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

Commission file number 000-21827

Amscan Holdings, Inc.

Delaware		13-3911462
(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)

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

     If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes þ No o

     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 þ No o

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

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

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

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company þ
		(Do not check if a smaller reporting company)

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

     The aggregate market value of the Common Stock held by non-affiliates of the Registrant (assuming for purposes of this calculation, without conceding, that all executive officers and directors are “affiliates”) at June 30, 2009, the last business day of the registrant’s most recently completed second fiscal quarter, was $49,669,000.

     The number of outstanding shares of the registrant’s common stock as of March 31, 2010 was 1,000.00.

     None.

 

 

AMSCAN HOLDINGS, INC.
FORM 10-K

December 31, 2008

TABLE OF CONTENTS

		Page
PART I
Item 1 Business			3
Item 1A Risk Factors			13
Item 1B Unresolved Staff Comments			15
Item 2 Properties			16
Item 3 Legal Proceedings			19
Item 4 Submission of Matters to a Vote of Security Holders			19
PART II
Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			19
Item 6 Selected Consolidated Financial Data			21
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations			23
Item 7A Quantitative and Qualitative Disclosures About Market Risk			38
Item 8 Financial Statements and Supplementary Data			39
Item 9 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure			39
Item 9A Controls and Procedures			39
Item 9B Other Information			40
PART III
Item 10 Directors and Executive Officers of the Registrant			41
Item 11 Executive Compensation			43
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			51
Item 13 Certain Relationships and Related Transactions			52
Item 14 Principal Accountant Fees and Services			53
PART IV
Item 15 Exhibits and Financial Statement Schedules			53
Signatures			56
EX-11
EX-23
EX-31.1
EX-31.2
EX-32

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

     You may read and copy any materials we file with the Securities and Exchange Commission (“SEC”) at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operations of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC, including us, at http://www.sec.gov.

PART I

Item 1.		Business

     Amscan Holdings, Inc. (“Amscan” or the “Company”) designs, manufactures, contracts for manufacture and distributes party goods, including paper and plastic tableware, metallic balloons, accessories, novelties, gifts and stationery. The Company also operates retail party goods and social expressions supply stores in the United States under the names Party City, Party America, The Paper Factory, Halloween USA and Factory Card & Party Outlet, and franchises both individual stores and franchise areas throughout the United States and Puerto Rico principally under the names Party City and Party America. The Company is a wholly-owned subsidiary of AAH Holdings Corporation. (“AAH”).

Wholesale Operations

     We believe we are a leading designer, manufacturer and distributor of decorative party goods in the United States and the largest manufacturer of metallic balloons in the world. We offer one of the broadest and deepest product lines in the party goods industry. We currently offer over 400 party goods ensembles, which range from approximately five to 100 design-coordinated items spanning tableware, accessories, novelties, balloons, decorations and gifts. The breadth of these ensembles enables retailers to encourage additional sales for a single occasion. We market party goods ensembles for a wide variety of occasions including seasonal and religious holidays, special events and themed celebrations. Our seasonal and religious ensembles enhance holiday celebrations throughout the year including New Year’s, Valentine’s Day, St. Patrick’s Day, Easter, Passover, Fourth of July, Halloween, Fall, Thanksgiving, Hanukkah and Christmas. Our special event ensembles include birthdays, christenings, first communions, bar mitzvahs, confirmations, graduations, bridal and baby showers and anniversaries. Our theme-oriented ensembles include Bachelorette, Casino, Chinatown, Cocktail Party, Disco, Fiesta, Fifties Rock-and-Roll, Hawaiian Luau, Hollywood, Mardi Gras, Masquerade, Patriotic, Retirement, Sports, Summer Barbeque and Western. In 2009, approximately 77% of our net sales at wholesale consisted of products designed for non-seasonal occasions, with the remaining 23% comprised of items used for holidays and seasonal celebrations throughout the year. Our extensive gift and stationery product lines, encompassing home, baby and wedding products for general gift giving or self-purchase, further leverage our design, marketing and distribution capabilities.

     Our products are sold at wholesale to party goods superstores, including our company-owned retail stores, other party goods retailers, independent card and gift stores, and other retailers and distributors throughout the world. Sales to the party goods superstore distribution channel account for approximately 52% of our sales at wholesale. Party goods superstores provide consumers with a one-stop source for all of their party needs, generally at discounted prices. In addition, we have strong, long-standing relationships with balloon distributors and independent party and card and gift retailers, with these channels generally accounting for 25% of our sales at wholesale. Approximately 42% of the product sold at wholesale are products manufactured by the Company. The remaining 58% of products sold are supplied by third-party manufacturers, many of whom are located in Asia.

Recent Wholesale Acquisition

     On December 21, 2009, the Company entered into an Asset Purchase Agreement with American Greetings Corporation (“American Greetings”) under which it acquired certain assets, equipment and processes used in the manufacture and distribution of party goods effective on March 1, 2010. In connection with the Asset Purchase Agreement, the companies also entered into a Supply and Distribution Agreement and a Licensing Agreement (collectively, the “Agreements”). Under the terms of the Agreements, on March 1, 2010, the Company has exclusive rights to manufacture and distribute products into various channels including the party store channel. American Greetings will continue to distribute party goods to various channels including to its mass, drug, grocery and specialty retail customers. American Greetings will purchase substantially all of their party goods requirements from the Company and the Company will license from American Greetings the “Designware” brand and other character licenses.

     In connection with the Agreements, American Greetings received total consideration of $45.9 million, including cash of $24.9 million and a warrant to purchase approximately 2% of the Common Stock of AAH.

Retail Operations

     The Company’s various retail operations began as independent retailers and franchisors in the mid to late 1980s. The Company acquired its retail operations in a series of transactions from December 2005 through November 2007. Our retail stores operate under the names Party City, Party America, The Paper Factory, Factory Card & Party Outlet and Halloween USA. Our retail focus is to provide the consumer with broad assortments, deep in-stock inventory positions, a compelling price-value proposition and an exceptional customer experience.

     As of December 31, 2009, the Company’s retail network consisted of 386 party goods supply superstores, 161 party goods and social expressions supply stores, 54 party goods outlet stores and 248 franchisee-owned party goods supply superstores. In addition, during the year ended December 31, 2009, the Company operated 247 temporary Halloween stores principally under the name Halloween USA. The Company’s party goods and social expressions supply stores typically range in size from 8,000 to 12,000 square feet and offer a broad range of products for all occasions, including Amscan and other brand merchandise. The Company’s outlet stores typically range in size from 3,000 to 5,000 square feet, and offer an assortment similar to their larger sister stores. Temporary Halloween stores typically range in size from 5,000 to 20,000 square feet and operate only during the Halloween selling season from the day after Labor Day through November 1 of each year.

     Non-seasonal merchandise generally accounts for approximately 70% of our annual retail net sales, with birthdays being the largest non-seasonal event. Seasonal merchandise for Halloween, Christmas, Summer, Graduation, Easter and other holidays represents the remaining 30% of our annual retail sales.

     Our retail operations generate revenue primarily through the sale of party goods at company-owned stores. Our Party City and Party America chains also generate revenue through the assessment of an initial one-time franchise fee and ongoing franchise royalty payments based on retail sales.

     The Company’s retail store 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 their 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.

Recent Retail Acquisitions

     On November 16, 2007, (the “Factory Card & Party Outlet Acquisition Date”), the Company completed the merger of its wholly-owned subsidiary, Amscan Acquisition, Inc. with and into Factory Card & Party Outlet Corp. (“FCPO”), in accordance with the terms of the Agreement and Plan of Merger, dated as of September 17, 2007 (the “Factory Card & Party Outlet Merger Agreement”). FCPO common stock was suspended from trading on the Nasdaq Global Market as of the close of trading on November 16, 2007. The merger followed the completion of a tender offer for all of the outstanding shares of FCPO common stock by Amscan Acquisition. As a result of the merger, each outstanding share of FCPO common stock was converted into the right to receive $16.50 per share, net to the seller in cash, without interest.

     In addition, in November 2007, Party City Corporation (“Party City”), a wholly-owned subsidiary of the Company, completed the acquisition of additional stores from franchisees in a series of transactions involving Party City, Party City Franchise Group Holdings, LLC (“PCFG Holdings”), a majority-owned subsidiary of Party City, and Party City Franchise Group, LLC (“PCFG”), a wholly-owned subsidiary of PCFG Holdings, on November 2, 2007 (“Party City Franchise Group Transaction Date”). Party City contributed cash and eleven of its corporate retail stores located in Florida to PCFG Holdings and PCFG Holdings and PCFG acquired 55 retail stores from three franchisees located in Florida and Georgia. The franchisee sellers received approximately $43.0 million in cash and, in certain instances, equity interests in PCFG Holdings in exchange for the retail stores. The acquisitions were financed through the combination of cash contributed by Party City, which included borrowings under the Company’s existing credit facility, a new credit facility entered into by PCFG (“PCFG Credit Agreement”) and PCFG Holdings equity issued to two franchisees in exchange for certain stores. PCFG Holdings is an unrestricted subsidiary under the Company’s existing debt facilities and the new PCFG Credit Agreement is a stand-alone facility which is not guaranteed by the Company or its other subsidiaries.

     On December 30, 2008, the Company acquired the PCFG Holdings equity held by the two former franchisees, in exchange for total consideration of $15.9 million, which included cash of $0.5 million and warrants to purchase 544.75 shares of AAH common stock at $0.01 per share.

Summary Financial Information about the Company

     Information about the Company’s revenues, income from operations and assets for each of the years in the five-year period ended December 31, 2009, is included in this report in Item 6, “Selected Consolidated Financial Data.” The Company’s consolidated financial statements include the accounts of the Company and its majority-owned and controlled entities.

     The Company does business in the United States and in other geographic areas of the world.

Wholesale Operations

     Despite a concentration of holidays in the fourth quarter of the year, as a result of our expansive product lines and customer base and increased promotional activities, the impact of seasonality on the quarterly results of our wholesale operations has been limited. Promotional activities, including special dating terms, particularly with respect to Halloween and Christmas products sold in the third quarter, and the introduction of our new everyday products and designs during the fourth quarter result in higher accounts receivables and inventory balances during these periods.

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, our year-end holiday sales. In addition, the results of retail operations and cash flows may also fluctuate significantly as a result of a variety of other factors, including the timing of new store openings and closings and the timing of the acquisition and disposition of stores.

     The results of operations for FCPO and PCFG are included in the consolidated results of operations since their respective dates of acquisition during November 2007.

Our Business Strategy

     Our objective is to be the primary source for consumers’ party goods requirements and to expand our position as a leading national chain of party goods supply stores, while internally improving our operating efficiencies. Key components of our business strategy include the following:

Wholesale Operations

	•		Build upon our Position as a Leading Provider to Party Goods Retailers. We will continue to offer convenient “one-stop shopping” for both large party goods superstores and smaller, independent party goods retailers. We will seek to grow our sales to existing stores by increasing our share of sales volume and shelf space, continuing to develop innovative new products and helping retailers promote coordinated ensembles that increase average purchase volume per consumer through “add-on” or impulse purchases.
	•		Expand International Presence. We believe there is an opportunity to expand our international business, which represented approximately 13% of our net sales at wholesale in each of the years in the three-year period ended December 31, 2009. We currently have a presence in Europe, Mexico, Canada, Asia and Australia. We have our own sales force in the United Kingdom, Mexico and Canada, and operate through third-party sales representatives elsewhere. The market for decorative party goods outside the U.S. is less mature due to lower consumer awareness of party products and less developed retail distribution channels. Our strategies include broadening our distribution network, increasing accessorization and customization of our products to local tastes and holidays and continuing to deepen retail penetration.
	•		Capitalize on Investments in Infrastructure. We intend to increase our net sales and profitability by leveraging the significant investments we have made in our infrastructure. We believe that our state-of-the-art 896,000 square foot distribution facility provides us with warehousing and distribution capabilities to serve anticipated future growth.
	•		Continued Growth Through Targeted Acquisitions. We believe that there will be, from time to time, opportunities to make acquisitions of complementary businesses. Through such businesses, we can leverage our existing marketing, distribution and production capabilities, expand our presence in the various retail distribution channels, further broaden and deepen our product lines and increase our penetration in international markets.

Retail Operations

	•		Offer a Broad Selection of Merchandise. We will continue to provide customers with convenient one-stop shopping for party supplies by offering what we believe is one of the most extensive selections of party supplies available. The typical retail store offers a broad selection of Amscan and other brand merchandise consisting of more than 20,000 active SKU’s.
	•		Maintain Value Price Position. We will continue to use the aggregate buying power of over 800 company-owned and franchise party good stores, which allows us to offer a broad line of high quality merchandise at low prices. We believe we reinforce customers’ expectations of value through our advertising and marketing campaigns.
	•		Store Layout and Product Selection. We have a standardized product assortment and continually evaluate our aisle layouts, where appropriate, to allow customers to navigate the store more easily, and to provide increased availability of Amscan and other desired products.
	•		Expand Network of Convenient Store Locations. Although we believe that our stores typically are destination shopping locations, we seek to maximize customer traffic and quickly build the visibility of new stores by situating our stores in high traffic areas. Site selection criteria include: population density, demographics, traffic counts, location of complementary retailers, storefront visibility and presence (either in a stand-alone building or in dominant strip shopping centers), competition, lease rates and accessible parking. We believe there are an extensive number of suitable domestic locations available for future stores, and we plan to open approximately 15 new company-owned retail stores and anticipate that our franchisees will open between five and ten franchise stores during 2010. In addition, based on the strong performance of our temporary Halloween stores, subject to the availability of suitable, short-term lease locations, we plan to open more than 100 additional temporary stores in 2010.
	•		Provide Excellent Customer Service. We view the quality of our customers’ shopping experience as critical to our continued success, and we are committed to making shopping in our stores an enjoyable experience. For example, at Halloween, our most important selling season, each store significantly increases the number of sales associates available to assist customers. We hire and train qualified store managers and other personnel committed to serving our customers and compensate them based on specific performance measures in order to ensure a customer-service oriented culture in our stores.
	•		Information Systems. In recent years, our retail segment upgraded a number of its information systems which will allow us to continue to use technology to enhance our business practices. During 2010, we plan to implement software systems that will align the POS systems of Halloween USA stores with those of our party goods superstores, to further automate its merchandise forecasting and planning functions.

Innovative Product Development and Design Capabilities

     Our 120 person in-house design staff continuously develops fresh, innovative and contemporary product designs and concepts. Our continued investment in art and design results in a steady supply of fresh ideas and the creation of complex, unique ensembles that appeal to consumers. In 2009, we introduced approximately 3,700 new products and 50 new ensembles. Our proprietary designs and strength in developing new product programs at value prices help us keep our products differentiated from the competition.

Product Lines

     The following table sets forth the principal products distributed by the Company at the wholesale level, by product line:

Party Goods and Stationery				Metallic Balloons		Gift
Decorative and Solid Color Tableware		Baby and Wedding Memory Books		Bouquets		Ceramic Giftware
Candles		Decorative Tissues		Standard 18 Inch		Decorative Candles
Cascades and Centerpieces		Gift Wrap, Bows and Bags		Sing-A-Tune SuperShapes		Decorative Frames
Crepe		Invitations, Notes and Stationery		Weights		Mugs
Cutouts		Photograph Albums
Flags and Banners		Stickers and Confetti
Latex Balloons		Serveware, Drinkware
Novelty Gifts		Games
Party Favors		Costumes, Costume Accessories
Piñatas
Scene Setters
Wearables

     The percentage of net sales at wholesale for each product line for 2009, 2008 and 2007 are set forth in the following table:

		2009				2008				2007
Party Goods and Stationery			78	%			77	%			77	%
Metallic Balloons			18				20				19
Gift			4				3				4
			100	%			100	%			100	%

     Our products span a wide range of lifestyle events from age-specific birthdays to theme parties and sporting events, as well as holidays such as Halloween and New Year’s. Approximately 77% of our net sales at wholesale consist of items designed for non-seasonal occasions, with the remaining 23% comprised of items used for holidays and seasonal celebrations throughout the year. Our product offerings cover the following:

Seasonal		Themes		Everyday
New Year’s		Bachelorette		Birthdays
Valentine’s Day		Casino		Anniversaries
St. Patrick’s Day		Card Party		Bar Mitzvahs
Easter		Chinatown		Bridal/Baby Showers
Passover		Cocktail Party		Christenings
Fourth of July		Disco		Confirmations
Halloween		Fiesta		First Communions
Fall		Fifties Rock and Roll		Graduations
Thanksgiving		Hawaiian Luau		Weddings
Hanukkah		Hollywood
Christmas		Mardi Gras
		Masquerade
		Patriotic
		Retirement
		Sports
		Summer Barbeque Western

Manufactured Products

     Our vertically integrated manufacturing capability ( i.e., our ability to perform each of the steps in the process of converting raw materials into our finished products) enables us to control costs, monitor product quality, manage inventory investment better and provide more efficient order fulfillment. We manufacture items generally representing approximately 42% of our net sales at wholesale. Our facilities in New York, Kentucky, Rhode Island, Minnesota and Mexico are highly automated and produce paper and plastic plates and cups, paper napkins, metallic balloons and other party and novelty items. State-of-the-art printing, forming, folding and packaging equipment support these manufacturing operations. Given our size and sales volume, we are generally able to operate our manufacturing equipment on the basis of at least two shifts per day, thus lowering production costs per unit. In addition, we manufacture products for third parties. This allows us to maintain a satisfactory level of equipment utilization.

Purchased Products

     We purchase products created and designed by us, generally representing approximately 58% of our net sales at wholesale, from independently-owned manufacturers, many of whom are located in Asia and with whom we have long-standing relationships. Our business is not dependent upon any single source of supply for these products. We maintain a sourcing office in Hong Kong that is dedicated to broadening our supplier base and facilitating process development and quality control.

Raw Materials

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

Wholesale Sales and Marketing

     Our principal wholesale sales and marketing efforts are conducted through a domestic direct employee sales force of approximately 100 professionals servicing approximately 15,000 retail accounts. Included in this sales force are approximately 20 seasoned sales professionals who primarily service the party goods specialty retailer channel and who, on average, have been affiliated with us for over 20 years. In addition to the employee sales team, a select group of manufacturers’ representatives handle specific account situations. Employees of subsidiaries outside the United States generally service international customers. Our Anagram subsidiary utilizes a group of approximately 35 independent distributors in the United States and approximately 35 international distributors to bring its metallic balloons to the grocery, gift and floral markets, as well as to our party superstore and specialty retailer customers.

     Our practice of including other party goods retailers in the various facets of our product development is a key element of our sales and marketing efforts. We target important consumer preferences by integrating our own market research with the input of other party goods retailers in the creation of our designs and products. In addition, our sales force may assist customers in the actual layout of displays of our products.

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

Wholesale Distribution and Systems

     We ship our products directly to retailers and distributors throughout the United States and Canada from company-owned and leased distribution facilities that employ computer assisted systems. Our electronic order entry and information systems allow us to manage our inventory with minimal waste, maintain strong fill rates and provide quick order turnaround times of generally between 24 to 48 hours.

     Our distribution facilities for party and gift items are principally located in New York and represent more than 1,000,000 square feet in the aggregate. We distribute our metallic balloons domestically from company-owned and leased facilities in Minnesota and New York. Products for markets outside the United States are also shipped from leased distribution facilities in the United Kingdom, Mexico, Japan and Australia.

Wholesale Customers

     Our wholesale customers include our company-owned retail stores, our franchisees, other party goods retailers, independent card and gift retailers and other distributors. We also have a presence in the mass, gift, supermarket and other smaller retail distribution channels. In the aggregate, we supply more than 40,000 retail outlets both domestically and internationally. To deepen our retail penetration at key European hypermarket and supermarket accounts, our focus includes broadening our distribution network, increasing accessorization and customization of our products to local tastes and holidays.

     We have a diverse third party customer base at wholesale. Although net sales to franchise-owned and operated stores represented 18%, 18% and 22% of the Company’s net sales at wholesale for the years ended December 31, 2009, 2008 and 2007, respectively; each franchisee is financially independent and represent a diversified credit exposure. For the years ended December 31, 2009, 2008 and 2007, no individual third party customer accounted for more than 5% of our total sales at wholesale.

Competition at Wholesale

     We compete on the basis of diversity and quality of our product designs, breadth of product line, product availability, price, reputation and customer service. Although we have many competitors with respect to one or more of our products, we believe that there are few competitors who manufacture and distribute products with the complexity of design and breadth of product lines that we do. Furthermore, our design and manufacturing processes create efficiencies in manufacturing that few of our competitors can achieve in the production of numerous coordinated products in multiple design types.

     Competitors include smaller independent specialty manufacturers, as well as divisions or subsidiaries of large companies with greater financial and other resources than ours. Certain of these competitors control various party goods product licenses for widely recognized images, such as cartoon or motion picture characters, which could provide them with a competitive advantage. However, we control one of the strongest portfolios of character licenses for use in the design and production of our metallic balloons and, primarily as a result of the Agreements with American Greetings, we will have access, in 2010, to a strong portfolio of character and other licenses for party goods.

Retail Merchandising

     Our stores are designed to be fun and engaging and to create a compelling shopping experience for the consumer. Our Party City, Party America and FCPO stores range in size from approximately 7,000 to 20,000 square feet with a typical store size between 8,000 and 12,000 square feet. Our Paper Factory Outlet stores range in size from 3,000 to 5,000 square feet. The stores are divided into various sections based upon product categories displayed to emphasize the breadth of merchandise available at a good value. In-store signage is used to emphasize our price-value position and make our stores easy to shop.

     To maintain consistency throughout our store network, we maintain a list of approved items that are permitted to be sold in our stores. Franchise stores are required to follow these guidelines according to the terms of their franchise agreements. We maintain a standard store merchandise layout and presentation format to be followed by company-owned and franchise stores. Any layout or format changes developed by us are communicated to the managers of stores on a periodic basis.

     Although product assortment is continually refreshed and updated, our product categories remain relatively consistent with our historical selection. The typical retail store offers a broad selection of Amscan and other branded merchandise consisting of more than 20,000 SKU’s. Non-seasonal merchandise historically represents two-thirds of a typical store’s selling space and annual net retail sales, while seasonal merchandise historically represents one-third of the selling space. We have over 40 product categories, each of which can be characterized into 11 general themes, including Halloween, Other Seasonal, Birthday, Balloons, Baby, Wedding, Anniversary, Greeting Card and Gift Wrap, Party Basics, Catering and Party Themes.

     We have many product categories that generally relate to birthdays, making this theme the largest non-seasonal occasion at approximately 25% of annual net retail sales. Each birthday product category includes a wide assortment of merchandise to fulfill customer needs for celebrating birthdays, including invitations, thank you cards, tableware, hats, horns, banners, cascades, balloons, novelty gifts, piñatas, favors and candy.

     Halloween is our retail segment’s largest seasonal product category/theme. As a key component of our sales strategy, our stores provide an extensive selection of Halloween products. The stores also carry a broad array of related decorations and accessories for the Halloween season. Our Halloween merchandise is prominently displayed to provide an exciting and fun shopping experience for customers. The stores display Halloween-related merchandise throughout the year to position us as the customer’s Halloween shopping resource. Historically, Halloween business has represented approximately 20% of the annual retail net sales at our party superstores. To maximize our seasonal opportunity, the Company also operates a chain of temporary Halloween stores, generally under the name Halloween USA, during the months of September and October of each year.

     During 2009 we began marketing party goods merchandise through our Party City website. Our website is a cost-effective medium designed to offer a convenient, highly visual, user-friendly, and secure online shopping option for new and existing customers. In addition to the ability to order products, our website gives customers information regarding products, party ideas and promotional offers.

Retailer Suppliers

     As a vertically integrated business, our wholesale operations are the largest supplier to our retail stores, providing 48%, 47% and 47% of the merchandise purchased by our company-owned party goods superstores for the years ended December 31, 2009, 2008 and 2007, respectively. No other supplier provided more than 10% of our retail segment’s purchases during the past three years.

     While our retail segment has historically purchased a significant portion of its other brand merchandise from a relatively small number of sources, we do not believe our retail business is dependent upon any single source of supply for these products. However, certain of these suppliers may control various product licenses for widely recognized images, such as cartoon or motion picture characters, and the loss of such suppliers could materially adversely affect our future business, results of operations, financial condition and cash flow. We consider numerous factors in supplier selection including, but not limited to, price, credit terms, product offerings and quality.

     We strive to maintain sufficient inventory to enable us to provide a high level of service to our customers. Inventory and accounts payable levels, payment terms and return policies are in accordance with the general practices of the party goods supply industry and standard business procedures. We negotiate pricing with suppliers on behalf of all stores in our network (company-owned and franchise). We believe that our buying power enables us to receive favorable pricing terms and enhances our ability to obtain high demand merchandise.

Retail Advertising and Marketing

     Our advertising focuses on promoting specific seasonal occasions as well as general themes, with a strong emphasis on our price-value position. Historically, we have advertised primarily via the use of free-standing inserts in newspapers throughout our market areas. We also utilize other marketing techniques to supplement the inserts, including outdoor, direct mail, newspaper, television and radio advertising in selected markets, with the goal of increasing customer traffic and building our brand. In 2010, we plan to launch a national television advertising program to further develop brand awareness and expand our customer base.

     In addition to selling party goods merchandise, we use our Party City website to communicate products, party ideas and promotional offers.

Franchise Operations

     As of December 31, 2009, we had 248 franchise stores throughout the United States and Puerto Rico. Stores run by franchisees utilize our format, design specifications, methods, standards, operating procedures, systems and trademarks.

     We receive revenue from our franchisees, consisting of an initial one-time fee and ongoing royalty fees. In addition, each franchisee has a mandated advertising budget, which consists of a minimum initial store opening promotion and ongoing local advertising and promotions. Further, franchisees must pay an additional 1% of net sales to a group advertising fund to cover common advertising materials. We do not offer financing to our franchisees for one-time fees and ongoing royalty fees.

     Current franchise agreements provide for an assigned area or territory that typically equals a three-mile radius from the franchisee’s store location and the right to use the Party City ^® and Party America ^® logos and trademarks, including “The Discount Party Super Store ^® “. In most stores, the franchisee or the majority owner of a corporate franchisee devotes full time to the management, operation and on-premises supervision of the stores or groups of stores.

     Although franchise locations are generally obtained and secured by the franchisee, pursuant to the franchise agreement we must approve all site locations. As franchisor, we also supply valuable and proprietary information pertaining to the operation of our retail store business, as well as advice regarding location, improvements and promotion. We also supply consultation in the areas of purchasing, inventory control, pricing, marketing, merchandising, hiring, training, improvements and new developments in the franchisee’s business operations, and we provide assistance in opening and initially promoting the store.

     We continually focus on the management of our franchise operations, looking for ways to improve the collaborative relationship in such areas as merchandising, advertising and information systems.

     As of December 31, 2009, we had three territory agreements with certain franchisees. These agreements grant the holder of the territory the right to open one or more stores within a stated time period.

Competition at Retail

     We operate in highly competitive markets. Our stores compete with a variety of smaller and larger retailers, including, but not limited to, single owner-operated party goods supply stores, specialty party goods supply and paper goods retailers (including superstores), warehouse/merchandise clubs, designated departments in drug stores, general mass merchandisers, supermarkets and department stores of local, regional and national chains and catalogue and Internet merchandisers. In addition, other stores or Internet merchandisers may enter the market and become significant competitors in the future. Our stores compete, among other things, on the basis of location and store layout, product mix, customer convenience and price. Some of our competitors in our markets have greater financial resources than we do.

     We believe that our retail stores maintain a leading position in the party goods supply business by offering a wider breadth of merchandise than most competitors, a greater selection within merchandise classes and low prices on most items in our stores. We believe that our significant buying power, which results from the size of our retail store network, is an important advantage.

Government Regulation

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

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

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

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

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

Copyrights and Trademarks

     We own copyrights on the designs we create and use on our products and trademarks on the words and designs used on or in connection with our products. It is our practice to register our copyrights with the United States Copyright Office to the extent we deem necessary. We do not believe that the loss of copyrights or trademarks with respect to any particular product or products would have a material adverse effect on our business. We hold approximately 150 licenses, allowing us to use various cartoon and other characters and designs principally on our metallic balloons. None of these licenses is individually material to our aggregate business.

     We own and permit our franchisees to use a number of trademarks and service marks registered with the United States Patent and Trademark Office, including Party City ®, The Discount Party Super Store ®, Halloween Costume Warehouse ®, Party America ®, The Paper Factory ®, The Factory Card & Party Outlet ®, and Halloween USA ®.

Information Systems

     We continually evaluate and upgrade our information systems to enhance the quantity, quality and timeliness of information available to management and to improve the efficiency of our manufacturing and distribution facilities as well as our service at the store level. We have implemented merchandise replenishment software to complement our distribution, planning and allocation processes. The system enhances the store replenishment function by improving in-stock positions, leveraging our distribution infrastructure and allowing us to become more effective in our use of store labor. In 2008 and 2009, we implemented new Point of Sale systems and upgraded merchandising systems to standardize technology across Party City, Party America, PCFG and FCPO. In 2010, we plan to implement similar systems at our Halloween USA stores.

Employees

     As of December 31, 2009, the Company had approximately 5,058 full-time employees and 7,858 part-time employees, none of whom is covered by a collective bargaining agreement. The Company considers its relationship with its employees to be good.

Item 1A.		Risk Factors

Consumer Demands and Preferences

     As a manufacturer, distributor and retailer, our products must appeal to a broad range of consumers whose preferences cannot be predicted with certainty and are subject to rapid change. Our success depends on our ability to identify product trends as well as to anticipate and respond to changing merchandise trends and consumer demand in a timely manner. We cannot assure you that we will be able to continue to offer assortments of products that appeal to our customers or that we will satisfy changing consumer demands in the future. In addition, if consumers’ demand for single-use, disposable party goods were to diminish in favor of reusable products for environmental or other reasons, our sales could decline. We also sell certain licensed products that are in great demand for short time periods, making it difficult to project our inventory needs for these products. Accordingly, if:

	•		we are unable to identify and respond to emerging trends;
	•		we miscalculate either the market for the merchandise in our stores or our customers’ purchasing habits; or
	•		consumer demand dramatically shifts away from disposable party supplies;

our business, results of operations, financial condition and cash flow could be materially adversely affected. In addition, we may be faced with significant excess inventory of some products and missed opportunities for other products, which would decrease our profitability.

Competition

     The party goods industry is highly competitive. We compete with many other manufactures and distributors, including smaller, independent specialty manufacturers and divisions or subsidiaries of larger companies with greater financial and other resources than we have. Some of our competitors control licenses for widely recognized images, such as cartoon or motion picture characters, and have broader access to mass market retailers which could provide them with a competitive advantage.

     Our retail stores compete with a variety of smaller and larger retailers. Our stores compete, among other things, on the basis of location and store layout, product mix, customer convenience and price. We cannot guarantee that we will continue to be able to compete successfully against existing or future competitors. Expansion into markets served by our competitors and entry of new competitors or expansion of existing competitors into our markets could materially adversely affect our business, results of operations, cash flows and financial condition.

Raw Material and Production Costs

     The costs of our key raw materials (paper and petroleum-based resin) fluctuate. In general, we absorb movements in raw material costs we consider temporary or insignificant. However, cost increases that are considered other than temporary may require us to increase our prices to maintain our margins. Customers may resist such price increases.

     Products we manufacture, primarily tableware and metallic balloons, generally represent approximately 42% of our net sales at wholesale. We believe our ability to manufacture product representing approximately 42% of our sales enables us to lower production costs by optimizing production while minimizing inventory investment, to ensure product quality through rigid quality control procedures during production and to be responsive to our customers’ product design demands.

Interest Rates

     Although we may utilize interest rate swap agreements to manage the risk associated with fluctuations in interest rates, we are exposed to fluctuations in interest rates on a significant portion of our debt.

Exchange Rates

     We are exposed to foreign currency risk principally from fluctuations in the Euro, British pound sterling, Mexican peso, Canadian dollar and Chinese renminbi and their impact on our profitability in foreign markets. Although we periodically enter into foreign currency forward contracts to hedge against the earnings effects of such fluctuations, we may not be able to hedge such risks completely or permanently.

Economic Downturn

     In general, our retail sales represent discretionary spending by our customers. Discretionary spending is affected by many factors, including, among others, general business conditions, interest rates, the availability of consumer credit, taxation, weather and consumer confidence in future economic conditions. Our customers’ purchases of discretionary items, including our products, could decline during periods when disposable income is lower or during periods of actual or perceived unfavorable economic conditions. If this occurs, our revenues and profitability will decline. In addition, our sales could be adversely affected by a downturn in the economic conditions in the markets in which we operate.

Key Vendors

     While our retail divisions have historically purchased a significant portion of its other brand merchandise from a relatively small number of sources, we do not believe our retail business is dependent upon any single source of supply for these products. However, certain of these suppliers may control various product licenses for widely recognized images, such as cartoon or motion picture characters and the loss of such suppliers could materially adversely affect our future business, results of operations, financial condition and cash flow.

     Many of our vendors currently provide us with incentives such as volume purchasing allowances and trade discounts. If our vendors were to reduce or discontinue these incentives, prices from our vendors could increase. Should we be unable to pass cost increases to consumers, our profitability would be reduced.

Franchise Program

     Our success depends, in part, upon our ability to contract with and retain qualified franchisees, as well as the ability of those franchisees to operate their stores and promote and develop our store concept. Although we have established criteria to evaluate prospective franchisees and our franchise agreements include certain operating standards, each franchisee operates independently. We cannot assure you that our franchisees will operate stores in a manner consistent with our concept and standards, which could reduce the gross revenues of these stores and therefore reduce our franchise revenue and possibly our wholesale sales. The closing of unprofitable stores or the failure of franchisees to comply with our policies could adversely affect our reputation as well as our revenues. These factors could have a material adverse effect on our revenues and operating income.

     If we are unable to attract new franchisees or to convince existing franchisees to open additional stores, any growth in royalties from franchised stores will depend solely upon increases in revenues at existing franchised stores. In addition, our ability to open additional franchise locations is limited by the territorial restrictions in our existing franchise agreements as well as our ability to identify additional markets in the United States that are not currently saturated with the products we offer. If we are unable to open additional franchise locations, we will have to sustain additional growth through acquisitions, opening new company-owned stores and by attracting new and repeat customers to our existing locations. If we are unable to do so, our revenues and operating income may decline.

Additional Capital Requirements

     Our management currently believes that the cash generated by operations, together with the borrowing availability under our credit agreements, will be sufficient to meet our working capital needs for the next twelve months, including investments made and expenses incurred in connection with technology to improve merchandising and distribution systems, support cost reduction initiatives, and improved efficiencies. However, if we are unable to generate sufficient cash from operations, we may be required to adopt one or more alternatives to raise cash, such as incurring additional indebtedness, selling our assets, seeking to raise additional equity capital or restructuring. If adequate financing is unavailable or is unavailable on acceptable terms, we may be unable to maintain, develop or enhance our operations, products and services, take advantage of future opportunities, service our current debt costs, or respond to competitive pressures.

Seasonal and Quarterly Fluctuations

     Our retail business is subject to significant seasonal variations. Historically, our stores realized a significant portion of their revenues, net income and cash flow in the fourth quarter of the year, principally due to our Halloween sales in October and, to a lesser extent, due to our year-end holiday sales. We believe this general pattern will continue in the future. An economic downturn during this period could adversely affect us to a greater extent than if such downturn occurred at other times of the year. Our results of operations and cash flows may also fluctuate significantly as a result of a variety of other factors, including the timing of new store openings, store closings and timing of the potential disposition and acquisition of stores.

Key Personnel

     Our success depends, to a large extent, on the continued service of our senior management team. The departure of senior officers could have a negative impact on our business, as we may not be able to find suitable management personnel to replace departing executives on a timely basis. We do not maintain key life insurance on any of our senior officers.

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

Item 1B.		Unresolved Staff Comments

     Not applicable.

Item 2.		Properties

     The Company maintains its corporate headquarters in Elmsford, New York and conducts its principal design, manufacturing and distribution operations at the following facilities:

						Owned or Leased
						(With
		Principal		Square		Expiration
Location		Activity		Feet		Date)
Elmsford, New York		Executive offices, show rooms, design and art production for party products		119,525 square feet		Leased (expiration date: December 31, 2014)
Harriman, New York		Manufacture of paper napkins		74,400 square feet		Leased (expiration date: March 31, 2011)
Newburgh, New York		Manufacture of paper napkins and cups		53,000 square feet		Leased (expiration date: May 31, 2012)
Narragansett, Rhode Island		Manufacture and distribution of plastic plates, cups and bowls		277,689 square feet		Leased (expiration date: April 26, 2011)
Louisville, Kentucky		Manufacture and distribution of paper plates		189,175 square feet		Leased (expiration date: March 31, 2013)
Eden Prairie, Minnesota		Manufacture of metallic balloons and accessories		115,600 square feet		Owned
Eden Prairie, Minnesota		Manufacture of retail, trade show and showroom fixtures		15,324 square feet		Leased (expiration date: July 31, 2012)
Tijuana, Mexico		Manufacture and distribution of party products		100,000 square feet		Leased (expiration date: August 15, 2015)
Chester, New York (1)		Distribution of party and gift products		896,000 square feet		Owned
Milton Keynes, Buckinghamshire, England		Distribution of party products throughout Europe		110,000 square feet		Leased (expiration date: June 30, 2017)
Dorval, Canada		Distribution of party and gift products		19,330 square feet		Leased (expiration date: March 31, 2012)
Edina, Minnesota		Distribution of metallic balloons and accessories		122,312 square feet		Leased (expiration date: December 31, 2015)
Rockaway, New Jersey		Party City corporate offices		106,000 square feet		Leased (expiration date: July 31, 2017)
Naperville, Illinois		Office and distribution of party goods for internet sales		340,000 square-foot		Leased (expiration date: December 31, 2018)
Atlanta, Georgia		Office and storage facilities		13,918 square foot		Leased (expiration date: November 30, 2011)

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

     As of December 31, 2009, there were 386 company-owned Party City and Party America superstores, 161 company-owned FCPO stores and 54 Paper Factory Outlet stores open in the United States. We lease the property for all of our company-owned stores. Our Party City, Party America and FCPO stores range in size from 6,800 to 19,800 square feet, with a typical store size between 8,000 and 12,000 square feet. Our Paper Factory Outlet stores range in size from 3,000 to 5,000 square feet. We do not believe that any individual store property is material to our financial condition or results of operations. Of the leases for the company-owned stores, 106 expire in 2010, 77 expire in 2011, 96 expire in 2012, 108 expire in 2013, 97 expire in 2014 and the balance expire in 2015 or thereafter. We have options to extend most of these leases for a minimum of five years.

     The following table shows the change in our retail network of stores for each of the years in the three-year period ended December 31, 2009.

		2009				2008				2007
Company-owned:
Stores open at beginning of year			643				673				630
Stores opened			6				19				6
Stores acquired			3				6				65
Stores closed / sold			(51	)			(55	)			(28	)
Stores open at end of year			601				643				673
Franchise:
Stores open at beginning of year			273				283				324
Stores opened			1				13				22
Stores acquired			2				7				7
Stores closed, sold or converted to independent			(28	)			(30	)			(70	)
Stores open at end of year			248				273				283
Total company-owned and franchise stores			849				916				956

     As of December 31, 2009, Company and franchise-owned retail stores were located in the following states and Puerto Rico:

State		Company-owned				Franchise				Chain-wide
Alabama			3				8				11
Arizona			1				21				22
Arkansas			1				3				4
California			86				20				106
Colorado			14				1				15
Connecticut			5				3				8
Delaware			1				1				2
Florida			56				11				67
Georgia			26				1				27
Hawaii			0				1				1
Illinois			63				0				63
Indiana			27				0				27
Iowa			9				1				10
Kansas			3				4				7
Kentucky			7				0				7
Louisiana			3				8				11
Maryland			14				12				26
Michigan			34				0				34
Minnesota			0				21				21
Mississippi			2				3				5
Missouri			22				3				25
Montana			0				1				1
Nebraska			6				0				6
Nevada			6				0				6
New Hampshire			1				0				1
New Jersey			14				14				28
New Mexico			0				3				3
New York			42				14				56
North Carolina			3				19				22
North Dakota			0				3				3
Ohio			31				0				31
Oklahoma			3				0				3
Oregon			2				5				7
Pennsylvania			20				11				31
Puerto Rico			0				5				5
South Carolina			2				6				8
Tennessee			8				10				18
Texas			38				24				62
Virginia			11				9				20
Washington			16				2				18
West Virginia			2				0				2
Wisconsin			19				0				19
Total			601				248				849

     In 2009, the Company operated 247 temporary Halloween stores principally under the Halloween USA name. Under this program, we operate temporary stores under short-term leases with terms of approximately four months, to cover the early September through early November Halloween season.

     We believe that our properties have been adequately maintained, are in generally good condition and are suitable for our business as presently conducted. We believe our existing manufacturing facilities provide sufficient production capacity for our present needs and for our anticipated needs in the foreseeable future. To the extent such capacity is not needed for the manufacture of our products, we generally use such capacity for the manufacture of products for others pursuant to terminable agreements. All manufacturing and distribution facilities generally are used on a basis of two shifts

per day. We also believe that, upon the expiration of our current leases, we will be able either to secure renewal terms or to enter into leases for alternative locations at market terms.

Item 3.		Legal Proceedings

     We are a party to certain claims and litigation in the ordinary course of business. We do not believe these proceedings will have, individually or in the aggregate, a material adverse effect on our financial condition or future results of operations.

Item 4.		Submission of Matters to a Vote of Security Holders

     Not applicable.

PART II

Item 5.		Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities

     There is no public trading market for the Company’s common stock.

     As of the close of business on March 31, 2010, there were 120 holders of record of the Company’s common stock.

Dividends

     The Company has not paid any dividends on its Common Stock and has no current plans to pay cash dividends in the foreseeable future. The Company currently intends to retain its earnings for working capital, repayment of indebtedness, capital expenditures and general corporate purposes. In addition, the Company’s current credit facility and the indenture governing its notes contain restrictive covenants which have the effect of limiting the Company’s ability to pay cash dividends or distributions to its stockholders.

Issuer Purchases of Equity Securities

     Under the terms of our stockholders’ agreement, we have an option to purchase all of the shares of common stock held by former management stockholders, as defined, and, under certain circumstances, former management stockholders can require us to purchase all of the shares held by them. The purchase price as prescribed in the stockholders’ agreements is to be determined through a market valuation of the minority-held shares or, under certain circumstances, based on cost, as defined therein.

The following table sets forth certain information as of December 31, 2009, concerning our equity compensation plans (1);

(a)

(b)

(c)

Number of

Number of Securities

Securities to be

Remaining Available

Issued Upon

Weighted-Average

for Future Issuance

Exercise of

Exercise Price of

Under Equity

Outstanding

Outstanding

Compensation Plans

Options, Warrants

Options, Warrants

(Excluding Securities

and Rights

and Rights

Reflected in Column (a))

Equity compensation plans approved by security holders

2,933.03

$

13,462

48.04

Equity compensation plans not approved by security holders

—

—

—

Total

2,933.03

$

13,462

48.04

Item 6.		Selected Consolidated Financial Data

     The selected consolidated financial data presented below as of and for the years ended December 31, 2009, 2008, 2007, 2006 and 2005, are derived from the consolidated financial statements of the Company. The consolidated financial statements as of and for the years ended December 31, 2009, 2008 and 2007, are included in this report under Item 8, “Financial Statements and Supplementary Data.” The selected consolidated financial data should be read in conjunction with the consolidated financial statements and the related notes thereto and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

		Year Ended December 31,
		2009				2008				2007(1)				2006(2)				2005(3)
(Dollars in thousands)
Income Statement Data :
Revenues:
Net sales		$	1,467,324			$	1,537,641			$	1,221,516			$	993,342			$	417,226
Royalties and franchise fees			19,494				22,020				25,888				21,746				509
Total revenues			1,486,818				1,559,661				1,247,404				1,015,088				417,735
Expenses:
Cost of sales			899,041				966,426				777,586				676,527				281,632
Selling expenses			39,786				41,894				41,899				39,449				36,181
Retail operating expenses			261,691				273,627				191,423				126,224				1,824
Franchise expenses			11,991				13,686				12,883				13,009				779
General and administrative expenses			119,193				120,272				105,707				84,836				36,026
Art and development costs			13,243				12,462				12,149				10,338				8,941
Impairment of trade name(4)			—				17,376				—				—				—
Income from operations			141,873				113,918				105,757				64,705				52,352
Interest expense, net			41,481				50,915				54,590				54,887				31,907
Other (income) expense, net (5)(6)			(32	)			(818	)			18,214				(1,000	)			3,224
Income before income taxes			100,424				63,821				32,953				10,818				17,221
Income tax expense			37,673				24,188				13,246				4,295				4,940
Net income			62,751				39,633				19,707				6,523				12,281
Less: net income (loss) attributable to noncontrolling interests			198				(877	)			446				83				21
Net income attributable to Amscan Holdings, Inc.		$	62,553			$	40,510			$	19,261			$	6,440			$	12,260
Other Financial Data:
Capital expenditures, including assets under capital leases			26,254				53,701				36,648				40,376				17,051
Depreciation and amortization			44,382				47,278				38,093				38,619				18,602
Ratio of earnings to fixed charges(7)			2.2	x			1.6	x			1.4	x			1.1	x			1.5	x

		At December 31,
		2009				2008				2007				2006				2005
(Dollars in thousands)
Balance Sheet Data:
Working capital		$	173,065			$	87,726			$	108,374			$	167,561			$	157,139
Total assets(8)(9)			1,480,501				1,507,977				1,498,845				1,217,371				1,118,947
Short-term obligations(10)		$	112,541			$	170,880			$	161,790			$	8,633			$	2,643
Long-term obligations(8)(9)			538,892				550,755				584,336				558,372				561,567
Total obligations		$	651,433			$	721,635			$	746,126			$	567,005			$	564,210
Redeemable common securities(11)		$	18,389			$	18,171			$	33,782			$	9,343			$	6,821
AHI stockholders’ Equity(8) (9) (11)		$	476,985			$	410,228			$	375,586			$	359,839			$	320,810
Non controlling interest			2,137				1,889				2,488				2,052				1,985
Total equity		$	479,122			$	412,117			$	378,074			$	361,891			$	322,795

Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

     Our wholesale revenues are generated from the sales of approximately 35,000 SKU’s consisting of party goods for all occasions, including paper and plastic tableware, accessories and novelties, metallic balloons, stationery and gift items. Tableware (e.g., plates, cups, cutlery, napkins and tablecovers) is our core product category, with coordinating accessories (e.g., balloons, banners, gifts and stationery) and novelties (e.g., party favors) being offered to complement these tableware products. Our products are sold at wholesale to party goods superstores, including our company-owned retail stores, other party goods retailers, independent card and gift stores, and other retailers and distributors throughout the world. As a metallic balloon manufacturer, we have a strong presence in grocery, gift and floral distribution channels. With our retail segment, we operate 601 retail party and social expressions supply stores within the continental United States, and franchise individual store and franchise areas throughout the United States and Puerto Rico. At December 31, 2009, our network included 248 franchise stores. Our retail operations generate revenue primarily through the sale of more than 20,000 Amscan and other branded SKU’s through our company-owned stores, and through the imposition of an initial one-time franchise fee and ongoing franchise royalty payments based on retail sales from our franchised stores.

Results of Operations

Year Ended December 31, 2009 Compared to Year Ended December 31, 2008

Percentage of Total Revenues

		Year Ended December 31,
		2009				2008
Revenues:
Net sales			98.7	%			98.6	%
Royalties and franchise fees			1.3				1.4
Total revenues			100.0				100.0
Expenses:
Cost of sales			60.5				62.0
Selling expenses			2.7				2.7
Retail operating expenses			17.6				17.5
Franchise expenses			0.8				0.9
General and administrative expenses			8.0				7.7
Art and development costs			0.9				0.8
Impairment of trade name			0.0				1.1
Total expenses			90.5				92.7
Income from operations			9.5				7.3
Interest expense, net			2.8				3.3
Other income, net			0.0				(0.1	)
Income before income taxes			6.7				4.1
Income tax expense			2.5				1.6
Net income			4.2				2.5
Less net income (loss) attributable to noncontrolling interests			0.0				(0.1	)
Net income attributable to Amscan Holdings, Inc.			4.2	%			2.6	%

Total Revenues

     The following table sets forth the Company’s total revenues for the years ended December 31, 2009 and 2008, respectively.

		Year Ended December 31,
		2009								2008
		Dollars in				Percentage of				Dollars in				Percentage of
		Thousands				Total Revenue				Thousands				Total Revenue
Revenues:
Sales:
Wholesale		$	633,006				42.6	%		$	653,403				41.9	%
Eliminations			(221,647	)			(14.9	)			(214,898	)			(13.8	)
Net wholesale			411,359				27.7				438,505				28.1
Retail			1,055,965				71.0				1,099,136				70.5
Total net sales			1,467,324				98.7				1,537,641				98.6
Franchise related			19,494				1.3				22,020				1.4
Total revenues		$	1,486,818				100.0	%		$	1,559,661				100.0	%

     Wholesale

     Net sales for 2009 of $411.4 million were $27.1 million or 6.2% lower than net sales for 2008, principally as a result of the downturn in the U.S. economy. Net sales to franchised and domestic independent party stores totaled $161.3 million and were $14.5 million or 8.3% lower than 2008 sales. Net sales to non-affiliated domestic retail channels totaled $84.6 million and were $1.9 million or 2.2% lower than in 2008, as the negative impact of the economy was partially offset by a seasonal direct import and contract manufacturing program for a supplier to the mass market and other channels. Net sales of metallic balloons were $84.5 million or 8.9% lower than in 2008, as wholesale distributors and retailers rationalized stock inventory levels in light of the economic downturn. International sales totaled $81.0 million and were $2.5 million or 3.0% lower than in 2008. Fluctuations in foreign currency account for an $11.0 million decrease in international sales, more than offsetting volume related growth in local currency sales, principally at European national accounts.

     Intercompany sales to our retail affiliates of $221.6 million were $6.7 million or 3.1% higher than in 2008. The increase in intercompany sales principally reflects growth in our share of shelf at our company-owned retail stores, particularly the FCPO stores acquired in November of 2007. The intercompany sales of our wholesale segment are eliminated against the intercompany purchases of our retail segment in the consolidated financial statements

     Retail

     Net retail sales at our company-owned stores for 2009 of $1,056 million were $43.2 million or 3.9% lower than net retail sales for 2008, reflecting the downturn in the U.S. economy and the operation of fewer Factory Card & Party Outlet and Paper Factory Outlet stores during 2009 and the inclusion of a 53^rd week in our 2008 retail calendar. Net retail sales of our company-owned Big Box party goods stores (i.e., stores generally greater than 8,000 square feet) totaled $790.9 million and were $42.2 million or 5.1% lower than in 2008. Same store sales during 2009 decreased 3.4% compared to 2008 as the result of a decrease in transaction count, as the average dollar per transaction remained consistent between 2009 and 2008. Net retail sales at our FCPO stores of $197.0 million decreased $29.5 million or 13.0%, reflecting a 3.0% decrease in store count by year end and a decrease of 5.0% in same store sales. The decrease in same store sales reflects a 5.3% decrease in transaction count partially offset by a 0.3% increase in average dollar per transaction. Net retail sales at our TPF outlet stores totaled $22.6 million and were $14.4 million or 38.9% lower than in 2008, principally due to the operation of 50% fewer outlet stores by year end, and a 15.9% decrease in same store sales. Net sales at our temporary Halloween stores totaled $68.0 million and were $28.6 million or 72.3% higher than in 2008 due to a 7.5% increase in average sales per store and a 65.7% increase in store count compared to 2008.

Royalties and franchise fees

     Franchise related revenue for the year ended December 31, 2009, consisting of royalties and franchise fees, totaled $19.5 million or 11.5% lower than in 2008, as our franchise store count decreased by 23 stores or 8.4% and the stores experienced a same-store net sales decrease of 2.3% compared to 2008.

Gross Profit

     The following table sets forth the Company’s consolidated gross profit on net sales for the years ended December 31, 2009 and 2008, respectively.

		Year Ended December 31,
		2009								2008
		Dollars in				Percentage of				Dollars in				Percentage of
		Thousands				Total Revenue				Thousands				Total Revenue
Wholesale		$	148,424				36.1	%		$	142,438				32.5	%
Retail			419,859				39.8	%			428,777				39.0	%
Total		$	568,283				38.7	%		$	571,215				37.1	%

     The gross profit margin on net sales at wholesale for 2009 was 36.1% or 360 basis points higher than in 2008. The increase in wholesale gross profit margin principally reflects reductions in distribution costs and changes in product mix, including fewer full case sales in 2009, which generally have lower profit margins.

     Retail gross profit margin for 2009 was 39.8% or 80 basis points higher than in 2008, primarily the result of favorable variances in inventory shrink and damage reserves as compared to 2008.

Operating expenses

     Selling expenses totaled $39.8 million and were $2.1 million or 5.0% lower than in 2008, reflecting a decrease in variable selling expenses, consistent with the decrease in wholesale sales, and a reduction in the size of our sales force and changes in foreign currency exchange rates, partially offset by inflationary increases principally in base compensation and employee benefits. Selling expenses were 2.7% of total revenue in both 2009 and 2008.

     Retail operating expenses of $261.7 million for 2009 were $11.9 million or 4.3% lower than 2008, principally reflecting a reduction in store count. Retail operating expenses were 24.8% of retail sales in 2009 and comparable to 2008. Franchise expenses for 2009 of $12.0 million were $1.7 million or 12.3% lower than in 2008, also reflecting a reduction in store count. Franchise expenses were 61.5% of franchise related revenue in 2009 compared to 62.2% in 2008.

     General and administrative expenses for 2009 totaled $119.2 million and were $1.1 million or 0.9% lower than in 2008. The decrease in general and administrative expenses reflects the benefit of a management-directed cost reduction program, which included reductions in work force, travel and other expenses, the reduction of a prior year purchase accounting reserve, and the impact of changes in foreign currency exchange rates. These decreases were partially offset by inflationary increases, particularly in base compensation and employee benefits, increased support for our expanding temporary Halloween operations, an increase in consulting expense and additional provision for bad debts due to the bankruptcy of a national account in Europe. As a percentage of total revenues, general and administrative expenses were 8.0% for 2009 compared to 7.7% for 2008.

     Art and development costs of $13.2 million for 2009 were comparable to 2008 expenses. As a percentage of total revenues, art and development costs were 0.9% and 0.8% of total revenues for 2009 and 2008, respectively.

Interest expense, net

     Interest expense of $41.5 million for 2009 was $9.4 million lower than for 2008, reflecting the impact of lower average debt and Libor rates.

Other income, net

     Other income, net, in 2009 primarily includes our share of income from an unconsolidated balloon distribution joint venture located in Mexico partially offset by foreign currency transaction losses and other expenses.

Income tax expense

     Income tax expense for 2009 and 2008 were based upon the estimated consolidated effective income tax rates of 37.5% and 37.9% for the years ended December 31, 2009 and December 31, 2008, respectively. The decrease in the 2009 effective income tax rate is primarily attributable to a lower average state income tax rate and the expiration of state statutes of limitations for certain states that resulted in the recognition of previous unrecognized tax benefits and the favorable settlement of the audits of our 2006 and 2005 federal tax returns. These tax rate reductions were partially offset by a lower domestic manufacturing deduction, as a percentage of pre-tax income.

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

Percentage of Total Revenues

		Year Ended
		December 31,
		2008				2007
Revenues:
Net sales			98.6	%			97.9	%
Royalties and franchise fees			1.4				2.1
Total revenues			100.0				100.0
Expenses:
Cost of sales			62.0				62.3
Selling expenses			2.7				3.4
Retail operating expenses			17.5				15.3
Franchise expenses			0.9				1.0
General and administrative expenses			7.7				8.5
Art and development costs			0.8				1.0
Impairment of trade name			1.1				—
Total expenses			92.7				91.5
Income from operations			7.3				8.5
Interest expense, net			3.3				4.4
Other (income) expense, net			(0.1	)			1.5
Income before income taxes			4.1				2.6
Income tax expense			1.6				1.1
Net income			2.5				1.5
Less net (loss) income attributable to noncontrolling interests			(0.1	)			0.0
Net income attributable to Amscan Holdings, Inc.			2.6	%			1.5	%

Total Revenues

     The following table sets forth the Company’s total revenues for the years ended December 31, 2008 and 2007, respectively.

		Year Ended December 31,
		2008								2007
		Dollars in				Percentage of				Dollars in				Percentage of
		thousands				Total Revenue				thousands				Total Revenue
Revenues:
Sales:
Wholesale		$	653,403				41.9	%		$	626,476				50.2	%
Eliminations			(214,898	)			(13.8	)			(173,143	)			(13.9	)
Net wholesale			438,505				28.1				453,333				36.3
Retail			1,099,136				70.5				768,183				61.6
Total net sales			1,537,641				98.6				1,221,516				97.9
Franchise related			22,020				1.4				25,888				2.1
Total revenues		$	1,559,661				100.0	%		$	1,247,404				100.0	%

     Wholesale

     Net sales for 2008 of $438.5 million were $14.8 million or 3.3% lower than net sales for 2007. Net sales for 2008 reflect the elimination of intercompany sales to PCFG and FCPO for the entire year. Net sales for 2007 reflect the elimination of intercompany sales to PCFG and FCPO from the Party City Franchise Transaction Date and the Factory Card & Party Outlet Acquisition Date, respectively. Had the PCFG transactions and FCPO acquisition occurred January 1, 2007, the Company would have eliminated an additional $31.0 million of intercompany sales during 2007 and net sales for 2008 would have been $16.2 million or 3.8% higher than adjusted sales for 2007.

     Net sales to party goods superstores (including our franchisees) and independent party stores totaled $151.5 million and were $5.2 million or 3.6% higher than adjusted 2007 sales, reflecting synergy-driven increases in sales to franchisees. Net sales of metallic balloons were $92.7 million or 4.5% higher than in 2007, principally the result of increased sales to international balloon distributors and the domestic mass market. Net sales to other retail channels (including card and gift stores, mass merchant, drug, craft and contract manufacturing) were $110.8 million or 3.2% higher than 2007, principally due to higher contract manufacturing sales early in 2008. International sales totaled $83.5 million and were $3.5 million or 4.4% higher than in 2007, as strong demand for new party programs at several European national accounts was partially offset by the impact of foreign currency fluctuations.

     Retail

     Net retail sales for company-owned stores for 2008 of $1,099 million were $331.0 million or 43.1% higher than net retail sales for 2007, reflecting the inclusion of FCPO and PCFG sales for the entire year 2008, which were $319.8 million higher than those sales included in 2007.

     Net retail sales of Party City and Party America company-owned stores totaled $685.6 million and were essentially flat compared to 2007, as a 3.6% decrease in average store count and a 13.0% decrease in same stores sales at our outlet stores offset a 1.2% increase in same store sales at our Big Box party stores (i.e., generally greater than 8,000 square feet) and the inclusion of a 53^rd week in our 2008 retail calendar. Net sales at our temporary Halloween stores totaled $39.5 million or 38.0% higher than in 2007 due to an increase in store count.

     Royalties and franchise fees

     Franchise related revenue for the year ended December 31, 2008, consisting of royalties and franchise fees, totaled $22.0 million or 14.9% lower than in 2007 principally as a result of the elimination in 2008 of royalties from the 55 former franchise stores acquired by PCFG in November 2007. During 2008, 23 stores were either opened or acquired by franchisees and 14 franchise stores were closed or sold, as compared to 29 stores opened or acquired by franchisees and 15 franchise stores were closed or sold during 2007. Franchise stores reported same-store net sales of $468.4 million or an increase of 0.7% for the year ended December 31, 2008 compared to the year ended December 31, 2007.

Gross Profit

     The following table sets forth the Company’s consolidated gross profit on net sales for the years ended December 31, 2008 and 2007, respectively.

		Year Ended December 31,
		2008								2007
		Dollars in				% of associated				Dollars in				% of associated
		thousands				sales				thousands				sales
Net Wholesale		$	142,438				32.5	%		$	131,674				29.0	%
Net Retail			428,777				39.0	%			312,256				40.6	%
Total Gross Profit		$	571,215				37.1	%		$	443,930				36.3	%

     The gross profit margin on net sales at wholesale for 2008 was 32.5% or 350 basis points higher than in 2007. The increase in gross profit margin principally reflects the elimination of certain low margin full case sales, other changes in product mix and lower distribution costs.

     Retail gross profit margin for 2008 was 39.0% or 160 basis points lower than in 2007, primarily due to increased promotional product pricing and inventory shrink and damage reserves and higher occupancy costs, as a percent of sales, principally as a result of the acquisition of FCPO.

Operating expenses

     Selling expenses totaled $41.9 million for both 2008 and 2007 as a decrease in variable expenses, attributable to a decrease in sales at wholesale, was offset by increases principally in base compensation and employee benefits. Selling expenses decreased to 2.7% of total revenue in 2008 from 3.4% in 2007, as a result of the increase in retail sales.

     Retail operating expenses of $273.6 million for 2008 were $82.2 million higher than 2007, reflecting the full year expenses of PCFG and FCPO. Retail operating expenses were 24.9% of retail sales in both 2008 and 2007. Franchise expenses for 2008 of $13.7 million increased to 62.1% of franchise related revenue in 2008 compared to 49.8% in 2007, principally as a result of the elimination of royalties from PCFG’s former franchise stores.

     General and administrative expenses for 2008 were $120.3 million, increasing by $14.6 million over 2007. After adjusting general and administrative expenses for the full year impact of PCFG and FCPO, comparable expenses decreased by $10.3 million. The decrease in general and administrative expenses principally reflects lower retail expenses resulting from the completion of the Party America integration, partially offset by higher base compensation and employee benefits. As a percentage of total revenues, general and administrative expenses were 7.7% for 2008 compared to 8.5% for 2007.

     Art and development costs of $12.5 million for 2008 were comparable to the costs for 2007. As a percentage of total revenues, art and development costs were 0.8% and 1.0% of total revenues for 2008 and 2007, respectively.

     During the fourth quarter of 2008, the Company instituted a program to convert its company-owned and franchised Party America stores to Party City stores and recorded a $17.4 million charge for the impairment of the Party America trade name.

Interest expense, net

     Interest expense of $50.9 million for 2008 was $3.8 million lower than for 2007, reflecting the impact of lower Libor as well as lower margin rates following our May 2007 debt refinancing, on higher average debt, following the PCFG transaction and the FCPO acquisition.

Other (income) expense, net

     Other income, net, totaled $0.8 million in 2008, as a net gain on the disposal of assets and our share of income from an unconsolidated balloon distribution joint venture located in Mexico were partially offset by the cost to amend a licensing agreement. In 2007, other expense, net of $18.2 million principally consists of debt retirement costs related to the refinancing of our term and revolving credit facilities during the second quarter of 2007, and a reserve recorded against an investment in a foreign subsidiary. It also includes derivative gains and losses, a net loss on the disposal of assets and our share of income from the unconsolidated joint venture. The undistributed income from the unconsolidated joint venture includes the elimination of intercompany profit in the joint venture’s inventory at December 31, 2008 and 2007.

Income tax expense

     Income tax expense for 2008 and 2007 were based upon the estimated consolidated effective income tax rates of 37.9% and 40.2% for the years ended December 31, 2008 and December 31, 2007, respectively. The decrease in the 2008 effective income tax rate is primarily attributable to a lower average state income tax rate.

Liquidity and Capital Resources

Capital Structure

     On May 25, 2007, the Company and its parent company, AAH, entered into (i) a $375 million Term Loan Credit Agreement (the “Term Loan Credit Agreement”), and (ii) an ABL Credit Agreement (the “ABL Credit Agreement”) with a committed revolving credit facility in an aggregate principal amount of up to $250 million (as amended). The Company used the proceeds from these facilities to terminate a previously existing $410 million first lien credit and guaranty agreement and (ii) the $60 million second lien credit and guaranty agreement.

Term Loan Credit Agreement

     The Term Loan Credit Agreement provides for two pricing options: (i) an alternate base rate (“ABR”) equal to the greater of (a) Credit Suisse’s prime rate in effect on such day and (b) the federal funds effective rate in effect on such day plus 1/2 of 1% or (ii) a LIBOR rate determined by reference to the cost of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, in each case plus an applicable margin. The applicable margin is 1.25% with respect to ABR borrowings and 2.25% with respect to LIBOR borrowings.

     The Term Loan Credit Agreement provides that the term loans may be prepaid any time prior to their maturity. The term loans are subject to mandatory prepayment out of (i) 100% of net proceeds arising from asset sales, insurance and condemnation proceeds, subject to reinvestment provisions, (ii) 50% of net proceeds arising from certain equity issuances by the Company or its subsidiaries (which percentage will be reduced to 25% or 0% if the Company’s total leverage ratio is less than specified ratios), (iii) net proceeds arising from any debt issued by the Company or its subsidiaries and (iv) 50% (which percentage will be reduced to 25% or 0% if the Company’s total leverage ratio is less than specified ratios) of the Company’s Excess Cash Flow, as defined, if any.

     The Company is required to repay installments on the term loans in quarterly principal amounts of 0.25% of their funded total principal amount through March 31, 2013, with the remaining amount payable on the maturity date of May 25, 2013.

     The obligations of the Company under the Term Loan Credit Agreement are jointly and severally guaranteed by AAH and each wholly-owned domestic subsidiary of the Company. Each guarantor has secured its obligations under the guaranty by a first priority lien on substantially all of its assets, with the exception of accounts receivable and inventories, which are under a second priority lien.

     The Company may, by written notice to the Administrative Agent from time to time, request additional incremental term loans, in an aggregate amount not to exceed $100 million from one or more lenders (which may include any existing Lender) willing to provide such additional incremental term loans in their own discretion.

     The Term Loan Credit Agreement contains a number of covenants that, among other things, restrict, subject to certain exceptions, the ability of the Company and its Subsidiaries to incur additional indebtedness; create, incur or suffer to exist liens on any of their property or assets; make investments or enter into joint venture arrangements; pay dividends and distributions or repurchase capital stock of the Company; engage in mergers, consolidations and sales of all or substantially all their assets; sell assets; make capital expenditures; enter into agreements restricting dividends and advances by the Company’s subsidiaries; and engage in transactions with affiliates.

     The Term Loan Credit Agreement also contains certain customary affirmative covenants and events of default.

     At December 31, 2009, the balance of the Term Loan was $364.7 million.

ABL Credit Agreement

     The Company has a committed revolving credit facility in an aggregate principal amount of up to $250 million for working capital, general corporate purposes and the issuance of letters of credit. The ABL Credit Agreement provides for (a) extension of credit in the form of Revolving Loans at any time and from time to time during the period ended May 25, 2012 (the “Availability Period”), in an aggregate principal amount at any time outstanding not in excess of $250 million, subject to a borrowing base described below, (b) commitments to obtain credit, at any time and from time to time during the Availability Period, in the form of Swingline Loans, in an aggregate principal amount at any time outstanding not in excess of $10 million and (c) ability to utilize Letters of Credit, in an aggregate face amount at any time outstanding not in excess of $25 million, to support payment obligations incurred in the ordinary course of business by the Company and its subsidiaries.

     The borrowing base at any time equals (a) 85% of eligible trade receivables, plus (b) the lesser of (i) 75% of eligible inventory and eligible in-transit inventory, valued at the lower of cost or market value, and (ii) 85% of net orderly liquidation value of eligible inventory and eligible in transit inventory (subject in the case of eligible in-transit inventory to a cap of $10 million) , plus (c) 85% of eligible credit card receivables, less (d) certain reserves.

     The ABL Credit Agreement provides for two pricing options: (i) an alternate base rate (“ABR”) equal to the greater of (a) Credit Suisse’s prime rate in effect on such day and (b) the federal funds effective rate in effect on such day plus 1/2 of 1% or (ii) a LIBOR rate determined by reference to the cost of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, in each case plus an applicable margin. The applicable margin is up to 0.50% with respect to ABR borrowings and from 1.00% to 1.50% with respect to LIBOR borrowings. The applicable margin at December 31, 2009 was 0.0% with respect to ABR borrowings and 1.00% with respect to LIBOR borrowings.

     In addition to paying interest on outstanding principal under the ABL Credit Agreement, the Company is required to pay a commitment fee of between 0.30% and 0.25% per annum in respect of the unutilized commitments thereunder. The Company must also pay customary letter of credit fees and agency fees.

     Upon prior notice, the Company may prepay any borrowing under the ABL Credit Agreement, in whole or in part, without premium or penalty other than customary “breakage” costs with respect to LIBOR loans.

     There is no scheduled amortization under the ABL Credit Agreement. The principal amount outstanding of the loans under the ABL Credit Agreement is due and payable in full on the fifth anniversary of the closing date.

     The obligations of the Company under the ABL Credit Agreement are jointly and severally guaranteed by AAH and each wholly-owned domestic subsidiary of the Company. Each guarantor has secured its obligations under the guaranty by a first priority lien on its accounts receivable and inventories and a second priority lien on substantially all of its other assets.

     The ABL Credit Agreement contains negative covenants that are substantially similar to the Term Loan Credit Agreement. The ABL Credit Agreement requires the Company to comply with certain financial covenants if it has less than $25 million of excess availability. The ABL Credit Agreement also limits the amount of consolidated capital expenditures in any fiscal year

     The ABL Credit Agreement also contains certain customary affirmative covenants and events of default.

     Borrowings under the ABL Credit Agreement were $77.0 million and outstanding standby letters of credit totaled $11.6 million at December 31, 2009.

Unrestricted Subsidiary Credit Agreement

     On November 2, 2007, PCFG entered into a Credit Agreement (the “PCFG Credit Agreement”), among PCFG, CIT Group/Business Credit, Inc., as Administrative Agent and Collateral Agent, Newstar Financial, Inc., as Syndication Agent, CIT Capital Securities LLC, as Sole Arranger, and the Lenders party thereto.

     Pursuant to the PCFG Credit Agreement, PCFG borrowed $30.0 million in term loans (“PCFG Term Loan”) and obtained a committed revolving credit facility in an aggregate principal amount of up to $10.0 million, as amended, for working capital and general corporate purposes and the issuance of letters of credit (of up to $5.0 million at any time outstanding) (“PCFG Revolver”). At December 31, 2009, the balance of the term loan was $23.0 million, borrowings under the PCFG Revolver were $0.6 million and there were no outstanding letters of credit. The Company is in compliance with the terms the PCFG Credit Agreement at December 31, 2009.

     PCFG and PCFG Holdings, the sole member of PCFG, have been designated by the Board of Directors of the Company as “Unrestricted Subsidiaries” pursuant to the Company’s existing ABL Credit Agreement, and the indenture governing its 8.75% Senior Subordinated Notes and neither PCFG nor PCFG Holdings is a guarantor of any of the Company’s other credit

facilities or indenture. In addition, PCFG’s credit facility is a stand-alone facility for PCFG and is not guaranteed by the Company or its other subsidiaries.

     At December 31, 2008, PCFG had not been in compliance with the financial covenants contained in the PCFG Credit Agreement. Effective September 30, 2009, PCFG and its lenders entered into a Waiver and Amendment Agreement which provided that, among other things, (1) interest would be accrued prospectively at either (i) for ABR borrowings, the Alternate Base Rate plus 6.00%, with a floor of 4.00% for the Alternate Base Rate or (ii) the Adjusted LIBO Rate plus 7.00% with a floor of 3.00% for the Adjusted LIBO Rate, (2) PCFG would pay an additional $1.5 million in principal on the Term Loans at the effective date of the waiver and amendment , and thereafter the quarterly amortization payment for the Term Loans would be $1.0 million each quarter until the Maturity Date, (3) the PCFG Revolver would be limited to a maximum of $10.0 million, and (4) financials covenants related to leverage ratio, fixed charge coverage ratio, minimum EBITDA, and maximum capital expenditures, were revised. As PCFG is an unrestricted subsidiary, the acceleration of our obligation under the PCFG Term Loan would not constitute an event of default under our other debt instruments.

Other Credit Agreements

     At December 31, 2009, we have a $0.4 million Canadian dollar denominated revolving credit facility that bears interest at the Canadian prime rate plus 1.1% and expires in April 2010, and a 1.4 million British Pound Sterling denominated revolving credit facility that bears interest at the UK base rate plus 1.75% on the first 1.0 million British Pound Sterling and 4.75% over the UK base rate on the remaining $0.4 million British Pound Sterling. The British Pound Sterling revolving credit facility expires on June 30, 2010. At December 31, 2009 the borrowings outstanding under the British Pound Sterling revolving credit facility was 0.4 million British Pound Sterling. We expect to renew these revolving credit facilities upon expiration.

     Long-term borrowings at December 31, 2009 include a mortgage note with the New York State Job Development Authority of $5.6 million. The mortgage note was amended on December 18, 2009, extending the fixed monthly payments of principal and interest for a period of 60 months up to and including December 31, 2014. The note bears interest at the rate of 2.45%, and is subject to review and adjustment semi-annually based on the New York State Job Development Authority’s confidential internal protocols. The mortgage note is collateralized by a distribution facility located in Chester, New York.

     In connection with its acquisition by AAH in April 2004, the Company issued $175.0 million of 8.75% senior subordinated notes due 2014 to their initial purchasers, which were subsequently resold to qualified institutional buyers and non-U.S. persons in reliance upon Rule 144A and Regulation S under the Securities Act of 1933 (the “Note Offering”). In August 2004, the Company filed with the Securities and Exchange Commission a Registration Statement on Form S-4, offering to exchange registered notes for the notes issued in connection with the Note Offering. The terms of the notes and the exchange notes were substantially identical. The exchange was completed in October 2004. Interest is payable semi-annually on May 1 and November 1 of each year.

     We have entered into various capital leases for machinery and equipment and automobiles with implicit interest rates ranging from 4.39% to 11.65% which extend to 2013. The Company has numerous non-cancelable operating leases for its retail store sites as well as several leases for offices, distribution and manufacturing facilities, showrooms and equipment. These leases expire on various dates through 2020 and generally contain renewal options and require the Company to pay real estate taxes, utilities and related insurance costs.

     Rent expense for the years ended December 31, 2009 and 2008 totaled $136.8 million and $142.5 million, respectively. Minimum lease payments currently required under non-cancelable operating leases for the year ending December 31, 2010, approximate $108.7 million.

     Restructuring costs associated with the Factory Card & Party Outlet Acquisition of $9.1 million were accrued for as part of net assets acquired. Through December 31, 2009, the Company incurred $6.7 million in restructuring costs, including $3.8 million incurred in 2009. The Company expects to incur the balance in 2010.

     During October of 2009, the Company communicated its plan to close the FCPO corporate office in Naperville, Illinois and to consolidate its retail corporate office operations with those of Party City, in Rockaway, New Jersey. In connection with the closing, the Company recorded additional planned severances costs of $1.8 million during 2009 and expects to incur additional retention costs of $1.5 million through April 2010. The Company will continue to utilize the Naperville facility as a distribution center for greeting cards and other products.

     The Company has a management agreement with Berkshire Partners LLC and Weston Presidio. Pursuant to the management agreement, the Company pays annual management fees of $1.2 million. Although the indenture governing the 8.75% senior subordinated notes will permit the payments under the management agreement, such payments will be restricted during an event of default under the notes and will be subordinated in right of payment to all obligations due with respect to the notes in the event of a bankruptcy or similar proceeding of Amscan.

     We expect that cash generated from operating activities and availability under our Credit Agreements will be our principal sources of liquidity. Based on our current level of operations, we believe these sources will be adequate to meet our liquidity needs for at least the next twelve months. We cannot assure you, however, that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under our senior secured credit facilities in an amount sufficient to enable us to repay our indebtedness, including the notes, or to fund our other liquidity needs.

Cash Flow Data — Year Ended December 31, 2009 Compared to Year Ended December 31, 2008

     Net cash provided by operating activities during the year ended December 31, 2009 totaled $123.9 million, as compared to $79.9 million for the year ended December 31, 2008. Net cash flow provided by operating activities before changes in operating assets and liabilities for the years ended December 31, 2009 and 2008, was $124.2 million and $102.6 million, respectively. Changes in operating assets and liabilities for the year ended December 31, 2009 and 2008 resulted in the use of cash of $0.2 million and $22.7 million, respectively. The increase in cash provided by operating activities during 2009 principally reflects an increase in income from operations and decreases in interest expense and inventory levels, partially offset by an increase in other assets.

     During the years ended December 31, 2009 and 2008, net cash used in investing activities totaled $54.4 million and $51.2 million, respectively. Investing activities for 2009 included $24.9 million paid in escrow in connection with the Asset Purchase Agreement with American Greetings. Retail capital expenditures, principally for store renovations and updated information systems, totaled $16.3 million in 2009, while wholesale capital expenditures totaled $9.9 million.

     During the years ended December 31, 2009 and 2008, net cash used in financing activities was $70.2 million and $23.0 million respectively. During 2009, the majority of cash used in financing activities was used to reduce borrowings under our revolving line of credit. Additionally, cash used in financing activities included scheduled payments on our long-term obligations that totaled $11.0 million compared to $8.9 million during the year ended December 31, 2008. Scheduled payments during the year ended December 31, 2009 included an additional $2.5 million for payments on the PCFG term loan in connection with the amended credit agreement.

Cash Flow Data — Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

     Net cash provided by operating activities during the year ended December 31, 2008 totaled $79.9 million, as compared to $9.6 million for the year ended December 31, 2007. Net cash flow provided by operating activities before changes in operating assets and liabilities for the years ended December 31, 2008 and 2007, were $102.6 million and $70.8 million, respectively. Changes in operating assets and liabilities for the years ended December 31, 2008 and 2007 resulted in the use of cash of $22.7 million and $61.2 million, respectively. The increase in cash provided by operating activities during 2008 principally reflects cash generated by the retail operations acquired in the fourth quarter of 2007, partially offset by higher levels of inventory.

     During the years ended December 31, 2008 and 2007, net cash used in investing activities totaled $51.2 million and $133.4 million, respectively. Investing activities for 2008 include $1.6 million of costs associated with our prior year acquisition of FCPO and our investment in PCFG. Retail capital expenditures, principally for store renovations and updated information systems, totaled $42.7 million in 2008, while wholesale capital expenditures totaled $10.3 million. Investing activities for 2007 include our $73.6 million acquisition of FCPO, our $32.4 million, net, investments in PCFG, Halloween USA and other franchise store transactions, retail capital expenditures of $13.5 million and wholesale capital expenditures of $13.9 million.

     During the years ended December 31, 2008, net cash used in financing activities was $23.0 million. During 2008, cash used to reduce borrowings under our revolving line of credit and for scheduled payments on our long-term obligations totaled $26.8 million. In addition, in 2008, the Company used $0.5 million to purchase redeemable common stock. Sources of cash included $2.5 million generated by the sale of an additional minority interest in PCFG and $1.8 million in tax benefits related to the exercise of common stock options held by employees. During the year ended December 31, 2007, net cash provided by financing activities was $134.6 million. Sources included (i) net borrowings under our revolving credit agreements of $152.7 million, principally used to acquire FCPO, PCFG, and Halloween USA, and (ii) capital contributions of $4.7 million. These sources were partially offset by a $10 million reduction of our term loan resulting from the refinancing, a $11.8 million cost to refinance current debt and retire prior debt, and scheduled payments on capital leases and other long-term obligations.

Tabular Disclosure of Contractual Obligations

     Our contractual obligations at December 31, 2009 are summarized by the year in which the payments are due in the following table (dollars in thousands):

		Total				2010				2011				2012				2013				2014				Thereafter
Long-term debt obligations (a)		$	568,288			$	38,819			$	8,845			$	19,870			$	324,583			$	176,171			$	—
Capital lease obligations (a)			5,510				2,087				2,065				1,346				12				—				—
Operating lease obligations (b)			408,567				108,719				91,906				75,845				49,607				28,736				53,754
Merchandise purchase commitments (c)			9,950				4,422				4,422				1,106				—				—				—
Minimum product royalty obligations			11,575				3,292				5,077				2,289				451				466				—
Total contractual obligations		$	1,003,890			$	157,339			$	112,315			$	100,456			$	374,653			$	205,373			$	53,754

     At December 31, 2009 there were no non-cancelable purchase orders related to capital expenditures.

     At December 31, 2009, there were $77.0 million of borrowings under our ABL Credit Agreement, and standby letters of credit totaling $11.6 million. Under our PCFG Revolver there were $0.6 million borrowings and no standby letters of credit. See Note 8 to our Consolidated Financial Statements which are included in this report beginning on page F-2.

     Not included in the above table are $1.0 million of net potential cash obligations associated with unrecognized tax benefits due to the high degree of uncertainty regarding the timing of future cash outflows associated with such obligations. Please refer to Note 16, “Income Taxes,” in the Notes to Consolidated Financial Statements for further information related to unrecognized tax benefits.

Off-Balance Sheet Arrangements

     We do not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K under the Securities Exchange Act of 1934, as amended.

Effects of Inflation

     Although we expect that our operating results will be influenced by general economic conditions, we do not believe that inflation has had a material effect on our results of operations during the periods presented. However, there can be no assurance that our business will not be affected by inflation in the future.

Critical Accounting Policies and 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.

Revenue Recognition

     Our terms of sale to retailers and other distributors are principally F.O.B. shipping point and, accordingly, title and the risks and rewards of ownership are transferred to the customer, and revenue is recognized, when goods are shipped. We estimate reductions to revenues for volume-based rebate programs at the time sales are recognized. Should customers earn rebates higher than estimated by us, additional reductions to revenues may be required.

     Revenue from retail operations is recognized at the point of sale. We estimate future retail sales returns and, when material, record a provision in the period that the related sales are recorded based on historical information. Should actual returns differ from our estimates, we would be required to revise estimated sales returns. Retail sales are reported net of taxes collected.

Store Closure Costs

     We record estimated store closure costs, estimated lease commitment costs net of estimated sublease income and other miscellaneous store closing costs when the liability is incurred. Such estimates, including sublease income, may be subject to change.

Product Royalty Agreements

     The Company enters into product royalty agreements that allow the Company to use licensed designs on certain of its products. These contracts require the Company to pay royalties, generally based on the sales of such product, and may require guaranteed minimum royalties, a portion of which may be paid in advance. The Company matches royalty expense with revenue by recording royalties at the time of sale, at the greater of the contractual rate or an effective rate calculated based on the guaranteed minimum royalty and the Company’s estimate of sales during the contract period. If a portion of the guaranteed minimum royalty is determined to be unrecoverable, the unrecoverable portion is charged to expense at that time.

Doubtful Accounts

     We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers and franchisees to make required payments. A considerable amount of judgment is required in assessing the ultimate realization of these receivables, including consideration of our history of receivable write-offs, the level of past due accounts and the economic status of our customers. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances would be required.

Inventories

     Our policy requires that we state our inventories at the lower of cost or market. In assessing the ultimate realization of inventories, we are required to make judgments regarding, among other things, future demand and market conditions, current inventory levels and the impact of the possible discontinuation of product designs. If actual conditions are less favorable than those projected by us, additional inventory write-downs to market value may be required.

     We estimate retail inventory shortage, for the period from the last inventory date to the end of the reporting period, on a store-by-store basis. Our inventory shortage estimate can be affected by changes in merchandise mix and changes in actual shortage trends. The shrinkage rate from the most recent physical inventory, in combination with historical experience, is the basis for estimating shrinkage.

Long-Lived and Intangible Assets

     We review the recoverability of our long-lived assets, including definite-lived intangible assets other than goodwill, whenever facts and circumstances indicate that the carrying amount may not be fully recoverable. For purposes of recognizing and measuring impairment, we evaluate long-lived assets other than goodwill based upon the lowest level of independent cash flows ascertainable to evaluate impairment. If the sum of the undiscounted future cash flows expected over the remaining asset life is less than the carrying value of the assets, we may recognize an impairment loss. The impairment related to long-lived assets is measured as the amount by which the carrying amount of the assets exceeds the fair value of the asset. When fair values are not readily available, we estimate fair values using expected discounted future cash flows.

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

     Goodwill is reviewed for potential impairment, on an annual basis or more frequently if circumstances indicate a possible impairment, by comparing the fair value of a reporting unit with its carrying amount, including goodwill. We estimate the fair value of each reporting unit using expected discounted cash flows. If the carrying amount of a reporting unit exceeds its fair value, the excess, if any, of the fair value of the reporting unit over amounts allocable to the unit’s other assets and liabilities is the implied fair value of goodwill. If the carrying amount of a reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss will be recognized in an amount equal to that excess. The fair value of a reporting unit refers to the amount at which the unit as a whole could be sold in a current transaction between willing parties.

Insurance accruals

     Our consolidated balance sheet includes significant liabilities with respect to self-insured workers’ compensation, medical and general liability claims. We estimated the required liability for such claims based upon various assumptions, which include, but are not limited to, our historical loss experience, projected loss development factors, actual payroll and other data. The required liability is also subject to adjustment in the future based upon changes in claims experience, including changes in the number of incidents (frequency) and changes in the ultimate cost per incident (severity). Adjustments to earnings resulting from changes in historical loss trends have been insignificant. Further, we do not anticipate any significant change in loss trends, settlements or other costs that would cause a significant change in our earnings.

Income Taxes

     Temporary differences arising from differing treatment of income and expense items for tax and financial reporting purposes result in deferred tax assets and liabilities that are recorded on the balance sheet. These balances, as well as income tax expense, are determined through management’s estimations, interpretation of tax law for multiple jurisdictions and tax planning. If our actual results differ from estimated results due to changes in tax laws or tax planning, our effective tax rate and tax balances could be affected. As such these estimates may require adjustment in the future as additional facts become known or as circumstances change.

     The Company’s income tax returns are periodically audited by the Internal Revenue Service and by various state and local jurisdictions. The Company reserves for uncertain tax positions according to the guidance of FIN No. 48. See further discussion in Note 16 of the Notes to the Consolidated Financial Statements.

Stock-Based Compensation

     On January 1, 2006, the Company adopted Statement of Financial Accounting Standards, Accounting Standards Codification or “ASC” Subtopic 718 (“SFAS“No. 123(R)) “Share-Based Payment,” which is a revision of SFAS No. 123 “Accounting for Stock-Based Compensation” as amended. ASC Subtopic 718 (SFAS No. 123(R)) establishes standards for the accounting for transactions where an entity exchanges its equity for goods or services and transactions that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. ASC Subtopic 718 (SFAS No. 123(R)) focuses primarily on accounting for transactions in which an entity obtains employee

services in share-based payment transactions. Generally, the fair value approach in ASC Subtopic 718 (SFAS No. 123(R)) is similar to the fair value approach described in SFAS No. 123.

     The Company adopted ASC Subtopic 718 (SFAS No. 123(R)) using the prospective method. Since the Company’s common stock is not publicly traded, the options granted in 2005 under SFAS No. 123 continue to be expensed under the provisions of SFAS No. 123 using a minimum value method. Options issued subsequent to January 1, 2006 are expensed under the provisions of ASC Subtopic 718 (SFAS No. 123(R)) (see Note 15).

Legal Proceedings

     We are a party to certain claims and litigation in the ordinary course of business. We do not believe any of these proceedings will result, individually or in the aggregate, in a material adverse effect upon our financial condition or future results of operations.

Recently Issued Accounting Standards

Implemented:

     Effective in the third quarter 2009, the Company adopted ASC 105 Generally Accepted Accounting Standards which became the single source for all authoritative generally accepted accounting principles, or GAAP, recognized by the FASB. ASC 105 does not change GAAP and did not impact the Company’s results of operations, cash flows or financial position. Subsequent revisions to GAAP will be incorporated into the ASC through issuance of Accounting Standards Updates (“ASU”).

     Effective January 1, 2009, the Company adopted an amendment to ASC 810 Consolidation which changes presentation of the financial statements. This standard governs the accounting for, and reporting of, noncontrolling interests in partially owned consolidated subsidiaries and the loss of control of subsidiaries. The standard requires that: (i) noncontrolling interest, previously referred to as minority interest, be reported as part of equity in the consolidated financial statements; (ii) losses be allocated to a noncontrolling interest even when such allocation might result in a deficit balance, reducing the losses attributed to the controlling interest; (iii) changes in ownership interests be treated as equity transactions if control is maintained; (iv) changes in ownership interests resulting in gain or loss be recognized in earnings if control is gained or lost; and (v) in a business combination the noncontrolling interest’s share of net assets acquired be recorded at the fair value, plus its share of goodwill. The Company’s consolidated balance sheet as of December 31, 2009 and 2008 and consolidated statements of income, stockholders’ equity and cash flow for each of the three years in the period ended December 31, 2009, have been retrospectively adjusted upon application of the standard.

     During the second quarter of 2009, the Company adopted ASC 855 Subsequent Events which (i) incorporates the principles and accounting guidance for recognizing and disclosing subsequent events that originated as auditing standards into the body of authoritative literature issued by the FASB and also (ii) prescribes disclosure regarding the date through which subsequent events have been evaluated. In February 2010, the FASB amended this new standard to eliminate the disclosure requirement regarding the date through which subsequent events have been evaluated. As the new standard was not intended to significantly change the current practice of reporting subsequent events, it did not have an impact on our results of operations, cash flows or financial positions. Refer to Note 23.

     Effective January 1, 2009, the Company adopted ASC 815 Derivatives and Hedging which enhanced disclosures about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedged items are accounted for and (iii) how derivative instruments and related hedged items affect an entity’s financial position, results of operations and cash flows. The adoption of ASC 815 did not have a financial impact on the Company’s financial statements.

     Effective January 1, 2009, the Company adopted an amendment to ASC 805 Business Combinations which significantly changes the accounting for business acquisitions both during the period of the acquisition and in subsequent periods. These amendments will be considered for all business combinations completed subsequent to the adoption date (none in 2009). Among the more significant changes:

	•		Acquired in-process research and development, which was previously expensed at acquisition, is now accounted for as an asset, with the cost recognized as the research and development is realized or abandoned.
	•		Contingent consideration, which was previously accounted for as a subsequent adjustment to purchase price, is now recorded at fair value as an element of purchase price with subsequent adjustments recognized in operations.
	•		Subsequent decreases in valuation allowances on acquired deferred tax assets are recognized in operations after the measurement period. Such changes were previously considered to be subsequent changes in consideration and were recorded as decreases in goodwill.
	•		Transaction costs, which were previously treated as costs of the acquisition, are now expensed.
	•		Upon gaining control of an entity in which the equity method or cost basis investment was held, the carrying value of that investment is adjusted to fair value with the related gain or loss recorded in earnings. Previously, this fair value adjustment would not have been made.
	•		Effective January 1, 2009, the Company retrospectively adopted an amendment to ASC 805 released in April 2009. The amendment requires pre-acquisition contingencies to be recognized at fair value, if fair value can be determined or reasonably estimated during the measurement period. If fair value cannot be determined or reasonably estimated, the standard requires measurement based on the recognition and measurement criteria of ASC 450 Contingencies.

     The Company adopted ASC 820 Fair Value Measurement and Disclosure in two steps: Effective January 1, 2008, the Company adopted it for all financial instruments and non-financial instruments accounted for at fair value on a recurring basis. Effective January 1, 2009, the Company adopted it for all non-financial instruments accounted for at fair value on a non-recurring basis. This standard also establishes a new framework for measuring fair value and expands related disclosures. Refer to Note 20.

Not Yet Implemented:

     The Company is currently evaluating all applicable outstanding ASU’s and does not believe any will have a material impact on the consolidated financial statements.

     During the second quarter of 2009, we adopted a newly issued accounting standard for subsequent events. The new standard incorporates the principles and accounting guidance for recognizing and disclosing subsequent events that originated as auditing standards into the body of authoritative literature issued by the FASB and also prescribes disclosure regarding the date through which subsequent events have been evaluated. We are required to evaluate subsequent events through the date our financial statements are issued. In February 2010, the FASB amended this new standard to eliminate the disclosure requirement regarding the date through which subsequent events have been evaluated. As the new standard was not intended to significantly change the current practice of reporting subsequent events, it did not have an impact on our results of operations, cash flows or financial positions.

“Safe Harbor” Statement under Private Securities Litigation Reform Act of 1995

     This report includes “forward-looking statements” within the meaning of various provisions of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, included in this report that address activities, events or developments that we expect or anticipate will or may occur in the future, future capital expenditures (including the amount and nature thereof), business strategy and measures to implement strategy, including any changes to operations, goals, expansion and growth of our business and operations, plans, references to future success and other such matters are forward-looking statements. These statements are based on certain assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions and expected future developments as well as other factors we believe are appropriate in the circumstances. Actual results may differ materially from those discussed. Whether actual results and developments will conform with our expectations and predictions is subject to a number of risks and uncertainties, including, but not limited to (1) the concentration of sales by us to party goods superstores where the reduction of purchases by a small number of customers could materially reduce our sales and profitability, (2) the failure by us to anticipate changes in tastes and preferences of party goods retailers and consumers, (3) the introduction by us of new product lines, (4) the introduction of new products by our competitors, (5) the inability to increase prices to recover fully future increases in raw material prices, especially increases in prices of paper and petroleum-based resin, (6) the loss of key employees, (7) changes in general business conditions, (8) other factors which might be described from time to time in our filings with the Commission, and (9) other factors which are beyond our control. Consequently, all of the forward-looking statements made in this report are qualified by these cautionary statements, and the actual results or developments anticipated by us may not be realized or, even if substantially realized, may not have the expected consequences to or effects on our business or operations. Although we believe that we have the product offerings and resources needed for growth in revenues and margins, future revenue and margin trends cannot be reliably predicted. Changes in such trends may cause us to adjust our operations in the future. Because of the foregoing and other factors, recent trends should not be considered reliable indicators of future financial results. In addition, our highly leveraged nature may impair our ability to finance our future operations and capital needs and our flexibility to respond to changing business and economic conditions and business opportunities.

Quarterly Results (Unaudited)

     Despite a concentration of holidays in the fourth quarter of the year, as a result of our expansive product lines and wholesale customer base and increased promotional activities, the impact of seasonality on the quarterly results of our wholesale operations in recent years has been limited. Promotional activities, including special dating terms, particularly with respect to Halloween and Christmas products sold to retailers and other distributors in the third quarter, and the introduction of our new everyday products and designs during the fourth quarter generally result in higher accounts receivables and inventory balances. Our retail operations are subject to substantial seasonal variations. Historically, our retail stores have realized a significant portion of their net sales, net income and cash flow in the fourth quarter of the year, principally due to the sales in October for the Halloween season and, to a lesser extent, due to sales for end of year holidays.

     The following table sets forth our historical revenues, gross profit, income (loss) from operations and net income (loss), by quarter, for 2009 and 2008.

		For the Three Months Ended,
		March 31,				June 30,				September 30,				December 31,
		(Dollars in thousands)
2009
Revenues:
Net sales		$	309,046			$	337,536			$	336,944			$	483,798
Royalties and franchise fees			3,694				4,536				4,164				7,100
Gross profit			103,629				128,425				121,453				214,776
Income from operations			12,201				27,818				14,937				86,917
Net income attributable to Amscan Holdings, Inc.			2,403				10,952				3,079				46,119
2008
Revenues:
Net sales		$	325,032			$	365,174			$	356,231			$	491,204
Royalties and franchise fees			5,342				6,350				5,863				4,465
Gross profit			110,347				139,414				125,311				196,143
Income from operations			8,778				35,511				18,573				51,056	(a)
Net income (loss) attributable to Amscan Holdings, Inc.			(2,537	)			14,669				4,563				23,815	(a)

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

     Our earnings are affected by changes in interest rates as a result of our variable rate indebtedness. However, we utilize interest rate swap agreements to manage the market risk associated with fluctuations in interest rates. If market interest rates for our variable rate indebtedness averaged 2% more than the interest rate actually paid for the years ended December 31, 2009, 2008 and 2007, our interest expense, after considering the effects of our interest rate swap agreements, would have increased, and income before income taxes would have decreased, by $6.7 million, $7.3 million, and $7.9 million, respectively. These amounts are determined by considering the impact of the hypothetical interest rates on our borrowings and interest rate swap agreements. This analysis does not consider the effects of the reduced level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management would likely take actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that we would take and their possible effects, the sensitivity analysis assumes no changes in our financial structure.

     Our earnings are also affected by fluctuations in the value of the U.S. dollar as compared to foreign currencies, predominately in European countries, as a result of the sales of our products in foreign markets. Although we periodically enter into foreign currency forward contracts to hedge against the earnings effects of such fluctuations, we (1) may not be able to achieve hedge effectiveness to qualify for hedge-accounting treatment and, therefore, would record any gain or loss on the fair value of the derivative in other income (expense) and (2) may not be able to hedge such risks completely or permanently. A uniform 10% strengthening in the value of the dollar relative to the currencies in which our foreign sales are denominated would have resulted in a decrease in gross profit of $5.5 million, $5.6 million, and $5.4 million for the years ended December 31, 2009, 2008 and 2007, respectively. These calculations assume that each exchange rate would change in the same direction relative to the U.S. dollar. In addition to the direct effects of changes in exchange rates, which could change the U.S. dollar value of the resulting sales, changes in exchange rates may also affect the volume of sales or the foreign currency sales price as competitors’ products become more or less attractive. Our sensitivity analysis of the effects of changes in foreign currency exchange rates does not factor in a potential change in sales levels or local currency prices.

Item 8. Financial Statements and Supplementary Data

     See the consolidated financial statements and supplementary data listed in the accompanying Index to Consolidated Financial Statements and Financial Statement Schedule on page F-1 herein.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     Not applicable.

Item 9A. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

          We maintain disclosure control procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), designed to provide reasonable assurance that information required to be disclosed in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’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.

          As of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer evaluated, with the participation of our management, the effectiveness of our disclosure controls and procedures. Based on the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2009.

(b) Changes in Internal Control Over Financial Reporting

          There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter of 2009 identified in connection with our Chief Executive Officer’s and Chief Financial Officer’s evaluation that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

(c) Management’s Annual Report on Internal Control Over Financial Reporting

          The management of Amscan is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d — 15(f) promulgated under the Exchange Act, as amended, as a process designed by, or under the supervision of, Amscan’s Chief Executive Officer and Chief Financial officer, or persons performing similar functions, and effected by Amscan’s board of directors, management and other personnel, 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 and includes those policies and procedures that:

	•		Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of Amscan;
	•		Provide reasonable assurance that transactions are recorded as necessary to permit preparation of the consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of Amscan are being made only in accordance with authorizations of management and directors of Amscan; and
	•		Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Amscan’s assets that could have a material effect on the consolidated financial statements.

          Our internal control system was designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also,

projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

     Under the supervision of the Company’s Chief Executive Officer and Chief Financial Officer, management conducted an evaluation of the Company’s internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on the evaluation performed, management concluded that its internal control over financial reporting, based on the COSO criteria, was effective, at the reasonable assurance level, as of December 31, 2009.

     This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

Item 9 (A) (T)

The information required by Item 9 (A) (T) of Regulation S-K is included herein in Item 9A(b).

Item 9B. Other Information

     Not applicable.

PART III

Item 10. Directors and Executive Officers of the Registrant

     Set forth below are the names, ages and positions with the Company of the persons who are serving as directors and executive officers of the Company at March 31, 2010.

Name		Age				Position
Gerald C. Rittenberg			58			Chief Executive Officer and Director
James M. Harrison			58			President, Chief Operating Officer and Director
Michael D. Heller			54			Executive Vice President — Retail Operations
Michael A. Correale			52			Chief Financial Officer
Robert J. Small			43			Chairman of the Board of Directors
Steven J. Collins			41			Director
Michael F. Cronin			56			Director
Kevin M. Hayes			41			Director
Jordan A. Kahn			68			Director
Richard K. Lubin			63			Director
Carol M. Meyrowitz			56			Director
David M. Mussafer			46			Director

     Gerald C. Rittenberg became our Chief Executive Officer in December 1997. From May 1997 until December 1997, Mr. Rittenberg served as acting Chairman of the Board. Prior to that time, Mr. Rittenberg served as the President of Amscan Inc. from April 1996 to October 1996, and as our President from the time of our formation in October 1996.

     James M. Harrison became our President in December 1997 and our Chief Operating Officer in March 2002. From February 1997 to March 2002, Mr. Harrison also served as our Chief Financial Officer and Treasurer. From February 1997 to December 1997, Mr. Harrison served as our Secretary. Prior to that time, Mr. Harrison served as the Chief Financial Officer of Amscan Inc., from August 1996 to February 1997.

     Michael D. Heller became our Executive Vice President — Retail Operations in December 2008. From December 2007 to December 2008, Mr. Heller served as the Executive Vice President of PCFG following our Party City Franchise Group transaction. Prior to that time, Mr. Heller was a significant franchisee of Party City.

     Michael A. Correale became our Chief Financial Officer in March 2002. Prior to that time, Mr. Correale served as our Vice President — Finance, from May 1997 to March 2002.

     Robert J. Small became one of our directors upon the consummation of the 2004 Transactions. Mr. Small, a Managing Director of Berkshire Partners LLC, which he joined in 1992, currently serves on the board of directors of TransDigm Group Incorporated. Mr. Small has also served on the board of directors of Hexcel Corporation and several privately held companies.

     Steven J. Collins has been a member of our Board since August 2008. Mr. Collins, a Managing Director of Advent International, which he joined in 1995, is currently a member of the board of directors of Kirkland’s, Inc. and previously served on the board of directors of lululemon athletica inc. and several privately held businesses. Mr. Collins received a B.S. from the Wharton School of the University of Pennsylvania and an M.B.A. from the Harvard Business School.

     Michael F. Cronin became one of our directors upon the consummation of the 2004 Transactions. From 1991 to the present, Mr. Cronin has served as Managing Partner of Weston Presidio. Mr. Cronin also serves as a director of several privately held companies and has served on the board of directors of Tweeter Home Entertainment Group and Tekni-Plex Inc.

     Kevin M. Hayes became one of our directors upon the consummation of the 2004 Transactions. Mr. Hayes is a General Partner of Weston Presidio and has served in that position since 2000. Mr. Hayes is also a director of Associated Materials Incorporated.

     Jordan A. Kahn became a director in January 2005. Mr. Kahn was the founder and Chairman of the Board of Directors of The Holmes Group and served as President and Chief Executive Officer of the Holmes organization from 1982 through 2005. Since 1968, Mr. Kahn has also been Managing Director of Jordan Kahn Co., Inc., a manufacturer’s representative representing small electric personal appliance manufacturers to retailers across the Northeast.

     Richard K. Lubin became one of our directors upon the consummation of the 2004 Transactions. Mr. Lubin, a Managing Director of Berkshire Partners LLC, which he co-founded in 1986, currently serves on the board of directors of Electro-Motive Diesel. Mr. Lubin has also served on the board of directors of Holmes Products Corporation and U.S. Can Corporation.

     Carol M. Meyrowitz became a director in August 2006. Ms. Meyrowitz is currently a Director and President and CEO of The TJX Companies, Inc., where she has had extensive management experience since 1983. Ms. Meyrowitz also serves as a director of Staples, Inc. and is a member of the Board of Overseers for the Joslin Diabetes Center. Ms. Meyrowitz also served on the board of directors of the Yankee Candle Company from 2004 through 2007.

     David M. Mussafer has been a member of our Board since August 2008. Mr. Mussafer, a Managing Partner of Advent International, which he joined in 1990, is currently a member of the board of directors of lululemon athletica inc. and several privately held businesses. Mr. Mussafer received a B.S.M. from Tulane University and an M.B.A. from the Wharton School of the University of Pennsylvania.

Board of Directors

     The Board of Directors is led by Robert J. Small, a Non-Executive Chairman of the Board, and is comprised of seven additional non-employee directors and two employee directors. The Board of Directors has determined that Jordan A. Kahn and Carol M. Meyrowitz are independent directors, as used in Item 7(d)(iv) of Schedule 14A under the Exchange Act.

     The Board of Directors holds regularly scheduled meetings each quarter. In addition to the quarterly meetings, there are typically other scheduled and special meetings annually. At each quarterly meeting, time is set aside for the non-management directors to meet without management present.

Board Leadership Structure

     The Company separates the roles of Chief Executive Officer and Chairman of the Board of Directors in recognition of the differences between the two roles. The Chief Executive Officer is responsible for setting the strategic direction for the Company and the day to day leadership and performance of the Company, while the Chairman of the Board of Directors provides guidance to the Chief Executive Officer and sets the agenda for board meetings and presides over meetings of the full Board of Directors. We also believe that separation of the positions creates an environment that is more conducive to objective evaluation and oversight of management’s performance, increasing management accountability and improving the ability of the Board of Directors to monitor whether management’s actions are in the best interests of the Company and its stockholders. Mr. Small, our Chairman of the Board of Directors, presides at all executive sessions of the Board of Directors.

Risk Oversight

     The Board of Director’s role in the Company’s risk oversight process includes receiving reports from members of senior management on areas of material risk to the Company, including operational, financial, legal and regulatory, and strategic risks. The full Board of Directors receives these reports to enable it to understand our risk identification, risk management and risk mitigation strategies. While the Audit and Compensation Committees are responsible for evaluating certain risks and overseeing the management of such risks, the entire Board of Directors is informed of such risks at the Board of Directors meeting following a given committee meeting. This enables the Board of Directors and its committees to coordinate the risk oversight role, particularly with respect to risk interrelationships.

Audit Committee

     The Audit Committee of the Board of Directors consists of Michael F. Cronin, Chairman, Robert J. Small, Steven J. Collins and James M. Harrison. The Audit Committee is responsible for evaluating and recommending independent auditors, reviewing with the independent auditors the scope and results of the audit engagement and establishing and monitoring the Company’s financial policies and control procedures. The audit committee is governed by a written charter approved by the Board of Directors. There are two regularly scheduled meetings of the Audit Committee and typically other special meetings each year.

     As required by SEC rules, the Audit Committee has established procedures for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters, as well as the confidential and anonymous submission of information, written or oral, by Company employees regarding questionable accounting or auditing matters. Both our independent auditors and internal financial personnel meet privately with our Audit Committee and have unrestricted access to the Committee.

     The Board of Directors has determined that Mr. Harrison has the requisite financial knowledge and experience and qualifies as an “audit committee financial expert” within the meaning of SEC regulations. Because of his role as an executive officer of the Company, Mr. Harrison is not “independent” within the meaning of SEC regulations.

Compensation Committee

     The Compensation Committee of the Board of Directors consists of Richard K. Lubin, Chairman, Kevin M. Hayes, Jordan A. Kahn and David M. Mussafer. The Compensation Committee is responsible for setting and administering the Company’s policies that govern executive compensation and for establishing the compensation of the Company’s executive officers. The Compensation Committee is also responsible for the administration of, and grants under, the Company’s equity incentive plan.

Code of Ethics

     The Company has adopted a Code of Business Conduct, a copy of which is filed with the Securities and Exchange Commission as an exhibit to this report. The Company’s Code of Business Conduct is a “code of ethics,” as defined in Item 406(b) of Regulation S-K of the Securities and Exchange Commission.

Section 16(a) Beneficial Ownership Reporting Compliance

     Because the Company’s common stock is not registered under the Exchange Act, none of the Company’s directors, officers or stockholders is obligated to file reports of beneficial ownership of Company common stock pursuant to Section 16 of the Exchange Act.

Item 11. Executive Compensation

Compensation Discussion and Analysis

     This compensation discussion and analysis section is intended to provide information about our compensation objectives and policies for our Chief Executive Officer, our Chief Operating Officer, our Executive Vice President — Retail Operations and our Chief Financial Officer (we refer to these officers as our “named executive officers”) that will place in context the information contained in the tables that follow this discussion.

Compensation Committee

     The Compensation Committee of the Board of Directors consists of Richard K. Lubin, Chairman, Kevin M. Hayes, Jordan A. Kahn and David M. Mussafer. The Compensation Committee is responsible for setting and administering the Company’s policies that govern executive compensation and for establishing the compensation of the Company’s executive officers. The Compensation Committee is also responsible for the administration of, and grants under, the Company’s Equity Incentive Plan (as defined hereafter). The Compensation Committee met periodically in 2009, and all members of the Compensation Committee attended each meeting. Our Board of Directors determined that each of these directors is a non-employee director within the meaning of Section 16 of the Securities Exchange Act.

     The Compensation Committee has the authority to retain outside independent executive compensation consultants to assist in the evaluation of executive officer compensation and in order to ensure the objectivity and appropriateness of the actions of the Compensation Committee. The Compensation Committee has the sole authority to retain, at our expense, and terminate any such consultant, including sole authority to approve such consultant’s fees and other retention terms. However, all decisions regarding compensation of executive officers are made solely by the Compensation Committee. No independent executive compensation consultants were retained by the Compensation Committee during 2009.

Compensation Philosophy

     The executive compensation program of the Company has been designed to motivate, reward, attract, and retain the management deemed essential to ensure the success of the Company. The program seeks to align executive compensation with Company objectives, business strategy, and financial performance. Our Company’s goal is to create a sustainable competitive advantage by achieving higher productivity and lower costs than our competitors. Our compensation objectives at all compensation levels are designed to support this goal by:

	•		linking pay to performance to create incentives to perform;
	•		ensuring compensation levels and components are actively managed; and
	•		using equity compensation to align employees’ long-term interests with those of the stockholders.

Compensation

     The Chief Executive Officer evaluates the performance of all executive and senior officers against their established goals and objectives. Annually, the Chief Executive Officer uses the results of these evaluations to determine compensation packages for executive and senior officers to be recommended for approval by the Compensation Committee. The Compensation Committee meets annually, usually in January, to evaluate the performance of the executive and senior officers, and to establish their base salaries, annual cash bonus and share-based incentive compensation to be effective in the first quarter of the current year. The Chief Executive Officer may request a meeting of the Compensation Committee at an interim date to review the compensation package of a named executive or other officer, as the result of unforeseen organizational or responsibility changes, including new hires that occur during the year.

     In determining compensation components and levels, the Chief Executive Officer and the Compensation Committee consider the size and responsibility of the officer’s position, the Company’s overall performance, the officer’s overall performance and future potential, the compensation paid by competitors to employees in comparable positions, and the officer’s income potential resulting from common stock acquired and stock options received in prior years.

     Our Chief Executive Officer and Chief Operating Officer set salaries and bonus opportunities for employees below the levels of executive and senior officers and make recommendations with respect to equity incentive awards to employees at these levels.

Components of Compensation

     The Company’s named executive and other officer compensation includes both short-term and long-term components. Short-term compensation consists of an officer’s annual base salary and annual incentive cash bonus. Long-term compensation may include grants of stock options, restricted stock or other share-based incentives established by the Company, as determined by the Compensation Committee.

     Compensation is comprised of the following components:

     Base Salary

     The base salaries for our officers were determined based on the scope of their responsibilities, taking into account competitive market compensation paid by other companies for similar positions. Generally, we believe that executive base salaries should be targeted near the median of the range of salaries for executives in similar positions and with similar responsibilities. Base salaries will be reviewed annually, and adjusted from time to time to reflect individual responsibilities, performance and experience, as well as market compensation levels.

Annual Cash Bonus Plan

     Officers are eligible to receive cash bonuses based on the Company’s actual performance compared to budgeted amounts approved by the Board of Directors on an annual basis. The bonus program focuses on Adjusted EBITDA, as well as the accomplishment of individual goals. Adjusted EBITDA is a non-GAAP measure used internally and is measured by taking net income (loss) from operations and adding back interest charges, income taxes, depreciation and amortization and adjustments for other non-cash or non-recurring transaction. Bonus targets are approved by the Compensation Committee on an annual basis and range between 10% and 100% of the employee’s base salary, based on the employee’s position with the Company, before any adjustments based on actual Adjusted EBITDA achieved or individual performance.

Stock-based Incentive Program

     The Company has adopted the AAH Holdings Corporation 2004 Equity Incentive Plan (the “Equity Incentive Plan”) under which the Company may grant incentive awards in the form of options to purchase shares of Company common stock and shares of restricted or unrestricted Company common stock to certain directors, officers, employees and consultants (“Participants”) of the Company and its affiliates. The Compensation Committee is authorized to make grants and various other decisions under the Equity Incentive Plan. Unless otherwise determined by the Compensation Committee, any Participant granted an award under the Equity Incentive Plan must become a party to, and agree to be bound by, the Company’s Stockholders’ Agreement.

     The Compensation Committee uses the Equity Incentive Plan as an important component of our overall compensation program due to its effect on retaining key employees, aligning key employees’ financial interests with the interests of shareholders, and rewarding the achievement of the Company’s long-term strategic goals. Common stock options provide our employees with the opportunity to purchase and maintain an equity interest in the Company and to share in the appreciation of the value of our stock.

     At December 31, 2009, there are 2,981.07 shares of Company common stock reserved for issuance under the Equity Incentive Plan, which may include restricted and unrestricted common stock awards and basic and performance incentive and nonqualified stock options. The Company’s common stock and stock options are nontransferable (except under certain limited circumstances). Common stock options issued under the plan are issued at the current fair market value on the date of grant. The grant dates for these stock options are the dates the Compensation Committee approves such awards. Common stock options generally vest 20% each year over a five-year period and, unless otherwise determined by the Compensation Committee, have a term of ten years. Upon a Participant’s death or when the Participant’s employment with the Company or the applicable affiliate of the Company is terminated for any reason, such Participant’s previously unvested stock options are forfeited and the Participant or his or her legal representative may, within 60 days (if termination of employment is for any reason other than death) or 90 days (in the case of the Participant’s death), exercise any previously vested Company stock options and in the case of performance options, within 30 days following the date value is determined as specified by the Board in the agreement evidencing the grant of such options.

     Unless otherwise provided in the related award agreement or, if applicable, the Stockholders’ Agreement, immediately prior to certain change of control transactions described in the Equity Incentive Plan, all outstanding Company stock options will, subject to certain limitations, become fully exercisable and vested and any restrictions and deferral limitations applicable to any restricted stock awards will lapse.

     The Equity Incentive Plan will terminate ten years after its effective date; however, awards outstanding as of such date will not be affected or impaired by such termination. The Company’s Board of Directors and the Compensation Committee has authority to amend the Equity Incentive Plan and awards granted thereunder, subject to the terms of the Equity Incentive Plan.

Other Compensation

     Each named executive is eligible to participate in the Company’s benefit plans, such as medical, dental, group life, disability and accidental death and dismemberment insurance. Under our profit sharing plan, our named executive officers and generally all full-time domestic exempt and non-exempt employees who meet certain length-of-service and age requirements, as defined, may contribute a portion of their compensation to the plan on a pre-tax basis and receive a matching contribution ranging from 25% to 100% of the employee contributions, not to exceed a range of 4% to 6% of the employee’s annual salary. In addition our profit-sharing plans provide for annual discretionary contributions to be credited to participants’ accounts. Named executive officers participate in the benefit plans on the same basis as most other Company employees.

     The Chief Executive Officer and the Chief Operating Officer drive automobiles owned by the Company. The Chief Financial Officer receives an allowance to cover the cost of his automobile. The annual value of the automobile usage and the allowance are reported as taxable income to the executive. All employees, including the named executives are reimbursed for the cost of business related travel.

     Executive officers did not receive any other perquisites or personal benefits or property in 2009.

Accounting and Tax Treatment

Accounting Treatment

     The Company accounts for share-based payment awards in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 123(R) or Accounting Standards Codification Subtopic 718, “Share-based Payment Awards,” which requires that all forms of share-based payments to employees, including but not limited to stock options, be treated as compensation expense and recognized in the Company’s consolidated statements of income over the vesting period.

     Cash compensation or non-share based compensation, including base salary and incentive compensation, is recorded as an expense in the Company’s consolidated financial statements as it is earned.

Tax Treatment

     As the Company’s common stock is not publicly traded, executive compensation is not subject to the provisions of Section 162(m) of the Internal Revenue Code which limit the deductibility of compensation paid to certain individuals to $1,000,000, excluding qualifying incentive-based compensation. However, as part of its role, the Compensation Committee reviews and considers the current and future deductibility of executive compensation. Accordingly, the Company believes that compensation paid to its named executive officers is and will remain fully deductible for federal income tax purposes. However, in certain situations, the Compensation Committee may approve compensation that will not meet these requirements in order to ensure competitive levels of total compensation for its named executive and senior officers. In addition, should executive compensation become non-deductible for income tax purposes, the Compensation Committee may consider revisions to its policies and programs in response to this provision of law.

     The following is a general description of the federal income tax consequences to the Participant and the Company with regard to the types of share-based payment awards granted under the Equity Incentive Plan:

     Incentive stock-options. There typically will be no federal income tax consequences to the optionee or to the Company upon the grant of an incentive stock option. As discussed subsequently in this paragraph, the exercise of an incentive stock option may result in alternative minimum tax consequences to the optionee. If the optionee holds the option shares for the required holding period of at least two years after the date the option was granted and one year after exercise, the difference between the exercise price and the amount realized upon sale or disposition of the option shares will be long-term capital gain or loss, and the Company will not be entitled to a federal income tax deduction. If the optionee disposes of the option shares in a sale, exchange, or other disqualifying disposition before the required holding period ends, he or she will recognize taxable ordinary income in an amount equal to the excess of the fair market value of the option shares at the time of exercise over the exercise price, and the Company will be allowed a federal income tax deduction equal to such amount. While the exercise of an incentive stock option does not result in current taxable income, the excess of the fair market value of the option shares at the time of exercise over the exercise price will be an item of adjustment for purposes of determining the optionee’s alternative minimum taxable income. Thus, exercise of an incentive stock option may trigger alternative minimum tax.

     Non-qualified stock-options. There typically will be no federal income tax consequences to the optionee or to the Company upon the grant of a nonqualified stock option under the Plan. When the optionee exercises a nonqualified option, however, he or she will recognize ordinary income in an amount equal to the excess of the fair market value of the common stock received at the time of exercise over the exercise price, and the Company will be allowed a corresponding deduction, subject to any applicable limitations under the Internal Revenue Code Section 162(m). Any gain that the optionee recognizes when he or she later sells or disposes of the option shares will be short-term or long-term capital gain, depending on how long the shares were held.

     Restricted Stock. Unless a participant makes an election to accelerate recognition of the income to the date of grant (as described below), the participant will not recognize income, and the Company will not be allowed a tax deduction, at the time a restricted stock award is granted. When the restrictions lapse, the participant will recognize ordinary income equal to the fair market value of the common stock as of that date (less any amount paid for the stock), and the Company will be allowed a corresponding federal income tax deduction at that time, subject to any applicable limitations under Section 162(m) of the Internal Revenue Code. If the participant files an election under Section 83(b) of the Internal Revenue Code within 30 days of the date of grant of the restricted stock, he or she will recognize ordinary income as of the date of grant equal to the fair market value of the stock as of that date (less any amount paid for the stock), and the Company will be allowed a corresponding federal income tax deduction at that time, subject to any applicable limitations under Section 162(m). Any future appreciation in the stock will be taxable to the participant at capital gains rates. However, if the stock is later forfeited, the participant will not be able to recover the tax previously paid pursuant to a Section 83(b) election.

     The Compensation Committee has reviewed and discussed the “Compensation Discussion and Analysis” required by Item 402(b) of Regulation S-K with management. Based on such review and discussions, the Compensation Committee recommended to the Board of Directors that the “Compensation Discussion and Analysis” be included in this Form 10-K.

Respectfully submitted,

Richard K. Lubin, Chairman
Kevin M. Hayes
Jordan A. Kahn
David M. Mussafer

     This Report shall not be deemed to be incorporated by reference by any general statement incorporating this report on Form 10-K into any filing under the Securities Act of 1933, as amended, and shall not otherwise be deemed filed under such statute.

Summary of Compensation Table

														Option				Other
Name and Principal Position		Year				Salary (a)				Bonus (b)				Awards (c)				Compensation (d)				Total
Gerald C, Rittenberg			2009			$	1,050,000			$	1,367,000			$	—			$	21,400			$	2,438,400
Chief Executive Officer			2008				1,000,000				1,066,000				595,300				21,400				2,682,700
			2007				825,000				879,000				—				27,100				1,731,000
James M. Harrison			2009			$	892,500			$	1,114,500			$	—			$	20,600			$	2,027,600
President and			2008				850,000				858,600				446,500				19,800				2,174,900
Chief Operating Officer			2007				742,500				791,100				—				24,700				1,558,300
Michael D. Heller			2009			$	507,800				270,100								700				778,600
Executive Vice President — Retail Operations			2008				507,800								331,000				700				839,500
Michael A. Correale			2009			$	333,125			$	129,100			$	—			$	40,400			$	502,625
Chief Financial Officer			2008				325,000				93,100				—				37,400				455,500
			2007				300,000				128,000				—				33,300				461,300

Grants of Plan Based Awards

     There were no time or performance-based stock option awards granted to the named officers during the year ended December 31, 2009.

Potential Payments upon Change in Control

     The employment contracts of Mr. Rittenberg and Mr. Harrison and a severance agreement with Mr. Correale provide for severance benefits upon the involuntary termination of their employment in the event of change of control to help keep them focused on their work responsibilities during the uncertainty that accompanies a change in control, to provide benefits for a period of time after a change in control transaction and to help us attract and retain key talent. Under these agreements, Mr. Rittenberg and Mr. Harrison would receive a minimum of 12 months of compensation and up to 36 months compensation should Mr. Rittenberg or Mr. Harrison be terminated following a change in control or should the Company extend the term of their Restriction Period (as defined hereafter, see “Employment Arrangements”) and Mr. Correale would receive 12 months of compensation.

Options Exercised

     There were no time or performance based options exercised by our named executives during the year ended December 31, 2009.

Outstanding Equity Awards

     The following table sets forth certain information with respect to outstanding equity awards at December 31, 2009 with respect to the named executive officers.

		Number of Securities								Option				Option
		Underlying Unexercised Options								Exercise				Expiration
Name		No. Exercisable				No. Unexercisable				Price ($/Share)				Date
Gerald C. Rittenberg			—				100.00				22,340				3/6/2018
			32.40				137.20				12,000				4/1/2016
			154.51				162.86				10,000				4/1/2015
			40.58				—				2,500				4/30/2014
James M. Harrison			—				75.00				22,340				3/6/2018
			29.16				123.48				12,000				4/1/2016
			103.01				108.58				10,000				4/1/2015
			20.29				—				2,500				4/30/2014
Michael D. Heller			4.53				53.42				28,350				12/30/2018
Michael A. Correale			9.72				28.44				12,000				4/1/2016
			10.44				17.40				10,000				4/1/2015