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)

     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). þ Yes o No

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See 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 o		Smaller reporting company þ
				(Do not check if a smaller reporting company)

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

     As of May 17, 2010, 1,000.00 shares of Registrant’s common stock were outstanding.

 

 

AMSCAN HOLDINGS, INC.
FORM 10-Q

March 31, 2010

TABLE OF CONTENTS

		Page
PART I
Item 1 Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at March 31, 2010 and December 31, 2009			3
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2010 and 2009			4
Condensed Consolidated Statement of Stockholders’ Equity for the Three Months Ended March 31, 2010			5
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009			6
Notes to Condensed Consolidated Financial Statements			7
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations			20
Item 3 Quantitative and Qualitative Disclosures About Market Risk			23
Item 4 Controls and Procedures			23
PART II
Item 6 Exhibits			23
Signature			24
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)

		March 31,				December 31,
		2010				2009
		(unaudited)				(Note 3)
ASSETS
Current assets:
Cash and cash equivalents		$	17,054			$	15,420
Accounts receivable, net of allowances			88,699				82,781
Inventories, net of allowances			333,199				335,950
Prepaid expenses and other current assets			72,217				69,541
Total current assets			511,169				503,692
Property, plant and equipment, net			175,837				174,994
Goodwill			576,200				548,439
Trade names			157,283				157,283
Other intangible assets, net			66,211				54,669
Other assets, net			16,452				41,424
Total assets		$	1,503,152			$	1,480,501
LIABILITIES, REDEEMABLE COMMON SECURITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Loans and notes payable		$	110,812			$	77,635
Accounts payable			61,631				76,901
Accrued expenses			89,488				93,680
Income taxes payable			25,389				32,061
Redeemable warrants			15,444				15,444
Current portion of long-term obligations			34,881				34,906
Total current liabilities			337,645				330,627
Long-term obligations, excluding current portion			536,172				538,892
Deferred income tax liabilities			102,207				101,570
Deferred rent and other long-term liabilities			8,841				11,901
Total liabilities			984,865				982,990
Redeemable common securities (including 592.84 common shares issued and outstanding at March 31, 2010 and December 31, 2009)			18,389				18,389
Commitments and contingencies
Stockholders’ equity:
Common Stock ($0.01 par value; 40,000.00 shares authorized; 30,226.50 shares issued and outstanding at March 31, 2010 and December 31, 2009 )			—				—
Additional paid-in capital			356,916				335,823
Retained earnings			149,145				149,557
Accumulated other comprehensive loss			(8,401	)			(8,395	)
Amscan Holdings, Inc. stockholders’ equity			497,660				476,985
Noncontrolling interests			2,238				2,137
Total stockholders’ equity			499,898				479,122
Total liabilities, redeemable common securities and stockholders’ equity		$	1,503,152			$	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 March 31,
		2010				2009
Revenues:
Net sales		$	304,379			$	309,046
Royalties and franchise fees			3,844				3,694
Total revenues			308,223				312,740
Expenses:
Cost of sales			199,900				205,417
Wholesale selling expenses			10,390				10,171
Retail operating expenses			52,960				51,501
Franchise expenses			3,124				2,889
General and administrative expenses			29,925				27,435
Art and development costs			3,636				3,126
Total expenses			299,935				300,539
Income from operations			8,288				12,201
Interest expense, net			9,301				10,665
Other (income) expense, net			(69	)			207
(Loss) income before income taxes			(944	)			1,329
Income tax benefit			(575	)			(1,132	)
Net (loss) income			(369	)			2,461
Less: net income attributable to noncontrolling interest			43				58
Net (loss) income attributable to Amscan Holdings, Inc.		$	(412	)		$	2,403

See accompanying notes to unaudited condensed consolidated financial statements.

AMSCAN HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

Three Months Ended March 31, 2010
(Unaudited)
(Amounts in thousands, except share amounts)

																						Amscan Holdings,
										Additional Paid-in								Accumulated Other				Inc. Stockholders’				Noncontrolling
		Common Shares				Common Stock				Capital				Retained Earnings				Comprehensive Loss				Equity				Interests				Total Equity
Balance at December 31, 2009			30,226.50			$	—			$	335,823			$	149,557			$	(8,395	)		$	476,985			$	2,137			$	479,122
Net (loss) income															(412	)							(412	)			43				(369	)
Net change in cumulative translation adjustment																			(1,032	)			(1,032	)			58				(974	)
Change in fair value of interest rate swap contracts, net of income taxes																			494				494								494
Change in fair value of foreign exchange contracts, net of income taxes																			532				532								532
Comprehensive (loss) income																							(418	)			101				(317	)
Issuance of non-redeemable warrants											21,000												21,000								21,000
Equity based compensation expense											93												93								93
Balance at March 31, 2010			30,226.50			$	—			$	356,916			$	149,145			$	(8,401	)		$	497,660			$	2,238			$	499,898

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,
		2010				2009
Cash flows used in operating activities:
Net (loss) income		$	(369	)		$	2,461
Less: net income attributable to noncontrolling interest			43				58
Net (loss) income attributable to Amscan Holdings, Inc.			(412	)			2,403
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Depreciation and amortization expense			11,574				10,646
Amortization of deferred financing costs			221				544
Provision for doubtful accounts			304				437
Deferred income tax provision (benefit)			377				(1,818	)
Deferred rent			437				366
Undistributed (income) loss in unconsolidated joint venture			(288	)			130
Loss on disposal of equipment			303				175
Equity based compensation			93				219
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable			(4,469	)			3,930
Decrease in inventories			2,752				22,962
Increase in prepaid expenses and other current assets			(4,140	)			(7,915	)
Decrease in accounts payable, accrued expenses and income taxes payable			(24,293	)			(66,074	)
Net cash used in operating activities			(17,541	)			(33,995	)
Cash flows used in investing activities:
Cash paid in connection with acquisitions			(3,585	)			(2	)
Capital expenditures			(6,924	)			(5,961	)
Proceeds from disposal of property and equipment			54				24
Net cash used in investing activities			(10,455	)			(5,939	)
Cash flows provided by financing activities:
Repayment of loans, notes payable and long-term obligations			(3,383	)			(2,091	)
Borrowings under revolving credit facilities			33,815				40,124
Net cash provided by financing activities			30,432				38,033
Effect of exchange rate changes on cash and cash equivalents			(802	)			648
Net increase (decrease) in cash and cash equivalents			1,634				(1,253	)
Cash and cash equivalents at beginning of period			15,420				13,058
Cash and cash equivalents at end of period		$	17,054			$	11,805

See accompanying notes to unaudited condensed consolidated financial statements.

AMSCAN HOLDINGS, INC.

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

Note 1 – Description of Business

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

Note 2 – Acquisitions

     On December 21, 2009, the Company entered into an Asset Purchase Agreement with American Greetings Corporation (“American Greetings”) under which it acquired certain assets, equipment and processes used in the manufacture and distribution of party goods effective on March 1, 2010. In connection with the Asset Purchase Agreement, the companies also entered into a Supply and Distribution Agreement and a Licensing Agreement (collectively, the “Agreements”). Under the terms of the Agreements, on March 1, 2010, the Company has exclusive rights to manufacture and distribute products into various channels including the party store channel. American Greetings will continue to distribute party goods to various channels including to its mass, 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 Wholesale segment.

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

     The American Greetings acquisition has been accounted for as a purchase business combination. The excess of the purchase price over the tangible assets and identified intangible assets acquired was assigned to goodwill. The following summarizes the estimated fair value of the assets acquired, based on preliminary valuation and subject to change: 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 amount of $38,436 is deductible over 15 years for tax purposes.

     Pro–forma results have not been presented because the effect of this business combination would not result in a materially different amount of revenue or net income (loss) had the acquisition occurred at the beginning of each period presented. The acquisition costs related to the transaction were immaterial to the condensed consolidated financial statements.

Note 3 – Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements as of March 31, 2010 and for the three months ended March 31, 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 months ended March 31, 2010 are not necessarily indicative of the results to be expected for the year ending December 31, 2010. Our business is subject to substantial seasonal variations, as our retail segment has realized a significant portion of its net sales, cash flow and net income in the fourth quarter of each year, principally due to its Halloween season sales in October and, to a lesser extent, other holiday season sales at the end of the calendar year. We expect that this general pattern will continue. Our results of operations may also be affected by industry factors that may be specific to a particular period, such as movement in and the general level of raw material costs. For further information, see the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, as filed with the Securities and Exchange Commission.

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

Note 4 – Inventories

     Inventories consisted of the following:

		March 31,				December 31,
		2010				2009
Finished goods		$	323,398			$	325,421
Raw Materials			12,474				12,650
Work in Process			5,667				6,431
			341,539				344,502
Reserve for slow-moving and obsolete inventory			(8,340	)			(8,552	)
		$	333,199			$	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 approximate 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 three months ended March 31, 2010 and 2009 were determined based upon estimates of the Company’s consolidated effective income tax rates of 35.7% for the year ending December 31, 2010 and 36.9% for the year ending December 31, 2009, respectively. The differences between the estimated consolidated effective income tax rate and the U.S. federal statutory rate are primarily attributable to state income taxes and available domestic manufacturing deductions. In addition, the income tax benefit for the first quarters of both 2009 and 2010 reflect the expiration of state statutes of limitations resolving previously unrecognized tax benefits. The income tax benefit for the first quarter of 2009 also reflects the favorable settlement of the audits of the Company’s 2005 and 2006 federal tax returns during the quarter.

Note 6 — Restructuring

     In connection with the November 2007 acquisition of 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, 2010, the Company incurred $6,853 in restructuring costs including $150 incurred in the three months ended March 31, 2010. The Company expects to incur the remaining balance of $2,248 in 2010.

     During October of 2009, the Company communicated its plan to close the FCPO corporate office in Naperville, Illinois and to consolidate its retail corporate office operations with those of Party City, in Rockaway, New Jersey. 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 additional planned severances costs of $1,800 in 2009. Through March 31, 2010, the Company had made severance payments of $1,300 and expects to pay additional severance of $500 during the remainder of 2010. In addition, in connection with the closing, during the quarter ended March 31, 2010, the Company incurred $900 in retention costs and expects to incur additional retention costs of $600 during the remainder of 2010.

Note 7 – Comprehensive (Loss) Income

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

		Three Months ended
		March 31,
		2010				2009
Net (loss) income attributable to Amscan Holdings, Inc.		$	(412	)		$	2,403
Net change in cumulative translation adjustment			(1,032	)			(743	)
Change in fair value of interest rate swap contracts, net of income tax expense of $290, and $68			494				115
Change in fair value of foreign exchange contracts, net of income tax expense (benefit) of $313, and $(127)			532				(217	)
Comprehensive (loss) income		$	(418	)		$	1,558

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

Note 8 – Capital Stock

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

     Certain employee stockholders owned 592.84 shares of AAH common stock at both March 31, 2010 and December 31, 2009. Under the terms of the AAH stockholders’ agreement dated April 30, 2004, as amended, the Company has an option to purchase all of the shares of common stock held by former employees and, under certain circumstances, former employee stockholders can require the Company to purchase all of their shares 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 $16,807 at March 31, 2010 and December 31, 2009, and is classified as redeemable common securities on the consolidated balance sheet, with a corresponding adjustment to stockholders’ equity. As there is no active market for the Company’s common stock, the Company estimated the fair value of its common stock based on a valuation calculated using a multiple of earnings.

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

Note 9 – Segment Information

Industry Segments

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

     The Company’s industry segment data for the three months ended March 31, 2010 and March 31, 2009 is as follows:

		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		$	19,483			$	(11,195	)		$	8,288
Interest expense, net											9,301
Other expense, net											(69	)
Loss before income tax benefit										$	(944	)
Total assets		$	811,933			$	691,219			$	1,503,152

		Wholesale				Retail				Consolidated
Three Months Ended March 31, 2009
Revenues:
Net sales		$	157,328			$	202,004			$	359,332
Royalties and franchise fees			—				3,694				3,694
Total revenues			157,328				205,698				363,026
Eliminations			(50,286	)			—				(50,286	)
Net Revenues		$	107,042			$	205,698			$	312,740
Income (loss) from operations		$	16,598			$	(4,397	)		$	12,201
Interest expense, net											10,665
Other expense, net											207
Income before income taxes										$	1,329
Total assets		$	781,689			$	708,708			$	1,490,397

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

Geographic Segments

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

Note 10 – Legal Proceedings

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

Note 11 – Stock Option Plan

     The Company recorded $93 and $219 of stock-based compensation in general and administrative expenses during the three months ended March 31, 2010 and 2009, respectively.

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

     There were no options exercised during the three-month period ended March 31, 2010. There are options to purchase 3,090.63 shares of common stock outstanding at March 31, 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 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, 2010 and December 31, 2009, the Company had interest rate swap agreements with notional amounts of $142,972 and $163,441 respectively, and a net liability fair value of $5,529 and $6,313 at March 31, 2010 and December 31, 2009, respectively. The swap agreements had unrealized net losses of $3,483 and $3,977 at March 31, 2010 and December 31, 2009, 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 (Continued)
(Unaudited)
(Amounts in thousands, except share amounts)

     At March 31, 2010 and December 31, 2009 the Company had foreign currency exchange contracts with a notional amount of $14,400 and $19,200, respectively and fair value of $576 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 March 31, 2010 and 2009 resulted in an unrealized net gain of $532 and an unrealized net loss of $127, 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 2010.

     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 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 March 31, 2010 and December 31, 2009, that are measured at fair value on a recurring basis (in thousands):

		Quoted Prices in				Significant
		Active Markets for				Other				Unobservable				Total as of
		Identical Assets or				Observable				Inputs				March 31,
		Liabilities (Level 1)				Inputs (Level 2)				(Level 3)				2010
Derivative assets			—			$	583				—			$	583
Derivative liabilities							(5,536	)			—				(5,536	)

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

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

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

		March 31, 2010								December 31, 2009
		Carrying				Fair				Carrying				Fair
		Amount				Value				Amount				Value
Term Loan		$	363,750			$	348,291			$	364,688			$	331,866
$175,000 Senior Subordinated Notes			175,000				166,250				175,000				166,250

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

										Derivative Assets																Derivative Liabilities
		Notional Amounts								March 31, 2010								December 31, 2009								March 31, 2010								December 31, 2009
										Balance								Balance								Balance								Balance
		March 31,				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				$	(5,529	)		(b) AE				$	(6,313	)
Foreign Exchange Contracts		$	14,400			$	19,200			(a) PP				$	583			(a) PP					—			(a) PP				$	(7	)		(b) AE				$	(269	)
Total Hedges		$	157,372			$	182,641							$	583							$	—							$	(5,536	)						$	(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.

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

AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(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 on April 30, 2004 and due on April 30, 2014 are guaranteed jointly and severally, fully and unconditionally, by the following wholly-owned domestic subsidiaries of the Company (the “Guarantors”):

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

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

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

     The following information presents condensed consolidating balance sheets at March 31, 2010 and December 31, 2009, and the condensed consolidating statements of operations for the three months ended March 31, 2010 and 2009, and the related condensed consolidating statements of cash flows for the three months ended March 31, 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.

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

CONDENSED CONSOLIDATING BALANCE SHEET
March 31, 2010
(Amounts in thousands)

		AHI and				Combined
		Combined				Non-
		Guarantors				Guarantors				Eliminations				Consolidated
ASSETS
Current assets:
Cash and cash equivalents		$	12,293			$	4,761			$	—			$	17,054
Accounts receivable, net of allowances			66,872				21,827				—				88,699
Inventories, net of allowances			292,741				46,930				(6,472	)			333,199
Prepaid expenses and other current assets			65,026				5,181				2,010				72,217
Total current assets			436,932				78,699				(4,462	)			511,169
Property, plant and equipment, net			165,442				10,395				—				175,837
Goodwill			538,268				37,374				558				576,200
Trade names			157,283												157,283
Other intangible assets, net			41,856				24,355								66,211
Other assets, net			139,041				21,046				(143,635	)			16,452
Total assets		$	1,478,822			$	171,869			$	(147,539	)		$	1,503,152
LIABILITIES, REDEEMABLE COMMON SECURITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Loans and notes payable			110,805				7				—				110,812
Accounts payable			53,676				7,955				—				61,631
Accrued expenses			81,542				7,946				—				89,488
Income taxes payable			26,431				(744	)			(298	)			25,389
Redeemable warrants			15,444				—				—				15,444
Current portion of long-term obligations			28,381				6,500				—				34,881
Total current liabilities			316,279				21,664				(298	)			337,645
Long-term obligations, excluding current portion			520,672				15,500				—				536,172
Deferred income tax liabilities			101,668				539				—				102,207
Other			17,429				88,840				(97,428	)			8,841
Total liabilities			956,048				126,543				(97,726	)			984,865
Redeemable common securities			18,389				—				—				18,389
Commitments and contingencies
Stockholders’ equity:
Common Stock			—				339				(339	)			—
Additional paid-in capital			356,876				46,115				(46,075	)			356,916
Retained earnings			155,910				(2,797	)			(3,968	)			149,145
Accumulated other comprehensive loss			(8,401	)			(569	)			569				(8,401	)
Amscan Holdings, Inc. stockholders’ equity			504,385				43,088				(49,813	)			497,660
Noncontrolling interests			—				2,238				—				2,238
Total stockholders’ equity			504,385				45,326				(49,813	)			499,898
Total liabilities, redeemable common securities and stockholders’ equity		$	1,478,822			$	171,869			$	(147,539	)		$	1,503,152

CONSOLIDATING BALANCE SHEET
December 31, 2009
(Amounts in thousands)

		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				41,893				(947	)			335,950
Prepaid expenses and other current assets			63,528				6,013				—				69,541
Total current assets			427,427				77,212				(947	)			503,692
Property, plant and equipment, net			163,999				10,995				—				174,994
Goodwill			510,400				38,039				—				548,439
Trade names			157,283				—				—				157,283
Other intangible assets, net			29,948				24,721				—				54,669
Other assets, net			160,401				7,033				(126,010	)			41,424
Total assets		$	1,449,458			$	158,000			$	(126,957	)		$	1,480,501
LIABILITIES, REDEEMABLE COMMON SECURITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Loans and notes payable		$	76,990			$	645			$	—			$	77,635
Accounts payable			67,235				9,666				—				76,901
Accrued expenses			83,430				10,250				—				93,680
Income taxes payable			32,969				(817	)			(91	)			32,061
Redeemable warrants			15,444				—				—				15,444
Current portion of long-term obligations			30,906				4,000				—				34,906
Total current liabilities			306,974				23,744				(91	)			330,627
Long-term obligations, excluding current portion			519,892				19,000				—				538,892
Deferred income tax liabilities			101,000				570				—				101,570
Other			20,288				71,569				(79,956	)			11,901
Total liabilities			948,154				114,883				(80,047	)			982,990
Redeemable common securities			18,389				—				—				18,389
Commitments and contingencies
Stockholders’ equity:
Common Stock			—				339				(339	)			—
Additional paid-in capital			335,731				46,167				(46,075	)			335,823
Retained earnings			155,579				(5,476	)			(546	)			149,557
Accumulated other comprehensive loss			(8,395	)			(50	)			50				(8,395	)
Amscan Holdings, Inc. stockholders’ equity			482,915				40,980				(46,910	)			476,985
Noncontrolling interests			—				2,137				—				2,137
Total stockholders’ equity			482,915				43,117				(46,910	)			479,122
Total liabilities, redeemable common securities and stockholders’ equity		$	1,449,458			$	158,000			$	(126,957	)		$	1,480,501

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
Wholesale 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
Income 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) expense			(408	)			95				(262	)			(575	)
Net income (loss)		$	291			$	461			$	(1,121	)		$	(369	)
Less net income attributable to noncontrolling interests			—				43				—				43
Net income (loss) attributable to Amscan Holdings, Inc.		$	291			$	418			$	(1,121	)		$	(412	)

		AHI and
		Combined				Combined Non-
		Guarantors				Guarantors				Eliminations				Consolidated
Revenues:
Net sales		$	275,263			$	39,672			$	(5,889	)		$	309,046
Royalties and franchise fees			3,694				—				—				3,694
Total revenues			278,957				39,672				(5,889	)			312,740
Expenses:
Cost of sales			184,859				26,690				(6,132	)			205,417
Wholesale selling expenses			8,217				1,954				—				10,171
Retail operating expenses			43,599				7,902				—				51,501
Franchise expenses			2,889				—				—				2,889
General and administrative expenses			24,301				3,464				(330	)			27,435
Art and development costs			3,126				—				—				3,126
Total expenses			266,991				40,010				(6,462	)			300,539
Income (loss) from operations			11,966				(338	)			573				12,201
Interest expense, net			10,151				514				—				10,665
Other (income) expense, net			(1,182	)			14				1,375				207
Income (loss) before income taxes			2,997				(866	)			(802	)			1,329
Income tax benefit			(662	)			(560	)			90				(1,132	)
Net income (loss)			3,659				(306	)			(892	)			2,461
Less Net income attributed to noncontrolling interest			—				58				—				58
Net income (loss) attributable to Amscan Holdings, Inc.		$	3,659			$	(364	)		$	(892	)		$	2,403

		AHI and
		Combined				Combined
		Guarantors				Non-Guarantors				Eliminations				Consolidated
Cash flows used in operating activities:
Net income (loss)		$	291			$	461			$	(1,121	)		$	(369	)
Less: net income attributable to noncontrolling interest			—				43				—				43
Net income (loss) attributable to Amscan Holdings, Inc.			291				418				(1,121	)			(412	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization expense			10,547				1,027				—				11,574
Amortization of deferred financing costs			154				67				—				221
Provision for doubtful accounts			248				56				—				304
Deferred income tax expense			377				—				—				377
Deferred rent			346				91				—				437
Undistributed gain in unconsolidated joint venture			(288	)			—				—				(288	)
Loss on disposal of equipment			106				197				—				303
Equity based compensation			93				—				—				93
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable			(4,712	)			243				—				(4,469	)
Decrease (increase) in inventories			2,264				(223	)			711				2,752
Increase in prepaid expenses and other current assets			(2,983	)			(928	)			(229	)			(4,140	)
Decrease in accounts payable, accrued expenses and income taxes payable			(24,366	)			(566	)			639				(24,293	)
Net cash (used in) provided by operating activities			(17,923	)			382				—				(17,541	)
Cash flows used in investing activities:
Cash paid in connection with acquisitions			(3,585	)			—				—				(3,585	)
Capital expenditures			(6,577	)			(347	)			—				(6,924	)
Proceeds from disposal of property and equipment			54				—				—				54
Net cash used in investing activities			(10,108	)			(347	)			—				(10,455	)
Cash flows provided by financing activities:
Repayments of loans, notes payable and long-term obligations			(1,745	)			(1,638	)			—				(3,383	)
Proceeds from loans, notes payable and long-term obligations			33,815				—				—				33,815
Net cash provided by financing activities			32,070				(1,638	)			—				30,432
Effect of exchange rate changes on cash and cash equivalents			14				(816	)			—				(802	)
Net decrease in cash and cash equivalents			4,053				(2,419	)			—				1,634
Cash and cash equivalents at beginning of period			8,240				7,180				—				15,420
Cash and cash equivalents at end of period		$	12,293			$	4,761			$	—			$	17,054