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

For the fiscal year ended December 31, 2010

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

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

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes þ No o

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

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

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

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

Large accelerated filer o		Accelerated filer o		Non-accelerated filer 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

     The aggregate market value of the Common Stock held by non-affiliates of the Registrant (assuming for purposes of this calculation, without conceding, that all executive officers and directors are “affiliates”) at June 30, 2010, the last business day of the registrant’s most recently completed second fiscal quarter, was $49,802,000.

     The number of outstanding shares of the registrant’s common stock as of April 13, 2011 was 1,000.00.

DOCUMENTS INCORPORATED BY REFERENCE

     None.

 

 

AMSCAN HOLDINGS, INC.
FORM 10-K

December 31, 2010

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

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

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

PART I

Item 1.		Business

     Amscan Holdings, Inc. (“Amscan” or the “Company”) designs, manufactures, contracts for manufacture and distributes party goods, including paper and plastic tableware, metallic balloons, accessories, novelties, costumes, other garments, gifts and stationery. The Company operates retail party goods 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 AAH Holdings Corporation. (“AAH”).

Wholesale Operations

     We believe we are a leading designer, manufacturer and distributor of decorative party goods in the United States and the largest manufacturer of metallic balloons in the world. We offer one of the broadest and deepest product lines in the party goods industry. We currently offer over 400 party goods ensembles, which range from approximately five to 100 design-coordinated items spanning tableware, accessories, novelties, balloons, decorations and gifts. The breadth of these ensembles enables retailers to encourage additional sales for a single occasion. We market party goods ensembles for a wide variety of occasions including seasonal and religious holidays, special events and themed celebrations. Our seasonal and religious ensembles enhance holiday celebrations throughout the year including New Year’s, Valentine’s Day, St. Patrick’s Day, Easter, Passover, Fourth of July, Halloween, Fall, Thanksgiving, Hanukkah and Christmas. Our special event ensembles include birthdays, christenings, first communions, bar mitzvahs, confirmations, graduations, bridal and baby showers and anniversaries. Our theme-oriented ensembles include Bachelorette, Casino, Chinatown, Cocktail Party, Disco, Fiesta, Fifties Rock-and-Roll, Hawaiian Luau, Hollywood, Mardi Gras, Masquerade, Patriotic, Retirement, Sports, Summer Barbeque and Western. In 2010, approximately 78% of our net sales at wholesale consisted of products designed for non-seasonal occasions, with the remaining 22% comprising items used for holidays and seasonal celebrations throughout the year. Our extensive gift and stationery product lines, encompassing home, baby and wedding products for general gift giving or self-purchase, further leverage our design, marketing and distribution capabilities.

     Our products are sold at wholesale to party goods superstores, including our company-owned retail stores, other party goods retailers, independent card and gift stores, and other retailers and distributors throughout the world. Sales to the party goods superstore distribution channel account for approximately 56% of our 2010 sales at wholesale. Party goods superstores provide consumers with a one-stop source for all of their party needs, generally at discounted prices. In addition, we have strong, long-standing relationships with balloon distributors and independent party and card and gift retailers, with these channels accounting for 23% of our 2010 sales at wholesale. We manufactured approximately 41% of the products sold at wholesale in 2010. The remaining 59% of products sold was supplied by third-party manufacturers, many of whom are located in Asia.

Recent Wholesale Acquisition

     On January 30, 2011, we acquired the common stock of C. Riethmuller GmbH (“Riethmuller”) for total consideration of $46.8 million. Riethmuller is a 150-year-old German balloon producer and the pre-eminent brand for party and carnival items in Germany, Austria and Switzerland. The acquisition expands the Company’s vertical business model into the latex balloon category and gives the Company a significant presence in Germany, Poland, and Malaysia.

     On September 30, 2010, we acquired Christy’s By Design Limited and three affiliated companies (the “Christy’s Group”) from Christy Holdings Limited for total consideration of $30.4 million. The Christy’s Group designs and distributes costumes and other garments and accessories through its operations in Asia and the UK. The Christy’s Group accelerates our entry into the costume wholesale business while increasing our direct-to-consumer penetration through our retail stores.

     On December 21, 2009, we acquired the Designware party goods division of American Greetings, including certain assets, equipment and processes used in the manufacture and distribution of party goods effective on March 1, 2010, for total consideration of $45.9 million (the “Designware Acquisition”). In connection with the Designware Acquisition, American Greetings and the Company also entered into a supply and distribution and licensing agreement. Under the terms of the agreements, after March 1, 2010, 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. In addition, the Company has exclusive rights to manufacture and distribute products into various channels including the party store channel. American Greetings will continue to distribute party goods to various channels including to its mass market, drug, grocery, and specialty retail customers. The results of the Designware Acquisition are included in the consolidated financial statements since the March 1, 2010 acquisition date.

Retail Operations

     The Company’s various retail operations began as independent retailers and franchisors in the mid to late 1980’s. The Company acquired its retail operations in a series of transactions from December 2005 through November 2007. Our retail stores operate principally under the names Party City, Halloween City, Factory Card & Party Outlet and The Paper Factory. During 2010, the Company began converting its FCPO stores from a format that emphasized both party goods and social expressions supplies to the Party City format that emphasizes principally party goods. Upon conversion, the stores are rebranded as Party City. In addition, certain FCPO stores have been converted to an outlet store format. As a result of the conversion and rebranding program, during 2010 the Company recorded an impairment charge against the Factory Card & Party Outlet trade name of $27.4 million.

     Our retail focus is to provide the consumer with broad assortments, deep in-stock inventory positions, a compelling price-value proposition and an exceptional customer experience.

     As of December 31, 2010, the Company’s retail network consisted of 439 party goods supply superstores, 90 party goods and social expressions supply stores, 67 party goods outlet stores and 232 franchisee-owned party goods supply superstores. In addition, during 2010, the Company operated 404 temporary Halloween stores principally under the name Halloween City. The Company’s party goods supply superstores and party goods and social expressions supply stores typically range in size from 8,000 to 12,000 square feet and offer a broad range of products for all occasions, including Amscan and other brand merchandise. The Company’s outlet stores typically range in size from 3,000 to 5,000 square feet, although former FCPO stores may range up to 13,000 square feet, and offer a larger assortment of products similar to their larger sister stores. Temporary Halloween stores typically range in size from 5,000 to 20,000 square feet and operate only during the Halloween selling season from the day after Labor Day through November 1 of each year.

     Non-seasonal merchandise generally accounts for approximately 64% of our annual retail net sales, with birthdays being the largest non-seasonal event. Seasonal merchandise for Halloween, Christmas, Summer, Graduation, Easter and other holidays represents the remaining 36% of our annual retail sales.

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

     The Company’s retail store operations define a fiscal year (“Fiscal Year”) as the 52-week period or 53-week period ended on the Saturday nearest December 31st of each year, and define their fiscal quarters (“Fiscal Quarter”) as the four interim 13-week periods following the end of the previous Fiscal Year, except in the case of a 53-week Fiscal Year when the fourth Fiscal Quarter is extended to 14 weeks.

Recent Retail Acquisitions

     Our franchise agreements provide us with a “right of first refusal” should any franchisee look to dispose of their operations. During 2010 the Company acquired 20 former franchisee stores principally consisting of store fixtures, inventory and goodwill. The franchisee stores were acquired from several franchisees in exchange for total consideration of $24.3 million, including cash and, in certain instances, the exchange of company-owned stores. The acquired stores were located in California, Connecticut, Florida, New Jersey, Pennsylvania and Texas.

Summary Financial Information about the Company

     Information about the Company’s revenues, income from operations and assets for each of the years in the five-year period ended December 31, 2010, is included in this report in Item 6, “Selected Consolidated Financial Data.” The Company’s consolidated financial statements include the accounts of the Company and its majority-owned and controlled entities.

Wholesale Operations

     Despite a concentration of holidays in the fourth quarter of the year, as a result of our expansive product lines and customer base and increased promotional activities, the impact of seasonality on the quarterly results of our wholesale operations has been limited. However, as a result of the acquisition of the Christy’s Group in September 2010, we expect our wholesale segment to experience a greater degree of seasonal sales in the third and fourth quarters of future years. Promotional activities, including special dating terms, particularly with respect to Halloween and Christmas products sold in the third quarter, and the introduction of our new everyday products and designs during the fourth quarter result in higher accounts receivable and inventory balances during these periods.

     During 2010, domestic and international sales accounted for 86% and 14% of our total wholesale sales, respectively. As a result of the September 2010 acquisition of the Christy’s Group and the January 2011 acquisition of Riethmuller, international sales are expected to increase as a percentage of our total wholesale sales reported in future periods.

Retail Operations

     Our retail operations are subject to significant seasonal variations. Historically, this segment has realized a significant portion of its revenues, cash flow and net income in the fourth quarter of the year, principally due to our Halloween sales in October and, to a lesser extent, our year-end holiday sales. In addition, the results of retail operations and cash flows may fluctuate significantly as a result of a variety of other factors, including the timing of new store openings and closings and the timing of the acquisition and disposition of stores.

Our Business Strategy

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

Wholesale Operations

	•		Build upon our Position as a Leading Provider to Party Goods Retailers. We will continue to offer convenient “one-stop shopping” for both large party goods superstores and smaller, independent party goods retailers. We will seek to grow our sales to existing stores by increasing our share of sales volume and shelf space, continuing to develop innovative new products, including costumes and other garments, and helping retailers promote coordinated ensembles that increase average purchase volume per consumer through “add-on” or impulse purchases.
	•		Expand our Presence and our Brand Internationally. We intend to begin to introduce the Party City retail concept internationally. We believe that the potential to do so, especially in English speaking markets is significant. We also believe there is an opportunity to expand our international wholesale business which represented approximately 14% of our net sales at wholesale in the three-year period ended December 31, 2010. With the acquisition on January 1, 2011 of Riethmuller, we currently have a commercial presence in the UK, Germany, Poland Mexico, Canada, Asia and Australia. We have our own sales force in the United Kingdom, Germany, Mexico and Canada, and operate through third-party sales representatives elsewhere. The market for decorative party goods outside the U.S. is less mature due to lower consumer awareness of party products and less developed retail distribution channels. Our strategies include broadening our distribution network through both organic and acquisitive growth, increasing accessorization and customization of our products to local tastes and holidays and continuing to deepen retail penetration.
	•		Increase the Amscan share of shelf at Company Owned and Franchised Retail Stores. As we integrate the Christy’s Group acquisition into our business model we will produce costumes and accessories for distribution into our vertical retail distribution. We will also make these products available for our broader distribution as well. We will continue to explore other product categories which will further advance our vertical retail distribution.
	•		Continued Growth Through Targeted Acquisitions. We believe that there will be, from time to time, opportunities to make acquisitions of complementary businesses. Through such businesses, we can leverage our existing marketing, distribution and production capabilities, expand our presence in the various retail distribution channels, further broaden and deepen our product lines and increase our penetration in international markets.

Retail Operations

	•		Continue to build the Party City Brand and Consumer Awareness. In 2010 we significantly altered our Party City brand advertising programs reducing our dependence on free standing newspaper inserts (FSIs), and substantially increased our use of television and radio advertising to improve brand awareness and drive consumer traffic. We anticipate continuing and expanding upon what has proven to be a successful strategy
	•		Offer a Broad Selection of Merchandise. We will continue to provide customers with convenient one-stop shopping for party goods by offering what we believe is one of the most extensive selections of party supplies available. Our typical retail store offers a broad selection of Amscan and other brand merchandise consisting of more than 20,000 active SKUs.
	•		Maintain Value Price Position. We will continue to use the aggregate buying power of over 800 company-owned and franchise party good stores, which allows us to offer a broad line of high quality merchandise at low prices. We believe we reinforce customers’ expectations of value through our advertising and marketing campaigns.
	•		Store Layout and Product Selection. We have a standardized product assortment and continually evaluate our aisle layouts, where appropriate, to allow customers to navigate the store more easily and to provide increased availability of our own and other desired products. During 2010 the Company began converting its FCPO stores from a party goods and social expressions supply format to the party goods supply format of Party City, which included rebranding the stores as Party City.
	•		Expand Network of Convenient Store Locations. Although we believe that our stores typically are destination shopping locations, we seek to maximize customer traffic and quickly build the visibility of new stores by situating our stores in high traffic areas. Site selection criteria include: population density, demographics, traffic counts, location of complementary retailers, storefront visibility and presence (either in a stand-alone building or in dominant strip shopping centers), competition, lease rates and accessible parking. We believe there are an extensive number of suitable domestic locations available for future stores, and we plan to open approximately 20 to 25 new company-owned retail stores and anticipate that our franchisees will open between three and five franchise stores during 2011. In addition, based on the performance of our temporary Halloween stores, subject to the availability of suitable, short-term lease locations, we plan to open at least 400 temporary stores for the 2011 and subsequent Halloween seasons.
	•		Expansion of our E-Commerce Store. We believe our addition of a Party City e-commerce website and the integration of our existing Factory Card & Party and Party America websites during 2009 will continue to generate significant revenue growth. Our website is a cost-effective medium designed to offer a convenient, highly visual, user-friendly, and secure online shopping option for new and existing customers. In addition to the ability to order products, our website gives customers information regarding products, party ideas and promotional offers.
	•		Provide Excellent Customer Service. We view the quality of our customers’ shopping experience as critical to our continued success, and we are committed to making shopping in our stores an enjoyable experience. For example, at Halloween, our most important selling season, each store significantly increases the number of sales associates available to assist customers. We hire and train qualified store managers and other personnel committed to serving our customers and compensate them based on specific performance measures in order to ensure a customer-service oriented culture in our stores.
	•		Information Systems. In recent years, our retail segment upgraded a number of its information systems which will allow us to continue to use technology to enhance our business practices. All retail units now use the same merchandising, POS, and financial systems.

Innovative Product Development and Design Capabilities

     Our 135 person in-house design staff continuously develops fresh, innovative and contemporary product designs and concepts. Our continued investment in art and design results in a steady supply of fresh ideas and the creation of complex, unique ensembles that appeal to consumers. In 2010, we introduced approximately 4,000 new products and 100 new tableware ensembles. Our proprietary designs and strength in developing new product programs at value prices help us keep our products differentiated from our competition.

Product Lines

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

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

     The percentage of net sales at wholesale for each product line for 2010, 2009 and 2008 are set forth in the following table:

		2010				2009				2008
Party Goods			81	%			78	%			77	%
Metallic Balloons			16				18				20
Gift			3				4				3
			100	%			100	%			100	%

     Our products span a wide range of lifestyle events from age-specific birthdays to theme parties and sporting events, as well as holidays such as Halloween and New Year’s. In 2010, approximately 78% of our net sales at wholesale consisted of items designed for non-seasonal occasions, with the remaining 22% comprising of items used for holidays and seasonal celebrations throughout the year. Our product offerings cover the following:

Seasonal		Themes		Everyday
New Year’s		Bachelorette		Birthdays
Valentine’s Day		Casino		Anniversaries
St. Patrick’s Day		Card Party		Bar Mitzvahs
Easter		Chinatown		Bridal/Baby Showers
Passover		Cocktail Party		Christenings
Fourth of July		Disco		Confirmations
Halloween		Fiesta		First Communions

Seasonal		Themes		Everyday
Fall		Fifties Rock and Roll		Graduations
Thanksgiving		Hawaiian Luau		Weddings
Hanukkah		Hollywood
Christmas		Mardi Gras
		Masquerade
		Patriotic
		Retirement
		Sports
		Summer Barbeque
		Western

Manufactured Products

     Our vertically integrated manufacturing capability ( i.e., our ability to perform each of the steps in the process of converting raw materials into our finished products) enables us to control costs, monitor product quality, manage inventory investment better and provide more efficient order fulfillment. In 2010, we manufactured items representing 41% of our net sales at wholesale. Our facilities in New York, Kentucky, Rhode Island, Minnesota and Mexico are highly automated and produce paper and plastic plates and cups, paper napkins, metallic balloons and other party and novelty items. State-of-the-art printing, forming, folding and packaging equipment support these manufacturing operations. Given our size and sales volume, we are generally able to operate our manufacturing equipment on the basis of at least two shifts per day, thus lowering production costs per unit. In addition, we manufacture products for third parties. This allows us to maintain a satisfactory level of equipment utilization.

     As a result of the acquisition of Riethmuller, beginning in 2011, the Company will manufacture certain party goods for the European market in Poland and will manufacture latex balloons for all markets in Malaysia.

Purchased Products

     In 2010, we purchased products created and designed by us, representing 59% of our net sales at wholesale, from independently-owned manufacturers, many of whom are located in Asia and with whom we have long-standing relationships. Our business is not dependent upon any single source of supply for these products. We maintain a sourcing office in Hong Kong that is dedicated to broadening our supplier base and facilitating product development and quality control.

     With the acquisition of the Christy’s Group in September 2010, the Company now designs and imports costumes and related accessories. The costumes and accessories are manufactured by several companies with which the Christy’s Group has long-standing relationships.

Raw Materials

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

     While not used in the actual manufacture of our products, currently the majority of our metallic balloons rely upon inflation with helium gas to facilitate their use. While adequate quantities of helium are currently available for this purpose, we will rely upon future exploration and refining of natural gas to assure continued adequate supply.

Wholesale Sales and Marketing

     Our principal wholesale sales and marketing efforts are conducted through a domestic direct employee sales force of approximately 100 professionals servicing approximately 15,000 independent retail accounts. Included in this sales force are approximately 20 seasoned sales professionals who primarily service the party goods specialty retailer channel and who, on average, have been affiliated with us for over 20 years. In addition to the employee sales team, a select group of manufacturers’ representatives handle specific account situations. Employees of subsidiaries outside the United States

generally service international customers. Our Anagram subsidiary utilizes a group of approximately 35 independent distributors in the United States and approximately 35 international distributors to bring its metallic balloons to the grocery, gift and floral markets, as well as to our party superstore and specialty retailer customers.

     As part of our sales and marketing efforts, we work with other party goods retailers to help target important consumer preferences, integrating their input with our own market research in the creation of our designs and products.

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

Wholesale Distribution and Systems

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

     Our distribution facilities for party and gift items are principally located in New York and represent more than 1,000,000 square feet in the aggregate. We distribute our metallic balloons domestically from company-owned and leased facilities in Minnesota and New York. The distribution center for our e-commerce platform, which is managed by our wholesale operation, is located in Naperville, Illinois.

     Products for markets outside the United States are also shipped from leased distribution facilities in the United Kingdom, Mexico, Australia and, beginning in 2011, Germany and Poland.

Wholesale Customers

     Our wholesale customers include our company-owned retail stores, our franchisees, other party goods retailers, independent card and gift retailers and other distributors. We also have a presence in the mass, gift, supermarket and other smaller retail distribution channels. In the aggregate, we supply more than 40,000 retail outlets both domestically and internationally.

     Our recent acquisitions of the Christy’s Group and Riethmuller will deepen our retail penetration at key international accounts, including European hypermarkets and supermarkets, as well as increase our international customer base. Our international focus includes broadening our distribution network and increasing the accessorization and customization of our products to local tastes and holidays.

     We have a diverse third party customer base at wholesale. Although net sales to franchise-owned and operated stores represented 18% of the Company’s net sales at wholesale in each of the last three years, franchisees are financially independent and represent a diversified credit exposure. During those three years, no individual third party customer accounted for more than 5% of our total sales at wholesale.

Competition at Wholesale

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

     Competitors include smaller independent specialty manufacturers, as well as divisions or subsidiaries of large companies with greater financial and other resources than ours. Certain of these competitors control various party goods product licenses for widely recognized images, such as cartoon or motion picture characters, which could provide them with a competitive advantage. However, we control one of the strongest portfolios of character licenses for use in the

design and production of our metallic balloons and, as a result of the Designware Acquisition, beginning in 2010, we have access to a strong portfolio of character and other licenses for party goods.

Retail Merchandising

     Our stores are designed to be fun and engaging and to create a compelling shopping experience for the consumer. Our stores range in size from approximately 3,000 to 24,000 square feet with a typical store size between 8,000 and 12,000 square feet. The stores are divided into various sections based upon product categories displayed to emphasize the breadth of merchandise available at a good value. In-store signage is used to emphasize our price-value position and make our stores easy to shop.

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

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

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

     Halloween is our retail segment’s largest seasonal product category/theme. As a key component of our sales strategy, our stores provide an extensive selection of Halloween products. The stores also carry a broad array of related decorations and accessories for the Halloween season. Our Halloween merchandise is prominently displayed to provide an exciting and fun shopping experience for customers. The stores display Halloween-related merchandise throughout the year to position us as the customer’s Halloween shopping resource. During 2010, Halloween sales represented approximately 27% of our retail net sales. To maximize our seasonal opportunity, the Company also operates a chain of temporary Halloween stores, generally under the name Halloween City, during the months of September and October of each year.

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

Retailer Suppliers

     As a vertically integrated business, our wholesale segment is the largest supplier to our retail stores, providing approximately 61%, 54% and 50% of the merchandise purchased by our company-owned party goods stores for the years ended December 31, 2010, 2009 and 2008, respectively. No other supplier provided more than 10% of our retail segment’s purchases during the past three years.

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

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

Retail Advertising and Marketing

     Our advertising focuses on promoting specific seasonal occasions and general party themes, with a strong emphasis on our price-value position, with the goal of increasing customer traffic and further building our brand. Prior to 2010, we advertised primarily via the use of free-standing inserts in newspapers and other supplemental marketing techniques including outdoor, direct mail, newspaper, television and radio advertising in selected markets. However, in the fourth quarter of 2009 and throughout 2010, we utilized a highly successful national television advertising program to further develop brand awareness and expand our customer base.

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

Franchise Operations

     As of December 31, 2010, we had 232 franchise stores throughout the United States and Puerto Rico. Stores run by franchisees utilize our format, design specifications, methods, standards, operating procedures, systems and trademarks.

     We receive revenue from our franchisees, consisting of an initial one-time fee and ongoing royalty fees generally ranging from 4% to 6%. In addition, each franchisee has a mandated advertising budget, which consists of a minimum initial store opening promotion and ongoing local advertising and promotions. Further, franchisees must pay an additional 1% to 2.25% of net sales to a group advertising fund to cover common advertising materials. The Company may pay a franchisee a reverse royalty on e-commerce sales occurring within the franchisee’s territory. The franchisee territory and the amount of the reverse royalty are based on several factors, including the profitability of our e-commerce operation and the territorial coverage of franchisee advertising. We do not offer financing to our franchisees for one-time fees or ongoing royalty fees.

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

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

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

     As of December 31, 2010, we had three territory agreements with certain franchisees. These agreements grant the holder of the territory the right to open one or more stores within a stated time period.

Competition at Retail

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

Government Regulation

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

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

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

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

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

Copyrights and Trademarks

     We own copyrights on the designs we create and use on our products and trademarks on the words and designs used on or in connection with our products. It is our practice to register our copyrights with the United States Copyright Office to the extent we deem necessary. We do not believe that the loss of copyrights or trademarks with respect to any particular product or products would have a material adverse effect on our business. We hold approximately 185 licenses, allowing us to use various cartoon and other characters and designs principally on our metallic balloons. None of these licenses is individually material to our aggregate business.

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

Information Systems

     We continually evaluate and upgrade our information systems to enhance the quantity, quality and timeliness of information available to management and to improve the efficiency of our manufacturing and distribution facilities as well as our service at the store level. We have implemented merchandise replenishment software to complement our distribution, planning and allocation processes. The system enhances the store replenishment function by improving in-stock positions, leveraging our distribution infrastructure and allowing us to become more effective in our use of store labor. We have implemented a new Point of Sale system and upgraded merchandising systems to standardize technology across all of our retail superstores and, in 2010, we implemented similar systems at our temporary Halloween City stores. In addition, in 2010, our retail operations implemented a system conversion to upgrade and enhance the current Oracle financial system in order to maintain support, streamline divisional reporting and allow for future growth.

Employees

     As of December 31, 2010, the Company had approximately 5,470 full-time employees and 7,950 part-time employees, none of whom is covered by a collective bargaining agreement. The Company considers its relationship with its employees to be good.

Item 1A.		Risk Factors

Consumer Demands and Preferences

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

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

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

Competition

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

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

Raw Material and Production Costs

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

     Products we manufacture, primarily tableware and metallic balloons, represent approximately 41% of our net sales at wholesale. We believe our ability to manufacture product representing approximately 41% of our sales enables us to lower production costs by optimizing production while minimizing inventory investment, to ensure product quality through rigid quality control procedures, and to be responsive to our customers’ product design needs.

Interest Rates

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

Exchange Rates

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

Economic Downturn

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

Key Vendors

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

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

Additional Capital Requirements

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

Seasonal and Quarterly Fluctuations

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

Key Personnel

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

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

Item 1B.		Unresolved Staff Comments

     Not applicable.

Item 2.		Properties

     The Company maintains the following facilities for its corporate and retail headquarters and to conducts its principal design, manufacturing and distribution operations:

						Owned or Leased
						(With
		Principal		Square		Expiration
Location		Activity		Feet		Date)
Elmsford, New York		Executive and other corporate offices, show rooms, design and art production for party products		119,525 square feet		Leased (expiration date: December 31, 2014)
Rockaway, New Jersey		Party City corporate offices		106,000 square feet		Leased (expiration date: July 31, 2017)
Eden Prairie, Minnesota		Manufacture of metallic balloons and accessories		115,600 square feet		Owned
Eden Prairie, Minnesota		Manufacture of retail, trade show and showroom fixtures		15,324 square feet		Leased (expiration date: July 31, 2012)
Harriman, New York		Manufacture of paper napkins		74,400 square feet		Leased (expiration date: March 31, 2016)
Louisville, Kentucky		Manufacture and distribution of paper plates		189,175 square feet		Leased (expiration date: March 31, 2013)
Newburgh, New York		Manufacture of paper napkins and cups		53,000 square feet		Leased (expiration date: May 31, 2012)
Narragansett, Rhode Island		Manufacture and distribution of plastic plates, cups and bowls		277,689 square feet		Leased (expiration date: April 26, 2011)
Tijuana, Mexico		Manufacture and distribution of party products		100,000 square feet		Leased (expiration date: August 15, 2015)
Chester, New York (1)		Distribution of party and gift products		896,000 square feet		Owned
Dorval, Canada		Distribution of party and gift products		19,330 square feet		Leased (expiration date: March 31, 2012)
Edina, Minnesota		Distribution of metallic balloons and accessories		122,312 square feet		Leased (expiration date: December 31, 2015)
Milton Keynes, Buckinghamshire, England		Distribution of party products throughout Europe		130,858 square feet		Leased (expiration date: June 30, 2017)
Naperville, Illinois		Distribution of party goods for e-commerce sales		440,343 square-foot		Leased (expiration date: December 31, 2018)
San Bernadino, California		Distribution of party goods for Halloween City		244,000 square foot		Leased (month to month)
Atlanta, Georgia		Office and storage facilities		15,012 square foot		Leased (expiration date: April 30, 2013)
Livonia, Michigan		Office and distribution of party goods for Halloween City		89,780 square foot		Leased (expiration date: May 31, 2013)
Pleasanton, California		Office for e-commerce sales		11,278 square-foot		Leased (expiration date: June 18, 2015)

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

     As of December 31, 2010, there were 439 company-owned Party City superstores, 90 company-owned FCPO stores and 67 outlet stores open in the United States. We lease the property for all of our company-owned stores. Our Party City and FCPO stores range in size from 5,000 to 24,000 square feet, with a typical store size between 8,000 and 12,000 square feet. Our outlet stores typically range in size from 3,000 to 5,000 square feet. We do not believe that any individual store property is material to our financial condition or results of operations. Of the leases for the company-owned stores 98 expire in 2011, 121 expire in 2012, 119 expire in 2013, 84 expire in 2014, 40 expire in 2015 and the balance expire in 2016 or thereafter. We have options to extend most of these leases for a minimum of five years.

     The following table shows the change in our retail network of stores for each of the years in the three-year period ended December 31, 2010.

		2010				2009				2008
Company-owned:
Stores open at beginning of year			601				643				673
Stores opened			13				6				19
Stores acquired			20				3				6
Stores closed / sold			(38	)			(51	)			(55	)
Stores open at end of year			596				601				643
Franchise:
Stores open at beginning of year			248				273				283
Stores opened			4				1				13
Stores acquired			5				2				7
Stores closed, sold or converted to independent			(25	)			(28	)			(30	)
Stores open at end of year			232				248				273
Total company-owned and franchise stores			828				849				916

     As of December 31, 2010, Company and franchise-owned retail stores were located in the following states and Puerto Rico:

State		Company-owned				Franchise				Chain-wide
Alabama			2				8				10
Arizona			1				20				21
Arkansas			1				3				4
California			86				18				104
Colorado			14				1				15
Connecticut			4				2				6
Delaware			1				1				2
Florida			54				10				64
Georgia			26				1				27
Hawaii			0				2				2
Illinois			61				0				61
Indiana			27				0				27
Iowa			9				1				10
Kansas			3				4				7
Kentucky			7				0				7
Louisiana			3				8				11
Maryland			14				12				26
Michigan			31				0				31
Minnesota			0				21				21
Mississippi			1				3				4
Missouri			19				3				22
Montana			0				1				1
Nebraska			5				0				5
Nevada			6				0				6
New Hampshire			1				0				1
New Jersey			26				2				28
New Mexico			0				3				3
New York			45				14				59
North Carolina			2				19				21
North Dakota			0				3				3
Ohio			31				0				31
Oklahoma			2				0				2
Oregon			2				5				7
Pennsylvania			17				14				31
Puerto Rico			0				5				5
South Carolina			2				6				8
Tennessee			7				10				17
Texas			41				21				62
Virginia			10				9				19
Washington			15				2				17
West Virginia			2				0				2
Wisconsin			18				0				18
Total			596				232				828

     In 2010, the Company operated 404 temporary Halloween stores principally under the Halloween City name. Under this program, we operate temporary stores under short-term leases with terms of approximately four months, to cover the early September through early November Halloween season.

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

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

Item 3.		Legal Proceedings

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

PART II

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

     There is no public trading market for the Company’s common stock. As of the close of business on April 13, 2011, there were 122 holders of record of the Company’s common stock.

Dividends

     In December 2010, in connection with the refinancing of the Company’s term loan agreement (see Liquidity and Capital Resources), the Company’s Board of Directors declared a one-time cash dividend of $9,400 per share of outstanding Common Stock totaling $289.7 million and similar distributions to the holders of vested common stock warrants of $12.1 million and holders of vested time options of $9.4 million. The distribution to vested time option holders resulted in a charge to pre-tax income in 2010. In addition, holders of unvested time and performance options at the declaration date may also receive a distribution of $9,400 per share, if and when the time and performance options vest. At December 31, 2010, the aggregate potential distribution associated with unvested time and performance options is $18.5 million.

     The Company’s current credit facilities and the indenture governing its senior subordinated notes contain restrictive covenants that effectively limit the Company’s ability to pay future cash dividends or distributions to its stockholders.

Issuer Purchases of Equity Securities

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

Equity Compensation Plan Information

The following table sets forth certain information as of December 31, 2010, concerning our equity compensation plans (1);

(a)

(b)

(c)

Number of

Number of Securities

Securities to be

Remaining Available

Issued Upon

Weighted-Average

for Future Issuance

Exercise of

Exercise Price of

Under Equity

Outstanding

Outstanding

Compensation Plans

Options, Warrants

Options, Warrants

(Excluding Securities

and Rights

and Rights

Reflected in Column (a))

Equity compensation plans approved by security holders

3,122.25

$

14,350

138.68

Equity compensation plans not approved by security holders

—

—

—

Total

3,122.25

$

14,350

138.68

Item 6.		Selected Consolidated Financial Data

     The selected consolidated financial data presented below as of and for the years ended December 31, 2010, 2009, 2008, 2007 and 2006, are derived from the consolidated financial statements of the Company. The consolidated financial statements as of and for the years ended December 31, 2010, 2009 and 2008, are included in this report under Item 8, “Financial Statements and Supplementary Data.” The selected consolidated financial data should be read in conjunction with the consolidated financial statements and the related notes thereto and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

		Year Ended December 31,
		2010(1)				2009				2008				2007(2)				2006(3)
(Dollars in thousands)
Income Statement Data:
Revenues:
Net sales		$	1,579,677			$	1,467,324			$	1,537,641			$	1,221,516			$	993,342
Royalties and franchise fees			19,417				19,494				22,020				25,888				21,746
Total revenues			1,599,094				1,486,818				1,559,661				1,247,404				1,015,088
Expenses:
Cost of sales			943,058				899,041				966,426				777,586				676,527
Selling expenses			42,725				39,786				41,894				41,899				39,449
Retail operating expenses			296,891				261,691				273,627				191,423				126,224
Franchise expenses			12,269				11,991				13,686				12,883				13,009
General and administrative expenses			134,392				119,193				120,272				105,707				84,836
Art and development costs			14,923				13,243				12,462				12,149				10,338
Impairment of trade name (4)			27,400				—				17,376				—				—
Income from operations			127,436				141,873				113,918				105,757				64,705
Interest expense, net			40,850				41,481				50,915				54,590				54,887
Other expense (income), net (5) (6)			4,208				(32	)			(818	)			18,214				(1,000	)
Income before income taxes			82,378				100,424				63,821				32,953				10,818
Income tax expense			32,945				37,673				24,188				13,246				4,295
Net income			49,433				62,751				39,633				19,707				6,523
Less: net income (loss) attributable to noncontrolling interests			114				198				(877	)			446				83
Net income attributable to Amscan Holdings, Inc.		$	49,319			$	62,553			$	40,510			$	19,261			$	6,440
Other Financial Data:
Capital expenditures, including assets under capital leases			53,967				26,254				53,701				36,648				40,376
Depreciation and amortization			49,418				44,382				47,278				38,093				38,619
Ratio of earnings to fixed charges (7)			1.9	x			2.2	x			1.6	x			1.4	x			1.1	x

		At December 31,
		2010				2009				2008				2007				2006
(Dollars in thousands)
Balance Sheet Data:
Working capital		$	189,993			$	162,243			$	76,904			$	99,543			$	158,730
Total assets (8) (9) (10)			1,653,151				1,480,501				1,507,977				1,498,845				1,217,371
Short-term obligations (8) (9) (10) (11)			159,144			$	112,541			$	170,880			$	161,790			$	8,633
Long-term obligations			841,112				538,892				550,755				584,336				558,372
Total obligations		$	1,000,256			$	651,433			$	721,635			$	746,126			$	567,005
Redeemable common securities (12) (13)		$	18,089			$	18,389			$	18,171			$	33,782			$	9,343
AHI stockholders’ Equity (8) (10) (13)			254,110				476,985				410,228				375,586				359,839
Non controlling interest			2,312				2,137				1,889				2,488				2,052
Total equity		$	256,422			$	479,122			$	412,117			$	378,074			$	361,891

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

General

     Our wholesale revenues are generated from the sales of approximately 37,000 SKUs consisting of party goods for all occasions, including paper and plastic tableware, accessories and novelties, metallic balloons, stationery and gift items. Tableware (e.g., plates, cups, cutlery, napkins and tablecovers) is our core product category, with coordinating accessories (e.g., balloons, banners, gifts and stationery) and novelties (e.g., party favors) being offered to complement these tableware products. Our products are sold at wholesale to party goods superstores, including our company-owned and franchised retail stores, other party goods retailers, independent card and gift stores, and other retailers and distributors throughout the world. As a metallic balloon manufacturer, we have a strong presence in grocery, gift and floral distribution channels.

     With our retail segment, we operate 596 Big Box retail party supply stores (i.e., stores generally greater than 8,000 square feet, including our retail party and social expressions supply stores) within the continental United States, and franchise individual store and franchise areas throughout the United States and Puerto Rico. At December 31, 2010, our network also included 232 franchise stores. Our retail operations generate revenue primarily through the sale of more than 20,000 Amscan and other branded SKUs through our company-owned stores, and through the imposition of an initial one-time franchise fee and ongoing franchise royalty payments based on retail sales from our franchised stores. In addition to our brick and mortar stores, our retail segment includes our e-commerce store, PartyCity.com and, during the Halloween selling season, a chain of temporary Halloween stores operating under the Halloween City banner.

Results of Operations

Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

Percentage of Total Revenues

		Year Ended December 31,
		2010				2009
Revenues:
Net sales			98.8	%			98.7	%
Royalties and franchise fees			1.2				1.3
Total revenues			100.0				100.0
Expenses:
Cost of sales			58.9				60.5
Selling expenses			2.7				2.7
Retail operating expenses			18.6				17.6
Franchise expenses			0.8				0.8
General and administrative expenses			8.4				8.0
Art and development costs			0.9				0.9
Impairment of trade name			1.7				0.0
Total expenses			92.0				90.5
Income from operations			8.0				9.5
Interest expense, net			2.6				2.8
Other expense, net			0.3				—
Income before income taxes			5.1				6.7
Income tax expense			2.0				2.5
Net income			3.1				4.2
Less net income attributable to noncontrolling interests			—				—
Net income attributable to Amscan Holdings, Inc.			3.1	%			4.2	%

Total Revenues

     The following table sets forth the Company’s total revenues for the years ended December 31, 2010 and 2009, respectively.

		Year Ended December 31,
		2010								2009
		Dollars in				Percentage of				Dollars in				Percentage of
		Thousands				Total Revenue				Thousands				Total Revenue
Revenues:
Sales:
Wholesale		$	769,247				48.1	%		$	633,006				42.6	%
Eliminations			(298,355	)			(18.7	)			(221,647	)			(14.9	)
Net wholesale			470,892				29.4				411,359				27.7
Retail			1,108,785				69.3				1,055,965				71.0
Total net sales			1,579,677				98.8				1,467,324				98.7
Franchise related			19,417				1.2				19,494				1.3
Total revenues		$	1,599,094				100.0	%		$	1,486,818				100.0	%

     Wholesale

     Net sales for 2010 of $470.9 million were $59.5 million or 14.5% higher than net sales for 2009. Net sales to franchised and domestic independent party stores totaled $184.4 million and were $23.1 million or 14.3% higher than 2009 sales. Net sales to other non-affiliated domestic retail channels totaled $96.8 million and were $12.2 million or 14.4% higher than in 2009. The increase in sales to both the party store and the other retail channels principally reflect the impact of our acquisition of American Greetings’ Designware division in February 2010 and a partial recovery from the effects of the economic downturn in 2009. Net sales of metallic balloons were $96.4 million or 14.1% higher than in 2009. The increase in balloon sales reflects the normalization of purchasing patterns by domestic distributors, following their liquidation of inventories in 2009. International sales totaled $93.3 million and were $12.3 million or 15.2% higher than in 2009, primarily the result of the acquisition of Christy’s Group in September 2010.

     Intercompany sales to our retail affiliates of $298.4 million were $76.7 million or 34.6% higher than in 2009 and represented 38.7% of total wholesale sales in 2010 compared to 35.0% in 2009. The increase in intercompany sales principally reflects the growth in our share of shelf at our company-owned retail stores, particularly at our FCPO stores, driven, in part, by our acquisition of Designware. During 2010, our wholesale sales to our retail segment represented 61.3% of the retail segment’s total purchases, compared to 53.7% in 2009. The intercompany sales of our wholesale segment are eliminated against the intercompany purchases of our retail segment in the consolidated financial statements

Retail

     Net retail sales at our company-owned stores for 2010 of $1,108.8 million were $52.8 million or 5.0% higher than net retail sales for 2009. The net retail sales of our company-owned Party City Big Box stores totaled $770.7 million and were $15.8 million or 2.1% higher than in 2009. Party City Big Box same store sales increased 1.4% during 2010, driven by a 2.0% increase in transaction count. Our e-commerce store sales totaled $40.2 million and were $26.9 million or 200.7% higher than in 2009. Same store sales for our e-commerce store (from the launch of the Party City e-commerce store in August  2009 and for the comparable period of 2010) increased 146.6%, driven by a 127.0% increase in transaction count and a 19.5% increase in the average sale transaction. Sales at stores converted from FCPO to Party City totaled $28.6 million and were $3.5 million or 13.8% higher than during the comparable period of 2009. The increase in same store sales reflects a 15.2% increase in the average sale transaction partially offset by a 1.4% decrease in transaction count attributed to the conversion in store format. Sales at all other full-time store formats totaled $167.8 million and were $26.7 million or 13.7% lower than in 2009. Net sales at our temporary Halloween City stores totaled $101.4 million and were $33.4 million or 49.1% higher than in 2009, due to a 62% increase in our temporary store count partially offset by an 8.8% decrease in average sales per store compared to 2009. The decrease in average Halloween City store sales is primarily attributable to the format’s expansion, in 2010, into several new territories with pre-existing competition.

Royalties and franchise fees

     Franchise related revenue for the year ended December 31, 2010, consisting of royalties and franchise fees, totaled $19.4 million and were $0.1 million lower than in 2009, principally as a result of a net decrease of 16 franchise stores during 2010 as compared to 2009. The decrease in franchise stores results from the acquisition by the Company of 20 franchise stores during 2010.

Gross Profit

     The following table sets forth the Company’s consolidated gross profit on net sales for the years ended December 31, 2010 and 2009, respectively.

		Year Ended December 31,
		2010								2009
		Dollars in				Percentage of				Dollars in				Percentage of
		Thousands				Associated Sales				Thousands				Associated Sales
Wholesale		$	174,507				37.1	%		$	148,424				36.1	%
Retail			462,112				41.7	%			419,859				39.8	%
Total		$	636,619				40.3	%		$	568,283				38.7	%

     The gross profit margin on net sales at wholesale for 2010 was 37.1% or 100 basis points higher than in 2009. The increase in wholesale gross profit margin principally reflects the impact of product price increases (in anticipation of cost increases), the continued leveraging of our distribution infrastructure and changes in product mix.

     Retail gross profit margin for 2010 was 41.7% or 190 basis points higher than in 2009, principally due to a greater concentration of sales of product manufactured or distributed by the wholesale segment, principally the result of the Designware Acquisition, which resulted in the realization of family-wide margin (i.e. manufacturing, wholesale and retail margin) on such retail sales. The increase in margin also reflects favorable variances in inventory shrink and damage reserves as compared to 2009.

Operating expenses

     Selling expenses totaled $42.7 million and were $2.9 million or 7.3% higher than in 2009. The increase in 2010 selling expense, as compared to 2009, reflects the increase in wholesale segment sales and includes the additional expenses of the Christy’s Group. Selling expenses were 2.7% of total revenue in both 2010 and 2009.

     Retail operating expenses of $296.9 million for 2010 were $35.2 million or 13.5% higher than 2009, principally reflecting additional costs associated with the growth in our temporary Halloween store network and e-commerce business, in addition to the implementation of a national television-based advertising program in 2010. Retail operating expenses were 26.8% of retail sales in 2010 and 24.8% of retail sales in 2009. Franchise expenses for 2010 of $12.3 million were $0.3 million or 2.5% higher than in 2009. Franchise expenses were 63.2% of franchise related revenue in 2010 compared to 61.5% in 2009.

     General and administrative expenses for 2010 totaled $134.4 million and were $15.2 million or 12.8% higher than in 2009. The increase in general and administrative expenses reflects increased stock and warrant compensation expense and support for our expanding temporary Halloween operations as well as the additional expenses of the Christy’s Group in 2010. These increases were partially offset by a lower provision for bad debts in 2010 as compared to 2009, and the continued implementation of cost reductions begun in 2009, including the consolidation of FCPO’s former corporate office operations in Naperville, Illinois into those of Party City. As a percentage of total revenues, general and administrative expenses were 8.4% for 2010 compared to 8.0% for 2009.

     Art and development costs for 2010 totaled $14.9 million and were $1.7 million higher than in 2009. As a percentage of total revenues, art and development costs were 0.9% in 2010, comparable to 2009.

     During 2010, the Company instituted a program to convert substantially all of its FCPO stores to either Party City stores or to an outlet format and recorded a $27.4 million charge for the impairment of the Factory Card & Party Outlet trade name.

Interest expense, net

     Interest expense of $40.9 million for 2010 was comparable to 2009. Despite increases in our ABL and term loan margin rates following our August 2010 ABL and December 2010 term loan refinancings and an increase in our term debt following the December 2010 refinancing, our average debt and effective interest rate for 2010 were comparable to those of 2009.

Other expense, net

     Other expense, net, for 2010 totaled $4.2 million. Other expense, net, includes costs of $2.4 million associated with the refinancing of the Company’s revolving and term debt credit facilities in 2010 and $1.6 million of acquisition related costs. These costs were partially offset by our share of income from an unconsolidated balloon distribution joint venture located in Mexico.

Income tax expense

     Income tax expense for 2010 and 2009 reflected consolidated effective income tax rates of 40.0% and 37.5% respectively. The increase in the 2010 effective income tax rate is primarily attributable to certain adjustments related to deferred tax accounts recorded in the current year related to activities associated with previous acquisitions and non - deductible warrant compensation charges, partly offset by an increased domestic manufacturing deduction, a lower average state income tax rate, the expiration of certain states’ statutes of limitations that resulted in the recognition of previous unrecognized tax benefits and the favorable settlement of the audit of our 2007 federal tax return.

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

Percentage of Total Revenues

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

Total Revenues

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

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

     Wholesale

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

     Intercompany sales to our retail affiliates of $221.6 million were $6.7 million or 3.1% higher than in 2008 and represented 35.0% of the total wholesale sales in 2009 compared to 32.9% in 2008. The increase in intercompany sales principally reflects growth in our share of shelf at our company-owned retail stores, particularly the FCPO stores acquired in November 2007. During 2009, our wholesale sales to our retail segment represented 53.7% of the retail segment’s total purchases compared to 50.4% in 2008. The intercompany sales of our wholesale segment are eliminated against the intercompany purchases of our retail segment in the consolidated financial statements

     Retail

     Net retail sales at our company-owned stores for 2009 of $1,056 million were $43.2 million or 3.9% lower than net retail sales for 2008, reflecting the downturn in the U.S. economy, the operation of fewer FCPO and outlet stores during 2009 and the inclusion of a 53^rd week in our 2008 retail fiscal year. Net retail sales of our company-owned Party City Big Box stores (i.e., stores generally greater than 8,000 square feet) totaled $754.9 million and were $37.0 million or 4.7% lower than in 2008. Same store sales during 2009 decreased 3.3% compared to 2008 as the result of a decrease in transaction count, as the average dollar per transaction remained consistent between 2009 and 2008. During 2009, we generated $13.4 million in e-commerce sales compared to $5.9 million in 2008. The increase in e-commerce sales was driven by the launch of the PartyCity.com website in August 2009. Net retail sales at our FCPO stores of $197.0 million decreased $29.5 million or 13.0%, reflecting a 3.0% decrease in store count by year end and a decrease of 5.0% in same store sales. The decrease in same store sales reflects a 5.3% decrease in transaction count partially offset by a 0.3% increase in average dollar per transaction. Net retail sales at our outlet stores totaled $22.6 million and were $14.4 million or 38.9% lower than in 2008, principally due to the operation of 50% fewer outlet stores by year and a 15.9% decrease in same store sales. Net sales at our temporary Halloween stores totaled $68.0 million and were $28.6 million or 72.3% higher than in 2008 due to a 7.5% increase in average sales per store and a 65.7% increase in store count compared to 2008.

     Royalties and franchise fees

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

Gross Profit

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

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

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

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

Operating expenses

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

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

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

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

Interest expense, net

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

Other income, net

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

Income tax expense

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

Liquidity and Capital Resources

Capital Structure

     On August 13, 2010, the Company entered into a new senior secured asset-based revolving credit facility (the “New ABL Facility”), for an aggregate principal amount of up to $325 million for working capital, general corporate purposes and the issuance of letters of credit. The New ABL Facility was used to refinance the Company’s existing asset-based revolver and its Party City Franchise Group (“PCFG”) revolver and term loan agreement. At closing, PCFG became a borrower under the New ABL facility and a guarantor under the terms of the Company’s then existing term loan facility and its 8.75%, $175 million senior subordinated notes.

     On December 2, 2010, the Company entered into a $675 million senior secured term loan facility (the “New Term Loan Credit Agreement”). The Company used the proceeds from this facility to terminate the then existing $342 million term loan facility, to pay a one-time cash dividend of $9,400 per share to common stockholders and a cash payment in lieu of a dividend to certain option holders and warrant holders aggregating approximately $311.2 million (the “Dividend”) and to pay related fees and expenses in connection with such refinancing and Dividend and related transactions (collectively, the “Transactions”). The term loans under the New Term Loan Credit Agreement were issued at a 1%, or $6.8 million discount that is being amortized by the effective interest method over the life of the loan.

     On December 2, 2010, the Company entered into an amendment to the New ABL Facility to permit the Transactions and amend the maturity date under the New ABL Facility to provide for a maturity date of August 13, 2015 or, if still outstanding, the date that is 120 days prior to the scheduled maturity of our senior subordinated notes or any indebtedness that refinances our senior subordinated notes.

New ABL Facility

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

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

     Amounts borrowed under the New ABL Facility bear interest at a rate per annum equal to an applicable margin plus, at our option, either (a) an alternate base rate determined by reference to the highest of (1) the prime rate of Wells Fargo, N.A., (2) the federal funds rate in effect on such date plus 1/2 of 1.00% and (3) the LIBOR rate for a three-month interest period plus 1% or (b) the LIBOR rate determined by reference to the LIBOR cost of funds for U.S. dollar deposits for the relevant interest period adjusted for certain additional costs. The applicable margin percentage ranges from 1.25% to 1.75% for alternate base rate loans and from 2.25% to 2.75% for loans based on the LIBOR rate, in each case based on average historical excess availability (as defined in the New ABL Facility). The applicable margin at December 31, 2010 was 1.50% for alternate base rate loans and 2.50% for loans based on the LIBOR rate.

     In addition to paying interest on outstanding principal under the New ABL Facility, the Company is required to pay a commitment fee of between 0.375% and 0.50% per annum in respect of the unutilized commitments thereunder. The Company must also pay customary letter of credit fees and agency fees.

     The New ABL Facility also provides that the Company has the right from time to time to request an amount of additional commitments up to $125 million, of which the entire amount remains available. The lenders under the New ABL Facility are not under any obligation to provide any such additional commitments, and any increase in commitments is subject to several conditions precedent and limitations. If we were to request any additional commitments, and the existing lenders or new lenders were to agree to provide such commitments, the facility size could be increased to up to $450 million, but our ability to borrow under this facility would still be limited by the amount of the borrowing base.

     In connection with the New ABL Facility, the Company incurred $3.8 million in finance costs that have been capitalized and will be amortized over the life of the loan.

     All obligations under the New ABL Facility are jointly and severally guaranteed by our parent and each existing and future domestic subsidiary of the Company. Each guarantor has secured its obligations under the guaranty by a first priority lien on its accounts receivable, inventory, cash and related proceeds and assets and a second priority lien on substantially all of its other assets.

     The New ABL Facility contains negative covenants that, among other things and subject to certain exceptions, restrict the ability of the parent, the Company and its restricted subsidiaries to:

	•		incur additional indebtedness;
	•		pay dividends or distributions on capital stock (except the Dividend) or redeem, repurchase or retire capital stock of the Company, the parent or any restricted subsidiary or make payments on, or redeem, repurchase or retire any subordinated indebtedness;
	•		make certain investments, loans, advances and acquisitions;
	•		enter into sale and leaseback transactions;
	•		engage in transactions with affiliates;
	•		create liens;
	•		transfer or sell assets;
	•		guarantee debt;
	•		create restrictions on the payment of dividends or other amounts to us from our restricted subsidiaries;
	•		consolidate, merge or transfer all or substantially all of our assets and the assets of our subsidiaries; and
	•		engage in unrelated businesses.

     In addition, we must comply with a fixed charge coverage ratio if our excess availability on any day is less than (a) 15% of the lesser of the aggregate commitments under the New ABL Facility or the then borrowing base or (b) $25 million. Excess availability under the New ABL Facility means the lesser of (a) the aggregate commitments under the New ABL Facility and (b) the then borrowing base, minus the outstanding credit extensions.

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

     Borrowings under the New ABL Facility at December 31, 2010 totaled $150.1 million at interest rates ranging from 2.77% to 4.75%. Outstanding standby letters of credit totaled $12.9 million and the Company had $162.0 million of excess availability under the terms of the New ABL Facility at December 31, 2010.

New Term Loan Credit Agreement

     Amounts borrowed under the New Term Loan Credit Agreement bear interest at a rate per annum equal to an applicable margin plus, at the Company’s option, either (a) an alternate base rate determined by reference to the highest of (1) the prime rate of Credit Suisse AG, (2) the federal funds rate in effect on such date plus 1/2 of 1.00% and (3) the LIBOR rate for a one-month interest period plus 1% or (b) a LIBOR rate determined by reference to the cost of funds for U.S. dollar deposits for the relevant interest period, adjusted for certain additional costs, but not less than 1.50%. The applicable margin percentage is 4.25% for alternate base rate loans and 5.75% for loans based on the LIBOR rate.

     In addition to paying interest on outstanding principal under the New Term Loan Credit Agreement, the Company must also pay customary agency fees.

     The New Term Loan Credit Agreement also provides that the Company has the right from time to time to request an amount of additional term loans up to $175 million and to refinance, replace or extend the maturity date of all or a portion of the then existing term loans thereunder. The lenders under the New Term Loan Credit Agreement are not under any obligation to provide any such additional term loans, provide such refinancing or replacement term loans, or agree to extend the maturity date of existing term loans held by them, and transactions to effect any additional, refinancing, replacement or extended term loans are subject to several conditions precedent and limitations.

     The New Term Loan Credit Agreement provides that the term loans are subject to a 1.00% prepayment premium if voluntarily repaid under certain circumstances before December 2, 2011. Otherwise, we may voluntarily prepay the term loans at any time without premium or penalty, other than customary breakage costs with respect to loans based on the LIBOR rate. The term loans are subject to mandatory prepayment, subject to certain exceptions, with (i) 100% of net proceeds arising from all non-ordinary course asset sales or other dispositions of property(including casualty events) by the Company or by its subsidiaries, subject to reinvestment rights and certain other exceptions, (ii) 100% of the net cash proceeds of any incurrence of debt other than debt permitted under the New Term Loan Credit Agreement, (iii) commencing with the fiscal year ended December 31, 2011, 50% (which percentage will be reduced to 25% and 0% if the Company’s total leverage ratio is less than specified ratios) of the Company’s annual excess cash flow (as defined in the New Term Loan Credit Agreement).

     The term loans under the New Term Loan Credit Agreement mature on December 2, 2017 (or January 30, 2014, if the Company’s senior subordinated notes are not refinanced with indebtedness permitted to be incurred under the New Term Loan Credit Agreement that matures at least 91 days after the maturity date of the term loans). The Company is required to repay installments on the term loans in quarterly principal amounts of 0.25%, with the remaining amount payable on the maturity date.

     All obligations under the New Term Loan Credit Agreement are jointly and severally guaranteed by our parent and each existing and future domestic subsidiary of the Company. Each guarantor has secured its obligations under the guaranty by a first priority lien on substantially all of its assets (other than accounts receivable, inventory, cash and related proceeds and assets) and a second priority lien on its accounts receivable, inventory, cash and related proceeds and assets.

     The New Term Loan Credit Agreement contains negative covenants that are substantially similar to our New ABL Facility, except that the New Term Loan Credit Agreement does not require compliance with a fixed charge coverage ratio. The New Term Loan Credit Agreement also contains certain customary affirmative covenants and events of default.

     In connection with the New Term Loan Credit Agreement, the Company incurred $12.2 million in finance costs that have been capitalized and will be amortized over the life of the loan.

     At December 31, 2010, the outstanding principal amount of term loans under the Term Loan Credit Agreement was $666.6 million, which reflects an original issue discount of $6.7 million net of $0.1 million of accumulated amortization, and the interest rate on borrowings ranged from 6.75% to 7.50%

Other Credit Agreements

     At December 31, 2010, we have a $0.4 million Canadian dollar denominated revolving credit facility that bears interest at the Canadian prime rate plus 1.1% and expires in June 2011, and a 1.4 million British Pound Sterling denominated revolving credit facility that bears interest at the UK base rate plus 1.75% on the first 1.0 million British Pound Sterling and 4.75% over the UK base rate on the remaining $0.4 million British Pound Sterling. The British Pound Sterling revolving credit facility expires on June 30, 2011. There were no borrowings under the British Pound Sterling revolving credit facility at December 31, 2010. At December 31, 2009, borrowings outstanding under the British Pound Sterling revolving credit facility were 0.4 million British Pound Sterling. At December 31, 2010 and 2009, there were no borrowings under the Canadian dollar denominated revolving credit facility. We expect to renew these revolving credit facilities upon expiration.

     Long-term borrowings at December 31, 2010 include a mortgage note with the New York State Job Development Authority of $4.5 million. The mortgage note was amended on December 18, 2009, extending the fixed monthly payments of principal and interest for a period of 60 months up to and including December 31, 2014. The note bears interest at the rate of 2.22%, and is subject to review and adjustment semi-annually based on the New York State Job Development Authority’s confidential internal protocols. The mortgage note is collateralized by a distribution facility located in Chester, New York.

     In connection with its acquisition by AAH on April 30, 2004, the Company issued $175.0 million in principal amount of 8.75% senior subordinated notes due 2014 to their initial purchasers, which were subsequently resold to qualified institutional buyers and non-U.S. persons in reliance upon Rule 144A and Regulation S under the Securities Act of 1933 (the “Note Offering”). In August 2004, the Company filed with the Securities and Exchange Commission a Registration Statement on Form S-4, offering to exchange registered notes for the notes issued in connection with the Note Offering. The terms of

the notes and the exchange notes were substantially identical. The exchange was completed in October 2004. Interest is payable semi-annually in arrears on May 1 and November 1 of each year. The outstanding senior subordinated notes are guaranteed, jointly and severally, on an unsecured subordinated basis by each of the Company’s existing and future domestic subsidiaries.

     The indenture governing the outstanding notes contains certain covenants limiting, among other things and subject to certain exceptions, the Company’s ability and the ability of the Company’s restricted subsidiaries to:

	•		incur additional indebtedness or issue preferred stock;
	•		pay dividends or distributions on capital stock (except the Dividend, as defined below), or redeem, repurchase or retire capital stock of the Company or any restricted subsidiary or make payments on, or redeem, repurchase or retire any subordinated indebtedness;
	•		make certain investments, loans, advances and acquisitions;
	•		enter into sale and leaseback transactions;
	•		engage in transactions with affiliates;
	•		create liens;
	•		transfer or sell assets;
	•		guarantee debt;
	•		create restrictions on the payment of dividends or other amounts to us from our restricted subsidiaries;
	•		consolidate, merge or transfer all or substantially all of our assets and the assets of our subsidiaries; and
	•		engage in unrelated businesses.

     We may redeem our outstanding senior subordinated notes, in whole or in part, at the redemption prices (expressed as percentages of principal amount of senior subordinated notes to be redeemed) set forth below, plus accrued and unpaid interest thereon, if redeemed during the twelve-month period beginning on May 1 of each of the years indicated below:

Year		Percentage
2011			101.458	%
2012 and thereafter			100.000	%

     If we experience certain kinds of change in control, we must offer to purchase our outstanding senior subordinated notes at 101% of their principal amount, plus accrued and unpaid interest.

     If we or our restricted subsidiaries engage in certain asset sales, we generally must either invest the net cash proceeds from such sales in our business within a period of time, prepay senior debt or make an offer to purchase a principal amount of our outstanding senior subordinated notes equal to the excess net cash proceeds, subject to certain exceptions. The purchase price of the outstanding senior subordinated notes will be 100% of their principal amount, plus accrued and unpaid interest.

     We have entered into various capital leases for machinery and equipment and automobiles with implicit interest rates ranging from 5.69% to 17.40% which extend to 2015. The Company has numerous non-cancelable operating leases for its retail store sites as well as several leases for offices, distribution and manufacturing facilities, showrooms and equipment. These leases expire on various dates through 2023 and generally contain renewal options and require the Company to pay real estate taxes, utilities and related insurance costs.

Restructuring costs

     Restructuring costs associated with the Factory Card & Party Outlet Acquisition of $9.1 million were accrued as part of net assets acquired. Through December 31, 2009, the Company incurred $6.7 million in restructuring costs, including $3.8 million in 2009. Through December 31, 2010, the Company incurred $7.6 million in restructuring costs including $0.9 million incurred in the year ended December 31, 2010. The Company expects to incur $0.5 million in restructuring costs in 2011.

     During October 2009, the Company communicated its plan to close the FCPO corporate office in Naperville, Illinois and to consolidate its retail corporate office operations into those of Party City, in Rockaway, New Jersey. In connection with the closing, the Company recorded severance costs of $1.8 million during 2009, all of which were paid by December 2010. The Company continues to utilize the Naperville facility as a distribution center for greeting cards and other products.

Other

     Rent expense for the years ended December 31, 2010 and 2009 totaled $144.0 million and $136.8 million, respectively. Minimum lease payments currently required under non-cancelable operating leases for the year ending December 31, 2011, approximate $112.2 million.

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

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

Cash Flow Data — Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

     Net cash provided by operating activities totaled $61.2 million during 2010, as compared to $123.9 million during 2009. Net cash flow provided by operating activities before changes in operating assets and liabilities was $133.4 million during 2010 and $124.2 million during 2009. Changes in operating assets and liabilities during 2010 resulted in the use of cash of $72.2 million and principally reflect an increase in inventories necessary to support the growth in our share of shelf at our company-owned retail stores as well as the growth in our temporary Halloween stores. Changes in operating assets and liabilities resulted in the use of cash of $0.2 million during 2009.

     Net cash used in investing activities totaled $102.8 million during 2010 and $54.4 million during 2009. Investing activities for 2010 included $30.4 million paid in connection with the purchase of the Christy’s Group and $21.5 million paid in connection with the purchase of retail franchise stores. Capital expenditures totaled $49.6 million in 2010 compared to $26.2 million in 2009. Retail capital expenditures totaled $37.2 million in 2010 and were principally for store renovations and updated information systems, while wholesale capital expenditures totaled $12.4 million.

     Net cash provided from financing activities was $46.5 million in 2010, compared to $70.2 million used in financing activities in 2009. During 2010, net cash provided by financing activities included $160.6 million from the refinancing of our asset based revolving credit facility and $675.0 million from the refinancing of our term loan credit facility. Cash provided by the refinancing of the revolving credit facility was principally used to pay off the $137.6 million balance on the prior revolving credit facility and the $19.2 million balance of the prior PCFG term loan. The remaining cash from financing under the revolving credit facility was principally used to pay down trade payables. Cash provided by the refinancing of the term loan credit facility was used to pay off the $341.6 million balance on the prior term loan credit facility and to pay a $301.8 million dividend to stockholders. Additionally, cash used in financing activities included scheduled payments on our long-term obligations that totaled $2.6 million compared to $11.0 million 2009.

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

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

     Net cash used in investing activities totaled $54.4 million in 2009 and $51.2 million in 2008. Investing activities for 2009 included $24.9 million paid in escrow in connection with the asset purchase agreement with American Greetings. Retail capital expenditures, principally for store renovations and updated information systems, totaled $16.3 million in 2009, while wholesale capital expenditures totaled $9.9 million.

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

Tabular Disclosure of Contractual Obligations

     Our contractual obligations at December 31, 2010 are summarized by the year in which the payments are due in the following table (dollars in thousands):

		Total				2011				2012				2013				2014				2015				Thereafter
Long-term debt obligations (a)		$	846,183			$	6,810			$	6,835			$	6,860			$	181,982			$	5,737			$	637,959
Capital lease obligations (a)			3,976				2,236				1,446				147				131				16				—
Operating lease obligations (b)			425,164				112,172				95,026				67,314				45,510				33,369				71,773
Merchandise purchase commitments (c)			81,600				26,700				27,200				27,700				—				—				—
Minimum product royalty obligations			19,765				8,271				7,320				1,724				800				550				1,100
Total contractual obligations		$	1,376,688			$	156,189			$	137,827			$	103,745			$	228,423			$	39,672			$	710,832

The operating lease obligations included above do not include contingent rent based upon sales volume (which represented less than 1% of minimum lease obligations in 2010), or other variable costs such as maintenance, insurance and taxes. See Note 17 to our Consolidated Financial Statements which are included in this report beginning on page F-2.

(c)      The Company has certain purchase commitments with vendors requiring minimum purchase commitments through 2013.

     At December 31, 2010 there were no non-cancelable purchase orders related to capital expenditures.

     At December 31, 2010, there were $150.1 million of borrowings under our ABL Credit Agreement, and standby letters of credit totaling $12.9 million.

     Not included in the above table are $0.7 million of net potential cash obligations associated with unrecognized tax benefits due to the high degree of uncertainty regarding the timing of future cash outflows associated with such obligations. Please refer to Note 16, “Income Taxes,” in the Notes to Consolidated Financial Statements for further information related to unrecognized tax benefits.

Off-Balance Sheet Arrangements

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

Effects of Inflation

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

Critical Accounting Policies and Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the appropriate application of certain accounting policies, many of which require estimates and assumptions about future events and their impact on amounts reported in the financial statements and related notes. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our estimates. Such differences could be material to the consolidated financial statements included herein.

     We believe our application of accounting policies, and the estimates inherently required by these policies, are reasonable. These accounting policies and estimates are constantly re-evaluated and adjustments are made when facts and circumstances dictate a change. Historically, we have found the application of accounting policies to be reasonable, and actual results generally do not differ materially from those determined using necessary estimates.

Revenue Recognition

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

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

Store Closure Costs

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

Product Royalty Agreements

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

Doubtful Accounts

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

Inventories

     Our policy requires that we state our inventories at the lower of cost or market. In assessing the ultimate realization of inventories, we are required to make judgments regarding, among other things, future demand and market conditions, current

inventory levels and the impact of the possible discontinuation of product designs. If actual conditions are less favorable than those projected by us, additional inventory write-downs to market value may be required.

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

Long-Lived and Intangible Assets

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

     During 2010 and 2008, the Company instituted programs to convert its FCPO stores and its company-owned and franchised Party America stores to Party City stores and recorded fourth quarter charges of $27.4 million and $17.4 million respectively, for the impairment of the Factory Card & Party Outlet and Party America trade names.

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

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

Insurance Accruals

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

Income Taxes

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

     The Company’s income tax returns are periodically audited by the Internal Revenue Service and by various state and local jurisdictions. The Company reserves for uncertain tax positions according to the guidance of ASC 740-10 Income Taxes. See further discussion in Note 16 of the Notes to the Consolidated Financial Statements.

Stock-Based Compensation

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

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

Legal Proceedings

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

Recently Issued Accounting Pronouncements

     In July 2010, the FASB issued ASU 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” ASU 2010-20 requires increased disclosures about the credit quality of financing receivables and allowances for credit losses, including disclosure about credit quality indicators, past due information and modifications of finance receivables. The guidance is generally effective for reporting periods ending after December 15, 2010. There was no material impact from this update.

     In December 2010, the FASB issued ASU 2010-29, “Business Combinations (Topic 805).” This update requires a public entity to disclose pro forma information for business combinations that occurred in the current reporting period and specifically requires the same information for the comparative prior period. This guidance is generally effective for annual reporting periods beginning on or after December 15, 2010. We do not anticipate any material impact from this update.

     In January 2011, the FASB 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.

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

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

by us may not be realized or, even if substantially realized, may not have the expected consequences to or effects on our business or operations. Although we believe that we have the product offerings and resources needed for growth in revenues and margins, future revenue and margin trends cannot be reliably predicted. Changes in such trends may cause us to adjust our operations in the future. Because of the foregoing and other factors, recent trends should not be considered reliable indicators of future financial results. In addition, our highly leveraged nature may impair our ability to finance our future operations and capital needs and our flexibility to respond to changing business and economic conditions and business opportunities.

Quarterly Results (Unaudited)

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

     The following table sets forth our historical revenues, gross profit, income from operations and net income (loss), by quarter, for 2010 and 2009.

		For the Three Months Ended,
		March 31,				June 30,				September 30,				December 31,
		(Dollars in thousands)
2010
Revenues:
Net sales		$	304,379			$	352,705			$	358,772			$	563,821
Royalties and franchise fees			3,844				4,453				4,035				7,085
Gross profit			104,479				141,840				132,437				257,863
Income from operations			8,288				35,367				17,963				65,818	(a)
Net (loss) income attributable to Amscan Holdings, Inc.			(412	)			16,460				4,603				28,668	(a)
2009
Revenues:
Net sales		$	309,046			$	337,536			$	336,944			$	483,798
Royalties and franchise fees			3,694				4,536				4,164				7,100
Gross profit			103,629				128,425				121,453				214,776
Income from operations			12,201				27,818				14,937				86,917
Net income attributable to Amscan Holdings, Inc.			2,403				10,952				3,079				46,119

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

     Our earnings are affected by changes in interest rates as a result of our variable rate indebtedness. However, we utilize interest rate swap agreements to manage the market risk associated with fluctuations in interest rates. If market interest rates for our variable rate indebtedness averaged 2% more than the interest rate actually paid for the years ended December 31, 2010, 2009 and 2008, our interest expense, after considering the effects of our interest rate swap agreements, would have increased, and income before income taxes would have decreased, by $7.1 million, $6.7 million, and $7.3 million, respectively. These amounts are determined by considering the impact of the hypothetical interest rates on our

borrowings and interest rate swap agreements. This analysis does not consider the effects of the reduced level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management would likely take actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that we would take and their possible effects, the sensitivity analysis assumes no changes in our financial structure.

     Our earnings are also affected by fluctuations in the value of the U.S. dollar as compared to foreign currencies, predominately in European countries, as a result of the sales of our products in foreign markets. Although we periodically enter into foreign currency forward contracts to hedge against the earnings effects of such fluctuations, we (1) may not be able to achieve hedge effectiveness to qualify for hedge-accounting treatment and, therefore, would record any gain or loss on the fair value of the derivative in other expense (income) and (2) may not be able to hedge such risks completely or permanently. A uniform 10% strengthening in the value of the dollar relative to the currencies in which our foreign sales are denominated would have resulted in a decrease in gross profit of $6.7 million, $5.5 million, and $5.6 million for the years ended December 31, 2010, 2009 and 2008, respectively. These calculations assume that each exchange rate would change in the same direction relative to the U.S. dollar. In addition to the direct effects of changes in exchange rates, which could change the U.S. dollar value of the resulting sales, changes in exchange rates may also affect the volume of sales or the foreign currency sales price as competitors’ products become more or less attractive. Our sensitivity analysis of the effects of changes in foreign currency exchange rates does not factor in a potential change in sales levels or local currency prices.

Item 8. Financial Statements and Supplementary Data

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

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

     Not applicable.

Item 9A. Controls and Procedures

(a)  Evaluation of Disclosure Controls and Procedures

          We maintain disclosure control procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), designed to provide reasonable assurance that information required to be disclosed in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and (ii) accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosures.

          As of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer evaluated, with the participation of our management, the effectiveness of our disclosure controls and procedures. Based on the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2010.

(b) Changes in Internal Control Over Financial Reporting

          There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter of 2010 identified in connection with our Chief Executive Officer’s and Chief Financial Officer’s evaluation that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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

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

financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

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

          Our internal control system was designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

     Under the supervision of the Company’s Chief Executive Officer and Chief Financial Officer, management conducted an evaluation of the Company’s internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on the evaluation performed, management concluded that its internal control over financial reporting, based on the COSO criteria, was effective, at the reasonable assurance level, as of December 31, 2010.

     This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s public accounting firm.

Item 9B. Other Information

     Not applicable.

PART III

Item 10. Directors and Executive Officers of the Registrant

     Set forth below are the names, ages and positions with the Company of the persons who are serving as directors and executive officers of the Company at April 13, 2011.

Name		Age				Position
Gerald C. Rittenberg			59			Chief Executive Officer and Director
James M. Harrison			59			President, Chief Operating Officer and Director
Michael A. Correale			53			Chief Financial Officer
Gregg A Melnick			41			President, Party City Retail Group
Robert J. Small			44			Chairman of the Board of Directors
Steven J. Collins			42			Director
Michael F. Cronin			57			Director
Kevin M. Hayes			42			Director
Jordan A. Kahn			69			Director
William A. Kussell			51			Director
Richard K. Lubin			64			Director
Carol M. Meyrowitz			57			Director
David M. Mussafer			47			Director

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

     James M. Harrison became our President in December 1997 and our Chief Operating Officer in March 2002. From February 1997 to March 2002, Mr. Harrison also served as our Chief Financial Officer and Treasurer. From February 1997 to December 1997, Mr. Harrison served as our Secretary.

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

     Gregg A. Melnick became President of Party City Retail Group in March 2011. From May 2010 to February 2011, Mr. Melnick was President of Party City Corporation. Previously, he was Chief Operating Officer from October 2007 to April 2010, and Chief Financial Officer from September 2004 to September 2007.

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

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

     Michael F. Cronin became one of our directors upon the consummation of the 2004 Transactions. From 1991 to the present, Mr. Cronin has served as Managing Partner of Weston Presidio. Mr. Cronin also serves as a director of several privately held companies.

     Kevin M. Hayes became one of our directors upon the consummation of the 2004 Transactions. Mr. Hayes is a Partner of Weston Presidio and has served in that position since 2000. Mr. Hayes is also serves as a director of several privately held companies.

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

     William A. Kussell became a director in October, 2010. Mr. Kussell is an Operating Partner at Advent International, working in the North American Consumer Retail Segment. Prior to joining Advent International, he was President and Chief Brand Officer for Dunkin Donuts World Wide. Mr. Kussel also serves on the board of directors of Modell’s Sporting Goods and Extended Stay Hotels.

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

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

     David M. Mussafer has been a member of our Board since August 2008. Mr. Mussafer, a Managing Partner of Advent International, which he joined in 1990, previously served on the board of directors of Dufry AG, Kirkland’s, lululemon athletica inc. and numerous privately held businesses. Mr. Mussafer received a B.S.M. from Tulane University and an M.B.A. from the Wharton School of the University of Pennsylvania.

Board of Directors

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

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

Board Leadership Structure

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

Risk Oversight

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

Audit Committee

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

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

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

Compensation Committee

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

Code of Ethics

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

Section 16(a) Beneficial Ownership Reporting Compliance

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

Item 11. Executive Compensation

Compensation Discussion and Analysis

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

  Compensation Committee

     The Compensation Committee of the Board of Directors consists of Richard K. Lubin, Chairman, Kevin M. Hayes, Jordan A. Kahn and David M. Mussafer. The Compensation Committee is responsible for setting and administering our executive compensation policies and programs and determining the compensation of our executive officers. The Compensation Committee also administers our Equity Incentive Plan (as defined hereafter). The Compensation Committee met periodically in 2010, and all members of the Compensation Committee attended each meeting.

     The Compensation Committee has the authority to retain outside independent executive compensation consultants to assist in the evaluation of executive officer compensation and in order to ensure the objectivity and appropriateness of the actions of the Compensation Committee. The Compensation Committee has the sole authority to retain, at our expense, and terminate any such consultant, including sole authority to approve such consultant’s fees and other retention terms. However, all decisions regarding compensation of executive officers are made solely by the Compensation Committee. No independent executive compensation consultants were retained by the Compensation Committee during 2010.

  Compensation Philosophy

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

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

  Compensation

     The Chief Executive Officer evaluates the performance of all executive and senior officers against their established goals and objectives. Annually, the Chief Executive Officer uses the results of these evaluations to determine compensation packages for executive and senior officers to be recommended for approval by the Compensation Committee. The Compensation Committee meets annually, usually in February, to evaluate the performance of the executive and senior officers, and to establish their base salaries, annual cash incentive award for the prior year’s performance and share-based incentive compensation to be effective in the first quarter of the current year. The Chief Executive Officer may request a meeting of the Compensation Committee

at an interim date to review the compensation package of a named executive or other officer, as the result of unforeseen organizational or responsibility changes, including new hires that occur during the year.

     In determining compensation components and levels, the Chief Executive Officer and the Compensation Committee consider the scope and responsibility of the officer’s position, our overall financial and operating performance, the officer’s overall performance and future potential, and the officer’s income potential resulting from common stock acquired and stock options received in prior years. Three of the four members of the Compensation Committee are representatives of the private equity firms that collectively own approximately 93% of our outstanding equity. Thus, unlike the situation at many public companies, compensation decisions at our Company are made by individuals who have a real and direct economic stake in the outcome of the decisions. The Committee members apply their considerable experiences in serving as directors of private equity portfolio companies to devise compensation packages that they believe will attract, retain and provide incentives to the executive talent necessary to manage an entity in which their firms have a substantial economic interest. Although the Committee looks to other companies to get a sense of the market for executive compensation in comparable circumstances, it does not engage in formal benchmarking or formulaic compensation. The members take the compensation actions that a prudent owner of a business would take to make sure that they have the right executive management to protect their investment.

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

  Components of Compensation

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

     Compensation is comprised of the following components:

  Base Salary

     The base salaries for our officers were determined based on the scope of their responsibilities, basing the determination in large part on the collective experience that the Sponsor representatives have with other companies in their respective portfolios. Generally, we believe that executive base salaries should be near the middle of the range of salaries that our Committee members have observed for executives in similar positions and with similar responsibilities. Base salaries will be reviewed annually, and adjusted from time to time to reflect individual responsibilities, performance and experience, as well as market compensation levels.

  Annual Cash Bonus Plan

     We have an annual cash incentive plan that is designed to serve as an incentive to drive annual financial performance. As a company with a substantial amount of indebtedness, we believe that Adjusted EBITDA is an important measure of our financial performance and ability to service our indebtedness and we use it as the target metric for our annual cash incentive plan. Adjusted EBITDA is a non-GAAP measure used internally and is measured by taking net income (loss) from operations and adding back interest charges, income taxes, depreciation and amortization and adjustments for other non-cash or non-recurring transactions. Individual performance factors can also play a role in determining incentive compensation. Each named executive is assigned a percentage of base salary — ranging from 50% to 100%- that can be earned if the target Adjusted EBITDA is achieved. The base range percentage is adjusted based on actual performance, with a maximum range of 75% to 150% and a minimum of zero.

     For 2010, the target Adjusted EBITDA was $206 million and the Company needed to achieve Adjusted EBITDA of $230 million in order for the maximum incentive to be earned. We achieved Adjusted EBITDA of $225 million. As a result, the Committee concluded to pay incentive awards that were 88% of the maximum.

  Stock-based Incentive Program

     We have an Equity Incentive Plan (the “Equity Incentive Plan”) under which the Committee may grant incentive awards in the form of options to purchase shares of common stock and shares of restricted or unrestricted common stock to directors, officers, employees and consultants (“Participants”) of Party City and its affiliates. The Compensation Committee uses the Equity Incentive Plan as an important component of our overall compensation program because it helps retain key employees, aligns their financial interests with the interests of our equity owners, and rewards the achievement of the our long-term strategic goals. Common stock options provide our employees with the opportunity to purchase and maintain an equity interest in the Company and to share in the appreciation of the value of our stock.

     We granted a substantial amount of equity at the time of the 2004 Acquisition and have refreshed those awards on several occasions since 2004. The Committee uses both time-based awards and performance-based awards to provide what it believes are the appropriate incentives. Time-based stock options help to retain executives, who must be employed by us at the time the award vests. In addition, because we set the exercise price of stock options at the fair value of the common stock at the time of grant, our equity value must increase — thereby benefiting all stockholders — before the awards have any value. Performance-based awards are vested only if there is a liquidity event and our private equity owners have achieved a specified internal rate of return on their investment. We believe that these awards put our executives in the shoes of the equity owners and align their interest with those of our stockholders.

     Unless otherwise provided in the related award agreement or, if applicable, the Stockholders’ Agreement, immediately prior to certain change of control transactions described in the Equity Incentive Plan, all outstanding Company stock options will, subject to certain limitations, become fully exercisable and vested and any restrictions and deferral limitations applicable to any restricted stock awards will lapse. We believe that providing for acceleration upon a liquidity event such as a change of control helps to align the interests of the executive with those of the stockholders.

     In March 2010, the Committee made a stock option award to Gregg A. Melnick, upon his promotion to President of our Party City Retail Group. The award consisted of time-based options for 30 shares that vest in five equal annual installments commencing on the first anniversary of the grant date and performance-based options for 16 shares that have the same terms as described above for all performance-based awards.

  Special stock option distribution

     In December 2010, in connection with the refinancing of our term loan agreement (see Liquidity and Capital Resources), our Board of Directors declared a one-time cash dividend of $9,400 per share of outstanding Common Stock and similar distributions to the holders of vested time options, in order to recognize that the dividend would reduce the Company’s stock valuation. The named executives, to the extent they held either common shares or vested time options, received the same payment per share or vested option as every other shareholder and time option holder. The distributions related to the vested time options are shown in the summary of compensation table in a separate column. In addition, for the portion of the outstanding

performance-based options that were vested at the time of the dividend, but as to which the additional performance criteria had not been met, the holders will receive a dividend equivalent payment if the performance conditions cause the award to be earned. The Board of Directors believed that this treatment of option holders was fair and consistent with their status as equity participant in our company.

  Other Compensation

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

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

     The named executive officers did not receive any other perquisites or personal benefits or property in 2010, 2009, or 2008.

Accounting and Tax Treatment

  Accounting Treatment

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

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

  Tax Treatment

     As the Company’s common stock is not publicly traded, executive compensation is not subject to the provisions of Section 162(m) of the Internal Revenue Code which limit the deductibility of compensation paid to certain individuals to $1.0 million, excluding qualifying incentive-based compensation. However, as part of its role, the Compensation Committee reviews and considers the current and future deductibility of executive compensation. Accordingly, the Company believes that compensation paid to its named executive officers is and will remain fully deductible for federal income tax purposes. However, in certain situations, the Compensation Committee may approve compensation that will not meet these requirements in order to ensure competitive levels of total compensation for its named executive and senior officers. In addition, should executive compensation become non-deductible for income tax purposes, the Compensation Committee may consider revisions to its policies and programs in response to this provision of law.

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

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

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

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

Report of Compensation Committee on Executive Compensation

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

Respectfully submitted,

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

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

Summary of Compensation Table

																		Other
														Option				Compensation
Name and Principal Position		Year				Salary (a)				Bonus (b)				Awards (c)				(d) (e)				Total
Gerald C, Rittenberg			2010			$	1,102,500			$	1,798,900			$	—			$	2,261,042			$	5,162,442
Chief Executive Officer			2009				1,050,000				1,367,000				—				21,400				2,438,400
			2008				1,000,000				1,066,000				595,300				21,400				2,682,700
James M. Harrison			2010			$	937,125			$	1,481,600			$	—			$	1,537,814			$	3,956,539
President and			2009				892,500				1,114,500				—				20,600				2,027,600
Chief Operating Officer			2008				850,000				858,600				446,500				19,800				2,174,900
Michael D. Heller			2009			$	507,800			$	270,100			$	—			$	700			$	778,600
Executive Vice President — Retail Operations			2008				507,800								331,000				700				839,500
Michael A. Correale			2010			$	345,000			$	226,700			$	—			$	258,804			$	830,504
Chief Financial Officer			2009				333,125				129,100				—				40,400				502,625
			2008				325,000				93,100				—				37,400				455,500
Gregg A Melnick			2010			$	525,000			$	344,991			$	232,530			$	262,600			$	1,365,121
President, Party City Retail Group