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		10523
(Address of Principal Executive Offices)		(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 November 15, 2010, 1,000.00 shares of Registrant’s common stock were outstanding.

 

 

AMSCAN HOLDINGS, INC.
FORM 10-Q

September 30, 2010

TABLE OF CONTENTS

		Page
PART I
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at September 30, 2010 and December 31, 2009			3
Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2010 and 2009			4
Condensed Consolidated Statements of Operations for the Nine Months Ended September 30, 2010 and 2009			5
Condensed Consolidated Statement of Stockholders’ Equity for the Nine Months Ended September 30, 2010			6
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 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			25
Item 3. Quantitative and Qualitative Disclosures About Market Risk			32
Item 4. Controls and Procedures			32
Item 5. Other Events			32
PART II
Item 6. Exhibits			34
Signature			35
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)

		September 30,				December 31,
		2010				2009
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	22,743			$	15,420
Accounts receivable, net of allowances			130,069				82,781
Inventories, net of allowances			469,570				335,950
Prepaid expenses and other current assets			77,625				69,541
Total current assets			700,007				503,692
Property, plant and equipment, net			186,996				174,994
Goodwill			597,332				548,439
Trade names			157,355				157,283
Other intangible assets, net			60,245				54,669
Other assets, net			17,572				41,424
Total assets		$	1,719,507			$	1,480,501
LIABILITIES, REDEEMABLE COMMON SECURITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Loans and notes payable		$	205,202			$	77,635
Accounts payable			197,899				76,901
Accrued expenses			112,469				93,680
Income taxes payable			6,793				32,061
Redeemable warrants			15,444				15,444
Current portion of long-term obligations			3,228				34,906
Total current liabilities			541,035				330,627
Long-term obligations, excluding current portion			522,553				538,892
Deferred income tax liabilities			102,444				101,570
Deferred rent and other long-term liabilities			10,625				11,901
Total liabilities			1,176,657				982,990
Redeemable common securities (including 597.52 and 592.85 common shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively)			18,522				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 September 30, 2010 and December 31, 2009)			—				—
Additional paid-in capital			357,254				335,823
Retained earnings			170,208				149,557
Accumulated other comprehensive loss			(5,508	)			(8,395	)
Amscan Holdings, Inc. stockholders’ equity			521,954				476,985
Noncontrolling interests			2,374				2,137
Total stockholders’ equity			524,328				479,122
Total liabilities, redeemable common securities and stockholders’ equity		$	1,719,507			$	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 September 30,
		2010				2009
Revenues:
Net sales		$	358,772			$	336,944
Royalties and franchise fees			4,035				4,164
Total revenues			362,807				341,108
Expenses:
Cost of sales			226,335				215,491
Wholesale selling expenses			10,524				9,984
Retail operating expenses			73,785				65,049
Franchise expenses			2,930				3,046
General and administrative expenses			27,495				29,274
Art and development costs			3,775				3,327
Total expenses			344,844				326,171
Income from operations			17,963				14,937
Interest expense, net			9,834				10,345
Other expense, net			704				421
Income before income taxes			7,425				4,171
Income tax expense			2,752				1,016
Net income			4,673				3,155
Less: net income attributable to noncontrolling interest			70				76
Net income attributable to Amscan Holdings, Inc.		$	4,603			$	3,079

See accompanying notes to unaudited condensed consolidated financial statements.

AMSCAN HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands)

		Nine Months Ended September 30,
		2010				2009
Revenues:
Net sales		$	1,015,856			$	983,525
Royalties and franchise fees			12,333				12,394
Total revenues			1,028,189				995,919
Expenses:
Cost of sales			637,100				630,018
Wholesale selling expenses			31,759				30,114
Retail operating expenses			191,161				174,714
Franchise expenses			9,203				8,811
General and administrative expenses			86,302				87,698
Art and development costs			11,044				9,606
Total expenses			966,569				940,961
Income from operations			61,620				54,958
Interest expense, net			28,261				31,502
Other expense, net			758				336
Income before income taxes			32,601				23,120
Income tax expense			11,766				6,492
Net income			20,835				16,628
Less: net income attributable to noncontrolling interest			184				193
Net income attributable to Amscan Holdings, Inc.		$	20,651			$	16,435

See accompanying notes to unaudited condensed consolidated financial statements.

AMSCAN HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
Nine Months Ended September 30, 2010
(Unaudited)
(Amounts in thousands, except share amounts)

																		Accumulated				Amscan
										Additional								Other				Holdings, Inc.								Total
		Common				Common				Paid-in				Retained				Comprehensive				Stockholders’				Noncontrolling				Stockholders’
		Shares				Stock				Capital				Earnings				Loss				Equity				Interests				Equity
Balance at December 31, 2009			30,226.50			$	—			$	335,823			$	149,557			$	(8,395	)		$	476,985			$	2,137			$	479,122
Net income															20,651								20,651				184				20,835
Net change in cumulative translation adjustment																			886				886				53				939
Change in fair value of interest rate swap contracts, net of income taxes																			1,771				1,771								1,771
Change in fair value of foreign exchange contracts, net of income taxes																			230				230								230
Comprehensive income																							23,538				237				23,775
Options exercised into redeemable common securities											(82	)											(82	)							(82	)
Issuance of non-redeemable warrants											21,000												21,000								21,000
Equity based compensation expense											513												513								513
Balance at September 30, 2010			30,226.50			$	—			$	357,254			$	170,208			$	(5,508	)		$	521,954			$	2,374			$	524,328

See accompanying notes to unaudited condensed consolidated financial statements.

AMSCAN HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)

		Nine Months Ended September 30,
		2010				2009
Cash flows (used in) provided by operating activities:
Net income		$	20,835			$	16,628
Less: net income attributable to noncontrolling interest			184				193
Net income attributable to Amscan Holdings, Inc.			20,651				16,435
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization expense			36,676				32,525
Amortization of deferred financing costs			2,142				1,616
Provision for doubtful accounts			838				3,392
Deferred income tax provision			660				3,410
Deferred rent			1,546				1,059
Undistributed income in unconsolidated joint venture			(382	)			(251	)
Loss on disposal of equipment			259				141
Equity based compensation			513				657
Changes in operating assets and liabilities:
Increase in accounts receivable			(29,588	)			(10,494	)
Increase in inventories			(130,625	)			(44,078	)
(Increase) decrease in prepaid expenses and other current assets			(12,972	)			167
Increase in accounts payable, accrued expenses and income taxes payable			108,782				15,585
Net cash (used in) provided by operating activities			(1,500	)			20,164
Cash flows used in investing activities:
Cash paid in connection with acquisitions			(35,630	)			(3,378	)
Capital expenditures			(36,100	)			(19,523	)
Proceeds from disposal of property and equipment			147				54
Net cash used in investing activities			(71,583	)			(22,847	)
Cash flows provided by financing activities:
Repayment of loans, notes payable and long-term obligations			(49,157	)			(6,343	)
Borrowings under revolving credit facility			128,851				19,927
Proceeds from issuance of common stock and exercise of options, net of retirements			52				90
Net cash provided by financing activities			79,746				13,674
Effect of exchange rate changes on cash and cash equivalents			660				2,317
Net increase in cash and cash equivalents			7,323				13,308
Cash and cash equivalents at beginning of period			15,420				13,058
Cash and cash equivalents at end of period		$	22,743			$	26,366

See accompanying notes to unaudited condensed consolidated financial statements.

AMSCAN HOLDINGS, INC.

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 September 30, 2010, the Company acquired Christy’s By Design Limited and three affiliated companies (“The Christy’s Group”) from Christy Holdings Limited, a UK based company. The Christy’s Group designs and distributes costumes and other garments and accessories through its operations in Asia and the UK. The transaction was denominated in British Pounds Sterling and the purchase price was recorded in US dollars. The fair value of the total consideration transferred at date of acquisition was £19,152, or $30,368. The purchase occurred on the last day of the quarter. Therefore, the condensed consolidated statement of operations is not affected by this newly acquired business.

     The Christy’s Group acquisition has been accounted for as a purchase business combination. The preliminary estimate of 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 and liabilities acquired: accounts receivable of $16,785, inventory of $2,995, fixed assets of $599, and accounts payable and accrued expenses of $9,669. The remaining $19,460 has been initially recorded as goodwill which is not being amortized. The allocation of the purchase price is based on our preliminary estimates of the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed. The Company is still in the process of accumulating information to complete the determination of the fair value of certain acquired assets. 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 and liabilities 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.

     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 valued at $21,000. 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.

Note 3 — Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements as of September 30, 2010 and for the three and nine months ended September 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 nine months ended September 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.

Note 4 — Inventories

     Inventories consisted of the following:

		September 30,				December 31,
		2010				2009
Finished goods		$	463,111			$	325,421
Raw Materials			11,649				12,650
Work in Process			6,314				6,431
			481,074				344,502
Reserve for slow-moving and obsolete inventory			(11,504	)			(8,552	)
		$	469,570			$	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 nine months ended September 30, 2010 and 2009 were determined based upon estimates of the Company’s consolidated effective income tax rates of 36.4% for the year ending December 31, 2010 and 36.8% for the year ended 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 nine 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 nine 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 nine 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 September 30, 2010, the Company incurred $7,510 in restructuring costs including $586 and $807 incurred in the three and nine months ended September 30, 2010, respectively. The Company expects to incur $414 in the remainder of 2010 and the remaining balance thereafter.

     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 severance costs of $1,800 in 2009, all of which have been paid by September 30, 2010. In addition, in connection with the closing, the Company incurred retention costs of $100 and $1,700 during the three and nine months ended September 30, 2010, respectively.

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

		Three Months Ended September 30,								Nine Months Ended September 30,
		2010				2009				2010				2009
Net income		$	4,603			$	3,079			$	20,651			$	16,435
Net change in cumulative translation adjustment			2,993				(164	)			886				4,401
Change in fair value of interest rate swap contracts, net of income tax expense (benefit) of $804, $(41), $1,040, and $680			1,370				(69	)			1,771				1,157
Change in fair value of foreign exchange contracts, net of income tax (benefit) expense of $(206), $(258), $135, $(965)			(351	)			(440	)			230				(1,643	)
Comprehensive income		$	8,615			$	2,406			$	23,538			$	20,350

Note 8 — Capital Stock

     At September 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 30,824.02 and 30,819.35 were issued and outstanding at September 30, 2010 and December 31, 2009, respectively. Of these shares, 597.52 and 592.85 shares were redeemable at September 30, 2010 and December 31, 2009 respectively, and are classified as redeemable common securities on the balance sheet, as described below.

     Certain employee stockholders owned 597.52 and 592.85 shares of AAH common stock at September 30, 2010 and December 31, 2009 respectively. 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 $16,940 and $16,807 at September 30, 2010 and December 31, 2009 respectively, 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 its 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.

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

Note 9 — Segment Information

     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 September 30, 2010 and 2009 is as follows:

Industry Segments

		Wholesale				Retail				Consolidated
Three Months Ended September 30, 2010
Revenues:
Net sales		$	219,976			$	229,856			$	449,831
Royalties and franchise fees			—				4,035				4,035
Total revenues			219,976				233,891				453,867
Eliminations			(91,060	)							(91,060	)
Net Revenues		$	128,916			$	233,891			$	362,807
Income (loss) from operations		$	29,566			$	(11,603	)		$	17,963
Interest expense, net											9,834
Other expense, net											704
Income before income taxes										$	7,425
Total assets		$	962,547			$	756,960			$	1,719,507

		Wholesale				Retail				Consolidated
Three Months Ended September 30, 2009
Revenues:
Net sales		$	172,948			$	222,367			$	395,315
Royalties and franchise fees			—				4,164				4,164
Total revenues			172,948				226,531				399,479
Eliminations			(58,371	)			—				(58,371	)
Net Revenues		$	114,577			$	226,531				341,108
Income (loss) from operations		$	19,536			$	(4,599	)		$	14,937
Interest expense, net											10,345
Other expense, net											421
Income before income taxes										$	4,171
Total assets		$	782,868			$	779,705				1,562,573

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

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

		Wholesale				Retail				Consolidated
Nine Months Ended September 30, 2010
Revenues:
Net sales		$	564,400			$	668,250			$	1,232,650
Royalties and franchise fees			—				12,333				12,333
Total revenues			564,400				680,583				1,244,983
Eliminations			(216,794	)			—				(216,794	)
Net Revenues		$	347,606			$	680,583			$	1,028,189
Income from operations		$	72,049			$	(10,429	)		$	61,620
Interest expense, net											28,261
Other expense, net											758
Income before income taxes										$	32,601
Total assets		$	962,547			$	756,960			$	1,719,507

		Wholesale				Retail				Consolidated
Nine Months Ended September 30, 2009
Revenues:
Net sales		$	478,147			$	668,520			$	1,146,667
Royalties and franchise fees			—				12,394				12,394
Total revenues			478,147				680,914				1,159,061
Eliminations			(163,142	)			—				(163,142	)
Net Revenues		$	315,005			$	680,914			$	995,919
Income from operations		$	45,826			$	9,132			$	54,958
Interest expense, net											31,502
Other expense, net											336
Income before income taxes										$	23,120
Total assets		$	782,868			$	779,705			$	1,562,573

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.

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

Note 11 — Stock Option Plan

     The Company recorded $237 and $219 of stock-based compensation in general and administrative expenses during the three months ended September 30, 2010 and 2009, and $513 and $657 during the nine months ended September 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 4.68 options exercised during the three and nine month period ended September 30, 2010. There are options to purchase 3,012.55 shares of common stock outstanding at September 30, 2010.

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 the Statement of Operations. 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 September 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 $3,501 and $6,313 at September 30, 2010 and December 31, 2009, respectively. The swap agreements had unrealized net losses of $2,206 and $3,977 at September 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 September 30, 2010 and December 31, 2009 the Company had foreign currency exchange contracts with a notional amount of $4,800 and $19,200, respectively and net asset (liability) fair value of $97 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 September 30, 2010 and December 31, 2009 resulted in an unrealized net gain of $61 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.

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

     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.
	•		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 September 30, 2010 and December 31, 2009, that are measured at fair value on a recurring basis:

		Quoted Prices in				Significant
		Active Markets for				Other				Unobservable
		Identical Assets or				Observable				Inputs				Total as of
September 30, 2010		Liabilities (Level 1)				Inputs (Level 2)				(Level 3)				September 30, 2010
Derivative assets			—			$	97				—			$	97
Derivative liabilities			—				(3,501	)			—				(3,501	)

Quoted Prices in

Significant

Active Markets for

Other

Unobservable

Identical Assets or

Observable

Inputs

Total as of

December 31, 2009

Liabilities (Level 1)

Inputs (Level 2)

(Level 3)

December 31, 2009

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 September 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:

		September 30, 2010								December 31, 2009
		Carrying				Fair				Carrying				Fair
		Amount				Value				Amount				Value
Term Loan		$	341,635			$	329,678			$	364,688			$	331,866
$175,000 Senior Subordinated Notes			175,000				166,250				175,000				166,250

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

     The carrying amounts for other long-term debt approximate fair value at September 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 September 30, 2010 and December 31, 2009.

										Derivative Assets																Derivative Liabilities
		Notional Amounts								September 30, 2010								December 31, 2009								September 30, 2010								December 31, 2009
										Balance								Balance								Balance								Balance
		September 30,				December 31,				Sheet				Fair				Sheet				Fair				Sheet				Fair				Sheet				Fair
Derivative Instrument		2010				2009				Line				Value				Line				Value				Line				Value				Line				Value
Interest Rate Hedge		$	142,972			$	163,441							$	—							$	—			(b) AE					($3,501	)		(b) AE					($6,313	)
Foreign Exchange Contracts			4,800				19,200			(a) PP					97			(a) PP					—			(a) PP					—			(b) AE					($269	)
Total Hedges		$	147,772			$	182,641							$	97							$	—								($3,501	)							($6,582	)

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 an 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.

     In October 2009, the FASB issued ASU 2009-13, “Revenue Recognition (Topic 605).” This ASU provides amendments to the criteria in Subtopic 605-24 for separating consideration in multiple-deliverable revenue arrangements. It establishes a hierarchy of selling prices to determine the selling price of each specific deliverable which includes vendor-specific objective evidence (if available), third-party evidence (if vendor-specific evidence is not available), or estimated selling price if neither of the first two are available. This Update also eliminates the residual method for allocating revenue between the elements of an arrangement and requires that arrangement consideration be allocated at the inception of the arrangement. Finally, this Update expands the disclosure requirements regarding a vendor’s multiple-deliverable revenue arrangements. This Update is effective for fiscal years beginning on or after June 15, 2010. We do not anticipate any material impact from this Update.

     The 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.

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

Note 14 — 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.
	•		Party City Franchise Group Holdings, LLC (“PCFG”)

     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.
	•		Christy’s Asia, Ltd.
	•		Christy’s By Design, Ltd.
	•		Christy’s Dress Up, Ltd.
	•		Christy’s Garments & Accessories Ltd.

     The following unaudited information presents condensed consolidating balance sheets at September 30, 2010 and December 31, 2009, Condensed Consolidating Statements of operations for the three and nine months ended September 30, 2010 and 2009, and the related Condensed Consolidating Statements of cash flows for the nine months ended September 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.

     As a result of the repayment of PCFG’s debt during the third quarter of 2010, PCFG became a Guarantor and is included under AHI and Combined Guarantors in the Consolidating Financial Statements as of September 30, 2010 and for the three and nine months ended September 30, 2010. For the prior periods presented PCFG was reflected under Combined Non Guarantors.

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

CONDENSED CONSOLIDATING BALANCE SHEET
September 30, 2010

		AHI and
		Combined				Combined Non-
		Guarantors				Guarantors				Eliminations				Consolidated
ASSETS
Current assets:
Cash and cash equivalents		$	19,645			$	3,098			$	—			$	22,743
Accounts receivable, net of allowances			87,273				42,796				—				130,069
Inventories, net of allowances			447,922				22,578				(930	)			469,570
Prepaid expenses and other current assets			73,631				3,994				—				77,625
Total current assets			628,471				72,466				(930	)			700,007
Property, plant and equipment, net			183,766				3,230				—				186,996
Goodwill			572,145				25,137				50				597,332
Trade names			157,355				—				—				157,355
Other intangible assets, net			60,245				—				—				60,245
Investment in unconsolidated subsidiaries			68,254				—				(68,254	)			—
Intercompany receivable			14,371				—				(14,371	)			—
Other assets, net			14,997				2,575				—				17,572
Total assets		$	1,699,604			$	103,408			$	(83,505	)		$	1,719,507
LIABILITIES, REDEEMABLE COMMON SECURITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Loans and notes payable		$	205,202			$	—			$	—			$	205,202
Intercompany payable			—				14,371				(14,371	)			—
Accounts payable			186,095				11,804				—				197,899
Accrued expenses			106,135				6,334				—				112,469
Income taxes payable			5,877				931				(15	)			6,793
Redeemable warrants			15,444				—				—				15,444
Current portion of long-term obligations			3,189				39				—				3,228
Total current liabilities			521,942				33,479				(14,386	)			541,035
Long-term obligations, excluding current portion			522,459				94				—				522,553
Deferred income tax liabilities			101,878				566				—				102,444
Deferred rent and other long-term liabilities			11,597				—				(972	)			10,625
Total liabilities			1,157,876				34,139				(15,358	)			1,176,657
Redeemable common securities			18,522				—				—				18,522
Commitments and contingencies
Stockholders’ equity:
Common Stock			336				336				(672	)			—
Additional paid-in capital			357,254				31,025				(31,025	)			357,254
Retained earnings			171,123				38,857				(39,772	)			170,208
Accumulated other comprehensive loss			(5,508	)			(3,323	)			3,323				(5,508	)
Amscan Holdings, Inc. stockholders’ equity			523,206				66,895				(68,147	)			521,954
Noncontrolling interests			—				2,374				—				2,374
Total stockholders’ equity			523,206				69,269				(68,147	)			524,328
Total liabilities, redeemable common securities and stockholders’ equity		$	1,699,604			$	103,408			$	(83,505	)		$	1,719,507

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

CONDENSED 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				76,674				(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 September 30, 2010

		AHI and
		Combined				Combined Non-
		Guarantors				Guarantors				Eliminations				Consolidated
Revenues:
Net sales		$	332,781			$	31,854			$	(5,863	)		$	358,772
Royalties and franchise fees			4,035				—				—				4,035
Total revenues			336,816				31,854				(5,863	)			362,807
Expenses:
Cost of sales			209,516				22,741				(5,922	)			226,335
Wholesale selling expenses			7,728				2,796				—				10,524
Retail operating expenses			73,785				—				—				73,785
Franchise expenses			2,930				—				—				2,930
General and administrative expenses			25,625				2,200				(330	)			27,495
Art and development costs			3,802				(27	)			—				3,775
Total expenses			323,386				27,710				(6,252	)			344,844
Income from operations			13,430				4,144				389				17,963
Interest expense, net			9,817				17				—				9,834
Other (income) expense, net			(3,753	)			148				4,309				704
Income before income taxes			7,366				3,979				(3,920	)			7,425
Income tax expense			3,189				1,509				(1,946	)			2,752
Net income			4,177				2,470				(1,974	)			4,673
Less net income attributable to noncontrolling interests			—				70				—				70
Net income attributable to Amscan Holdings, Inc.		$	4,177			$	2,400			$	(1,974	)		$	4,603