UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

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

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

Commission file number 000-21827

Amscan Holdings, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware (State or Other Jurisdiction of Incorporation or Organization)		13-3911462 (I.R.S. Employer Identification No.)

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

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

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

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

     As of August 16, 2010, 1,000.00 shares of Registrant’s common stock were outstanding.

 

 

AMSCAN HOLDINGS, INC.
FORM 10-Q

June 30, 2010

TABLE OF CONTENTS

		Page
PART I
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at June 30, 2010 and December 31, 2009			3
Condensed Consolidated Statements of Operations for the Three Months Ended June 30, 2010 and 2009			4
Condensed Consolidated Statements of Operations for the Six Months Ended June 30, 2010 and 2009			5
Condensed Consolidated Statement of Stockholders’ Equity for the Six Months Ended June 30, 2010			6
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009			7
Notes to Condensed Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			24
Item 3. Quantitative and Qualitative Disclosures About Market Risk			29
Item 4. Controls and Procedures			30
Item 5. Other Events			30
PART II
Item 6. Exhibits			31
Signature			32
EX-31.1
EX-31.2
EX-32

     References throughout this document to “Amscan,” “AHI,” and 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 majority 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.

AMSCAN HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share amounts)

		June 30,				December 31,
		2010				2009
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	16,046			$	15,420
Accounts receivable, net of allowances			88,923				82,781
Inventories, net of allowances			345,520				335,950
Prepaid expenses and other current assets			77,214				69,541
Total current assets			527,703				503,692
Property, plant and equipment, net			183,332				174,994
Goodwill			577,368				548,439
Trade names			157,355				157,283
Other intangible assets, net			63,303				54,669
Other assets, net			15,541				41,424
Total assets		$	1,524,602			$	1,480,501
LIABILITIES, REDEEMABLE COMMON SECURITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Loans and notes payable		$	130,235			$	77,635
Accounts payable			82,985				76,901
Accrued expenses			101,148				93,680
Income taxes payable			4,011				32,061
Redeemable warrants			15,444				15,444
Current portion of long-term obligations			7,209				34,906
Total current liabilities			341,032				330,627
Long-term obligations, excluding current portion			538,417				538,892
Deferred income tax liabilities			102,370				101,570
Deferred rent and other long-term liabilities			8,942				11,901
Total liabilities			990,761				982,990
Redeemable common securities (including 592.84 common shares issued and outstanding at June 30, 2010 and December 31, 2009)			18,389				18,389
Commitments and contingencies
Stockholders’ equity:
Common Stock ($0.01 par value; 40,000.00 shares authorized; 30,226.50 shares issued and outstanding at June 30, 2010 and December 31, 2009)			—				—
Additional paid-in capital			357,099				335,823
Retained earnings			165,606				149,557
Accumulated other comprehensive loss			(9,519	)			(8,395	)
Amscan Holdings, Inc. stockholders’ equity			513,186				476,985
Noncontrolling interests			2,266				2,137
Total stockholders’ equity			515,452				479,122
Total liabilities, redeemable common securities and stockholders’ equity		$	1,524,602			$	1,480,501

See accompanying notes to unaudited condensed consolidated financial statements.

AMSCAN HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands)

		Three Months Ended June 30,
		2010				2009
Revenues:
Net sales		$	352,705			$	337,536
Royalties and franchise fees			4,453				4,536
Total revenues			357,158				342,072
Expenses:
Cost of sales			210,865				209,111
Wholesale selling expenses			10,845				9,959
Retail operating expenses			64,416				58,164
Franchise expenses			3,149				2,876
General and administrative expenses			28,882				30,989
Art and development costs			3,634				3,155
Total expenses			321,791				314,254
Income from operations			35,367				27,818
Interest expense, net			9,126				10,492
Other expense (income), net			122				(292	)
Income before income taxes			26,119				17,618
Income tax expense			9,588				6,607
Net income			16,531				11,011
Less: net income attributable to noncontrolling interest			71				59
Net income attributable to Amscan Holdings, Inc.		$	16,460			$	10,952

See accompanying notes to unaudited condensed consolidated financial statements.

AMSCAN HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands)

		Six Months Ended June 30,
		2010				2009
Revenues:
Net sales		$	657,084			$	646,582
Royalties and franchise fees			8,297				8,230
Total revenues			665,381				654,812
Expenses:
Cost of sales			410,765				414,528
Wholesale selling expenses			21,235				20,130
Retail operating expenses			117,376				109,665
Franchise expenses			6,273				5,765
General and administrative expenses			58,807				58,424
Art and development costs			7,269				6,281
Total expenses			621,725				614,793
Income from operations			43,656				40,019
Interest expense, net			18,427				21,157
Other expense (income), net			53				(85	)
Income before income taxes			25,176				18,947
Income tax expense			9,013				5,475
Net income			16,163				13,472
Less: net income attributable to noncontrolling interest			114				117
Net income attributable to Amscan Holdings, Inc.		$	16,049			$	13,355

See accompanying notes to unaudited condensed consolidated financial statements.

AMSCAN HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
Six Months Ended June 30, 2010
(Unaudited)
(Amounts in thousands, except share amounts)

																		Accumulated				Amscan
										Additional								Other				Holdings, Inc.
		Common				Common				Paid-in				Retained				Comprehensive				Stockholders’				Noncontrolling
		Shares				Stock				Capital				Earnings				Loss				Equity				Interests				Total
Balance at December 31, 2009			30,226.50			$	—			$	335,823			$	149,557			$	(8,395	)		$	476,985			$	2,137			$	479,122
Net income															16,049								16,049				114				16,163
Net change in cumulative translation adjustment																			(2,107	)			(2,107	)			15				(2,092	)
Change in fair value of interest rate swap contracts, net of income taxes																			402				402								402
Change in fair value of foreign exchange contracts, net of income taxes																			581				581								581
Comprehensive income																							14,925				129				15,054
Issuance of non-redeemable warrants											21,000												21,000								21,000
Equity based compensation expense											276												276								276
Balance at June 30, 2010			30,226.50			$	—			$	357,099			$	165,606			$	(9,519	)		$	513,186			$	2,266			$	515,452

See accompanying notes to unaudited condensed consolidated financial statements.

AMSCAN HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)

		Six Months Ended June 30,
		2010				2009
Cash flows provided by operating activities:
Net income		$	16,163			$	13,472
Less: net income attributable to noncontrolling interest			114				117
Net income attributable to Amscan Holdings, Inc.			16,049				13,355
Adjustments to reconcile net income attributable to Amscan Holdings Inc. to net cash provided by operating activities:
Depreciation and amortization expense			23,706				21,665
Amortization of deferred financing costs			1,060				1,070
Provision for doubtful accounts			845				2,874
Deferred income tax provision			595				1,760
Deferred rent			811				899
Undistributed income in unconsolidated joint venture			(364	)			(182	)
Loss on disposal of property and equipment			237				440
Equity based compensation			276				438
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable			(5,203	)			5,523
(Increase) decrease in inventories			(9,570	)			26,085
Increase in prepaid expenses and other current assets			(5,941	)			(6,516	)
Decrease in accounts payable, accrued expenses and income taxes payable			(15,839	)			(36,484	)
Net cash provided by operating activities			6,662				30,927
Cash flows used in investing activities:
Cash paid in connection with acquisitions			(5,261	)			(726	)
Capital expenditures			(23,170	)			(12,281	)
Proceeds from disposal of property and equipment			134				54
Net cash used in investing activities			(28,297	)			(12,953	)
Cash flows provided by (used in) financing activities:
Repayment of loans, notes payable and long-term obligations			(29,242	)			(14,850	)
Proceeds from loans, notes payable and long-term obligations			53,284				—
Capital contributions and proceeds from issuance of common stock and exercise of options			—				79
Net cash provided by (used in) financing activities			24,042				(14,771	)
Effect of exchange rate changes on cash and cash equivalents			(1,781	)			2,654
Net increase in cash and cash equivalents			626				5,857
Cash and cash equivalents at beginning of period			15,420				13,058
Cash and cash equivalents at end of period		$	16,046			$	18,915

See accompanying notes to unaudited condensed consolidated financial statements.

AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share amounts)

Note 1 — Description of Business

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

Note 2 — Acquisitions

     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 market, 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. The results of this newly acquired business are included in the condensed consolidated financial statements since the March 1, 2010 acquisition date and are reported in the operating results of the Company’s Wholesale segment.

     The acquisition-date fair value of the total consideration transferred was $45,881, including cash of $24,881 which was held in escrow at December 31, 2009 and reported in other assets in the consolidated balance sheet at that date, and a warrant to purchase approximately 2% of the Common Stock of AAH. The fair value of the warrant was determined based on the agreement between the parties.

     The American Greetings acquisition has been accounted for as a purchase business combination. The excess of the purchase price over the tangible assets and identified intangible assets acquired was assigned to goodwill. The following summarizes the estimated fair value of the assets acquired: inventory of $4,000, fixed assets of $3,445 and intangible license rights of $13,812, which are being amortized over the remaining license periods averaging 2.5 years. The remaining $24,624 represents goodwill which is not being amortized. Goodwill arises because the purchase price reflects the strategic fit and expected synergies this business will bring to the Company’s operations. The entire excess of the purchase price over the fair value of the tangible assets acquired is deductible for tax purposes over 15 years.

     Pro-forma results have not been presented because the effect of this business combination is not material to the Company’s condensed consolidated results of operations. The acquisition costs related to the transaction were immaterial to the condensed consolidated financial statements and were expensed as incurred.

Note 3 — Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements as of June 30, 2010 and for the three and six months ended June 30, 2010 and 2009, and the audited balance sheet as of December 31, 2009, include the accounts of the Company and its majority-owned and controlled entities. All material intercompany balances and transactions have been eliminated in consolidation. The unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included in the unaudited condensed consolidated financial statements. Operating results for the three and six months ended June 30, 2010 are not necessarily indicative of the results to be expected for the year ending December 31, 2010. Our business is subject to substantial seasonal variations, as our retail segment has realized a significant portion of its net sales, cash flow and net income in the fourth quarter of each year, principally due to its Halloween season sales in October and, to a lesser extent, other holiday season sales at the end of the calendar year. We expect that this general pattern will continue. Our results of operations may also be affected by industry factors that may be specific to a particular period, such as movement in and the general level of raw material costs. For further information, see the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, as filed with the Securities and Exchange Commission.

AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Amounts in thousands, except share amounts)

Note 4 — Inventories

     Inventories consisted of the following:

		June 30,				December 31,
		2010				2009
Finished goods		$	319,687			$	325,421
Raw Materials			31,117				12,650
Work in Process			5,712				6,431
			356,516				344,502
Reserve for slow-moving and obsolete inventory			(10,996	)			(8,552	)
		$	345,520			$	335,950

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

Note 5 — Income Taxes

     The income tax expense for the three and six months ended June 30, 2010 and 2009 were determined based upon estimates of the Company’s consolidated effective income tax rates of 35.7% for the year ending December 31, 2010 and 37.0% for the year ending December 31, 2009, respectively. The differences between the estimated consolidated effective income tax rate and the U.S. federal statutory rate are primarily attributable to state income taxes and available domestic manufacturing deductions. In addition, the income tax expense for the first six months of 2010 and 2009 includes the expiration of state statutes of limitations resolving previously unrecognized tax benefits. The income tax expense for the first six months of 2010 also reflects the favorable settlement of the audit of the Company’s 2007 federal tax return as well as the increase in the domestic manufacturing deduction from 6% to 9%. The income tax expense for the first six months of 2009 reflects the favorable settlement of the audits of the Company’s 2005 and 2006 federal tax returns.

Note 6 — Restructuring

     In connection with the November 2007 acquisition of Factory Card & Party Outlet (“FCPO”), $9,101 was accrued related to plans to restructure FCPO’s merchandising assortment and administrative operations and to involuntarily terminate a limited number of FCPO personnel. Through June 30, 2010, the Company incurred $6,924 in restructuring costs including $71 and $221 incurred in the three and six months ended June 30, 2010, respectively. The Company expects to incur $1,000 in the remainder of 2010 and the remaining balance there after.

     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. The Company will continue to utilize the Naperville facility as a distribution center for greeting cards and other products. In connection with the closing, the Company recorded severances costs of $1,800 in 2009, all of which have been paid out thus far in 2010. In addition, in connection with the closing, the Company incurred retention costs of $900 and $1,600 during the three and six months ended June 30, 2010, respectively, and expects to incur additional retention costs of $100 during the remainder of 2010.

Note 7 — Comprehensive Income

     Comprehensive income attributable to Amscan Holdings, Inc. consisted of the following:

		Three months ended June 30,								Six Months Ended June 30,
		2010				2009				2010				2009
Net income		$	16,460			$	10,952			$	16,049			$	13,355
Net change in cumulative translation adjustment			(1,075	)			5,308				(2,107	)			4,565
Change in fair value of interest rate swap contracts, net of income tax (benefit) expense of $(54), $653, $235, and $720			(92	)			1,111				402				1,226
Change in fair value of foreign exchange contracts, net of income tax expense (benefit) of $29, $(579), $342, $(707)			49				(986	)			581				(1,203	)
Comprehensive income		$	15,342			$	16,385			$	14,925			$	17,943

AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Amounts in thousands, except share amounts

Note 8 — Capital Stock

     At June 30, 2010 and December 31, 2009, the Company’s authorized capital stock consisted of 10,000.00 shares of preferred stock, $0.01 par value, of which no shares were issued or outstanding and 40,000.00 shares of common stock, $0.01 par value, of which 30,226.50 were issued and outstanding. Of these shares, 592.84 shares were redeemable at June 30, 2010 and December 31, 2009, and are classified as redeemable common securities on the balance sheet, as described below.

     Certain employee stockholders owned 592.84 shares of AAH common stock at both June 30, 2010 and December 31, 2009. Under the terms of the AAH stockholders’ agreement dated April 30, 2004, as amended, the Company has an option to purchase all of the shares of common stock held by former employees and, under certain circumstances, former employee stockholders can require the Company to purchase all of their shares. The purchase price as prescribed in the stockholders’ agreement is to be determined through a market valuation of the minority-held shares or, under certain circumstances, based on cost, as defined therein. The aggregate amount that may be payable by the Company to certain employee stockholders based on the estimated fair market value of fully paid and vested common stock totaled $16,807 at June 30, 2010 and December 31, 2009, and is classified as redeemable common securities on the consolidated balance sheet, with a corresponding adjustment to stockholders’ equity. As there is no active market for the Company’s common stock, the Company estimated the fair value of its common stock based on a valuation calculated using a multiple of earnings.

     In addition, in 2004, the Company’s CEO and President exchanged vested options in a predecessor company for fully vested options to purchase common stock of the Company. Since these options vested immediately and can be exercised upon the death or disability of the officer and put back to the Company, they are reflected as redeemable common securities of $1,582 on the Company’s balance sheet.

Note 9 — Segment Information

Industry Segments

     The Company has two identifiable business segments. The Wholesale segment includes the design, manufacture, contract for manufacture and wholesale distribution of party goods, including paper and plastic tableware, metallic balloons, accessories, novelties, gifts and stationery. The Retail segment includes the operation of company-owned retail party supply superstores in the United States and the sale of franchises on an individual store and franchise area basis throughout the United States and Puerto Rico.

     The Company’s industry segment data for the three months ended June 30, 2010 and 2009 is as follows:

		Wholesale				Retail				Consolidated
Three Months Ended June 30, 2010
Revenues:
Net sales		$	183,465			$	239,938			$	423,403
Royalties and franchise fees			—				4,453				4,453
Total revenues			183,465				244,391				427,856
Eliminations			(70,698	)							(70,698	)
Net Revenues		$	112,767			$	244,391			$	357,158
Income from operations		$	22,997			$	12,370			$	35,367
Interest expense, net											9,126
Other expense, net											122
Income before income taxes and minority interests										$	26,119
Total assets		$	810,928			$	713,674			$	1,524,602

		Wholesale				Retail				Consolidated
Three Months Ended June 30, 2009
Revenues:
Net sales		$	147,871			$	244,149			$	392,020
Royalties and franchise fees			—				4,536				4,536
Total revenues			147,871				248,685				396,556
Eliminations			(54,484	)			—				(54,484	)
Net Revenues		$	93,387			$	248,685				342,072
Income from operations		$	9,744			$	18,074			$	27,818
Interest expense, net											10,492
Other income, net											(292	)
Income before income taxes and minority interests										$	17,618
Total assets		$	741,070			$	734,208			$	1,475,278

AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Amounts in thousands, except share amounts)

     The Company’s industry segment data for the six months ended June 30, 2010 and 2009 is as follows:

		Wholesale				Retail				Consolidated
Six Months Ended June 30, 2010
Revenues:
Net sales		$	344,424			$	438,394			$	782,818
Royalties and franchise fees			—				8,297				8,297
Total revenues			344,424				446,691				791,115
Eliminations			(125,734	)			—				(125,734	)
Net Revenues		$	218,690			$	446,691			$	665,381
Income from operations		$	42,482			$	1,174			$	43,656
Interest expense, net											18,427
Other expense, net											53
Income before income taxes and minority interests										$	25,176
Total assets		$	810,928			$	713,674			$	1,524,602

		Wholesale				Retail				Consolidated
Six Months Ended June 30, 2009
Revenues:
Net sales		$	305,199			$	446,154			$	751,353
Royalties and franchise fees			—				8,230				8,230
Total revenues			305,199				454,384				759,583
Eliminations			(104,771	)			—				(104,771	)
Net Revenues		$	200,428			$	454,384			$	654,812
Income from operations		$	26,291			$	13,728			$	40,019
Interest expense, net											21,157
Other income, net											(85	)
Income before income taxes and minority interests										$	18,947
Total assets		$	741,070			$	734,208			$	1,475,278

Geographic Segments

     The Company’s export sales, other than inter-company sales between geographic areas, are not material. Inter-company sales between geographic areas primarily consist of sales of finished goods for distribution in foreign markets, and are made at cost plus a share of operating profit. No single foreign operation is significant to the Company’s consolidated operations.

Note 10 — Legal Proceedings

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

Note 11 — Stock Option Plan

     The Company recorded $183 and $219 of stock-based compensation in general and administrative expenses during the three months ended June 30, 2010 and 2009, and $276 and $438 during the six months ended June 30, 2010 and 2009, respectively.

     During March 2010, the Company granted 73 time options and 96 performance options to employees under the terms of the AAH 2004 Equity Incentive Plan. The options vest at a rate of 20% per year and are exercisable at $28,350 per share. The ability to exercise vested performance options is contingent upon the occurrence of an initial public offering or a change in control, as defined, and the achievement of specific investment returns to the Company’s stockholders.

     There were no options exercised during the three and six month period ended June 30, 2010. There are options to purchase 3,026.23 shares of common stock outstanding at June 30, 2010.

AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share amounts)

Note 12 — Hedging Transactions, Derivative Financial Instruments and Fair Value

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

     Interest Rate Risk Management

     As part of the Company’s risk management strategy, the Company periodically uses interest rate swap agreements to hedge the variability of cash flows on floating rate debt obligations. Accordingly, interest rate swap agreements are reflected in the consolidated balance sheets at fair value and the related gains and losses on these contracts are deferred in equity and recognized in interest expense over the same period in which the related interest payments being hedged are recognized in income. The fair value of an interest rate swap agreement is the estimated amount that the counterparty would receive or pay to terminate the swap agreement at the reporting date, taking into account current interest rates and the current creditworthiness of the swap counterparty.

     At June 30, 2010 and December 31, 2009, the Company had interest rate swap agreements with notional amounts of $142,972 and $163,441 respectively, and with net liability fair values of $5,675 and $6,313 at June 30, 2010 and December 31, 2009, respectively. The swap agreements had unrealized net losses of $3,575 and $3,977 at June 30, 2010 and December 31, 2009, respectively, which were included in accumulated other comprehensive loss. No components of these agreements are excluded in the measurement of hedge effectiveness. As these hedges are 100% effective, there is no current impact on earnings due to hedge ineffectiveness.

     Foreign Exchange Risk Management

     A portion of the Company’s cash flows is derived from transactions denominated in foreign currencies. The United States dollar value of transactions denominated in foreign currencies fluctuates as the United States dollar strengthens or weakens relative to these foreign currencies. In order to reduce the uncertainty of foreign exchange rate movements on transactions denominated in foreign currencies, including the British Pound Sterling and the Euro, the Company enters into foreign exchange contracts with major international financial institutions. These forward contracts, which typically mature within one year, are designed to hedge anticipated foreign currency transactions, primarily inter-company inventory purchases and trade receivables. No components of the contracts are excluded in the measurement of hedge effectiveness. The critical terms of the foreign exchange contracts are the same as the underlying forecasted transactions; therefore, changes in the fair value of foreign exchange contracts should be highly effective in offsetting changes in the expected cash flows from the forecasted transactions.

     At June 30, 2010 and December 31, 2009 the Company had foreign currency exchange contracts with a notional amount of $9,600 and $19,200, respectively and net asset (liability) fair value of $654 and $(269), respectively. The foreign currency exchange contracts are reflected in the consolidated balance sheets at fair value. The fair value of the foreign currency exchange contracts is the estimated amount that the counter-parties would receive or pay to terminate the foreign currency exchange contracts at the reporting date, taking into account current foreign exchange spot rates. The fair value adjustment at June 30, 2010 and December 31, 2009 resulted in an unrealized net gain of $412 and an unrealized net loss of $169, respectively, which are included in accumulated other comprehensive loss. As these hedges are 100% effective, there is no current impact on earnings due to hedge ineffectiveness. The Company anticipates that substantially all gains and losses in accumulated other comprehensive loss related to these foreign exchange contracts will be reclassified into earnings by December 2010.

     Fair Value Measurement

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

•

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

•

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

AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share amounts)

•

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

     The following tables show assets and liabilities as of June 30, 2010 and December 31, 2009, that are measured at fair value on a recurring basis (in thousands):

		Quoted Prices in				Significant
		Active Markets for				Other				Unobservable
		Identical Assets or				Observable				Inputs				Total as of
		Liabilities (Level 1)				Inputs (Level 2)				(Level 3)				June 30, 2010
Derivative assets			—			$	703				—			$	703
Derivative liabilities							(5,724	)			—				(5,724	)

		Quoted Prices in				Significant
		Active Markets for				Other				Unobservable				Total as of
		Identical Assets or				Observable				Inputs				December 31,
		Liabilities (Level 1)				Inputs (Level 2)				(Level 3)				2009
Derivative assets			—				—				—				—
Derivative liabilities							(6,582	)			—				(6,582	)

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

     The carrying amounts for cash and cash equivalents, accounts receivables, prepaid expenses and other current assets, accounts payable, accrued expenses and other current liabilities and loans and notes payable approximate fair value at June 30, 2010 and December 31, 2009 because of the short-term maturity of those instruments or their variable rates of interest.

     The carrying amount and fair value (based on market prices) of the Company’s Term Loan and $175,000 Senior Subordinated Notes are as follows:

		June 30, 2010								December 31, 2009
		Carrying				Fair				Carrying				Fair
		Amount				Value				Amount				Value
Term Loan		$	341,635			$	327,116			$	364,688			$	331,866
$175,000 Senior Subordinated Notes			175,000				166,250				175,000				166,250

     The carrying amounts for other long-term debt approximate fair value at June 30, 2010 and December 31, 2009, based on the discounted future cash flow of each instrument at rates currently offered for similar debt instruments of comparable maturity.

     The following table summarizes the Company’s outstanding derivative instruments on a gross basis as recorded on its consolidated balance sheets as of June 30, 2010 and December 31, 2009.

										Derivative Assets																Derivative Liabilities
		Notional Amounts								June 30, 2010								December 31, 2009								June 30, 2010								December 31, 2009
										Balance								Balance								Balance								Balance
						December 31,				Sheet				Fair				Sheet				Fair				Sheet				Fair				Sheet				Fair
Derivative Instrument		June 30, 2010				2009				Line				Value				Line				Value				Line				Value				Line				Value
Interest Rate Hedge		$	142,972			$	163,441							$	—							$	—			(b) AE					($5,675	)		(b) AE					($6,313	)
Foreign Exchange Contracts		$	9,600			$	19,200			(a) PP				$	703			(a) PP					—			(a) PP					($49	)		(b) AE					($269	)
Total Hedges		$	152,572			$	182,641							$	703							$	—								($5,724	)							($6,582	)

AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share amounts)

Note 13 — Recently Issued Accounting Pronouncements

     In June 2009, the Financial Accounting Standards Board (“FASB “) amended its accounting guidance on the consolidation of variable interest entities (VIE). Among other things, the new guidance requires a qualitative rather than a quantitative assessment to determine the primary beneficiary of a VIE based on whether the entity (1) has the power to direct matters that most significantly impact the activities of the VIE and (2) has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. In addition, the amended guidance requires as ongoing reconsideration of the primary beneficiary. The provisions of this new guidance were effective as of the beginning of our 2010 fiscal year and did not have an impact on our financial statements.

     The Financial Accounting Standards Board (“FASB”) issued guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets and liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of transfers. Additionally, the guidance requires a roll forward of activities on purchases, sales, issuances, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The guidance became effective for the Company with the reporting period beginning January 1, 2010, except for the disclosure on the roll forward activities for Level 3 fair value measurements, which will become effective for the Company with the reporting period beginning July 1, 2011. Other than requiring additional disclosures, adoption of this new guidance did not have a material impact on the condensed consolidated financial statements. See Note 12 — Hedging Transactions, Derivative Financial Instruments and Fair Value.

Note 14 — Subsequent Events

     On August 13, 2010, the Company entered into an amended and extended ABL revolving credit facility (“the New ABL facility”), for an aggregate principal amount of up to $325,000 for working capital, general corporate purposes and the issuance of letters of credit. The New ABL facility was used to refinance the Company’s existing ABL revolver and its Party City Franchise Group (“PCFG”) revolver and term loan agreement. At closing, PCFG became a Borrower under the New ABL facility and a Restricted Subsidiary under the terms of the Company’s Term Loan Credit Agreement, its 8.75% $175,000 senior subordinated notes and the New ABL Facility.

     The New ABL facility provides for (a) revolving loans during the five year period ended August 12, 2015 in an aggregate principal amount at any time outstanding not to exceed $325,000, subject to a borrowing base described below, (b) swing-line loans in an aggregate principal amount at any time outstanding not to exceed 10% of the aggregate commitments under the facility and (c) letters of credit, in an aggregate face amount at any time outstanding not to exceed $50,000, to support payment obligations incurred in the ordinary course of business by the Company and its subsidiaries.

     Under the New ABL facility, the borrowing base at any time equals (a) 85% of eligible trade receivables plus (b) 85% of eligible inventory at its net orderly liquidation value and (c) 90% of eligible credit card receivables, less (d) certain reserves.

     The New ABL facility provides for two pricing options: (i) an alternate base interest rate (“ABR”) equal to the greater of (a) the prime rate (b) the federal funds plus 1/2 of 1% or (c) the LIBOR rate plus 1%, in each case, on the date of such borrowing or (ii) a LIBOR based interest rate determined by reference to the LIBOR cost of funds for U.S. dollar deposits for the relevant interest period adjusted for certain additional costs and, in each case, plus an applicable margin. The applicable margin ranges from 1.25% to 1.75% with respect to ABR borrowings and from 2.25% to 2.75% 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 0.375% and 0.50% per annum in respect of the unutilized commitments thereunder. The Company must also pay customary letter of credit fees and agency fees.

     The obligations of the Company under the New ABL facility 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 New ABL facility contains negative covenants that are substantially similar to the Term Loan Credit Agreement and requires the Company to comply with certain financial covenants if it’s excess availability is less than 15% of the lower of the aggregate commitment or the borrowing base for three consecutive days.

     The New ABL facility also contains certain customary affirmative covenants and events of default.

AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Amounts in thousands, except share amounts)

Note 15 — Condensed Consolidating Financial Information

     Borrowings under the Term Loan Credit Agreement, the ABL Credit Agreement and the Company’s 8.75% $175,000 senior subordinated notes issued in April 30, 2004 and due in April 30, 2014 are guaranteed jointly and severally, fully and unconditionally, by the following wholly-owned domestic subsidiaries of the Company (the “Guarantors”):

	•		Amscan Inc.
	•		Am-Source, LLC
	•		Anagram Eden Prairie Property Holdings LLC
	•		Anagram International, Inc.
	•		Anagram International Holdings, Inc.
	•		Anagram International, LLC
	•		Gags & Games, Inc.
	•		JCS Packaging Inc. (formerly JCS Realty Corp.)
	•		M&D Industries, Inc.
	•		Party City Corporation
	•		PA Acquisition Corporation
	•		SSY Realty Corp.

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

	•		Amscan (Asia-Pacific) Pty. Ltd.
	•		Amscan de Mexico, S.A. de C.V.
	•		Amscan Distributors (Canada) Ltd.
	•		Anagram Espana, S.A.
	•		Anagram France S.C.S.
	•		Amscan Holdings Limited
	•		Anagram International (Japan) Co., Ltd.
	•		Amscan Partyartikel GmbH
	•		JCS Hong Kong Ltd.
	•		Party City Franchise Group Holdings, LLC

     The following unaudited information presents condensed consolidating balance sheets at June 30, 2010 and December 31, 2009, and the condensed consolidating statements of operations for the three and six months ended June 30, 2010 and 2009, and the related condensed consolidating statements of cash flows for the six months ended June 30, 2010 and 2009, for the combined Guarantors and the combined Non-guarantors, together with the elimination entries necessary to consolidate the entities comprising the combined companies.

     Certain amounts in the condensed consolidating balance sheet at December 31, 2009 have been reclassified between the combined Non-Guarantors and the Eliminations. These reclassifications have no effect on the balance sheet amounts for the combined Guarantors or the consolidated amounts.

AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Amounts in thousands, except share amounts)

CONDENSED CONSOLIDATING BALANCE SHEET
June 30, 2010

		AHI and
		Combined				Combined Non-
		Guarantors				Guarantors				Eliminations				Consolidated
ASSETS
Current assets:
Cash and cash equivalents		$	11,654			$	4,392			$	—			$	16,046
Accounts receivable, net of allowances			66,521				22,402				—				88,923
Inventories, net of allowances			305,390				46,703				(6,573	)			345,520
Prepaid expenses and other current assets			68,785				6,363				2,066				77,214
Total current assets			452,350				79,860				(4,507	)			527,703
Property, plant and equipment, net			173,312				10,020				—				183,332
Goodwill			539,583				37,177				608				577,368
Trade names			157,355				—				—				157,355
Other intangible assets, net			39,288				24,015				—				63,303
Investment in unconsolidated subsidiaries			45,167				—				(45,167	)			—
Intercompany receivable			41,377				—				(41,377	)			—
Other assets, net			42,443				3,210				(30,112	)			15,541
Total assets		$	1,490,875			$	154,282			$	(120,555	)		$	1,524,602
LIABILITIES, REDEEMABLE COMMON SECURITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Loans and notes payable			130,235				—				—				130,235
Intercompany payable			—				41,377				(41,377	)			—
Accounts payable			75,436				7,549				—				82,985
Accrued expenses			91,776				9,372				—				101,148
Income taxes payable			5,253				(940	)			(302	)			4,011
Redeemable warrants			15,444				—				—				15,444
Current portion of long-term obligations			3,175				4,034				—				7,209
Total current liabilities			321,319				61,392				(41,679	)			341,032
Long-term obligations, excluding current portion			523,209				15,208				—				538,417
Deferred income tax liabilities			101,831				539				—				102,370
Deferred rent and other long-term liabilities			8,958				956				(972	)			8,942
Total liabilities			955,317				78,095				(42,651	)			990,761
Redeemable common securities			18,389				—				—				18,389
Commitments and contingencies
Stockholders’ equity:
Common Stock			336				336				(672	)			—
Additional paid-in capital			357,049				46,775				(46,725	)			357,099
Retained earnings			169,303				32,894				(36,591	)			165,606
Accumulated other comprehensive loss			(9,519	)			(6,084	)			6,084				(9,519	)
Amscan Holdings, Inc. stockholders’ equity			517,169				73,921				(77,904	)			513,186
Noncontrolling interests			—				2,266				—				2,266
Total stockholders’ equity			517,169				76,187				(77,904	)			515,452
Total liabilities, redeemable common securities and stockholders’ equity		$	1,490,875			$	154,282			$	(120,555	)		$	1,524,602

AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Amounts in thousands, except share amounts)

CONSOLIDATING BALANCE SHEET
December 31, 2009

		AHI and
		Combined				Combined Non-
		Guarantors				Guarantors				Eliminations				Consolidated
ASSETS
Current assets:
Cash and cash equivalents		$	8,240			$	7,180			$	—			$	15,420
Accounts receivable, net of allowances			60,655				22,126				—				82,781
Inventories, net of allowances			295,004				46,708				(5,762	)			335,950
Prepaid expenses and other current assets			63,529				4,231				1,781				69,541
Total current assets			427,428				80,245				(3,981	)			503,692
Property, plant and equipment, net			163,999				10,995				—				174,994
Goodwill			510,400				37,988				51				548,439
Trade names			157,283				—				—				157,283
Other intangible assets, net			29,948				24,721				—				54,669
Investment in unconsolidated subsidiaries			76,032				—				(76,032	)			—
Intercompany receivable			42,335				9,760				(52,095	)			—
Other assets, net			41,622				(198	)			—				41,424
Total assets		$	1,449,047			$	163,511			$	(132,057	)		$	1,480,501
LIABILITIES, REDEEMABLE COMMON SECURITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Loans and notes payable		$	77,635			$	—			$	—			$	77,635
Accounts payable			67,235				9,666				—				76,901
Accrued expenses			83,430				10,250				—				93,680
Income taxes payable			32,969				(552	)			(356	)			32,061
Redeemable warrants			15,444				—				—				15,444
Current portion of long-term obligations			27,761				7,145				—				34,906
Total current liabilities			304,474				26,509				(356	)			330,627
Long-term obligations, excluding current portion			522,392				16,500				—				538,892
Intercompany payable			9,760				42,335				(52,095	)			—
Deferred income tax liabilities			101,000				570				—				101,570
Deferred rent and other long term-liabilities			12,087				786				(972	)			11,901
Total liabilities			949,713				86,700				(53,423	)			982,990
Redeemable common securities			18,389				—				—				18,389
Commitments and contingencies
Stockholders’ equity:
Common Stock			336				336				(672	)			—
Additional paid-in capital			336,331				47,333				(47,841	)			335,823
Retained earnings			152,673				31,561				(34,677	)			149,557
Accumulated other comprehensive loss			(8,395	)			(4,556	)			4,556				(8,395	)
Amscan Holdings Inc. stockholders’ equity			480,945				74,674				(78,634	)			476,985
Noncontrolling interests			—				2,137				—				2,137
Total stockholders’ equity			480,945				76,811				(78,634	)			479,122
Total liabilities, redeemable common securities and stockholders’ equity		$	1,449,047			$	163,511			$	(132,057	)		$	1,480,501

AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Amounts in thousands, except share amounts)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended June 30, 2010

		AHI and
		Combined				Combined Non-
		Guarantors				Guarantors				Eliminations				Consolidated
Revenues:
Net sales		$	313,882			$	54,042			$	(15,219	)		$	352,705
Royalties and franchise fees			5,716				—				(1,263	)			4,453
Total revenues			319,598				54,042				(16,482	)			357,158
Expenses:
Cost of sales			188,513				37,395				(15,043	)			210,865
Wholesale selling expenses			8,415				2,430				—				10,845
Retail operating expenses			56,763				8,916				(1,263	)			64,416
Franchise expenses			3,149				—				—				3,149
General and administrative expenses			26,066				3,146				(330	)			28,882
Art and development costs			3,656				(22	)			—				3,634
Total expenses			286,562				51,865				(16,636	)			321,791
Income from operations			33,036				2,177				154				35,367
Interest expense, net			8,528				598				—				9,126
Other (income) expense, net			(1,786	)			214				1,694				122
Income before income taxes			26,294				1,365				(1,540	)			26,119
Income tax expense			10,150				266				(828	)			9,588
Net income			16,144				1,099				(712	)			16,531
Less net income attributable to noncontrolling interests			—				71				—				71
Net income attributable to Amscan Holdings, Inc.		$	16,144			$	1,028			$	(712	)		$	16,460