Party City Holdco Inc. (Form: 10-Q, Received: 06/12/2020 16:04:02)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2020

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

For the transition period from to

Commission file number 001-37344

Party City Holdco Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware		46-0539758
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

80 Grasslands Road Elmsford, NY		10523
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code:

(914) 345-2020

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock, Par Value: $0.01/share

PRTY

New York Stock Exchange

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

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

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

Large accelerated filer	☐	Accelerated filer	☒

Non-accelerated filer	☐	Smaller reporting company	☐

		Emerging Growth Company	☐

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

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

As of May 31, 2020, 94,491,352 shares of the Registrant’s common stock were outstanding.

EXPLANATORY NOTE

On May 8, 2020, Party City Holdco Inc. (the “Company” or “Party City Holdco”) filed a Current Report on Form 8-K with the U.S. Securities and Exchange Commission (the “SEC”) indicating its reliance on the SEC’s March 25, 2020 Order (Release No. 34-88465) (the “Order”). The Order allows for the delay of certain filings required under the Securities and Exchange Act of 1934, as amended.

The Company filed the Form 8-K indicating its intension to rely on the Order permitting extensions in filings due to circumstances related to the novel coronavirus (“COVID-19”) pandemic. As stated in the Form 8-K, the Company’s operations and business have experienced disruptions due to the unprecedented conditions surrounding the spread of COVID-19 throughout North America. In particular, COVID-19 and measures implemented to reduce the spread of the virus have limited access to the Company’s facilities and disrupted its normal interactions with its accounting personnel, legal advisors, auditors and others involved in the preparation of the Quarterly Report. Due to the factors listed above, the Company required additional time to finalize its Quarterly Report on Form 10-Q as of and for the quarter ended March 31, 2020, (the “Quarterly Report”) by the original deadline of May 13, 2020.

In light of the impact of the factors described above, the Company was unable to compile and review certain information required in order to permit it to timely file the Quarterly Report by May 13, 2020, the original filing deadline, without unreasonable effort or expense. The Company relied on the Order in furnishing the Form 8-K by the original filing deadline of the Quarterly Report.

PARTY CITY HOLDCO INC.

Form 10-Q

March 31, 2020

TABLE OF CONTENTS

		Page

PART I

Item 1. Condensed Consolidated Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets at March 31, 2020 and December 31, 2019		4

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months ended March 31, 2020 and March 31, 2019		5

Condensed Consolidated Statements of Stockholders’ Equity for the Three Months ended March 31, 2020 and March 31, 2019		6

Condensed Consolidated Statements of Cash Flows for the Three Months ended March 31, 2020 and March 31, 2019		7

Notes to Condensed Consolidated Financial Statements		8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		21

Item 3. Quantitative and Qualitative Disclosures about Market Risk		35

Item 4. Controls and Procedures		35

PART II

Item 1. Legal Proceedings		36

Item 1A. Risk Factors		36

Item 5. Other Information		37

Item 6. Exhibits		38

Signature		39

PARTY CITY HOLDCO INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

	March 31, 2020			December 31, 2019
	(Note 2) (Unaudited)			(Note 2)
ASSETS
Current assets:
Cash and cash equivalents	$	194,433		$	34,917
Accounts receivable, net		116,223			149,109
Inventories, net		629,875			658,419
Prepaid expenses and other current assets		76,698			51,685
Total current assets		1,017,229			894,130
Property, plant and equipment, net		235,577			243,572
Operating lease asset		773,775			802,634
Goodwill		665,129			1,072,330
Trade names		394,221			530,320
Other intangible assets, net		41,960			45,060
Other assets, net		6,904			7,273
Total assets	$	3,134,795		$	3,595,319
LIABILITIES, REDEEMABLE SECURITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Loans and notes payable	$	381,422		$	128,806
Accounts payable		96,383			152,300
Accrued expenses		154,847			150,921
Current portion of operating lease liability		153,614			155,471
Income taxes payable		—			35,905
Current portion of long-term obligations		98,588			71,524
Total current liabilities		884,854			694,927
Long-term obligations, excluding current portion		1,474,854			1,503,987
Long-term portion of operating lease liability		707,734			720,735
Deferred income tax liabilities, net		70,943			126,081
Other long-term liabilities		16,036			16,517
Total liabilities		3,154,421			3,062,247
Redeemable securities		—			3,351
Commitments and contingencies
Stockholders’ equity:
Common stock (94,491,352 and 94,461,576 shares outstanding and 121,708,422 and 121,662,540 shares issued at March 31, 2020 and December 31, 2019, respectively)		1,211			1,211
Additional paid-in capital		933,174			928,573
Retained deficit		(578,732	)		(37,219	)
Accumulated other comprehensive loss		(47,947	)		(35,734	)
Total Party City Holdco Inc. stockholders’ equity before common stock held in treasury		307,706			856,831
Less: Common stock held in treasury, at cost (27,217,070 and 27,200,964 shares at March 31, 2020 and December 31, 2019, respectively)		(327,170	)		(327,086	)
Total Party City Holdco Inc. stockholders’ equity		(19,464	)		529,745
Noncontrolling interests		(162	)		(24	)
Total stockholders’ equity		(19,626	)		529,721
Total liabilities, redeemable securities and stockholders’ equity	$	3,134,795		$	3,595,319

See accompanying notes to unaudited condensed consolidated financial statements.

PARTY CITY HOLDCO INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

(In thousands, except share and per share data)

	Three Months Ended March 31,
	2020			2019
Revenues:
Net sales	$	412,461		$	511,102
Royalties and franchise fees		1,582			2,014
Total revenues		414,043			513,116
Cost of sales		296,757			339,042
Wholesale selling expenses		15,458			17,961
Retail operating expenses		88,166			95,018
Franchise expenses		3,309			3,303
General and administrative expenses		59,996			41,925
Art and development costs		5,322			5,929
Development stage expenses		2,029			2,226
Store impairment and restructuring charges		17,728			18,009
Goodwill and intangibles impairment		536,648			—
Total expenses		1,025,413			523,413
Loss from operations		(611,370	)		(10,297	)
Interest expense, net		25,120			29,257
Other expense, net		5,676			1,254
Loss before income taxes		(642,166	)		(40,808	)
Income tax benefit		(100,498	)		(10,519	)
Net loss		(541,668	)		(30,289	)
Less: Net loss attributable to noncontrolling interests		(155	)		(71	)
Net loss attributable to common shareholders of Party City Holdco Inc.	$	(541,513	)	$	(30,218	)
Net loss per share attributable to common shareholders of Party City Holdco Inc.–Basic	$	(5.80	)	$	(0.32	)
Net loss per share attributable to common shareholders of Party City Holdco Inc.–Diluted	$	(5.80	)	$	(0.32	)
Weighted-average number of common shares-Basic		93,395,609			93,174,553
Weighted-average number of common shares-Diluted		93,395,609			93,174,553
Dividends declared per share	$	—		$	—
Comprehensive loss	$	(553,881	)	$	(26,637	)
Less: Comprehensive loss attributable to noncontrolling interests		(155	)		(62	)
Comprehensive loss attributable to common shareholders of Party City Holdco Inc.	$	(553,726	)	$	(26,575	)

See accompanying notes to unaudited condensed consolidated financial statements.

PARTY CITY HOLDCO INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(In thousands)

	Common Stock		Additional Paid-in Capital		Retained Deficit			Accumulated Other Comprehensive Loss			Total Party City Holdco Inc. Stockholders’ Equity Before Common Stock Held In Treasury			Common Stock Held In Treasury			Total Party City Holdco Inc. Stockholders’ Equity			Non- Controlling Interests			Total Stockholders’ Equity
Balance at December 31, 2019	$	1,211	$	928,573	$	(37,219	)	$	(35,734	)	$	856,831		$	(327,086	)	$	529,745		$	(24	)	$	529,721
Net loss		—		—		(541,513	)		—			(541,513	)		—			(541,513	)		(155	)		(541,668	)
Stock option expense		—		354		—			—			354			—			354			—			354
Restricted stock units – time – based		—		621		—			—			621			—			621			—			621
Director – non-cash compensation		—		75		—			—			75			—			75			—			75
Warrant expense (see Note 19 – Kazzam, LLC)		—		1,033		—			—			1,033			—			1,033			—			1,033
Acquired non-controlling interest		—		2,518		—			—			2,518			—			2,518			17			2,535
Treasury Stock purchases		—		—		—			—			—			(84	)		(84	)		—			(84	)
Foreign currency adjustments		—		—		—			(12,201	)		(12,201	)		—			(12,201	)		—			(12,201	)
Impact of foreign exchange contracts, net		—		—		—			(12	)		(12	)		—			(12	)		—			(12	)
Balance at March 31, 2020	$	1,211	$	933,174	$	(578,732	)	$	(47,947	)	$	307,706		$	(327,170	)	$	(19,464	)	$	(162	)	$	(19,626	)

	Common Stock		Additional Paid-in Capital		Retained Earnings (Deficit)			Accumulated Other Comprehensive Loss			Total Party City Holdco Inc. Stockholders’ Equity Before Common Stock Held In Treasury			Common Stock Held In Treasury			Total Party City Holdco Inc. Stockholders’ Equity			Non- Controlling Interests			Total Stockholders’ Equity
Balance at December 31, 2018	$	1,208	$	922,476	$	495,777		$	(49,201	)	$	1,370,260		$	(326,930	)	$	1,043,330		$	291		$	1,043,621
Cumulative effect of change in accounting principle, net (see Note 2)		—		662		(503	)		—			159			—			159			—			159
Balance at December 31, 2018, as adjusted	$	1,208	$	923,138	$	495,274		$	(49,201	)	$	1,370,419		$	(326,930	)	$	1,043,489		$	291		$	1,043,780
Net loss		—		—		(30,218	)		—			(30,218	)		—			(30,218	)		(71	)		(30,289	)
Stock option expense		—		370		—			—			370			—			370			—			370
Restricted stock units – time based		—		392		—			—			392			—			392			—			392
Director – non-cash compensation		—		77		—			—			77			—			77			—			77
Warrant expense		—		129		—			—			129			—			129			—			129
Exercise of stock options		2		1,086		—			—			1,088			—			1,088			—			1,088
Acquired non-controlling interest		—		41		—			—			41			—			41			71			112
Treasury Stock purchases		—		—		—			—			—			(156	)		(156	)		—			(156	)
Foreign currency adjustments		—		—		—			4,156			4,156			—			4,156			9			4,165
Impact of foreign exchange contracts, net		—		—		—			(513	)		(513	)		—			(513	)		—			(513	)
Balance at March 31, 2019	$	1,210	$	925,233	$	465,056		$	(45,558	)	$	1,345,941		$	(327,086	)	$	1,018,855		$	300		$	1,019,155

See accompanying notes to unaudited condensed consolidated financial statements.

PARTY CITY HOLDCO INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

	Three Months Ended March 31,
	2020			2019
Cash flows used in operating activities:
Net loss	$	(541,668	)	$	(30,289	)
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization expense		17,752			21,341
Amortization of deferred financing costs and original issuance discounts		1,202			1,143
Provision for doubtful accounts		1,119			371
Deferred income tax benefit		(54,991	)		(9,383	)
Change in operating lease liability/asset		(389	)		(19,693	)
Undistributed income in equity method investments		(144	)		(198	)
Loss on disposal of assets		40			94
Non-cash adjustment for store impairment and restructuring charges		16,277			18,009
Goodwill and intangibles impairment		536,648			—
Non-employee equity-based compensation (see Note 19 – Kazzam, LLC)		1,033			129
Stock option expense		354			370
Restricted stock unit expense – time-based		621			392
Directors – non-cash compensation		75			77
Changes in operating assets and liabilities, net of effects of acquired businesses:
Decrease in accounts receivable		27,635			8,022
Decrease (increase) in inventories		23,205			(6,426	)
Increase in prepaid expenses and other current assets		(26,661	)		(7,935	)
Decrease in accounts payable, accrued expenses and income taxes payable		(76,138	)		(76,911	)
Net cash used in operating activities		(74,030	)		(100,887	)
Cash flows used in investing activities:
Cash paid in connection with acquisitions, net of cash acquired		—			(545	)
Capital expenditures		(10,726	)		(12,393	)
Proceeds from disposal of property and equipment		7			10
Net cash used in investing activities		(10,719	)		(12,928	)
Cash flows provided by financing activities:
Repayment of loans, notes payable and long-term obligations		(3,932	)		(23,495	)
Proceeds from loans, notes payable and long-term obligations		253,030			114,260
Stock repurchases		(85	)		(156	)
Exercise of stock options		—			1,088
Net cash provided by financing activities		249,013			91,697
Effect of exchange rate changes on cash and cash equivalents		(4,863	)		2,216
Net decrease in cash and cash equivalents and restricted cash		159,401			(19,902	)
Cash and cash equivalents and restricted cash at beginning of period		35,176			59,219
Cash and cash equivalents and restricted cash at end of period	$	194,577		$	39,317
Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	35,927		$	42,484
Cash paid during the period for income taxes, net of refunds	$	11,368		$	3,708

See accompanying notes to unaudited condensed consolidated financial statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share)

Note 1 – Description of Business

Party City Holdco Inc. (the “Company” or “Party City Holdco”) is the leading party goods company by revenue in North America and, we believe, the largest vertically integrated supplier of decorated party goods globally by revenue. The Company is a popular one-stop shopping destination for party supplies, balloons, and costumes. In addition to being a great retail brand, the Company is a global, world-class organization that combines state-of-the-art manufacturing and sourcing operations, and sophisticated wholesale operations complemented by a multi-channel retailing strategy and e-commerce retail operations. The Company is a leading player in its category and vertically integrated in its breadth and depth. The Company designs, manufactures, sources and distributes party goods, including paper and plastic tableware, metallic and latex balloons, Halloween and other costumes, accessories, novelties, gifts and stationery throughout the world. As of March 31, 2020 the Company’s retail operations include 854 specialty retail party supply stores (including franchise stores) throughout the United States and Mexico operating under the names Party City and Halloween City, and e-commerce websites, including through the domain name PartyCity.com and others.

In March 2020, the World Health Organization declared COVID-19 a global pandemic, and governmental authorities around the world have implemented measures to reduce the spread of the virus. The global spread of COVID-19 and the measures to contain it have negatively impacted the global economy, disrupted global supply chains, and created significant volatility and disruption in financial markets. In response to COVID-19, to safeguard the health and safety of its team members and customers, the Company temporarily closed all of its corporate retail stores as of March 18, 2020. During the temporary store closures, the Company offered curbside pickup and the Company’s e-commerce site, www.partycity.com, remained fully operational. However, quarantines, stay-at-home orders and related measures had significantly reduced consumer spending as well as customer demand for our products. In addition, these restrictions and other dislocations caused by the outbreak have disrupted, and may continue to disrupt, our planning, branding and administrative functions, as well as that of our suppliers, transporters and customers. Party City Holdco is a holding company with no operating assets or operations. The Company owns 100% of PC Nextco Holdings, LLC (“PC Nextco”), which owns 100% of PC Intermediate Holdings, Inc. (“PC Intermediate”). PC Intermediate owns 100% of Party City Holdings Inc. (“PCHI”), which owns most of the Company’s operating subsidiaries.

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 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, 2020. Our business is subject to substantial seasonal variations as our retail segment has historically 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 and the uncertainty surrounding the impact of the COVID-19 pandemic.

Recently Issued and Adopted Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-13, “Fair Value Measurement (Topic 820) – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement”. The new guidance improves and clarifies the fair value measurement disclosure requirements of ASC 820. The new disclosure requirements include the disclosure of the changes in unrealized gains or losses included in other comprehensive (loss)

income for recurring Level 3 fair value measurements held at the end of the reporting period and the explicit requirement to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The other provisions of ASU 2018-13 also include eliminated and modified disclosure requirements. The guidance was effective for fiscal years beginning after December 15, 2019. This ASU had no significant impact on the Company’s condensed consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07, “Compensation — Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting”. The ASU simplifies the accounting for non-employee share-based payments. The Company adopted the update during the first quarter of 2019. The pronouncement requires companies to record the impact of adoption, if any, as a cumulative-effect adjustment to retained earnings as of the adoption date. Therefore, on January 1, 2019, the Company decreased retained earnings by $503. Additionally, the Company increased additional paid-in capital by $662 and recorded a $159 deferred income tax asset.

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities”. The pronouncement amends the existing hedge accounting model in order to enable entities to better portray the economics of their risk management activities in their financial statements. The Company adopted the update during the first quarter of 2019 and such adoption had no impact on the Company’s consolidated financial statements.

In January 2017 the FASB issued ASU No. 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”, which eliminates the requirement to measure a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under the amendments in ASU 2017-04, an entity will perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized will not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity will consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The Company adopted ASU No. 2017-04 during the first quarter of 2019 and such adoption had no impact on the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses”. The ASU changes how entities will account for credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The ASU requires that an entity measure and recognize expected credit losses at the time the asset is recorded, while considering a broader range of information to estimate credit losses including macroeconomic conditions that correlate with historical loss experience, delinquency trends and aging behavior of receivables, among others. The Company has adopted this guidance effective January 1, 2020, prospectively, with respect to its receivables, and the adoption and application of this standard did not have a material impact to the consolidated financial statements during the first quarter.

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of the Company’s customers to make required payments. Judgment is required in assessing the ultimate realization of these receivables, including consideration of the Company’s history of receivable write-offs, the level of past due accounts and the economic status of the Company’s customers. In an effort to identify adverse trends relative to customer economic status, the Company assesses the financial health of the markets it operates in and performs periodic credit evaluations of its customers and ongoing reviews of account balances and aging of receivables. Amounts are considered past due when payment has not been received within the time frame of the credit terms extended. Write-offs are charged directly against the allowance for doubtful accounts and occur only after all collection efforts have been exhausted. The Company will continue to actively monitor the impact of the COVID-19 pandemic on expected losses. At March 31, 2020 and December 31, 2019, the allowance for doubtful accounts was $5,342 and $4,786, respectively.

In February 2016, the FASB issued ASU 2016-02, “Leases”. The ASU requires that companies recognize assets and liabilities for the rights and obligations created by companies’ leases. The Company’s lease portfolio is primarily comprised of store leases, manufacturing and distribution facility leases, warehouse leases and office leases. Most of the leases are operating leases. The Company’s finance leases are not material to its consolidated financial statements.

The Company adopted the new lease standard during the first quarter of 2019 and, to the extent required by the pronouncement, recognized a right of use asset and liability for its operating lease arrangements with terms of greater than twelve months. The pronouncement had no impact on the Company’s consolidated statement of operations and comprehensive loss and it did not impact the Company’s compliance with its debt covenants. Additionally, the standard requires companies to make certain annual disclosures, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Note 3 – Store Impairment and Restructuring Charges

Each year, the Company typically closes approximately ten Party City stores as part of its typical network rationalization process and in response to ongoing consumer, market and economic changes that naturally arise in the business. The Company performed a comprehensive review of its store locations aimed at improving the overall productivity of such locations (“store optimization program”). After careful consideration and evaluation of the store locations, the Company made the decision to accelerate the optimization of its store portfolio with the closure of stores, which are primarily located in close proximity to other Party City stores. In 2019, 55 stores were identified for closure, out of which 35 stores were closed in 2019 and 20 stores were closed in January 2020. In addition, 21 stores were identified in 2020 for closure at a future date. These closings should provide the Company with capital flexibility to expand into underserved markets. In addition, the Company evaluated the recoverability of long lived assets at the open stores and recorded an impairment charge associated with the operating lease asset and property, plant and equipment for open stores where sales were affected due to the outbreak of, and local, state and federal governmental responses to, COVID-19. In conjunction with the store optimization program and store impairment, during the three months ended March 31, 2020 and 2019, the Company recorded the following charges:

	Three Months Ended March 31,
	2020		2019
Inventory reserves	$	11,696	$	17,629
Operating lease asset impairment		14,212		13,209
Property, plant and equipment impairment		2,065		4,139
Labor and other costs incurred closing stores		1,451		—
Severance		—		661
Total	$	29,424	$	35,638

Amounts disclosed above represent the Company’s best estimate of the total charges that are expected to be recorded. As the Company closes the stores, it records charges for common area maintenance, insurance and taxes to be paid subsequent to such closures in accordance with the stores’ lease agreements. However, such amounts are immaterial. Additionally, the Company incurs costs while moving inventory, cleaning the stores and returning them to their original condition. Such costs are also immaterial.

The fair values of the operating lease assets and property, plant and equipment were determined based on estimated future discounted cash flows for such assets using market participant assumptions, including data on the ability to sub-lease the stores.

The charge for inventory reserves is related to inventory that is disposed of following the closures of the stores and inventory that is sold below cost prior to such closures. The charge for inventory reserves was recorded in cost of sales in the Company’s statement of operations and comprehensive loss. The other charges were recorded in Store impairment and restructuring charges in the Company’s statement of operations and comprehensive loss.

The Company cannot guarantee that it will be able to achieve the anticipated benefits from the store optimization program. If the Company is unable to achieve such benefits, its results of operations and financial condition could be affected.

Note 4 – Goodwill and Intangibles Impairment

The Company reviews goodwill and other intangibles that have indefinite lives for impairment annually as of October 1 or when events or changes in circumstances indicate the carrying value of these assets might exceed their current fair values. Impairment testing is based upon the best information available including estimates of fair value which incorporate assumptions marketplace participants would use in making their estimates of fair value. Significant assumptions and estimates are required, including, but not limited to, projecting future cash flows, determining appropriate discount rates and terminal growth rates, and other assumptions, to estimate the fair value of goodwill and indefinite lived intangible assets. Although the Company believes the assumptions and estimates made are reasonable and appropriate, different assumptions and estimates could materially impact its reported financial results.

During the three months ended March 31, 2020, the Company identified intangible assets’ impairment indicators associated with its market capitalization and significantly reduced customer demand for its products due to COVID-19. As a result, the Company performed interim impairment tests on the goodwill at its retail and wholesale reporting units and its other indefinite lived intangible assets as of March 31, 2020. The interim impairment tests were performed using an income approach. The Company recognized non-cash pre-tax goodwill impairment charges at March 31, 2020 of $253,110 and $148,326 against the goodwill associated with its retail and wholesale reporting units, respectively.

There was no goodwill impairment charge for the three months ended March 31, 2019.

In addition, during the three months ended March 31, 2020, the Company recorded an impairment charge of $131,287 and $3,925 on its Party City and Halloween City tradenames, respectively. During 2019, there was no impairment on the Party City trade name and the Company recorded a Halloween City trade name impairment charge of $6,575.

Note 5 – Sale/Leaseback Transaction

In June 2019, the Company sold its main distribution center in Chester, New York, its metallic balloons manufacturing facility in Eden Prairie, Minnesota and its injection molded plastics manufacturing facility in Los Lunas, New Mexico. Simultaneously, the Company entered into twenty-year leases for each of the facilities. The aggregate sale price was $128,000 and, during the year ended December 31, 2019, the Company recorded a $58,381 gain on the sale, net of transaction costs, in the Company’s condensed consolidated statement of operations and comprehensive loss.

Under the terms of the lease agreements, the Company pays total rent of $8,320 during the first year and the annual rent will increase by 2% thereafter.

The Chester and Eden Prairie leases are being accounted for as operating leases and the sale of such properties resulted in the gain above.

However, for the Los Lunas property, the present value of the lease payments is greater than substantially all of the fair value of the assets. Therefore, the lease is a finance lease and sale accounting treatment is prohibited. As such, the Company is accounting for the proceeds as a financing lease. As of March 31, 2020, $11,944 is recorded as a part of a Finance lease.

In conjunction with the sale/leaseback transaction, the Company amended its Term Loan Credit Agreement. The amendment required the Company to use half of the proceeds from the transaction, net of costs, to paydown part of the outstanding balance under such debt agreement. Additionally, the amendment required the Company to pay an immaterial “consent fee” to the lenders. As the Term Loan Credit Agreement is a loan syndication, the Company assessed, on a creditor-by-creditor basis, whether the amendment should be accounted for as an extinguishment or a modification. The Company concluded that, for each creditor, the amendment should be accounted for as a modification. Therefore, no capitalized deferred financing costs or original issuance discounts were written off in conjunction with the amendment.

During June 2019, the Company used proceeds from the sale (net of costs) of $125,864 to paydown outstanding Term Loan debt of $62,770 with the balance used to paydown the ABL Facility. See Note 16 – Current and Long-Term Obligations.

Note 6 – Disposition of Assets

On October 1, 2019, the Company sold its Canadian-based Party City stores to a Canadian-based retailer for $131,711 and entered into a 10-year supply agreement under which the acquirer agreed to purchase product from the Company for such Party City stores, as well as the acquirer’s other stores. The Company expects to use $85 million of the net proceeds to paydown principal on the Term Loan, see Note 16 – Current and Long-Term Obligations.

Note 7 – Inventories

Inventories consisted of the following:

	March 31, 2020		December 31, 2019
Finished goods	$	583,662	$	606,036
Raw materials		30,795		34,259
Work in process		15,418		18,124
	$	629,875	$	658,419

Inventories are valued at the lower of cost or net realizable value. The Company principally determines the cost of inventory using the weighted average method.

The Company estimates retail inventory shrinkage for the period 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.

Note 8 – Income Taxes

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act (“the CARES Act”) was signed into law. The CARES Act is a $2 trillion legislative package intended to provide economic relief to companies impacted by the COVID-19 pandemic, and it enacted a number of Internal Revenue Code modifications which are of particular benefit to the Company, including: 5-year net operating loss carryback, temporary relaxation of the limitations on interest deductions, qualified improvement property eligible for bonus depreciation, employee retention tax credits and deferral of payment of payroll tax.

The effective income tax rate for the three months ended March 31, 2020 of 15.7% is different from the statutory rate of 21.0% primarily due to the non-deductible portions of goodwill impairment charges (see Note 4 – Goodwill and Intangibles Impairment above for further discussion), state taxes, and a rate benefit related to the carryback of a net operating loss to years when the statutory income tax rate was 35.0%.

Note 9 – Changes in Accumulated Other Comprehensive Loss

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

	Three Months Ended March 31, 2020
	Foreign Currency Adjustments			Impact of Foreign Exchange Contracts, Net of Taxes			Total, Net of Taxes
Balance at December 31, 2019	$	(37,434	)	$	1,700		$	(35,734	)
Other comprehensive (loss) income before reclassifications, net of tax		(12,201	)		11			(12,190	)
Gains reclassified from accumulated other comprehensive loss to the condensed consolidated statement of operations and comprehensive loss, net of income tax		—			(23	)		(23	)
Net current-period other comprehensive loss		(12,201	)		(12	)		(12,213	)
Balance at March 31, 2020	$	(49,635	)	$	1,688		$	(47,947	)

	Three Months Ended March 31, 2019
	Foreign Currency Adjustments			Impact of Foreign Exchange Contracts, Net of Taxes			Total, Net of Taxes
Balance at December 31, 2018	$	(50,056	)	$	855		$	(49,201	)
Other comprehensive income before reclassifications		4,156			62			4,218
Gain reclassified from accumulated other comprehensive loss to the condensed consolidated statement of operations and comprehensive loss, net of income tax		—			(575	)		(575	)
Net current-period other comprehensive income		4,156			(513	)		3,643
Balance at March 31, 2019	$	(45,900	)	$	342		$	(45,558	)

Note 10 – Capital Stock

At March 31, 2020, the Company’s authorized capital stock consisted of 300,000,000 shares of $0.01 par value common stock and 15,000,000 shares of $0.01 par value preferred stock.

Note 11 – Segment Information

Industry Segments

The Company has two identifiable business segments. The Wholesale segment designs, manufactures, sources and distributes decorated 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, 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 March 31, 2020 and March 31, 2019 was as follows:

	Wholesale			Retail			Consolidated
Three Months Ended March 31, 2020
Revenues:
Net sales	$	214,798		$	301,394		$	516,192
Royalties and franchise fees		—			1,582			1,582
Total revenues		214,798			302,976			517,774
Eliminations		(103,731	)		—			(103,731	)
Net revenues	$	111,067		$	302,976		$	414,043
Loss from operations	$	(163,548	)	$	(447,822	)	$	(611,370	)
Interest expense, net								25,120
Other expense, net								5,676
Loss before income tax benefits							$	(642,166	)

	Wholesale			Retail			Consolidated
Three Months Ended March 31, 2019
Revenues:
Net sales	$	290,301		$	378,153		$	668,454
Royalties and franchise fees		—			2,014			2,014
Total revenues		290,301			380,167			670,468
Eliminations		(157,352	)		—			(157,352	)
Net revenues	$	132,949		$	380,167		$	513,116
Income (loss) from operations	$	2,223		$	(12,520	)	$	(10,297	)
Interest expense, net								29,257
Other expense, net								1,254
Loss before income taxes							$	(40,808	)

In 2019, the Company initiated a store optimization program under which the Company identified approximately 55 Party City stores to be closed. In addition, 21 stores were identified in 2020 for closure at a future date. In conjunction with the program, the Company’s Retail segment recorded $29,424 and $35,638 of store impairment and restructuring charges in the first quarter of 2020 and 2019, respectively. See Note 3 – Store Impairment and Restructuring Charges for further detail.

During the three months ended March 31, 2020, the Company identified intangible assets’ impairment indicators associated with its market capitalization and significantly reduced customer demand for its products due to COVID-19. As a result, the Company performed interim impairment tests on the goodwill at its retail and wholesale reporting units and its other indefinite lived intangible assets as of March 31, 2020. As a result, the Company recognized non-cash pre-tax goodwill and trade name impairment charges. See Note 4 – Goodwill and Intangibles Impairment for further detail.

Note 12 – 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.

Note 13 – 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 equity and recognized in interest expense over the same period in which the related interest payments being hedged are recognized in income. The Company did not utilize interest rate swap agreements during the three months ended March 31, 2020 and 2019.

Foreign Exchange Risk Management

A portion of the Company’s cash flows are 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, the Australian Dollar, and the Mexican Peso, 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. At March 31, 2020 and December 31, 2019, 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 are 100% effective, there is no current 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 2020.

The following table displays the fair values of the Company’s derivatives at March 31, 2020 and December 31, 2019:

Derivative Assets

Derivative Liabilities

March 31, 2020

December 31, 2019

March 31, 2020

December 31, 2019

Balance

Sheet

Line

Fair

Value

Balance

Sheet

Line

Fair

Value

Balance

Sheet

Line

Fair

Value

Balance

Sheet

Line

Fair

Value

Foreign Exchange Contracts

(a) PP

—

(b) AE

—

(b) AE

—

(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 March 31, 2020 and December 31, 2019:

Derivative Instrument

March 31,

2020

December 31,

2019

Foreign Exchange Contracts

1,800

300

Note 14 – Fair Value Measurements

The provisions of 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.

During 2017, the Company acquired a 28% ownership interest in Punchbowl, Inc. (“Punchbowl”), a provider of digital greeting cards and digital invitations. At such time, the Company provided Punchbowl’s other investors with the ability to “put” their interest in Punchbowl to the Company at a future date. Additionally, at such time, the Company received the ability to “call” the interest of the other investors. During the twelve months ended December 31, 2019, the option was terminated and the Company wrote off its asset related to the call option and reversed its liability related to the put option. Prior to such time, the Company had been adjusting the put liability to fair value on a recurring basis. The liability represented a Level 3 fair value measurement as it was based on unobservable inputs. In November 2019, the Company sold its ownership interest in Punchbowl, and recorded a net charge of $2,169 in other expenses, net for the option termination and the sale of its ownership interest.

During 2017, the Company and Ampology, a subsidiary of Trivergence, reached an agreement to form a new legal entity, Kazzam, LLC (“Kazzam”), for the purpose of designing, developing and launching an online exchange platform for party-related services. As part of Ampology’s compensation for designing, developing and launching the exchange platform, Ampology received an ownership interest in Kazzam. The interest had been recorded as redeemable securities in the mezzanine of the Company’s consolidated balance sheet as Ampology had the right to cause the Company to purchase the interest. The liability was adjusted to the greater of the current fair value or the original fair value at the time at which the ownership interest was issued (adjusted for any subsequent changes in the ownership interest percentage). On March 23, 2020, the Company agreed to purchase all of Ampology’s interest in Kazzam. Refer to Note 19 – Kazzam, LLC for further detail. As of both March 31, 2020 and December 31, 2019 the original value was greater and, therefore, the liabilities are not disclosed.

The majority of the Company’s non-financial instruments, which include goodwill, intangible assets, lease assets, inventories and property, plant and equipment, are not required to be carried at fair value on a recurring basis. However, if certain triggering events occur (or at least annually for goodwill and indefinite-lived intangible assets), a non-financial instrument is required to be evaluated for impairment. If the Company determines that the non-financial instrument is impaired, the Company would be required to write down the non-financial instrument to its fair value. See Note 3 – Store Impairment and Restructuring Charges and Note 4 – Goodwill and Intangibles Impairment for further detail.

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 March 31, 2020 because of the short-term maturities of the instruments and/or their variable rates of interest.

The carrying amounts and fair values of borrowings under the Term Loan Credit Agreement and the Company’s senior notes as of March 31, 2020 are as follows:

	March 31, 2020
	Carrying Amount		Fair Value
Term Loan Credit Agreement	$	715,940	$	349,178
6.125% Senior Notes – due 2023		347,221		80,500
6.625% Senior Notes – due 2026		495,104		55,000

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.

Note 15 – Earnings Per Share

Basic earnings per share are computed by dividing net income attributable to common shareholders of Party City Holdco Inc. by the weighted average number of common shares outstanding for the period. Diluted earnings per share are calculated based on the weighted average number of outstanding common shares plus the dilutive effect of stock options and warrants, as if they were exercised, and restricted stock units, as if they vested.

Basic and diluted loss per share is as follows:

	Three Months Ended
	March 31, 2020			March 31, 2019
Net loss attributable to common shareholders of Party City Holdco Inc.	$	(541,513	)	$	(30,218	)
Weighted average shares - Basic		93,395,609			93,174,553
Effect of dilutive securities:
Warrants		—			—
Restricted stock units		—			—
Stock options		—			—
Weighted average shares - Diluted		93,395,609			93,174,553
Net loss per share attributable to common shareholders of Party City Holdco Inc. - Basic	$	(5.80	)	$	(0.32	)
Net loss per share attributable to common shareholders of Party City Holdco Inc. - Diluted	$	(5.80	)	$	(0.32	)

During the three months ended March 31, 2020, 3,450,209 stock options, 1,000,000 warrants and 413,968 restricted stock units were excluded from the calculation of net loss per share attributable to common shareholders of Party City Holdco Inc. – diluted as they were anti-dilutive. During the three months ended March 31, 2019, 3,613,408 stock options, 596,000 warrants and 142,130 restricted stock units were excluded from the calculation of net loss per share attributable to common shareholders of Party City Holdco Inc. – diluted as they were anti-dilutive.

Note 16 – Current and Long-Term Obligations

Long-term obligations at March 31, 2020 and December 31, 2019 consisted of the following:

	March 31, 2020			December 31, 2019
Term Loan Credit Agreement	$	716,195		$	718,596
6.125% Senior Notes – due 2023		347,221			347,015
6.625% Senior Notes – due 2026		495,104			494,910
Finance lease obligations		14,922			14,990
Total long-term obligations		1,573,442			1,575,511
Less: current portion		(98,588	)		(71,524	)
Long-term obligations, excluding current portion	$	1,474,854		$	1,503,987

As disclosed in Note 6 – Disposition of Assets, the Company expects to use $85 million of the net proceeds from the sale of its Canadian-based stores to paydown the Term Loan.

Prior to April 2019, the Company had a $540,000 asset-based revolving credit facility (with a seasonal increase to $640,000 during a certain period of each calendar year) (the “ABL Facility”), which matures during August 2023 (subject to a springing maturity at an earlier date if the maturity date of certain of the Company’s other debt has not been extended or refinanced). It provides for (a) revolving loans, subject to a borrowing base, and (b) letters of credit, in an aggregate face amount at any time outstanding not to exceed $50,000. During April 2019, the Company amended the ABL Facility. Such amendment removed the seasonal component and made the ABL Facility a $640,000 facility with no seasonal modification component.

In the first quarter of 2020 the Company drew down $253.0 million under the ABL Facility. At March 31, 2020, $150 million was invested in US Treasury funds with maturities of less than three months at March 31, 2020. The Company had approximately $71.3 million of availability under the ABL Facility as of March 31, 2020.

Refer to Note 20 – Subsequent Events for further disclosure about the Company’s debt.

Note 17 – Revenue from Contracts with Customers

The following table summarizes revenue from contracts with customers for the three months ended March 31, 2020 and 2019:

	Three Months Ended March 31,
	2020		2019
Retail Net Sales:
North American Party City Stores	$	259,878	$	346,140
Global E-commerce		29,753		31,808
Other		11,763		205
Total Retail Net Sales	$	301,394	$	378,153
Royalties and Franchise Fees		1,582		2,014
Total Retail Revenue	$	302,976	$	380,167
Wholesale Net Sales:
Domestic	$	58,754	$	73,821
International		52,313		59,128
Total Wholesale Net Sales	$	111,067	$	132,949
Total Consolidated Revenue	$	414,043	$	513,116

Note 18 – Cash, Cash Equivalents and Restricted Cash

The Company’s March 31, 2020 consolidated balance sheet included $194,433 of cash and cash equivalents (with maturities of less than three months) and $144 of restricted cash and the Company’s December 31, 2019 consolidated balance sheet included $34,917 of cash and cash equivalents and $259 of restricted cash.

Restricted cash is recorded in Prepaid expenses and other current assets.

Note 19 – Kazzam, LLC

During the first quarter of 2017, the Company and Ampology, a subsidiary of Trivergence, reached an agreement to form a new legal entity, Kazzam, LLC (“Kazzam”), for the purpose of designing, developing and launching an online exchange platform for party-related services.

At December 31, 2019, though the Company owned 26% of Kazzam’s equity, Kazzam was a variable interest entity and the Company consolidated Kazzam into the Company’s financial statements. Further, the Company was funding all of Kazzam’s start-up activities via a loan to Kazzam and recorded its operating results in “development stage expenses” in the Company’s consolidated statement of operations and comprehensive (loss) income. Ampology’s ownership interest in Kazzam had been recorded in redeemable securities in the mezzanine of the Company’s consolidated balance sheet.

In January 2020, the Company and Ampology terminated certain services agreements and warrants that Ampology had in the Company stock. The parties concurrently entered into an interim transition agreement for which expenses are recorded as development stage expenses.

On March 23, 2020, the Company agreed to purchase Ampology’s interest in Kazzam in exchange for a three-year royalty on net service revenue and a warrant to purchase up to 1,000,000 shares of the Company’s common stock. The acquisition of Ampology’s interest in Kazzam is an equity transaction and the difference between the fair value of the consideration transferred and the carrying value of Ampology’s interest in Kazzam is recorded within the consolidated statement of stockholders’ equity.

Note 20 – Subsequent Events

Transaction Support Agreement with Certain Existing Noteholders

On May 28, 2020, the Company and an ad hoc committee of holders (the “Consenting Noteholders”) of approximately 52% of the aggregate principal amount of the 6.125% Senior Notes due 2023 (the “2023 Notes”) and the 6.625% Senior Notes due 2026 (the “2026 Notes” and, together with the 2023 Notes, the “Existing Notes”), each issued by Party City Holdings Inc. (“Holdings”), entered into an agreement (together with all exhibits, annexes and schedules thereto and as subsequently amended on June 9, 2020, the “Transaction Support Agreement”), whereby the Consenting Noteholders agreed to support a set of transactions to be commenced by the Company (collectively, the “Transactions”).

Under the Transaction Support Agreement, each of the Company and the Consenting Noteholders have undertaken customary commitments to one another. The Company has agreed, among other things, to solicit approval of the Transactions by the holders of the Existing Notes through the Exchange Offer (as defined below) and to negotiate in good faith the definitive documents that will govern the Transactions. The Consenting Noteholders have agreed, among other things, to timely vote, exchange, and tender their Existing Notes in connection with the Transactions, to use commercially reasonable efforts to support approval and implementation of the Transactions, and to negotiate in good faith the definitive documents that will govern the Transactions.

The Transactions consist of the Exchange Offer, the Consent Solicitation (as defined below), the Rights Offering (as defined below) and the Private Placement (as defined below).

As of June 12, 2020, the Consenting Noteholders held a total of approximately 54% of the aggregate principal amount of the Existing Notes.

Exchange Offer

Under the Transaction Support Agreement, the Company will conduct an exchange offer (the “Exchange Offer”) in respect of the Existing Notes in which the Company will offer to exchange any and all Existing Notes, including accrued and unpaid interest on account of such notes to, but not including, the settlement date (the “Settlement Date”) of the Exchange Offer, (in each case assuming all Existing Notes are validly tendered and not validly withdrawn in the Exchange Offer) for:

•

shares of common stock of Party City Holdco Inc., par value $0.01 per share, representing 19.90% of such common stock outstanding on the Settlement Date prior to the settlement of the Exchange Offer (the “Shares”);

•

$100.0 million aggregate principal amount of 10.00% Senior Secured Notes due 2026 (the “Second Lien Issuer Exchange Notes”) to be issued by a newly formed limited liability company, a direct wholly owned subsidiary of Holdings, and Anagram International, Inc. (together, the “Issuer”). The Second Lien Issuer Exchange Notes will be secured by second-priority liens on all assets of the Issuer and its subsidiaries guaranteeing such notes and all of the Issuer’s capital stock, subject to certain agreed upon exceptions; and

•

$185.0 million aggregate principal amount of variable rate Senior Secured Notes due 2025 (the “First Lien Party City Exchange Notes”) to be issued by Holdings and secured by first-priority liens on all assets of Holdings and its subsidiaries that currently secure the Company’s existing senior credit facilities.

Consent Solicitation

The Company will seek, and holders of Existing Notes who tender pursuant to the Exchange Offer will be required to deliver, consents to certain amendments (the “Proposed Amendments”) to each of the indentures governing the Existing Notes (together, the “Existing Indentures”). The Proposed Amendments will:

•

allow for the issuance of the New Money First Lien Issuer Notes (as defined below), the Second Lien Issuer Exchange Notes and the First Lien Party City Exchange Notes;

•

allow for the issuance of the Shares;

•

eliminate substantially all of the restrictive covenants and certain events of default and related provisions contained in the Existing Indentures;

•

waive any related cross-defaults under the Existing Indentures;

•

release any guarantees provided by guarantors (or groups of guarantors) under the Existing Indentures that do not constitute Significant Subsidiaries (as defined in the Existing Indentures);

•

prohibit the designation of any future guarantors under the Existing Indentures; and

•

waive any requirement to use excess proceeds from any previous asset sales to make an offer to repurchase the Existing Notes under the provisions of the asset sales covenant in the Existing Indentures.

Rights Offering

Simultaneously with the launch of the Exchange Offer and the Consent Solicitation, the Company will initiate a rights offering (the “Rights Offering”) whereby holders of the Existing Notes eligible to participate in the Exchange Offer (“Eligible Holders”) who validly tender (and do not validly withdraw) their Existing Notes for exchange in the Exchange Offer will be provided the right (a “Right”) to purchase a pro rata portion of $41.5 million of 15.00% Senior Secured Notes due 2025 (the “New Money First Lien Issuer Notes”) to be issued by the Issuer and secured by first-priority liens on all assets of the Issuer and its subsidiaries guaranteeing such notes and all of the Issuer’s capital stock, subject to certain agreed upon exceptions.

Certain of the Consenting Noteholders (as designated from time to time, the “Backstop Parties”) have agreed in the Transaction Support Agreement to, and will, enter into a backstop and private placement agreement (the “Backstop and Private Placement Agreement”) with the Company prior to launch of the Transactions, to purchase up to $41.5 million of New Money First Lien Issuer Notes. The Backstop and Private Placement Agreement will include a $41.5 million commitment by the Backstop Parties to purchase the amount of New Money First Lien Issuer Notes that may be issued in the Rights Offering, representing the aggregate amount the Backstop Parties may purchase in the Rights Offering plus an additional amount of New Money First Lien Issuer Notes that are otherwise available to be purchased in the Rights Offering but for which applicable Rights have not been exercised by other Eligible Holders.

As consideration for entering into the Backstop and Private Placement Agreement and providing their respective commitments , the Company has agreed to pay to each of the Backstop Parties (i) its pro rata portion of an aggregate premium of $5.275 million in the form of New Money First Lien Issuer Notes plus (ii) its pro rata portion of an aggregate premium of $5.0 million in the form of First Lien Party City Exchange Notes.

Private Placement

On May 28, 2020, the Company and Barings LLC (including certain funds or advisory accounts managed, advised or sub-advised by it, “Barings”) entered into a private placement commitment agreement (the “Private Placement Commitment Agreement”). The Private Placement Commitment Agreement includes a commitment by Barings to purchase $40.0 million of New Money First Lien Issuer Notes in a private transaction (the “Private Placement”) exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”). Pursuant to the terms of the Transaction Support Agreement, the Backstop and Private Placement Agreement will also contain commitments by certain parties, including Barings, to purchase $58.5 million of New Money First Lien Issuer Notes in the Private Placement. As consideration for entering into the Backstop and Private Placement Agreement (and, with respect to Barings, the Private Placement Commitment Agreement) and providing commitments in the aggregate amount of

$58.5 million, the Company will pay to each party participating in the Private Placement an agreed portion of an aggregate premium of $4.725 million in the form of New Money First Lien Issuer Notes.

As of June 12, 2020, the Company has secured commitments in an aggregate amount of $58.5 million of New Money First Lien Issuer Notes in connection with the Private Placement.

Notice of Delisting or Failure to Satisfy a Continued Listing Rule or Standard; Transfer of Listing.

On April 9, 2020, the Company received written notice (the “Notice”) from the New York Stock Exchange (the “NYSE”) that the Company is no longer in compliance with the NYSE continued listing standards set forth in Section 802.01C of the NYSE’s Listed Company Manual, which requires listed companies to maintain an average closing share price of at least $1.00 over a consecutive 30 trading-day period.

Under NYSE continued listing standards, the Company has a period of six months following the receipt of the Notice to regain compliance with the minimum share price requirement. However, on April 20, 2020, the NYSE made a rule filing with the Securities and Exchange Commission for relief on the $1.00 share closing price standard, which became effective on April 21, 2020. The relief provides issuers additional time to cure noncompliance with the $1.00 share closing price standard. As a result, the Company’s new noncompliance cure expiration date is December 18, 2020. In order to regain compliance, on the last trading day of any calendar month during the cure period, the Company’s common stock, $0.01 par value per share (the “Common Stock”), must have (i) a closing price of at least $1.00 per share and (ii) an average closing price of at least $1.00 per share over the 30-trading day period ending on the last trading day of such month. If the Company is unable to regain compliance, the NYSE will initiate procedures to suspend and delist the Common Stock.

The Notice has no immediate impact on the listing of the Company’s Common Stock, which will continue to be listed and traded on the NYSE during the cure period, subject to the Company’s compliance with the other listing requirements of the NYSE. The Common Stock will continue to trade under the symbol “PRTY” but will have an added designation of “.BC” to indicate the status of the Common Stock as “below compliance” with the NYSE continued listing standards. The “.BC” indicator will be removed at such time as the Company regains compliance.

The Notice does not affect the Company’s business operations or its reporting obligations with the Securities and Exchange Commission, and it does not conflict with or cause an event of default under any of the Company’s material debt or other agreements.

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

References throughout this document to the “Company” include Party City Holdco 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 company by revenue in North America and, we believe, the largest vertically integrated supplier of decorated party goods globally by revenue. The Company is a popular one-stop shopping destination for party supplies, balloons, and costumes. In addition to being a great retail brand, the Company is a global, world-class organization that combines state-of-the-art manufacturing and sourcing operations, and sophisticated wholesale operations complemented by a multi-channel retailing strategy and e-commerce retail operations. The Company is a leading player in its category and vertically integrated in its breadth and depth. The Company designs, manufactures, sources and distributes party goods, including paper and plastic tableware, metallic and latex balloons, Halloween and other costumes, accessories, novelties, gifts and stationery throughout the world. As of March 31, 2020, the Company’s retail operations include 854 specialty retail party supply stores (including franchise stores) throughout the United States and Mexico operating under the names Party City and Halloween City, and e-commerce websites, including through the domain name PartyCity.com and others.

In addition to our retail operations, we are also one of the largest global designers, manufacturers and distributors of decorated consumer party products, with items found in over 40,000 retail outlets worldwide, including independent party supply stores, mass merchants, grocery retailers, e-commerce merchandisers and dollar stores. Our products are available in over 100 countries with the United Kingdom (“U.K.”), Canada, Germany, Mexico and Australia among the largest end markets for our products outside of the United States.

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 net income (loss), adjusted net income (loss) per common share – diluted and adjusted EBITDA. For a discussion of our use of these measures and a reconciliation of adjusted net income (loss) and adjusted EBITDA to net income (loss), please refer to “Financial Measures - Adjusted EBITDA,” “Financial Measures - Adjusted Net Income (Loss)” and “Financial Measures - Adjusted Net Income (Loss) Per Common Share – Diluted” below.

Segments

We have two reporting segments: Retail and Wholesale.

Our retail segment generates revenue primarily through the sale of our party supplies, which are sold under the Amscan, Designware, Anagram and Costumes USA brand names through Party City, Halloween City and PartyCity.com. During 2019, 80% of the product that was sold by our retail segment was supplied by our wholesale segment and 24% of the product that was sold by our retail segment was self-manufactured.

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

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

Financial Measures

Revenues. Revenue from retail store operations is recognized at the point of sale as control of the product is transferred to the customer at such time. Retail e-commerce sales are recognized when the consumer receives the product as control transfers upon delivery. 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 sales are reported net of taxes collected.

Under the terms of our agreements with our franchisees, we provide both: 1) brand value (via significant advertising spend) and 2) support with respect to planograms, in exchange for a royalty fee that ranges from 4% to 6% of the franchisees’ sales. The Company records the royalty fees at the time that the franchisees’ sales are recorded.

For most of our wholesale sales, control transfers upon the shipment of the product as: 1) legal title transfers on such date and 2) we have a present right to payment at such time. Wholesale sales returns are not significant as we generally only accept the return of goods that were shipped to the customer in error or that were damaged when received by the customer. Additionally, due to our extensive history operating as a leading party goods wholesaler, we have sufficient history with which to estimate future sales returns and we use the expected value method to estimate such activity.

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. Acquired stores are excluded from same-store sales until they are converted to the Party City format and included in our sales for the comparable 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. 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, including rent at distribution facilities, and outbound freight to get goods to our wholesale customers. At retail, cost of sales reflects the direct cost of goods purchased from third parties and the production or purchase costs of goods acquired from our wholesale segment. Retail cost of sales also includes inventory shrinkage, inventory adjustments, inbound freight, occupancy costs related to store operations (such as rent and common area maintenance, utilities and depreciation on assets) and all logistics costs associated with our retail e-commerce business.

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

Cost of sales related to sales from our wholesale segment to our retail segment are eliminated in our consolidated financial statements.

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 expenses, 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 (loss) income. 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.

Development Stage Expenses. Development stage expenses represent start-up activities related to Kazzam, LLC (“Kazzam”).

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 core 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 calculate Adjusted EBITDA in the same manner. We believe that Adjusted EBITDA is an appropriate measure of operating performance in addition to EBITDA because we believe it assists investors in comparing our performance across reporting periods on a consistent basis by eliminating the impact of 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.

Adjusted Net Income (Loss). Adjusted net income (loss) represents our net income (loss), adjusted for, among other items, intangible asset amortization, non-cash purchase accounting adjustments, amortization of deferred financing costs and original issue discounts, equity-based compensation and impairment charges. We present adjusted net income because we believe it assists investors in comparing our performance across reporting periods on a consistent basis by eliminating the impact of items that we do not believe are indicative of our core operating performance.

Adjusted Net Income (Loss) Per Common Share – Diluted. Adjusted net income (loss) per common share – diluted represents adjusted net income (loss) divided by the Company’s diluted weighted average common shares outstanding. We present the metric because we believe it assists investors in comparing our per share performance across reporting periods on a consistent basis by eliminating the impact of items that we do not believe are indicative of our core operating performance.

Results of Operations

Impact of the COVID-19 Pandemic

This led to a temporary furlough of approximately 90% of store employees and 70% of wholesale, manufacturing and corporate employees for whom the Company provides health benefits. In addition, there were non-payroll expense reductions including advertising and other store operating expenses, as well as professional and consulting fees, and cancellation of orders and negotiated receipt delays to manage inventory levels.

As of June 5, 2020, approximately 85% of our corporate retail stores have opened with store employees returning from furlough. But our business, operations, financial condition and liquidity have been and may continue to be materially and adversely affected. The disruption to the global economy and to our business, along with the decline in our stock price, negatively impacted the recoverability value of certain assets, including intangibles, and goodwill.

Three Months Ended March 31, 2020 Compared To Three Months Ended March 31, 2019

The following table sets forth the Company’s operating results and operating results as a percentage of total revenues for the three months ended March 31, 2020 and 2019.

	Three Months Ended March 31,
	2020						2019
	(Dollars in thousands)
Revenues:
Net sales	$	412,461		99.6		%	$	511,102		99.6		%
Royalties and franchise fees		1,582		0.4				2,014		0.4
Total revenues		414,043		100.0				513,116		100.0
Expenses:
Cost of sales		296,757		71.7				339,042		66.1
Wholesale selling expenses		15,458		3.7				17,961		3.5
Retail operating expenses		88,166		21.3				95,018		18.5
Franchise expenses		3,309		0.8				3,303		0.6
General and administrative expenses		59,996		14.5				41,925		8.2
Art and development costs		5,322		1.3				5,929		1.2
Development stage expenses		2,029		0.5				2,226		0.4
Store impairment and restructuring charges		17,728		4.3				18,009		3.5
Goodwill and intangibles impairment		536,648		129.6				—		—
Total expenses		1,025,413		247.7				523,413		102.0
Loss from operations		(611,370	)	(147.7	)			(10,297	)	(2.0	)
Interest expense, net		25,120		6.1				29,257		5.7
Other expense, net		5,676		1.4				1,254		0.2
Loss before income taxes		(642,166	)	(155.1	)			(40,808	)	(8.0	)
Income tax benefit		(100,498	)	(24.3	)			(10,519	)	(2.1	)
Net loss		(541,668	)	(130.8	)			(30,289	)	(5.9	)
Less: Net loss attributable to noncontrolling interests		(155	)	—				(71	)	—
Net loss attributable to common shareholders of Party City Holdco Inc.	$	(541,513	)	(130.8	)	%	$	(30,218	)	(5.9	)	%
Net loss per share attributable to common shareholders of Party City Holdco Inc. – Basic	$	(5.80	)				$	(0.32	)
Net loss per share attributable to common shareholders of Party City Holdco Inc. – Diluted	$	(5.80	)				$	(0.32	)

Revenues

Total revenues for the first quarter of 2020 were $414.0 million and were $99.1 million, or 19.3%, lower than the first quarter of 2019. The following table sets forth the Company’s total revenues for the three months ended March 31, 2020 and 2019.

	Three Months Ended March 31,
	2020							2019
	Dollars in Thousands			Percentage of Total Revenues				Dollars in Thousands			Percentage of Total Revenues
Net Sales:
Wholesale	$	214,798			51.9		%	$	290,301			56.6		%
Eliminations		(103,731	)		(25.1	)			(157,352	)		(30.7	)
Net wholesale		111,067			26.8				132,949			25.9
Retail		301,394			72.8				378,153			73.7
Total net sales		412,461			99.6				511,102			99.6
Royalties and franchise fees		1,582			0.4				2,014			0.4
Total revenues	$	414,043			100.0		%	$	513,116			100.0		%

Retail

Retail net sales during the first quarter of 2020 were $301.4 million and were $76.8 million, or 20.3%, lower than during the first quarter of 2019. Retail net sales at our North American Party City stores totaled $259.9 million and were $86.3 million, or 24.9% lower than in the first quarter of 2019 principally due to the temporary closure of all Party City stores in response to the COVID-19 pandemic starting on March 18, 2020, the sale of 65 Canadian Party City stores in October 2019, and the closure of 55 stores in conjunction with our 2019 store optimization program. These negative factors affecting sales were partially offset by the acquisition of six franchise and independent stores and the opening of one new store during the twelve months ended March 31, 2020. Global retail e-commerce sales totaled $40.9 million during the first quarter of 2020 and were $9.1 million, or 28.6% higher than during the corresponding quarter of 2019. Sales at other store formats totaled $0.6 million during the first quarter of 2020.

Same-store sales for the Party City brand (including North American retail e-commerce sales) decreased by 17.1% during the first quarter of 2020, principally due to the impact of the temporary closure of all Party City stores in response to the COVID-19 pandemic.

Our North American retail e-commerce sales, which include our Amazon marketplace sales, decreased by 17.1% compared to the first quarter of 2019 and, when adjusting for the impact of our “buy online, pick-up in store” program which includes our curbside pickup launched on March 25, 2020 (such sales are included in our store sales), decreased by 6.9%.

Excluding the impact of e-commerce, same-store sales decreased by 18.2%.

Same-store sales percentages were not affected by foreign currency as such percentages are calculated in local currency.

Wholesale

Wholesale net sales during the first quarter of 2020 totaled $111.1 million and were $21.8 million, or 16.5%, lower than the first quarter of 2019. Net sales to domestic party goods retailers and distributors (including our franchisee network) totaled $43.7 million and were $10.6 million, or 19.6%, lower than during 2019 principally due to lower distributor demand and closed franchise and independent party goods stores as a result of the COVID-19 pandemic. Net sales of metallic balloons to domestic distributors and retailers (including our franchisee network) totaled $15.1 million during the first quarter of 2020 and were $4.4 million, or 22.8%, lower than during the corresponding quarter of 2019 principally due to the COVID-19 pandemic. Our international sales (which include U.S. export sales and exclude U.S. import sales from foreign subsidiaries) totaled $52.3 million and were $6.8 million, or 11.5%, lower than in 2019. Foreign currency translation negatively impacted sales by approximately $1.1 million.

Intercompany sales to our retail affiliates totaled $103.7 million during the first quarter of 2020 and were $53.6 million lower than during the corresponding quarter of 2019. Intercompany sales represented 48.3% of total wholesale sales during the first quarter of 2020 and were 34.1% lower than during the first quarter of 2019, principally reflecting the impact of the Party City store closures related to the COVID-19 pandemic. 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 quarter of 2020 totaled $1.6 million and were $0.4 million lower than during the first quarter of 2019 primarily due to lower sales as a result of store closures resulting from the COVID-19 pandemic.

Gross Profit

The following table sets forth the Company’s gross profit for the three months ended March 31, 2020 and 2019.

	Three Months Ended March 31,
	2020					2019
	Dollars in Thousands		Percentage of Net Sales			Dollars in Thousands		Percentage of Net Sales
Retail	$	94,361		31.3	%	$	136,018		36.0	%
Wholesale		21,343		19.2			36,042		27.1
Total	$	115,704		28.1	%	$	172,060		33.7	%

The gross profit margin on net sales at retail during the first quarter of 2020 was 31.3% or 470 basis points lower than during the corresponding quarter of 2019. The decrease was mainly due to sales deleverage from the temporary closure of all the Company’s retail stores announced on March 18, 2020 in response to the COVID-19 pandemic. In addition, the increased costs of helium, and unfavorable product mix due to lower sales of higher margin products contributed to the margin decline. The declines in margin were partially offset by margin increases due to favorable share of shelf gains and lower year over year markdowns in conjunction with the Company’s “store optimization program” (see “operating expenses” below for further discussion). Our manufacturing share of shelf (i.e., the percentage of our retail product cost of sales manufactured by our wholesale segment) of 29.0% during the first quarter of 2020 was 1.4% higher as compared to the first quarter of 2019. 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 segment) was 81.3% during the quarter or 3.2% higher than during the first quarter of 2019.

The gross profit margin on net sales at wholesale during the first quarters of 2020 and 2019 was 19.2% and 27.1%, respectively. The decrease was principally due to the deleveraging of distribution and manufacturing costs from lower sales to closed franchise and independent party stores due to the COVID-19 pandemic as well as increased rent associated with the sale leaseback transaction.

Operating expenses

Wholesale selling expenses were $15.5 million during the first quarter of 2020 and were $2.5 million lower than during the corresponding quarter of 2019 principally due to lower travel, commissions, marketing, and impact of foreign exchange. Wholesale selling expenses were 13.9% and 13.5% of net wholesale sales during the first quarters of 2020 and 2019, respectively.

Retail operating expenses during the first quarter of 2020 were $88.2 million and were $6.8 million lower than the corresponding quarter of 2019. The decrease was mainly due to the sale of the 65 Canada Retail stores, 55 closed US stores in conjunction with the store optimization program, and lower credit card fees and marketing due to the COVID-19 pandemic partially offset by higher costs associated with the acquisition of Livario and Webdots in December of 2019. Retail operating expenses were 29.3% and 25.1% of retail sales during the first quarters of 2020 and 2019, respectively.

Franchise expenses during each of the first quarter of 2020 and 2019 were $3.3 million.

General and administrative expenses during the first quarters of 2020 totaled $60.0 million and were $18.1 million, or 43.1%, higher than in the first quarter of 2019 principally due to increased legal and settlement costs, new executive leadership compensation, and higher professional fees. General and administrative expenses as a percentage of total revenues were 14.5% and 8.2% during the first quarters of 2020 and 2019, respectively.

Art and development costs were $5.3 million and $5.9 million during the first quarters of 2020 and 2019, respectively.

Development stage expenses represent costs related to Kazzam.

During the three months ended March 31, 2020, the Company performed a comprehensive review of its store locations aimed at improving the overall productivity of such locations (“store optimization program”) and, after careful consideration and evaluation of the store locations, the Company made the decision to accelerate the optimization of its store portfolio with the closure of approximately 21 stores which are primarily located in close proximity to other Party City stores. These closings should provide the Company with capital flexibility to expand into underserved markets. In addition, the Company estimated lease impairment for open stores where sales were affected due to the outbreak of, and local, state and federal governmental responses to, COVID-19.

Goodwill and intangibles impairment charges for the three months ended March 31, 2020 were $536.6 million. The non-cash pre-tax goodwill impairment charges were the result of a sustained decline in the Company’s market capitalization and significantly reduced customer demand for its products due to COVID-19. There were no goodwill impairment charges for the three months ended March 31, 2019. See Note 4 – Goodwill and Intangibles Impairment, of Item 1, “Condensed Consolidated Financial Statements (Unaudited)” in this Quarterly Report on Form 10-Q for further discussion.

Interest expense, net

Interest expense, net, totaled $25.1 million during the first quarter of 2020, compared to $29.3 million during the first quarter of 2019. The decrease in interest principally reflects lower average debt following a debt repayment in the fourth quarter of 2019.

Other expense, net

For the first quarters of 2020 and 2019, other expense, net, totaled $5.7 million and $1.3 million, respectively. The change is due to currency loss during the first quarter of 2020.

Income tax benefit

The effective income tax rate for the three months ended March 31, 2020, 15.7%, is different from the statutory rate primarily due the non-deductible portions of the goodwill impairment charges noted above, state taxes, and a rate benefit related to the carryback of a net operating loss to years when the statutory income tax rate was 35.0%.

Adjusted EBITDA, Adjusted Net Income and Adjusted Net Income per Common Share – Diluted

The Company presents adjusted EBITDA, adjusted net income and adjusted net income per common share - diluted as supplemental measures of its operating performance. The Company defines EBITDA as net income (loss) before interest expense, net, income taxes, depreciation and amortization and defines adjusted EBITDA as EBITDA, as further adjusted to eliminate the impact of certain items that the Company does not consider indicative of our core operating performance. These further adjustments are itemized below. Adjusted net income represents the Company’s net income (loss) adjusted for, among other items, intangible asset amortization, non-cash purchase accounting adjustments, amortization of deferred financing costs and original issue discounts, equity-based compensation, and impairment charges. Adjusted net income per common share – diluted represents adjusted net income divided by diluted weighted average common shares outstanding. The Company presents these measures as supplemental measures of its operating performance. You are encouraged to evaluate these adjustments and the reasons the Company considers them appropriate for supplemental analysis. In evaluating the measures, you should be aware that in the future the Company may incur expenses that are the same as, or similar to, some of the adjustments in this presentation. The Company’s presentation of adjusted EBITDA, adjusted net income and adjusted net income per common share-diluted should not be construed as an inference that the Company’s future results will be unaffected by unusual or non-recurring items. The Company presents the measures because the Company believes they assist investors in comparing the Company’s performance across reporting periods on a consistent basis by eliminating items that the Company does not believe are indicative of its core operating performance. In addition, the Company uses adjusted EBITDA: (i) as a factor in determining incentive compensation, (ii) to evaluate the effectiveness of its business strategies and (iii) because its credit facilities use adjusted EBITDA to measure compliance with certain covenants. The Company also believes that adjusted net income and adjusted net income per common share - diluted are helpful benchmarks to evaluate its operating performance.

Adjusted EBITDA, adjusted net income, and adjusted net income per common share - diluted have limitations as analytical tools. Some of these limitations are:

•

they do not reflect the Company’s cash expenditures or future requirements for capital expenditures or contractual commitments;

•

they do not reflect changes in, or cash requirements for, the Company’s working capital needs;

•

adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on the Company’s 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 the Company’s overall long-term incentive compensation package, although the Company excludes it as an expense when evaluating its core operating performance for a particular period;

•

they do not reflect the impact of certain cash charges resulting from matters the Company considers not to be indicative of its ongoing operations; and

•

other companies in the Company’s industry may calculate adjusted EBITDA, adjusted net income and adjusted net income per common share differently than the Company does, limiting its usefulness as a comparative measure.

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

	Three Months Ended March 31,
	2020			2019
(Dollars in thousands)
Net loss	$	(541,668	)	$	(30,289	)
Interest expense, net		25,120			29,257
Income taxes		(100,498	)		(10,519	)
Depreciation and amortization		17,752			21,341
EBITDA		(599,294	)		9,790
Non-cash purchase accounting adjustments		—			1,001
Store impairment and restructuring charges (a)		27,761			35,638
Other restructuring, retention and severance (b)		3,047			1,388
Goodwill and intangibles impairment (c)		536,648			—
Deferred rent (d)		(1,384	)		(1,150	)
Closed store expense (e)		1,235			591
Foreign currency losses/(gains), net		4,255			(293	)
Stock option expense (f)		354			370
Non-employee equity-based compensation (g)		1,033			129
Undistributed income in equity method investments		(144	)		(198	)
Corporate development expenses (h)		2,969			2,845
Restricted stock units – time-based (i)		621			392
Non-recurring legal settlements/costs		6,321			732
COVID - 19 (l)		26,180			—
Other		2,272			247
Adjusted EBITDA	$	11,874		$	51,482

				March 31, 2020 EBITDA Adjustments
	March 31, 2020 GAAP Basis (as reported)			Goodwill and intangibles impairment (c)			Store impairment and restructuring charges (a)			Corporate development expenses (h)			Legal			Stock Option Expense/Non- Employee Equity Compensation/ Restricted stock units – time-based (f)(g)(i)			Deferred Rent (d)		Other restructuring, retention and severance (b)			Closed store expense (e)			COVID- 19 (l)			Foreign currency losses			Other			March 31, 2020 Non-GAAP basis
Revenues:
Net sales	$	412,461																																		$	412,461
Royalties and franchise fees		1,582																																			1,582
Total revenues		414,043																																			414,043
Cost of sales		296,757						(10,033	)																			(12,804	)					(429	)		273,491
Wholesale selling expenses		15,458									(736	)																(114	)								14,608
Retail operating expenses		88,166																		1,336					(1,166	)		(10,178	)								78,158
Franchise expenses		3,309																										(329	)								2,980
General and administrative expenses		59,996									(100	)		(6,321	)		(975	)		48		(3,047	)		(69	)		(2,755	)								46,777
Art and development costs		5,322																																			5,322
Development stage expenses		2,029									(2,029	)																									—
Store impairment and restructuring charges		17,728						(17,728	)																												—
Goodwill and intangibles impairment		536,648			(536,648	)																															—
Total expenses		1,025,413			(536,648	)		(27,761	)		(2,865	)		(6,321	)		(975	)		1,384		(3,047	)		(1,235	)		(26,180	)		—			(429	)		421,336
Loss from operations		(611,370	)																																		(7,293	)
Interest expense, net		25,120																																			25,120
Other expense, net		5,676									(104	)					(1,033	)													(4,255	)		(1,699	)		(1,415	)
Loss before income taxes		(642,166	)																																		(30,998	)
Interest expense, net		25,120																																			25,120
Depreciation and amortization		17,752																																			17,752
EBITDA		(599,294	)																																		11,874
Adjustments to EBITDA		611,168			(536,648	)		(27,761	)		(2,969	)		(6,321	)		(2,008	)		1,384		(3,047	)		(1,235	)		(26,180	)		(4,255	)		(2,128	)		—
Adjusted EBITDA	$	11,874		$	(536,648	)	$	(27,761	)	$	(2,969	)	$	(6,321	)	$	(2,008	)	$	1,384	$	(3,047	)	$	(1,235	)	$	(26,180	)	$	(4,255	)	$	(2,128	)	$	11,874

				March 31, 2019 EBITDA Adjustments
	March 31, 2019 GAAP Basis (as reported)			Store impairment and restructuring charges (a)			Corporate development expenses (h)			Legal			Stock Option Expense/Non- Employee Equity Compensation/ Restricted stock units – time-based (f)(g)(i)			Deferred Rent (d)		Other restructuring, retention and severance (b)			Closed store expense (e)			Non-Cash Purchase Accounting Adjustments			Foreign currency gains		Other			March 31, 2019 Non-GAAP basis
Revenues:
Net sales	$	511,102																														$	511,102
Royalties and franchise fees		2,014																															2,014
Total revenues		513,116																															513,116
Cost of sales		339,042			(17,629	)											1,150																322,563
Wholesale selling expenses		17,961																															17,961
Retail operating expenses		95,018																	(31	)		(479	)										94,508
Franchise expenses		3,303																															3,303
General and administrative expenses		41,925									(732	)		(891	)				(1,357	)		(112	)										38,833
Art and development costs		5,929																															5,929
Development stage expenses		2,226						(2,226	)																								—
Store impairment and restructuring charges		18,009			(18,009	)																											—
Goodwill and intangibles impairment		—																															—
Total expenses		523,413			(35,638	)		(2,226	)		(732	)		(891	)		1,150		(1,388	)		(591	)		—			—		—			483,097
Loss from operations		(10,297	)																														30,019
Interest expense, net		29,257																															29,257
Other expense, net		1,254						(619	)																(1,001	)		293		(49	)		(122	)
Loss before income taxes		(40,808	)																														884
Interest expense, net		29,257																															29,257
Depreciation and amortization		21,341																															21,341
EBITDA		9,790																															51,482
Adjustments to EBITDA		41,692			(35,638	)		(2,845	)		(732	)		(891	)		1,150		(1,388	)		(591	)		(1,001	)		293		(49	)		—
Adjusted EBITDA	$	51,482		$	(35,638	)	$	(2,845	)	$	(732	)	$	(891	)	$	1,150	$	(1,388	)	$	(591	)	$	(1,001	)	$	293	$	(49	)	$	51,482

	Three Months Ended March 31,
	2020			2019
(Dollars in thousands, except per share amounts)
Loss before income taxes	$	(642,166	)	$	(40,808	)
Intangible asset amortization		2,866			3,429
Non-cash purchase accounting adjustments		—			1,317
Amortization of deferred financing costs and original issuance discounts (j)		1,202			1,143
Store impairment and restructuring charges (a)		27,973			35,638
Other restructuring charges (b)		922			—
Goodwill and intangibles impairment (c)		536,648			—
Non-employee equity-based compensation (g)		1,033			129
Non-recurring legal settlements/costs		6,321			—
Stock option expense (f)		354			370
COVID - 19 (l)		26,180			—
Adjusted (loss) income before income taxes		(38,667	)		1,218
Adjusted income tax (benefit) expense (k)		(12,284	)		115
Adjusted net (loss) income	$	(26,383	)	$	1,103
Adjusted net (loss) income per common share – diluted	$	(0.28	)	$	0.01
Weighted-average number of common shares-diluted		93,395,609			93,879,979

(a)

During the three months ended March 31, 2019, the Company initiated a store optimization program under which it closed approximately 55 Party City stores during the course of 2019 and 21 Party City stores during the first quarter of 2020. In conjunction with the program, during the first three months of 2020, the Company recorded the following charges: inventory reserves: $11,696, operating lease asset impairment: $8,162, plant and equipment impairment: $2,065 and labor and other costs related to closing the stores: $1,451. In addition the Company recorded $6,051 of operating lease asset impairment related to its active stores, driven partially by stores that were closed due to COVID-19. During the first three months of 2019, the Company recorded the following charges related to the store optimization program: inventory reserves: $17,629, operating lease asset impairment: $13,209, property, plant and equipment impairment: $4,139 and severance: $661. See Note 3 – Store Impairment and Restructuring Charges in Item 1 for further discussion. Additionally, during the process of liquidating the inventory in such stores, the Company lost margin of $980.

(b)	Amounts expensed during the first quarter 2020 principally relate to severance due to the organizational changes.

(c)	As a result of a sustained decline in market capitalization, the Company recognized a non-cash pre-tax goodwill and intangibles impairment charge at March 31, 2020 of $536,648.

(d)

The “deferred rent” adjustment reflects the difference between accounting for rent and landlord incentives in accordance with GAAP and the Company’s actual cash outlay for such items. During the first quarter of 2019, the Company adopted ASC 842. Under the standard, the difference between accounting for rent and landlord incentives in accordance with GAAP and the Company’s actual cash outlay for such items is now incorporated in the Company’s operating lease asset.

(e)	Charges incurred related to closing and relocating stores in the ordinary course of business.

(f)	Represents non-cash charges related to stock options.

(g)	The acquisition of Ampology’s interest in Kazzam, LLC in an equity transaction. See Note 19 – Kazzam, LLC in Item 1 for further discussion.

(h)	Primarily represents costs for Kazzam (see Note 19 – Kazzam, LLC in Item 1 for further discussion) and third-party costs related to acquisitions (principally legal and diligence expenses).

(i)	Non-cash charges for restricted stock units that vest based on service conditions.

(j)

During February 2018, the Company amended the Term Loan Credit Agreement. In conjunction with the amendment, the Company wrote-off capitalized deferred financing costs, original issue discounts and call premiums. The amounts are included in “Amortization of deferred financing costs and original issuance discounts” in the adjusted net income table above.

(k)

Represents income tax expense/benefit after excluding the specific tax impacts for each of the pre-tax adjustments. The tax impacts for each of the adjustments were determined by applying to the pre-tax adjustments the effective income tax rates for the specific legal entities in which the adjustments were recorded.

(l)	Represents COVID-19 expenses for employees on temporary furlough for whom the Company provides health benefits; non-payroll expenses including advertising, occupancy and other store expenses.

Liquidity

The Company’s indebtedness principally consists of: (i) a senior secured term loan facility (“Term Loan Credit Agreement”), (ii) $350 million of 6.125% Senior Notes (the “2023 Notes”) and (iii) $500 million of 6.625% Senior Notes (the “2026 Notes”). Additionally, the Company has a $640 million asset-based revolving credit facility (“ABL Facility”) that it draws down on as necessary (see the consolidated statement of cash flows in Item 1). As disclosed in Note 6 – Disposition of Assets in Item 1, the Company expects to use $85 million of the net proceeds from the sale of its Canadian-based stores to paydown the Term Loan.

During the temporary store closures as a result of COVID-19, quarantines, stay-at-home orders and related measures had significantly reduced consumer spending as well as customer demand for our products. The Company reduced cash outflow through reduction of employee and non-employee expenses, cancellation of orders and negotiated receipt delays to manage inventory levels.

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 twelve months. We cannot provide assurance, 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.

As a result and as disclosed in Note 20 – Subsequent Events, on May 28, 2020, the Company entered into an exchange offer transaction support agreement with an ad hoc committee of holders of at least 52% of the aggregate principal amount of the 2023 and 2026 Notes whereby the Consenting Noteholders have agreed to support a set of transactions to be commenced by the Company. The contemplated transactions are expected to deleverage the Company’s balance sheet by approximately $450 million and the Company intends to raise $100.0 million in new capital to increase its financial strength and support PCHI’s global operations and ongoing transformation initiatives.

Cash Flow

Net cash used in operating activities totaled $74.0 million and $100.9 million during the three months ended March 31, 2020 and 2019, respectively. The variance principally reflects decrease in accounts receivable due to decreased sales as well as reduced payments from lower inventory levels. Changes in operating assets and liabilities during the first three months of 2020 and 2019 resulted in the use of cash of $52.0 million and $83.3 million, respectively.

Net cash used in investing activities totaled $10.7 million during the three months ended March 31, 2020, as compared to $12.9 million used in investing activities during the three months ended March 31, 2019. Capital expenditures during the three months ended March 31, 2020 and 2019 were $10.7 million and $12.4 million, respectively. Retail capital expenditures totaled $5.0 million during 2020. Wholesale capital expenditures during 2020 totaled $6.0 million.

Net cash provided by financing activities was $249.0 million during the three months ended March 31, 2020 and $91.7 million during the three months ended March 31, 2019. The variance was principally due to a $150.0 million draw down under the ABL Facility, which were invested in US Treasury funds at March 31, 2020.

As of March 31, 2020, the Company had approximately $71.3 million of availability under the ABL Facility.

Critical Accounting Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the appropriate application of certain accounting policies, many of which require estimates and assumptions about future events and their impact on amounts reported in the financial statements and related notes. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our estimates. Such differences could be material to the consolidated financial statements included herein.

We believe our application of accounting policies, and the estimates inherently required by these policies, are reasonable. These accounting policies and estimates are constantly re-evaluated and adjustments are made when facts and circumstances dictate a change. Historically, we have found the application of accounting policies to be reasonable, and actual results generally do not differ materially from those determined using necessary estimates.

Long-Lived and Intangible Assets (including Goodwill)

We review the recoverability of our long-lived assets, including finite-lived intangible assets, whenever facts and circumstances indicate that the carrying amount may not be fully recoverable. For purposes of recognizing and measuring impairment, we evaluate long-lived assets/asset groups, other than goodwill, based upon the lowest level of independent cash flows ascertainable to evaluate impairment. If an impairment indicator exists, we compare the undiscounted future cash flows of the asset/asset group to the carrying value of the asset/asset group. If the sum of the undiscounted future cash flows is less than the carrying value of the asset/asset group, we would calculate discounted future cash flows based on market participant assumptions. If the sum of discounted cash flows is less than the carrying value of the asset/asset group, we would recognize an impairment loss. The impairment related to long-lived assets is measured as the amount by which the carrying amount of the asset(s) exceeds the fair value of the asset(s). When fair values are not readily available, we estimate fair values using discounted expected future cash flows. Such estimates of fair value require significant judgment, and actual fair value could differ due to changes in the expectations of cash flows or other assumptions, including discount rates.

In the evaluation of the fair value and future benefits of finite long-lived assets attached to retail stores, we perform our cash flow analysis generally on a store-by-store basis. Various factors including future sales growth and profit margins are included in this analysis. To the extent these future projections or strategies change, the conclusion regarding impairment may differ from the current estimates.

Goodwill is reviewed for potential impairment on an annual basis or more frequently if circumstances indicate a possible impairment. For purposes of testing goodwill for impairment, reporting units are determined by identifying individual operating segments within our organization which constitute a business for which discrete financial information is available and is reviewed by management. Components within a segment are aggregated to the extent that they have similar economic characteristics. Based on this evaluation, we have determined that our operating segments, wholesale and retail, represent our reporting units for the purposes of our goodwill impairment test.

If it is concluded that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we estimate the fair value of the reporting unit using a combination of a market approach and an income approach. If such carrying value exceeds the fair value, an impairment loss will be recognized in an amount equal to such excess. The fair value of a reporting unit refers to the amount at which the unit as a whole could be sold in a current transaction between willing parties. The determination of such fair value is subjective, and actual fair value could differ due to changes in the expectations of cash flows or other assumptions, including discount rates.

During the first quarter of 2020, the Company identified impairment indicators associated with its market capitalization and significantly reduced customer demand for its products due to COVID-19. As a result, the Company performed interim impairment tests on the goodwill at its retail and wholesale reporting units. As a result, the Company recorded a $536.6 million goodwill impairment charge. See Note 4 – Goodwill and Intangibles Impairment, of Item 1, “Condensed Consolidated Financial Statements (Unaudited)” in this Quarterly Report on Form 10-Q for further discussion. Should actual results differ from certain key assumptions used in the interim impairment test, including revenue and EBITDA growth, which are both impacted by economic conditions, or should other key assumptions change, including discount rates and market multiples, in subsequent periods the Company could record additional impairment charges for the goodwill of such reporting units.

Contractual Obligations

Other than as described above under “Liquidity”, there were no material changes to our future minimum contractual obligations as of December 31, 2019 as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019.

Off Balance Sheet Arrangements

We had no off-balance sheet arrangements during the three months ended March 31, 2020 and the year ended December 31, 2019.

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, the inventory balances of our wholesale operations are slightly higher during the third quarter than during the remainder of the year. Additionally, Halloween products sold to retailers and other distributors result in slightly higher accounts receivable balances during the 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 section titled “Risk Factors” included in our Annual Report on Form 10-K filed with the SEC on March 12, 2020 and in the “Risk Factors” section of this Quarterly Report on Form 10-Q. 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:

•

potential risks and uncertainties relating to the ultimate geographic spread of COVID-19;

•

economic slowdown affecting consumer spending and general economic conditions, including as a result of the COVID-19 pandemic;

•

the severity of the COVID-19 pandemic;

•

the duration of the COVID-19 pandemic;

•

actions that may be taken by governmental authorities to contain the COVID-19 pandemic or to treat its impact;

•

the potential negative impacts of COVID-19 on the global economy and foreign sourcing;

•

the impacts of COVID-19 on the Company’s financial condition and business operation;

•

our ability to satisfy the conditions to, and consummate, a series of expected refinancing transactions and, if such transactions are consummated, our ability to realize the expected benefits of such transactions from improving our capital structure and our near term liquidity;

•

our ability to compete effectively in a competitive industry;

•

fluctuations in commodity prices;

•

helium shortages;

•

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

•

successful implementation of our business strategy;

•

decreases in our Halloween sales;

•

unexpected or unfavorable consumer responses to our promotional or merchandising programs;

•

failure to comply with existing or future laws relating to our marketing programs, e-commerce initiatives and the use of consumer information;

•

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;

•

changes in regulations or enforcement, or our failure to comply with existing or future regulations;

•

our international operations subjecting us to additional risks;

•

potential litigation and claims;

•

risks related to international trade disputes and the U.S. government’s trade policy;

•

lack of available additional capital;

•

our inability to retain or hire key personnel;

•

risks associated with leasing substantial amounts of space;

•

risks arising from the results of the public referendum held in United Kingdom and its membership in the European Union;

•

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;

•

potential negative effect of certain aspects of recent U.S. federal income tax reform;

•

risks related to our substantial indebtedness;

•

risks associated with interest rate changes;

•

straining of resources and ability to attract and retain qualified board members due to maintaining and improving our financial controls;

•

decline of our common stock market price due to the large number of outstanding shares of our common stock eligible for sale; and

•

the other factors set forth under “Risk Factors” in our Annual Report on Form 10-K, filed with the SEC on March 12, 2020, and in the “Risk Factors” section of this Quarterly Report on Form 10-Q.

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

There have been no material changes in our market risks since December 31, 2019 as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019.

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 March 31, 2020. 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 three months ended March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II-OTHER INFORMATION

Item 1. Legal Proceedings

Information in response to this Item is incorporated herein by reference from Note 12 – Commitments and Contingencies, to our Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

Item 1A. Risk Factors

"Item 1A, Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the Securities Exchange Commission on March 12, 2020, includes a discussion of our risk factors. The information presented below updates, and should be read in conjunction with, the risk factors disclosed in our Annual Report on Form 10-K. The effects of the events and circumstances described in the following risk factor may have the additional effect of heightening many of the risks noted in our Annual Report on Form 10-K. Otherwise, except as presented below, there have been no material changes to the risk factors disclosed in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended February 1, 2020, as filed with the Securities Exchange Commission on March 27, 2020.

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

In March 2020, the World Health Organization declared COVID-19 a global pandemic, and governmental authorities around the world have implemented measures to reduce the spread of the virus. The global spread of COVID-19 and the measures to contain it have negatively impacted the global economy, disrupted global supply chains, and created significant volatility and disruption in financial markets. In response to COVID-19, to safeguard the health and safety of its team members and customers, the Company temporarily closed all of its corporate retail stores as of March 18, 2020. Although the Company’s e-commerce site, www.partycity.com, remains fully operational and the number of stores offering curbside pickup continues to expand, quarantines, stay-at-home orders and related measures have significantly reduced consumer spending as well as customer demand for our products. In addition, these restrictions and other dislocations caused by the outbreak have disrupted our planning, branding and administrative functions, as well as that of our suppliers, transporters and customers, which will make it more difficult for our business to recover even after we are able to reopen. As a result, our business, operations, financial condition and liquidity have been and may continue to be materially and adversely affected. Further, the disruption to the global economy and to our business, along with the decline in our stock price, may negatively impact the carrying value of certain assets, including inventories, accounts receivables, intangibles, and goodwill. The full extent to which COVID-19 and the measures to contain it will impact our business, operations financial condition and liquidity will depend on the severity and duration of the COVID-19 outbreak and other future developments related to the response to the virus all of which are highly uncertain. As a result, we cannot predict the ultimate impact of COVID-19 on the Company and its operational and financial performance.

We are currently contemplating a series of refinancing transactions. We may not be able to complete such transactions or any other alternative transaction, on favorable terms or at all, and our financial condition could be materially adversely affected.

The Company and certain consenting holders of its outstanding Senior Notes (the "Existing Notes") entered into a transaction support agreement whereby such consenting noteholders have agreed to support a series of transactions expected to be commenced by the Company, including an offer to exchange the Existing Notes for newly issued Senior Secured Notes, solicitation of consents to certain amendments to the indentures governing the Existing Notes and issuance of additional Senior Secured Notes to raise new capital through a rights offering and a private placement. The closing of such transactions is conditioned on the satisfaction or waiver of a number of conditions precedent, including finalizing all definitive documents and achieving certain participation thresholds. Specifically, the transaction support agreement requires the valid tender, without valid withdrawal, of a minimum of 98.00%, or $833 million, of the outstanding aggregate principal amount of the Existing Notes. Among other things, these transactions are conditioned on, and would only be consummated concurrently with, each other and as a result, this series of transactions may not be completed as contemplated or at all. If the Company is unable to complete these transactions or any other alternative transaction, on favorable terms or at all, due to market conditions or otherwise, its financial condition could be materially adversely affected. Nothing contained in this Quarterly Report on Form 10-Q should be construed as an offer to sell, or a solicitation of an offer to purchase, any securities of the Company. See Note 20 – "Subsequent Events" to our Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for additional information.

Item 5. Other Information

On June 9, 2020, the Company and certain consenting holders of the Company’s outstanding 6.125% Senior Notes due 2023 and 6.625% Senior Notes due 2026 (collectively, the “Existing Notes”) entered into an amendment (the “Amendment”) to the Transaction Support Agreement, dated as of May 28, 2020 (the “Original Agreement”), among the Company and an ad hoc committee of holders of at least 52% of the aggregate principal of the Existing Notes. The Original Agreement is described in the Company’s Current Report on Form 8-K, dated May 29, 2020. The full text of the Original Agreement is attached hereto as Exhibit 10.3 and is incorporated herein by reference.

Among other things, the Amendment provides for the following modifications to the Original Agreement:

•

with respect to the contemplated private placement (the “Private Placement”) of 15.00% Senior Secured Notes due 2025 (the “New Money First Lien Issuer Notes”), the Amendment provides for the increase of the aggregate size of commitments by private placement parties (the “Private Placement Parties”) from $50.0 million to $58.5 million;

•

with respect to a contemplated offering of rights (the “Rights Offering”) to purchase a pro rata portion of New Money First Lien Issuer Notes, the Amendment provides for the decrease of the aggregate size of the Rights Offering it decreases the aggregate size of such offering from $50.0 million to $41.5 million;

•

with respect to the consideration payable to the Private Placement Parties in the form of New Money First Lien Issuer Notes, the Amendment modifies it from a pro rata allocation of an aggregate premium of $5.0 million to an agreed allocation of an aggregate premium of $4.725 million; and

•

with respect to the portion of the total consideration payable in the form of New Money First Lien Issuer Notes to certain holders of Existing Notes in exchange for backstopping the Rights Offering, the Amendment increases it from $5.0 million to $5.275 million.

The foregoing is a summary of the material terms of, and is qualified by, the full text of the Amendment, which is attached hereto as Exhibit 10.5 and is incorporated herein by reference. Nothing contained in this Quarterly Report on Form 10-Q should be construed as an offer to sell, or a solicitation of an offer to purchase, any securities of the Company.

Item 6. Exhibits

Exhibit Number		Description

3.1		Certificate of Correction to Party City Holdco Inc.’s Second Amended and Restated Certificate of Incorporation filed on June 6, 2019, dated December 17, 2019 and corrected Second Amended and Restated Certificate of Incorporation

3.2		Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to Party City Holdco Inc.’s Form 8-K dated June 7, 2019)

10.1†*		Employment Agreement between Party City Holdings Inc., Party City Holdco Inc. and Michael P. Harrison, dated April 5, 2020

10.2†*		Form of Temporary Reduction in Base Salary Agreement between Party City Holdco Inc. and (Employees) dated April 25, 2020

10.3		Transaction Support Agreement, dated as of May 28, 2020, among Party City Holdings Inc., Party City Holdco Inc., the other credit parties party thereto and certain consenting noteholders party thereto (incorporated by reference to Exhibit 10.1 to Party City Holdco Inc.’s Form 8-K dated May 28, 2020)

10.4		Private Placement Commitment Agreement, dated as of May 28, 2020, among Party City Holdings Inc., Party City Holdco Inc., the other credit parties party thereto and the private placement party named therein (incorporated by reference to Exhibit 10.2 to Party City Holdco Inc.’s Form 8-K dated May 28, 2020)

10.5*		First Amendment to the Transaction Support Agreement, dated as of June 9, 2020, among Party City Holdings Inc., Party City Holdco Inc., the other credit parties party thereto and certain consenting noteholders party thereto

10.6†*		Form of Nonqualified Stock Option Award Agreement (Employees) under the Party City Holdco Inc. Amended and Restated 2012 Omnibus Equity Incentive Plan

21.1*		List of Subsidiaries of Party City Holdco Inc.

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

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

32.2*		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS*		XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

101.SCH*		Inline XBRL Taxonomy Extension Schema Document

101.CAL*		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*		Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE*		Inline XBRL Taxonomy Extension Presentation Linkbase Document

104.1*		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

†	Management contract of compensatory plan or arrangement

*	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 HOLDCO INC.

	By:		/s/ Todd Vogensen
			Todd Vogensen
			Chief Financial Officer (Principal Financial Officer)

Date: June 12, 2020

eXHIBIT 10.1

AMENDED AND RESTATED EMPLOYMENT AGREEMENT

AMENDED AND RESTATED EMPLOYMENT AGREEMENT (“Agreement”), dated as of the 5th day of April, 2020 (the “Effective Date”), by and between Party City Holdings Inc., a Delaware corporation (the “Company”), Party City Holdco Inc., a Delaware corporation (“Holdco”), and Michael P. Harrison (the “Executive”) and effective as of the Effective Date.

WHEREAS, the Executive has served the Company and Holdco as the Senior Vice President and General Manager of the North American Consumer Products Division of the Company and Holdco pursuant to an Employment Agreement, dated December 17, 2018 (the “Prior Employment Agreement”); and

WHEREAS, the Company, Holdco and the Executive desire to set forth in this new Agreement the terms and conditions under which the Executive will continue to be employed as the Senior Vice President and General Manager of the North American Consumer Products Division of the Company and Holdco effective as of the Effective Date.

NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:

1.Employment Period. The Company and Holdco shall continue to employ the Executive, and the Executive agrees to, and shall, serve the Company and Holdco, on the terms and conditions set forth in this Agreement, for the period beginning on the Effective Date and ending on December 31, 2020, unless sooner terminated as set forth hereinafter (the “Employment Period”).

2.Position and Duties.

(a)During the Employment Period, the Executive shall continue to serve as the Senior Vice President and General Manager of the North American Consumer Products Division of the Company and of Holdco with such duties and responsibilities as are assigned to him by the bylaws or Board of Directors of Holdco (the “Board”) or the Chief Executive Officer of the Company (the “CEO”) consistent with his position as Senior Vice President and General Manager of the North American Consumer Products Division of the Company and Holdco, including, as the Board or the CEO may request, without additional compensation, to serve as an officer or director of certain of the subsidiaries and other affiliates of Holdco and/or the Company. During the Employment Period, the Executive shall report to the CEO.

(b)During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive shall devote his full attention and time during normal business hours to the business and affairs of the Company and Holdco and shall use his reasonable best efforts to carry out the responsibilities assigned to the Executive faithfully and efficiently. It shall not be considered a violation of the foregoing for the Executive to (i) serve on civic or charitable boards or committees, (ii) deliver lectures, fulfill speaking engagements or teach at educational institutions, (iii) serve on the board of directors of other companies, so long as the Board approves such appointments (such approval not to be unreasonably withheld), or (iv) manage personal investments, so long as such activities do not compete with and are not provided

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to or for any entity that competes with or intends to compete with the Company, Holdco or any of their respective subsidiaries and affiliates and do not interfere with the performance of the Executive’s responsibilities as an employee of the Company or Holdco in accordance with this Agreement.

3.Compensation.

(a)Base Salary. Effective as of the Effective Date, the Executive shall receive from the Company an annual base salary of $450,000.00 (as such amount may be increased from time to time, in the sole discretion of the Board or the Compensation Committee of the Board (the “Committee”), the “Annual Base Salary”), payable in regular intervals in accordance with the Company’s customary payroll practices in effect during the Employment Period.

(b)Annual Bonus. In addition to the Annual Base Salary, during the Employment Period, the Executive shall be eligible to receive annual bonus compensation (the “Annual Bonus”) consistent with the Company’s bonus plan for key executives as in effect from time to time (the “Bonus Plan”). The Annual Bonus (including any pro rata portion thereof, to the extent payable under this Agreement), if any, shall be paid no later than two and one-half months following the end of the calendar year to which such Annual Bonus corresponds. Effective as of the Effective Date, the target amount of the Annual Bonus shall be 60% of the Annual Base Salary (the “Target Bonus Amount”) (with it being understood that the Executive’s Target Bonus Amount for 2020 shall be $270,000, unless the Annual Base Salary is increased by the Committee subsequent to the Effective Date) and the maximum amount of the Annual Bonus shall be 120% of the Annual Base Salary, with the actual amount of the Annual Bonus, if any, to be determined by the Board or the Committee in accordance with the Bonus Plan. Except as otherwise provided in Section 5 of this Agreement, for any year during which the Executive is employed by the Company and Holdco for less than the entire calendar year (including a year in which the Executive’s employment is terminated), the Annual Bonus, if any, shall be determined based on actual performance, pro-rated for the period during which the Executive was employed during such calendar year (based on the number of days in such calendar year the Executive was so employed divided by 365), as determined in good faith by the Board or the Committee.

(c)Other Benefits; Car Allowance. During the Employment Period: (i) the Executive shall be eligible to participate in all incentive, savings and retirement plans, practices, policies and programs of the Company and shall be entitled to paid vacation, to the same extent and on the same terms and conditions as peer executives; and (ii) the Executive and/or the Executive’s family, as the case may be, shall be eligible for participation in, and shall receive all benefits under, all other welfare benefit plans, practices, policies and programs provided by the Company (including, to the extent provided, without limitation, medical, prescription, dental, disability, employee life insurance, group life insurance, accidental death and travel accident insurance plans and programs) to the same extent and on the same terms and conditions as peer executives. The term “peer executives” means the Executive Chairman, Chief Executive Officer and Senior Vice Presidents of the Company, if such positions exist, and if such positions do not exist, the definition of the term “peer executives” shall be determined by the Board or the Committee in good faith. During the Employment Period, the Company will pay the Executive a monthly car allowance equal to $600, which will be paid not later than thirty (30) days after the end of the month to which it relates.

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(d)Incentive Equity Grants. The Executive is eligible to receive incentive equity grants under Holdco’s equity compensation program for senior executives, subject to the terms of such program as in effect from time to time and with any grants under such program in the discretion of the Board or the Committee.

(e)Expenses. During the Employment Period, the Executive shall be entitled to receive reimbursement for all reasonable travel and other expenses incurred by the Executive in carrying out the Executive’s duties under this Agreement; provided that the Executive complies with the policies, practices and procedures of the Company for submission of expense reports, receipts, or similar documentation of such expenses.

(f)Indemnification. During and after the Employment Period, the Executive shall be entitled to all rights to indemnification available under the by-laws or certificate of incorporation of Holdco and the Company, or to which he may otherwise be entitled, through the Company, Holdco and/or any of their respective subsidiaries and affiliates, in accordance with their respective terms.

4.Termination of Employment.

(a)Death or Permanent Disability. The Executive’s employment shall terminate automatically upon the Executive’s death during the Employment Period. The Company or Holdco shall be entitled to terminate the Executive’s employment because of the Executive’s Permanent Disability during the Employment Period. “Permanent Disability” means that the Executive (i) is unable to perform his duties under this Agreement by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months; (ii) is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months receiving income replacement benefits for a period of not less than three months under an accident and health plan covering employees of the Company; or (iii) has been determined to be totally disabled by the Social Security Administration. A termination of the Executive’s employment by the Company or Holdco for Permanent Disability shall be communicated to the Executive by written notice and shall be effective on the 30th day after receipt of such notice by the Executive (the “Disability Effective Date”), unless the Executive returns to full-time performance of the Executive’s duties in accordance with the provisions of Section 2 before such 30th day. In the event of a dispute as to whether the Executive has suffered a Permanent Disability, the final determination shall be made by a licensed physician selected by the Board and acceptable to the Executive in the Executive’s reasonable judgment.

(b)Other than Death or Disability. The Company or Holdco may terminate the Executive’s employment at any time during the Employment Period with or without Cause upon notice to the Executive.

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(c)Good Reason. The Executive may terminate his employment at any time during the Employment Period for Good Reason, upon prior written notice to the Company setting forth in reasonable detail the nature of such Good Reason, as set forth below. For purposes of this Agreement, “Good Reason” is defined as any one or more of the following without the Executive’s consent: any attempt to relocate the Executive to a work location that is more than 100 miles from the Company’s offices in Elmsford, New York; any material diminution in the nature or scope of the Executive’s responsibilities or duties as defined under this Agreement (provided that a change in reporting relationships resulting from the direct or indirect control of the Company or Holdco (or a successor corporation) by another corporation or other person(s) shall not be deemed to constitute “Good Reason”); any material breach by the Company or any affiliate of the Company of any provision of this Agreement or any other written agreement with the Executive, which breach is not cured within twenty (20) days following written notice by the Executive to the Company; or any material failure of the Company to provide the Executive with at least the Annual Base Salary and/or any other compensation or benefits in accordance with the terms of Section 3 hereof, other than an inadvertent failure which is cured within ten (10) business days following written notice from the Executive specifying in reasonable detail the nature of such failure. Notwithstanding the foregoing, the appointment of an interim executive responsible for management of North American Consumer Products Division of the Company and of Holdco during and for any period of the Executive’s disability (which may potentially result in a Permanent Disability) will not be considered “Good Reason” (so long as the Executive continues to be compensated pursuant to the terms of this Agreement), until the occurrence of a Permanent Disability as defined in Section 4(a). The Executive’s employment will only be deemed to have been terminated for Good Reason if he gives written notice to the Company setting forth in reasonable detail the nature of such Good Reason, and terminates employment within sixty (60) days of the date of the later of the first occurrence and the Executive’s knowledge of the circumstances giving rise to Good Reason (to the extent the Company has not previously cured the circumstances giving rise to Good Reason).

(d)Change in Control. If there occurs a “Change in Control” (as hereinafter defined) during the Employment Period, and the Executive is not offered employment on substantially similar terms by Holdco or one of its continuing affiliates immediately thereafter, then, for all purposes of this Agreement, the Executive’s employment shall be deemed to have been terminated by the Company in a manner qualifying as a “Change in Control Termination” effective as of the date of such Change in Control; provided, however, that neither the Company nor Holdco shall have any obligation to the Executive under this Section 4 if the Executive is hired or offered employment on substantially similar terms by the purchaser of the stock or assets of Holdco or the Company, if the Executive’s employment hereunder is continued by Holdco or one of its continuing affiliates, or if the Executive does not actually terminate employment. Further, if the Company terminates the Executive’s employment without Cause or the Executive terminates his employment for Good Reason, in either case, within six (6) months prior to, or twenty-four (24) months following, the consummation of such Change in Control (the “Change in Control Protection Period”), the Executive shall be deemed to have had a Change in Control Termination.. As used herein, a “Change in Control” shall be deemed to have occurred solely upon the occurrence of any of the following events:

(i)a change in the ownership of Holdco within the meaning of Treasury Regulation Section 1.409A-3(i)(5)(v) as in effect on the date hereof; or

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(ii)a change in the ownership of all or substantially all of Holdco’s assets.

(e)Date of Termination. The “Date of Termination” means the date of the Executive’s death, the Disability Effective Date or the date on which the termination of the Executive’s employment by the Company and Holdco, or by the Executive, is effective, as the case may be, including by reason of the expiration of the Employment Period.

5.Obligations of the Company Upon Termination.

(a)By the Company Upon the Executive’s Death or Permanent Disability. If the Executive dies during the Employment Period or the Company or Holdco terminates the Executive’s employment due to the Executive’s Permanent Disability, the Company shall pay the Executive or his legal representative:

(i)the Executive’s accrued but unpaid cash compensation (the “Accrued Obligations”), which shall equal the sum of (1) any portion of the Executive’s Annual Base Salary through the Date of Termination that has not yet been paid; (2) any Annual Bonus that the Executive has earned for a prior full calendar year that has ended prior to the Date of Termination but which has not yet been calculated and paid; (3) any accrued but unpaid vacation pay and (4) any unreimbursed expenses incurred prior to the Date of Termination, including any then unreimbursed car allowance for each month or partial month of employment; and

(ii)a pro rata Annual Bonus for the year of death or termination, calculated and paid in accordance with Section 3(b).

The Accrued Obligations shall be paid in cash within thirty (30) days of the Date of Termination (other than the amount described in clause (2) of the definition of Accrued Obligations, which shall be paid in accordance with Section 3(b)). Notwithstanding anything to the contrary set forth herein, the Executive shall not be entitled to any payment pursuant to clause (ii) of this Section 5(a) unless the Executive (or the Executive’s beneficiary previously designated in writing to the Company or, if no such beneficiary has been so designated, the Executive’s estate, as applicable) shall have, at the written request of the Company or Holdco, executed a release of any and all legal claims substantially in the form attached hereto as Exhibit A (which form may be modified by the Company to the extent necessary to reflect execution by a person other than the Executive) (the “Release”) no later than twenty-one (21) days (or, if so instructed by the Company, forty-five (45) days) following the Date of Termination (which period shall be sixty-five (65) days following the Date of Termination in the case of a termination of the Executive’s employment due to his death) and shall not have revoked the Release in accordance with its terms. The Company shall provide the final Release promptly in connection with any termination of the Executive’s employment hereunder.

(b)By the Company for Cause. If the Executive’s employment is terminated by the Company or Holdco for “Cause” (as hereinafter defined), then the Executive shall be entitled to only the payment of the Accrued Obligations which shall be paid to the Executive in cash in a lump sum within thirty (30) days of the Date of Termination (other than the amount described in clause (2) of the definition of Accrued Obligations, which shall be paid in accordance with Section 3(b)) and neither the Company nor Holdco shall have any further obligation under this Agreement, except as expressly provided herein. For purposes of this Agreement, “Cause”

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shall mean (1) conviction of the Executive by a court of competent jurisdiction of a felony (excluding felonies under any state or local vehicle and traffic code); (2) any act of intentional fraud in connection with his duties under this Agreement; (3) any act of gross negligence or willful misconduct with respect to the Executive’s duties under this Agreement and (4) any act of willful disobedience in violation of specific reasonable directions of the Board or the CEO consistent with the Executive’s duties; provided, in the case of clause (3) or (4), that the Executive has not cured the circumstances giving rise to “Cause” within fifteen (15) days of the date the Company gives notice to the Executive of its intent to terminate his employment on such basis.

(c)By the Company for any reason other than Cause or by the Executive for Good Reason. If the Executive’s employment is terminated during the Employment Period (i) by the Company or Holdco other than for Cause, death or Permanent Disability or (ii) by the Executive for Good Reason, in each case, except if such termination is a Change in Control Termination, the Company shall pay to the Executive (A) the Accrued Obligations, paid in cash within thirty (30) days of the Date of Termination (other than the amount described in clause (2) of the definition of Accrued Obligations, which shall be paid in accordance with Section 3(b)); (B) a pro rata Annual Bonus for the year of termination, calculated and paid in accordance with Section 3(b); and (C) a severance payment (the “Severance Payment”), in an amount equal to the Executive’s then current Annual Base Salary. The Severance Payment shall be payable in cash in the form of salary continuation over the twelve (12) months following the Date of Termination, with the first payment(s) being payable in arrears on the date that is sixty (60) days following the Date of Termination. Notwithstanding anything to the contrary set forth herein, the Executive shall not be entitled to any payment pursuant to clauses (B) or (C) of this Section 5(c) unless the Executive shall have executed the Release not later than twenty-one (21) days (or, if so instructed by the Company, forty-five (45) days) following the Date of Termination and shall not have revoked the Release in accordance with its terms. The Company shall provide the final Release promptly in connection with any termination of the Executive’s employment hereunder.

(d)Change in Control Termination. Notwithstanding anything to the contrary set forth herein, in the event of a Change in Control Termination:

(i)the Company shall pay to the Executive the Accrued Obligations;

(ii)the Company shall pay to the Executive:

(A)an amount equal to two (2) times the sum of (1) Executive’s then current Annual Base Salary and (2) the target Annual Bonus,

(B)an amount equal to a pro rata Annual Bonus for the year of termination, calculated and paid in accordance with Section 3(b), and

(C)provided that the Executive timely elects to continue his coverage in the Company’s group health plan under the federal law known as “COBRA”, a monthly amount equal to that portion of the monthly health premiums for such coverage paid by the Company on behalf of the Executive prior to the date of the Change in Control Termination until the date that is twelve (12) months following the date of the Change in Control Termination (the “Health Continuation Benefits”); and

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(iii)any stock options, restricted stock, restricted stock units, performance stock units or similar awards granted on or after January 1, 2014 (or any awards or rights issued in exchange for such grants in connection with a Change in Control or otherwise) shall be treated as follows: (A) such awards or rights that vest solely based on the Executive’s continued service over time shall immediately become fully vested as of the date of the Change in Control Termination and (B) such awards or rights that vest upon the occurrence of specified performance metrics, shall be treated as earned and vest as follows: (1) if the full performance period has elapsed as of the date of the Change in Control Termination, such awards and rights shall be earned based on actual achievement of the applicable performance goals, as provided in the applicable award agreement and shall immediately become vested without pro-ration and (2) otherwise, such awards and rights shall be earned based on assumed achievement of the applicable performance goals at 100% of the performance target, as provided in the applicable award agreement, and shall immediately vest as to a prorated portion of each such award or right based on the number of days of the Executive’s actual employment or other service with the Company prior to the Change in Control Termination during the applicable full performance period; provided, that, if the Executive does not experience a Change in Control Termination prior to the end of the applicable original performance period, such awards and rights shall be earned based on assumed achievement of the applicable performance goals at 100% of the performance target, as provided in the applicable award agreement, and shall be eligible to vest as of the last day of the applicable original performance period without pro-ration, subject to the terms of the applicable award agreement. Any stock options, restricted stock, restricted stock units, performance stock units or similar awards granted on or after January 1, 2014 (or any awards or rights issued in exchange for such grants in connection with a Change in Control or otherwise) that do not vest after application of the preceding sentence shall be immediately forfeited without payment due thereon. For the avoidance of doubt, upon the occurrence of a Change in Control Termination, the vesting of any stock option granted prior to January 1, 2014 (or awards or rights issued in exchange therefor) shall be determined pursuant to the terms of the applicable award agreement.

Notwithstanding the foregoing, in the event that the Health Continuation Benefits would subject the Executive or the Company to any tax or penalty under the ACA or Section 105(h) of the Code (as defined below), or applicable subsequent regulations, guidance or successor statutes, the Executive and the Company agree to work together in good faith to restructure the Health Continuation Benefits in a manner that avoids such adverse consequences. All amounts payable hereunder (except the Annual Bonus which is payable in accordance with Section 3(b), the Accrued Obligations, which shall be calculated and paid in a lump sum in cash within thirty (30) days of the date of the Change in Control Termination and the Health Continuation Benefits, which shall be paid as described above in this Section 5(d)) shall be paid in cash in a lump sum on the date that is the later of sixty (60) days following the date of the Change in Control Termination or sixty (60) days following the consummation of the Change in Control (except that, if the Change in Control Termination occurs due to a qualifying termination within six (6) months prior to a Change in Control, such payment will be made over the twenty-four (24) months following the Date of Termination, with the first payment(s) being payable in arrears on the date that is sixty (60) days following the Date of Termination). Notwithstanding anything to the contrary set forth herein, the Executive shall not be entitled to any payment or benefit pursuant to clauses (ii) or (iii) of this Section 5(d) unless the Executive shall have, at the written request of the Company or Holdco, executed the Release no later than twenty-one (21) days (or, if so instructed by the Company, forty-five (45) days) following the date of the Change in Control Termination and shall not have revoked such release in accordance with its terms.

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(e)By the Executive other than for Good Reason. If during the Employment Period the Executive terminates his employment with the Company and Holdco other than for Good Reason, the Company shall pay the Accrued Obligations to the Executive in a lump sum in cash within thirty (30) days of the Date of Termination (other than the amount described in clause (2) of the definition of Accrued Obligations, which shall be paid in accordance with Section 3(b)) and neither the Company nor Holdco shall have any further obligation under this Agreement except as expressly provided herein.

(f)Expiration of the Term. Unless otherwise terminated pursuant to any of the foregoing clauses of this Section 5, the Executive’s employment hereunder will automatically terminate at the expiration of the Employment Period and the Company shall pay to the Executive the Accrued Obligations; provided, however, that if the Company allows the Executive’s employment to terminate due to an expiration of the Employment Period occurring during the Change in Control Protection Period, the Executive will be deemed to have had a Change in Control Termination and will be entitled to the payments and benefits described in Section 5(d) above and shall not otherwise receive payment under this Section 5(f). The Accrued Obligations shall be paid to the Executive in a lump sum in cash within thirty (30) days of the Date of Termination (other than the amount described in clause (2) of the definition of Accrued Obligations, which, for the avoidance of doubt, shall be the Annual Bonus for the calendar year in which the Employment Period expires and which shall be paid in accordance with Section 3(b)). Upon expiration of the Employment Period, no Severance Payment will be due and no further Restriction Period shall apply.

6.Section 409A. The parties intend for the compensation provided under this Agreement to comply with, or be exempt from, the provisions of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”) (together with the regulations thereunder, “Section 409A”). Notwithstanding the foregoing, in no event shall the Company, Holdco or any of their respective affiliates have any liability to the Executive or to any other person claiming rights under this Agreement relating to the failure or alleged failure of any payment or benefit under this Agreement to comply with, or be exempt from, the provisions of Section 409A.

(a)Definitions. For purposes of this Agreement, all references to “termination of employment” and similar or correlative phrases shall be construed to require a “separation from service” (as defined in Section 1.409A-1(h) of the Treasury regulations after giving effect to the presumptions contained therein), and the term “specified employee” means an individual determined by Holdco to be a specified employee under Treasury regulation Section 1.409A-1(i).

(b)Certain Delayed Payments. If any payment or benefit hereunder constituting “nonqualified deferred compensation” subject to Section 409A would be subject to subsection (a)(2)(B)(i) of Section 409A (relating to payments made to “specified employees” of publicly-traded companies upon separation from service), any such payment or benefit to which the Executive would otherwise be entitled during the six (6) month period following the Executive’s separation from service will instead be provided or paid without interest on the first business day following the expiration of such six (6) month period, or if earlier, the date of the Executive’s death.

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(c)Separate Payments. Each payment made under this Agreement shall be treated as a separate payment.

(d)Reimbursements. Notwithstanding anything to the contrary in this Agreement, any reimbursement that constitutes or could constitute nonqualified deferred compensation subject to Section 409A will be subject to the following additional requirements: (i) the expenses eligible for reimbursement will have been incurred during the term of this Agreement, (ii) the amount of expenses eligible for reimbursement during any calendar year will not affect the expenses eligible for reimbursement in any other taxable year; (iii) reimbursement will be made not later than December 31 of the calendar year following the calendar year in which the expense was incurred; and (iv) the right to reimbursement will not be subject to liquidation or exchange for any other benefit.

7.Full Settlement. The Company’s obligations to make the payments provided for in, and otherwise to perform its obligations under, this Agreement shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action that the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced, regardless of whether the Executive obtains other employment.

8.Confidential Information. The Executive shall hold in a fiduciary capacity for the benefit of the Company and Holdco all secret or confidential information, knowledge or data relating to the Company, Holdco or any of their affiliates and their respective businesses that the Executive obtains during the Executive’s employment by the Company and Holdco (whether before, during or after the Employment Period) and that is not public knowledge (other than as a result of the Executive’s violation of this Section 8) (“Confidential Information”). The Executive shall not communicate, divulge or disseminate Confidential Information at any time during or after the Executive’s employment with the Company and Holdco, except with the prior written consent of the Company or as otherwise required by law. For the avoidance of doubt, (a) nothing contained in this Agreement or any other agreement containing confidentiality provisions or other restrictive covenants in favor of any of Holdco, the Company or any affiliate of either of them, restricts or in any other way affects the Executive’s communicating with any governmental agency or entity, or communicating with any official or staff person of a governmental agency or entity, concerning matters relevant to the governmental agency or entity and (b) the Executive will not be held criminally or civilly liable under any federal or state trade secret law for disclosing a trade secret (i) in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney, solely for the purpose of reporting or investigating a suspected violation of law, or (ii) in a complaint or other document filed under seal in a lawsuit or other proceeding; provided that notwithstanding this immunity from liability, the Executive may be held liable if the Executive unlawfully accesses trade secrets by unauthorized means.

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9.Noncompetition; Nonsolicitation.

(a)Noncompetition. During the Employment Period, and following termination of the Executive’s employment with the Company, Holdco and any of their affiliates, during the “Restriction Period” (as hereinafter defined), the Executive shall not directly or indirectly participate in or permit his name directly or indirectly to be used by or become associated with (including as an advisor, representative, agent, promoter, independent contractor, provider of personal services or otherwise) any person, corporation, partnership, firm, association or other enterprise or entity (a “person”) that is, or intends to be, engaged in any business which is in competition with any business of the Company, Holdco or any of their respective subsidiaries or affiliates in any geographic area in which the Company, Holdco or any of their respective subsidiaries or affiliates operate, compete or are engaged in such business or at such time intend so to operate, compete or become engaged in such business (a “Competitor”) provided, however, that the foregoing will not prohibit the Executive from participating in or becoming associated with a person if (i) less than 10% of the consolidated gross revenues of such person, together with its affiliates, derive from activities or businesses that are in competition with any business of the Company or any of its subsidiaries or affiliates (a “Competitive Business”) and (ii) the Executive does not, directly or indirectly, participate in, become associated with, or otherwise have responsibilities that relate to the conduct or operations of, any Competitive Business that is conducted by such person or a division, group, or subsidiary or affiliate of such person. For purposes of this Agreement, the term “participate” includes any direct or indirect interest, whether as an officer, director, employee, partner, sole proprietor, trustee, beneficiary, agent, representative, independent contractor, consultant, advisor, provider of personal services, creditor, or owner (other than by ownership of less than five percent of the stock of a publicly-held corporation whose stock is traded on a national securities exchange or in an over-the-counter market).

(b)Nonsolicitation. During the Employment Period, and during the Restriction Period following termination of employment, the Executive shall not, directly or indirectly, encourage or solicit, or assist any other person or firm in encouraging or soliciting, any person or firm that during the three-year period preceding such termination of the Executive’s employment with the Company and Holdco (or, if such action occurs during the Employment Period, on the date such action was taken) is or was engaged in a business relationship with the Company or Holdco, any of their respective subsidiaries or affiliates to terminate its relationship with the Company or Holdco or any of their respective subsidiaries or affiliates or, in the case of any such person, to engage in a business relationship with a Competitor.

(c)No Hire. During the Employment Period, and during the Restriction Period following termination of employment, the Executive will not, except with the prior written consent of the Company, directly or indirectly, induce any employee of the Company, Holdco or any of their respective subsidiaries or affiliates to terminate employment with such entity, and will not, directly or indirectly, either individually or as owner, agent, employee, consultant or otherwise, employ, offer employment or cause employment to be offered to any person (including employment as an independent contractor) who is or was employed by the Company, Holdco or any of their respective subsidiaries or affiliates unless such person shall have ceased to be employed by such entity for a period of at least twelve months. For purposes of this Section 9(c), “employment” shall be deemed to include rendering services as an independent contractor and “employees” shall be deemed to include independent contractors.

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(d)Restriction Period. The term “Restriction Period” as used herein, shall mean the one-year period (except, in the case of a Change in Control Termination (or a deemed Change in Control Termination under Section 5(f)), in which case such period shall be the two- year period) immediately following the Date of Termination (other than a termination at the expiration of the Employment Period).

(e)Return of Confidential Information. Promptly following the Executive’s termination of employment, including due to expiration of the Employment Period, the Executive shall return to the Company all property of the Company, Holdco and their respective subsidiaries and affiliates, and all copies thereof, in the Executive’s possession or under his control, including, without limitation, all Confidential Information in whatever media such Confidential Information is maintained.

(f)Injunctive Relief. The Executive acknowledges and agrees that the Restriction Period and the covenants and obligations of the Executive in Section 8 and this Section 9 with respect to noncompetition, nonsolicitation and confidentiality and with respect to the property of the Company and its subsidiaries and affiliates, and the territories covered thereby, are fair and reasonable and the result of negotiation. The Executive further acknowledges and agrees that the covenants and obligations of the Executive in Section 8 and this Section 9 with respect to noncompetition, nonsolicitation and confidentiality and with respect to the property of the Company, Holdco and their respective subsidiaries and affiliates, and the territories covered thereby, relate to special, unique and extraordinary matters and that a violation of any of the terms of such covenants and obligations will cause the Company, Holdco and their respective subsidiaries and affiliates irreparable injury for which adequate remedies are not available at law. Therefore, the Executive agrees that the Company and Holdco shall be entitled to an injunction, restraining order or such other equitable relief as a court of competent jurisdiction may deem necessary or appropriate to restrain the Executive from committing any violation of such covenants and obligations. These injunctive remedies are cumulative and are in addition to any other rights and remedies the Company and Holdco may have at law or in equity. If, at the time of enforcement of Section 8 and/or this Section 9, a court holds that any of the restrictions stated herein are unreasonable under circumstances then existing, the parties hereto agree that the maximum period, scope, and/or geographical area legally permissible under such circumstances will be substituted for the period, scope and/or area stated herein.

10.Successors.

(a)This Agreement is personal to the Executive and shall not be assignable by the Executive. This Agreement shall inure to the benefit of and be enforceable by the Executive’s legal representatives and heirs and successors.

(b)This Agreement shall inure to the benefit of and be binding upon Holdco, the Company and their respective successors and assigns.

11.Section 280G. In the event that the Company undergoes a change in control at a time when it (or any affiliate of the Company, including Holdco, that would be treated, together with the Company, as a single corporation under Section 280G of the Code and the regulations thereunder) has stock that is readily tradeable on an established securities market (within the

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meaning of Section 280G of the Code and the regulations thereunder), if all, or any portion, of the payments provided under this Agreement, either alone or together with other payments or benefits which the Executive receives or is entitled to receive from the Company or an affiliate, could constitute an “excess parachute payment” within the meaning of Section 280G of the Code, then the Executive shall be entitled to receive (i) an amount limited so that no portion thereof shall fail to be tax deductible under Section 280G of the Code (the “Limited Amount”), or (ii) if the amount otherwise payable hereunder, together with the other payments or benefits the Executive is so entitled to receive, (without regard to clause (i)) reduced by the excise tax imposed by Section 4999 of the Code and all other applicable federal, state and local taxes (with income taxes all computed at the highest applicable marginal rate) is greater than the Limited Amount reduced by all taxes applicable thereto (with income taxes all computed at the highest marginal rate), the amount otherwise payable hereunder. If it is determined that the Limited Amount will maximize the Executive’s after-tax proceeds, payments and benefits shall be reduced to equal the Limited Amount in the following order: (i) first, by reducing cash severance payments, (ii) second, by reducing other payments and benefits to which Q&A 24(c) of Section 1.280G-1 of the Treasury Regulations does not apply, and (iii) finally, by reducing all remaining payments and benefits, with all such reductions done on a pro rata basis. All determinations made pursuant this Section 11 will be made at the Company’s expense by the independent public accounting firm most recently serving as the Company’s outside auditors or such other accounting or benefits consulting group or firm as the Company may designate.

12.Miscellaneous.

(a)This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified except by a written agreement executed by the parties hereto or their respective heirs, successors and legal representatives.

(b)All notices and other communications under this Agreement shall be in writing and shall be given by hand delivery to the other party or by overnight courier or by registered or certified mail, return receipt requested, postage prepaid, or by facsimile (with receipt confirmation), addressed as follows:

If to the Executive:

Michael Harrison

At his most recent address

shown in the Company’s records

If to the Company:

Party City Holdings Inc.

80 Grasslands Road

Elmsford, NY 10523

Attention: Corporate Secretary

Fax no.: (914) 345-2056

or to such other address as either party furnishes to the other in writing in accordance with this Section 12(b). Notices and communications shall be effective when actually received by the addressee.

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(c)The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement.

(d)Notwithstanding any other provision of this Agreement, the Company may withhold from amounts payable under this Agreement all federal, state, local and foreign taxes that are required to be withheld by applicable laws or regulations. In addition, the obligations of the Company under this Agreement shall be conditional on compliance with this Section 12(d), and the Company shall, to the extent permitted by law, have the right to deduct any such taxes from any payment otherwise due to the Executive.

(e)Any party’s failure to insist upon strict compliance with any provision of, or to assert any right under, this Agreement shall not be deemed to be a waiver of such provision or right or of any other provision of or right under this Agreement.

(f)The Executive acknowledges that this Agreement, together with the Exhibit hereto and the other agreements referred to herein except as modified herein or therein, supersedes, as of the Effective Date, all other agreements and understandings, both written and oral, between the Executive, on one hand, and the Company and Holdco, on the other, with respect to the subject matter hereof, including, without limitation, the Prior Employment Agreement or any amendments or restatements thereof. Upon the effectiveness of this Agreement, the Prior Employment Agreement and any amendments or restatements thereof shall terminate and be of no further force and effect.

(g)This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which shall together constitute one and the same instrument.

(h)Provisions of this Agreement shall survive any termination of employment if so provided herein or if necessary or desirable to accomplish the purposes of other surviving provisions, including, without limitation, the obligations of the Executive under Sections 8 and 9 hereof.

[Remainder of Page Intentionally Left Blank]

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IN WITNESS WHEREOF, the Executive has hereunto set the Executive’s hand and, pursuant to the authorization of their respective boards of directors, the Company and Holdco have each caused this Agreement to be executed in its name on its behalf, all as of the day and year first above written.

PARTY CITY HOLDINGS INC.

By:	/s/ Brad Weston
	Name: Brad Weston
	Title: Chief Executive Officer

PARTY CITY HOLDCO INC.

By:	/s/ Brad Weston
	Name: Brad Weston
	Title: Chief Executive Officer

/s/ Michael Harrison
MICHAEL P. HARRISON

[Signature Page to Employment Agreement]

Exhibit A

FORM OF RELEASE OF CLAIMS

This Release of Claims is provided by me, Michael P. Harrison (or by my designated beneficiary or estate, in the event of my death during my employment), pursuant to the Amended and Restated Employment Agreement between me, Party City Holdings, Inc. (the “Company”) and Party City Holdco Inc. (“Holdco”) dated as of April 5, 2020 (the “Employment Agreement”).

This Release of Claims is given in consideration of the severance benefits to be provided to me (or, in the event of my death during my employment, to my designated beneficiary) in connection with the termination of my employment under Section 5 of the Employment Agreement (the “Separation Payments”), which are conditioned on my signing this Release of Claims and to which I am not otherwise entitled, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged. On my own behalf and that of my heirs, executors, administrators, beneficiaries, representatives and assigns, and all others connected with or claiming through me, I hereby release and forever discharge the Company from any and all causes of action, rights or claims of any type or description, known or unknown, which I have had in the past, now have or might have, through the date of my signing of this Release of Claims. This includes, without limitation, any and all causes of action, rights or claims in any way resulting from, arising out of or connected with my employment by the Company or the termination of that employment or pursuant to any federal, state or local law, regulation or other requirement, including without limitation Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act, the Age Discrimination in Employment Act, the fair employment practices statutes of the state or states in which I have provided services to the Company or any other federal, state, local or foreign law, all as amended, any contracts of employment, any tort claims, or any agreements, plans or policies.

For purposes of this Release of Claims, the word “Company” always includes the Company, Holdco the subsidiaries and affiliates of the Company or Holdco and all of their respective past, present and future officers, directors, trustees, shareholders, employees, employee benefit plans and any of the trustees or administrators thereof, agents, general and limited partners, members, managers, investors, joint venturers, representatives, predecessors, successors and assigns, and all others connected with any of them, both individually and in their official capacities.

Nothing in this Release of Claims shall be construed to prohibit me from filing a charge with or participating in any investigation or proceeding conducted by the federal Equal Employment Opportunity Commission or a comparable state or local agency, except that I hereby agree to waive my right to recover monetary damages or other individual relief in any charge, complaint or lawsuit filed by me or by anyone else on my behalf.

Nothing in this Release of Claims is intended to or does waive or release any rights I may have with respect to (i) coverage under liability insurance or indemnification rights provided or maintained by the Company during, or applicable to, my employment with the Company, or under any other obligation or policy of insurance maintained by the Company in accordance with their respective terms; (ii) any other defense or indemnity right under applicable law; (iii) the enforcement of the right to any payment or benefits due upon the termination of my employment in accordance with the express terms of the Employment Agreement or (iv) any right or claim that cannot, by law, be waived or released through this Release of Claims.

Also excluded from the scope of this Release of Claims is any right to benefits that were vested or eligible for continuation under the Company’s employee benefit plans on the date on which my employment with the Company terminated, in accordance with the terms of such plans.

In signing this Release of Claims, I give the Company assurance that I have returned to the Company any and all documents, materials and information related to the business, whether present or otherwise, of the Company and all keys and other property of the Company that were in my possession or control, all as required by and consistent with Section 9(e) of the Employment Agreement. I agree that I will not, for any purpose, attempt to access or use any computer or computer network or system of the Company, including without limitation their electronic mail systems. I further acknowledge that I have disclosed to the Company all passwords necessary or desirable to enable the Company to access all information which I have password-protected on its computer network or system.

In signing this Release of Claims, I agree that I have been paid in full all compensation due to me, whether for services rendered by me to the Company or otherwise, through the date on which my employment with the Company terminated and that, exclusive only of the Separation Payments and the Accrued Obligations, as defined in the Employment Agreement, no further compensation of any kind shall be due to me by the Company, whether arising under the Employment Agreement or otherwise, in connection with my employment or the termination thereof. I also agree that except for any right I and my eligible dependents may have to continue participation in the Company’s health and dental plans under the federal law commonly known as COBRA, my right to participate in any employee benefit plan of the Company will be determined in accordance with the terms of such plan.

I acknowledge that my eligibility for the Separation Payments is not only contingent on my signing and returning this Release of Claims to the Company in a timely manner and not revoking it thereafter, but also is subject to my compliance with the covenants contained in the Employment Agreement.

In signing this Release of Claims, acknowledge that I have not relied on any promises or representations, express or implied, that are not set forth expressly in this Release of Claims. I further acknowledge that I am waiving and releasing any rights I may have under the Age Discrimination in Employment Act of 1967, as amended (“ADEA”), and that this waiver and release is knowing and voluntary and is being done with a full understanding of its terms. I agree that the consideration given for this wavier and release is in addition to anything of value to which I was already entitled. I further acknowledge that I have been advised by this writing as required by the ADEA that:

1.I have the right to and am advised by the Company to consult with an attorney prior to executing this Release of Claims; and I acknowledge that I have had sufficient time to consider this Release of Claims and to consult with an attorney, if I wished to do so, or to consult with any other person of my choosing before signing;

2.I may not sign this Release of Claims prior to the termination of my employment, but that I may consider the terms of this Release of Claims for up to twenty-one (21) days (or, if the Company so instructs, forty-five (45) days) from the later of the date my employment with the Company terminates or the date I receive this Release of Claims;

3.I have seven (7) days following my execution of this Release of Claims to revoke this Release of Claims; and

4.This Release of Claims shall not be effective until the revocation period has expired.

Intending to be legally bound, I have signed this Release of Claims under seal as of the date written below.

Signature:			Date signed:

Party City Holdings Inc.


Name:
Title:

Party City Holdco Inc.


Name:
Title:

Exhibit 10.2

April 25, 2020

To: Joseph Zepf, General Counsel, Party City Holdco Inc.

Re: Temporary Reduction in Base Salary

Dear Mr. Zepf:

From and after April 26, 2020, I hereby agree that my annual base salary payable to me by Party City Holdco Inc. and its subsidiaries (together, the “Company”) will be reduced as described herein (the amount of such reduction, the “Reduction Amount”). This reduction will be effected by reducing the gross amount of each payment of my base salary by [__________] percent ([__]%), until the earlier of such time as (i) the Company decides to revert to the annual base salary I received immediately prior to April 26, 2020; (ii) the Company reopens at least seventy-five percent (75%) of its corporately operated brick and mortar retail store chain for regular operations (as compared to those stores which were open and operating as of February 1, 2020); or (iii) July 20, 2020. I hereby waive all rights that I would otherwise have with respect to the Reduction Amount.

I understand that this waiver, once executed, cannot be revoked and that this waiver will be binding upon my heirs, executors and legal representatives. If for whatever reason I receive any portion of the Reduction Amount, I agree that I will promptly repay such portion to the Company. I also understand and agree that I have no right to require that the Reduction Amount be used for any particular purpose.

This waiver will supersede any plan, program, policy, agreement or arrangement that would otherwise provide for the payment of all or any portion of the Reduction Amount. I further understand and agree that I will not become entitled to any severance or other termination payments or benefits, and that I will not at any time have “Good Reason” (or any similar right to terminate employment with rights to severance or any other termination payments or benefits) under any employment agreement, offer letter, severance agreement, equity award agreement or other agreement or arrangement with, or plan, program, or policy of, the Company, in any such case, solely by virtue of executing this waiver or being provided with the opportunity to execute this waiver. The Reduction Amount will not be treated as reducing my annual base salary or any other element of compensation for purposes of calculating (i) my target annual bonus for 2020, (ii) my target Long Term Incentive Plan (LTIP) grant for 2020, or (iii) my potential severance or other similar termination payments or benefits under any employment agreement, offer letter, severance agreement, equity award agreement or other agreement or arrangement with, or any plan, program or policy of, the Company. All subsidiaries of Party City Holdco Inc. are intended beneficiaries of this waiver. This waiver will be governed by, construed and enforced in accordance with the laws of the State of Delaware without reference to the principles of conflicts of law. This waiver may not be amended or otherwise modified without the prior written consent of the Company and me. This waiver may be signed in any number of counterparts, each of which will be treated as an

-1-

original, with the same effect as if the signatures thereto and hereto were upon the same instrument. The execution of this waiver may be by actual signature, by electronic signature (e.g., DocuSign) or by e-mail as a portable document format (.pdf) file or image file attachment.



Name:

Accepted and agreed:

Party City holdco inc.

By:
	Name: Joseph J. Zepf
	Title: Executive Vice-President,
	General Counsel & Secretary

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Exhibit 10.5

Execution Version

FIRST AMENDMENT TO TRANSACTION SUPPORT AGREEMENT

This FIRST AMENDMENT TO TRANSACTION SUPPORT AGREEMENT, dated as of June 9, 2020 (the “First TSA Amendment”), is entered into among the Credit Parties and certain Consenting Noteholders party hereto (such Consenting Noteholders party hereto constituting the Required Consenting Noteholders) (collectively, the “Parties”), and amends that certain Transaction Support Agreement, dated as of May 28, 2020 among the parties thereto (the “Transaction Support Agreement”).¹

RECITALS

WHEREAS, prior to the date hereof, the Parties have negotiated the terms of a restructuring of the Senior Notes and the raising of additional debt capital in good faith and at arm’s length, each as set forth and as specified in the Transaction Support Agreement, the Transaction Term Sheet and the Definitive Documents (collectively, the “Transaction”).

WHEREAS, on May 28, 2020, the Parties, among others, entered into the Transaction Support Agreement, and the Agreement Effective Date occurred.

NOW, THEREFORE, in consideration of the covenants and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, each Party, intending to be legally bound, hereby agrees as follows:

AGREEMENT

Amendments

. The Transaction Term Sheet is hereby amended as follows:

(a)The section of the Transaction Term Sheet entitled “Rights Offering” is hereby amended to delete the stricken text (indicated textually in the same manner as the following example: ~~stricken text~~) and to add the bolded-underlined text (indicated textually in the same manner as the following example: bolded-underlined text) in the following provision:

Simultaneously with the launch of the Exchange Offer, Party City will initiate a “rights offering” (the “Rights Offering”) whereby Eligible Holders who validly tender (and do not validly withdraw) their Existing Notes for exchange in the Exchange Offer will be provided the right (a “Right”) to purchase a pro rata portion of New Money First Lien Issuer Notes to be issued by the Issuer on the Settlement Date, such New Money First Lien Issuer Notes issued pursuant to the Rights Offering representing an aggregate principal amount of $~~50.0~~41.5 million and with the terms set forth in Exhibit A hereto. If more than $~~50.0~~41.5 million of Rights are subscribed in the Rights Offering, subscription amounts will be reduced on a pro rata basis.

[The remaining portion of the section of the Transaction Term Sheet entitled
“Rights Offering” is intentionally omitted as unchanged pursuant to this First TSA Amendment.]

(b)The section of the Transaction Term Sheet entitled “New Money First Lien Issuer Notes Financing; Backstop and Private Placement Agreement; Private Placement Commitment Agreement” is hereby amended to delete the stricken text (indicated textually in the same manner as the following example: ~~stricken text~~) and to add the bolded-underlined text

¹	Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Transaction Support Agreement.

(indicated textually in the same manner as the following example: bolded-underlined text) in the following provisions:

Consenting Noteholders that wish to participate in the Rights Offering and purchase additional New Money First Lien Issuer Notes over and above the amount they may purchase in the Rights Offering (such parties identified on Schedule I hereto or in the Backstop Agreement and Private Placement Agreement (as defined below), as applicable, the “Backstop Parties”) will agree in the Transaction Support Agreement to, and will enter into a backstop and private placement agreement with Party City, the Issuer and their applicable subsidiaries prior to the Commencement Date (the “Backstop and Private Placement Agreement”), purchase $41.5 million of New Money First Lien Issuer Notes. Party City, the Issuer and the Consenting Noteholders shall work together in good faith to identify and sign up additional Backstop Parties to increase such commitment to $50.0 million of New Money First Lien Issuer Notes prior to the Commencement Date. If so increased, tThe Backstop and Private Placement Agreement will include a $~~50.0~~41.5 million commitment by the Backstop Parties to purchase the amount of New Money First Lien Issuer Notes which may be issued in the Rights Offering, representing the aggregate amount the Backstop Parties may purchase in the Rights Offering plus an additional amount of New Money First Lien Issuer Notes which are otherwise available to be purchased in the Rights Offering but for which applicable Rights have not been exercised by other Eligible Holders.

Additionally, certain parties that do not own Existing Notes and that wish to purchase New Money First Lien Issuer Notes directly from the Issuer (such parties identified on Schedule II hereto or in the Backstop ~~Agreement~~ and Private Placement Agreement, as applicable, the “Private Placement Parties”) will also enter into the Backstop and Private Placement Agreement. The Backstop and Private Placement Agreement will include a commitment by such Private Placement Parties to purchase $~~40.0~~58.5 million of New Money First Lien Issuer Notes in a private transaction exempt from the registration requirements of the Securities Act (the “Private Placement”). Prior to entering into the Backstop and Private Placement Agreement, the Private Placement Parties will enter into a private placement commitment agreement with Party City, the Issuer and their applicable subsidiaries ~~concurrently with or prior to the execution of the Transaction Support Agreement~~ (the “Private Placement Commitment Agreement”) with respect to the Private Placement. The Private Placement Commitment Agreement will be superseded by ~~(but will not be inconsistent with) the Backstop and Private Placement Agreement, and the Private Placement Commitment Agreement~~ and will cease to be of any effect upon the execution of the Backstop and Private Placement Agreement. Party City, the Issuer, the Consenting Noteholders and the Private Placement Parties shall work together in good faith to identify and sign up additional Private Placement Parties to increase such commitment to $50.0 million of New Money First Lien Issuer Notes prior to the Commencement Date.

The respective commitments to purchase New Money First Lien Issuer Notes in the Backstop and Private Placement Agreement, ~~in each case assuming an increase to $50.0 million~~ (to which, for the avoidance of doubt, shall be $100.0 million in the aggregate), are collectively referred to as the “Commitments.” The purchase of $100.0 million of New Money First Lien Issuer Notes (i) by Eligible Holders pursuant to the Rights Offering and by the Backstop Parties of any unsubscribed amounts of the Rights Offering and (ii) by the Private Placement Parties in the Private Placement is together referred to herein as the “New Money First Lien Issuer Notes Financing.”

As consideration for entering into the Backstop and Private Placement Agreement and providing their respective Commitments, Party City will pay to each of the Backstop Parties (x) its pro rata portion of an aggregate premium of $5.0275 million in the form of New Money First Lien Issuer Notes plus (y) its pro rata portion of an aggregate premium of $5.0 million in the form of First Lien Party City Exchange Notes.

As consideration for entering into the Backstop and Private Placement Agreement (and, initially, the Private Placement Commitment Agreement~~, if applicable~~) and providing their respective Commitments, Party City will pay to each of the Private Placement Parties ~~its pro rata~~ an agreed portion of an aggregate premium of $~~5.0~~4.725 million in the form of New Money First Lien Issuer Notes (the “Private Placement Fee”). Any additional consideration beyond the Private Placement Fee provided to the Private Placement Parties shall also be offered to the Backstop Parties.

(c)Schedule II to the Transaction Term Sheet entitled “Private Placement Parties” is hereby amended to delete the stricken text (indicated textually in the same manner as the following example: ~~stricken text~~) and to add the bolded-underlined text (indicated textually in the same manner as the following example: bolded-underlined text):

SCHEDULE II

Private Placement Parties


Name	Principal Amount of New Money First Lien Issuer Notes

Effectiveness of this First TSA Amendment

. Pursuant to Section 17(a) of the Transaction Support Agreement, this First TSA Amendment shall be effective upon the date counsel to the Parties have received signature pages hereto signed by the Credit Parties and the Required Consenting Noteholders. If the Company attaches a copy of this First TSA Amendment to (i) a Form 8-K or any periodic report required or permitted to be filed by the Company under the Exchange Act with the SEC or (ii) a press release that results in prompt public dissemination of such information, the Company will redact any reference to a specific Consenting Noteholder or its holdings information, including the signature pages hereto.

Section 3.Effect of this First TSA Amendment on the Transaction Support Agreement. Except as specifically amended or waived hereby, the terms and provisions of the Transaction Support Agreement are in all other respects ratified and confirmed and remain in full force and effect without modification or limitation. No reference to this First TSA Amendment need be made in any notice, writing or other communication relating to the Transaction Support Agreement, and any such reference to the Transaction Support Agreement shall be deemed a reference thereto as amended by this First TSA Amendment. This First TSA Amendment shall be limited precisely as written and, except as expressly provided herein, shall not be deemed or construed (i) to be a consent granted pursuant to, or a waiver (except for the specific waivers set forth above), modification or forbearance of, any term or condition of the Transaction Support Agreement, any of the instruments or agreements referred to therein or a waiver of any breach under the Transaction Support Agreement, or (ii) to prejudice any right or remedy which the Consenting Noteholders or any of the Credit Parties may now have or have in the future under or in connection with the Transaction Support Agreement, or any of the instruments or agreements referred to therein, as applicable.

Section 4.Governing Law. Section 21 of the transaction support agreement shall apply MUTATIS MUTANDIS to this first tsa amendment in full force and effect.

Section 5.Counterparts; Electronic Execution. This First TSA Amendment may be executed in one or more counterparts, each of which, when so executed, shall constitute one and the same instrument, and the counterparts may be delivered by facsimile transmission or by electronic mail in portable document format (.pdf).

Section 6.Reference to the Transaction Support Agreement. All references to the “Transaction Support Agreement”, “hereunder”, “hereof” or words of like import in the Transaction Support Agreement shall mean and be a reference to the Transaction Support Agreement as modified hereby and as may in the future be amended, restated, supplemented or modified from time to time.

Section 7.Breach of this First TSA Amendment. This First TSA Amendment shall be part of the Transaction Support Agreement and a breach of any representation, warranty or covenant herein shall constitute a breach under the Transaction Support Agreement.

IN WITNESS WHEREOF, this First Amendment to the Transaction Support Agreement has been duly executed as of the date first written above.

PARTY CITY HOLDCO INC.

PARTY CITY HOLDINGS INC.

PARTY CITY CORPORATION

AMSCAN INC.

ANAGRAM INTERNATIONAL INC.

ANAGRAM INTERNATIONAL HOLDINGS, INC.

PARTY HORIZON INC.

TRISAR, INC.

PC INTERMEDIATE HOLDINGS INC.

By: _/s/ Todd Vogensen___________________
Name: Todd Vogensen
Title: Chief Financial Officer

AM-SOURCE, LLC

AMSCAN NM LAND, LLC

AMSCAN PURPLE SAGE, LLC

ANAGRAM EDEN PRAIRIE PROPERTY HOLDINGS LLC

By: _/s/ Todd Vogensen___________________
Name: Todd Vogensen
Title: Authorized Officer

[Signature Page to First Amendment to the Transaction Support Agreement]

IN WITNESS WHEREOF, this First Amendment to the Transaction Support Agreement has been duly executed as of the date first written above.

[Name of Consenting Noteholder]

By: ______________________________________
Name:
Title:

Holdings: $__________________ of 2023 Notes

Holdings: $__________________ of 2026 Notes

Holdings: $_______________ of Senior Credit Facilities Claims

Holdings: _______________ shares of HoldCo stock

[Signature Page to First Amendment to the Transaction Support Agreement]

Exhibit 10.6

Party City Holdco Inc.

Amended and Restated 2012 Omnibus Equity Incentive Plan

NONQUALIFIED STOCK OPTION AWARD AGREEMENT

THIS AGREEMENT (this “Award Agreement”), is made effective as of April 1, 2020 (the “Date of Grant”), by and between Party City Holdco Inc., a Delaware corporation (the “Company”), and James M. Harrison (the “Participant”). Capitalized terms not otherwise defined herein shall have the meanings set forth in the Party City Holdco Inc. Amended and Restated 2012 Omnibus Equity Incentive Plan (as amended from time to time, the “Plan”).

R E C I T A L S:

WHEREAS, the Committee has determined that it would be in the best interests of the Company and its stockholders to grant the option provided for herein to the Participant pursuant to the Plan and the terms set forth herein.

NOW THEREFORE, in consideration of the mutual covenants hereinafter set forth, the parties agree as follows:

Grant of the Option. The Company hereby grants to the Participant the right and option to purchase, on the terms and conditions set forth in the Plan and this Award Agreement, 200,000 Shares (the “Option”), subject to adjustment as set forth in the Plan. The Option is intended to be a Nonqualified Stock Option. The Option shall be subject to the vesting conditions described in Section 3 below. At any time, the portion of the Option that has become vested and exercisable is hereinafter referred to as the “Vested Portion” and any portion of the Option that is not a Vested Portion is hereinafter referred to as the “Unvested Portion”.

Option Price. The purchase price of all of the Shares subject to the Option shall be $3.00 per Share (the “Option Price”), subject to adjustment as set forth in the Plan.

Vesting of the Option. One-half (1/2) of the Option shall vest on December 31, 2020 and the remaining one-half (1/2) of the Award shall vest on December 31, 2021 (each such date, a “Time-Vesting Date”), subject, in each case, to the Participant’s continued employment with the Company or Party City Holdings Inc. (“Service”) (or deemed Service as described in Section 4(a) below) on the applicable Time-Vesting Date.

Forfeiture; Expiration.

Termination of Employment. Upon the termination of the Participant’s Service for any reason at any time, any Unvested Portion of the Option will be forfeited automatically without consideration; provided that in the event the Participant’s Service is terminated by the Company or Party City Holdings Inc. other than for Cause, death or Permanent Disability, the Participant will, subject to the otherwise applicable terms of the Option, be deemed to remain in Service through the time of any Time-Vesting Date that follows such termination. Notwithstanding anything herein or any other agreement to the contrary, in the event the Participant’s Service is terminated for Cause or the Participant resigns at a time when the Participant’s acts or omissions constituted grounds to terminate the Participant’s Service for Cause without regard to any applicable cure rights, the Vested Portion of the Option shall also be forfeited without consideration.

Breach of Restrictive Covenants. Any outstanding portion of the Option, including the Vested Portion, shall be forfeited without consideration if the Participant breaches any restrictive covenant relating to non-competition, non-solicitation and/or non-disparagement and/or other similar restrictive covenants in favor of the Company or any of its Subsidiaries.

Expiration of Option Term. To the extent not earlier terminated or forfeited, any unexercised portion of the Option shall expire upon the tenth (10th) anniversary of the Date of Grant.

Period of Exercise. Subject to the provisions of the Plan and this Award Agreement, the Participant may exercise all or any part of the Vested Portion at any time prior to the earliest to occur of:

the tenth (10th) anniversary of the Date of Grant;

the date that is sixty (60) days following termination of the Participant’s Service for any reason other than death, Permanent Disability or Cause; and

the date that is one (1) year following termination of the Participant’s Service due to death or Permanent Disability.

Exercise Procedures.

Notice of Exercise. Subject to Section 5 hereof, the Vested Portion may be exercised by delivering to the Company at its principal office written notice of intent to so exercise in the form attached hereto as Exhibit A (such notice, a “Notice of Exercise”) or by such other means as is permitted by the Committee in its sole discretion. Such Notice of Exercise or such exercise by such other means shall be accompanied by payment in full of the aggregate Option Price for the Shares to be acquired upon exercise. In the event the Option is being exercised by the Participant’s representative, the Notice of Exercise or such exercise by such other means shall be accompanied by proof (satisfactory to the Committee) of the representative’s right to exercise the Option. The aggregate Option Price for the Shares to be exercised may be paid in cash or its equivalent (e.g., by cashiers check) or by such other means as are permitted by the Committee in its sole discretion.

Rights of Participant; Method of Exercise. Neither the Participant nor the Participant’s representative shall have any rights to dividends, voting rights or other rights of a stockholder with respect to Shares subject to the Option until (i) the Participant has given a Notice of Exercise of the Option (or has otherwise exercised the Option in a manner permitted by the Committee in its sole discretion) and paid in full for such Shares, (ii) such Shares have been issued, and (iii) if applicable, the Participant has satisfied any other conditions imposed by the Committee pursuant to the Plan. In the event of the Participant’s death, the Vested Portion shall be exercisable by the executor or administrator of the Participant’s estate, or the person or persons to whom the Participant’s rights under this Award Agreement shall pass by will or by the laws of descent and distribution, as the case may be. Any heir or legatee of the Participant shall take rights herein granted subject to the terms and conditions of this Award Agreement and the Plan.

No Right to Continued Service. The granting of the Option shall impose no obligation on the Company or any Subsidiary to continue the employment or other Service of the Participant and shall not lessen or affect any right that the Company or any Subsidiary may have to terminate the employment or other Service of the Participant.

Withholding. The Company shall have the power and the right to deduct or withhold automatically from any payment or Shares deliverable under this Award Agreement, or require the Participant to remit to the Company, the minimum statutory amount to satisfy federal, state, and local taxes, domestic or foreign, required by law or regulation to be withheld with respect to any taxable event arising as a result of this Award Agreement. The Participant authorizes the Company and its Subsidiaries to withhold such amounts due hereunder from any payments otherwise owed to the Participant, but nothing in this sentence shall be construed as relieving the Participant of any liability for satisfying his or her obligation under the preceding provisions of this Section 8.

Transferability. Unless otherwise determined by the Committee, the Participant shall not be permitted to transfer or assign the Option except in the event of death and in accordance with Section 14.6 of the Plan.

Adjustment of Option. Adjustments to the Option (or any Shares underlying the Option) shall be made in accordance with the terms of the Plan.

Option Subject to Plan. By entering into this Award Agreement the Participant agrees and acknowledges that the Participant has read a copy of the Plan, which has been made available to him. The Option is subject to the terms and conditions of the Plan. In the event of a conflict between any term hereof and a term of the Plan, the applicable term of the Plan shall govern and prevail.

Choice of Law. This Award Agreement, and all claims or causes of action or other matters that may be based upon, arise out of or relate to this Award Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, excluding any conflict or choice of law rule or principle that might otherwise refer construction or interpretation thereof to the substantive laws of another jurisdiction.

Consent to Jurisdiction. The Company and the Participant, by his or her execution hereof, (a) hereby irrevocably submit to the exclusive jurisdiction of the state and federal courts in the State of Delaware for the purposes of any claim or action arising out of or based upon this Award Agreement or relating to the subject matter hereof, (b) hereby waive, to the extent not prohibited by applicable law, and agree not to assert by way of motion, as a defense or otherwise, in any such claim or action, any claim that it, he or she is not subject personally to the jurisdiction of the above-named courts, that its, his or her property is exempt or immune from attachment or execution, that any such proceeding brought in the above-named court is improper or that this Award Agreement or the subject matter hereof may not be enforced in or by such court and (c) hereby agree not to commence any claim or action arising out of or based upon this Award Agreement or relating to the subject matter hereof other than before the above-named courts nor to make any motion or take any other action seeking or intending to cause the transfer or removal of any such claim or action to any court other than the above-named courts whether on the grounds of inconvenient forum or otherwise; provided, however, that the Company and the Participant may seek to enforce a judgment issued by the above-named courts in any proper jurisdiction. The Company and the Participant hereby consent to service of process in any such proceeding, and agree that service of process by registered or certified mail, return receipt requested, at its, his or her address specified pursuant to Section 16 is reasonably calculated to give actual notice.

WAIVER OF JURY TRIAL. TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW THAT CANNOT BE WAIVED, EACH PARTY HERETO HEREBY WAIVES AND COVENANTS THAT HE, SHE OR IT SHALL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT OR OTHERWISE) ANY RIGHT TO TRIAL BY JURY IN ANY FORUM IN RESPECT OF ANY ISSUE OR ACTION, CLAIM, CAUSE OF ACTION OR SUIT (IN CONTRACT, TORT OR OTHERWISE), INQUIRY, PROCEEDING OR INVESTIGATION ARISING OUT OF OR BASED UPON THIS AWARD AGREEMENT OR THE SUBJECT MATTER HEREOF OR IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE TRANSACTIONS CONTEMPLATED HEREBY, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING. EACH PARTY HERETO ACKNOWLEDGES THAT IT HAS BEEN INFORMED BY THE OTHER PARTY HERETO THAT THIS SECTION 14 CONSTITUTES A MATERIAL INDUCEMENT UPON WHICH THEY ARE RELYING AND SHALL RELY IN ENTERING INTO THIS AWARD AGREEMENT. ANY PARTY HERETO MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION 14 WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF EACH SUCH PARTY TO THE WAIVER OF ITS RIGHT TO TRIAL BY JURY.

Compliance with Securities Laws. Shares shall not be issued pursuant to this Award Agreement unless the issuance and delivery of such Shares comply with (or are exempt from) all applicable requirements of law, including, without limitation, the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder, state securities laws and regulations, and the regulations of any stock exchange or other securities market on which the Company’s securities may then be traded. The Company shall not be obligated to file any registration statement under any applicable securities laws to permit the purchase or issuance of any Shares, and accordingly any certificates for Shares may have an appropriate legend or statement of applicable restrictions endorsed thereon. If the Company deems it necessary to ensure that the issuance of Shares under this Award Agreement is not required to be registered under any applicable securities laws, the Participant shall deliver to the Company an agreement containing such representations, warranties and covenants as the Company may reasonably require.

Notices. Any notice or other communication provided for herein or given hereunder to a party hereto must be in writing, and shall be deemed to have been given (a) when personally delivered or delivered by facsimile transmission with confirmation of delivery, (b) one (1) business day after deposit with Federal Express or similar overnight courier service, or (c) three (3) business days after being mailed by first class mail, return receipt requested. A notice shall be addressed to the Company at its principal executive office, attention General Counsel and to the Participant at the address that he most recently provided to the Company.

Entire Agreement. This Award Agreement, including Exhibit A attached hereto, and the Plan constitute the entire agreement and understanding among the parties hereto in respect of the subject matter hereof and supersede all prior and contemporaneous arrangements, agreements and understandings, whether oral or written and whether express or implied, and whether in term sheets, appendices, exhibits, presentations or otherwise, among the parties hereto, or between any of them, with respect to the subject matter hereof; provided, that, the Participant shall continue to be bound by any other confidentiality, non-competition, non-solicitation and other similar restrictive covenants contained in any other agreements between the Participant and the Company, its Affiliates and their respective predecessors to which the Participant is bound.

Amendment; Waiver. No amendment or modification of any term of this Award Agreement shall be effective unless signed in writing by or on behalf of the Company and the Participant, and made in accordance with the terms of the Plan. No waiver of any breach or condition of this Award Agreement shall be deemed to be a waiver of any other or subsequent breach or condition whether of like or different nature.

Successors and Assigns; No Third Party Beneficiaries. The provisions of this Award Agreement shall inure to the benefit of, and be binding upon, the Company and its successors and assigns and upon the Participant and the Participant’s heirs, successors, legal representatives and permitted assigns. Nothing in this Award Agreement, express or implied, is intended to confer on any person other than the Company and the Participant, and their respective heirs, successors, legal representatives and permitted assigns, any rights, remedies, obligations or liabilities under or by reason of this Award Agreement.

Signature in Counterparts. This Award Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.

No Guarantees Regarding Tax Treatment. The Participant (or his beneficiaries) shall be responsible for all taxes with respect to the Option. The Committee and the Company make no guarantees regarding the tax treatment of the Option. Neither the Committee nor the Company has any obligation to take any action to prevent the assessment of any tax under Section 409A (as defined below), Section 4999 of the Code or otherwise and none of the Company, any Subsidiary or Affiliate, or any of their employees or representatives shall have any liability to a Participant with respect thereto.

IN WITNESS WHEREOF, the parties hereto have executed this Award Agreement.

	PARTY CITY HOLDCO INC.


	By:	/s/ Denise Kulikowsky
		Name: Denise Kulikowsky
		Title: Executive Vice-President & Chief Human Resources Officer

Agreed and acknowledged as of the date first above written:

/s/ Jim Harrison
James M. Harrison

EXHIBIT A

NOTICE OF EXERCISE

Party City Holdco Inc.
80 Grasslands Road
Elmsford NY 10523
Attention: Chief Executive Officer			Date of Exercise:

Ladies & Gentlemen:

1.Exercise of Option. This constitutes notice to Party City Holdco Inc. (the “Company”) that pursuant to my Nonqualified Stock Option Award Agreement, dated July 25, 2019 (the “Award Agreement”), I elect to purchase the number of Shares set forth below and for the price set forth below. Capitalized terms used and not otherwise defined herein shall have the meaning ascribed to such term in the Award Agreement. By signing and delivering this notice to the Company, I hereby acknowledge that I am the holder of the Option exercised by this notice and have full power and authority to exercise the same.

	Number of Shares as to which the Option is exercised (the “Shares”):

	Date of Grant:

	Shares to be issued in name of:

	Total exercise price of the Shares:

2.Form of Payment. Forms of payment other than cash or its equivalent (e.g., by cashier’s check) are permissible only to the extent approved by the Committee, in its sole discretion.

3.Delivery of Payment. With this notice, I hereby deliver to the Company the full exercise price of the Shares, and any and all withholding taxes due in connection with the exercise of my Option or have otherwise satisfied such requirements.

4.Rights as Stockholder. While the Company shall endeavor to process this notice in a timely manner, I acknowledge that until the issuance of the Shares (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) and my satisfaction of any other conditions imposed by the Committee pursuant to the Plan or set forth in the Award Agreement, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to such shares, notwithstanding the exercise of my Option. No adjustment shall be made for a dividend or other right for which the record date is prior to the date of issuance of the Shares.

5.Interpretation. Any dispute regarding the interpretation of this notice shall be submitted promptly by me or by the Company to the Committee. The resolution of such a dispute by the Committee shall be final and binding on all parties.

6.Entire Agreement. The Plan and the Award Agreement under which the Shares were granted are incorporated herein by reference, and together with this notice constitute the entire agreement of the parties with respect to the subject matter hereof.

		Very truly yours,




			(social security number)

Exhibit 21.1

List of Subsidiaries of Party City Holdco Inc.


Name	State/Country of Organization or Incorporation
Amscan Asia Limited	Hong Kong
Amscan Canada Inc.	Ontario
Amscan Custom Injection Molding, LLC	Delaware
Amscan de Mexico S.A. de C.V.	Mexico
Amscan Europe GmbH	Germany
Amscan Holdings Limited	United Kingdom
Amscan Inc.	New York
Amscan International Limited	United Kingdom
Amscan Mauritius Company Limited	Mauritius
Amscan NM Land, LLC	Delaware
Amscan Party Goods Pty. Limited	Australia
Amscan Purple Sage, LLC	Delaware
Am-Source, LLC	Rhode Island
Anagram Eden Prairie Property Holdings LLC	Delaware
Anagram France S.C.S.	France
Anagram International Holdings, Inc.	Minnesota
Anagram International Inc.	Minnesota
Anagram International LLC	Nevada
Baja Pacific Paper, S. de R.L. de C.V.	Mexico
Balloon Agencies Pty Ltd.	Australia
Christy Dressup Limited	United Kingdom
Christy’s By Design Limited	United Kingdom
Christy Garments and Accessories Limited	United Kingdom
Convergram de Mexico S. de R.L. (49.9% owned)	Mexico
Eastlake Manufacturing de Mexico S.A. de C.V.	Mexico
Everts Malaysia SDN BHD	Malaysia
Festival S.A.	Madagascar
Granmark S.A. de C.V. (85% owned)	Mexico
Guangzhou Christy Trading Company Limited	China
Kazzam, LLC	Delaware
Livario GmbH	Germany
Mindvent AG	Switzerland
Party City Corporation	Delaware
Party City Holdings Inc.	Delaware
Party Delights Ltd.	United Kingdom
Party HQ Ltd. (65% owned)	United Kingdom
Party Horizon Inc.	Delaware
PC Nextco Holdings, LLC	Delaware
PC Nextco Finance, Inc.	Delaware
PC Intermediate Holdings, Inc.	Delaware
PD Retail Group Ltd. (82.5% owned)	United Kingdom
Print Appeal, Inc. (70% owned)	Texas
Riethmüller (Polska) Sp.z.o.o.	Poland
Trisar, Inc. Webdots GmbH	California Germany

Exhibit 31.1

Section 302 Certification

I, Brad Weston, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Party City Holdco Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: June 12, 2020

/s/ Brad Weston

Brad Weston

(Principal Executive Officer)

Exhibit 31.2

Section 302 Certification

I, Todd Vogensen, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Party City Holdco Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(a)

(b)

(c)

(d)

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: June 12, 2020

/s/ Todd Vogensen

Todd Vogensen

Chief Financial Officer

(Principal Financial Officer)

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Party City Holdco Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2020, as filed with the Securities and Exchange Commission (the “Report”), I, Brad Weston, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Brad Weston

Brad Weston

Chief Executive Officer

(Principal Executive Officer)

Date: June 12, 2020

This certification accompanies the Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Party City Holdco Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Party City Holdco Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2020, as filed with the Securities and Exchange Commission (the “Report”), I, Todd Vogensen, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Todd Vogensen

Todd Vogensen

Chief Financial Officer

(Principal Financial Officer)

Date: June 12, 2020