10-Q 1 y92368e10vq.htm FORM 10-Q e10vq
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2011
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 000-21827
Amscan Holdings, Inc.
(Exact Name of Registrant as Specified in Its Charter)
     
Delaware
(State or Other Jurisdiction of Incorporation or Organization)
  13-3911462
(I.R.S. Employer Identification No.)
     
80 Grasslands Road Elmsford, NY
(Address of Principal Executive Offices)
  10523
(Zip Code)
Registrant’s telephone number, including area code:
(914) 345-2020
     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No þ
     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer o   Accelerated filer o   Non-accelerated filer þ (Do not check if a smaller reporting company)   Smaller reporting company o
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
     As of August 15, 2011, 1,000.00 shares of the Registrant’s common stock were outstanding.
 
 

 


 

AMSCAN HOLDINGS, INC.
FORM 10-Q
June 30, 2011
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 EX-31.1
 EX-31.2
 EX-32
     References throughout this document to “Amscan,” “AHI” and the “Company” include Amscan Holdings, Inc. and its wholly owned subsidiaries. In this document the words “we,” “our,” “ours” and “us” refer only to the Company and its majority owned subsidiaries and not to any other person.
     You may read and copy any materials we file with the Securities and Exchange Commission (“SEC”) at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operations of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website at http://www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC

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AMSCAN HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share amounts)
                 
    June 30,     December 31,  
    2011     2010  
    (unaudited)     (Note 3)  
ASSETS
               
Current assets:
               
Cash and cash equivalents
  $ 15,579     $ 20,454  
Accounts receivable, net of allowances
    117,484       107,331  
Inventories, net of allowances
    452,653       424,317  
Prepaid expenses and other current assets
    66,080       65,672  
 
           
Total current assets
    651,796       617,774  
Property, plant and equipment, net
    204,621       190,729  
Goodwill
    661,163       630,492  
Trade names
    133,134       129,954  
Other intangible assets, net
    50,267       55,362  
Other assets, net
    28,600       28,840  
 
           
Total assets
  $ 1,729,581     $ 1,653,151  
 
           
 
               
LIABILITIES, REDEEMABLE COMMON SECURITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Loans and notes payable
  $ 182,285     $ 150,098  
Accounts payable
    133,265       108,172  
Accrued expenses
    111,453       111,054  
Income taxes payable
    36,678       34,325  
Redeemable warrants
          15,086  
Current portion of long-term obligations
    9,116       9,046  
 
           
Total current liabilities
    472,797       427,781  
Long-term obligations, excluding current portion
    836,852       841,112  
Deferred income tax liabilities
    94,618       94,981  
Deferred rent and other long-term liabilities
    17,865       14,766  
 
           
Total liabilities
    1,422,132       1,378,640  
 
               
Redeemable common securities (including 1,152.27 and 597.52 Class A common shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively)
    35,765       18,089  
 
               
Commitments and contingencies
               
 
               
Stockholders’ equity:
               
Class A common stock, $0.01 par value, 40,000 shares authorized, 19,051.31 and 18,307.79 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively
             
Class B common stock, $0.01 par value, convertible into Class A common stock, 15,200 shares authorized, 11,918.71 shares issued and outstanding at June 30, 2011 and December 31, 2010
             
Additional paid-in capital
    285,950       287,583  
Retained deficit
    (15,589 )     (27,558 )
Accumulated other comprehensive loss
    (1,171 )     (5,915 )
 
           
Amscan Holdings Inc. stockholders’ equity
    269,190       254,110  
Noncontrolling interests
    2,494       2,312  
 
           
Total stockholders’ equity
    271,684       256,422  
 
           
Total liabilities, redeemable common securities and stockholders’ equity
  $ 1,729,581     $ 1,653,151  
 
           
See accompanying notes to unaudited condensed consolidated financial statements.

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AMSCAN HOLDINGS, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(Unaudited)
(Amounts in thousands)
                 
    Three Months Ended June 30,  
    2011     2010  
Revenues:
               
Net sales
  $ 411,502     $ 352,705  
Royalties and franchise fees
    4,550       4,453  
 
           
Total revenues
    416,052       357,158  
 
               
Expenses:
               
Cost of sales
    247,787       210,865  
Wholesale selling expenses
    14,467       10,845  
Retail operating expenses
    72,368       64,416  
Franchise expenses
    3,370       3,149  
General and administrative expenses
    30,956       28,882  
Art and development costs
    4,082       3,634  
 
           
Total expenses
    373,030       321,791  
 
           
Income from operations
    43,022       35,367  
 
               
Interest expense, net
    20,312       9,126  
Other expense, net
    185       122  
 
           
Income before income taxes
    22,525       26,119  
 
               
Income tax expense
    7,947       9,588  
 
           
Net income
    14,578       16,531  
Less: net income attributable to noncontrolling interest
    46       71  
 
           
Net income attributable to Amscan Holdings, Inc.
  $ 14,532     $ 16,460  
 
           
See accompanying notes to unaudited condensed consolidated financial statements.

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AMSCAN HOLDINGS, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(Unaudited)
(Amounts in thousands)
                 
    Six Months Ended June 30,  
    2011     2010  
Revenues:
               
Net sales
  $ 764,003     $ 657,084  
Royalties and franchise fees
    8,231       8,297  
 
           
Total revenues
    772,234       665,381  
 
               
Expenses:
               
Cost of sales
    472,801       410,765  
Wholesale selling expenses
    28,319       21,235  
Retail operating expenses
    134,216       117,376  
Franchise expenses
    6,736       6,273  
General and administrative expenses
    62,500       58,807  
Art and development costs
    8,032       7,269  
 
           
Total expenses
    712,604       621,725  
 
           
Income from operations
    59,630       43,656  
 
               
Interest expense, net
    40,680       18,427  
Other expense, net
    247       53  
 
           
Income before income taxes
    18,703       25,176  
 
               
Income tax expense
    6,617       9,013  
 
           
Net income
    12,086       16,163  
Less: net income attributable to noncontrolling interest
    117       114  
 
           
Net income attributable to Amscan Holdings, Inc.
  $ 11,969     $ 16,049  
 
           
See accompanying notes to unaudited condensed consolidated financial statements.

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AMSCAN HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
Six Months Ended June 30, 2011
(Unaudited)
(Amounts in thousands)
                                                                 
                                    Accumulated     Amscan              
    Class A and Class B     Additional             Other     Holdings, Inc.              
    Common     Common     Paid-in     Retained     Comprehensive     Stockholders’     Noncontrolling        
    Shares     Stock     Capital     Deficit     Loss     Equity     Interests     Total Equity  
     
Balance at December 31, 2010
    30,226.50             287,583       (27,558 )     (5,915 )     254,110       2,312       256,422  
Net income
                            11,969               11,969       117       12,086  
Net change in cumulative translation adjustment
                                    3,550       3,550       65       3,615  
Change in fair value of interest rate swap contracts, net of income taxes
                                    1,414       1,414               1,414  
Change in fair value of foreign exchange contracts, net of income tax benefit
                                    (220 )     (220 )             (220 )
Comprehensive income
                                            16,713       182       16,895  
Exercise of redeemable warrants
                    (4 )                     (4 )             (4 )
Exercise of redeemable common stock options
                    (157 )                     (157 )             (157 )
Exercise of non-redeemable warrants
    740.74                                                      
Exercise of non-redeemable common stock options
    2.78               28                       28               28  
Equity based compensation expense
                    693                       693               693  
 
Revaluation of redeemable shares
                    (2,193 )                     (2,193 )             (2,193 )
     
Balance at June 30, 2011
    30,970.02               285,950       (15,589 )     (1,171 )     269,190       2,494       271,684  
     
See accompanying notes to unaudited condensed consolidated financial statements.

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AMSCAN HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
                 
    Six Months Ended June 30,  
    2011     2010  
 
               
Cash flows provided by operating activities:
               
Net income
  $ 12,086     $ 16,163  
Less: net income attributable to noncontrolling interest
    117       114  
 
           
Net income attributable to Amscan Holdings, Inc.
    11,969       16,049  
 
               
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization expense
    27,239       23,706  
Amortization of deferred financing costs
    2,394       1,060  
Provision for doubtful accounts
    704       845  
Deferred income tax benefit
    (255 )     595  
Deferred rent
    4,550       811  
Undistributed income in unconsolidated joint venture
    (596 )     (364 )
Loss on disposal of equipment
    81       237  
Equity based compensation
    809       276  
Changes in operating assets and liabilities, net of effects of acquisitions:
               
Increase in accounts receivable
    (2,415 )     (5,203 )
Increase in inventories
    (12,654 )     (9,570 )
Increase in prepaid expenses and other current assets
    (1,879 )     (5,941 )
Increase (decrease) in accounts payable, accrued expenses and income taxes payable
    19,550       (15,839 )
 
           
Net cash provided by operating activities
    49,497       6,662  
 
               
Cash flows used in investing activities:
               
Cash paid in connection with acquisitions, net of cash acquired
    (60,500 )     (5,261 )
Capital expenditures
    (24,072 )     (23,170 )
Proceeds from disposal of property and equipment
    22       134  
 
           
Net cash used in investing activities
    (84,550 )     (28,297 )
 
               
Cash flows provided by financing activities:
               
Repayment of loans, notes payable and long-term obligations
    (5,033 )     (29,242 )
Borrowings under revolving credit facilities
    32,187       53,284  
Proceeds from exercise of stock options
    148        
 
           
Net cash provided by financing activities
    27,302       24,042  
 
               
Effect of exchange rate changes on cash and cash equivalents
    2,876       (1,781 )
 
           
Net (decrease) increase in cash and cash equivalents
    (4,875 )     626  
 
               
Cash and cash equivalents at beginning of period
    20,454       15,420  
 
           
Cash and cash equivalents at end of period
  $ 15,579     $ 16,046  
 
           
 
               
Supplemental disclosure of cash flow information:
               
Cash paid during the period
               
Interest
  $ 33,529     $ 17,263  
Income taxes
  $ 5,578     $ 32,877  
See accompanying notes to unaudited condensed consolidated financial statements.

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AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share amounts)
Note 1 — Description of Business
     Amscan Holdings, Inc. (“Amscan Holdings,” or the “Company”), designs, manufactures, contracts for manufacture and distributes party goods, including paper and plastic tableware, metallic and latex balloons, accessories, novelties, costumes, other garments, gifts and stationery throughout the world. In addition, the Company operates specialty retail party supply stores in the United States, principally under the names Party City and Halloween City, franchises both individual stores and franchise areas throughout the United States and Puerto Rico principally under the name Party City and operates its e-commerce website, PartyCity.com. On a stand alone basis, without the consolidation of its subsidiaries, Amscan Holdings, Inc. has no significant assets or operations. The Company is a wholly-owned subsidiary of Party City Holdings Inc. (“PCHI”), formerly known as AAH Holdings Corporation.
Note 2 — Acquisitions
     On January 30, 2011, the Company acquired the common stock of Riethmüller GmbH (“Riethmüller”) for $47,069, in a transaction accounted for as a purchase business combination. Riethmüller is a German distributor of party goods and carnival items with latex balloon manufacturing operations in Malaysia and the ability to manufacture certain party goods in Poland. The results of this newly acquired business are included in the consolidated financial statements since the January 30, 2011 acquisition date and are reported in the operating results of the Company’s Wholesale segment.
     The preliminary estimate of the excess of the purchase price over the tangible assets is initially being assigned to goodwill. The following summarizes the estimated fair value of the assets and liabilities acquired: accounts receivable of $8,581, inventory of $14,828, fixed assets of $11,715, other current and non-current assets of $770, and accounts payable and other current liabilities of $9,308. The remaining $20,483 has been initially recorded as goodwill. The allocation of the purchase price is based on our preliminary estimates of the fair value of the tangible assets acquired and liabilities assumed. The Company is still in the process of accumulating information to complete the determination of the fair value of certain acquired assets, including identifiable intangible assets acquired. Goodwill arises because the purchase price reflects the strategic fit and expected synergies this business will bring to the Company’s operations. The acquisition expands the Company’s vertical business model into the latex balloon category, allowing the Company to capture the manufacturing and wholesale margin on such sales, and gives the Company an additional significant presence in Germany, Poland and Malaysia.
     On September 30, 2010, the Company acquired Christy’s By Design Limited and three affiliated companies (the “Christy’s Group”) from Christy Holdings Limited, a U.K. based company. The Christy’s Group designs and distributes costumes and other garments and accessories through its operations in Asia and the U.K. The fair value of the total consideration paid for the Christy’s Group was $34,342, including $3,974 paid during the six months ended June 30, 2011. The results of this newly acquired business are included in the consolidated financial statements since the September 30, 2010 acquisition date and are reported in the operating results of the Company’s Wholesale segment.
     The Christy’s Group acquisition has been accounted for as a purchase business combination. The preliminary estimate of the excess of the purchase price over the tangible assets and identified intangible assets acquired was assigned to goodwill. The following summarizes the estimated fair value of the assets and liabilities acquired: accounts receivable of $17,656, inventory of $457, trade names of $3,180, fixed assets of $582, and accounts payable and accrued expenses of $13,636. The remaining $26,104 has been initially recorded as goodwill. The allocation of the purchase price is based on our preliminary estimates of the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed. The Company is still in the process of accumulating information to complete the determination of the fair value of certain acquired assets. Goodwill arises because the purchase price reflects the strategic fit and expected synergies this business will bring to the Company’s operations. The Christy’s Group acquisition provided the Company the opportunity to manufacture

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AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Halloween costumes for sale to its U.S. retail segment, allowing the Company to capture the manufacturing and wholesale margins on such sales. The acquisition also allowed the Company to leverage its existing U.K. distribution capacity to expand the Christy’s Group business in Europe. The Company elected to treat the U.K. entities acquired as foreign branches for U.S. tax purposes. As a result, the entire excess of the purchase price over the fair value of the tangible assets and liabilities acquired is deductible for U.S. tax purposes over 15 years.
     On December 21, 2009, the Company entered into an Asset Purchase Agreement with American Greetings Corporation (“American Greetings”) under which it acquired certain assets, equipment and processes used in the manufacture and distribution of party goods effective on March 1, 2010 (the “Designware Acquisition”). In connection with the Designware Acquisition, the companies also entered into a Supply and Distribution Agreement and a Licensing Agreement (collectively, the “Agreements”). Under the terms of the Agreements, the Company has exclusive rights to manufacture and distribute products into various channels including the party store channel. In addition, American Greetings will continue to distribute party goods to various channels including to its mass market, drug, grocery, and specialty retail customers. American Greetings will purchase substantially all of its party goods requirements from the Company and the Company will license from American Greetings the “Designware” brand and other character licenses. The results of this business are included in the consolidated financial statements since the March 1, 2010 acquisition date and are reported in the operating results of the Company’s Wholesale segment.
     The acquisition-date fair value of the total consideration transferred was $45,881, including cash of $24,881 and a warrant to purchase approximately 2% of the Common Stock of the Company valued at $21,000. The fair value of the warrant was determined based on the agreement between the parties. The warrant was exercised in February 2011.
     During the six months ended June 30, 2011, the Company acquired three franchisee stores located in California and one store located in Iowa for total consideration of $9,457. The fair value of the assets acquired were $1,519 of inventory and $338 of fixed assets. The remaining $7,600 has been recorded as goodwill.
     During 2010, the Company acquired 20 franchisee stores located throughout several states for total consideration of $24,300. Total consideration consisted of $21,500 in cash and the exchange of five corporate stores located in Pennsylvania. Excluding the assets exchanged of $2,800, the fair value of the assets and liabilities acquired for cash were $2,500 of inventory and $1,600 of fixed assets. The remaining $17,400 has been recorded as goodwill. Goodwill arises because the purchase price reflects the value of the geographic location of each acquired store, as well as their maturity and historical profitability. The entire excess of the purchase price over the fair value of the tangible assets acquired is deductible for tax purposes over 15 years.
Note 3 — Basis of Presentation
     The accompanying unaudited condensed consolidated financial statements as of June 30, 2011 and for the three and six months ended June 30, 2011 and 2010, and the audited balance sheet as of December 31, 2010, include the accounts of the Company and its majority-owned and controlled entities. All material intercompany balances and transactions have been eliminated in consolidation. The unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included in the unaudited condensed consolidated financial statements.

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AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
     Our retail 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. The consolidated financial statements of the Company combined the Fiscal Quarters of our retail operations with the calendar quarters of our wholesale operations as the differences are not significant.
     The Company has determined the difference between the retail operation’s Fiscal Year and Fiscal Quarters and the calendar year and quarters to be insignificant.
     Operating results for the three and six months ended June 30, 2011 are not necessarily indicative of the results to be expected for the year ending December 31, 2011. Our business is subject to substantial seasonal variations, as our retail segment has realized a significant portion of its net sales, cash flow and net income in the fourth quarter of each year, principally due to its Halloween season sales in October and, to a lesser extent, other holiday season sales at the end of the calendar year. We expect that this general pattern will continue. Our results of operations may also be affected by industry factors that may be specific to a particular period, such as movement in and the general level of raw material costs.
Note 4 — Inventories
     Inventories consisted of the following:
                 
    June 30,     December 31,  
    2011     2010  
Finished goods
  $ 441,687     $ 416,831  
Raw materials
    14,712       11,879  
Work in process
    5,714       6,112  
 
           
 
               
 
    462,113       434,822  
Reserve for slow-moving and obsolete inventory
    (9,460 )     (10,505 )
 
           
 
               
 
  $ 452,653     $ 424,317  
 
           
     Inventories are valued at the lower of cost or market. The Company determines the cost of inventory at its retail stores using the weighted average method, which approximates the first-in, first-out method. All other inventory cost is determined using the first-in, first-out method.
Note 5 — Income Taxes
     The income tax expense for the three and six months ended June 30, 2011 and 2010 were determined based upon the Company’s estimated consolidated effective income tax rates of 36.3% and 35.7% for the years ending December 31, 2011 and 2010, respectively. The differences between the estimated consolidated effective income tax rate and the U.S. federal statutory rate are primarily attributable to state income taxes and available domestic manufacturing deductions.
     In addition, the income tax expense for the three and six months ended June 30, 2011 reflects the settlement of the audit of the Company’s 2008 and 2009 federal tax returns and the settlement of the audit of several 2007 and 2008 state income tax returns. Also, the income tax expense for the three and six months ended June 30, 2010 reflects the settlement of the Company’s 2007 federal tax return.

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AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 6 — Restructuring
In connection with the November 2007 acquisition of Factory Card & Party Outlet (“FCPO”), $9,101 was accrued related to plans to restructure FCPO’s merchandising assortment and administrative operations and involuntarily terminate a limited number of FCPO personnel. Through June 30, 2011, the Company incurred $8,034 in restructuring costs, including $375 and $428 incurred in the three and six months ended June 30, 2011, respectively. The Company expects to incur an additional $208 of restructuring costs in 2011 and the remaining balance of $859 in 2012.
Note 7 — Comprehensive Income
     Comprehensive income attributable to Amscan Holdings, Inc. consisted of the following:
                                 
    Three months ended     Six months ended  
    June 30,     June 30,  
    2011     2010     2011     2010  
Net income
  $ 14,532     $ 16,460     $ 11,969     $ 16,049  
Net change in cumulative translation adjustment
    (244 )     (1,075 )     3,550       (2,107 )
Change in fair value of interest rate swap contracts, net of income tax expense (benefit) of $415, $(54), $830, and $235
    706       (92 )     1,414       402  
Change in fair value of foreign exchange contracts, net of income tax (benefit) expense of $(12), $29, $(129), and $342
    (20 )     49       (220 )     581  
 
                       
Comprehensive income
  $ 14,974     $ 15,342     $ 16,713     $ 14,925  
 
                       
Note 8 — Capital Stock
     At June 30, 2011 and December 31, 2010, the Company’s authorized capital stock consisted of 10,000.00 shares of preferred stock, $0.01 par value, of which no shares were issued or outstanding, 40,000.00 shares of Class A Common Stock, $0.01 par value, of which 20,203.58 and 18,905.31 shares were issued and outstanding, respectively, and 15,200.00 shares of Class B Common Stock, $0.01 par value, of which 11,918.71 shares were issued and outstanding. At June 30, 2011 and December 31, 2010, 15,200 shares of Class A Common Stock, $0.01 par value were reserved for issuance upon the conversion of Class B Common Stock, $0.01 par value.
     The holders of common stock are entitled to vote as a single class on all matters upon which shareholders have a right to vote, subject to the requirements of applicable laws. Each share of Class A and Class B Common Stock entitles its holder to one vote and both classes participate equally in any dividend or distribution of earnings of the Company. For so long as at least 50% of the shares of Class B Common Stock issued at the effective time of the Second Amended and Restated Certificate of Incorporation remain outstanding, the holders of a majority of outstanding shares of Class B Common Stock must affirmatively vote or consent to sell, merge, consolidate, reorganize, liquidate or otherwise dispose of all or substantially all of the assets of the Company and, among other things and in certain instances, to incur indebtedness, to pay dividends or distributions and to effectuate a public offering of the Company’s Class A Common Stock.
     Each share of Class B Common Stock is convertible into a share of Class A Common Stock on a one-for-one basis (i) upon transfer to a person or entity which is not a Permitted Transferee (as defined in our Second Amended and Restated Certificate of Incorporation), (ii) upon a Qualified Initial Public Offering (as defined in our Second Amended and Restated Certificate of Incorporation) and (iii) at such time as less than 20% of the 11,918.71 shares of Class B Common Stock are controlled or owned by Permitted Transferees.

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AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
     Certain employee stockholders owned 1,152.27 and 597.52 shares of the Company’s Class A common stock at June 30, 2011 and December 31, 2010, respectively. Under the terms of the Company’s stockholders’ agreement dated April 30, 2004, as amended, the Company has an option to purchase all of the shares of common stock held by former employees and, under certain circumstances, former employee stockholders can require the Company to purchase all of the shares held by the former employee. The purchase price as prescribed in the stockholders’ agreement is to be determined through a market valuation of the minority-held shares or, under certain circumstances, based on cost, as defined therein. The aggregate amount that may be payable by the Company to certain employee stockholders based on the estimated fair market value of fully paid and vested common securities totaled $34,107 at June 30, 2011 and $16,547 at December 31, 2010, and is classified as redeemable common securities on the consolidated balance sheet, with a corresponding adjustment to stockholders’ equity. As there is no active market for the Company’s common stock, the Company estimates the fair value of its common stock based on a valuation model confirmed periodically by recent acquisitions or independent appraisals.
     In addition, in 2004, the Company’s CEO and President exchanged vested options in a predecessor company for fully vested options to purchase common stock of the Company. Since these options vested immediately and can be exercised upon the death or disability of the officer and put back to the Company, they are reflected as redeemable common securities of $1,658 and $1,542 on the Company’s balance sheets as of June 30, 2011 and December 31, 2010, respectively.
     The changes in redeemable securities during the six months ended June 30, 2011 are as follows:
                         
    Common Shares     Rollover options     Total  
Balance December 31, 2010
  $ 16,547     $ 1,542     $ 18,089  
Employee warrant exercise
    15,090               15,090  
Employee option exercise
    277               277  
Common stock revaluation
    2,193       116       2,309  
 
                 
Balance June 30, 2011
  $ 34,107     $ 1,658     $ 35,765  
 
                 
Note 9 — Segment Information
   Industry Segments
     The Company has two identifiable business segments. The Wholesale segment includes the design, manufacture, contract for manufacture and wholesale distribution of party goods, including paper and plastic tableware, metallic and latex balloons, accessories, novelties, costumes, other garments, gifts and stationery. The Retail segment includes the operation of company-owned retail party supply superstores in the United States, the sale of franchises on an individual store and franchise area basis throughout the United States and Puerto Rico and e-commerce operations through our PartyCity.com website.

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AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
     The Company’s industry segment data for the three months ended June 30, 2011 and 2010 is as follows:
                         
    Wholesale     Retail     Consolidated  
Three Months Ended June 30, 2011
                       
Revenues:
                       
Net sales
  $ 213,971     $ 269,638     $ 483,609  
Royalties and franchise fees
          4,550       4,550  
 
                 
 
Total revenues
    213,971       274,188       488,159  
Eliminations
    (72,107 )           (72,107 )
 
                 
 
                       
Net revenues
  $ 141,864     $ 274,188     $ 416,052  
 
                 
 
                       
Income from operations
  $ 25,300     $ 17,722     $ 43,022  
 
Interest expense, net
                    20,312  
Other expense, net
                    185  
 
                     
 
Income before income tax benefit
                  $ 22,525  
 
                     
 
                       
Depreciation and amortization
  $ 5,283     $ 8,707     $ 13,990  
 
Total assets
  $ 1,039,170     $ 690,411     $ 1,729,581  
                         
    Wholesale     Retail     Consolidated  
Three Months Ended June 30, 2010
                       
Revenues:
                       
Net sales
  $ 183,465     $ 239,938     $ 423,403  
Royalties and franchise fees
          4,453       4,453  
 
                 
 
Total revenues
    183,465       244,391       427,856  
Eliminations
    (70,698 )           (70,698 )
 
                 
 
Net revenues
  $ 112,767     $ 244,391     $ 357,158  
 
                 
 
                       
Income from operations
  $ 21,177     $ 14,190     $ 35,367  
 
Interest expense, net
                    9,126  
Other expense, net
                    122  
 
                     
 
Income before income tax benefit
                  $ 26,119  
 
                     
 
                       
Depreciation and amortization
  $ 5,125     $ 7,007     $ 12,132  
 
Total assets
  $ 810,928     $ 713,674     $ 1,524,602  

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AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
     The Company’s industry segment data for the six months ended June 30, 2011 and 2010 is as follows:
                         
    Wholesale     Retail     Consolidated  
Six Months Ended June 30, 2011
                       
Revenues:
                       
Net sales
  $ 413,547     $ 489,744     $ 903,291  
Royalties and franchise fees
          8,231       8,231  
 
                 
 
                       
Total revenues
    413,547       497,975       911,522  
Eliminations
    (139,288 )           (139,288 )
 
                 
 
Net revenues
  $ 274,259     $ 497,975     $ 772,234  
 
                 
 
                       
Income from operations
  $ 42,586     $ 17,044     $ 59,630  
Interest expense, net
                    40,680  
Other expense, net
                    247  
 
                     
 
                       
Income before income tax benefit
                  $ 18,703  
 
                     
 
                       
Depreciation and amortization
  $ 10,417     $ 16,822     $ 27,239  
 
Total assets
  $ 1,039,170     $ 690,411     $ 1,729,581  
                         
    Wholesale     Retail     Consolidated  
Six Months Ended June 30, 2010
                       
Revenues:
                       
Net sales
  $ 344,424     $ 438,394     $ 782,818  
Royalties and franchise fees
          8,297       8,297  
 
                 
 
                       
Total revenues
    344,424       446,691       791,115  
Eliminations
    (125,734 )           (125,734 )
 
                 
 
                       
Net revenues
  $ 218,690     $ 446,691     $ 665,381  
 
                 
 
                       
Income from operations
  $ 38,589     $ 5,068     $ 43,655  
 
                       
Interest expense, net
                    18,427  
Other expense, net
                    53  
 
                     
 
                       
Income before income tax benefit
                  $ 25,175  
 
                     
 
                       
Depreciation and amortization
  $ 9,516     $ 14,190     $ 23,706  
 
                       
Total assets
  $ 810,928     $ 713,674     $ 1,524,602  
     Geographic Segments
     The Company’s export sales, other than inter-company sales between geographic areas, are not material. Inter-company sales between geographic areas primarily consist of sales of finished goods for distribution in foreign markets, and are made at cost plus a share of operating profit. No single foreign operation is significant to the Company’s consolidated operations.

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AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 10 — Legal Proceedings
     The Company is a party to certain claims and litigation in the ordinary course of business. The Company does not believe these proceedings will result, individually or in the aggregate, in a material adverse effect on its financial condition or future results of operations.
Note 11 — Stock Option Plan
     The Company recorded $666 and $183 of stock-based compensation in general and administrative expenses during the three months ended June 30, 2011 and 2010 and $809 and $276 during the six months ended June 30, 2011 and 2010, respectively. Stock based compensation expense for the three and six months ended June 30, 2011 included a charge of $116 arising from the revaluation of redeemable common stock options held by the CEO and President.
     During February 2011, the Company granted 26 time options and 138 performance options to employees under the terms of the Company’s 2004 Equity Incentive Plan. The options vest at a rate of 20% per year and are exercisable at $27,700 per share. The ability to exercise vested performance options is contingent upon the occurrence of an initial public offering or a change in control, as defined, and the achievement of specific investment returns to the Company’s stockholders.
     During June 2011, the Company granted 175 time options and 350 performance options to the Company’s CEO and President under the terms of the Company’s 2004 Equity Incentive Plan. The options vested one third upon grant and one third per year thereafter, and are exercisable at $29,600 per share. The ability to exercise vested performance options is contingent upon the occurrence of an initial public offering or a change in control, as defined, and the achievement of specific investment returns to the Company’s stockholders.
     During the six months ended June 30, 2011, 12.78 options were exercised. There are options to purchase 3,798.27 shares of common stock outstanding at June 30, 2011.
Note 12 — Hedging Transactions, Derivative Financial Instruments and Fair Value
     The Company is directly and indirectly affected by changes in certain market conditions. These changes in market conditions may adversely impact the Company’s financial performance and are referred to as market risks. The Company, when deemed appropriate, uses derivatives as a risk management tool to mitigate the potential impact of certain market risks. The primary market risks managed through the use of derivative financial instruments are interest rate risk and foreign currency exchange rate risk.
   Interest Rate Risk Management
     As part of the Company’s risk management strategy, the Company periodically uses interest rate swap agreements to hedge the variability of cash flows on floating rate debt obligations. Accordingly, interest rate swap agreements are reflected in the consolidated balance sheets at fair value and the related gains and losses on these contracts are deferred in equity and recognized in interest expense over the same period in which the related interest payments being hedged are recognized in income. The fair value of an interest rate swap agreement is the estimated amount that the counterparty would receive or pay to terminate the swap agreement at the reporting date, taking into account current interest rates and the current creditworthiness of the swap counterparty.
     At December 31, 2010, the Company had an interest rate swap with the notional amount of $135,374 and a net liability fair value of $2,244. The swap agreement had an unrealized net loss of $1,414 at December 31, 2010 which was included in accumulated other comprehensive income (loss). No component of the agreement was excluded in the measurement of hedge effectiveness. As the hedge was 100% effective, there was no current impact on earnings due to hedge ineffectiveness. The interest rate swap agreement matured on June 22, 2011.

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AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Foreign Exchange Risk Management
     A portion of the Company’s cash flows is derived from transactions denominated in foreign currencies. The United States dollar value of transactions denominated in foreign currencies fluctuates as the United States dollar strengthens or weakens relative to these foreign currencies. In order to reduce the uncertainty of foreign exchange rate movements on transactions denominated in foreign currencies, including the British Pound Sterling and the Euro, the Company enters into foreign exchange contracts with major international financial institutions. These forward contracts, which typically mature within one year, are designed to hedge anticipated foreign currency transactions, primarily inter-company inventory purchases and trade receivables. No components of the contracts are excluded in the measurement of hedge effectiveness. The critical terms of the foreign exchange contracts are the same as the underlying forecasted transactions; therefore, changes in the fair value of foreign exchange contracts should be highly effective in offsetting changes in the expected cash flows from the forecasted transactions.
     At June 30, 2011 and December 31, 2010 the Company had foreign currency exchange contracts with notional amounts of $9,882 and $13,468, respectively and net (liability) asset fair values of $(152) and $197, respectively. The foreign currency exchange contracts are reflected in the consolidated balance sheets at fair value. The fair value of the foreign currency exchange contracts is the estimated amount that the counter-parties would receive or pay to terminate the foreign currency exchange contracts at the reporting date, taking into account current foreign exchange spot rates. The fair value adjustment at June 30, 2011 and December 31, 2010 resulted in an unrealized net loss of $(96) and an unrealized net gain of $124, respectively, which are included in accumulated other comprehensive income (loss). As these hedges are 100% effective, there is no current impact on earnings due to hedge ineffectiveness. The Company anticipates that substantially all gains and losses in accumulated other comprehensive income (loss) related to these foreign exchange contracts will be reclassified into earnings by December 2011.
   Fair Value Measurement
     ASC Subtopic 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. ASC Subtopic 820 establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
    Level 1 — Quoted prices in active markets for identical assets or liabilities.
 
    Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
 
    Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
     The following tables show assets and liabilities as of June 30, 2011 and December 31, 2010, which are measured at fair value on a recurring basis (in thousands):
                                 
    Quoted Prices in     Significant              
    Active Markets for     Other     Unobservable        
    Identical Assets or     Observable     Inputs     Total as of  
    Liabilities (Level 1)     Inputs (Level 2)     (Level 3)     June 30, 2011  
Derivative assets
        $ 19           $ 19  
Derivative liabilities
          (171 )           (171 )

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AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
                                 
            Significant              
    Quoted Prices in     Other              
    Active Markets for     Observable     Unobservable        
    Identical Assets or     Inputs     Inputs     Total as of  
    Liabilities (Level 1)     (Level 2)     (Level 3)     December 31, 2010  
Derivative assets
        $ 241           $ 241  
Derivative liabilities
          (2,288 )           (2,288 )
     In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company is required to record other assets and liabilities at fair value on a nonrecurring basis, generally as a result of impairment charges.
     The carrying amounts for cash and cash equivalents, accounts receivables, prepaid expenses and other current assets, accounts payable, accrued expenses and other current liabilities approximate fair value at June 30, 2011 and December 31, 2010 because of the short-term maturity of those instruments or their variable rates of interest.
     The carrying amount and fair value (based on market prices) of the term loans and the senior subordinated notes are as follows:
                                 
    June 30, 2011     December 31, 2010  
    Carrying     Fair     Carrying     Fair  
    Amount     Value     Amount     Value  
Term Loans
  $ 663,770     $ 670,408     $ 666,644     $ 674,060  
Senior Subordinated Notes
    175,000       176,750       175,000       176,750  
     The carrying amounts for other long-term debt approximate fair value at June 30, 2011 and December 31, 2010, based on the discounted future cash flow of each instrument at rates currently offered for similar debt instruments of comparable maturity.
     The following table summarizes the Company’s outstanding derivative instruments on a gross basis as recorded on its consolidated balance sheets as of June 30, 2011 and December 31, 2010.
                                                                                 
                            Derivative Assets                     Derivative Liabilities          
                    June 30,     December 31,     June 30,     December 31,  
                    2011     2010     2011     2010  
                                                                             
    Notional Amounts     Balance             Balance             Balance             Balance        
    June 30,     December 31,     Sheet     Fair     Sheet     Fair     Sheet     Fair     Sheet     Fair  
Derivative Instrument   2011     2010     Line     Value     Line     Value     Line     Value     Line     Value  
Interest Rate Hedge
  $     $ 135,374             $             $             $     (b) AE   $ (2,244 )
Foreign Exchange Contracts
    9,882       13,468     (a) PP     19     (a) PP     241     (b) AE     (171 )   (b) AE     (44 )
 
                                                           
Total Hedges
  $ 9,882     $ 148,842             $ 19             $ 241             $ (171 )           $ (2,288 )
 
                                                           
 
(a)   PP = Prepaid expenses and other current assets
 
(b)   AE = Accrued expenses

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AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 13 — Subsequent Events
     On July 29, 2011, the Company acquired the common stock of Party Packagers for $31,783 in a transaction accounted for as a purchase business combination. Founded in 1976, Party Packagers is a Canadian retailer of party goods and outdoor toys operating 26 superstores. The acquisition gives the Company a significant retail presence in Canada. The Company is in the process of accumulating information to complete the determination of the fair value of certain acquired assets and liabilities, including identifiable intangible assets acquired.
Note 14 — Recently Issued Accounting Pronouncements
     In June 2011, the Financial Accounting Standards Board issued ASU 2011-05, Comprehensive Income (Topic 220), Presentation of Comprehensive Income. The new US GAAP guidance gives two choices of how to present items of net income, items of other comprehensive income (OCI) and total comprehensive income: one continuous statement of comprehensive income or two separate consecutive statements can be presented. OCI is no longer allowed to be presented in the statement of stockholder’s equity. The guidance also requires the reclassification adjustments for each component of OCI to be displayed in both net income and OCI. For public companies, these amendments are effective for fiscal year and interim periods beginning after December 15, 2011 and should be applied retrospectively. For nonpublic companies, these amendments are effective for fiscal year and interim periods beginning after December 15, 2012 and interim and annual periods thereafter. Since the update only requires a change in presentation, we do not expect that the adoption of this will have a material impact on our results of operations, cash flows or financial condition.
     In May 2011, the Financial Accounting Standards Board issued ASU 2011-04, Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards, or IFRS. The ASU amends the fair value measurement and disclosure guidance in ASC 820, Fair Value Measurement, to converge US GAAP and IFRS requirements for measuring amounts at fair value as well as disclosures about these measurements. Many of the amendments clarify existing concepts and are generally not expected to result in significant changes to application of fair value principles. In certain instances, however, the FASB changed a principle to achieve convergence, and while limited, these amendments have the potential to significantly change practice. These amendments are effective during interim and annual periods beginning after December 15, 2011. Although we continue to review this update, we do not believe it will have a material impact on our financial statements or the notes thereto.
     In April 2011, the Financial Accounting Standards Board issued ASU 2011-02, Receivables (Topic 310), A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring. The FASB believes there has been diversity in practice related to identifying and disclosing troubled debt restructurings, and this diversity has been amplified over the last several years given the economic conditions. The amendments in this ASU clarify the accounting guidance for all banks and other creditors that make concessions to borrowers who are experiencing financial difficulties. The changes clarify the guidance on determining whether a concession has been granted and whether a borrower is considered to be experiencing financial difficulty.
     The amendments are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. The disclosures that were deferred by ASU 2011-01 will be effective for interim and annual periods beginning on or after June 15, 2011. For nonpublic entities, the amendments are effective for annual periods ending on or after December 15, 2012, including interim periods within those annual periods. We do not anticipate any material impact from this update.
     In January 2011, the Financial Accounting Standards Board issued ASU 2011-01, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. ASU 2011-01 defers the portion of ASU 2010-20 related to troubled debt disclosures. We do not anticipate any material impact from this update.

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AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 15 — Condensed Consolidating Financial Information
     Amscan Holdings is the issuer of the senior subordinated notes due April 30, 2014. The senior subordinated notes are guaranteed jointly and severally, fully and unconditionally, by the following wholly-owned domestic subsidiaries (collectively, the “Guarantors”), which subsidiaries are 100% owned, directly or indirectly, by Amscan Holdings:
    Amscan Inc.
 
    Am-Source, LLC
 
    Anagram Eden Prairie Property Holdings LLC
 
    Anagram International, Inc.
 
    Anagram International Holdings, Inc.
 
    Anagram International, LLC
 
    Factory Card & Party Outlet Corp.
 
    Gags & Games, Inc.
 
    JCS Packaging Inc.
 
    M&D Industries, Inc.
 
    Party City Corporation
 
    PA Acquisition Corporation
 
    Party City Franchise Group Holdings, LLC
 
    SSY Realty Corp.
 
    Trisar, Inc.
     Non-guarantor subsidiaries (collectively, “Non-guarantors”) include the following:
    Amscan (Asia-Pacific) Pty. Ltd.
 
    Amscan de Mexico, S.A. de C.V.
 
    Amscan Distributors (Canada) Ltd.
 
    Amscan Holdings Limited
 
    Anagram International (Japan) Co., Ltd.
 
    Amscan Partyartikel GmbH
 
    Christy Asia, Ltd.
 
    Christy’s By Design, Ltd.
 
    Christy Dress Up, Ltd.
 
    Christy Garments & Accessories Ltd.
 
    JCS Hong Kong Ltd.
 
    Riethmüller GmbH
     The following information presents condensed consolidating balance sheets at June 30, 2011 and December 31, 2010, the condensed consolidating statements of operations for the three months ended June 30, 2011 and 2010, and the related condensed consolidating statements of cash flows for the three months ended June 30, 2011 and 2010, for the combined Guarantors and the combined Non-guarantors, together with the elimination entries necessary to consolidate the entities comprising the combined companies.

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AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
CONDENSED CONSOLIDATING BALANCE SHEET
June 30, 2011
                                 
    Amscan                    
    Holdings,                    
    Inc. and     Combined              
    Combined     Non-              
    Guarantors     Guarantors     Eliminations     Consolidated  
     
ASSETS
                               
Current assets:
                               
Cash and cash equivalents
  $ 10,868     $ 4,711     $     $ 15,579  
Accounts receivable , net of allowances
    72,250       45,234             117,484  
Inventories, net of allowances
    411,738       42,141       (1,226 )     452,653  
Prepaid expenses and other current assets
    58,632       7,448             66,080  
 
                       
Total current assets
    553,488       99,534       (1,226 )     651,796  
Property, plant and equipment, net
    190,535       14,086             204,621  
Goodwill
    608,411       52,752             661,163  
Trade names
    129,954       3,180             133,134  
Other intangible assets, net
    50,267                   50,267  
Investment in and advances to unconsolidated subsidiaries
    120,552             (120,552 )      
Due from affiliates
    72,444       70,502       (142,946 )      
Other assets, net
    27,700       900             28,600  
 
                       
Total assets
  $ 1,753,351     $ 240,954     $ (264,724 )   $ 1,729,581  
 
                       
 
                               
LIABILITIES, REDEEMABLE COMMON SECURITIES AND STOCKHOLDERS’ EQUITY                
Current liabilities:
                               
Loans and notes payable
    182,285                   182,285  
Accounts payable
    112,763       20,502             133,265  
Accrued expenses
    94,251       17,202             111,453  
Income taxes payable
    37,439       (658 )     (103 )     36,678  
Due to affiliates
    63,009       79,937       (142,946 )      
Current portion of long-term obligations
    9,073       43             9,116  
 
                       
Total current liabilities
    498,820       117,026       (143,049 )     472,797  
Long-term obligations, excluding current portion
    836, 781       71             836,852  
Deferred income tax liabilities
    93,854       764             94,618  
Other
    17,818       47             17,865  
 
                       
Total liabilities
    1,447,273       117,908       (143,049 )     1,422,132  
 
                               
Redeemable common securities
    35,765                   35,765  
 
                               
Commitments and contingencies
                               
 
                               
Stockholders’ equity:
                               
Class A and Class B Common Stock
          336       (336 )      
Additional paid-in capital
    285,950       82,069       (82,069 )     285,950  
Retained (deficit) earnings
    (14,466 )     39,798       (40,921 )     (15,589 )
Accumulated other comprehensive loss
    (1,171 )     (1,651 )     1,651       (1,171 )
 
                       
Amscan Holdings, Inc. stockholders’ equity
    270,313       120,552       (121,675 )     269,190  
Noncontrolling interests
          2,494             2,494  
 
                       
Total stockholders’ equity
    270,313       123,046       (121,675 )     271,684  
 
                       
Total liabilities, redeemable common securities and stockholders’ equity
  $ 1,753,351     $ 240,954     $ (264,724 )   $ 1,729,581  
 
                       

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AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2010
                                 
    Amscan                    
    Holdings,                    
    Inc. and                    
    Combined     Combined              
    Guarantors     Non-Guarantors     Eliminations     Consolidated  
            (Amounts in thousands)          
ASSETS
                               
Current assets:
                               
Cash and cash equivalents
  $ 14,198     $ 6,256     $     $ 20,454  
Accounts receivable , net
    76,699       30,632             107,331  
Inventories, net
    405,452       19,883       (1,018 )     424,317  
Prepaid expenses and other current assets
    61,211       4,461             65,672  
 
                       
Total current assets
    557,560       61,232       (1,018 )     617,774  
Property, plant and equipment, net
    187,574       3,155             190,729  
Goodwill
    600,014       30,478             630,492  
Trade names
    129,954                   129,954  
Other intangible assets, net
    55,362                   55,362  
Investment in and advances to unconsolidated subsidiaries
    64,485             (64,485 )      
Due from affiliates
    22,148       12,998       (35,146 )      
Other assets, net
    28,057       783             28,840  
 
                       
Total assets
  $ 1,645,154     $ 108,646     $ (100,649 )   $ 1,653,151  
 
                       
 
                               
LIABILITIES, REDEEMABLE COMMON SECURITIES AND STOCKHOLDERS’ EQUITY                
Current liabilities:
                               
Loans and notes payable
    150,098                   150,098  
Accounts payable
    97,510       10,662             108,172  
Accrued expenses
    102,749       8,305             111,054  
Income taxes payable
    35,706       (1,355 )     (26 )     34,325  
Due to affiliates
    11,593       23,553       (35,146 )      
Redeemable warrants
    15,086                   15,086  
Current portion of long-term obligations
    9,005       41             9,046  
 
                       
Total current liabilities
    421,747       41,206       (35,172 )     427,781  
Long-term obligations, excluding current portion
    841,023       89             841,112  
Deferred income tax liabilities
    94,427       554             94,981  
Other
    14,766                   14,766  
 
                       
Total liabilities
    1,371,963       41,849       (35,172 )     1,378,640  
Redeemable common securities
    18,089                   18,089  
Commitments and contingencies
                               
Stockholders’ equity:
                               
Class A and Class B Common Stock
          336       (336 )      
Additional paid-in capital
    287,583       31,025       (31,025 )     287,583  
Retained (deficit)earnings
    (26,566 )     37,535       (38,527 )     (27,558 )
Accumulated other comprehensive (loss) income
    (5,915 )     (4,411 )     4,411       (5,915 )
 
                       
Amscan Holdings, Inc. stockholders’ equity
    255,102       64,485       (65,477 )     254,110  
Noncontrolling interests
          2,312             2,312  
 
                       
Total stockholders’ equity
    255,102       66,797       (65,477 )     256,422  
 
                       
Total liabilities, redeemable common securities and stockholders’ equity
  $ 1,645,154     $ 108,646     $ (100,649 )   $ 1,653,151  
 
                       

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AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
CONDENSED CONSOLIDATING INCOME STATEMENT
Three Months Ended June 30, 2011
(Amounts in thousands)
                                 
    Amscan                    
    Holdings, Inc.                    
    and Combined     Combined Non-              
    Guarantors     Guarantors     Eliminations     Consolidated  
Revenues:
                               
Net sales
  $ 366,993     $ 57,051     $ (12,542 )   $ 411,502  
Royalties and franchise fees
    4,550                   4,550  
 
                       
Total revenues
    371,543       57,051       (12,542 )     416,052  
 
                               
Expenses:
                               
Cost of sales
    217,691       42,491       (12,395 )     247,787  
Selling expenses
    8,177       6,290             14,467  
Retail operating expenses
    72,368                   72,368  
Franchise expenses
    3,370                   3,370  
General and administrative expenses
    26,787       4,259       (90 )     30,956  
Art and development costs
    4,001       81             4,082  
 
                       
Total expenses
    332,394       53,121       (12,485 )     373,030  
 
                       
Income from operations
    39,149       3,930       (57 )     43,022  
 
                               
Interest expense, net
    20,100       212             20,312  
Other (income) expense , net
    (3,280 )     (358 )     3,823       185  
 
                       
Income before income taxes
    22,329       4,076       (3,880 )     22,525  
Income tax expense
    7,704       297       (54 )     7,947  
 
                       
Net income
    14,625       3,779       (3,826 )     14,578  
 
Less net income attributable to noncontrolling interests
          46             46  
 
                       
 
Net income attributable to Amscan Holdings, Inc.
  $ 14,625     $ 3,733     $ (3,826 )   $ 14,532  
 
                       

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AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
CONDENSED CONSOLIDATING INCOME STATEMENT
Six Months Ended June 30, 2011
(Amounts in thousands)
                                 
    Amscan                    
    Holdings, Inc.                    
    and Combined     Combined Non-              
    Guarantors     Guarantors     Eliminations     Consolidated  
Revenues:
                               
Net sales
  $ 683,736     $ 98,359     $ (18,092 )   $ 764,003  
Royalties and franchise fees
    8,231                   8,231  
 
                       
Total revenues
    691,967       98,359       (18,092 )     772,234  
 
                               
Expenses:
                               
Cost of sales
    415,832       74,853       (17,884 )     472,801  
Selling expenses
    16,490       11,829             28,319  
Retail operating expenses
    134,216                   134,216  
Franchise expenses
    6,736                   6,736  
General and administrative expenses
    53,832       9,088       (420 )     62,500  
Art and development costs
    7,890       142             8,032  
 
                       
Total expenses
    634,996       95,912       (18,304 )     712,604  
 
                       
Income from operations
    56,971       2,447       212       59,630  
 
                               
Interest expense, net
    40,229       451             40,680  
Other (income) expense, net
    (1,440 )     (996 )     2,683       247  
 
                       
Income before income taxes
    18,182       2,992       (2,471 )     18,703  
Income tax expense
    6,082       612       (77 )     6,617  
 
                       
Net income
    12,100       2,380       (2,394 )     12,086  
Less net income attributable to noncontrolling interests
          117             117  
 
                       
Net income attributable to Amscan Holdings, Inc.
  $ 12,100     $ 2,263     $ (2,394 )   $ 11,969  
 
                       

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AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended June 30, 2010
(Amounts in thousands)
                                 
    Amscan Holdings,                    
    Inc. and Combined     Combined Non-              
    Guarantors     Guarantors     Eliminations     Consolidated  
Revenues:
                               
Net sales
  $ 313,882     $ 54,042     $ (15,219 )   $ 352,705  
Royalties and franchise fees
    5,716             (1,263 )     4,453  
 
                       
Total revenues
    319,598       54,042       (16,482 )     357,158  
 
                               
Expenses:
                               
Cost of sales
    188,513       37,395       (15,043 )     210,865  
Wholesale selling expenses
    8,415       2,430             10,845  
Retail operating expenses
    56,763       8,916       (1,263 )     64,416  
Franchise expenses
    3,149                   3,149  
General and administrative expenses
    26,066       3,146       (330 )     28,882  
Art and development costs
    3,656       (22 )           3,634  
 
                       
Total expenses
    286,562       51,865       (16,636 )     321,791  
 
                       
Income from operations
    33,036       2,177       154       35,367  
 
                               
Interest expense, net
    8,528       598             9,126  
Other (income) expense, net
    (1,786 )     214       1,694       122  
 
                       
 
Income before income taxes
    26,294       1,365       (1,540 )     26,119  
 
                               
Income tax expense
    10,150       266       (828 )     9,588  
 
                       
Net income
    16,144       1,099       (712 )     16,531  
Less net income attributable to noncontrolling interests
          71             71  
 
                       
Net income attributable to Amscan Holdings, Inc.
  $ 16,144     $ 1,028     $ (712 )   $ 16,460  
 
                       

24


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AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Six Months Ended June 30, 2010
(Amounts in thousands)
                                 
    Amscan                    
    Holdings, Inc.                    
    and Combined     Combined Non-              
    Guarantors     Guarantors     Eliminations     Consolidated  
Revenues:
                               
Net sales
  $ 578,401     $ 107,650     $ (28,967 )   $ 657,084  
Royalties and franchise fees
    10,785             (2,488 )     8,297  
 
                       
Total revenues
    589,186       107,650       (31,455 )     665,381  
 
                               
Expenses:
                               
Cost of sales
    363,425       75,437       (28,097 )     410,765  
Wholesale selling expenses
    16,172       5,063             21,235  
Retail operating expenses
    102,647       17,217       (2,488 )     117,376  
Franchise expenses
    6,273                   6,273  
General and administrative expenses
    53,176       6,291       (660 )     58,807  
Art and development costs
    7,315       (46 )           7,269  
 
                       
Total expenses
    549,008       103,962       (31,245 )     621,725  
 
                       
Income from operations
    40,178       3,688       (210 )     43,656  
 
                               
Interest expense, net
    17,181       1,246             18,427  
Other (income) expense, net
    (3,049 )     536       2,566       53  
 
                       
Income before income taxes
    26,046       1,906       (2,776 )     25,176  
 
                               
Income tax expense
    9,335       355       (677 )     9,013  
 
                       
Net income
  $ 16,711     $ 1,551     $ (2,099 )   $ 16,163  
Less net income attributable to noncontrolling interests
          114             114  
 
                       
Net income attributable to Amscan Holdings, Inc.
  $ 16,711     $ 1,437     $ (2,099 )   $ 16,049  
 
                       

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AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Six Months Ended June 30, 2011
(Amounts in thousands)
                                 
    Amscan                    
    Holdings, Inc.                    
    and     Combined              
    Combined     Non-              
    Guarantors     Guarantors     Eliminations     Consolidated  
 
                               
Cash flows used in operating activities:
                               
Net income
    12,100       2,380       (2,394 )     12,086  
Net income attributable to noncontrolling interest
          117             117  
 
                       
Net income attributable to Amscan Holdings, Inc.
  $ 12,100     $ 2,263     $ (2,394 )   $ 11,969  
 
                               
Adjustments to reconcile net income to net cash used in operating activities:
                               
Depreciation and amortization expense
    26,040       1,199             27,239  
Amortization of deferred financing costs
    2,394                   2,394  
Provision for doubtful accounts
    508       196             704  
 
Deferred income tax expense (benefit)
    (255 )                 (255 )
Deferred rent
    4,550                   4,550  
Undistributed loss (gain) in unconsolidated joint venture
    (596 )                 (596 )
(Gain) Loss on disposal of equipment
    79       2             81  
Equity based compensation
    809                   809  
Changes in operating assets and liabilities, net of effects of acquisitions:
                               
Decrease (increase) in accounts receivable
    3,805       (6,220 )           (2,415 )
(Increase) in inventories
    (5,432 )     (7,430 )     208       (12,654 )
 
Decrease (increase) in prepaid expenses and other current assets
    455       (2,334 )           (1,879 )
Increase in accounts payable, accrued expenses and income taxes payable
    8,223       9,141       2,186       19,550  
 
                       
Net cash provided by (used) in operating activities
    52,680       (3,183 )           49,497  
 
                               
Cash flows used in investing activities:
                               
Cash paid in connection with acquisitions, net of cash acquired
    (60,500 )                 (60,500 )
Capital expenditures
    (23,406 )     (666 )           (24,072 )
Proceeds from disposal of property and equipment
    6       16             22  
 
                       
Net cash used in investing activities
    (83,900 )     (650 )           (84,550 )
 
                               
Cash flows provided by financing activities:
                               
Repayments of loans, notes payable and long-term obligations
    (5,012 )     (21 )           (5,033 )
Proceeds from loans, notes payable and long-term obligations
    32,187                   32,187  
Capital contributions and proceeds from issuance of common stock and exercise of options, net of retirements
    148                   148  
 
                       
Net cash provided by (used in) financing activities
    27,323       (21 )           27,302  
Effect of exchange rate changes on cash and cash equivalents
    567       2,309             2,876  
 
                       
Net decrease in cash and cash equivalents
    (3,330 )     (1,545 )           (4,875 )
Cash and cash equivalents at beginning of period
    14,198       6,256               20,454  
 
                         
 
Cash and cash equivalents at end of period
  $ 10,868     $ 4,711     $     $ 15,579  
 
                       

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AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Six Months Ended June 30, 2010
(Amounts in thousands)
                                 
    Amscan Holding, Inc.     Combined              
    and Combined     Non-              
    Guarantors     Guarantors     Eliminations     Consolidated  
Cash flows provided by operating activities:
                               
Net income
    16,711       1,551       (2,099 )     16,163  
Net income attributable to noncontrolling interest
          114             114  
 
                       
Net income attributable to Amscan Holdings, Inc.
  $ 16,711     $ 1,437     $ (2,099 )   $ 16,049  
 
                               
Adjustments to reconcile net income to net cash provided by operating activities:
                               
Depreciation and amortization expense
    21,680       2,026             23,706  
Amortization of deferred financing costs
    928       132             1,060  
Provision for doubtful accounts
    729       116             845  
Deferred income tax expense
    595                   595  
Deferred rent
    641       170             811  
Undistributed income in unconsolidated joint venture
    (364 )                 (364 )
Loss on disposal of equipment
    100       137             237  
Equity based compensation
    276                   276  
Changes in operating assets and liabilities, net of effects of acquisitions:
                               
Increase in accounts receivable
    (5,189 )     (14 )           (5,203 )
Increase in inventories
    (10,386 )     (122 )     938       (9,570 )
Increase in prepaid expenses and other current assets
    (3,629 )     (2,027 )     (285 )     (5,941 )
Decrease increase in accounts payable, accrued expenses and income taxes payable
    (18,966 )     1,681       1,446       (15,839 )
 
                       
Net cash provided by operating activities
    3,126       3,536             6,662  
 
                               
Cash flows used in investing activities:
                               
Cash paid in connection with acquisitions, net of cash acquired
    (5,263 )     2             (5,261 )
Capital expenditures
    (22,447 )     (723 )           (23,170 )
Proceeds from disposal of property and equipment
    104       30             134  
 
                       
Net cash used in investing activities
    (27,606 )     (691 )           (28,297 )
 
                               
Cash flows provided by (used in) financing activities:
                               
Repayments of loans, notes payable and long-term obligations
    (25,345 )     (3,897 )           (29,242 )
Proceeds from loans, notes payable and long-term obligations
    53,245       39             53,284  
 
                       
Net cash provided by (used in) financing activities
    27,900       (3,858 )           24,042  
Effect of exchange rate changes on cash and cash equivalents
    (5 )     (1,776 )           (1,781 )
 
                       
Net increase (decrease) in cash and cash equivalents
    3,415       (2,789 )           626  
Cash and cash equivalents at beginning of period
    8,239       7,181               15,420  
 
                         
 
Cash and cash equivalents at end of period
  $ 11,654     $ 4,392     $     $ 16,046  
 
                       

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2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Business Overview
Our Company
     We are a global leader in decorated party supplies. We make it easy and fun to enhance special occasions with a wide assortment of innovative and exciting merchandise at a compelling value. With the 2005 acquisition of Party City, we created a vertically integrated business combining the leading product design, manufacturing and distribution platform, Amscan, with the largest U.S. retailer of party supplies. We believe we have the industry’s broadest selection of decorated party supplies, which we distribute to over 100 countries. Our party superstore retail network consists of approximately 800 locations in the United States and is approximately 15 times larger than that of our next largest party superstore competitor. Our vertically integrated business model and scale differentiate us from other party supply companies and allow us to capture the manufacturing-to-retail margin on a significant portion of the products sold in our stores. We believe our widely recognized brands, broad product offering, low-cost global sourcing model and category-defining retail concept are significant competitive advantages. We believe these characteristics, combined with our vertical business model and scale, position us for continued organic and acquisition-led growth in the United States and internationally.
How We Assess the Performance of Our Company
     In assessing the performance of our company, we consider a variety of performance and financial measures for our two operating segments, Retail and Wholesale. These key measures include revenues and gross profit, comparable retail same-store sales and operating expenses.
Segments
     Our Wholesale segment generates revenues globally through sales of our Amscan, Designware, Anagram and other party supplies to party goods superstores, including our company-owned and franchised stores, independent party supply stores, dollar stores, mass merchants, grocery retailers and gift shops. Domestic sales and international sales accounted for 86% and 14%, respectively, of our total wholesale sales in 2010 and 77% and 23%, respectively, during the first six months of 2011.
     Our Retail segment generates revenues from the sale of merchandise to the end consumer through our chain of company-owned party goods stores, online through our e-commerce websites, including PartyCity.com, and through our chain of temporary Halloween locations. Franchise revenues include royalties on franchise retail sales and franchise fees charged for the initial franchise award and subsequent renewals. Our retail sales of party goods are fueled by everyday events such as birthdays, various seasonal events and other special occasions occurring throughout the year. In addition, through Halloween City, our temporary Halloween business, we seek to maximize our Halloween seasonal opportunity. As a result, in the year ended 2010, our Halloween business represented approximately 25% of our total annual retail sales, generally occurring in a five-week selling season ending on October 31. We expect to continue to generate a significant portion of our retail sales during the Halloween selling season.
     Intercompany sales between the Wholesale and the Retail segment are eliminated, and the profits on intercompany sales are deferred and realized at the time merchandise is sold to the consumer. For segment reporting purposes, certain general and administrative expenses and art and development costs are allocated based on total revenues.

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Financial Measures
     Revenues. Revenues from retail operations are recognized at point of sale. We estimate future retail sales returns and record a provision in the period in which the related sales are recorded based on historical information. Retail revenues include shipping revenue related to e-commerce sales. Retail sales are reported net of taxes collected. Franchise royalties are recognized based on reported franchise retail sales. Revenues from our wholesale operations represent the sale of our products to third parties, less rebates, discounts and other allowances. The terms of our wholesale sales are generally FOB shipping point, and revenue is recognized when goods are shipped. We estimate reductions to revenues for volume-based rebate programs and subsequent credits at the time sales are recognized. Intercompany sales from our wholesale operations to our retail stores are eliminated in our consolidated total revenues.
     Comparable Retail Same-Store Sales. The growth in same-store sales represents the percentage change in same-store sales in the period presented compared to the prior year. Same-store sales exclude the net sales of a store for any period if the store was not open during the same period of the prior year. Comparable sales are calculated based upon stores that were open at least thirteen full months as of the end of the applicable reporting period. When a store is reconfigured or relocated within the same general territory, the store continues to be treated as the same store. If, during the period presented, a store was closed, sales from that store up to and including the closing day are included as same-store sales as long as the store was open during the same period of the prior year. FCPO stores that are in the process of being converted have not been included in Party City same store-sales and will not be included until the thirteenth month following conversion.
     Cost of Sales. Cost of sales at wholesale reflects the production costs (i.e., raw materials, labor and overhead) of manufactured goods and the direct cost of purchased goods, inventory shrinkage, inventory adjustments, inbound freight to our manufacturing and distribution facilities, distribution costs and outbound freight to get goods to our wholesale customers. At retail, cost of sales reflects the direct cost of goods purchased from third parties and the production or purchase costs of goods acquired from our wholesale operations. Retail cost of sales also includes inventory shrinkage, inventory adjustments, inbound freight, occupancy costs related to store operations (such as rent and common area maintenance, utilities and depreciation on assets) and all logistics costs associated with our e-commerce business.
     Our cost of sales increases in higher volume periods as the direct costs of manufactured and purchased goods, inventory shrinkage and freight are generally tied to sales. However, other costs are largely fixed or vary based on other factors and do not necessarily increase as sales volume increases. Changes in the mix of our products, such as changes in the proportion of company manufactured goods, which have higher margins, may also impact our overall cost of sales. The direct costs of manufactured and purchased goods are influenced by raw material costs (principally paper, petroleum-based resins and cotton), domestic and international labor costs in the countries where our goods are purchased or manufactured and logistics costs associated with transporting our goods. We monitor our inventory levels on an on-going basis in order to identify slow-moving goods and generally use our outlet stores to clear such goods.
     Selling Expenses. Selling expenses include the costs associated with our wholesale sales and marketing efforts, including licensing, merchandising and customer service. Costs include the salaries and benefits of the related work force, including sales-based bonuses and commissions. Other costs include catalogues, showroom rent, travel and other operating costs. Certain selling expenses, such as sales-based bonuses and commissions, vary in proportion to sales, while other costs vary based on other factors, such as our marketing efforts, or are largely fixed and do not necessarily increase as sales volume increases.
     Retail Operating Expenses. Retail operating expenses include all of the costs associated with retail store operations, excluding occupancy-related costs included in the cost of sales. Costs include store payroll and benefits, advertising, supplies and credit card costs. Retail expenses are largely variable but do not necessarily vary in proportion to sales.
     Franchise Expenses. Franchise expenses include the costs associated with operating our franchise network, including salaries and benefits of the administrative work force and other administrative costs. These expenses generally do not vary proportionally with net sales or franchise-related income.
     General and Administrative Expenses. General and administrative expenses include all operating costs not included elsewhere. These expenses include payroll and other expenses related to operations at our corporate

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offices including occupancy costs, related depreciation and amortization, legal and professional fees and data-processing costs. These expenses generally do not vary proportionally with net sales.
     Art and Development Costs. Art and development costs include the costs associated with art production, creative development and product management. Costs include the salaries and benefits of the related work force. These expenses generally do not vary proportionally with net sales.
Results of Operations
Three Months Ended June 30, 2011 Compared To Three Months Ended June 30, 2010
     The following tables set forth our operating results and operating results as a percentage of total revenues for the three months ended June 30, 2011 and 2010.
                                 
    Three Months Ended June 30,  
    2011     2010  
            (dollars in thousands)          
Revenues:
                               
Net sales
  $ 411,502       98.9 %   $ 352,705       98.8 %
Royalties and franchise fees
    4,550       1.1       4,453       1.2  
 
                       
 
                               
Total revenues
    416,052       100.0       357,158       100.0  
Expenses:
                               
Cost of sales
    247,787       59.6       210,865       59.0  
Wholesale selling expenses
    14,467       3.5       10,845       3.0  
Retail operating expenses
    72,368       17.4       64,416       18.0  
Franchise expenses
    3,370       0.8       3,149       0.9  
General and administrative expenses
    30,956       7.4       28,882       8.1  
Art and development costs
    4,082       1.0       3,634       1.0  
 
                       
 
                               
Total expenses
    373,030       89.7       321,791       90.0  
 
                       
 
                               
Income from operations
    43,022       10.3       35,367       10.0  
Interest expense, net
    20,312       4.9       9,126       2.6  
Other expense, net
    185       0.0       122       0.0  
 
                       
 
                               
Income before income taxes
    22,525       5.4       26,119       7.4  
Income tax expense
    7,947       1.9       9,588       2.7  
 
                       
 
                               
Net income
    14,578       3.5       16,531       4.7  
Less net income attributable to noncontrolling interests
    46       0.0       71       0.0  
 
                       
 
                               
Net income attributable to Amscan Holdings, Inc.
  $ 14,532       3.5 %   $ 16,460       4.7 %
 
                       

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     Revenues
     Total revenues for the second quarter of 2011 were $416.1 million, or 16.5% higher than for the second quarter of 2010, reflecting growth in both reporting segments. The following table sets forth our total revenues for the quarters ended June 30, 2011 and 2010, respectively.
                                 
    Three Months Ended June 30,  
    2011     2010  
            Percentage of             Percentage of  
    Dollars in     Total     Dollars in     Total  
    Thousands     Revenue     Thousands     Revenue  
Revenues
                               
Sales
                               
Wholesale
  $ 213,971       51.4 %   $ 183,465       51.4 %
Eliminations
    (72,107 )     (17.3) %     (70,698 )     (19.8) %
 
                       
Net wholesale
    141,864       34.1 %     112,767       31.6 %
 
                               
Retail
    269,638       64.8 %     239,938       67.2 %
 
                       
Total net sales
    411,502       98.9 %     352,705       98.8 %
 
                               
Franchise related
    4,550       1.1 %     4,453       1.2 %
 
                       
Total revenues
  $ 416,052       100.0 %   $ 357,158       100.0 %
 
                       
Wholesale
     Net sales for the second quarter of 2011 of $141.9 million were $29.1 million or 25.8% higher than net sales for the corresponding quarter of 2010. Net sales to domestic party goods retailers, including our franchisee network, and to other domestic party goods distributors during the second quarter of 2011 totaled $68.3 million and were comparable to the corresponding 2010 sales. Net sales of metallic balloons of $25.8 million were $0.8 million or 3.0% higher than in the second quarter of 2010, principally driven by an increase in sales of our value price balloon line to the dollar store channel. International sales totaled $47.8 million and were $27.3 million higher than in the second quarter of 2010, principally reflecting additional sales as a result of the acquisition of the Christy’s Group in September 2010 and Riethmüller in late January 2011 of $9.7 million and $15.8 million, respectively. In addition, changes in foreign currency exchange rates resulted in a 10.0% increase in international sales over 2010.
     Intercompany sales to our retail affiliates of $72.1 million were $1.4 million or 2.0% higher than in the second quarter of 2010 and represented 33.7% of total wholesale sales in the second quarter of 2011 compared to 38.5% in the second quarter of 2010. The increase in intercompany sales principally reflects the conversion of an additional 44 FCPO retail stores to the Party City format and the re-merchandising of the stores to carry a greater percentage of our wholesale product. During the second quarter of 2011, our wholesale sales to our retail stores represented 59.4% of the retail stores’ total purchases, compared to 66.1% in 2010. The decrease, as a percentage of total purchases, is attributable to the accelerated timing of purchases of third party Halloween products into the second quarter of 2011 as compared to the third quarter of 2010. The intercompany sales of our wholesale segment are eliminated against the intercompany purchases of our retail segment in the consolidated financial statements.
Retail
     Retail sales for the second quarter of 2011 of $269.6 million were $29.7 million or 12.4% higher than retail sales in the second quarter of 2010. The retail sales at our Party City stores (including converted FCPO stores) totaled $250.3 million and were $26.3 million or 11.8%, higher than in 2010. Party City same-store sales increased 6.0% during 2011, driven by a 1.9% increase in average transaction size and a 4.1% increase in transaction count. The increase in sales is partially attributable to the successful shift in our principal advertising strategy from free

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standing newspaper inserts to a national broadcasting campaign. The increase in Party City store sales also reflects the net addition of 22 stores during the twelve months ended June 30, 2011, including the net acquisition of 19 stores from franchisees, and the conversion of 44 stores from the FCPO store format to the Party City store format. During the second quarter of 2011, sales at stores converted from the FCPO format to Party City during the twelve months ended June 30, 2011 were 15.3% higher than sales at these same stores during the second quarter of 2010. Converted FCPO stores will be included in Party City’s same-store sales beginning with the thirteenth month following conversion. Our e-commerce sales totaled $13.8 million in the second quarter of 2011 and were $7.3 million or 111.3% higher than in the second quarter of 2010, reflecting continued performance in the online channel following the successful re-launch of the PartyCity.com website in August 2009, mainly driven by our national advertising campaign, coupled with other online initiatives. Sales at all other store formats, including unconverted FCPO and outlet stores, totaled $5.5 million and were $3.9 million or 41.6% lower than in 2010. The decrease reflects the net closure of 23 stores during the twelve months ended June 30, 2011, and the impact of liquidating non-conforming FCPO inventories prior to the stores’ remerchandising and rebranding.
   Royalties and franchise fees
     Royalties and franchise fees for the second quarter of 2011 were $4.6 million and comparable to the second quarter of 2010, as the negative impact on royalty income from our acquisition of 19 franchise stores, net, during the twelve months ended June 30, 2011 was offset principally by the impact of increased same-store sales at remaining franchise stores.
   Gross Profit
     Our total margin on net sales for the second quarter of 2011 was 39.8%, or 40 basis points lower than in the second quarter of 2010. The following table sets forth our gross profit on net sales for the three months ended June 30, 2011 and 2010.
                                 
    Three Months Ended June 30,  
    2011     2010  
    Dollars in     Percentage of     Dollars in     Percentage of  
    Thousands     Sales     Thousands     Sales  
 
                               
Wholesale
  $ 51,880       36.6 %   $ 42,203       37.4 %
Retail
    111,835       41.5 %     99,637       41.5 %
 
                       
 
                               
Total
  $ 163,715       39.8 %   $ 141,840       40.2 %
 
                       
     The gross profit margin on net sales at wholesale for the second quarter of 2011 was 36.6% or 80 basis points lower than in the second quarter of 2010. The decrease in wholesale gross profit margin reflects the mix shift associated with our recent international acquisitions, the Christy’s Group and Riethmüller, which have lower historical gross profit margins relative to our wholesale operations. Wholesale gross profit margin, excluding the impact of the Christy’s Group and Riethmüller acquisitions, was 37.7% in the second quarter of 2011 compared to 37.4% in the second quarter of 2010.
     Retail gross profit margin for the second quarter of 2011 and 2010 was 41.5%. During the second quarter of 2011, 66.4% of our retail store sales were products supplied by our wholesale operations, compared to 68.3% for 2010.
   Operating expenses
     Wholesale selling expenses of $14.5 million for the second quarter of 2011 were $3.6 million higher than for the second quarter of 2010. The increase in 2011 wholesale selling expense, as compared to 2010, principally reflects the additional expenses related to the acquisitions of the Christy’s Group and Riethmüller of $1.9 million and $1.3 million, respectively, as well as inflationary increases in compensation and employee benefits. Wholesale selling expenses were 6.8% of total wholesale sales in the second quarter of 2011 compared to 5.9% for the comparable quarter of 2010.
     Retail operating expenses for the second quarter of 2011 totaled $72.4 million or $8.0 million higher than in the second quarter of 2010, principally reflecting additional costs associated with the national broadcasting campaign and the growth in our retail store base and our e-commerce business. E-commerce costs reflect additional

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distribution, website and customer service costs. The increase in retail operating expenses also reflects inflationary increases in retail expenses. As a percent of retail sales, retail operating expenses were 26.8% for the second quarter of 2011 and 2010. Franchise expenses for the second quarter of 2011 of $3.4 million were $0.2 million, or 7.0% higher than in the second quarter of 2010.
As a percentage of total revenues, general and administrative expenses decreased to 7.4% for the second quarter of 2011, compared to 8.1% for the second quarter of 2010. General and administrative expenses for the quarter totaled $31.0 million, or $2.1 million higher than in the second quarter of 2010, principally due to the additional expenses related to the acquisitions of the Christy’s Group and Riethmüller of $0.7 million and $1.4 million, respectively, as well as inflationary compensation and employee benefit cost increases. These increases were partially offset by nonrecurring costs incurred in the second quarter of 2010 relating to the restructure of the FCPO corporate office in Naperville, Illinois.
Art and development costs of $4.1 million for the quarter ended June 30, 2011 were $0.4 million or 12.3% higher than in the second quarter of 2010, principally reflecting increases in personnel, compensation and employee benefits. As a percentage of total revenues, art and development costs were 1.0% in the second quarter of 2011 and 2010.
   Interest expense, net
     Interest expense of $20.3 million for the quarter ended June 30, 2011 was $11.2 million higher than for the second quarter of 2010, reflecting the increase in the New ABL Facility and New Term Loan Credit Agreement interest rates and a $326.6 million increase in our term loan borrowings following the New ABL Facility and New Term Loan Credit Agreement refinancings in August and December of 2010, respectively.
   Other expense, net
     Other expense, net, was $0.2 million for the second quarter of 2011 compared to $0.1 million for the second quarter of 2010. Other expense, net, principally consists of our share of (income) loss from an unconsolidated balloon distribution joint venture in Mexico, foreign currency (gains) losses and acquisition related expenses.
   Income tax expense
     The income tax expense for the quarters ended June 30, 2011 and 2010 were determined based upon the Company’s estimated consolidated effective income tax rates of 36.3% and 35.7% for the years ending December 31, 2011 and 2010, respectively. The differences between the estimated consolidated effective income tax rate and the U.S. federal statutory rate are primarily attributable to state income taxes and available domestic manufacturing deductions.
     In addition, the income tax expense for the quarter ended June 30, 2011 reflects the settlement of the audit of the Company’s 2008 and 2009 federal tax returns and the settlement of the audit of several 2007 and 2008 state income tax returns. Also, the income tax expense for the quarter ended June 30, 2010 reflects the settlement of the Company’s 2007 federal tax return.

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Six Months Ended June 30, 2011 Compared To Six Months Ended June 30, 2010
     The following tables set forth our operating results and operating results as a percentage of total revenues for the six months ended June 30, 2011 and 2010.
                                 
    Six Months Ended June 30,  
    2011     2010  
            (dollars in thousands)          
 
                               
Revenues:
                               
Net sales
  $ 764,003       98.9 %   $ 657,084       98.8 %
Royalties and franchise fees
    8,231       1.1       8,297       1.2  
 
                       
 
                               
Total revenues
    772,234       100.0       665,381       100.0  
Expenses:
                               
Cost of sales
    472,801       61.2       410,765       61.7  
Wholesale selling expenses
    28,319       3.7       21,235       3.2  
Retail operating expenses
    134,216       17.4       117,376       17.6  
Franchise expenses
    6,736       0.9       6,273       0.9  
General and administrative expenses
    62,500       8.1       58,807       8.8  
Art and development costs
    8,032       1.0       7,269       1.1  
 
                       
 
                               
Total expenses
    712,604       92.3       621,725       93.3  
 
                       
 
                               
Income from operations
    59,630       7.7       43,656       6.7  
Interest expense, net
    40,680       5.3       18,427       2.8  
Other expense, net
    247       0.0       53       0.0  
 
                       
 
                               
Income before income taxes
    18,703       2.4       25,176       3.9  
Income tax expense
    6,617       0.9       9,013       1.4  
 
                       
 
                               
Net income
    12,086       1.5       16,163       2.5  
Less net income attributable to noncontrolling interests
    117       0.0       114       0.0  
 
                       
 
                               
Net income attributable to Amscan Holdings, Inc.
  $ 11,969       1.5 %   $ 16,049       2.5 %
 
                       
   Revenues
     Total revenues for the six months ended June 30, 2011 were $772.2 million, or 16.1% higher than for the six months ended June 30, 2010, reflecting growth in both reporting segments. The following table sets forth our total revenues for the quarters ended June 30, 2011 and 2010, respectively.
                                 
    Six Months Ended June 30,  
    2011     2010  
            Percentage of             Percentage of  
    Dollars in     Total     Dollars in     Total  
    Thousands     Revenue     Thousands     Revenue  
 
                               
Revenues
                               
Sales
                               
Wholesale
  $ 413,547       53.6 %   $ 344,424       51.8 %
Eliminations
    (139,288 )     (18.0) %     (125,734 )     (18.9) %
 
                       
Net wholesale
    274,259       35.5 %     218,690       32.9 %
 
                               
Retail
    489,744       63.4 %     438,394       65.9 %
 
                       
Total net sales
    764,003       98.9 %     657,084       98.8 %
 
                               
Franchise related
    8,231       1.1 %     8,297       1.2 %
 
                       
Total revenues
  $ 772,234       100.0 %   $ 665,382       100.0 %
 
                       

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Wholesale
     Net sales for the first six months of 2011 of $274.3 million were $55.6 million or 25.4% higher than net sales for the corresponding quarter of 2010. Net sales to domestic party goods retailers, including our franchisee network, and to other domestic party goods distributors during the first six months of 2011 totaled $134.5 million and were $5.3 million or 4.1% higher than 2010 sales. The increase in sales reflects the benefit of Designware product sales during the entire six months ended June 30, 2011 compared to less than four full months in 2010, which represented an increase of $0.8 million. In addition, sales of party accessories, plasticware and wearable products were higher than in the first six months of 2010 due, in part, to increased marketing. Net sales of metallic balloons of $52.6 million were $3.2 million or 6.4% higher than in the first six months of 2010, principally driven by an increase in sales of our value price balloon line to the dollar store channel. International sales totaled $87.2 million and were $47.1 million higher than in the first six months of 2010, principally reflecting additional sales as a result of the acquisition of the Christy’s Group in September 2010 and Riethmüller in late January 2011 of $14.6 million and $29.1 million, respectively. In addition, changes in foreign currency exchange rates resulted in a 7.7% increase in international sales over 2010.
     Intercompany sales to our retail affiliates of $139.3 million were $13.6 million or 10.8% higher than in the first six months of 2010 and represented 33.7% of total wholesale sales in the first six months of 2011 compared to 36.5% in the first six months of 2010. The increase in intercompany sales principally reflects the impact of the acquisition of Designware and the conversion of an additional 44 FCPO retail stores to the Party City format and the re-merchandising of the stores to carry a greater percentage of our wholesale product. During the first six months of 2011, our wholesale sales to our retail stores represented 62.8% of the retail stores’ total purchases, compared to 66.2% in 2010. The decrease, as a percentage of total purchases, is attributable to the accelerated timing of purchases of third party Halloween products in the second quarter of 2011, as compared to 2010. The intercompany sales of our wholesale segment are eliminated against the intercompany purchases of our retail segment in the consolidated financial statements.

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Retail
     Retail sales for the first six months of 2011 of $489.7 million were $51.3 million or 11.7% higher than retail sales in the first six months of 2010. The retail sales at our Party City stores (including converted FCPO stores) totaled $453.2 million and were $44.4 million or 10.9%, higher than in 2010. Party City same-store sales increased 5.3% during 2011, driven by a 2.5% increase in average transaction size and a 2.8% increase in transaction count. The increase in sales is partially attributable to the successful shift in our principal advertising strategy from free standing newspaper inserts to a national broadcasting campaign. The increase in Party City store sales also reflects the net addition of 22 stores during the twelve months ended June 30, 2011, including the net acquisition of 19 stores from franchisees, and the conversion of 44 FCPO stores to the Party City format. During the first six months of 2011, sales at stores converted from the FCPO format to Party City during the twelve months ended June 30, 2011 were 15.6% higher than sales at these same stores during the first six months of 2010. Converted FCPO stores will be included in Party City’s same-store sales beginning with the thirteenth month following conversion. Our e-commerce sales totaled $26.0 million in the first six months of 2011 and were $13.6 million or 109.9% higher than in the first six months of 2010, reflecting continued performance in the online channel following the successful re-launch of the PartyCity.com website in August 2009, mainly driven by our naional advertising campaign and other online initiatives. Sales at all other store formats, including unconverted FCPO and outlet stores, totaled $10.5 million and were $6.7 million or 38.7% lower than in 2010. The decrease reflects the net closure of 23 stores during the twelve months ended June 30, 2011, and the impact of liquidating non-conforming FCPO inventories prior to the stores’ remerchandising and rebranding.
   Royalties and franchise fees
     Royalties and franchise fees for the first six months of 2011 were $8.2 million and comparable to the first six months of 2010, as the negative impact on royalty income from our acquisition of 19 franchise store, net, during the twelve months ended June 30, 2011 was offset principally by the impact of increased same-store sales at remaining franchise stores.
   Gross Profit
     Our total margin on net sales for the six months ended June 30, 2011 was 38.1%, or 60 basis points higher than in the six months ended June 30, 2010. The following table sets forth our gross profit on net sales for the six months ended June 30, 2011 and 2010.
                                 
    Six Months Ended June 30,  
    2011     2010  
    Dollars in     Percentage of     Dollars in     Percentage of  
    Thousands     Sales     Thousands     Sales  
Wholesale
  $ 96,052       35.0 %   $ 80,078       36.6 %
Retail
    195,150       39.8 %     166,242       37.9 %
 
                       
 
                               
Total
  $ 291,202       38.1 %   $ 246,320       37.5 %
 
                       
     The gross profit margin on net sales at wholesale for the first six months of 2011 was 35.0% or 160 basis points lower than in the first six months of 2010. The decrease in wholesale gross profit margin reflects the mix shift associated with our recent international acquisitions, the Christy’s Group and Riethmüller, which have lower historical gross profit margins relative to our wholesale operations. Wholesale gross profit margin, excluding the impact of the Christy’s Group and Riethmüller acquisitions, was 36.8% in the first six months of 2011 compared to 36.6% in the first six months of 2010.
     Retail gross profit margin for the first six months of 2011 was 39.8% or 190 basis points higher than in the first six months of 2010, principally due to a greater percentage of products sold at retail that were manufactured or sourced by us, including Designware products, and the realization of higher previously deferred manufacturing and distribution margin in the first six months of 2011 compared to the first six months of 2010. During the six months ended June 30, 2011, 65.4% of our retail store sales were products supplied by our wholesale operations, compared to 63.1% for 2010.

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   Operating expenses
     Wholesale selling expenses of $28.3 million for the first six months of 2011 were $7.1 million higher than for the first six months of 2010. The increase in 2011 wholesale selling expense, as compared to 2010, principally reflects the additional expenses related to the acquisitions of the Christy’s Group and Riethmüller of $3.6 million and $2.3 million, respectively, as well as inflationary increases in compensation and employee benefits. Wholesale selling expenses were 6.8% of total wholesale sales in the first six months of 2011 compared to 6.2% in the first six months of 2010.
     Retail operating expenses for the first six months of 2011 totaled $134.2 million or $16.8 million higher than in the first six months of 2010, principally reflecting additional costs associated with the national broadcasting campaign and the growth in our retail store base and our e-commerce business. E-commerce costs reflect additional distribution, website and customer service costs. The increase in retail operating expenses also reflects inflationary increases in retail expenses. As a percent of retail sales, retail operating expenses were 27.4% for the first six months of 2011, as compared to 26.8% for the first six months of 2010. Franchise expenses for the first six months of 2011 of $6.7 million were $0.5 million or 7.4% higher than in the first six months of 2010.
     As a percentage of total revenues, general and administrative expenses decreased to 8.1% for the first six months of 2011, compared to 8.8% for the first six months of 2010. General and administrative expenses for the quarter totaled $62.5 million, or $3.7 million higher than in the first six months of 2010, principally due to the additional expenses related to the acquisitions of the Christy’s Group and Riethmüller of $1.3 million and $3.4 million, respectively, as well as inflationary compensation and employee benefit cost increases. These increases were substantially offset by the non-recurring costs incurred in the first six months of 2010 relating to the restructure of the FCPO corporate office in Naperville, Illinois as well as higher legal and professional costs in the first six months of 2010.
     Art and development costs of $8.0 million for the quarter ended June 30, 2011 were $0.8 million or 10.5% higher than in the first six months of 2010, principally reflecting increases in personnel, compensation and employee benefits. As a percentage of total revenues, art and development costs were 1.0% and 1.1% in the first six months of 2011 and 2010, respectively.
   Interest expense, net
     Interest expense of $40.7 million for the quarter ended June 30, 2011 was $22.3 million higher than for the first six months of 2010, reflecting the increase in the New ABL Facility and New Term Loan Credit Agreement interest rates and a $326.6 million increase in our term loan borrowings following the New ABL Facility and New Term Loan Credit Agreement refinancing in August and December of 2010, respectively.
   Other expense, net
     Other expense, net, was $0.2 million for the first six months of 2011 compared to $0.1 million for the first six months of 2010. Other expense, net, principally consists of our share of (income) loss from an unconsolidated balloon distribution joint venture in Mexico, foreign currency (gains) losses and acquisition related expenses.
   Income tax expense
     The income tax expense for the six months ended June 30, 2011 and 2010 were determined based upon the Company’s estimated consolidated effective income tax rates of 36.3% and 35.7% for the years ending December 31, 2011 and 2010, respectively. The differences between the estimated consolidated effective income tax rate and the U.S. federal statutory rate are primarily attributable to state income taxes and available domestic manufacturing deductions.
     In addition, the income tax expense for the six months ended June 30, 2011 reflects the settlement of the audit of the Company’s 2008 and 2009 federal tax returns and the settlement of the audit of several 2007 and 2008 state income tax returns. Also, the income tax expense for the six months ended June 30, 2010 reflects the settlement of the Company’s 2007 federal tax return.

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Liquidity
     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 the New ABL Facility and the New Term Loan Agreement in an amount sufficient to enable us to repay our indebtedness, including the notes, or to fund our other liquidity needs.
   Cash Flow Data — Six Months Ended June 30, 2011 Compared To Six Months Ended June 30, 2010
     Net cash provided by operating activities totaled $49.5 million during the six months ended June 30, 2011, as compared to $6.7 million during the comparable six months ended June 30, 2010. Net cash flow provided by operating activities before changes in operating assets and liabilities was $46.9 million during the six months ended June 30, of 2011 and $43.2 million during the comparable six months ended June 30, 2010. Changes in operating assets and liabilities during the first six months of 2011 and 2010 resulted in the source of cash of $2.6 million and a use of cash $36.5 million, respectively, and principally reflect the timing of certain seasonal trade and income tax payments.
     Net cash used in investing activities totaled $84.5 million during the six months ended June 30, 2011, as compared to $28.3 million during the comparable six month period of 2010. Investing activities during the six months ended June 30, 2011 included $47.1 million paid in connection with the acquisition of Riethmüller, $4.0 million paid in connection with the acquisition of Christy’s, and $9.5 million paid in connection with the purchase of retail franchise stores. Capital expenditures totaled $24.1 million during the six months ended June 30, 2011 compared to $23.2 million in the six months ended June 30, 2010. Retail capital expenditures totaled $17.6 million in 2011 and were principally for new stores and store renovations, while wholesale capital expenditures, principally for printing plates and dies and distribution equipment, totaled $6.5 million.
     Net cash provided by financing activities was $27.3 million during the six months ended June 30, 2011, compared to $24.0 million in the six months ended June 30, 2010 and principally reflects borrowings under our revolving credit facility, net of scheduled term debt repayment.
     Required repayments under our term debt for the remainder of 2011 will be $3.4 million. At June 30, 2011, we had $127.4 million of excess availability under the New ABL Facility.
Legal Proceedings
     The Company is a party to certain claims and litigation in the ordinary course of business. The Company does not believe any of these proceedings will result, individually or in the aggregate, in a material adverse effect on its financial condition or future results of operations.
Seasonality
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 our quarterly results of wholesale operations has been limited.
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 its sales in October for the Halloween season and, to a lesser extent, due to our year-end holiday sales. We believe this general pattern will continue in the future. 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 and store closings and the timing of potential acquisitions and dispositions of stores.

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Cautionary Note Regarding Forward-Looking Statements
     This quarterly report on Form 10-Q contains “forward-looking statements” including statements about the adequacy of our liquidity and the seasonality of our retail operations. Forward-looking statements give our current expectations or forecasts of future events. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “project” or “continue” or the negative thereof and similar words. From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. Any or all of our forward-looking statements in this quarterly report and in any public statements we make may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks or uncertainties. Consequently, no forward-looking statement can be guaranteed. Actual results may vary materially. Investors are cautioned not to place undue reliance on any forward-looking statements. Important factors that could cause actual results to differ materially from the forward-looking statements include, but are not limited to: our inability to satisfy our debt obligations, the reduction of volume of purchases by one or more of our large customers, our inability to collect receivables from our customers, the termination of our licenses, our inability to identify and capitalize on changing design trends and customer preferences, changes in the competitive environment, increases in the costs of raw materials and the possible risks and uncertainties that have been noted in reports filed by us with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2010.
Item 3. 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 have utilized 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 three months ended June 30, 2011 and 2010, our interest expense, after considering the effects of our interest rate swap agreements, would have increased by $3.7 million and $1.5 million, respectively. The income before income taxes for the quarters ended June 30, 2011 and 2010 would also have decreased by the same amounts. If market interest rates for our variable rate indebtedness averaged 2% more than the interest rate actually paid for the six months ended June 30, 2011 and 2010, our interest expense, after considering the effects of our interest rate swap agreements, would have increased by $7.3 million and $3.0 million, respectively. The income before income taxes for the quarters ended June 30, 2011 and 2010 would also have decreased by the same amounts. 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, predominantly the British Pound Sterling and the Euro, 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 U.S. dollar relative to the currencies in which our foreign sales are denominated would have resulted in a decrease in operating income of $4.0 million and $1.4 million for the three months ended June 30, 2011 and 2010 and 7.0 million and 2.7 million for the six months ended June 30, 2011 and 2010, 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 4. Controls and Procedures
     We have carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2011 pursuant to Rules l3a-15(b) and l5d-15(b) of the Securities Exchange Act of 1934, as amended (the “Act”). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’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.
     There were no changes in our internal control over financial reporting (as defined in Rules l3a-15(f) and l5d-15(f) under the Act) during the six months ended June 30, 2011 identified in connection with the evaluation by our management, including our Chief Executive Officer and Chief Financial Officer, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II
Item 6. Exhibits
     
31.1
  Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
 
   
31.2
  Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
 
   
32
  Certification of Chief Executive and Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURE
     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  AMSCAN HOLDINGS, INC.
 
 
  By:   /s/ Michael A. Correale    
    Michael A. Correale   
    Chief Financial Officer (on behalf of the registrant and as principal financial and accounting officer)   
 
Date: August 15, 2011

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