UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2015

¨	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 333-173690

Party City Holdings Inc.

(Exact Name of Registrant as Specified in Its Charter)


Delaware		20-1033029
(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)		(Zip Code)

Registrant’s telephone number, including area code:

(914) 345-2020

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 x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

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

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

As of August 12, 2015, 100.00 shares of the Registrant’s common stock were outstanding.

PARTY CITY HOLDINGS INC.

Form 10-Q

June 30, 2015

TABLE OF CONTENTS


	Page
PART I

Item 1. Condensed Consolidated Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets at June 30, 2015 and December 31, 2014		3

Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income for the Three Months ended June 30, 2015 and June 30, 2014		4

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Six Months ended June 30, 2015 and June 30, 2014		5

Condensed Consolidated Statement of Stockholder’s Equity for the Six Months ended June 30, 2015		6

Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2015 and June 30, 2014		7

Notes to Condensed Consolidated Financial Statements		8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		28

Item 3. Quantitative and Qualitative Disclosures about Market Risk		44

Item 4. Controls and Procedures		44

PART II

Item 6. Exhibits		45

Signature		46

PARTY CITY HOLDINGS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)


	June 30,			December 31,
	2015			2014
	(Note 2) (Unaudited)			(Note 2)
ASSETS
Current assets:
Cash and cash equivalents	$	42,811		$	47,151
Accounts receivable, net		116,739			140,663
Inventories, net		625,691			582,230
Prepaid expenses and other current assets		97,358			75,403

Total current assets		882,599			845,447
Property, plant and equipment, net		248,701			248,684
Goodwill		1,565,622			1,557,250
Trade names		569,500			569,343
Other intangible assets, net		97,371			107,010
Other assets, net		48,277			46,659

Total assets	$	3,412,070		$	3,374,393

LIABILITIES, REDEEMABLE COMMON SECURITIES AND STOCKHOLDER’S EQUITY
Current liabilities:
Loans and notes payable	$	83,223		$	25,336
Accounts payable		154,579			145,686
Accrued expenses		149,112			154,113
Income taxes payable		0			34,670
Current portion of long-term obligations		12,143			12,249

Total current liabilities		399,057			372,054
Long-term obligations, excluding current portion		1,775,450			1,780,267
Deferred income tax liabilities		311,616			314,197
Deferred rent and other long-term liabilities		72,132			56,190

Total liabilities		2,558,255			2,522,708

Redeemable common securities		0			35,062

Commitments and contingencies

Stockholder’s equity:
Common stock (100.00 shares issued and outstanding at June 30, 2015 and December 31, 2014, respectively)		0			0
Additional paid-in capital		824,856			751,662
Retained earnings		47,302			77,696
Accumulated other comprehensive loss		(18,343	)		(12,735	)

Total stockholder’s equity		853,815			816,623

Total liabilities, redeemable common securities and stockholder’s equity	$	3,412,070		$	3,374,393

See accompanying notes to unaudited condensed consolidated financial statements.

PARTY CITY HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME

(Unaudited)

(In thousands)


	Three Months Ended June 30,
	2015			2014
Revenues:
Net sales	$	491,206		$	487,182
Royalties and franchise fees		4,314			4,392

Total revenues		495,520			491,574

Expenses:
Cost of sales		302,863			304,518
Wholesale selling expenses		16,235			18,438
Retail operating expenses		85,229			85,667
Franchise expenses		3,530			3,431
General and administrative expenses		36,417			34,362
Art and development costs		5,179			4,853

Total expenses		449,453			451,269

Income from operations		46,067			40,305

Interest expense, net		30,408			30,331
Other expense (income), net		33,214			(2,098	)

(Loss) income before income taxes		(17,555	)		12,072
Income tax (benefit) expense		(5,992	)		4,483

Net (loss) income	$	(11,563	)	$	7,589

Comprehensive (loss) income	$	(4,844	)	$	12,255

See accompanying notes to unaudited condensed consolidated financial statements.

PARTY CITY HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

(In thousands)


	Six Months Ended June 30,
	2015			2014
Revenues:
Net sales	$	949,401		$	916,402
Royalties and franchise fees		8,224			8,159

Total revenues		957,625			924,561

Expenses:
Cost of sales		597,137			578,899
Wholesale selling expenses		33,360			36,626
Retail operating expenses		165,543			165,953
Franchise expenses		6,989			6,796
General and administrative expenses		74,069			70,455
Art and development costs		10,456			9,624

Total expenses		887,554			868,353

Income from operations		70,071			56,208

Interest expense, net		60,738			61,600
Other expense, net		31,793			4,551

Loss before income taxes		(22,460	)		(9,943	)
Income tax benefit		(7,379	)		(2,746	)

Net loss	$	(15,081	)	$	(7,197	)

Comprehensive loss	$	(20,689	)	$	(3,164	)

See accompanying notes to unaudited condensed consolidated financial statements.

PARTY CITY HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER’S EQUITY

(Unaudited)

(In thousands, except share data)


	Common Shares		Common Stock		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Loss			Total Stockholder’s Equity
Balance at December 31, 2014		100.00	$	0	$	751,662	$	77,696		$	(12,735	)	$	816,623
Net loss								(15,081	)					(15,081	)
Equity based compensation						1,124								1,124
Distribution to Parent								(15,313	)					(15,313	)
Adjustment of redeemable common shares						35,062								35,062
Capital contributions						37,008								37,008
Foreign currency adjustments											(5,620	)		(5,620	)
Impact of foreign exchange contracts, net											12			12

Balance at June 30, 2015		100.00	$	0	$	824,856	$	47,302		$	(18,343	)	$	853,815

See accompanying notes to unaudited condensed consolidated financial statements.

PARTY CITY HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)


	Six Months Ended June 30,
	2015			2014
Cash flows (used in) provided by operating activities:
Net loss	$	(15,081	)	$	(7,197	)

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization expense		39,801			40,851
Amortization of deferred financing costs and original issuance discount		5,182			8,289
Provision for doubtful accounts		24			587
Deferred income tax benefit		(3,151	)		(6,371	)
Deferred rent		4,101			6,562
Undistributed loss in unconsolidated joint venture		35			472
(Gain) loss on sale of assets		(2,589	)		2,315
Equity based compensation		1,124			791
Changes in operating assets and liabilities, net of effects of acquired businesses:
Decrease in accounts receivable		25,088			14,336
Increase in inventories		(44,090	)		(97,847	)
(Increase) decrease in prepaid expenses and other current assets		(7,428	)		553
(Decrease) increase in accounts payable, accrued expenses and income taxes payable		(37,235	)		44,266

Net cash (used in) provided by operating activities		(34,219	)		7,607

Cash flows used in investing activities:
Cash paid in connection with acquisitions, net of cash acquired		(8,258	)		(2,152	)
Capital expenditures		(31,889	)		(33,055	)
Proceeds from disposal of property and equipment		601			947

Net cash used in investing activities		(39,546	)		(34,260	)

Cash flows used in financing activities:
Repayment of loans, notes payable and long-term obligations		(81,263	)		(1,191,656	)
Proceeds from loans, notes payable and long-term obligations		133,100			1,240,735
Cash held in escrow in connection with acquisitions		(3,832	)		0
Capital contributions		37,008			0
Distribution to Parent		(15,313	)		(16,503	)
Exercise of stock options		0			1,062
Debt issuance costs		0			(148	)

Net cash provided by financing activities		69,700			33,490
Effect of exchange rate changes on cash and cash equivalents		(275	)		145

Net (decrease) increase in cash and cash equivalents		(4,340	)		6,982
Cash and cash equivalents at beginning of period		47,151			25,487

Cash and cash equivalents at end of period	$	42,811		$	32,469

Supplemental disclosure of cash flow information:
Cash paid during the period
Interest	$	55,720		$	58,367
Income taxes, net of refunds	$	33,759		$	15,835

See accompanying notes to unaudited condensed consolidated financial statements.

PARTY CITY HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share)

Note 1 – Description of Business

Party City Holdings Inc. (the “Company” or “PCHI”) is the leading party goods retailer by revenue in North America and, we believe, the largest vertically integrated supplier of decorated party goods globally by revenue. 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 with a multi-channel retailing strategy that includes the Party City brick and mortar and e-commerce retail operations. The Company is the leading player in its category, vertically integrated and unique in its breadth and depth. PCHI 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 approximately 900 specialty retail party supply stores (including approximately 200 franchise stores) in the United States and Canada operating under the names Party City and Halloween City, and e-commerce websites, principally through the domain name PartyCity.com. PCHI franchises both individual stores and franchise areas throughout the United States, Mexico and Puerto Rico, principally under the name Party City.

PCHI is a wholly-owned subsidiary of PC Intermediate Holdings, Inc. (“PC Intermediate” or “Parent”), which is a wholly-owned subsidiary of PC Nextco Holdings, LLC (“PC Nextco”). PC Nextco is a wholly-owned subsidiary of Party City Holdco Inc. (“Party City Holdco”).

Note 2 – Basis of Presentation and Recently Issued Accounting Pronouncements

The unaudited condensed consolidated financial statements of the Company include the accounts of the Company and its majority-owned and controlled entities. All significant intercompany balances and transactions have been eliminated in consolidation. The unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included in the unaudited condensed consolidated financial statements.

The majority of our retail operations define a fiscal year (“Fiscal Year”) as the 52-week period or 53-week period ended on the Saturday nearest December 31st of each year and define fiscal quarters (“Fiscal Quarter”) as the four interim 13-week periods following the end of the previous Fiscal Year, except in the case of a 53-week Fiscal Year when the fourth Fiscal Quarter is extended to 14 weeks. The condensed consolidated financial statements of the Company combine the Fiscal Quarters of our retail operations with the calendar quarters of our wholesale operations. The Company has determined the differences between the retail operation’s Fiscal Year and Fiscal Quarters and the calendar year and calendar quarters to be insignificant.

Operating results for interim periods are not necessarily indicative of the results to be expected for the year ending December 31, 2015. Our business is subject to substantial seasonal variations as our retail segment has realized a significant portion of its net sales, cash flows and net income in the fourth quarter of each year, principally due to its Halloween season sales in October and, to a lesser extent, other year-end holiday sales. We expect that this general pattern will continue. Our results of operations may also be affected by industry factors that may be specific to a particular period such as movement in and the general level of raw material costs. For further information see the consolidated financial statements, and notes thereto, included in the Company’s Annual Report for the year ended December 31, 2014, as filed with the Securities and Exchange Commission.

PARTY CITY HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands, except per share)

Recently Issued Accounting Pronouncements

In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-11, “Simplifying the Measurement of Inventory”. The update changes the measurement principle for inventory from the lower of cost or market to lower of cost and net realizable value. The pronouncement will be effective for the Company during the first quarter of 2017. The Company is in the process of evaluating the impact of the pronouncement on the Company’s consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs”. The pronouncement will be effective for the Company during the first quarter of 2016. It will require companies to present debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of such debt liability. As of June 30, 2015 and December 31, 2014, the Company had $33,783 and $37,787, respectively, of debt issuance costs recorded in “other assets” on the Company’s condensed consolidated balance sheet.

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

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”. The pronouncement contains a five-step model which replaces most existing revenue recognition guidance. The update is effective for the Company during the first quarter of 2018; however, early adoption is permitted. The pronouncement can be applied retrospectively to prior reporting periods or through a cumulative-effect adjustment as of the date of adoption. The Company is in the process of evaluating the impact of the pronouncement on the Company’s consolidated financial statements.

Note 3 – Inventories

Inventories consisted of the following:


	June 30, 2015		December 31, 2014
Finished goods	$	595,671	$	550,975
Raw materials		21,394		22,093
Work in process		8,626		9,162

	$	625,691	$	582,230

Inventories are valued at the lower of cost or market. The Company determines the cost of inventory at its retail stores using the weighted average method. Other inventory cost is principally determined using the first-in, first-out method.

The Company estimates retail inventory shortages for the periods between physical inventory dates on a store-by-store basis. Inventory shrinkage estimates can be affected by changes in merchandise mix and changes in actual shortage trends. The shrinkage rate from the most recent physical inventory, in combination with historical experience, is the basis for estimating shrinkage.

PARTY CITY HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands, except per share)

Note 4 – Income Taxes

The income tax benefit for the six months ended June 30, 2015 was determined based upon the Company’s estimated consolidated effective income tax rate for the year ending December 31, 2015. The difference between the estimated consolidated effective income tax rate for the year ending December 31, 2015 and the U.S. federal statutory rate is primarily attributable to unrecognized foreign tax credits and state income taxes, partially offset by a foreign rate differential and available domestic manufacturing deductions.

Note 5 – Changes in Accumulated Other Comprehensive (Loss) Income

The changes in accumulated other comprehensive (loss) income consisted of the following:


	Three Months Ended June 30, 2015
	Foreign Currency Adjustments			Impact of Foreign Exchange Contracts, Net of Taxes			Total, Net of Taxes
Balance at March 31, 2015	$	(26,328	)	$	1,266		$	(25,062	)
Other comprehensive income (loss) before reclassifications		7,739			(933	)		6,806
Amounts reclassified from accumulated other comprehensive loss to the condensed consolidated statement of operations and comprehensive loss		0			(87	)		(87	)

Net current-period other comprehensive income (loss)		7,739			(1,020	)		6,719

Balance at June 30, 2015	$	(18,589	)	$	246		$	(18,343	)


	Three Months Ended June 30, 2014
	Foreign Currency Adjustments		Impact of Foreign Exchange Contracts, Net of Taxes			Total, Net of Taxes
Balance at March 31, 2014	$	5,111	$	(336	)	$	4,775
Other comprehensive income (loss) before reclassifications		4,704		(104	)		4,600
Amounts reclassified from accumulated other comprehensive income to the condensed consolidated statement of operations and comprehensive income		0		66			66

Net current-period other comprehensive income (loss)		4,704		(38	)		4,666

Balance at June 30, 2014	$	9,815	$	(374	)	$	9,441

PARTY CITY HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands, except per share)


	Six Months Ended June 30, 2015
	Foreign Currency Adjustments			Impact of Foreign Exchange Contracts, Net of Taxes			Total, Net of Taxes
Balance at December 31, 2014	$	(12,969	)	$	234		$	(12,735	)
Other comprehensive (loss) income before reclassifications		(5,620	)		265			(5,355	)
Amounts reclassified from accumulated other comprehensive loss to the condensed consolidated statement of operations and comprehensive loss		0			(253	)		(253	)

Net current-period other comprehensive (loss) income		(5,620	)		12			(5,608	)

Balance at June 30, 2015	$	(18,589	)	$	246		$	(18,343	)


	Six Months Ended June 30, 2014
	Foreign Currency Adjustments		Impact of Foreign Exchange Contracts, Net of Taxes			Total, Net of Taxes
Balance at December 31, 2013	$	5,738	$	(330	)	$	5,408
Other comprehensive income (loss) before reclassifications		4,077		(160	)		3,917
Amounts reclassified from accumulated other comprehensive income to the condensed consolidated statement of operations and comprehensive loss		0		116			116

Net current-period other comprehensive income (loss)		4,077		(44	)		4,033

Balance at June 30, 2014	$	9,815	$	(374	)	$	9,441

PARTY CITY HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands, except per share)

Note 6 – Capital Stock

At June 30, 2015, the Company’s authorized capital stock consisted of 100.00 shares of $0.01 par value common stock.

In 2012, the Company entered into a management agreement with Thomas H. Lee Partners, L.P. (“THL”) and Advent International Corporation (“Advent”) under which THL and Advent provided advice to the Company on, among other things, financing, operations, acquisitions and dispositions. Under the agreement, THL and Advent were paid an annual management fee for such services. In connection with Party City Holdco’s April 2015 initial public offering, the management agreement was terminated and the Company paid THL and Advent an aggregate termination fee of $30,697. Such amount was recorded in other expense, net in the Company’s condensed consolidated statement of operations and comprehensive loss for the three months ended June 30, 2015.

In addition to the management agreement termination fee discussed above, Party City Holdco also contributed $6,311 of the proceeds from the initial public offering to the Company.

Under the terms of Party City Holdco’s prior stockholders’ agreement, dated July 27, 2012, employee stockholders who died or became disabled while employed could have required Party City Holdco to purchase all of the shares held by the employee stockholders. The aggregate amount that would have been payable by the Company to current employee stockholders should they have died or become disabled while employed, based on the estimated fair market value of fully paid and vested common securities, totaled $35,062 at December 31, 2014 and was classified as redeemable common securities on the Company’s consolidated balance sheet. During April 2015, Party City Holdco consummated an initial public offering of its common stock and, at such time, the existing stockholders’ agreement was amended and restated. In conjunction with such amendment and restatement, employee stockholders no longer have the ability to require Party City Holdco to purchase their shares in the event of death or disability and, therefore, all amounts included in redeemable common securities have been reclassified to common stock and additional paid-in capital.

The changes in redeemable common securities during the six months ended June 30, 2015 were as follows:


Balance at December 31, 2014	$	35,062
Adjustment of common shares to fair value		5,893
Impact of stockholders’ agreement amendment and restatement		(40,955	)

Balance at June 30, 2015	$	0

On August 1, 2013, PC Nextco issued $350,000 of 8.75% notes (“the Nextco Notes”). The Nextco Notes paid interest semiannually on February 15^th and August 15^th. Since PC Nextco has no assets or operations other than its investment in and income from the Company and its subsidiaries, interest payments for the Nextco Notes were funded by the Company. During the six months ended June 30, 2015 and 2014, the Company made distributions to its Parent, PC Intermediate, in the amounts of $15,313 and $16,503, respectively. PC Intermediate then distributed the funds to PC Nextco so that PC Nextco could make interest payments on the Nextco Notes. During April 2015, Party City Holdco consummated an initial public offering of its common stock and the proceeds were used to, among other things, fully redeem the Nextco Notes.

PARTY CITY HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands, except per share)

Note 7 – Segment Information

Industry Segments

The Company has two identifiable business segments. The Wholesale segment designs, manufactures, contracts for manufacture 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 Retail segment operates specialty retail party supply stores in the United States and Canada, principally under the names Party City and Halloween City, and it operates e-commerce websites, principally through the domain name Partycity.com. The Retail segment also franchises both individual stores and franchise areas throughout the United States, Mexico and Puerto Rico, principally under the name Party City.

The Company’s industry segment data for the three months ended June 30, 2015 and June 30, 2014 was as follows:


	Wholesale			Retail		Consolidated
Three Months Ended June 30, 2015
Revenues:
Net sales	$	254,554		$	350,459	$	605,013
Royalties and franchise fees		0			4,314		4,314

Total revenues		254,554			354,773		609,327
Eliminations		(113,807	)		0		(113,807	)

Net revenues	$	140,747		$	354,773	$	495,520

Income from operations	$	11,353		$	34,714	$	46,067

Interest expense, net							30,408
Other expense, net							33,214

Loss before income taxes						$	(17,555	)


	Wholesale			Retail		Consolidated
Three Months Ended June 30, 2014
Revenues:
Net sales	$	255,803		$	342,436	$	598,239
Royalties and franchise fees		0			4,392		4,392

Total revenues		255,803			346,828		602,631
Eliminations		(111,057	)		0		(111,057	)

Net revenues	$	144,746		$	346,828	$	491,574

Income from operations	$	14,668		$	25,637	$	40,305

Interest expense, net							30,331
Other income, net							(2,098	)

Income before income taxes						$	12,072

PARTY CITY HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands, except per share)

The Company’s industry segment data for the six months ended June 30, 2015 and June 30, 2014 was as follows:


	Wholesale			Retail		Consolidated
Six Months Ended June 30, 2015
Revenues:
Net sales	$	505,270		$	663,731	$	1,169,001
Royalties and franchise fees		0			8,224		8,224

Total revenues		505,270			671,955		1,177,225
Eliminations		(219,600	)		0		(219,600	)

Net revenues	$	285,670		$	671,955	$	957,625

Income from operations	$	24,022		$	46,049	$	70,071

Interest expense, net							60,738
Other expense, net							31,793

Loss before income taxes						$	(22,460	)


	Wholesale			Retail		Consolidated
Six Months Ended June 30, 2014
Revenues:
Net sales	$	488,294		$	642,015	$	1,130,309
Royalties and franchise fees		0			8,159		8,159

Total revenues		488,294			650,174		1,138,468
Eliminations		(213,907	)		0		(213,907	)

Net revenues	$	274,387		$	650,174	$	924,561

Income from operations	$	26,570		$	29,638	$	56,208

Interest expense, net							61,600
Other expense, net							4,551

Loss before income taxes						$	(9,943	)

PARTY CITY HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands, except per share)

Note 8 – Commitments and Contingencies

The Company is a party to certain claims and litigation in the ordinary course of business. The Company does not believe these proceedings will result, individually or in the aggregate, in a material adverse effect on its financial condition or future results of operations.

The Company is an assignor with contingent lease liability for three stores sold to franchisees and other parties. The potential contingent lease obligations continue until the applicable leases expire in 2018. The maximum amount of the contingent lease obligations may vary, but is limited to the sum of the total amount due under the leases. At June 30, 2015, the maximum amount of the contingent lease obligations was approximately $668. Payment of such amount is contingent upon certain events occurring, which management has not assessed as probable or estimable at this time.

Note 9 – Derivative Financial Instruments

The Company is directly and indirectly affected by changes in certain market conditions. These changes in market conditions may adversely impact the Company’s financial performance and are referred to as market risks. The Company, when deemed appropriate, uses derivatives as a risk management tool to mitigate the potential impact of certain market risks. The primary market risks managed through the use of derivative financial instruments are interest rate risk and foreign currency exchange rate risk.

Interest Rate Risk Management

As part of the Company’s risk management strategy, the Company periodically uses interest rate swap agreements to hedge the variability of cash flows on floating rate debt obligations. Accordingly, interest rate swap agreements are reflected in the consolidated balance sheets at fair value and the related gains and losses on these contracts are deferred in stockholder’s equity and recognized in interest expense over the same period in which the related interest payments being hedged are recognized in income. The fair value of an interest rate swap agreement is the estimated amount that the counterparty would receive or pay to terminate the swap agreement at the reporting date, taking into account current interest rates and the current creditworthiness of the swap counterparty. The Company did not utilize interest rate swap agreements during the six months ended June 30, 2015 and June 30, 2014.

Foreign Exchange Risk Management

A portion of the Company’s cash flows is derived from transactions denominated in foreign currencies. In order to reduce the uncertainty of foreign exchange rate movements on transactions denominated in foreign currencies, including the British Pound Sterling, the Canadian Dollar, the Euro, the Malaysian Ringgit and the Australian Dollar, the Company enters into foreign exchange contracts with major international financial institutions. These forward contracts, which typically mature within one year, are designed to hedge anticipated foreign currency transactions, primarily inventory purchases and sales. For contracts that qualify for hedge accounting, the terms of the foreign exchange contracts are such that cash flows from the contracts should be highly effective in offsetting the expected cash flows from the underlying forecasted transactions.

The foreign currency exchange contracts are reflected in the condensed consolidated balance sheets at fair value. The fair value of the foreign currency exchange contracts is the estimated amount that the counterparties would receive or pay to terminate the foreign currency exchange contracts at the reporting date, taking into account current foreign exchange spot rates. At June 30, 2015 and December 31, 2014, the Company had foreign currency exchange contracts that qualified for hedge accounting. No components of these agreements were excluded in the measurement of hedge effectiveness. As these hedges were 100% effective, there was no impact on earnings due to hedge ineffectiveness. The Company anticipates that substantially all unrealized gains and losses in accumulated other comprehensive loss related to these foreign currency exchange contracts will be reclassified into earnings by June 2017.

PARTY CITY HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands, except per share)

The following table displays the fair values of the Company’s derivatives at June 30, 2015 and December 31, 2014:

Derivative Assets

Derivative Liabilities

Balance
Sheet
Line

Fair
Value

Balance
Sheet
Line

Fair
Value

Balance
Sheet
Line

Fair
Value

Balance
Sheet
Line

Fair
Value

Derivative

Instrument

June 30, 2015

December 31, 2014

June 30, 2015

December 31, 2014

Foreign Exchange Contracts

(a) PP

1,131

(a)PP

(b)AE

675

(b)AE

476

(a) PP = Prepaid expenses and other current assets

(b) AE = Accrued expenses

The following table displays the notional amounts of the Company’s derivatives at June 30, 2015 and December 31, 2014:


Derivative Instrument	June 30, 2015		December 31, 2014
Foreign Exchange Contracts	$	32,746	$	8,900

Note 10 – Fair Value Measurements

The provisions of FASB ASC Topic 820, “Fair Value Measurement”, define fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 established a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

•

Level 1 — Quoted prices in active markets for identical assets or liabilities.

•

Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

•

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

PARTY CITY HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands, except per share)

The following table shows assets and liabilities as of June 30, 2015 that are measured at fair value on a recurring basis:


	Level 1		Level 2		Level 3		Total as of June 30, 2015
Derivative assets	$	0	$	1,131	$	0	$	1,131
Derivative liabilities		0		675		0		675

The following table shows assets and liabilities as of December 31, 2014 that are measured at fair value on a recurring basis:


	Level 1		Level 2		Level 3		Total as of December 31, 2014
Derivative assets	$	0	$	0	$	0	$	0
Derivative liabilities		0		476		0		476

In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company is required to record other assets and liabilities at fair value on a nonrecurring basis, generally as a result of impairment charges.

The carrying amounts for cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses and other current liabilities approximated fair value at June 30, 2015 because of the short-term maturities of the instruments and/or their variable rates of interest.

The carrying amount and fair value of the Company’s borrowings under its $1,125,000 Term Loan Credit Agreement (“Term Loan Credit Agreement”) and its $700,000 of 8.875% senior notes (“Senior Notes”) are as follows:


	June 30, 2015
	Carrying Amount		Fair Value
Term Loan Credit Agreement	$	1,084,865	$	1,092,930
Senior Notes		700,000		750,470

The fair values of the Term Loan Credit Agreement and the Senior Notes represent Level 2 fair value measurements as the debt instruments trade in inactive markets.

The carrying amounts for other long-term debt approximated fair value at June 30, 2015 based on the discounted future cash flows of each instrument at rates currently offered for similar debt instruments of comparable maturity.

PARTY CITY HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands, except per share)

Note 11 – Long-Term Obligations

Long-term obligations consisted of the following:


	June 30, 2015			December 31, 2014
Term Loan Credit Agreement	$	1,084,865		$	1,089,242
Capital lease obligations		2,728			3,274
Senior Notes		700,000			700,000

Total long-term obligations		1,787,593			1,792,516
Less: current portion		(12,143	)		(12,249	)

Long-term obligations, excluding current portion	$	1,775,450		$	1,780,267

Note 12 – Subsequent Events

Subsequent to June 30, 2015, the Company announced that it intends to redeem its $700,000 of 8.875% Senior Notes and refinance its existing Term Loan Credit Agreement and $400,000 ABL Revolving Credit Facility (“ABL Facility”) with new indebtedness consisting of: (i) a $1,340,000 senior secured term loan facility, (ii) a $540,000 asset-based revolving credit facility (with a seasonal increase to $640,000 during a certain period of each calendar year) and (iii) $350,000 of 6.125% senior notes due 2023. The Company has caused to be delivered to the holders of the Senior Notes conditional notices of redemption calling half of the Senior Notes on August 27, 2015 and half on September 4, 2015 (the “Redemption Dates”). The redemption price will be 106.656 % of the principal amount of the Senior Notes, plus accrued and unpaid interest on the Senior Notes to, but excluding, the Redemption Dates. The Company’s obligation to make the first redemption payment on August 27, 2015 is conditioned upon the refinancing of the Term Loan Credit Agreement and ABL Facility resulting in gross proceeds to the Company in an amount sufficient to repay the existing indebtedness under the agreements, make the first redemption payment for the Senior Notes, and pay related fees and expenses on or before August 27, 2015 (the “Refinancing Condition”). The Company’s obligation to make the second redemption payment on September 4, 2015 is conditioned upon the Refinancing Condition being satisfied and the consummation of the offering of the notes resulting in gross proceeds to the Company of at least $350,000 on or before September 4, 2015. The Company may waive the conditions in its sole discretion.

PARTY CITY HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands, except share and per share amounts)

Note 13 – Condensed Consolidating Financial Information

Borrowings under the Company’s $400,000 ABL Credit Agreement (“ABL Facility”), the Term Loan Credit Agreement and the Senior Notes are guaranteed jointly and severally, fully and unconditionally, by the following 100%-owned domestic subsidiaries of the Company (collectively, “the Guarantors”):

•

Amscan Inc.

•

Am-Source, LLC

•

Anagram Eden Prairie Property Holdings LLC

•

Anagram International, Inc.

•

Anagram International Holdings, Inc.

•

Party City Corporation

•

Trisar, Inc.

•

U.S. Balloon Manufacturing Co., Inc.

Non-guarantor subsidiaries (collectively, “Non-guarantors”) include the following:

•

Amscan Asia International Ltd.

•

Amscan de Mexico, S.A. de C.V.

•

Amscan Distributors (Canada) Ltd.

•

Amscan Europe GmbH

•

Amscan Holdings Limited

•

Amscan International Ltd.

•

Amscan Japan Co., Ltd.

•

Amscan Party Goods Pty. Ltd.

•

Amscan Partyartikel GmbH

•

Anagram Espana, S.L.

•

Anagram France S.C.S.

•

Anagram International Inc.

•

Christy’s Asia, Ltd.

•

Christy’s By Design, Ltd.

•

Christy’s Dressup, Ltd.

•

Christy’s Garments and Accessories, Ltd.

•

Convergram de Mexico S. de R.L.

•

Delights Ltd.

•

Everts International, Ltd.

•

Everts Malaysia SDN BHD

•

Party City Canada Inc.

•

Party Delights, Ltd.

•

Riethmueller (Polska) Sp z.o.o.

•

Travis Designs, Ltd.

The following information presents condensed consolidating balance sheets at June 30, 2015 and December 31, 2014, the condensed consolidating statements of operations and comprehensive (loss) income for the three and six months ended June 30, 2015 and 2014 and the related condensed consolidating statements of cash flows for the six months ended June 30, 2015 and 2014, for PCHI, the combined Guarantors and the combined Non-guarantors, together with the elimination entries necessary to consolidate the entities.

PARTY CITY HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

CONDENSED CONSOLIDATING BALANCE SHEET

June 30, 2015

(Amounts in thousands)


	PCHI			Combined Guarantors		Combined Non- Guarantors			Eliminations			Consolidated
	PCHI			Combined Guarantors		Combined Non- Guarantors			Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	0		$	9,493	$	33,318		$	0		$	42,811
Accounts receivable , net		0			77,985		38,754			0			116,739
Inventories, net		0			549,921		75,770			0			625,691
Prepaid expenses and other current assets		0			82,419		14,939			0			97,358

Total current assets		0			719,818		162,781			0			882,599
Property, plant and equipment, net		0			225,134		23,567			0			248,701
Goodwill		0			1,488,269		77,353			0			1,565,622
Trade names		0			556,000		13,500			0			569,500
Other intangible assets, net		0			96,130		1,241			0			97,371
Investment in and advances to consolidated subsidiaries		839,820			0		387			(840,207	)		0
Due from affiliates		1,466,260			132,271		77,896			(1,676,427	)		0
Other assets, net		29,515			11,858		4,027			2,877			48,277

Total assets	$	2,335,595		$	3,229,480	$	360,752		$	(2,513,757	)	$	3,412,070

LIABILITIES, REDEEMABLE COMMON SECURITIES AND STOCKHOLDER’S EQUITY
Current liabilities:
Loans and notes payable	$	82,450		$	0	$	773		$	0		$	83,223
Accounts payable		0			113,231		41,348			0			154,579
Accrued expenses		30,707			94,299		24,106			0			149,112
Income taxes payable		(30,526	)		29,924		602			0			0
Due to affiliates		0			1,551,336		122,601			(1,673,937	)		0
Current portion of long-term obligations		7,250			4,893		0			0			12,143

Total current liabilities		89,881			1,793,683		189,430			(1,673,937	)		399,057
Long-term obligations, excluding current portion		1,391,899			383,551		0			0			1,775,450
Deferred income tax liabilities		0			311,269		347			0			311,616
Deferred rent and other long-term liabilities		0			64,006		8,126			0			72,132

Total liabilities		1,481,780			2,552,509		197,903			(1,673,937	)		2,558,255

Redeemable common securities		0			0		0			0			0

Commitments and contingencies

Stockholder’s equity:
Common Stock		0			0		308			(308	)		0
Additional paid-in capital		824,856			391,805		175,028			(566,833	)		824,856
Retained earnings		47,302			285,166		5,856			(291,022	)		47,302
Accumulated other comprehensive loss		(18,343	)		0		(18,343	)		18,343			(18,343	)

Total stockholder’s equity		853,815			676,971		162,849			(839,820	)		853,815
Total liabilities, redeemable common securities and Stockholder’s equity	$	2,335,595		$	3,229,480	$	360,752		$	(2,513,757	)	$	3,412,070

PARTY CITY HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

CONDENSED CONSOLIDATING BALANCE SHEET

December 31, 2014

(Amounts in thousands)


	PCHI			Combined Guarantors		Combined Non- Guarantors			Eliminations			Consolidated
	PCHI			Combined Guarantors		Combined Non- Guarantors			Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	0		$	28,185	$	18,966		$	0		$	47,151
Accounts receivable , net		0			89,596		51,067			0			140,663
Inventories, net		0			514,689		67,541			0			582,230
Prepaid expenses and other current assets		0			68,995		6,408			0			75,403

Total current assets		0			701,465		143,982			0			845,447
Property, plant and equipment, net		0			225,055		23,629			0			248,684
Goodwill		0			1,486,579		70,671			0			1,557,250
Trade names		0			556,000		13,343			0			569,343
Other intangible assets, net		0			105,568		1,442			0			107,010
Investment in and advances to consolidated subsidiaries		790,593			0		387			(790,980	)		0
Due from affiliates		1,445,009			114,278		71,259			(1,630,546	)		0
Other assets, net		32,983			11,567		104			2,005			46,659

Total assets	$	2,268,585		$	3,200,512	$	324,817		$	(2,419,521	)	$	3,374,393

LIABILITIES, REDEEMABLE COMMON SECURITIES AND STOCKHOLDER’S EQUITY
Current liabilities:
Loans and notes payable	$	23,975		$	0	$	1,361		$	0		$	25,336
Accounts payable		0			113,614		32,072			0			145,686
Accrued expenses		30,644			108,105		15,364			0			154,113
Income taxes payable		(39,693	)		73,302		1,061			0			34,670
Due to affiliates		0			1,523,573		105,355			(1,628,928	)		0
Current portion of long-term obligations		7,250			4,999		0			0			12,249

Total current liabilities		22,176			1,823,593		155,213			(1,628,928	)		372,054
Long-term obligations, excluding current portion		1,394,724			385,480		63			0			1,780,267
Deferred income tax liabilities		0			313,818		379			0			314,197
Deferred rent and other long-term liabilities		0			52,694		3,496			0			56,190

Total liabilities		1,416,900			2,575,585		159,151			(1,628,928	)		2,522,708

Redeemable common securities		35,062			0		0			0			35,062

Commitments and contingencies

Stockholder’s equity:
Common Stock		0			0		308			(308	)		0
Additional paid-in capital		751,662			385,487		163,402			(548,889	)		751,662
Retained earnings		77,696			239,440		14,691			(254,131	)		77,696
Accumulated other comprehensive loss		(12,735	)		0		(12,735	)		12,735			(12,735	)

Total stockholder’s equity		816,623			624,927		165,666			(790,593	)		816,623

Total liabilities, redeemable common securities and Stockholder’s equity	$	2,268,585		$	3,200,512	$	324,817		$	(2,419,521	)	$	3,374,393

PARTY CITY HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS

Three Months Ended June 30, 2015

(Amounts in thousands)


	PCHI			Combined Guarantors		Combined Non- Guarantors			Eliminations			Consolidated
	PCHI			Combined Guarantors		Combined Non- Guarantors			Eliminations			Consolidated
Revenues:
Net sales	$	0		$	431,161	$	95,501		$	(35,456	)	$	491,206
Royalties and franchise fees		0			4,314		0			0			4,314

Total revenues		0			435,475		95,501			(35,456	)		495,520
Expenses:
Cost of sales		0			259,877		78,442			(35,456	)		302,863
Wholesale selling expenses		0			8,449		7,786			0			16,235
Retail operating expenses		0			80,412		4,817			0			85,229
Franchise expenses		0			3,530		0			0			3,530
General and administrative expenses		0			29,868		6,549			0			36,417
Art and development costs		0			5,179		0			0			5,179

Total expenses		0			387,315		97,594			(35,456	)		449,453

Income (loss) from operations		0			48,160		(2,093	)		0			46,067

Interest expense, net		25,916			4,457		35			0			30,408
Other expense (income), net		31,197			3,395		(1,378	)		0			33,214

(Loss) income before income taxes		(57,113	)		40,308		(750	)		0			(17,555	)

Income tax (benefit) expense		(21,138	)		14,631		515			0			(5,992	)
Equity based income from subsidiaries		24,412			0		0			(24,412	)		0

Net (loss) income	$	(11,563	)	$	25,677	$	(1,265	)	$	(24,412	)	$	(11,563	)

Comprehensive (loss) income	$	(4,844	)	$	25,677	$	5,454		$	(31,131	)	$	(4,844	)

PARTY CITY HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME

Three Months Ended June 30, 2014

(Amounts in thousands)


	PCHI			Combined Guarantors		Combined Non- Guarantors			Eliminations			Consolidated
	PCHI			Combined Guarantors		Combined Non- Guarantors			Eliminations			Consolidated
Revenues:
Net sales	$	0		$	426,865	$	103,098		$	(42,781	)	$	487,182
Royalties and franchise fees		0			4,392		0			0			4,392

Total revenues		0			431,257		103,098			(42,781	)		491,574

Expenses:
Cost of sales		0			262,227		85,072			(42,781	)		304,518
Wholesale selling expenses		0			10,464		7,974			0			18,438
Retail operating expenses		0			80,967		4,700			0			85,667
Franchise expenses		0			3,431		0			0			3,431
General and administrative expenses		0			27,902		6,460			0			34,362
Art and development costs		0			4,853		0			0			4,853

Total expenses		0			389,844		104,206			(42,781	)		451,269

Income (loss) from operations		0			41,413		(1,108	)		0			40,305

Interest expense, net		25,768			4,527		36			0			30,331
Other expense, net		162			2,447		(4,707	)		0			(2,098	)

(Loss) income before income taxes		(25,930	)		34,439		3,563			0			12,072

Income tax (benefit) expense		(9,591	)		13,294		780			0			4,483
Equity based income from subsidiaries		23,928			0		0			(23,928	)		0

Net income	$	7,589		$	21,145	$	2,783		$	(23,928	)	$	7,589

Comprehensive income	$	12,255		$	21,145	$	7,449		$	(28,594	)	$	12,255

PARTY CITY HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS

Six Months Ended June 30, 2015

(Amounts in thousands)


	PCHI			Combined Guarantors		Combined Non- Guarantors			Eliminations			Consolidated
	PCHI			Combined Guarantors		Combined Non- Guarantors			Eliminations			Consolidated
Revenues:
Net sales	$	0		$	837,933	$	160,511		$	(49,043	)	$	949,401
Royalties and franchise fees		0			8,224		0			0			8,224

Total revenues		0			846,157		160,511			(49,043	)		957,625

Expenses:
Cost of sales		0			515,028		131,152			(49,043	)		597,137
Wholesale selling expenses		0			17,897		15,463			0			33,360
Retail operating expenses		0			156,455		9,088			0			165,543
Franchise expenses		0			6,989		0			0			6,989
General and administrative expenses		0			61,043		13,026			0			74,069
Art and development costs		0			10,355		101			0			10,456

Total expenses		0			767,767		168,830			(49,043	)		887,554

Income (loss) from operations		0			78,390		(8,319	)		0			70,071

Interest expense, net		51,729			8,938		71			0			60,738
Other expense, net		30,774			914		105			0			31,793

(Loss) income before income taxes		(82,503	)		68,538		(8,495	)		0			(22,460	)

Income tax (benefit) expense		(30,531	)		22,812		340			0			(7,379	)
Equity based income from subsidiaries		36,891			0		0			(36,891	)		0

Net (loss) income	$	(15,081	)	$	45,726	$	(8,835	)	$	(36,891	)	$	(15,081	)

Comprehensive (loss) income	$	(20,689	)	$	45,726	$	(14,443	)	$	(31,283	)	$	(20,689	)

PARTY CITY HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS

Six Months Ended June 30, 2014

(Amounts in thousands)


	PCHI			Combined Guarantors		Combined Non- Guarantors			Eliminations			Consolidated
	PCHI			Combined Guarantors		Combined Non- Guarantors			Eliminations			Consolidated
Revenues:
Net sales	$	0		$	810,091	$	160,876		$	(54,565	)	$	916,402
Royalties and franchise fees		0			8,159		0			0			8,159

Total revenues		0			818,250		160,876			(54,565	)		924,561

Expenses:
Cost of sales		0			503,777		129,687			(54,565	)		578,899
Wholesale selling expenses		0			20,875		15,751			0			36,626
Retail operating expenses		0			157,107		8,846			0			165,953
Franchise expenses		0			6,796		0			0			6,796
General and administrative expenses		0			57,927		12,528			0			70,455
Art and development costs		0			9,624		0			0			9,624

Total expenses		0			756,106		166,812			(54,565	)		868,353

Income (loss) from operations		0			62,144		(5,936	)		0			56,208

Interest expense, net		52,217			9,314		69			0			61,600
Other expense (income), net		3,097			5,295		(3,841	)		0			4,551

(Loss) income before income taxes		(55,314	)		47,535		(2,164	)		0			(9,943	)

Income tax (benefit) expense		(20,466	)		17,096		624			0			(2,746	)
Equity based income from subsidiaries		27,651			0		0			(27,651	)		0

Net (loss) income	$	(7,197	)	$	30,439	$	(2,788	)	$	(27,651	)	$	(7,197	)

Comprehensive (loss) income	$	(3,164	)	$	30,439	$	1,245		$	(31,684	)	$	(3,164	)

PARTY CITY HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Six Months Ended June 30, 2015

(Amounts in thousands)


	PCHI			Combined Guarantors			Combined Non- Guarantors			Eliminations			Consolidated
Cash flows (used in) provided by operating activities:
Net (loss) income	$	(15,081	)	$	45,726		$	(8,835	)	$	(36,891	)	$	(15,081	)
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization expense		0			37,088			2,713			0			39,801
Amortization of deferred financing costs and original issuance discount		4,223			959			0			0			5,182
Provision for doubtful accounts		0			(603	)		627			0			24
Deferred income tax benefit		0			(2,983	)		(168	)		0			(3,151	)
Deferred rent		0			3,193			908			0			4,101
Undistributed loss in unconsolidated joint venture		0			35			0			0			35
(Gain) loss on sale of assets		0			(2,641	)		52			0			(2,589	)
Equity based income from subsidiaries		(36,891	)		0			0			36,891			0
Equity based compensation		0			1,124			0			0			1,124

Changes in operating assets and liabilities, net of effects of acquired businesses:
Decrease in accounts receivable		0			14,849			10,239			0			25,088
Increase in inventories		0			(34,507	)		(9,583	)		0			(44,090	)
Increase in prepaid expenses and other current assets		0			(203	)		(7,225	)		0			(7,428	)
(Decrease) increase in accounts payable, accrued expenses and income taxes payable		(22,524	)		(55,534	)		40,823			0			(37,235	)

Net cash (used in) provided by operating activities		(70,273	)		6,503			29,551			0			(34,219	)

Cash flows used in investing activities:
Cash paid in connection with acquisitions, net of cash acquired		0			(1,771	)		(6,487	)		0			(8,258	)
Capital expenditures		0			(27,840	)		(4,049	)		0			(31,889	)
Proceeds from disposal of property and equipment		0			579			22			0			601

Net cash used in investing activities		0			(29,032	)		(10,514	)		0			(39,546	)

Cash flows provided by (used in) financing activities:
Repayments of loans, notes payable and long-term obligations		(77,425	)		(2,480	)		(1,358	)		0			(81,263	)
Proceeds from loans, notes payable and long-term obligations		132,320			0			780			0			133,100
Cash held in escrow in connection with acquisitions		0			0			(3,832	)		0			(3,832	)
Capital contributions		30,691			6,317			0			0			37,008
Distribution to Parent		(15,313	)		0			0			0			(15,313	)

Net cash provided by (used in) financing activities		70,273			3,837			(4,410	)		0			69,700
Effect of exchange rate changes on cash and cash equivalents		0			0			(275	)		0			(275	)

Net (decrease) increase in cash and cash equivalents		0			(18,692	)		14,352			0			(4,340	)
Cash and cash equivalents at beginning of period		0			28,185			18,966			0			47,151

Cash and cash equivalents at end of period	$	0		$	9,493		$	33,318		$	0		$	42,811

PARTY CITY HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Six Months Ended June 30, 2014

(Amounts in thousands)


	PCHI			Combined Guarantors			Combined Non- Guarantors			Eliminations			Consolidated
Cash flows (used in) provided by operating activities:
Net (loss) income	$	(7,197	)	$	30,439		$	(2,788	)	$	(27,651	)	$	(7,197	)
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization expense		0			38,356			2,495			0			40,851
Amortization of deferred financing costs and original issuance discount		6,227			2,062			0			0			8,289
Provision for doubtful accounts		0			273			314			0			587
Deferred income tax benefit		0			(5,520	)		(851	)		0			(6,371	)
Deferred rent		0			6,186			376			0			6,562
Undistributed loss in unconsolidated joint venture		0			472			0			0			472
Loss (gain) on disposal of equipment		0			2,323			(8	)		0			2,315
Equity based income from subsidiaries		(27,651	)		0			0			27,651			0
Equity based compensation		0			791			0			0			791

Changes in operating assets and liabilities, net of effects of acquired businesses:
Decrease (increase) in accounts receivable		0			14,957			(621	)		0			14,336
Increase in inventories		0			(90,876	)		(6,971	)		0			(97,847	)
(Increase) decrease in prepaid expenses and other current assets		0			(4,237	)		4,790			0			553
(Decrease) increase in accounts payable, accrued expenses and income taxes payable		(7,410	)		42,422			9,254			0			44,266

Net cash (used in) provided by operating activities		(36,031	)		37,648			5,990			0			7,607

Cash flows used in investing activities:
Cash paid in connection with acquisitions, net of cash acquired		0			(2,152	)		0			0			(2,152	)
Capital expenditures		0			(29,424	)		(3,631	)		0			(33,055	)
Proceeds from disposal of property and equipment		0			433			514			0			947

Net cash used in investing activities		0			(31,143	)		(3,117	)		0			(34,260	)

Cash flows provided by (used in) financing activities:
Repayments of loans, notes payable and long-term obligations		(794,111	)		(397,494	)		(51	)		0			(1,191,656	)
Proceeds from loans, notes payable and long-term obligations		845,731			395,004			0			0			1,240,735
Exercise of stock options		1,062			0			0			0			1,062
Distribution to Parent		(16,503	)		0			0			0			(16,503	)
Debt issuance costs		(148	)		0			0			0			(148	)

Net cash provided by (used in) financing activities		36,031			(2,490	)		(51	)		0			33,490
Effect of exchange rate changes on cash and cash equivalents		0			0			145			0			145

Net increase in cash and cash equivalents		0			4,015			2,967			0			6,982
Cash and cash equivalents at beginning of period		0			16,182			9,305			0			25,487

Cash and cash equivalents at end of period	$	0		$	20,197		$	12,272		$	0		$	32,469

Item 2.

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

References throughout this document to the “Company” include Party City Holdings Inc. and its subsidiaries. In this document the words “we,” “our,” “ours” and “us” refer only to the Company and its subsidiaries and not to any other person.

Business Overview

Our Company

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

How We Assess the Performance of Our Company

In assessing the performance of our company, we consider a variety of performance and financial measures for our two operating segments, Retail and Wholesale. These key measures include revenues and gross profit, comparable retail same-store sales and operating expenses. We also review other metrics such as adjusted EBITDA. For a discussion of our use of these measures and a reconciliation of adjusted EBITDA to net income (loss), please see below.

Segments

Our Retail segment generates revenues from the sale of merchandise to the end consumer through our chain of company-owned party goods stores, our e-commerce websites, including PartyCity.com, and our chain of temporary Halloween City locations. Franchise revenues include royalties on franchise retail sales and franchise fees charged for the initial franchise award and subsequent renewals. Our retail sales of party goods are fueled by everyday events such as birthdays, various seasonal events, particularly Halloween, and other special occasions occurring throughout the year. In addition, through Halloween City, our temporary Halloween business, we seek to maximize our Halloween seasonal opportunity. As a result, in 2014, our Halloween business represented approximately 25% of our total domestic retail sales, generally occurring in a five-week selling season ending on October 31. We expect to continue to generate a significant portion of our retail sales during the Halloween selling season.

Our Wholesale segment generates revenues globally through sales of Amscan, Designware, Anagram, Costumes USA and other party supplies to party goods superstores, including our company-owned and franchised stores, other party goods retailers, dollar stores, mass merchants, independent card and gift stores and other retailers and distributors throughout the world.

Intercompany sales between the Wholesale and the Retail segment are eliminated, and the profits on intercompany sales are deferred and realized at the time the merchandise is sold to the consumer. For segment reporting purposes, certain general and administrative expenses and art and development costs are allocated based on revenues.

Financial Measures

Revenues. Revenues from retail operations are recognized at point of sale. We estimate future retail sales returns and record a provision in the period in which the related sales are recorded based on historical information. Retail revenues include shipping revenue related to e-commerce sales. Retail sales are reported net of taxes collected. Franchise royalties are recognized based on reported franchise retail sales.

Revenues from our wholesale operations represent the sale of our products to third parties, less rebates, discounts and other allowances. The terms of our wholesale sales are generally free-on-board (“FOB”) shipping point, and revenue is recognized when goods are shipped. We estimate reductions to revenues for volume-based rebate programs and subsequent credits at the time sales are recognized. Intercompany sales from our wholesale operations to our retail stores are eliminated in our consolidated total revenues.

Comparable Retail Same-Store Sales. The growth in same-store sales represents the percentage change in same-store sales in the period presented compared to the prior year. Same-store sales exclude the net sales of a store for any period if the store was not open during the same period of the prior year. Comparable sales are calculated based upon stores that were open at least thirteen full months as of the end of the applicable reporting period. When a store is reconfigured or relocated within the same general territory, the store continues to be treated as the same store. If, during the period presented, a store was closed, sales from that store up to and including the closing day are included as same-store sales as long as the store was open during the same period of the prior year. Same-store sales for the Party City brand include North American retail e-commerce sales.

Cost of Sales. At retail, cost of sales reflects the direct cost of goods purchased from third parties and the production or purchase costs of goods acquired from our wholesale operations. Retail cost of sales also includes inventory shrinkage, inventory adjustments, inbound freight, occupancy costs related to store operations (such as rent and common area maintenance, utilities and depreciation on assets) and all logistics costs associated with our retail e-commerce business. Cost of sales at wholesale reflects the production costs (i.e., raw materials, labor and overhead) of manufactured goods and the direct cost of purchased goods, inventory shrinkage, inventory adjustments, inbound freight to our manufacturing and distribution facilities, distribution costs and outbound freight to get goods to our wholesale customers.

Our cost of sales increases in higher volume periods as the direct costs of manufactured and purchased goods, inventory shrinkage and freight are generally tied to net sales. However, other costs are largely fixed or vary based on other factors and do not necessarily increase as sales volume increases. Changes in the mix of our products may also impact our overall cost of sales. The direct costs of manufactured and purchased goods are influenced by raw material costs (principally paper, petroleum-based resins and cotton), domestic and international labor costs in the countries where our goods are purchased or manufactured and logistics costs associated with transporting our goods. We monitor our inventory levels on an on-going basis in order to identify slow-moving goods.

On July 27, 2012, PC Merger Sub, Inc., a wholly-owned subsidiary of PC Intermediate, merged into PCHI, with PCHI being the surviving entity (“the Transaction”). As a result of the Transaction, we applied the acquisition method of accounting and increased the value of our inventory by $89.8 million as of July 28, 2012. The adjustment principally reflects the previously deferred wholesale margin on inventory supplied to our retail operations and on hand at July 27, 2012. Such adjustment increased our cost of sales subsequent to July 27, 2012 as the related inventory was sold. See “Results of Operations” below for further discussion.

Wholesale Selling Expenses. Wholesale selling expenses include the costs associated with our wholesale sales and marketing efforts, including merchandising and customer service. Costs include the salaries and benefits of the related work force, including sales-based bonuses and commissions. Other costs include catalogues, showroom rent, travel and other operating costs. Certain selling expenses, such as sales-based bonuses and commissions, vary in proportion to sales, while other costs vary based on other factors, such as our marketing efforts, or are largely fixed and do not necessarily increase as sales volumes increase.

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

Franchise Expenses. Franchise expenses include the costs associated with operating our franchise network, including salaries and benefits of the administrative work force and other administrative costs. These expenses generally do not vary proportionally with royalties and franchise fees.

General and Administrative Expenses. General and administrative expenses include all operating costs not included elsewhere in the statement of operations and comprehensive income (loss). These expenses include payroll and other expenses related to operations at our corporate offices, including occupancy costs, related depreciation and amortization, legal and professional fees and data-processing costs. These expenses generally do not vary proportionally with net sales.

Art and Development Costs. Art and development costs include the costs associated with art production, creative development and product management. Costs include the salaries and benefits of the related work force. These expenses generally do not vary proportionally with net sales.

Adjusted EBITDA. We define EBITDA as net income (loss) before interest expense, net, income taxes, depreciation and amortization. We define Adjusted EBITDA as EBITDA, as further adjusted to eliminate the impact of certain items that we do not consider indicative of our ongoing operating performance. We caution investors that amounts presented in accordance with our definition of Adjusted EBITDA may not be comparable to similar measures disclosed by other issuers, because not all issuers and analysts calculate Adjusted EBITDA in the same manner. We present Adjusted EBITDA because we believe it assists investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. In addition, we use Adjusted EBITDA: (i) as a factor in determining incentive compensation, (ii) to evaluate the effectiveness of our business strategies and (iii) because the credit facilities use Adjusted EBITDA to measure compliance with certain covenants.

Results of Operations

Three Months Ended June 30, 2015 Compared To Three Months Ended June 30, 2014

The following table sets forth the Company’s operating results and operating results as a percentage of total revenues for the three months ended June 30, 2015 and 2014.


	Three Months Ended June 30,
	2015					2014
	(Dollars in thousands)
Revenues:
Net sales	$	491,206		99.1	%	$	487,182		99.1	%
Royalties and franchise fees		4,314		0.9			4,392		0.9

Total revenues		495,520		100.0			491,574		100.0

Expenses:
Cost of sales		302,863		61.1			304,518		62.0
Wholesale selling expenses		16,235		3.3			18,438		3.7
Retail operating expenses		85,229		17.2			85,667		17.4
Franchise expenses		3,530		0.7			3,431		0.7
General and administrative expenses		36,417		7.4			34,362		7.0
Art and development costs		5,179		1.0			4,853		1.0

Total expenses		449,453		90.7			451,269		91.8

Income from operations		46,067		9.3			40,305		8.2

Interest expense, net		30,408		6.1			30,331		6.2
Other expense (income), net		33,214		6.7			(2,098	)	(0.4	)

(Loss) income before income taxes		(17,555	)	(3.5	)		12,072		2.5

Income tax (benefit) expense		(5,992	)	(1.2	)		4,483		0.9

Net (loss) income	$	(11,563	)	(2.3	)%	$	7,589		1.6	%

Revenues

Total revenues for the second quarter of 2015 were $495.5 million and were $3.9 million or 0.8% higher than the second quarter of 2014. The following table sets forth the Company’s total revenues for the three months ended June 30, 2015 and 2014.


	Three Months Ended June 30,
	2015						2014
	Dollars in Thousands			Percentage of Total Revenues			Dollars in Thousands			Percentage of Total Revenues
Net Sales:
Wholesale	$	254,554			51.4	%	$	255,803			52.0	%
Eliminations		(113,807	)		(23.0	)%		(111,057	)		(22.6	)%

Net wholesale		140,747			28.4	%		144,746			29.4	%
Retail		350,459			70.7	%		342,436			69.7	%

Total net sales		491,206			99.1	%		487,182			99.1	%
Royalties and franchise fees		4,314			0.9	%		4,392			0.9	%

Total revenues	$	495,520			100.0	%	$	491,574			100.0	%

Retail

Retail net sales during the second quarter of 2015 were $350.5 million and increased $8.0 million, or 2.3%, compared to the corresponding quarter of 2014. Retail net sales at our Party City stores totaled $320.7 million and were $8.8 million, or 2.8%, higher than the corresponding quarter of 2014. In addition to a 1.1% increase in same-store sales discussed below, the increase in sales at our Party City stores reflects the operation of 20 additional stores during the second quarter of 2015 as 27 stores were opened, two stores were acquired and nine stores were closed during the twelve months ended June 30, 2015. A shift in the timing of the Easter selling season into the first quarter of 2015, compared to the second quarter of 2014, negatively impacted second quarter 2015 sales by approximately $4 million. Additionally, foreign currency translation negatively impacted store sales by approximately $2 million due to the strengthening of the U.S. Dollar in comparison to the Canadian Dollar. Global retail e-commerce sales totaled $29.8 million during the second quarter of 2015 and were $0.8 million, or 2.6%, lower than the corresponding quarter of 2014. Foreign currency translation negatively impacted global e-commerce sales by approximately $0.6 million due to the strengthening of the U.S. Dollar in comparison to the British Pound. In addition, retail e-commerce sales were negatively impacted by approximately $0.7 million, compared to the second quarter of fiscal 2014, due to a timing shift that caused the historically slow e-commerce sales week of the Fourth of July to fall within the second quarter of fiscal 2015.

Same-store sales for the Party City brand (including North American retail e-commerce sales and sales at acquired stores, to the extent that the stores were converted to the Party City format and included in our sales for the comparable period of the prior year) increased by 1.2% during the second quarter of 2015 as a 3.7% increase in average transaction dollar size was partially offset by a 2.5% decrease in transaction count. The shift in the timing of the Easter selling season negatively impacted brand comp by 1.5%. Excluding the impact of e-commerce, same-store sales increased by 1.1% as a 3.8% increase in average transaction dollar size was partially offset by a 2.7% decrease in transaction count. The North American retail e-commerce sales included in our Party City brand comp increased by 3.2% as a 5.2% increase in transaction count was partially offset by a 2.0% decrease in average transaction dollar size. Comp sales percentages were not affected by the shift in the start of the Company’s retail calendar or by foreign currency as such percentages are based on a comparison of local currency sales for the corresponding weeks from each calendar year.

Wholesale

Wholesale net sales during the second quarter of 2015 totaled $140.7 million and were $4.0 million, or 2.8%, lower than during the second quarter of 2014. During the quarter, net sales to domestic party goods retailers and distributors, including our franchisee network, totaled $65.9 million and were $0.8 million, or 1.2%, higher than the corresponding quarter of 2014. The increase was principally driven by contract manufacturing sales of paper tableware and costume sales to franchisees and independent retailers. Net sales of metallic balloons to domestic distributors, other domestic retailers and our franchisee network totaled $19.1 million and were $4.2 million, or 18.0%, lower than in 2014. Our acquisition of the balloon distributor U.S. Balloon Manufacturing Co., Inc. (“U.S. Balloon”), in October 2014, resulted in the addition of approximately $2 million of third-party sales during the second quarter of 2015. However, those sales were more than offset by the elimination of the now intercompany sales from our balloon manufacturing operations to U.S. Balloon (which totaled approximately $6 million in the second quarter of 2014 and which was reported as third-party sales in such quarter). Sales from our international operations (including certain import sales into the U.S.) and our U.S. export sales totaled $55.7 million and were $0.6 million, or 1.1%, lower than the second quarter of 2014. Foreign currency translation negatively impacted second quarter 2015 international sales by approximately $6 million. Excluding the impact of foreign currency, international sales increased versus 2014 primarily due to higher sales to a customer in Australia and increased sales of latex balloons and Christy’s costumes.

Intercompany sales to our retail affiliates totaled $113.8 million during the second quarter of 2015 and were $2.8 million, or 2.5%, higher than the corresponding period of 2014. The increase principally reflects the acquisition of U.S. Balloon, which distributes metallic balloons to our Party City stores. Intercompany sales represented 44.7% of total wholesale sales during the second quarter of 2015, compared to 43.4% during the corresponding period of 2014. The intercompany sales of our wholesale segment are eliminated against the intercompany purchases of our retail segment in the consolidated financial statements.

Royalties and franchise fees

Royalties and franchise fees for the second quarter of 2015 were $4.3 million and were principally consistent with the corresponding quarter of 2014.

Gross Profit

Our total gross profit on net sales during the second quarter of 2015 was 38.3%, compared to 37.5% during the second quarter of 2014. As a result of the Transaction, we applied the acquisition method of accounting and increased the value of our inventory by $89.8 million as of July 28, 2012. Such adjustment increased our cost of sales during the second quarter of 2014 by $1.4 million as the related inventory was sold. Further, during the application of the acquisition method of accounting, we increased the values of certain intangible assets and property, plant and equipment. The impact of such adjustments on depreciation and amortization expense increased our cost of sales during the second quarters of 2015 and 2014 by $2.9 million and $3.9 million, respectively. The purchase accounting adjustments to cost of sales negatively impacted our gross profit percentages during the second quarters of 2015 and 2014 by 60 basis points and 110 basis points, respectively.

The following table sets forth the Company’s gross profit for the three months ended June 30, 2015 and June 30, 2014.


	Three Months Ended June 30,
	2015					2014
	Dollars in Thousands		Percentage of Net Sales			Dollars in Thousands		Percentage of Net Sales
Retail	$	147,260		42.0	%	$	136,821		40.0	%
Wholesale		41,083		29.2			45,843		31.7

Total	$	188,343		38.3	%	$	182,664		37.5	%

The gross profit on net sales at retail during the second quarters of 2015 and 2014 was 42.0% and 40.0%, respectively. The purchase accounting adjustments to cost of sales negatively impacted retail’s gross profit percentage during the second quarters of 2015 and 2014 by 40 basis points and 90 basis points, respectively. The gross profit percentage during the second quarter of 2015 was higher than during the second quarter of 2014 due to increased share of shelf, favorable product mix, and fewer markdowns. During the second quarter of 2015, our wholesale share of shelf at our Party City stores and our North American retail e-commerce operations (i.e., the percentage of our retail product cost of sales supplied by our wholesale operations) was 75.6%.

The gross profit on net sales at wholesale during the second quarters of 2015 and 2014 was 29.2% and 31.7%, respectively. The purchase accounting adjustments to cost of sales negatively impacted wholesale’s gross profit percentage during the second quarters of 2015 and 2014 by 110 basis points and 140 basis points, respectively. The decrease in margin was partially due to the strengthening of the U.S. Dollar and its unfavorable impact on certain of our international subsidiaries that purchase product denominated in U.S. Dollars and sell in local currency. Additionally, the 2015 margin percentage was impacted by changes in sales mix, including decreased high-margin metallic balloon sales due to the acquisition of U.S. Balloon (see above), and increased contract manufacturing and international sales.

Operating expenses

Wholesale selling expenses were $16.2 million during the second quarter of 2015 and $18.4 million during the corresponding quarter of 2014. Approximately $0.9 million of the $2.2 million decrease was due to foreign currency translation at international subsidiaries. The remainder of the decrease was principally due to cost savings associated with a reorganization of our party/gift sales and marketing group and a $0.3 million decrease in intangible asset amortization. Wholesale selling expenses were 11.5% and 12.7% of net wholesale sales during the second quarters of 2015 and 2014, respectively.

Retail operating expenses during the second quarter of 2015 were $85.2 million and were $0.4 million or 0.5%, lower than the second quarter of 2014. The decrease was due to the timing of certain advertising costs and the impact of foreign currency translation at our Canadian and U.K. retail operations. These factors were mostly offset by the expenses of new stores, net of closures, and inflationary cost increases. Retail operating expenses were 24.3% and 25.0% of net retail sales during the second quarters of 2015 and 2014, respectively.

Franchise expenses during the second quarters of 2015 and 2014 were $3.5 million and $3.4 million, respectively.

General and administrative expenses during the second quarter of 2015 totaled $36.4 million and were $2.1 million or 6.0% higher than in 2014. The increase principally reflects a non-recurring contract termination charge of approximately $1 million, the inclusion of U.S. Balloon and Travis Designs Limited expenses (for a total of approximately $1 million), and inflationary cost increases. Such increases were partially offset by favorable bad debt expense and foreign currency translation. General and administrative expenses as a percentage of total revenues increased from 7.0% in 2014 to 7.4% in 2015.

Art and development costs during the second quarters of 2015 and 2014 were $5.2 million and $4.9 million, respectively. The increase of $0.3 million was principally due to increased head count and other costs incurred in order to support the expansion of Halloween and other retail programs. The costs were 1.0% of total revenues during both 2015 and 2014.

Interest expense, net

Interest expense, net, totaled $30.4 million during the second quarter of 2015, compared to $30.3 million during the second quarter of 2014.

Other expense (income), net

Other expense (income), net generally includes foreign currency (gains) losses, corporate development expenses and (gains) losses from unconsolidated joint ventures.

For the three months ended June 30, 2015, other expense, net, totaled $33.2 million.

During April 2015, in conjunction with Party City Holdco’s initial public offering, the Company paid a management agreement termination fee of $30.7 million to affiliates of Thomas H. Lee Partners, L.P. (“THL”) and Advent International Corporation (“Advent”). The Company recorded the termination fee in other expense, net in the Company’s condensed consolidated statement of operations and comprehensive loss for the three months ended June 30, 2015.

For the three months ended June 30, 2014, other income, net, totaled $2.1 million.

During the second quarter of 2014, the Company received $3.7 million of business interruption insurance proceeds relating to the interruption caused by Superstorm Sandy in October 2012 and the Company recorded the amount in other income, net.

Income tax (benefit) expense

The income tax benefit for the three months ended June 30, 2015 was determined based upon the Company’s estimated consolidated effective income tax rate for the year ending December 31, 2015.

The difference between the estimated consolidated effective income tax rate for the year ending December 31, 2015, as determined as of June 30, 2015, and the U.S. federal statutory rate is primarily attributable to unrecognized foreign tax credits and state income taxes, partially offset by a foreign rate differential and available domestic manufacturing deductions.

Six Months Ended June 30, 2015 Compared To Six Months Ended June 30, 2014

The following table sets forth the Company’s operating results and operating results as a percentage of total revenues for the six months ended June 30, 2015 and 2014.


	Six Months Ended June 30,
	2015					2014
	(Dollars in thousands)
Revenues:
Net sales	$	949,401		99.1	%	$	916,402		99.1	%
Royalties and franchise fees		8,224		0.9			8,159		0.9

Total revenues		957,625		100.0			924,561		100.0
Expenses:

Cost of sales		597,137		62.4			578,899		62.6
Wholesale selling expenses		33,360		3.5			36,626		4.0
Retail operating expenses		165,543		17.3			165,953		18.0
Franchise expenses		6,989		0.7			6,796		0.7
General and administrative expenses		74,069		7.7			70,455		7.6
Art and development costs		10,456		1.1			9,624		1.0

Total expenses		887,554		92.7			868,353		93.9

Income from operations		70,071		7.3			56,208		6.1

Interest expense, net		60,738		6.4			61,600		6.7
Other expense, net		31,793		3.3			4,551		0.5

Loss before income taxes		(22,460	)	(2.4	)		(9,943	)	(1.1	)

Income tax benefit		(7,379	)	(0.8	)		(2,746	)	(0.3	)

Net loss	$	(15,081	)	(1.6	)%	$	(7,197	)	(0.8	)%

Revenues

Total revenues for the six months ended June 30, 2015 were $957.6 million and were $33.1 million or 3.6% higher than the corresponding period of 2014. The following table sets forth the Company’s total revenues for the six months ended June 30, 2015 and 2014.


	Six Months Ended June 30,
	2015						2014
	Dollars in Thousands			Percentage of Total Revenues			Dollars in Thousands			Percentage of Total Revenues
Net Sales:
Wholesale	$	505,270			52.7	%	$	488,294			52.8	%
Eliminations		(219,600	)		(22.9	)%		(213,907	)		(23.1	)%

Net wholesale		285,670			29.8	%		274,387			29.7	%
Retail		663,731			69.3	%		642,015			69.4	%

Total net sales		949,401			99.1	%		916,402			99.1	%
Royalties and franchise fees		8,224			0.9	%		8,159			0.9	%

Total revenues	$	957,625			100.0	%	$	924,561			100.0	%

Retail

Retail net sales during the six months ended June 30, 2015 were $663.7 million and increased $21.7 million, or 3.4%, compared to the corresponding period of 2014. Retail net sales at our Party City stores totaled $603.1 million and were $20.0 million, or 3.4%, higher than the corresponding period of 2014. In addition to a 3.0% increase in same-store sales discussed below, the increase in sales at our Party City stores reflects the operation of 20 additional stores during the first six months of 2015 as 27 stores were opened, two stores were acquired and nine stores were closed during the twelve months ended June 30, 2015. Partially offsetting these positive factors was the impact of the Company’s retail calendar. For the Company’s retail operations, fiscal 2015 and 2014 began on January 4, 2015 and December 29, 2013, respectively. The timing shift negatively impacted sales during the first six months of 2015 by approximately $7 million in comparison to the corresponding period of 2014 as 2014 benefitted from New Year’s sales. Additionally, during the first six months of 2015, foreign currency translation negatively impacted store sales by approximately $4 million due to the strengthening of the U.S. Dollar in comparison to the Canadian Dollar. Global retail e-commerce sales totaled $60.6 million during the first six months of 2015 and were $1.7 million, or 2.9%, higher than the corresponding period of 2014. Foreign currency translation negatively impacted 2015 global e-commerce sales by approximately $1 million due to the strengthening of the U.S. Dollar in comparison to the British Pound.

Same-store sales for the Party City brand (including North American retail e-commerce sales and sales at acquired stores, to the extent that the stores were converted to the Party City format and included in our sales for the comparable period of the prior year) increased by 3.1% during the first six months of 2015 as a 4.1% increase in average transaction dollar size was partially offset by a 1.0% decrease in transaction count. Excluding the impact of e-commerce, same-store sales increased by 3.0% as a 4.1% increase in average transaction dollar size was partially offset by a 1.1% decrease in transaction count. The North American retail e-commerce sales included in our Party City brand comp increased by 3.9% due to a 2.5% increase in transaction count and a 1.4% increase in average transaction dollar size. Comp sales percentages were not affected by the shift in the start of the Company’s retail calendar or by foreign currency as such percentages are based on a comparison of local currency sales for the corresponding weeks from each calendar year.

Wholesale

Wholesale net sales during the first six months of 2015 totaled $285.7 million and were $11.3 million, or 4.1%, higher than during the first six months of 2014. During the period, net sales to domestic party goods retailers and distributors, including our franchisee network, totaled $139.6 million and were $7.7 million, or 5.8%, higher than the corresponding period of 2014. The increase was principally driven by licensed juvenile birthday product, contract manufacturing sales of paper tableware and gift sales. Net sales of metallic balloons to domestic distributors, other domestic retailers and our franchisee network totaled $41.9 million and were $1.7 million, or 3.9%, lower than in 2014. Our acquisition of the balloon distributor U.S. Balloon Manufacturing Co., Inc. (“U.S. Balloon”), in October 2014, resulted in the addition of approximately $5 million of third-party sales during the first six months of 2015. However, those sales were more than offset by the elimination of the now intercompany sales from our balloon manufacturing operations to U.S. Balloon (which totaled approximately $11 million during the first six months of 2014 and which were reported as third-party sales during such period). Excluding the impact of the U.S. Balloon acquisition, metallic balloon sales increased during the first six months of 2015 principally due to strong sales of licensed product and the timing of certain Valentine’s Day sales, which shifted from the fourth quarter of 2013 to the first quarter of 2015. Sales from our international operations (including certain import sales into the U.S.) and our U.S. export sales totaled $104.2 million and were $5.3 million, or 5.4%, higher than the first six months of 2014. Foreign currency translation negatively impacted 2015 international sales by approximately $10 million. Excluding the impact of foreign currency, the increase in international sales principally reflects higher sales of party goods in the U.K. and Australia, as well as increased sales of Christy’s costumes and latex balloons.

Intercompany sales to our retail affiliates totaled $219.6 million during 2015 and were $5.7 million, or 2.7%, higher than the corresponding period of 2014. The increase principally reflects the acquisition of U.S. Balloon, which distributes metallic balloons to our Party City stores. Intercompany sales represented 43.5% of total wholesale sales during 2015, compared to 43.8% during the corresponding period of 2014. The intercompany sales of our wholesale segment are eliminated against the intercompany purchases of our retail segment in the consolidated financial statements.

Royalties and franchise fees

Royalties and franchise fees for the first six months of 2015 were $8.2 million and were consistent with the corresponding period of 2014.

Gross Profit

Our total gross profit on net sales during the first six months of 2015 was 37.1%, compared to 36.8% during 2014. As a result of the Transaction, we applied the acquisition method of accounting and increased the value of our inventory by $89.8 million as of July 28, 2012. Such adjustment increased our cost of sales during 2014 by $2.8 million as the related inventory was sold. Further, during the application of the acquisition method of accounting, we increased the values of certain intangible assets and property, plant and equipment. The impact of such adjustments on depreciation and amortization expense increased our cost of sales during the first six months of 2015 and 2014 by $5.9 million and $8.4 million, respectively. The purchase accounting adjustments to cost of sales negatively impacted our gross profit percentages during 2015 and 2014 by 60 basis points and 120 basis points, respectively.

The following table sets forth the Company’s gross profit for the six months ended June 30, 2015 and June 30, 2014.


	Six Months Ended June 30,
	2015					2014
	Dollars in Thousands		Percentage of Net Sales			Dollars in Thousands		Percentage of Net Sales
Retail	$	266,736		40.2	%	$	249,011		38.8	%
Wholesale		85,528		29.9			88,492		32.3

Total	$	352,264		37.1	%	$	337,503		36.8	%

The gross profit on net sales at retail during the first six months of 2015 and 2014 was 40.2% and 38.8%, respectively. The purchase accounting adjustments to cost of sales negatively impacted retail’s gross profit percentage during 2015 and 2014 by 40 basis points and 110 basis points, respectively. In addition to the impact of purchase accounting, the gross profit percentage during 2015 was higher than during 2014 due to increased share of shelf, favorable product mix, and fewer markdowns. During the first six months of 2015, our wholesale share of shelf at our Party City stores and our North American retail e-commerce operations (i.e., the percentage of our retail product cost of sales supplied by our wholesale operations) was 73.7%.

The gross profit on net sales at wholesale during the first six months of 2015 and 2014 was 29.9% and 32.3%, respectively. The purchase accounting adjustments to cost of sales negatively impacted wholesale’s gross profit percentage during 2015 and 2014 by 110 basis points and 160 basis points, respectively. The decrease in margin was partially due to the strengthening of the U.S. Dollar and its unfavorable impact on certain of our international subsidiaries that purchase product denominated in U.S. Dollars and sell in local currency. Additionally, the 2015 margin percentage was impacted by changes in sales mix, including lower margins from higher international sales, increased contract manufacturing sales, and increased sales of licensed product (due to the impact of royalties).

Operating expenses

Wholesale selling expenses totaled $33.4 million during the first six months of 2015 and were $3.3 million or 8.9% lower than during the comparable period of 2014. Approximately $2 million of the decrease was due to foreign currency translation at international subsidiaries. The remainder of the decrease was principally due to cost savings associated with a reorganization of our party/gift sales and marketing group and a $0.6 million decrease in intangible asset amortization. Wholesale selling expenses were 11.7% and 13.3% of net wholesale sales during 2015 and 2014, respectively.

Retail operating expenses during the first six months of 2015 were $165.5 million and were $0.4 million or 0.2%, lower than 2014. The impact of new store expenses (net of closures) and inflationary cost increases were more than offset by the timing of certain advertising costs and the impact of foreign currency translation at our Canadian and U.K. retail operations. Retail operating expenses were 24.9% and 25.9% of net retail sales during 2015 and 2014, respectively.

Franchise expenses during 2015 and 2014 were $7.0 million and $6.8 million, respectively.

General and administrative expenses during the first six months of 2015 totaled $74.1 million and were $3.6 million, or 5.1%, higher than in 2014. The increase principally reflects a non-recurring contract termination charge of approximately $1 million, the inclusion of U.S. Balloon and Travis Designs Limited expenses, and inflationary cost increases. These increases were partially offset by favorable bad debt expense and foreign currency translation. General and administrative expenses as a percentage of total revenues increased from 7.6% in 2014 to 7.7% in 2015.

Art and development costs during 2015 and 2014 were $10.5 million and $9.6 million, respectively. The increase of $0.8 million, or 8.6%, was principally due to increased head count and other costs incurred in order to support the expansion of Halloween and other retail programs. The costs were 1.1% and 1.0% of total revenues during 2015 and 2014, respectively.

Interest expense, net

Interest expense, net, totaled $60.7 million during the first six months of 2015, compared to $61.6 million during 2014. The decrease was principally due to the February 2014 amendment of the Term Loan Credit Agreement.

Other expense, net

Other expense (income), net generally includes foreign currency (gains) losses, corporate development expenses and (gains) losses from unconsolidated joint ventures.

For the six months ended June 30, 2015, other expense, net, totaled $31.8 million.

During the first quarter of 2015, the Company sold certain assets related to the newly acquired U.S. Balloon business and recorded a $2.7 million gain on such sale in other expense, net.

For the six months ended June 30, 2014, other expense, net, totaled $4.6 million.

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

Income tax benefit

The income tax benefit for the six months ended June 30, 2015 was determined based upon the Company’s estimated consolidated effective income tax rate for the year ending December 31, 2015.

Adjusted EBITDA

We present adjusted EBITDA as a supplemental measure of our operating performance. We define EBITDA as net income (loss) before interest expense, net, income taxes, depreciation and amortization. We define adjusted EBITDA as EBITDA, as further adjusted to eliminate the impact of certain items that we do not consider indicative of our ongoing operating performance. These further adjustments are itemized below. We present adjusted EBITDA as a supplemental measure of our performance. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. We present adjusted EBITDA because we believe it assists investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. In addition, we use adjusted EBITDA: (i) as a factor in determining incentive compensation, (ii) to evaluate the effectiveness of our business strategies and (iii) because the credit facility uses adjusted EBITDA to measure compliance with certain covenants.

Adjusted EBITDA has limitations as analytical tools. Some of these limitations are:

•

adjusted EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;

•

adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

•

adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our indebtedness;

•

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and adjusted EBITDA does not reflect any cash requirements for such replacements;

•

non-cash compensation is and will remain a key element of our overall long-term incentive compensation package, although we exclude it as an expense when evaluating our ongoing operating performance for a particular period;

•

adjusted EBITDA does not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations; and

•

other companies in our industry may calculate adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

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


	Three Months Ended June 30, 2015			Three Months Ended June 30, 2014			Six Months Ended June 30, 2015			Six Months Ended June 30, 2014
(Dollars in thousands)
Net (loss) income	$	(11,563	)	$	7,589		$	(15,081	)	$	(7,197	)
Interest expense, net		30,408			30,331			60,738			61,600
Income taxes		(5,992	)		4,483			(7,379	)		(2,746	)
Depreciation and amortization		19,650			19,879			39,801			40,851

EBITDA		32,503			62,282			78,079			92,508
Non-cash purchase accounting adjustments		3,937			1,359			5,755			2,806
Management fee (a)		30,697			839			31,627			1,678
Restructuring, retention and severance		1,505			635			2,145			2,174
Refinancing charges		—			—			—			4,396
Deferred rent		2,696			3,873			4,101			6,562
Closed store expense		307			333			568			1,148
Foreign currency losses		1,558			224			2,760			1,403
Business interruption proceeds, net of costs		—			(2,476	)		—			(2,476	)
Equity based compensation		728			395			1,124			791
Undistributed loss (income) in unconsolidated joint venture		126			(111	)		35			472
Gain on sale of assets		—			—			(2,660	)		—
Corporate development expenses		994			187			1,129			273
Other		(101	)		1,753			(218	)		2,393

Adjusted EBITDA	$	74,950		$	69,293		$	124,445		$	114,128

(a)

In 2012, the Company entered into a management agreement with THL and Advent under which THL and Advent provided advice to the Company on, among other things, financing, operations, acquisitions and dispositions. Under the agreement, THL and Advent were paid an annual management fee for such services. In connection with the initial public offering, the management agreement was terminated and the Company paid THL and Advent a termination fee. Such amount was recorded in other expense, net in the Company’s condensed consolidated statement of operations and comprehensive loss for the three months ended June 30, 2015.

Liquidity

We expect that cash generated from operating activities and availability under our credit agreements will be our principal sources of liquidity. Based on our current level of operations, we believe that these sources will be adequate to meet our liquidity needs for at least the next 12 months. We cannot assure you, however, that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under the ABL Facility and the Term Loan Credit Agreement in amounts sufficient to enable us to repay our indebtedness or to fund our other liquidity needs.

Subsequent to June 30, 2015, the Company announced that it intends to redeem its $700 million of 8.875% Senior Notes and refinance its existing Term Loan Credit Agreement and $400 million ABL Revolving Credit Facility (“ABL Facility”) with new indebtedness consisting of: (i) a $1,340 million senior secured term loan facility, (ii) a $540 million asset-based revolving credit facility (with a seasonal increase to $640 million during a certain period of each calendar year) and (iii) $350 million of 6.125% senior notes due 2023. The Company has caused to be delivered to the holders of the Senior Notes conditional notices of redemption calling half of the Senior Notes on August 27, 2015 and half on September 4, 2015 (the “Redemption Dates”). The redemption price would be 106.656 % of the principal amount of the Senior Notes, plus accrued and unpaid interest on the Senior Notes to, but excluding, the Redemption Dates. The Company’s obligation to make the first redemption payment on August 27, 2015 is conditioned upon the refinancing of the Term Loan Credit Agreement and ABL Facility resulting in gross proceeds to the Company in an amount sufficient to repay the existing indebtedness under the agreements, make the first redemption payment for the Senior Notes, and pay related fees and expenses on or before August 27, 2015 (the “Refinancing Condition”). The Company’s obligation to make the second redemption payment on September 4, 2015 is conditioned upon the Refinancing Condition being satisfied and the consummation of the offering of the notes resulting in gross proceeds to the Company of at least $350 million on or before September 4, 2015. The Company may waive the conditions in its sole discretion.

Cash Flow

Net cash used in operating activities totaled $34.2 million during the six months ended June 30, 2015. Net cash provided by operating activities totaled $7.6 million during the six months ended June 30, 2014. Net cash flows provided by operating activities before changes in operating assets and liabilities were $29.4 million during the first six months of 2015, compared to $46.3 million during 2014, with the variance principally attributable to the management agreement termination fee. Changes in operating assets and liabilities during the first six months of 2015 and 2014 resulted in the use of cash of $63.6 million and $38.7 million, respectively. The variance was principally due to higher income tax payments in 2015.

Net cash used in investing activities totaled $39.5 million during the six months ended June 30, 2015, as compared to $34.3 million during the six months ended June 30, 2014. Investing activities during 2015 and 2014 included $8.3 million and $2.2 million, respectively, paid in connection with acquisitions. Capital expenditures during the six months ended June 30, 2015 and 2014 were $31.9 million and $33.1 million, respectively. Retail capital expenditures totaled $22.7 million during 2015 and principally related to store conversions and new stores. Wholesale capital expenditures totaled $9.2 million and primarily related to printing plates and dies, as well as machinery and equipment at the Company’s manufacturing operations.

Net cash provided by financing activities was $69.7 million during the six months ended June 30, 2015, as compared to $33.5 million during the corresponding period of 2014. In connection with Party City Holdco’s April 2015 initial public offering, the management agreement was terminated and the Company paid THL and Advent an aggregate termination fee of $30.7 million. In addition, Party City Holdco also contributed $6.3 million of the proceeds from the initial public offering to the Company. Additionally, during February 2015 and February 2014, PCHI made distributions to PC Nextco, its indirect parent, in the amounts of $15.3 million and $16.5 million, respectively, so that PC Nextco could pay interest on outstanding notes (see Note 6 of the condensed consolidated financial statements included in Item 1 for further detail).

Legal Proceedings

From time to time, we are subject to various legal proceedings and claims that arise in the ordinary course of our business activities. Although the results of litigation and claims cannot be predicted with certainty, as of the date of this filing, we do not believe we are party to any claim or litigation, the outcome of which, if determined adversely to us, would individually or in the aggregate be reasonably expected to have a material adverse effect on our business. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

Seasonality

Wholesale Operations

Despite a concentration of holidays in the fourth quarter of the year, as a result of our expansive product lines, customer base and increased promotional activities, the impact of seasonality on the quarterly results of our wholesale operations has been limited. However, due to Halloween and Christmas, the inventory balances of our wholesale operations are slightly higher during the third quarter than during the remainder of the year. Additionally, the promotional activities of our wholesale business, including special dating terms, particularly with respect to Halloween products sold to retailers and other distributors, result in slightly higher accounts receivable balances during the third quarter.

Retail Operations

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.

Cautionary Note Regarding Forward-Looking Statements

From time to time, including in this filing and, in particular, the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we make “forward-looking statements” within the meaning of federal and state securities laws. Disclosures that use words such as the company “believes,” “anticipates,” “expects,” “estimates,” “intends,” “will,” “may” or “plans” and similar expressions are intended to identify forward-looking statements. These forward-looking statements reflect our current expectations and are based upon data available to us at the time the statements were made. An example of a forward-looking statement is our belief that our cash generated from operating activities and availability under our credit facilities will be adequate to meet our liquidity needs for at least the next 12 months. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from expectations. These risks, as well as other risks and uncertainties, are detailed in the sections titled “Risk Factors” and elsewhere in our Form 10-K filed with the SEC. 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 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 filing. Any such forward-looking statements, whether made in this filing or elsewhere, should be considered in context with the various disclosures made by us about our business. The following risks related to our business, among others, could cause actual results to differ materially from those described in the forward-looking statements:

•

our ability to compete effectively in a competitive industry;

•

fluctuations in commodity prices;

•

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

•

successful implementation of our store growth strategy;

•

decreases in our Halloween sales;

•

disruption to the transportation system or increases in transportation costs;

•

product recalls or product liability;

•

economic slowdown affecting consumer spending and general economic conditions;

•

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

•

disruptions at our manufacturing facilities;

•

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

•

our international operations subjecting us to additional risks;

•

potential litigation and claims;

•

lack of available additional capital;

•

our inability to retain or hire key personnel;

•

risks associated with leasing substantial amounts of space;

•

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

•

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

•

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

•

our inability to successfully identify and integrate acquisitions;

•

adequacy of our intellectual property rights;

•

adequacy of helium supplies;

•

risks related to our substantial indebtedness; and

•

the other factors set forth under “Risk Factors” in the Company’s Form 10-K.

Except as required by law, we undertake no obligation to update publicly any forward-looking statements after the date of this filing to conform these statements to actual results or to changes in our expectations.

You should read this filing with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

As a result of our variable rate indebtedness, our earnings are affected by changes in interest rates. If market interest rates for our variable rate indebtedness averaged 2% more than the interest rate incurred during the three months ended June 30, 2015 and 2014, the interest expense amounts disclosed in “Results of Operations” in Item 2. would have increased by $6.0 million and $6.1 million, respectively. The income (loss) before income taxes for the three months ended June 30, 2015 and 2014 would also have been impacted by the same amounts. Additionally, if market interest rates for our variable rate indebtedness averaged 2% more than the interest rate incurred during the six months ended June 30, 2015 and 2014, the interest expense amounts disclosed in “Results of Operations” in Item 2. would have increased by $11.8 million and $12.1 million, respectively. The income (loss) before income taxes for the six months ended June 30, 2015 and 2014 would also have been impacted by the same amounts. These amounts are determined by considering the impact of the hypothetical interest rates on our borrowings and considering any interest rate swap agreements. This analysis does not consider the effects of the reduced level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management could potentially take action to mitigate our exposure to the change. However, due to the uncertainty of the specific actions that we would take and their possible effects, the sensitivity analysis assumes no changes in our financial structure.

Foreign Currency Risk

As a result of the sale of our products in foreign markets, our earnings are affected by fluctuations in the value of the U.S. dollar when compared to the values of foreign currencies. Although we periodically enter into foreign currency forward contracts to hedge against the earnings impact of such fluctuations, we (1) may not be able to achieve hedge effectiveness in order to qualify for hedge-accounting treatment and, therefore, would record any gain or loss on the mark-to-market of the contracts in other expense (income) and (2) may not be able to hedge such risks completely or permanently. A uniform 10% strengthening in the value of the U.S. dollar relative to the currencies in which our foreign sales are denominated would have decreased income from operations, as stated in the consolidated financial statements included elsewhere in this filing, by $2.9 million and $2.8 million during the three months ended June 30, 2015 and 2014, respectively. The income (loss) before income taxes would have also been impacted by the same amounts. A uniform 10% strengthening in the value of the U.S. dollar relative to the currencies in which our foreign sales are denominated would have decreased income from operations, as stated in the consolidated financial statements included elsewhere in this filing, by $5.1 million and $4.9 million during the six months ended June 30, 2015 and 2014, respectively. The income (loss) before income taxes would have also been impacted by the same amounts. In addition to the direct effects of changes in exchange rates, changes in exchange rates may also affect the volume of sales. Our sensitivity analysis of the effects of changes in foreign currency exchange rates does not consider a potential change in sales levels.

Item 4.

Controls and Procedures

We have carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act of 1934, as amended (the “Act”)) as of June 30, 2015. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Act is: (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms; and (ii) accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosures.

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Act) during the quarter ended June 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

Item 6.

Exhibits



31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101*		Interactive Data Files pursuant to Rule 405 of Regulation S-T: (i) Condensed Consolidated Balance Sheets at June 30, 2015 and December 31, 2014; (ii) Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income for the three month periods ended June 30, 2015 and June 30, 2014; (iii) Condensed Consolidated Statements of Operations and Comprehensive Loss for the six month periods ended June 30, 2015 and June 30, 2014; (iv) Condensed Consolidated Statement of Stockholder’s Equity for the six month period ended June 30, 2015 and (v) Condensed Consolidated Statements of Cash Flows for the six month periods ended June 30, 2015 and June 30, 2014; and (vi) Notes to the Condensed Consolidated Financial Statements.

		* Filed herewith.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.


		PARTY CITY HOLDINGS INC.

	By:	/s/ Michael A. Correale
		Michael A. Correale
		Chief Financial Officer
		(on behalf of the Registrant and as Principal
Date: August 14, 2015		Financial Officer)

Large accelerated filer

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Smaller reporting company

Party City Holdings Inc. 10-Q