2

Properties

29

Item 3

Legal Proceedings

31

Item 4

Mine Safety Disclosures

31

 

 

 

 

PART II

 

 

 

 

Item 5

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

32

Item 6

Selected Consolidated Financial Data

34

Item 7

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

42

Item 7A

Quantitative and Qualitative Disclosures About Market Risk

66

Item 8

Financial Statements and Supplementary Data

67

Item 9

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

125

Item 9A

Controls and Procedures

125

Item 9B

Other Information

126

 

 

 

 

PART III

 

 

 

 

Item 10

Directors, Executive Officers and Corporate Governance

127

Item 11

Executive Compensation

127

Item 12

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

127

Item 13

Certain Relationships and Related Party Transactions and Director Independence

127

Item 14

Principal Accountant Fees and Services

127

 

 

 

 

PART IV

 

 

 

 

Item 15

Exhibits and Financial Statement Schedules

128

Item 16

Form 10-K Summary

132

 

 

 

 


 

 

PART I

Forward-Looking Statements

This Annual Report on Form 10-K, including the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7, contains information that may constitute forward-looking statements. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts, such as statements regarding our future financial condition or results of operations, our prospects and strategies for future growth and the development and introduction of new products. In many cases you can identify forward-looking statements by terms such as “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.

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 section Item 1A. “Risk Factors.” 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 Annual Report on Form 10-K 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 are qualified by these cautionary statements and are made only as of the date of this Annual Report on Form 10-K. Any such forward-looking statements should be considered in context with the various disclosures made by us about our business. 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 Securities and Exchange Commission (the “SEC”) after the date of the filing of this Annual Report on Form 10-K.

In this Annual Report on Form 10-K references to “Party City Holdco,” “Party City,” the “Company,” “we,” “our,” “ours” and “us” refer to Party City Holdco Inc. and its consolidated subsidiaries unless stated or the context otherwise requires.

Item 1.

Business

Overview

Party City Holdco is a Delaware corporation formed in 2012. It has no operating assets or operations. Party City Holdco owns 100% of PC Nextco Holdings, LLC (“PC Nextco”), which owns 100% of PC Intermediate Holdings, Inc. (“PC Intermediate”). PC Intermediate owns 100% of Party City Holdings Inc. (“PCHI”). PCHI or its direct or indirect subsidiaries conduct most of our operations. The Company’s principal executive offices are located at 80 Grasslands Road, Elmsford, New York 10523.

We are the leading party goods company by revenue in North America and, we believe, the largest vertically integrated supplier of decorated party goods globally by revenue. The Company is a popular one-stop shopping destination for party supplies, balloons, and costumes. In addition to being a great retail brand, the Company is a global, world-class organization that combines state-of-the-art manufacturing and sourcing operations, and sophisticated wholesale operations complemented by a multi-channel retailing strategy and e-commerce retail operations. The Company is a leading player in its category and vertically integrated in its breadth and depth. The Company designs, manufactures, sources and distributes party goods, including paper and plastic tableware, metallic and latex balloons, Halloween and other costumes, accessories, novelties, gifts and stationery throughout the world. The Company’s retail operations include 831 specialty retail party supply stores (including franchise stores) throughout the United States and Mexico operating under the names Party City and Halloween City, and e-commerce websites, including through the domain name PartyCity.com.

1


 

In addition to our retail operations, we are also one of the largest global designers, manufacturers and distributors of decorated consumer party products, with items found in retail outlets worldwide, including independent party supply stores, mass merchants, grocery retailers, e-commerce merchandisers and dollar stores. Our products are available or licensed in over 100 countries with the United Kingdom (“U.K.”), Canada, Germany, Mexico and Australia among the largest end markets for our products outside of the United States.

Industry Overview

We operate in the broadly defined retail party goods industry and Halloween market. The party goods industry includes decorative paper and plastic tableware, costumes, decorations, accessories and balloons, all of which are supported by a range of suppliers from commodity paper goods producers to party goods manufacturers. The retail landscape for decorated party goods is comprised primarily of party superstores, mass merchants, e-commerce merchandisers, craft stores, grocery retailers, and dollar stores. 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.

Segments

We have two reporting segments: Retail and Wholesale. In 2020, we generated 74.5% of our total revenues from our retail segment and 25.5% of our total revenues from our wholesale segment.

Our retail operations generate revenue primarily through the sale of our party supplies, which are sold under the Amscan and Anagram brand names, through our Party City stores, Halloween City stores and PartyCity.com.

Our wholesale revenues are generated from the sale of decorated party goods for all occasions, including paper and plastic tableware, accessories and novelties, costumes, metallic and latex balloons and stationery. Our products are sold at wholesale to party goods superstores (including our franchise stores), other party goods retailers, mass merchants, independent card and gift stores, dollar stores and e-commerce merchandisers.

Financial information about our industry segments and geographic segments is provided in Note 19, Segment Information, to our consolidated financial statements in Part II, Item 8, “Financial Statements and Supplementary Data,” in this Annual Report on Form 10-K.

 

Product Lines

Our product line spans a wide variety of ways to celebrate everyday events including from birthdays to theme parties to sporting events. Additionally, we offer seasonal products throughout the year to decorate and dress up for holidays such as Halloween, New Year’s Eve and Mardi Gras. Our product offering is designed to provide everything needed to throw an amazing event and capture life’s special moments including a wide range of décor, tabletop, balloons and wearable product formats.

 

Category

 

Items

 

Tableware

 

Plastic Plates, Paper Plates, Plastic Cups, Paper Cups, Paper Napkins, Plastic Cutlery, Table Covers

 

Costumes & Accessories

 

Costumes, Other Wearables, Wigs

 

Decorations

 

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

 

Metallic Balloons

 

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

 

Favors, Stationery & Other

 

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

 

 

2


 

 

Retail Operations

Overview

After 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. Our websites, including PartyCity.com, offer a convenient, user-friendly and secure online shopping option for our customers. In addition to the ability to order products, our websites provide a substantial amount of content about our party products, party planning ideas and promotional offers. The websites are also one of our key marketing vehicles, specifically as they relate to social media marketing initiatives. We have franchised stores throughout the United States, Mexico and Puerto Rico run by franchisees utilizing our format, design specifications, methods, standards, operating procedures, systems and trademarks. Our wholesale sales to franchised stores generally mirror, with respect to relative size, mix and category, those to our company-owned stores. We are not currently marketing, nor do we plan to market, new franchise territories in the United States.

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

 

 

 

2020

 

 

2019

 

 

2018

 

Stores open at beginning of year

 

 

777

 

 

 

866

 

 

 

803

 

Stores opened

 

 

5

 

 

 

5

 

 

 

15

 

Stores acquired from franchisees/others

 

 

6

 

 

 

6

 

 

 

58

 

Stores closed and sold

 

 

(42

)

 

 

(100

)

 

 

(10

)

Stores open at end of year

 

 

746

 

 

 

777

 

 

 

866

 

 

The following table shows the change in our franchise-owned store network over the past three years:

 

 

 

2020

 

 

2019

 

 

2018

 

Stores open at beginning of year

 

 

98

 

 

 

96

 

 

 

148

 

Stores opened/acquired by existing franchisees

 

 

 

 

 

2

 

 

 

1

 

Stores sold to the Company

 

 

(6)

 

 

 

 

 

 

(50

)

Stores closed or converted to independent stores

 

 

(7)

 

 

 

 

 

 

(3

)

Stores open at end of year

 

 

85

 

 

 

98

 

 

 

96

 

 

We receive revenue from our franchisees, consisting of an initial one-time fee and ongoing royalty fees generally ranging from 4% to 6% of net sales. In exchange for these franchise fees, franchisees principally receive brand value and company support with respect to planograms. Each franchisee has a mandated advertising budget, which consists of a minimum initial store opening promotion and ongoing local advertising and promotions. Additionally, franchisees must pay 1% to 2.25% of net sales to a group advertising fund to cover common advertising materials. 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. For 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.

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. Halloween business represents approximately 20% of our total domestic retail sales. To maximize our seasonal opportunity, we operate a chain of temporary Halloween stores, under the Halloween City banner, during the months of September and October of each year.

3


 

Wholesale Operations

Overview

We currently offer over 400 party goods ensembles, which range from approximately five to 50 design-coordinated items spanning tableware, accessories, novelties, balloons and decorations. The breadth of these ensembles enables our retail stores and third – party 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 and Anagram branded products are offered in retail outlets worldwide, ranging from party goods superstores (including our franchise stores), other party goods retailers, mass merchants, independent card and gift stores, dollar stores and e-commerce merchandisers. We have long-term relationships with many of our wholesale customers.

The table below shows the breakdown of our total wholesale sales by channel for the year ended December 31, 2020:

 

Channel

 

Sales

 

 

 

(dollars in millions)

 

Owned stores and e-commerce

 

$

472

 

Party City franchised stores and other domestic retailers

 

 

174

 

Domestic balloon distributors/retailers

 

 

73

 

International balloon distributors

 

 

20

 

Other international

 

 

201

 

Total wholesale sales

 

$

940

 

 

Wholesale Manufactured Products

We manufacture items representing approximately 43% of our net sales at wholesale (including sales to our retail operations). Generally, our manufacturing facilities are highly automated and produce paper and plastic plates and cups, paper napkins, metallic and latex balloons, injection molded product, costumes, pinatas and other party and novelty items at globally competitive costs. State-of-the-art printing, forming, folding and packaging equipment support most of 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 company’s facilities and the products produced at each location is listed in Item 2. “Properties” in this Annual Report on Form 10-K.

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 relationships that exceed twenty years with many of our vendors and often represent a significant portion of their overall business. They 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 and source 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 centers. We have a full-time staff of professionals in the United States, Asia and Europe dedicated to product safety and quality assurance.

4


 

Wholesale Distribution and Systems

We ship our products directly to retailers and distributors throughout the world from our distribution facilities, as well as directly from our domestic and international factories. Our electronic order entry and information systems allow us to manage our inventory.

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 serves as the main point of distribution for our Amscan-branded products and utilizes a paperless, pick-by-light system, a Goods-To-Person (OSR) picking system, offering superior inventory management and turnaround times as short as 48 hours. Refer to Item 2. “Properties” in this Annual Report on Form 10-K for additional information on other distribution centers that support our US and international customers.

Wholesale Customers

We have a diverse third-party customer base at wholesale. During 2020, no individual third-party customer accounted for more than 10% of our total third-party sales at wholesale.

 

Competitive Strengths

We believe 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 decorated party supplies retailer, providing a one-stop fun and engaging 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 product 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, and we believe 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 consumer party products, by revenue, with over 45,000 SKUs found in 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 decorated consumer party products, acting as a one-stop shop for 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 40,000 SKUs offered online. Our extensive selection offers customers a single source for all of their party needs. Our in-house design team introduces approximately 6,000 products annually, driving innovation in our licensed and unlicensed product offering and supporting increased sales across our channels.

Highly efficient global sourcing and distribution capabilities. Over the past 70 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 throughout North America and have opened sourcing, quality control and testing offices throughout Asia, with offices located in China, Vietnam, India, Indonesia 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.

5


 

World-Class Management Team with a Proven Track Record. Our senior management team averages 20 years of industry experience and possesses a unique combination of management skills and experience in the party goods sector. Our team has successfully grown our sales and profits during various economic cycles and through several business transformations. Additionally, our team has a strong track record of successful acquisitions and integrations, which continue to be an important part of our overall strategy.

Growth Strategy

The Company continues to advance its strategic initiatives that underpin efforts to grow our business and expand on our purpose of creating joy by making it easy to create unforgettable memories.

Develop a more relevant in-store experience. We continue to make progress on our next generation store prototype, as we test changes to provide a better shopping experience for our customers. We found that our traditional store formats could be overwhelming to some customers and time-consuming to navigate, which provides a natural opportunity for us to simplify the shopping experience. The material changes to our stores include a new shop-in-shop store layout with improved product adjacencies, edited and more curated product assortments, reduced inventory, as well as new services and experiences. A new balloon shop and customer engagement center are now the focal point of the store and add significant theater to the entire experience. Balloon sales growth in our next-gen stores are significantly higher than the trend in the balance of the chain. Customers have also told us that they appreciate the decluttering of the stores due to the lower sightlines and the more curated assortment.

Win in balloons. For manufacturing and wholesale, all the way through to Party City retail, balloons are a focal point of our growth strategy. With the recent helium shortage behind us, we began 2020 focusing on balloons as a key driver of our differentiated brand experience. As the leader in the global balloon business with an unmatched breadth of balloon assortment, we continue to bring innovation in products, do-it-yourself options and how-to guidelines, along with greater access points to balloons through new digital engagement and additional fulfillment options through curbside pickup and delivery. Buying balloons online with the ability to pick them up in store, at curbside or have them delivered the same day is increasing balloon demand. As part of our balloon business, Anagram designs, manufactures and markets foil balloons and inflated décor. See “—Anagram.” Winning in the balloon category remains a top strategic priority across our enterprise growth initiatives and business disciplines.

Address price value perception in key categories. Customer behavior and insights have told us we were overpriced on some key value indicator items across our assortment. To address this and sharpen our price value perception, since fall of 2019, we have reduced prices on approximately 30% of our total active SKU count. The customer has noticed and has responded favorably with their feedback and the unit sales volume increases we intended. As projected, these reductions in price across product categories have driven increased enterprise margin dollars and increased retail margin rate when coupled with the reduction of previously ineffective promotional offers. We continue to monitor and react to price-related customer insights and price elasticity data on a regular basis. Rebuilding trust with the customer on price is critical to our broad efforts to gain relevancy with consumers, and we are pleased with our progress to date.

Improve our customer engagement selling culture. Improving customer engagement across our marketing messages, our product and merchandising approach, as well as digital experiences with our brand is also critical to driving greater relevancy. Our dramatic shift in digital content, including new, more relevant content formats, carefully curated product assortments and new technology has driven growth in consumer engagement as well as online conversion rates. In 2020, we launched digital workshops and live video formats across our social platforms for the first time, which have garnered hundreds of thousands of views and reached millions of consumers.

Our customers are also increasingly looking to create a complete party experience, and we are transforming our company to do more than selling party supplies. We believe there is a clear opportunity to play more of a party planner role with customers who are shopping our stores for party supplies. In order to successfully capitalize on this growing trend, we are focused on improving in-store customer engagement. We are pivoting from a store operations and maintenance culture to a customer engagement and selling culture. This pivot is driven by leading, hiring and training store management and associates with a higher level of accountability for sales and customer engagement metrics. In addition, as we reduce our SKU count in inventory levels, this frees up time for our sales associates to focus on customer engagement.

6


 

Build on our omni-channel platform. Key components of increasing our omnichannel capabilities, such as buy online, pick-up in store, curbside and same-day delivery, are now core to our customer experience. We continue to optimize and add to these experiences as we focus on the customer experience with our brand and seek new and innovative ways to make it easy to create celebrations. In the third quarter of 2020, we rolled out an enhanced curbside delivery experience in all of our stores allowing customers to communicate their expected pick-up time, arrival and vehicle information, all via text message, which creates a more intuitive and efficient experience for our customers. As customers seek same-day delivery options, we remain focused on improving the customer experience with improved speed and reliability. We are investing in improved technology to enable more proficient orchestration of delivery process and have expanded our last-mile delivery partner network.

Continue to grow our wholesale business. We are transforming our wholesale business from a transactional product selling organization into a strategic category partner via improved consumer insights, assortment, merchandising and promotional strategies, all enabled by world-class service and supply chain capabilities. Additionally, we are focused on driving stronger margins through increased manufacturing and distribution efficiencies with strategic investments in automation, technology, new equipment and process improvement while also improving our inventory management capabilities.

COVID-19 Update

Our business, operations, financial condition and liquidity have been and may continue to be materially and adversely affected by COVID-19. Further, the disruption to the global economy and to our business, along with the decline in our stock price, may negatively impact the carrying value of certain assets, including inventories, accounts receivable, intangibles and goodwill. The full extent to which COVID-19 and the measures to contain it will impact our business, operations, financial condition and liquidity will depend on the severity and duration of the COVID-19 outbreak and other future developments related to the response to the virus, all of which are highly uncertain, and we expect this uncertainty to continue in 2021. Our results of operations may be affected by the uncertainty surrounding the impact of the COVID-19 pandemic, and we will continue to actively monitor the impact of the COVID-19 pandemic on our expected losses.

We have proactively managed our liquidity profile throughout the last fiscal year and expect to continue to do so going forward. We expect to rely on cash on hand, cash generated by operation and borrowing available under our New ABL Facility to meet our working capital needs.

However, if the duration of the COVID-19 outbreak continues longer than we expect or the severity worsens, we may need to access other sources of financing, including incurring additional indebtedness, selling our assets and raising additional equity capital. These alternatives may not be available to us on satisfactory terms or at all, which could have a material adverse effect on our business.

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 temporary and permanent superstores.

Human Capital Disclosure

As of December 31, 2020, the Company had approximately 8,370 full-time employees and 8,928 part-time employees, none of whom is covered by a collective bargaining agreement. We consider our relationship with our employees to be good.

7


 

Our employees are critical to delivering our company Purpose - inspiring joy to make it easy for our customers to create unforgettable memories. Our employees live by our four company values: Customer First, It Can Be Done, People Matter and Celebrate, and this, along with our focus on key priorities, is driving our transformation.

The health and safety of our employees and customers is a top priority. We are laser focused on designing and implementing CDC-compliant COVID protocols and practices and convened an enterprise-wide COVID Task Force to continually evolve our approach as the guidelines shift and evolve. Early on in the pandemic, we were focused on supporting our employees from a mental, emotional and physical wellness perspective, and launched PCHI Cares, a series of communications with resources and information for employees and their families to maintain their own wellness.

In 2020, we announced our commitment to Diversity & Inclusion and launched an enterprise-wide assessment which enabled us to develop our 2021 Diversity, Equity, Inclusion & Belonging strategy built on awareness, education and infrastructure. We believe deeply that diversity creates a high level of employee engagement and drives game-changing innovation.

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 are 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, Oh, It’s On, Nobody has More Party for Less, 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.

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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.

Available Information

We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and in accordance therewith, we file reports, proxy and information statements and other information with the SEC. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and other information to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available through the investor relations section of our website at www.partycity.com or investor.partycity.com. Reports are available free of charge as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. The information contained on our website is not incorporated by reference into this Annual Report on Form 10-K. The SEC maintains an Internet site that contains our reports, proxy and information statements, and other information that we file electronically with the SEC at www.sec.gov.

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Item 1A.

Risk Factors

The following risk factors may be important to understanding any statement in this Annual Report on Form 10-K or elsewhere. Our business, financial condition and operating results can be affected by a number of factors, whether currently known or unknown, including but not limited to those described below. Any one or more of such factors could directly or indirectly cause our actual results of operations and financial condition to vary materially from past or anticipated future results of operations and financial condition. Any of these factors, in whole or in part, could materially and adversely affect our business, financial condition, results of operations and stock price.

Summary of Risk Factors

Below is a summary of the principal risks that apply to Party City or our securities. This summary does not address all of the risks that we face. Additional discussion of the risks summarized here, and other risks that we face, can be found immediately below this summary.

 

Our business, operations, financial condition and liquidity have been and may continue to be materially and adversely affected by the outbreak of COVID-19.

 

We face risks related to our balloon business [including our use of helium gas and changes in consumer preferences].

 

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

 

Because we rely heavily on our own manufacturing operations and those of our suppliers, disruptions at

manufacturing facilities could adversely affect our business, results of operations, cash flows and financial performance.

 

A decrease in our Halloween sales could have a material adverse effect on our operating results for the

year.

 

Our failure to appropriately respond to changing merchandise trends and consumer preferences could

significantly harm our customer relationships and financial performance.

 

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

 

Product recalls and/or product liability may adversely impact our business, merchandise offerings,

reputation, results of operations, cash flow and financial performance.

 

Our business is sensitive to consumer spending and general economic conditions, and other factors beyond our control, including adverse weather conditions or the outbreak of disease, and an economic slowdown could adversely affect our financial performance.

 

Our business may be adversely affected by the loss or actions of our third-party vendors.

 

Our international operations subject us to additional risks, which risks and related costs may differ in each

country in which we do business and may cause our profitability to decline.

 

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

 

Our business could be harmed if our existing franchisees do not conduct their business in accordance with agreed upon standards.

 

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

 

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

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The market price of our common stock could decline due to the large number of outstanding shares of our common stock eligible for future sale.

 

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 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.

 

Risks Related to Our Business

 

Our business, operations, financial condition and liquidity have been and may continue to be materially and adversely affected by the outbreak of COVID-19.

In March 2020, the World Health Organization declared COVID-19 a global pandemic, and governmental authorities around the world have implemented measures to reduce the spread of the virus. The global spread of COVID-19 and the measures to contain it have negatively impacted the global economy, disrupted global supply chains, and created significant volatility and disruption in financial markets. Quarantines, stay-at-home orders and related measures have significantly reduced consumer spending as well as customer demand for our products. In response to COVID-19, to safeguard the health and safety of its team members and customers, we temporarily closed all of our corporate retail stores as of March 18, 2020. During the temporary store closures, we offered curbside pickup and our e-commerce site, www.partycity.com, remained fully operational. This led to a temporary furlough of approximately 90% of store employees and 70% of wholesale, manufacturing and corporate employees for whom we provide health benefits. In addition, there were non-payroll expense reductions, including advertising and other store operating expenses, as well as professional and consulting fees, and cancellation of orders and negotiated receipt delays to manage inventory levels. We began reopening stores on May 1, 2020, in accordance with state and local health ordinances, and by June 22, 2020, all stores were re-opened. However, although all of our stores have reopened, these restrictions and other dislocations caused by the outbreak have disrupted our planning, branding and administrative functions, as well as that of our suppliers, transporters and customers. As a result, our business, operations, financial condition and liquidity have been and may continue to be materially and adversely affected. Further, the disruption to the global economy and to our business, the sustained decline in market capitalization, and reduced fair value of certain intangibles and long-lived assets, resulted in our recognizing non-cash pre-tax impairment charges for the nine months ended September 30, 2020.

COVID-19 has subjected our business, operations and financial condition to a number of risks, including, but not limited to, those discussed below:

 

Risks relating to our revenues and profitability. 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, public health crises, including COVID-19, and consumer confidence in future economic conditions. Our customers’ purchases 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 or as a result of geopolitical events or widespread health emergencies, and we have experienced significant declines due to COVID-19. The COVID-19 pandemic led to store closures during parts of 2020 and has decreased traffic in our stores and caused consumers to decide not to host or attend gatherings or other events. In addition, our retail business realizes a significant portion of its revenues, net income and cash flows in September and October, principally due to Halloween sales. Because of COVID-19 and related restrictions, we opened significantly fewer Halloween City stores in the fourth quarter of 2020 than in prior years. As a result, our revenues and profitability have been materially and adversely affected. In addition, although we have taken actions in the fourth quarter of 2020 to rationalize our in-store SKU count and dispose of certain inventory, the COVID-19 pandemic and the related economic downturn 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

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insufficient inventories, resulting in our inability to satisfy our customer demand and potential loss of market share.

 

Risks relating to our operations. In 2020, COVID-19 and related quarantines and work and travel restrictions in China and other countries disrupted, and may continue to disrupt, production for certain of our suppliers and our own manufacturing operations, and the extent to which these events will affect our results of operations and financial position remains uncertain. For our own manufacturing operations, the interruption in supply of certain key raw materials essential to the manufacturing of our products and significant changes in commodity prices had an adverse impact, and may continue to have an adverse impact on our and our suppliers’ abilities to manufacture the products necessary to maintain our existing customer relationships. COVID-19 has also at times disrupted, and may in the future disrupt, the transportation system we rely on and could increase product lead times due primarily to ocean shipping congestion from Asia, which may impact the timing of product availability on some SKUs.

 

Risks relating to impairment of our long-lived and intangible assets. During the first and third quarters of 2020, we identified impairment indicators associated with our market capitalization and significantly reduced customer demand for our products due to COVID-19. As a result, we performed interim impairment tests on the goodwill at its retail and wholesale reporting units. As a result, we recorded a $581.4 million goodwill, intangibles and long-lived assets impairment charge. Should actual results differ from certain key assumptions used in the interim impairment test, including revenue and EBITDA growth, which are both impacted by economic conditions, or should other key assumptions change, including discount rates and market multiples, in subsequent periods, we could record additional impairment charges for the goodwill of such reporting units.

 

Risks relating to our financial condition and liquidity. During the third quarter of 2020, we undertook the exchange offers as previously announced in order to reduce our overall indebtedness and extend the weighted average maturity of our indebtedness. However, we continue to have a substantial level of indebtedness. We expect rely on cash on hand, cash generated by operations and borrowings available under our New ABL Facility to meet our working capital needs. However, if the duration of the COVID-19 outbreak continues longer than we expect or the severity worsens, we may need to access other sources of financing, including incurring additional indebtedness, selling our assets and raising additional equity capital. These alternatives may not be available to us on satisfactory terms or at all, which could have a material adverse effect on our business.

 

The full extent to which COVID-19 and the measures to contain it will impact our business, operations financial condition and liquidity will depend on the severity and duration of the COVID-19 outbreak and other future developments related to the response to the virus, all of which are highly uncertain and we expect this uncertainty to continue in 2021. As a result, we cannot predict the ultimate impact of COVID-19 on the Company and its operational and financial performance. Our results of operations may be affected by the uncertainty surrounding the impact of the COVID-19 pandemic, and we will continue to actively monitor the impact of the COVID-19 pandemic on expected losses.

We face risks related to our balloon business including our use of helium gas and changes in consumer preferences.

Balloons are a focal point of our growth strategy and are a key driver of our differentiated brand experience. The ongoing success of our balloon business may be affected by a number of factors. For example, some state and local governments have implemented or considered implementing rules, ordinances or regulations governing the sale of metallic balloons. As part of our balloon business, Anagram designs, manufactures and markets foil balloons. If widespread adoption of such rules, ordinances or regulations significantly restricts or discourages the sale of metallic balloons, it would have a material adverse effect on our business, results of operations, and financial condition, including those of Anagram.

In addition, helium gas is currently used to inflate the majority of our metallic balloons and a portion of our latex balloons. Helium shortages and pricing can adversely impact the financial performance of our retail and wholesale operations.

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Changing consumer preferences, whether we are able to anticipate, identify and respond to them or not, could adversely impact our sales. Inventory levels for certain balloon styles no longer considered to be “on trend” may increase, leading to higher markdowns to sell through excess inventory and, therefore, lower than planned margins. Conversely, if we underestimate consumer demand for our balloons, or if we fail to supply quality products in a timely manner, we may experience inventory shortages, which may negatively impact customer relationships, diminish brand loyalty and result in lost sales.

 

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 wholesale segment competes 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, but not limited to, independent party goods supply stores, specialty stores, warehouse/merchandise clubs, drug stores, dollar stores, mass merchants and e-commerce merchants. We face competition from internet-based retailers in addition to store-based retailers. These internet-based retailers may have a significant collective online presence and may be able to offer similar products to those that we sell, which may result in increased price competition. We compete, among other ways, on the basis of product mix and availability, customer convenience, quality, price and, with respect to our retail stores, location and store layout. 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.

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

Any significant disruption in manufacturing facilities, in the United States or abroad, for any reason, including regulatory requirements, unstable labor relations, public health crises, including the occurrence of a contagious disease or illness, such as the flu or COVID-19, the loss of certifications, power interruptions, fires, hurricanes, war or other forces of nature, could disrupt our supply of products, adversely affecting our business, results of operations, cash flows and financial performance. For example, the recent spread of the COVID-19 and related quarantines and work and travel restrictions in China and other countries has disrupted, and may continue to disrupt, production for certain of our suppliers and our own manufacturing operations, and the extent to which these events will affect our results of operations and financial position remains uncertain. 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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A change in our competitive environment, including a decrease in our Halloween sales, could have a material adverse effect on our operating results for the year.

Our retail business currently realizes a significant portion of its revenues, net income and cash flows in September and October, principally due to Halloween sales. We have also seen an increased demand in some of our other products, such as balloons. Any unanticipated decrease in demand for our products could require us to maintain excess inventory or sell excess inventory at substantial markdowns, which could have a material adverse effect on our business, profitability, ability to repay any indebtedness and our brand image. Failure to have proper lease space and adequate personnel could hurt our business, financial conditions and results of operations. In addition, our competitors could divert our sales during the Halloween season or if we are unable to hire qualified temporary personnel to adequately staff our stores and our distribution facility during the Halloween season, whether due to labor market conditions or a failure in our internal recruiting and staffing processes or otherwise.  

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.

Our business may be adversely affected by material 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. As a result, significant changes in commodity prices, foreign currency exchange rates, the imposition of tariffs on imported products or interest rates, and effects from public health crises, including the occurrence of a contagious disease or illness, such as COVID-19, could have a substantial adverse effect on our financial condition or results of operations.

We may not be able to successfully implement our growth strategy.

Our ability to increase our sales depends on many factors including, among others, our ability to:

 

Develop a more-relevant in-store experience;

 

Win in balloons;

 

Address price value perception in key categories;

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Improve our customer engagement selling culture, including our in-store customer engagement;

 

Build on our omni-channel platform; and

 

Continue to grow our wholesale business.

 

Implement new retail programs that could include but are not limited to loyalty rewards, new formats for existing stores, fewer skus and less inventory;

 

Obtain or maintain adequate capital resources on acceptable terms;

 

Manufacture and source sufficient levels of inventory at acceptable costs;

 

Hire, train and retain an expanded workforce of store managers and other store-level personnel, many of whom are in entry-level or part-time positions with historically high rates of turnover;

 

Successfully integrate new stores/e-commerce operations 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; and

 

Gain brand recognition and acceptance in new markets.

Unexpected or unfavorable consumer responses to our promotional or merchandising programs could materially adversely affect our business, results of operations, cash flows and financial performance.

Brand recognition, quality and price have a significant influence on consumers’ choices among competing products and brands. Advertising, promotion, merchandising and the cadence of new product introductions also have a significant impact on consumers’ buying decisions. If we misjudge consumer responses to our existing or future promotional activities, this could have a material adverse impact on our business, results of operations, cash flow and financial performance.

Our marketing programs, e-commerce initiatives and use of consumer information are governed by an evolving set of laws and enforcement trends and unfavorable changes in those laws or trends, or our failure to comply with existing or future laws, could substantially harm our business and results of operations.

We collect, maintain and use data provided to us through our online activities and other customer interactions in our business. Our current and future marketing programs depend on our ability to collect, maintain and use this information, and our ability to do so is subject to certain contractual restrictions in third-party contracts as well as evolving international, federal and state laws and enforcement trends. We strive to comply with all applicable laws and other legal obligations relating to privacy, data protection and consumer protection, including those relating to the use of data for marketing purposes. It is possible, however, that these requirements may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another, may conflict with other rules or may conflict with our practices. If so, we may suffer damage to our reputation and be subject to proceedings or actions against us by governmental entities or others. Any such proceeding or action could hurt our reputation, force us to spend significant amounts to defend our practices, distract our management, increase our costs of doing business and result in monetary liability.

In addition, as data privacy and marketing laws change, we may incur additional costs to ensure we remain in compliance with such laws. If applicable data privacy and marketing laws become more restrictive at the federal or state level, our compliance costs may increase, our ability to effectively engage customers via personalized marketing may decrease, our investment in our e-commerce platform may not be fully realized, our opportunities for growth may be curtailed by our compliance capabilities or reputational harm and our potential liability for security breaches may increase.

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For example, in 2018 California enacted the California Consumer Privacy Act (“CCPA”), which broadly regulates the sale of the consumer information of California residents and grants California residents certain rights to, among other things, access and delete data about them in certain circumstances. CCPA went into effect on January 1, 2020, and compliance with the CCPA may increase the cost to us of operating in California. Other states are considering similar proposals. Such attempts by the states to regulate have the potential to create a patchwork of differing and/or conflicting state regulations.

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 and sales to third-party customers. 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, public health crises, fuel shortages or transportation cost increases could adversely affect our business, results of operations, cash flows and financial performance. In particular, if the current COVID-19 outbreak continues and results in a prolonged period of travel restrictions, we could experience global supply disruptions. If we experience supply disruptions, we may not be able to develop alternate sourcing quickly, which could adversely affect our operations.

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 other factors beyond our control, including adverse weather conditions or the outbreak of disease, 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, hurricanes, public health crises, including the occurrence of a contagious disease or illness, such as the flu or COVID-19, and consumer confidence in future economic conditions. Our customers’ purchases 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 or as a result of geopolitical events or widespread health emergencies. Geopolitical events, such as the threat of terrorism or cyber-attacks, and widespread health emergencies, such as COVID-19 or other pandemics or epidemics, could cause people to avoid our stores or decide not to host or attend gatherings or other events. 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.

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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.

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 websites 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.

Changes in regulations or enforcement, or our failure to comply with existing or future regulations, may adversely impact our business.

We are subject to federal, state and local regulations with respect to our operations in the United States. Additionally, we are subject to regulations in the foreign countries in which we operate and such regulations are increasingly distinct from those in the United States. Further, we may be subject to greater international regulation if we expand our business internationally. There are a number of legislative and regulatory initiatives that could adversely impact our business if they are enacted or enforced. Those initiatives include increased or new tariffs on imported products, wage or workforce issues (such as minimum-wage requirements, overtime and other working conditions and citizenship requirements), collective bargaining matters, environmental regulation, price and promotion regulation, trade regulations, data and privacy protection and others.

Proposed changes in tax regulations may also change our effective tax rate as our business is subject to a combination of applicable tax rates in the various countries, states and other jurisdictions in which we operate. New accounting pronouncements and interpretations of existing accounting rules and practices have occurred and may occur in the future. A change in accounting standards or practices can have a significant effect on our reported results of operations. Failure to comply with legal requirements could result in, among other things, increased litigation risk that could affect us adversely by subjecting us to significant monetary damages and other remedies or by increasing our litigation expenses, administrative enforcement actions, fines and civil and criminal liability. If such issues become more expensive to address, or if new issues arise, they could increase our expenses, generate negative publicity, or otherwise adversely affect us.

Certain aspects of recent U.S. federal income tax reform could negatively affect us.

The Tax Cuts and Jobs Act of 2017 (the “TCJA”) resulted in an overall benefit to us because it reduced our marginal U.S. federal income rate to 21% and generally allowed us to immediately deduct 100% of the cost of tangible, depreciable property that we acquire and place into service on or before January 1, 2023 for federal income tax purposes. President Biden has proposed raising the highest U.S. federal income tax rate applicable to corporations to 28%. If this proposal were enacted into law, the benefit to us from the TCJA’s reduction in our marginal U.S. federal income tax rate to 21% would be reversed in part.

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Certain aspects of the TCJA, however, could negatively affect us. For example, under the TCJA, we generally cannot deduct our business interest expense to the extent that it exceeds 30% of our Adjusted Taxable Income through our 2021 tax year or 30% of our EBIT thereafter. However, any such non-deductible interest is available for an indefinite carryforward.

Additionally, under the TCJA, we became subject to a tax on global intangible low-taxed income (“GILTI”). President Biden has proposed doubling the U.S. federal income tax rate on GILTI. Under the TCJA, we are required to pay a one-time transition tax on the previously untaxed deferred foreign earnings that our foreign subsidiaries have accrued since 1986 at a rate of 15.5% for cash and cash-equivalent profits and 8% on other reinvested foreign earnings (the “Transition Tax”). We elected to pay and are paying this Transition Tax over eight annual installments without interest.

 

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act (“the CARES Act”) was signed into law. The CARES Act is a $2 trillion legislative package intended to provide economic relief to companies impacted by the COVID-19 pandemic, and it enacted a number of Internal Revenue Code modifications which are of particular benefit to us, including: (1) 5-year net operating loss carryback, (2) temporary relaxation of the limitation on interest deductions by raising for 2019 and 2020 the business interest expense limitation from 30% to 50% of our Adjusted Taxable Income, and by allowing for the option to use the higher 2019 Adjusted Taxable Income to compute the 2020 limitation, (3) qualified improvement property eligible for 100% bonus depreciation, (4) employee retention tax credits, and (5) the deferral of the payment of most of the employer share of social security payroll tax incurred in 2020 until 2021 (50%) and 2022 (50%).

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

We source certain products 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. 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 British Pound Sterling, the Canadian Dollar, the Euro, the Malaysian Ringgit, the Mexican Peso and the Australian Dollar;

 

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;

 

Public health crises, including the occurrence of a contagious disease or illness such as the COVID-19 outbreak;

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Legal and regulatory changes and the burdens and costs of our compliance with a variety of laws, including new or additional trade restrictions, tariffs and changes in environmental regulations; and political and economic instability.

International trade disputes and the U.S. government’s trade policy could adversely affect our business.

International trade disputes could result in tariffs and other protectionist measures that could adversely affect our business. Tariffs could increase the cost of our products and the components and raw materials that go into making them and could further increase the costs of importing or exporting products from one jurisdiction into another. These increased costs could adversely impact the gross margin that we earn on our products. Countries may also adopt other protectionist measures that could limit our ability to offer our products and services, including, but not limited to, tariffs on China and China’s retaliatory tariffs on certain products from the U.S. Political uncertainty surrounding international trade disputes and protectionist measures could also have a negative effect on consumer confidence and spending, which could adversely affect our business.

To the extent that significant additional tariffs are imposed, depending on the extent of such tariffs, they could have a material impact on our operating results in the future.

In response to the U.S. government’s actions, certain foreign governments have imposed retaliatory tariffs on goods that their countries import from the United States. Changes in U.S. trade policy could result in one or more foreign governments adopting responsive trade policies that, depending on the scope of the policies, could make it more difficult or costly for us to do business in those countries.

We cannot predict the extent to which the United States or other countries will impose quotas, duties, tariffs, taxes or other similar restrictions upon the import or export of our products in the future, nor can we predict future trade policy or the terms of any renegotiated trade agreements and their impact on our business. The adoption and expansion of trade restrictions, the occurrence of a trade war, or other governmental action related to tariffs or trade agreements or policies has the potential to adversely impact demand for our products, our costs, our customers, our suppliers, and the U.S. economy, which in turn could have a material adverse effect on our business, operating results and financial condition.

We may face risks associated with litigation and claims.

From time to time, we may become involved in other legal 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. Such matters can be time-consuming, divert management’s attention and resources and cause us to incur significant expenses. 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. Furthermore, because litigation is inherently uncertain, there can be no assurance that the results of any of these actions will not have a material adverse effect on our business, results of operations or financial condition.

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.

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Our success depends, in large part, on our senior management team.

The success of our business depends, to a large extent, on the continued service of our senior management team and the ability to integrate new senior management. We may not be able to adequately mitigate the negative impact on our business and competitive position that a change of senior leadership could have, as we may not be able to find management personnel internally or externally with similar experience and industry knowledge to replace the individual on a timely basis. We do not maintain key life insurance on any of our senior officers.

 

Our supply of qualified personnel and our labor costs depend in part on factors outside of our control.

As our business expands, we believe that our future success will depend greatly on our continued ability to attract, motivate and retain qualified personnel who are able to successfully meet the needs of our business. 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, labor market conditions, minimum wage legislation and changing demographics. Recently, various legislative movements have sought to increase the federal minimum wage in the United States, as well as the minimum wage in a number of individual states. As federal or state minimum wage rates increase, we may need to increase not only the wage rates of our minimum wage employees, but also the wages paid to our other hourly employees as well. 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 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.

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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 platforms 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.

Historically we have had merger, acquisition, investment and divestiture (M&A) activity, and we may have similar M&A activity in the future as part of our growth strategy. Future M&A activity 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 acquisition, merger or investment candidates.

Should future M&A activity occur, this requires significant capital resources and can divert management’s attention from our existing business. This also entails an inherent risk that we could become subject to contingent or other liabilities, including liabilities arising from events or conduct predating the activity, that were not known to us at the time of the transaction. We may also incur significantly greater expenditures in integrating an acquired business or investment or divesting a business than we had anticipated at the time, which could impair our ability to achieve anticipated cost savings and synergies. M&A activity may also have unanticipated tax and accounting ramifications. Furthermore, this might consume a significant portion of our senior management team’s time and efforts with issues unrelated to advancing our core business strategies and operation issues. Our failure to successfully identify and consummate, manage M&A activity 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, merger or investment candidates

 

Consummate M&A activity 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 or investment do not meet our performance expectations, we have in the past and may in the future restructure the acquired business or write-off the value of some or all of the assets of the acquired business or investment.

Risks Related to Our Intellectual Property

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, Nobody Has More Party for Less, Party America and Halloween City. Our failure to properly control our franchisees’ use of such trademarks could adversely affect our ability to enforce

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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 and on the marketplace demand for these licensed properties, which could in turn lead to a decrease in licensed costume sales. 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 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, or significant reduction in demand for product bearing the intellectual property of third parties, 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, 2020, we had total indebtedness of $1,519.1 million, net of deferred financing costs, capitalized call premiums and original issue discounts. Additionally, we had $176.5 million of borrowing capacity available under our asset-based revolving credit facility (“ABL Facility”).

As of December 31, 2020, we had outstanding approximately $355.9 million in aggregate principal amount of indebtedness under the Senior Credit Facilities, net of deferred financing costs, capitalized call premiums and original issue discounts. Such indebtedness bears interest at a floating rate.

We also have, and will continue to have, significant lease obligations. As of December 31, 2020, our minimum aggregate rental obligation under operating leases for fiscal 2021 through 2025 totaled $816.6 million. See Note 26 to the consolidated financial statements in Item 8 for further discussion.

Our substantial level of indebtedness increases 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;

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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.

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 covenant of 1.00 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 them. 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 or terminate their commitments to lend additional money, which would also lead to an event of default under the senior secured term loan facility (“the Term Loan Credit Agreement”) and would lead to an event of default under our senior 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.

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.

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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 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 restrict our ability to dispose of assets and use the proceeds from the disposition. We may not be able to consummate those dispositions or obtain the proceeds that we could realize from them and the 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 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.

Our unrestricted subsidiaries under the Term Loan Credit Agreement, the ABL Facility credit agreement and the indenture governing the First Lien Party City Notes are not subject to any of the covenants under such agreements and do not guarantee the Term Loan Credit Agreement, the ABL Facility and the First Lien Party City Notes, and we may not be able to rely on the cash flow or assets of those unrestricted subsidiaries to pay certain of our debt, including the Term Loan Credit Agreement, the ABL Facility and the First Lien Party City Notes.

Our unrestricted subsidiaries under the Term Loan Credit Agreement, the ABL Facility credit agreement and the indenture governing the Senior Secured First Lien Floating Rate Notes due 2025 (the “First Lien Party City

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Notes”) are not subject to the covenants under such agreements and do not guarantee or pledge assets to secure the Term Loan Credit Agreement, the ABL Facility and the First Lien Party City Notes or any future indebtedness not incurred by such unrestricted subsidiaries. As of the date of this report on Form 10-K, Anagram Holdings and Anagram International (together, the “Anagram Issuers”) and their subsidiaries were unrestricted subsidiaries. Subject to compliance with the covenants contained in the Term Loan Credit Agreement, the ABL Facility credit agreement and the indenture governing the First Lien Party City Notes, we will be permitted to designate further subsidiaries as unrestricted subsidiaries. The creditors of the Anagram Issuers and their subsidiaries, including under the 15.00% PIK/Cash Senior Securred First Lien Notes due 2025 (the “First Lien Anagram Notes”) and the “10.00% PIK/Cash Senior Secured Sec and Lien Notes due 2026 (the “Second Lien Anagram Notes”) will generally be entitled to payment of their claims from the assets of the Anagram Issuers and their subsidiaries before those assets would be available for distribution to us. In addition, the indentures governing the First Lien Anagram Notes and the Second Lien Anagram Notes limit the Anagram Issuers and their subsidiaries’ ability to make loans or other payments to fund payments in respect of the Term Loan Credit Agreement, the ABL Facility and the First Lien Party City Notes and the indenture governing the First Lien Anagram Notes requires the maintenance of certain minimum liquidity. As a result, the cash flow or assets of the Anagram Issuers and their subsidiaries may not be available to pay any of our debt other than debt incurred by the Anagram Issuers and their subsidiaries.

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 the Term Loan Credit Agreement. The interest rate swap agreements that we use to manage the risk associated with fluctuations in interest rates (if any) may not be able to fully eliminate our exposure to these changes.

The transition away from LIBOR may adversely affect our cost to obtain financing.

On July 27, 2017, the U.K. Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. As a result, LIBOR may be discontinued. While there is no consensus on what rate or rates may become accepted alternatives to LIBOR, the Alternative Reference Rates Committee, a steering committee comprised of U.S. financial market participants selected and the Federal Reserve Bank of New York started in May 2018 to publish the Secured Overnight Finance Rate (“SOFR”) as an alternative to LIBOR. SOFR is a broad measure of the cost of borrowing cash in the overnight U.S. treasury repo market. At this time, it is not possible to predict whether the SOFR or another reference rate will become an accepted alternative to LIBOR. The manner and impact of this transition may materially adversely affect the trading market for LIBOR-based loans, including our Term Loan Credit Agreement, as well as the applicable interest rate on and the amount of interest paid on our current or future debt obligations, including our Senior Credit Facilities.

Risks Related to Our Common Stock

The market price of our common stock could decline due to the large number of outstanding shares of our common stock eligible for future sale.

Sales of substantial amounts of our common stock in the public market in future offerings, or the perception that these sales could occur, could cause the market price of our common stock to decline. These sales could also make it more difficult for us to sell equity or equity-related securities in the future, at a time and price that we deem appropriate. In addition, the additional sale of our common stock by our officers, directors or significant shareholders in the public market, or the perception that these sales may occur, could cause the market price of our common stock to decline.

We may issue shares of our common stock or other securities from time to time as consideration for, or to finance, future acquisitions and investments or for other capital needs. We cannot predict the size of future issuances of our shares or the effect, if any, that future sales and issuances of shares would have on the market price of our common stock. If any such acquisition or investment is significant, the number of shares of common stock or the number or aggregate principal amount, as the case may be, of other securities that we may issue may in turn be substantial and may result in additional dilution to our stockholders. We may also grant registration rights covering shares of our common stock or other securities that we may issue in connection with any such acquisitions and investments.

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To the extent that any of us, our executive officers or our directors sell, or indicate an intent to sell, substantial amounts of our common stock in the public market, the trading price of our common stock could decline significantly.

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:

 

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;

 

the required approval of holders of at least 6623% 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;

 

limitations on the ability of stockholders to call special meetings and take action by written consent; and

 

provisions that reproduce much of the provisions that limit the ability of “interested stockholders” from engaging in specified business combinations with us absent prior approval of the board of directors or holders of 6623% 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 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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Because we have no current plans to pay cash dividends on our common stock for the foreseeable future, you may not receive any return on investment unless you sell your common stock for a price greater than you paid.

We plan to retain future earnings, if any, for future operation, expansion and debt repayment and have no current plans to pay any cash dividends for the foreseeable future. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that our board of directors may deem relevant. In addition, our ability to pay dividends may be limited by covenants of any existing and future outstanding indebtedness we or our subsidiaries incur. As a result, you may not receive any return on an investment in our common stock unless you sell our common stock for a price greater than you paid.

 

General Risk Factors

Maintaining and improving our financial controls and the requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members.

As a public company, we are subject to the reporting and other requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the New York Stock Exchange (the “NYSE”) rules. The requirements of these rules and regulations have increased and will continue to significantly increase our legal and financial compliance costs, including costs associated with the hiring of additional personnel, making some activities more difficult, time-consuming, or costly, and may also place undue strain on our personnel, systems and resources. The Exchange Act requires, among other things, that we file annual, quarterly, and current reports with respect to our business and financial condition.

The Sarbanes-Oxley Act requires, among other things, that we maintain disclosure controls and procedures and internal control over financial reporting. Ensuring that we have adequate internal financial and accounting controls and procedures in place is a costly and time-consuming effort that needs to be re-evaluated frequently. We test our internal controls in order to comply with the requirements of Section 404 of the Sarbanes-Oxley Act (“Section 404”). Section 404 requires that we evaluate our internal control over financial reporting to enable management to report on, and our independent auditors to audit, the effectiveness of those controls. Both we and our independent registered public accounting firm test our internal controls in connection with the Section 404 requirements and could, as part of that testing, identify material weaknesses, significant deficiencies or other areas for further attention or improvement.

Implementing any appropriate changes to our internal controls may require specific compliance training for our directors, officers and employees, require the hiring of additional finance, accounting and other personnel, entail substantial costs to modify our existing accounting systems, and take a significant period of time to complete. These changes may not, however, be effective in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and could materially impair our ability to operate our business. Moreover, adequate internal controls are necessary for us to produce reliable financial reports and are important to help prevent fraud. As a result, our failure to satisfy the requirements of Section 404 on a timely basis could result in the loss of investor confidence in the reliability of our financial statements, which in turn could cause the market value of our common stock to decline.

Various rules and regulations applicable to public companies make it more difficult and more expensive for us to maintain directors’ and officers’ liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to maintain coverage. If we are unable to maintain adequate directors’ and officers’ liability insurance, our ability to recruit and retain qualified officers and directors, especially those directors who may be deemed independent for purposes of the NYSE rules, will be significantly curtailed.

27


 

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 conducted over the internet. We could experience operational problems with our information systems and e-commerce platforms 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 our employees, and we process customer payment card and check information, including via our e-commerce platforms. Computer hackers may attempt to penetrate our computer system, payment card terminals or other payment systems and, if successful, misappropriate personal information, payment card or check information or confidential Company business information. In particular, the techniques used by criminals to obtain unauthorized access to sensitive data change frequently and often are not recognized until launched against a target; accordingly, we may be unable to anticipate these techniques or implement adequate preventative measures. 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. While we maintain insurance coverage that may, subject to policy terms and conditions, cover certain aspects of cyber risks, such insurance coverage may be insufficient to cover all losses and would not remedy damage to our reputation. There can be no assurance that we will not suffer a criminal attack in the future, that unauthorized parties will not gain access to personal information, or that any such incident will be discovered in a timely manner.

Item 1B.

Unresolved Staff Comments

Not applicable.

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Item 2.

Properties

The Company maintains the following facilities for its corporate and retail headquarters and to conduct its 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, showrooms, design and art production for party products

 

146,346 square feet

 

Leased (1)

Rockaway, New Jersey

 

Retail corporate offices

 

106,000 square feet

 

Leased (expiration date:

July 31, 2022)

Antananarivo, Madagascar

 

Manufacture of costumes

 

41,000 square feet

 

Leased (expiration date:

December 31, 2023)

Dallas, Texas

 

Manufacture/personalization of cups and napkins

 

54,413 square feet

 

Leased (expiration date:

October 31, 2022)

East Providence, Rhode Island

 

Manufacture and distribution of plastic plates, cups and bowls

 

229,230 square feet (2)

 

Leased (expiration date:

February 28, 2033)

Eden Prairie, Minnesota

 

Manufacture of metallic balloons and accessories

 

115,600 square feet

 

Leased (expiration date:

June 30, 2039)

Los Lunas, New Mexico

 

Manufacture of injection molded plastics

 

85,055 square feet

 

Leased (expiration date:

6/30/2039)

Louisville, Kentucky

 

Manufacture and distribution of paper plates

 

213,958 square feet

 

Leased (expiration date:

March 31, 2025)

Monterrey, Mexico

 

Manufacture and distribution of party products ( Stickers, gift wrap, bags and invites)

 

355,500 square feet

 

Leased (expiration date:

March 3, 2027)

Newburgh, New York

 

Manufacture of paper napkins and cups

 

248,000 square feet

 

Leased (expiration date:

July 31, 2027)

Tijuana, Mexico

 

Manufacture and distribution of plates and other party products

 

135,000 square feet

 

Leased (3)

Chester, New York

 

Distribution of party products

 

896,000 square feet

 

Leased (expiration date:

June 30, 2039)

Edina, Minnesota

 

Distribution of metallic balloons and accessories

 

122,300 square feet

 

Leased (expiration date:

June 30, 2026)

Naperville, Illinois

 

Distribution of party goods for e-commerce sales

 

440,343 square feet

 

Leased (expiration date:

December 31, 2033)

 

 

*Excludes locations that were sold as part of the Company’s sale of a substantial portion of its international operations. See Note 6, Disposition of Assets and Assets and Liabilities Held for Sale, of Item 8, “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for further discussion.

(1)

Property is comprised of two buildings with various lease expiration dates through December 31, 2027.

(2)

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

(3)

Property is comprised of two buildings with various lease expiration dates through March 31, 2022.

In addition to the facilities listed above, we maintain a smaller distribution facility in the United Kingdom, smaller manufacturing facilities in Minnesota, small administrative offices in California, Australia, and the United Kingdom, and sourcing offices in China, Hong Kong, India, Indonesia and Vietnam. We also maintain warehouses in Colorado, Florida, Georgia, Michigan, Minnesota, New Jersey and New York and showrooms in Georgia, Nevada, and the United Kingdom.

 

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As of December 31, 2020, Company-owned and franchised permanent stores were located in the following states and Puerto Rico:

 

State

 

Company- owned

 

 

Franchise

 

 

Chain- wide

 

Alabama

 

 

9

 

 

 

 

 

 

9

 

Alaska

 

 

1

 

 

 

 

 

 

 

1

 

Arizona

 

 

14

 

 

 

 

 

 

14

 

Arkansas

 

 

 

 

 

3

 

 

 

3

 

California

 

 

89

 

 

 

15

 

 

 

104

 

Colorado

 

 

13

 

 

 

 

 

 

13

 

Connecticut

 

 

12

 

 

 

 

 

 

12

 

District of Columbia

 

 

 

 

 

 

 

 

 

Delaware

 

 

1

 

 

 

 

 

 

1

 

Florida

 

 

64

 

 

 

3

 

 

 

67

 

Georgia

 

 

29

 

 

 

1

 

 

 

30

 

Hawaii

 

 

 

 

 

2

 

 

 

2

 

Idaho

 

 

 

 

 

 

 

 

 

Illinois

 

 

42

 

 

 

 

 

 

42

 

Indiana

 

 

19

 

 

 

 

 

 

19

 

Iowa

 

 

7

 

 

 

 

 

 

7

 

Kansas

 

 

7

 

 

 

 

 

 

7

 

Kentucky

 

 

9

 

 

 

 

 

 

9

 

Louisiana

 

 

11

 

 

 

 

 

 

11

 

Maine

 

 

2

 

 

 

 

 

 

2

 

Maryland

 

 

21

 

 

 

1

 

 

 

22

 

Massachusetts

 

 

21

 

 

 

 

 

 

21

 

Michigan

 

 

26

 

 

 

 

 

 

26

 

Minnesota

 

 

12

 

 

 

 

 

 

12

 

Mississippi

 

 

1

 

 

 

2

 

 

 

3

 

Missouri

 

 

17

 

 

 

1

 

 

 

18

 

Montana

 

 

 

 

 

1

 

 

 

1

 

Nebraska

 

 

3

 

 

 

 

 

 

3

 

Nevada

 

 

6

 

 

 

 

 

 

6

 

New Hampshire

 

 

4

 

 

 

 

 

 

4

 

New Jersey

 

 

26

 

 

 

1

 

 

 

27

 

New Mexico

 

 

3

 

 

 

 

 

 

3

 

New York

 

 

50

 

 

 

11

 

 

 

61

 

North Carolina

 

 

16

 

 

 

 

 

 

16

 

North Dakota

 

 

4

 

 

 

 

 

 

4

 

Ohio

 

 

28

 

 

 

 

 

 

28

 

Oklahoma

 

 

11