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		13-3911462
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
80 Grasslands Road Elmsford, NY		10523
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code:
(914) 345-2020

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

     Indicate by check mark 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):

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

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

     As of May 16, 2011, 1,000.00 shares of the Registrant’s common stock were outstanding.

 

 

AMSCAN HOLDINGS, INC.
FORM 10-Q

March 31, 2011

TABLE OF CONTENTS

		Page
PART I
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at March 31, 2011 and December 31, 2010			3
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2011 and 2010			4
Condensed Consolidated Statement of Stockholders’ Equity for the Three Months Ended March 31, 2011			5
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010			6
Notes to Condensed Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3. Quantitative and Qualitative Disclosures About Market Risk			25
PART II
Item 6. Exhibits			25
Signature			26
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 at http://www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC

AMSCAN HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share amounts)

		March 31,				December 31,
		2011				2010
		(unaudited)				(Note 3)
ASSETS
Current assets:
Cash and cash equivalents		$	18,221			$	20,454
Accounts receivable, net of allowances			113,889				107,331
Inventories, net of allowances			437,059				424,317
Prepaid expenses and other current assets			65,037				65,672
Total current assets			634,206				617,774
Property, plant and equipment, net			202,757				190,729
Goodwill			660,366				630,492
Trade names			129,954				129,954
Other intangible assets, net			52,795				55,362
Other assets, net			29,250				28,840
Total assets		$	1,709,328			$	1,653,151
LIABILITIES, REDEEMABLE COMMON SECURITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Loans and notes payable		$	227,632			$	150,098
Accounts payable			91,848				108,172
Accrued expenses			107,803				111,054
Income taxes payable			29,550				34,325
Redeemable warrants			—				15,086
Current portion of long-term obligations			9,100				9,046
Total current liabilities			465,933				427,781
Long-term obligations, excluding current portion			839,051				841,112
Deferred income tax liabilities			95,091				94,981
Deferred rent and other long-term liabilities			17,623				14,766
Total liabilities			1,417,698				1,378,640
Redeemable common securities (including 1,142.27 and 597.52 common shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively)			33,179				18,089
Commitments and contingencies
Stockholders’ equity:
Common Stock ($0.01 par value; 40,000.00 shares authorized; 30,970.02 and 30,226.50 shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively )			—				—
Additional paid-in capital			287,751				287,583
Retained deficit			(30,119	)			(27,558	)
Accumulated other comprehensive loss			(1,613	)			(5,915	)
Amscan Holdings Inc. stockholders’ equity			256,019				254,110
Noncontrolling interests			2,432				2,312
Total stockholders’ equity			258,451				256,422
Total liabilities, redeemable common securities and stockholders’ equity		$	1,709,328			$	1,653,151

See accompanying notes to unaudited condensed consolidated financial statements.

AMSCAN HOLDINGS, INC.

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

		Three Months Ended March 31,
		2011				2010
Revenues:
Net sales		$	352,501			$	304,379
Royalties and franchise fees			3,681				3,844
Total revenues			356,182				308,223
Expenses:
Cost of sales			225,014				199,900
Wholesale selling expenses			13,852				10,390
Retail operating expenses			61,848				52,960
Franchise expenses			3,365				3,124
General and administrative expenses			31,545				29,925
Art and development costs			3,950				3,636
Total expenses			339,574				299,935
Income from operations			16,608				8,288
Interest expense, net			20,368				9,301
Other expense (income), net			62				(69	)
Loss before income taxes			(3,822	)			(944	)
Income tax benefit			(1,330	)			(575	)
Net loss			(2,492	)			(369	)
Less: net income attributable to noncontrolling interest			71				43
Net loss attributable to Amscan Holdings, Inc.		$	(2,563	)		$	(412	)

See accompanying notes to unaudited condensed consolidated financial statements.

AMSCAN HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
Three Months Ended March 31, 2011
(Unaudited)
(Amounts in thousands)

																		Accumulated				Amscan
										Additional								Other				Holdings, Inc.
		Common				Common				Paid-in				Retained				Comprehensive				Stockholders’				Noncontrolling				Total
		Shares				Stock				Capital				Deficit				Loss				Equity				Interests				Equity
Balance at December 31, 2010			30,226.50			$	—			$	287,583			$	(27,558	)		$	(5,915	)		$	254,110			$	2,312			$	256,422
Net loss															(2,563	)							(2,563	)			71				(2,492	)
Net change in cumulative translation adjustment																			3,794				3,794				49				3,843
Change in fair value of interest rate swap contracts, net of income taxes																			708				708								708
Change in fair value of foreign exchange contracts, net of income taxes																			(200	)			(200	)							(200	)
Comprehensive income																							1,739				120				1,859
Exercise of redeemable warrants											(3	)											(3	)							(3	)
Exercise of non-redeemable warrant			740.74								—												—								—
Exercise of non-redeemable common stock options			2.78								28												28								28
Equity based compensation expense											143												143								143
Distribution in lieu of dividend															2								2								2
Balance at March 31, 2011			30,970.02			$	—			$	287,751			$	(30,119	)		$	(1,613	)		$	256,019			$	2,432			$	258,451

See accompanying notes to unaudited condensed consolidated financial statements.

AMSCAN HOLDINGS, INC.

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

		Three Months Ended March 31,
		2011				2010
Cash flows used in operating activities:
Net loss		$	(2,492	)		$	(369	)
Less: net income attributable to noncontrolling interest			71				43
Net loss attributable to Amscan Holdings, Inc.			(2,563	)			(412	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense			13,249				11,574
Amortization of deferred financing costs			1,197				221
Provision for doubtful accounts			361				304
Deferred income tax provision			261				377
Deferred rent			2,023				437
Undistributed income in unconsolidated joint venture			(313	)			(288	)
Loss on disposal of equipment			5				303
Equity based compensation			143				93
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable			1,660				(4,469	)
Decrease in inventories			2,721				2,752
Decrease (increase) in prepaid expenses and other current assets			3,392				(4,140	)
Decrease in accounts payable, accrued expenses and income taxes payable			(35,043	)			(24,293	)
Net cash used in operating activities			(12,907	)			(17,541	)
Cash flows used in investing activities:
Cash paid in connection with acquisitions			(56,420	)			(3,585	)
Capital expenditures			(10,977	)			(6,924	)
Proceeds from disposal of property and equipment			1				54
Net cash used in investing activities			(67,396	)			(10,455	)
Cash flows provided by financing activities:
Repayment of loans, notes payable and long-term obligations			(2,506	)			(3,383	)
Borrowings under revolving credit facilities			77,816				33,815
Distribution in lieu of dividend			2				—
Proceeds from exercise of stock options			28				—
Net cash provided by financing activities			75,340				30,432
Effect of exchange rate changes on cash and cash equivalents			2,730				(802	)
Net (decrease) increase in cash and cash equivalents			(2,233	)			1,634
Cash and cash equivalents at beginning of period			20,454				15,420
Cash and cash equivalents at end of period		$	18,221			$	17,054
Supplemental disclosure of cash flow information:
Cash paid during the period
Interest		$	14,032			$	4,751
Income taxes		$	3,081			$	3,516

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 and latex balloons, accessories, novelties, costumes, other garments, gifts and stationery throughout the world. In addition, the Company operates specialty retail party supply stores in the United States principally under the names Party City and Halloween City and franchises both individual stores and franchise areas throughout the United States and Puerto Rico principally under the name Party City. The Company is a wholly-owned subsidiary of Party City Holdings Inc. (“PCHI”), formerly known as AAH Holdings Corporation.

Note 2 — Acquisitions

     On January 30, 2011, the Company acquired the common stock of Riethmuller GmbH (“Riethmuller”) for $47,069, in a transaction accounted for as a purchase business combination. Riethmuller is a German distributor of party goods and carnival items with latex balloon manufacturing operations in Malaysia and the ability to manufacture certain party goods in Poland. The acquisition expands the Company’s vertical business model into the latex balloon category and gives the Company an additional significant presence in Germany, Poland and Malaysia. The results of this newly acquired business are included in the consolidated financial statements since the January 30, 2011 acquisition date and are reported in the operating results of the Company’s Wholesale segment.

     The preliminary estimate of the excess of the purchase price over the tangible assets is initially being assigned to goodwill. The following summarizes the estimated fair value of the assets and liabilities acquired: accounts receivable of $8,581, inventory of $14,828, fixed assets of $11,227, other current and non-current assets of $5,403, accounts payable and other current liabilities of $9,440 and other non-current liabilities of $4,086. The remaining $20,556 has been initially recorded as goodwill. The allocation of the purchase price is based on our preliminary estimates of the fair value of the tangible 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, including identifiable intangible assets acquired. Goodwill arises because the purchase price reflects the strategic fit and expected synergies this business will bring to the Company’s operations.

     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 fair value of the total consideration paid at date of acquisition was $30,368. The results of this newly acquired business are included in the consolidated financial statements since the September 30, 2010 acquisition date and are reported in the operating results of the Company’s Wholesale segment.

     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 $17,656, inventory of $457, fixed assets of $582, and accounts payable and accrued expenses of $13,636. The remaining $25,309 has been initially recorded as goodwill. 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 Company elected to treat the UK entities acquired as foreign branches for US tax purposes. As a result, the entire excess of the purchase price over the fair value of the tangible assets and liabilities acquired is deductible for US tax purposes over 15 years.

     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 (the “Designware Acquisition”). In connection with the Designware Acquisition, the companies also entered into a Supply and Distribution Agreement and a Licensing Agreement (collectively, the “Agreements”). Under the terms of the Agreements, the Company has exclusive rights to manufacture and distribute products into various channels including the party store channel. In addition, 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 its 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 business are included in the 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 and a warrant to purchase approximately 2% of the Common Stock of PCHI valued at $21,000. The fair value of the warrant was determined based on the agreement between the parties. The warrant was exercised in February 2011.

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

     During 2010, the Company acquired 20 franchisee stores located throughout several states for total consideration of $24,300. Total consideration consisted of $21,500 in cash and the exchange of five corporate stores located in Pennsylvania. Excluding the assets exchanged of $2,800, the fair value of the assets and liabilities acquired for cash were $2,500 of inventory and $1,600 of fixed assets. The remaining $17,400 has been recorded as goodwill. The entire excess of the purchase price over the fair value of the tangible assets acquired is deductible for tax purposes over 15 years

     During the three months ended March 21, 2011, the Company acquired 3 franchisee stores in California for total consideration of $9,200. The fair value of the assets acquired were $1,300 of inventory and $300 of fixed assets. The remaining $7,600 has been recorded as goodwill.

Note 3 — Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements as of March 31, 2011 and for the three months ended March 31, 2011 and 2010, and the audited balance sheet as of December 31, 2010, 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 months ended March 31, 2011 are not necessarily indicative of the results to be expected for the year ending December 31, 2011. 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, 2010, as filed with the Securities and Exchange Commission.

Note 4 — Inventories

     Inventories consisted of the following:

		March 31,				December 31,
		2011				2010
Finished goods		$	426,912			$	416,831
Raw Materials			13,670				11,879
Work in Process			7,048				6,112
			447,630				434,822
Reserve for slow-moving and obsolete inventory			(10,571	)			(10,505	)
		$	437,059			$	424,317

     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 benefit for the quarters ended March 31, 2011 and 2010 were determined based upon the Company’s estimated consolidated effective income tax rates of 35.8% and 35.7% for the years ending December 31, 2011 and 2010, 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 benefit for the first quarter of 2011 reflects interest on remaining unrecognized tax benefits, and for the first quarter of 2010 reflects the expiration of state statutes of limitations resolving previously unrecognized tax benefits.

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

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 involuntarily terminate a limited number of FCPO personnel. Through March 31, 2011, the Company incurred $7,656 in restructuring costs, including $51 incurred in the three months ended March 31, 2011. The Company expects to incur the remaining balance of $1,445 in 2011.

Note 7 — Comprehensive Income (Loss)

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

		Three Months ended March 31,
		2011				2010
Net loss		$	(2,563	)		$	(412	)
Net change in cumulative translation adjustment			3,794				(1,032	)
Change in fair value of interest rate swap contracts, net of income tax expense of $416 and $290			708				494
Change in fair value of foreign exchange contracts, net of income tax (benefit) expense of $(117) and $313		$	(200	)		$	532
Comprehensive income (loss)		$	1,739			$	(418	)

Note 8 — Capital Stock

     At March 31, 2011 and December 31, 2010, 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 30,970.02 and 30,226.50, respectively, were issued and outstanding. Of these shares, 1,142.27 and 597.52 shares were redeemable at March 31, 2011 and December 31, 2010, respectively, and are classified as redeemable common securities on the balance sheet, as described below.

     Certain employee stockholders owned 1,142.27 and 597.52 shares of PCHI common stock at March 31, 2011 and December 31, 2010, respectively. Under the terms of the PCHI 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 the shares held by the former employee. 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 securities totaled $33,179 at March 31, 2011 and $18,089 at December 31, 2010, 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 estimates the fair value of its common stock based on a valuation model confirmed periodically by recent acquisitions or independent appraisals.

     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 $1,542 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

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 and latex balloons, accessories, novelties, costumes, other garments, 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 March 31, 2011 and March 31, 2010 is as follows:

		Wholesale				Retail				Consolidated
Three Months Ended March 31, 2011
Revenues:
Net sales		$	199,576			$	220,106			$	419,682
Royalties and franchise fees			—				3,681				3,681
Total revenues			199,576				223,787				423,363
Eliminations			(67,181	)			—				(67,181	)
Net Revenues		$	132,395			$	223,787			$	356,182
Income (loss) from operations		$	17,286			$	(678	)		$	16,608
Interest expense, net											20,368
Other expense, net											62
Loss before income tax benefit										$	(3,822	)
Depreciation & Amortization		$	5,134			$	8,115			$	13,249
Total assets		$	1,036,646			$	672,682			$	1,709,328
		Wholesale				Retail				Consolidated
Three Months Ended March 31, 2010
Revenues:
Net sales		$	160,959			$	198,456			$	359,415
Royalties and franchise fees			—				3,844				3,844
Total revenues			160,959				202,300				363,259
Eliminations			(55,036	)			—				(55,036	)
Net Revenues		$	105,923			$	202,300			$	308,223
Income (loss) from operations		$	17,410			$	(9,122	)		$	8,288
Interest expense, net											9,301
Other income, net											(69	)
Loss before income tax benefit										$	(944	)
Depreciation & Amortization		$	4,391			$	7,183			$	11,574
Total assets		$	811,933			$	691,219			$	1,503,152

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.

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

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 $143 and $93 of stock-based compensation in general and administrative expenses during the three months ended March 31, 2011 and 2010, respectively.

     During February 2011, the Company granted 26 time options and 138 performance options to employees under the terms of the PCHI 2004 Equity Incentive Plan. The options vest at a rate of 20% per year and are exercisable at $27,700 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.

     During the three months ended March 31, 2011, 2.78 options were exercised. There are options to purchase 3,283.47 shares of common stock outstanding at March 31, 2011.

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 March 31, 2011 and December 31, 2010, the Company had an interest rate swap agreement with the notional amount of $135,374, and a net liability fair value of $1,120 and $2,244 at March 31, 2011 and December 31, 2010, respectively. The swap agreements had unrealized net losses of $706 and $1,414 at March 31, 2011 and December 31, 2010, respectively, which were included in accumulated other comprehensive income (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.

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

     At March 31, 2011 and December 31, 2010 the Company had foreign currency exchange contracts with notional amounts of $14,774 and $13,468, respectively and fair values of $(120) and $197, 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 March 31, 2011 and December 31, 2010 resulted in an unrealized net gain of $124 and an unrealized net loss of $(76), respectively, which are included in accumulated other comprehensive income (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 income (loss) related to these foreign exchange contracts will be reclassified into earnings by December 2011.

     Fair Value Measurement

     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 establishes 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 March 31, 2011 and December 31, 2010, 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)				March 31, 2011
Derivative assets			—			$	33				—			$	33
Derivative liabilities			—				(1,274	)			—				(1,274	)

						Significant
		Quoted Prices in				Other
		Active Markets for				Observable				Unobservable
		Identical Assets or				Inputs				Inputs				Total as of
		Liabilities (Level 1)				(Level 2)				(Level 3)				December 31, 2010
Derivative assets			—			$	241				—			$	241
Derivative liabilities			—				(2,288	)			—				(2,288	)

     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.

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

     The carrying amounts for cash and cash equivalents, accounts receivables, prepaid expenses and other current assets, accounts payable, accrued expenses and other current liabilities approximate fair value at March 31, 2011 and December 31, 2010 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:

		March 31, 2011								December 31, 2010
		Carrying				Fair				Carrying				Fair
		Amount				Value				Amount				Value
Term Loan		$	665,205			$	671,857			$	666,644			$	674,060
$175,000 Senior Subordinated Notes			175,000				176,750				175,000				176,750

     The carrying amounts for other long-term debt approximate fair value at March 31, 2011 and December 31, 2010, 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 March 31, 2011 and December 31, 2010.

										Derivative Assets																Derivative Liabilities
		Notional Amounts								March 31, 2011								December 31, 2010								March 31, 2011								December 31, 2010
										Balance								Balance								Balance								Balance
		March 31,				December 31,				Sheet				Fair				Sheet				Fair				Sheet				Fair				Sheet				Fair
Derivative Instrument		2011				2010				Line				Value				Line				Value				Line				Value				Line				Value
Interest Rate Hedge		$	135,374			$	135,374							$	—							$	—			(b) AE				$	(1,120	)		(b) AE				$	(2,244	)
Foreign Exchange Contracts			14,774				13,468			(a) PP					33			(a) PP					241			(b) AE					(154	)		(b) AE					(44	)
Total Hedges		$	150,148			$	148,842							$	33							$	241							$	(1,274	)						$	(2,288	)

Note 13 — Recently Issued Accounting Pronouncements

     In January 2011, the Financial Accounting Standards Board issued ASU 2011-01, “Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings” in Update No. 2010-20. ASU 2011-01 defers the portion of ASU 2010-20 related to troubled debt disclosures. This guidance is anticipated to be effective for interim and annual periods ending after June 15, 2011. We do not anticipate any material impact from this update.

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 due 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.
	•		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
	•		Christy’s Asia, Ltd.
	•		Christy’s By Design, Ltd.
	•		Christy’s Dress Up, Ltd.
	•		Christy’s Garments & Accessories Ltd.
	•		JCS Hong Kong Ltd.
	•		Riethmuller GmbH

     The following information presents condensed consolidating balance sheets at March 31, 2011 and December 31, 2010, the condensed consolidating statements of operations for the three months ended March 31, 2011 and 2010, and the related condensed consolidating statements of cash flows for the three months ended March 31, 2011 and 2010, for the combined Guarantors and the combined Non-guarantors, together with the elimination entries necessary to consolidate the entities comprising the combined companies.

AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

CONDENSED CONSOLIDATING BALANCE SHEET
March 31, 2011
(Amounts in thousands)

		AHI and
		Combined				Combined Non-
		Guarantors				Guarantors				Eliminations				Consolidated
ASSETS
Current assets:
Cash and cash equivalents		$	9,608			$	8,613			$	—			$	18,221
Accounts receivable, net of allowances			75,137				38,752				—				113,889
Inventories, net of allowances			399,394				38,744				(1,079	)			437,059
Prepaid expenses and other current assets			58,881				6,156				—				65,037
Total current assets			543,020				92,265				(1,079	)			634,206
Property, plant and equipment, net			188,554				14,203				—				202,757
Goodwill			608,302				52,064				—				660,366
Trade names			129,954				—				—				129,954
Other intangible assets, net			52,795				—				—				52,795
Investment in and advances to unconsolidated subsidiaries			113,253				—				(113,253	)			—
Due from affiliates			73,843				59,788				(133,631	)			—
Other assets, net			28,349				901				—				29,250
Total assets		$	1,738,070			$	219,221			$	(247,963	)		$	1,709,328
LIABILITIES, REDEEMABLE COMMON SECURITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Loans and notes payable			227,632				—				—				227,632
Accounts payable			80,469				11,379				—				91,848
Accrued expenses			92,208				15,595				—				107,803
Income taxes payable			29,932				(333	)			(49	)			29,550
Due to affiliates			58,282				75,349				(133,631	)			—
Current portion of long-term obligations			9,059				41				—				9,100
Total current liabilities			497,582				102,031				(133,680	)			465,933
Long-term obligations, excluding current portion			838,972				79				—				839,051
Deferred income tax liabilities			94,370				721				—				95,091
Other			16,918				705				—				17,623
Total liabilities			1,447,842				103,536				(133,680	)			1,417,698
Redeemable common securities			33,179				—				—				33,179
Commitments and contingencies
Stockholders’ equity:
Common Stock			—				336				(336	)			—
Additional paid-in capital			287,751				78,094				(78,094	)			287,751
Retained earnings			(29,089	)			36,065				(37,095	)			(30,119	)
Accumulated other comprehensive income (loss)			(1,613	)			(1,242	)			1,242				(1,613	)
Amscan Holdings Inc. stockholders’ equity			257,049				113,253				(114,283	)			256,019
Noncontrolling interests			—				2,432				—				2,432
Total stockholders’ equity			257,049				115,685				(114,283	)			258,451
Total liabilities, redeemable common securities and stockholders’ equity		$	1,738,070			$	219,221			$	(247,963	)		$	1,709,328

AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

CONSOLIDATING BALANCE SHEET
December 31, 2010
(Amounts in thousands)

		AHI and
		Combined				Combined Non-
		Guarantors				Guarantors				Eliminations				Consolidated
ASSETS
Current assets:
Cash and cash equivalents		$	14,198			$	6,256			$	—			$	20,454
Accounts receivable , net			76,699				30,632				—				107,331
Inventories, net			405,452				19,883				(1,018	)			424,317
Prepaid expenses and other current assets			61,211				4,461				—				65,672
Total current assets			557,560				61,232				(1,018	)			617,774
Property, plant and equipment, net			187,574				3,155				—				190,729
Goodwill			600,014				30,478				—				630,492
Trade names			129,954				—				—				129,954
Other intangible assets, net			55,362				—				—				55,362
Investment in and advances to unconsolidated subsidiaries			64,485				—				(64,485	)			—
Due from affiliates			22,148				12,998				(35,146	)			—
Other assets, net			28,057				783				—				28,840
Total assets			1,645,154			$	108,646			$	(100,649	)		$	1,653,151
LIABILITIES, REDEEMABLE COMMON SECURITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Loans and notes payable			150,098				—				—				150,098
Accounts payable			97,510				10,662				—				108,172
Accrued expenses			102,749				8,305				—				111,054
Income taxes payable			35,706				(1,355	)			(26	)			34,325
Due to affiliates			11,593				23,553				(35,146	)			—
Redeemable warrants			15,086				—				—				15,086
Current portion of long-term obligations			9,005				41				—				9,046
Total current liabilities			421,747				41,206				(35,172	)			427,781
Long-term obligations, excluding current portion			841,023				89				—				841,112
Deferred income tax liabilities			94,427				554				—				94,981
Other			14,766				—				—				14,766
Total liabilities			1,371,963				41,849				(35,172	)			1,378,640
Redeemable common securities			18,089				—				—				18,089
Commitments and contingencies
Stockholders’ equity:
Common Stock			—				336				(336	)			—
Additional paid-in capital			287,583				31,025				(31,025	)			287,583
Retained (deficit)earnings			(26,566	)			37,535				(38,527	)			(27,558	)
Accumulated other comprehensive (loss) income			(5,915	)			(4,411	)			4,411				(5,915	)
Amscan Holdings, Inc. stockholders’ equity			255,102				64,485				(65,477	)			254,110
Noncontrolling interests			—				2,312				—				2,312
Total stockholders’ equity			255,102				66,797				(65,477	)			256,422
Total liabilities, redeemable common securities and stockholders’ equity		$	1,645,154			$	108,646			$	(100,649	)		$	1,653,151

AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended March 31, 2011
(Amounts in thousands)

		AHI and
		Combined				Combined Non-
		Guarantors				Guarantors				Eliminations				Consolidated
Revenues:
Net sales		$	316,743			$	41,308			$	(5,550	)		$	352,501
Royalties and franchise fees			3,681				—				—				3,681
Total revenues			320,424				41,308				(5,550	)			356,182
Expenses:
Cost of sales			198,141				32,362				(5,489	)			225,014
Selling expenses			8,313				5,539				—				13,852
Retail operating expenses			61,848				—				—				61,848
Franchise expenses			3,365				—				—				3,365
General and administrative expenses			27,046				4,829				(330	)			31,545
Art and development costs			3,889				61				—				3,950
Total expenses			302,602				42,791				(5,819	)			339,574
Income (loss) from operations			17,822				(1,483	)			269				16,608
Interest expense, net			20,129				239				—				20,368
Other income (expense), net			1,840				(638	)			(1,140	)			62
Loss before income taxes			(4,147	)			(1,084	)			1,409				(3,822	)
Income tax (benefit) expense			(1,622	)			315				(23	)			(1,330	)
Net loss			(2,525	)			(1,399	)			1,432				(2,492	)
Less net income attributable to noncontrolling interests			—				71				—				71
Net loss attributable to Amscan Holdings, Inc.		$	(2,525	)		$	(1,470	)		$	1,432			$	(2,563	)

AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended March 31, 2010
(Amounts in thousands)

		AHI and
		Combined				Combined Non-
		Guarantors				Guarantors				Eliminations				Consolidated
Revenues:
Net sales		$	266,083			$	53,608			$	(15,312	)		$	304,379
Royalties and franchise fees			3,844				—				—				3,844
Total revenues			269,927				53,608				(15,312	)			308,223
Expenses:
Cost of sales			175,250				38,027				(13,377	)			199,900
Selling expenses			7,757				2,633				—				10,390
Retail operating expenses			45,884				8,301				(1,225	)			52,960
Franchise expenses			3,124				—				—				3,124
General and administrative expenses			27,110				3,145				(330	)			29,925
Art and development costs			3,660				(24	)			—				3,636
Total expenses			262,785				52,082				(14,932	)			299,935
(Loss) Income loss from operations			7,142				1,526				(380	)			8,288
Interest expense, net			8,653				648				—				9,301
Other (income) expense, net			(1,394	)			322				1,003				(69	)
(Loss) income before income taxes			(117	)			556				(1,383	)			(944	)
Income tax benefit			(408	)			95				(262	)			(575	)
Net income (loss)		$	291			$	461			$	(1,121	)		$	(369	)
Less Net income attributed to noncontrolling interest			—				43				—				43
Net income (loss) attributable to Amscan Holdings, Inc.		$	291			$	418			$	(1,121	)		$	(412	)