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 September 30, 2011


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		13-3911462
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

80 Grasslands Road Elmsford, NY		10523
(Address of Principal Executive Offices)		(Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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	Smaller reporting company o
		(Do not check if a smaller reporting company)

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

As of November 14, 2011, 1,000.00 shares of the Registrant’s common stock were outstanding.

AMSCAN HOLDINGS, INC.
FORM 10-Q

September 30, 2011

TABLE OF CONTENTS


	Page
PART I
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at September 30, 2011 and December 31, 2010		3
Condensed Consolidated Income Statements for the Three Months Ended September 30, 2011 and 2010		4
Condensed Consolidated Income Statements for the Nine Months Ended September 30, 2011 and 2010		5
Condensed Consolidated Statement of Stockholders’ Equity for the Nine Months Ended September 30, 2011		6
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010		7
Notes to Condensed Consolidated Financial Statements		8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		29
Item 3. Quantitative and Qualitative Disclosures About Market Risk		40
Item 4. Controls and Procedures		40
PART II
Item 6. Exhibits		42
Signature		43
EX-31.1
EX-31.2
EX-32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

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

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

AMSCAN HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share and per share amounts)


	September 30,			December 31,
	2011			2010
	(unaudited)			(Note 3)
ASSETS
Current assets:
Cash and cash equivalents	$	19,484		$	20,454
Accounts receivable, net of allowances		143,971			107,331
Inventories, net of allowances		523,135			424,317
Prepaid expenses and other current assets		78,756			65,672

Total current assets		765,346			617,774
Property, plant and equipment, net		208,148			190,729
Goodwill		685,448			630,492
Trade names		133,370			129,954
Other intangible assets, net		47,931			55,362
Other assets, net		26,528			28,840

Total assets	$	1,866,771		$	1,653,151


LIABILITIES, REDEEMABLE COMMON SECURITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Loans and notes payable	$	263,398		$	150,098
Accounts payable		187,258			108,172
Accrued expenses		131,694			111,054
Income taxes payable		32,414			34,325
Redeemable warrants		—			15,086
Current portion of long-term obligations		8,845			9,046

Total current liabilities		623,609			427,781
Long-term obligations, excluding current portion		834,910			841,112
Deferred income tax liabilities		93,947			94,981
Deferred rent and other long-term liabilities		20,748			14,766

Total liabilities		1,573,214			1,378,640

Redeemable common securities (including 1,172.56 and 597.52 Class A common shares issued and outstanding at September 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 September 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 September 30, 2011 and December 31, 2010		—			—
Additional paid-in capital		286,257			287,583
Retained deficit		(21,512	)		(27,558	)
Accumulated other comprehensive loss		(9,345	)		(5,915	)

Amscan Holdings, Inc. stockholders’ equity		255,400			254,110
Noncontrolling interests		2,392			2,312

Total stockholders’ equity		257,792			256,422

Total liabilities, redeemable common securities and stockholders’ equity	$	1,866,771		$	1,653,151

See accompanying notes to unaudited condensed consolidated financial statements.

AMSCAN HOLDINGS, INC.

CONDENSED CONSOLIDATED INCOME STATEMENTS

(Unaudited)

(Amounts in thousands)


	Three Months Ended
	September 30,
	2011			2010
Revenues:
Net sales	$	436,186		$	358,772
Royalties and franchise fees		3,962			4,035

Total revenues		440,148			362,807

Expenses:
Cost of sales		288,147			226,335
Wholesale selling expenses		14,651			10,524
Retail operating expenses		82,740			73,785
Franchise expenses		3,558			2,930
General and administrative expenses		35,554			27,495
Art and development costs		4,222			3,775

Total expenses		428,872			344,844

Income from operations		11,276			17,963

Interest expense, net		19,572			9,834
Other expense, net		703			704

(Loss) income before income taxes		(8,999	)		7,425

Income tax (benefit) expense		(3,179	)		2,752

Net (loss) income		(5,820	)		4,673
Less: net income attributable to noncontrolling interest		102			70

Net (loss) income attributable to Amscan Holdings, Inc.	$	(5,922	)	$	4,603

See accompanying notes to unaudited condensed consolidated financial statements.

AMSCAN HOLDINGS, INC.

CONDENSED CONSOLIDATED INCOME STATEMENTS

(Unaudited)

(Amounts in thousands)


	Nine Months Ended
	September 30,
	2011		2010
Revenues:
Net sales	$	1,200,188	$	1,015,856
Royalties and franchise fees		12,193		12,333

Total revenues		1,212,381		1,028,189

Expenses:
Cost of sales		760,947		637,100
Wholesale selling expenses		42,970		31,759
Retail operating expenses		216,956		191,161
Franchise expenses		10,294		9,203
General and administrative expenses		98,055		86,302
Art and development costs		12,254		11,044

Total expenses		1,141,476		966,569

Income from operations		70,905		61,620

Interest expense, net		60,252		28,261
Other expense, net		950		758

Income before income taxes		9,703		32,601

Income tax expense		3,438		11,766

Net income		6,265		20,835
Less: net income attributable to noncontrolling interest		219		184

Net income attributable to Amscan Holdings, Inc.	$	6,046	$	20,651

See accompanying notes to unaudited condensed consolidated financial statements.

AMSCAN HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

Nine Months Ended September 30, 2011

(Unaudited)

(Amounts in thousands, except share amounts)


														Amscan
	Class A and Class B										Accumulated			Holdings,
					Additional						Other			Inc.
	Common		Common		Paid-in			Retained			Comprehensive			Stockholders’			Noncontrolling			Total
	Shares		Stock		Capital			Deficit			Loss			Equity			Interests			Equity

Balance at December 31, 2010		30,226.50		—	$	287,583		$	(27,558	)	$	(5,915	)	$	254,110		$	2,312		$	256,422
Net income									6,046						6,046			219			6,265
Net change in cumulative translation adjustment												(4,662	)		(4,662	)		(139	)		(4,801	)
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												(182	)		(182	)					(182	)


Comprehensive income															2,616			80			2,696
Exercise of warrants to redeemable common stock						(4	)								(4	)					(4	)
Exercise of stock options to redeemable common stock						(106	)								(106	)					(106	)
Exercise of non-redeemable warrants		740.74
Exercise of non-redeemable common stock options		2.78				28									28						28
Equity based compensation expense						949									949						949
Revaluation of redeemable shares						(2,193	)								(2,193	)					(2,193	)

Balance at September 30, 2011		30,970.02		—	$	286,257		$	(21,512	)	$	(9,345	)	$	255,400		$	2,392		$	257,792

See accompanying notes to unaudited condensed consolidated financial statements.

AMSCAN HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Amounts in thousands)


	Nine Months Ended September 30,
	2011			2010
Cash flows provided by (used in) operating activities:
Net income	$	6,265		$	20,835
Less: net income attributable to noncontrolling interest		219			184

Net income attributable to Amscan Holdings, Inc.		6,046			20,651
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization expense		43,084			36,676
Amortization of deferred financing costs		3,606			2,142
Provision for doubtful accounts		599			838
Deferred income tax (benefit) expense		(615	)		660
Deferred rent		5,811			1,546
Undistributed income in unconsolidated joint venture		(589	)		(382	)
Loss on disposal of equipment		196			259
Equity based compensation		1,065			513
Changes in operating assets and liabilities, net of effects of acquisitions:
Increase in accounts receivable		(30,446	)		(29,588	)
Increase in inventories		(71,182	)		(130,625	)
Increase in prepaid expenses and other current assets		(13,932	)		(12,972	)
Increase in accounts payable, accrued expenses and income taxes payable		82,946			108,782

Net cash provided by (used in) operating activities		26,589			(1,500	)

Cash flows used in investing activities:
Cash paid in connection with acquisitions, net of cash acquired		(95,627	)		(35,630	)
Capital expenditures		(36,269	)		(36,100	)
Proceeds from disposal of property and equipment		52			147

Net cash used in investing activities		(131,844	)		(71,583	)

Cash flows provided by financing activities:
Repayment of long-term obligations		(7,581	)		(49,157	)
Borrowings under loans and notes payable		113,300			128,851
Proceeds from exercise of stock options		199			52

Net cash provided by financing activities		105,918			79,746

Effect of exchange rate changes on cash and cash equivalents		(1,633	)		660

Net (decrease) increase in cash and cash equivalents		(970	)		7,323

Cash and cash equivalents at beginning of period		20,454			15,420

Cash and cash equivalents at end of period	$	19,484		$	22,743


Supplemental disclosure of cash flow information:
Cash paid during the period
Interest	$	48,471		$	22,500
Income taxes	$	5,128		$	36,780

See accompanying notes to unaudited condensed consolidated financial statements.

AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share and per 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 and Canada, principally under the names Party City, Halloween City and Party Packagers. The Company also 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 July 29, 2011, the Company acquired all of the common stock of Party Packagers for $31,783 in cash in a transaction accounted for as a purchase business combination. Party Packagers is a Canadian retailer of party goods and outdoor toys. The results of this newly acquired business are included in the consolidated financial statements since the July 29, 2011 acquisition date and are reported in the operating results of the Company’s Retail segment.

The preliminary estimate of the excess of the purchase price over the tangible assets acquired is initially being assigned to goodwill. The following summarizes the estimated fair value of the assets and liabilities acquired: accounts receivable of $284, inventory of $11,643, fixed assets of $4,456, other current and non-current assets of $270, and accounts payable and other current liabilities of $8,341. The remaining $23,471 has been initially recorded as goodwill. The allocation of the purchase price is based on our preliminary estimate 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, giving the Company a significant retail presence in Canada.

On January 30, 2011, the Company acquired all of the common stock of Riethmüller GmbH (“Riethmüller”) for $47,069 in cash, 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 following summarizes the estimated fair value of the assets and liabilities acquired: accounts receivable of $14,498, inventory of $14,828, fixed assets of $11,504, amortizable intangible assets of $1,638 and accounts payable and other current liabilities of $13,714. The remaining $18,315 has been initially recorded as goodwill. The allocation of the purchase price is based on our preliminary estimate 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 nine months ended September 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.

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

The excess of the purchase price over the tangible assets and identified intangible assets acquired was assigned to goodwill. The following summarizes the 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 $26,103 has been recorded as goodwill. The allocation of the purchase price is based on the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed.

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 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 nine months ended September 30, 2011, the Company acquired three franchisee stores located in California, one store located in Iowa and four stores located in Texas for total consideration of $12,801 in cash. The fair value of the assets acquired were $3,298 of inventory and $680 of fixed assets. The remaining $8,823 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 from the acquisition of franchise and independent stores because the purchase price reflects the value of the geographic location of each acquired store, as well as their maturity and historical profitability. The excess of the purchase price over the fair value of the tangible assets acquired is deductible for tax purposes over 15 years.

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

Note 3 — Basis of Presentation

The accompanying unaudited condensed consolidated financial statements as of September 30, 2011 and for the three and nine months ended September 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.

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 combine 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 nine months ended September 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:


	September 30,			December 31,
	2011			2010
Finished goods	$	512,757		$	416,831
Raw materials		14,122			11,879
Work in process		6,639			6,112


		533,518			434,822
Reserve for slow-moving and obsolete inventory		(10,383	)		(10,505	)


	$	523,135		$	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.

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

Note 5 — Loans and Notes Payable

On September 12, 2011, the Company entered into an agreement with Wells Fargo Bank, National Association (“Wells Fargo), under which Wells Fargo agreed to increase its commitment by $25,000, under the terms of the Company’s asset based revolving credit facility dated August 13, 2010, as amended (the “ABL Credit Agreement”). The increase results in an aggregate commitment for extensions of credit under the ABL Credit Agreement of $350,000.

In connection with the acquisitions of the Christy’s Group, Riethmüller and Party Packagers, during the nine months ended September 30, 2011, the Company entered into several foreign asset-based and overdraft credit facilities that provide the Company with GBP19,000, CDN4,000, EUR1,800 and MYR5,000 of borrowing capacity. At September 30, 2011, borrowings under the foreign facilities totaled $12,808. Borrowings under the foreign facilities generally bear interest at prime plus margins ranging from 1% to 1.75%. The facilities contain customary affirmative and negative covenants. In connection with one of the facilities, the Company maintains a compensating cash balance of $4,266 to secure outstanding standby letters of credit. The compensating cash balance is included in prepaid expenses and other current assets.

Note 6 — Income Taxes

The income tax (benefit) expense for the three and nine months ended September 30, 2011 and 2010 were determined based upon the Company’s estimated consolidated effective income tax rates of 36.2% and 36.4% for the years ending December 31, 2011 and 2010, respectively. The differences between the estimated consolidated effective income tax rate and the U.S. federal statutory rate are primarily attributable to state income taxes and available domestic manufacturing deductions.

In addition, the income tax (benefit) expense for the three and nine months ended September 30, 2011 reflects the settlement of the audits of the Company’s 2008 and 2009 federal tax returns and the settlement of the audits of several 2007 and 2008 state income tax returns. Also, the income tax expense for the three and nine months ended September 30, 2010 reflects the settlement of the audit of the Company’s 2007 federal tax return and the expiration of state statutes of limitations resolving previously unrecognized tax benefits.

Note 7 — 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 September 30, 2011, the Company spent $8,087 in restructuring costs, including $53 and $481 spent in the three and nine months ended September 30, 2011, respectively. The Company expects to spend an additional $155 on restructuring costs in 2011 and the remaining balance of $859 in 2012.

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

Note 8 — Comprehensive (Loss) Income

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


	Three months ended						Nine months ended
	September 30,						September 30,
	2011			2010			2011			2010
Net (loss) income attributable to Amscan Holdings, Inc.	$	(5,922	)	$	4,603		$	6,046		$	20,651
Net change in cumulative translation adjustment		(8,212	)		2,993			(4,662	)		886
Change in fair value of interest rate swap contracts, net of income tax expense of $-, $804, $830, and $1,040		—			1,370			1,414			1,771
Change in fair value of foreign exchange contracts, net of income tax expense (benefit) of $22, $(206), $(107), and $135		38			(351	)		(182	)		230


Comprehensive (loss) income	$	(14,096	)	$	8,615		$	2,616		$	23,538

Note 9 — Capital Stock

At September 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 September 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.

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

Certain employee stockholders owned 1,172.56 and 597.52 shares of the Company’s Class A common stock at September 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 $34,708 at September 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 $1,057 and $1,542 on the Company’s balance sheets as of September 30, 2011 and December 31, 2010, respectively.

During the third quarter of 2011 the President exercised his 20.29 rollover options.

The changes in redeemable securities during the nine months ended September 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		878		(601	)		277
Common stock revaluation		2,193		116			2,309

Balance September 30, 2011	$	34,708	$	1,057		$	35,765

Note 10 — Segment Information

Industry Segments

The Company has two identifiable business segments. The Wholesale segment includes the design, manufacture, contract for manufacture and wholesale distribution of party goods, including paper and plastic tableware, metallic and latex balloons, accessories, novelties, costumes, other garments, gifts and stationery. The Retail segment includes the operation of company-owned retail party supply superstores in the United States and Canada, 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.

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

The Company’s industry segment data for the three months ended September 30, 2011 and 2010 is as follows:


	Wholesale			Retail			Consolidated
Three Months Ended September 30, 2011
Revenues:
Net sales	$	293,932		$	264,548		$	558,480
Royalties and franchise fees		—			3,962			3,962

Total revenues		293,932			268,510			562,442
Eliminations		(122,294	)		—			(122,294	)

Net revenues	$	171,638		$	268,510		$	440,148


Income (loss) from operations	$	33,214		$	(21,938	)	$	11,276
Interest expense, net								19,572
Other expense, net								703

Loss before income taxes							$	(8,999	)

Depreciation and amortization	$	6,098		$	9,747		$	15,845

Total assets	$	1,117,054		$	749,717		$	1,866,771


	Wholesale			Retail			Consolidated
Three Months Ended September 30, 2010
Revenues:
Net sales	$	219,976		$	229,856		$	449,832
Royalties and franchise fees		—			4,035			4,035

Total revenues		219,976			233,891			453,867
Eliminations		(91,060	)		—			(91,060	)

Net revenues	$	128,916		$	233,891		$	362,807


Income (loss) from operations	$	28,260		$	(10,297	)	$	17,963
Interest expense, net								9,834
Other expense, net								704

Income before income taxes							$	7,425


Depreciation and amortization	$	5,162		$	7,808		$	12,970

Total assets	$	962,547		$	756,960		$	1,719,507

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

The Company’s industry segment data for the nine months ended September 30, 2011 and 2010 is as follows:


	Wholesale			Retail			Consolidated
Nine Months Ended September 30, 2011
Revenues:
Net sales	$	707,478		$	754,292		$	1,461,770
Royalties and franchise fees		—			12,193			12,193

Total revenues		707,478			766,485			1,473,963
Eliminations		(261,582	)		—			(261,582	)

Net revenues	$	445,896		$	766,485		$	1,212,381


Income (loss) from operations	$	75,800		$	(4,895	)	$	70,905
Interest expense, net								60,252
Other expense, net								950

Income before income tax benefit							$	9,703


Depreciation and amortization	$	16,515		$	26,569		$	43,084

Total assets	$	1,117,054		$	749,717		$	1,866,771


	Wholesale			Retail			Consolidated
Nine Months Ended September 30, 2010
Revenues:
Net sales	$	564,400		$	668,250		$	1,232,650
Royalties and franchise fees		—			12,333			12,333

Total revenues		564,400			680,583			1,244,983
Eliminations		(216,794	)		—			(216,794	)

Net revenues	$	347,606		$	680,583		$	1,028,189


Income (loss) from operations	$	66,850		$	(5,230	)	$	61,620
Interest expense, net								28,261
Other expense, net								758

Income before income tax benefit							$	32,601


Depreciation and amortization	$	14,678		$	21,998		$	36,676

Total assets	$	962,547		$	756,960		$	1,719,507

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

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.

Note 11 — 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 12 — Stock Option Plan

The Company recorded $256 and $237 of stock-based compensation in general and administrative expenses during the three months ended September 30, 2011 and 2010 and $1,065 and $513 during the nine months ended September 30, 2011 and 2010, respectively. Stock-based compensation expense for the nine months ended September 30, 2011 included a charge of $116 arising from the revaluation of redeemable common stock options held by the CEO and President.

In addition, the Company made a cash distribution to holders of vested time options granted before December, 2010 of $98 during the three months ended September 30, 2011, and $507 during the nine months ended September 30, 2011.

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. These options vest at a rate of 20% per year and are exercisable at $27,700 per share. 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 2004 Equity Incentive Plan. These options vest 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 three and nine months ended September 30, 2011, 20.29 and 33.07 options were exercised, respectively. There are options to purchase 3,777.37 shares of common stock outstanding at September 30, 2011.

Note 13 — 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 foreign currency exchange rate risk and interest rate risk.

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 September 30, 2011 and December 31, 2010, the Company had foreign currency exchange contracts with notional amounts of $4,884 and $13,468, respectively, and net liability and asset fair values of $(92) 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 September 30, 2011 and December 31, 2010 resulted in an unrealized net loss of $(58) 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.

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 September 30, 2011, the Company had no interest rate swap agreements. 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 September 22, 2011.

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

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 September 30, 2011 and December 31, 2010, which are measured at fair value on a recurring basis:


			Significant
	Quoted Prices in		Other
	Active Markets for		Observable			Unobservable		Total as of
	Identical Assets or		Inputs			Inputs		September 30,
	Liabilities (Level 1)		(Level 2)			(Level 3)		2011
Derivative assets		—	$	8			—	$	8
Derivative liabilities		—		(100	)		—		(100	)


			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 September 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:


	September 30, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Term Loans	$	662,337	$	655,714	$	666,644	$	674,060
Senior Subordinated Notes		175,000		176,750		175,000		176,750

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

The carrying amounts for other long-term debt approximate fair value at September 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 September 30, 2011 and December 31, 2010.


					Derivative Assets						Derivative Liabilities
					September 30,			December 31,			September 30,				December 31,
					2011			2010			2011				2010
	Notional Amounts				Balance			Balance			Balance				Balance
	September 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		4,884		13,468	(a) PP		8	(a) PP		241	(b) AE		(100	)	(b) AE		(44	)


Total Hedges	$	4,884	$	148,842		$	8		$	241		$	(100	)		$	(2,288	)


(a)		PP = Prepaid expenses and other current assets

(b)		AE = Accrued expenses

Note 14 — Recently Issued Accounting Pronouncements

In September 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. 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.

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

The amendments are effective for the first interim or annual period beginning on or after September 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 September 15, 2011. We do not anticipate any material impact from this update.

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.

	•		Party Packagers

	•		Riethmüller GmbH

The following information presents condensed consolidating balance sheets at September 30, 2011 and December 31, 2010, the condensed consolidating statements of operations for the three months ended September 30, 2011 and 2010, and the related condensed consolidating statements of cash flows for the three months ended September 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.

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

CONDENSED CONSOLIDATING BALANCE SHEET
September 30, 2011


	Amscan
	Holdings,
	Inc. and			Combined
	Combined			Non-
	Guarantors			Guarantors			Eliminations			Consolidated
	(Amounts in thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	12,336		$	7,148		$	—		$	19,484
Accounts receivable , net of allowances		93,458			50,513			—			143,971
Inventories, net of allowances		466,228			58,266			(1,359	)		523,135

Prepaid expenses and other current assets		66,807			12,458			(509	)		78,756

Total current assets		638,829			128,385			(1,868	)		765,346
Property, plant and equipment, net		190,569			17,579			—			208,148
Goodwill		609,483			75,965			—			685,448
Trade names		129,740			3,630			—			133,370
Other intangible assets, net		47,931			—			—			47,931
Investment in and advances to unconsolidated subsidiaries		260,633			—			(260,633	)		—
Due from affiliates		82,005			71,027			(153,032	)		—
Other assets, net		25,737			791			—			26,528

Total assets	$	1,984,927		$	297,377		$	(415,533	)	$	1,866,771


LIABILITIES, REDEEMABLE COMMON SECURITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Loans and notes payable		250,590			12,808			—			263,398
Accounts payable		157,454			29,804			—			187,258
Accrued expenses		113,272			18,422			—			131,694
Income taxes payable		33,075			—			(661	)		32,414
Due to affiliates		68,540			84,492			(153,032	)		—
Current portion of long-term obligations		8,806			39			—			8,845

Total current liabilities		631,737			145,565			(153,693	)		623,609
Long-term obligations, excluding current portion		834,854			56			—			834,910
Deferred income tax liabilities		93,347			600			—			93,947
Other		19,382			1,366			—			20,748

Total liabilities		1,579,320			147,587			(153,693	)		1,573,214

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		399,492			113,893			(227,128	)		286,257
Retained (deficit) earnings		(20,305	)		42,069			(43,276	)		(21,512	)
Accumulated other comprehensive loss		(9,345	)		(8,900	)		8,900			(9,345	)


Amscan Holdings, Inc. stockholders’ equity		369,842			147,398			(261,840	)		255,400

Noncontrolling interests		—			2,392			—			2,392


Total stockholders’ equity		369,842			149,790			(261,840	)		257,792


Total liabilities, redeemable common securities and stockholders’ equity	$	1,984,927		$	297,377		$	(415,533	)	$	1,866,771

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			5,816			(1,355	)		65,672

Total current assets		557,560			62,587			(2,373	)		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		$	110,001		$	(102,004	)	$	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			—			(1,381	)		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			42,561			(36,527	)		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			43,204			(36,527	)		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		(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		$	110,001		$	(102,004	)	$	1,653,151

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

CONDENSED CONSOLIDATING INCOME STATEMENT
Three Months Ended September 30, 2011
(Amounts in thousands)


	Amscan
	Holdings, Inc.
	and Combined			Combined Non-
	Guarantors			Guarantors		Eliminations			Consolidated
Revenues:
Net sales	$	374,233		$	73,419	$	(11,466	)	$	436,186
Royalties and franchise fees		3,962			—		—			3,962

Total revenues		378,195			73,419		(11,466	)		440,148

Expenses:
Cost of sales		243,750			55,730		(11,333	)		288,147
Wholesale selling expenses		8,376			6,275		—			14,651
Retail operating expenses		79,941			2,799		—			82,740
Franchise expenses		3,558			—		—			3,558
General and administrative expenses		30,247			4,887		420			35,554
Art and development costs		4,159			63		—			4,222

Total expenses		370,031			69,754		(10,913	)		428,872

Income from operations		8,164			3,665		(553	)		11,276

Interest expense, net		19,397			175		—			19,572
Other (income) expense , net		(1,728	)		580		1,851			703

(Loss) income before income taxes		(9,505	)		2,910		(2,404	)		(8,999	)
Income tax (benefit) expense		(3,666	)		536		(49	)		(3,179	)

Net (loss) income		(5,839	)		2,374		(2,355	)		(5,820	)
Less net income attributable to noncontrolling interests		—			102		—			102

Net (loss) income attributable to Amscan Holdings, Inc.	$	(5,839	)	$	2,272	$	(2,355	)	$	(5,922	)

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

CONDENSED CONSOLIDATING INCOME STATEMENT
Nine Months Ended September 30, 2011
(Amounts in thousands)


	Amscan
	Holdings, Inc.
	and Combined			Combined Non-
	Guarantors			Guarantors			Eliminations			Consolidated
Revenues:
Net sales	$	1,057,969		$	171,777		$	(29,558	)	$	1,200,188
Royalties and franchise fees		12,193			—			—			12,193

Total revenues		1,070,162			171,777			(29,558	)		1,212,381

Expenses:
Cost of sales		659,582			130,582			(29,217	)		760,947
Wholesale selling expenses		24,866			18,104			—			42,970
Retail operating expenses		214,156			2,800			—			216,956
Franchise expenses		10,294			—			—			10,294
General and administrative expenses		84,080			13,975			—			98,055
Art and development costs		12,049			205			—			12,254

Total expenses		1,005,027			165,666			(29,217	)		1,141,476

Income from operations		65,135			6,111			(341	)		70,905

Interest expense, net		59,627			625			—			60,252
Other (income) expense, net		(3,168	)		(416	)		4,534			950

Income before income taxes		8,676			5,902			(4,875	)		9,703
Income tax expense		2,416			1,148			(126	)		3,438

Net income		6,260			4,754			(4,749	)		6,265
Less net income attributable to noncontrolling interests		—			219			—			219

Net income attributable to Amscan Holdings, Inc.	$	6,260		$	4,535		$	(4,749	)	$	6,046

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

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended September 30, 2010
(Amounts in thousands)


	Amscan Holdings,
	Inc. and Combined			Combined Non-
	Guarantors			Guarantors			Eliminations			Consolidated
Revenues:
Net sales	$	332,781		$	31,854		$	(5,863	)	$	358,772
Royalties and franchise fees		4,035			—			—			4,035

Total revenues		336,816			31,854			(5,863	)		362,807

Expenses:
Cost of sales		209,516			22,741			(5,922	)		226,335
Wholesale selling expenses		7,728			2,796			—			10,524
Retail operating expenses		73,785			—			—			73,785
Franchise expenses		2,930			—			—			2,930
General and administrative expenses		25,625			2,200			(330	)		27,495
Art and development costs		3,802			(27	)		—			3,775

Total expenses		323,386			27,710			(6,252	)		344,844

Income from operations		13,430			4,144			389			17,963

Interest expense, net		9,817			17			—			9,834
Other (income) expense, net		(3,753	)		148			4,309			704

Income before income taxes		7,366			3,979			(3,920	)		7,425
Income tax expense		3,189			1,509			(1,946	)		2,752

Net income		4,177			2,470			(1,974	)		4,673
Less net income attributable to noncontrolling interests		—			70			—			70

Net income attributable to Amscan Holdings, Inc.	$	4,177		$	2,400		$	(1,974	)	$	4,603

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

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Nine Months Ended September 30, 2010
(Amounts in thousands)


	Amscan
	Holdings, Inc.
	and Combined			Combined Non-
	Guarantors			Guarantors			Eliminations			Consolidated
Revenues:
Net sales	$	955,977		$	77,309		$	(17,430	)	$	1,015,856
Royalties and franchise fees		12,333			—			—			12,333

Total revenues		968,310			77,309			(17,430	)		1,028,189

Expenses:
Cost of sales		599,003			55,486			(17,389	)		637,100
Wholesale selling expenses		23,900			7,859			—			31,759
Retail operating expenses		191,161			—			—			191,161
Franchise expenses		9,203			—			—			9,203
General and administrative expenses		80,717			6,575			(990	)		86,302
Art and development costs		11,117			(73	)		—			11,044

Total expenses		915,101			69,847			(18,379	)		966,569

Income from operations		53,209			7,462			949			61,620

Interest expense, net		28,213			48			—			28,261
Other (income) expense, net		(7,646	)		487			7,917			758

Income before income taxes		32,642			6,927			(6,968	)		32,601
Income tax expense		11,781			2,323			(2,328	)		11,766

Net income		20,861			4,604			(4,630	)		20,835
Less net income attributable to noncontrolling interests		—			184			—			184

Net income attributable to Amscan Holdings, Inc.	$	20,861		$	4,420		$	(4,630	)	$	20,651

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

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Nine Months Ended September 30, 2011
(Amounts in thousands)


	Amscan
	Holdings, Inc.
	and			Combined
	Combined			Non-
	Guarantors			Guarantors			Eliminations			Consolidated
Cash flows provided by (used in) operating activities:
Net income		6,261			4,753			(4,749	)		6,265
Net income attributable to noncontrolling interest		—			219			—			219

Net income attributable to Amscan Holdings, Inc.	$	6,261		$	4,534		$	(4,749	)	$	6,046

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization expense		40,139			2,945			—			43,084
Amortization of deferred financing costs		3,606			—			—			3,606
Provision for doubtful accounts		301			298			—			599
Deferred income tax benefit		(615	)		—			—			(615	)
Deferred rent		5,839			(28	)		—			5,811
Undistributed income in unconsolidated joint venture		(589	)		—			—			(589	)
Loss on disposal of equipment		133			63			—			196
Equity based compensation		1,065			—			—			1,065
Changes in operating assets and liabilities, net of effects of acquisitions:
Increase in accounts receivable		(17,196	)		(13,250	)		—			(30,446	)
Increase in inventories		(58,143	)		(13,380	)		341			(71,182	)
Increase in prepaid expenses and other current assets		(7,369	)		(6,563	)		—			(13,932	)
Increase in accounts payable, accrued expenses and income taxes payable		62,091			16,447			4,408			82,946

Net cash provided by (used) in operating activities		35,523			(8,934	)		—			26,589

Cash flows used in investing activities:
Cash paid in connection with acquisitions, net of cash acquired		(95,627	)		—			—			(95,627	)
Capital expenditures		(34,578	)		(1,691	)		—			(36,269	)
Proceeds from disposal of property and equipment		36			16			—			52


Net cash used in investing activities		(130,169	)		(1,675	)		—			(131,844	)

Cash flows provided by financing activities:
Repayments of loans, notes payable and long-term obligations		(7,549	)		(32	)		—			(7,581	)
Proceeds from loans, notes payable and long-term obligations		100,491			12,809			—			113,300
Capital contributions and proceeds from issuance of common stock and exercise of options, net of retirements		199			—			—			199

Net cash provided by financing activities		93,141			12,777			—			105,918
Effect of exchange rate changes on cash and cash equivalents		(357	)		(1,276	)		—			(1,633	)

Net (decrease) increase in cash and cash equivalents		(1,862	)		892			—			(970	)
Cash and cash equivalents at beginning of period		14,198			6,256			—			20,454


Cash and cash equivalents at end of period	$	12,336		$	7,148		$	—		$	19,484

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

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Nine Months Ended September 30, 2010
(Amounts in thousands)


	Amscan
	Holdings, Inc.
	and			Combined
	Combined			Non-
	Guarantors			Guarantors			Eliminations			Consolidated
Cash flows (used in) provided by operating activities:
Net income		20,861			4,604			(4,630	)		20,835
Net income attributable to noncontrolling interest		—			184			—			184

Net income attributable to Amscan Holdings, Inc.	$	20,861		$	4,420		$	(4,630	)	$	20,651

Adjustments to reconcile net income attributable to Amscan Holdings, Inc. to net cash (used in) provided by operating activities:
Depreciation and amortization expense		36,006			670			—			36,676
Amortization of deferred financing costs		2,142			—			—			2,142
Provision for doubtful accounts		658			180			—			838
Deferred income tax expense		660			—			—			660
Deferred rent		1,546			—			—			1,546
Undistributed income in unconsolidated joint venture		(382	)		—			—			(382	)
Loss (gain) on disposal of equipment		266			(7	)		—			259
Equity based compensation		513			—			—			513
Changes in operating assets and liabilities, net of effects of acquisitions:
Increase in accounts receivable		(24,966	)		(4,622	)		—			(29,588	)
Increase in inventories		(129,152	)		(1,565	)		92			(130,625	)
Increase in prepaid expenses and other current assets		(11,773	)		(1,199	)		—			(12,972	)
Increase in accounts payable, accrued expenses and income taxes payable		100,936	)		3,308			4,538			108,782

Net cash (used in) provided by operating activities		(2,685	)		1,185			—			(1,500	)

Cash flows used in investing activities:
Cash paid in connection with acquisitions, net of cash acquired		(35,632	)		2			—			(35,630	)
Capital expenditures		(35,343	)		(757	)		—			(36,100	)
Proceeds from disposal of property and equipment		109			38			—			147

Net cash used in investing activities		(70,866	)		(717	)		—			(71,583	)

Cash flows provided by financing activities:
Repayments of loans, notes payable and long-term obligations		(49,136	)		(21	)		—			(49,157	)
Proceeds from loans, notes payable and long-term obligations		128,812			39			—			128,851
Capital contributions and proceeds from issuance of common stock and exercise of options, net of retirements		52			—			—			52

Net cash provided by financing activities		79,728			18			—			79,746
Effect of exchange rate changes on cash and cash equivalents		(131	)		791			—			660

Net increase in cash and cash equivalents		6,046			1,277			—			7,323
Cash and cash equivalents at beginning of period		13,599			1,821			—			15,420

Cash and cash equivalents at end of period	$	19,645		$	3,098		$	—		$	22,743

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 approximately 30 locations in Canada 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 and international sales accounted for 86% and 14%, respectively, of our total wholesale sales in 2010 and 77% and 23%, respectively, during the first nine months of 2011. International wholesale sales are expected to increase as a result of our recent acquisitions and the further maturation of international party supply markets.

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 the 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.

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, to total sales, 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 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 September 30, 2011 Compared To Three Months Ended September 30, 2010

The following tables set forth our operating results and operating results as a percentage of total revenues for the three months ended September 30, 2011 and 2010.


	Three Months Ended September 30,
	2011					2010
	(dollars in thousands)
Revenues:
Net sales	$	436,186		99.1	%	$	358,772	98.9	%
Royalties and franchise fees		3,962		0.9			4,035	1.1

Total revenues		440,148		100.0			362,807	100.0

Expenses:
Cost of sales		288,147		65.5			226,335	62.4
Wholesale selling expenses		14,651		3.3			10,524	2.9
Retail operating expenses		82,740		18.8			73,785	20.3
Franchise expenses		3,558		0.8			2,930	0.8
General and administrative expenses		35,554		8.1			27,495	7.6
Art and development costs		4,222		1.0			3,775	1.0

Total expenses		428,872		97.5			344,844	95.0


Income from operations		11,276		2.5			17,963	5.0
Interest expense, net		19,572		4.4			9,834	2.7
Other expense, net		703		0.2			704	0.2


(Loss) income before income tax (benefit) expense		(8,999	)	(2.1	)		7,425	2.1
Income tax (benefit) expense		(3,179	)	(0.7	)		2,752	0.8


Net (loss) income		(5,820	)	(1.4	)		4,673	1.3
Less net income attributable to noncontrolling interests		102		0.0			70	0.0


Net (loss) income attributable to Amscan Holdings, Inc.	$	(5,922	)	(1.4	)%	$	4,603	1.3	%

Revenues

Total revenues for the third quarter of 2011 were $440.1 million or 21.3% higher than for the third quarter of 2010. The following table sets forth our total revenues for the quarters ended September 30, 2011 and 2010, respectively.


	Three Months Ended September 30,
	2011						2010
				Percentage of						Percentage of
	Dollars in			Total			Dollars in			Total
	Thousands			Revenue			Thousands			Revenue
Revenues
Sales
Wholesale	$	293,932			66.8	%	$	219,976			60.6	%
Eliminations		(122,294	)		(27.8	)%		(91,060	)		(25.1	)%

Net wholesale		171,638			39.0	%		128,916			35.5	%

Retail		264,548			60.1	%		229,856			63.4	%

Total net sales		436,186			99.1	%		358,772			98.9	%

Franchise related		3,962			0.9	%		4,035			1.1	%

Total revenues	$	440,148			100.0	%	$	362,807			100.0	%

Wholesale

Net wholesale sales for the third quarter of 2011 of $171.6 million were $42.7 million, or 33.1%, higher than net sales for the corresponding quarter of 2010. During the third quarter of 2011 net sales to domestic party goods retailers, including our franchisee network, and to other domestic party goods distributors totaled $87.6 million and were $3.4 million, or 4.1% higher, than during the quarter ended September 30, 2010. The increase in sales was principally attributable to an increase in Halloween products shipped directly to our franchise stores under a distribution center bypass program, including $3.1 million of synergistic sales of Christy’s Halloween and other costumes. Net sales of metallic balloons of $25.2 million were $2.6 million or 11.6% higher than in the third quarter of 2010, principally driven by an increase in domestic and international sales of custom balloons as well as increased sales to mass market retailers. International sales totaled $58.8 million and were $36.7 million higher than in the third quarter of 2010, principally reflecting the acquisitions of the Christy’s Group in September 2010 and Riethmüller in late January 2011, which added sales of $24.3 million and $11.7 million, respectively, in the third quarter of 2011.

Intercompany sales to our retail affiliates of $122.3 million were $31.2 million or 34.3% higher than in the third quarter of 2010 and represented 41.6% of total wholesale sales in the third quarter of 2011, compared to 41.4% in the third quarter of 2010. The increase in intercompany sales also reflects an increase in Halloween products shipped under the distribution center bypass program, including $8.1 million of synergistic sales of Christy’s Halloween and other costumes. The increase in intercompany sales also reflects the re-merchandising, during the past twelve months, of an additional 34 FCPO retail stores to the Party City format, as such stores carry a greater percentage of our wholesale products. During the third quarter of 2011, our wholesale sales to our permanent retail stores represented 61.0% of the retail stores’ total purchases, compared to 54.4% in 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 third quarter of 2011 of $264.5 million were $34.7 million, or 15.1%, higher than retail sales in the third quarter of 2010. The retail sales at our Party City stores (including converted FCPO stores)

totaled $203.6 million and were $17.8 million, or 9.6%, higher than in 2010. Party City same-store sales increased 1.4% during the third quarter of 2011, driven by a 2.3% increase in average transaction dollar size, which was partially offset by a 0.9% decrease in transaction count. The increase in Party City store sales also reflects the net addition of 29 new stores during the twelve months ended September 30, 2011, including the net acquisition of 23 stores from franchisees, and the conversion of 34 stores from the FCPO format to the Party City format during that time period. During the third quarter of 2011, sales at stores converted from the FCPO format to the Party City format during the last twelve months were 21.9% higher than sales at these same stores during the third 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 $18.4 million in the third quarter of 2011 and were $9.8 million or 114.6% higher than in the third quarter of 2010, driven, in part, by our shift to a national broadcast advertising campaign coupled with other successful online initiatives implemented since our re-launch of the PartyCity.com website in August 2009. Net sales at our temporary Halloween City stores totaled $13.4 million or $2.1 million higher than in the third quarter of 2010. The Party Packager stores acquired at the end of July 2011 added net sales of $8.2 million to the quarter. Sales at all other store formats, including unconverted FCPO and outlet stores, totaled $20.9 million and were $3.2 million or 13.4% lower than in 2010. The decrease principally reflects the net closure of 19 stores during the twelve months ended September 30, 2011.

Royalties and franchise fees

Royalties and franchise fees for the third quarter of 2011, $4.0 million, were comparable to the third quarter of 2010, as the negative impact on royalty income from our acquisition of 23 franchise stores, net, during the twelve months ended September 30, 2011 was offset by the impact of increased same-store sales at the remaining franchise stores.

Gross Profit

Our total margin on net sales for the third quarter of 2011 was 33.9% or 300 basis points lower than in the third quarter of 2010. The following table sets forth our gross profit on net sales for the three months ended September 30, 2011 and 2010.


	Three Months Ended September 30,
	2011					2010
	Dollars in		Percentage of			Dollars in		Percentage of
	Thousands		Sales			Thousands		Sales
Wholesale	$	58,854		34.3	%	$	48,132		37.3	%
Retail		89,185		33.7	%		84,304		36.7	%


Total	$	148,039		33.9	%	$	132,436		36.9	%

The gross profit margin on net sales at wholesale for the third quarter of 2011 was 34.3% or 300 basis points lower than in the third quarter of 2010. The decrease in wholesale gross profit margin reflects the dilutive impact of our recent international acquisitions, the Christy’s Group and Riethmüller, which have lower gross profit margins relative to our historical wholesale operations. The impact of the Christy’s Group and Riethmüller on wholesale gross profit margin was 220 basis points of the decline in the third quarter of 2011. The remaining 80 basis points of the decline reflected a combination of increased sales of lower margin products, including distribution center bypass sales, and increases in certain raw material, product and freight costs.

Retail gross profit margin for the third quarter of 2011 was 33.7% or 300 basis points lower than in the third quarter of 2010. Retail margins were affected by several factors including margin compression as a result of increased promotional activity. In addition, during the third quarter of 2011, our domestic retail store sales of our wholesale product decreased slightly, from 63.3% in 2010 to 62.1% in 2011 and, as the Company has yet to fully implement product synergies at Party Packagers, its inclusion in the results for the third quarter of 2011 further reduces the percentage of our products sold, and the gross profit margin, at our retail stores. Additionally, retail margin was also negatively affected during the quarter ended September 30, 2011 by the timing of temporary Halloween City store occupancy expenses.

Operating expenses

Wholesale selling expenses of $14.7 million for the third quarter of 2011 were $4.1 million higher than for the third quarter of 2010. The increase in 2011 wholesale selling expense principally reflects the additional expenses from 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 5.0% of total wholesale sales in the third quarter of 2011, compared to 4.8% for the comparable quarter of 2010.

Retail operating expenses for the third quarter of 2011 totaled $82.7 million, which was $9.0 million higher than in the third quarter of 2010. The increase in retail operating expenses for the third quarter of 2011 reflects the growth in our retail store base, including $2.8 million of expenses from the acquisition of Party Packagers, and the growth in our e-commerce operations. E-commerce costs reflect additional distribution, website and customer service costs. The increase in retail operating expenses also reflects additional costs associated with a national broadcasting campaign and inflationary increases in retail expenses. As a percent of retail sales, retail operating expenses were 31.3% for the third quarter of 2011, compared to 32.1% for the third quarter of 2010. Franchise expenses for the third quarter of 2011 of $3.6 million were $0.6 million, or 21.4%, higher than in the third quarter of 2010, principally due to an increase in commissions paid to franchisees on e-commerce sales originating in their territories.

General and administrative expenses for the quarter totaled $35.6 million, or $8.1 million higher than in the third quarter of 2010, principally due to additional expenses from the acquisitions of the Christy’s Group, Riethmüller, and Party Packagers, of $0.7 million, $1.8 million and $0.9 million, respectively, as well as the timing of certain costs related to the Company’s temporary Halloween City store operations. The increase in general and administrative expenses for the third quarter of 2011 also reflects inflationary compensation and employee benefit cost increases. As a percentage of total revenues, general and administrative expenses were 8.1% for the third quarter of 2011, compared to 7.6% for the third quarter of 2010.

Art and development costs of $4.2 million for the quarter ended September 30, 2011 were $0.4 million, or 11.8%, higher than in the third quarter of 2010, reflecting increases in personnel, compensation and employee benefits. As a percentage of total revenues, art and development costs were 1.0% for the third quarter of both 2011 and 2010.

Interest expense, net

Interest expense of $19.6 million for the quarter ended September 30, 2011 was $9.7 million higher than the third quarter of 2010. The increase reflects higher interest rates and a $326.6 million increase in our term loan borrowings following the New ABL Facility refinancing in August 2010 and the New Term Loan Credit Agreement refinancing in December 2010, the proceeds of which were used to make a dividend distribution.

Other expense, net

Other expense, net, totaled $0.7 million for the third quarter of 2011 and 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 (benefit) expense for the three months ended September 30, 2011 and 2010 were determined based upon the Company’s estimated consolidated effective income tax rates of 36.2% and 36.4% for the years ending December 31, 2011 and 2010, respectively. The differences between the estimated consolidated effective income tax rate and the U.S. federal statutory rate are primarily attributable to state income taxes and available domestic manufacturing deductions.

In addition, the income tax (benefit) expense for the three months ended September 30, 2011 reflects the settlement of the audits of the Company’s 2008 and 2009 federal tax returns and the settlement of the audits of several 2007 and 2008 state income tax returns. Also, the income tax expense for the three months ended September 30, 2010 reflects the settlement of the audit of the Company’s 2007 federal tax return and the expiration of state statutes of limitations resolving previously unrecognized tax benefits.

Nine Months Ended September 30, 2011 Compared To Nine Months Ended September 30, 2010

The following tables set forth our operating results and operating results as a percentage of total revenues for the nine months ended September 30, 2011 and 2010.


	Nine Months Ended September 30,
	2011					2010
			(dollars in thousands)
Revenues:
Net sales	$	1,200,188		99.0	%	$	1,015,8566	98.8	%
Royalties and franchise fees		12,193		1.0			12,333	1.2

Total revenues		1,212,381		100.0			1,028,189	100.0

Expenses:
Cost of sales		760,947		62.8			637,100	62.0
Wholesale selling expenses		42,970		3.5			31,759	3.1
Retail operating expenses		216,956		17.9			191,161	18.6
Franchise expenses		10,294		0.8			9,203	0.9
General and administrative expenses		98,055		8.1			86,302	8.4
Art and development costs		12,254		1.0			11,044	1.1

Total expenses		1,141,476		94.1			966,569	94.1


Income from operations		70,905		5.9			61,620	5.9

Interest expense, net		60,252		5.0			28,261	2.7
Other expense, net		950		0.1			758	0.1


Income before income taxes		9,703		0.8			32,601	3.1
Income tax expense		3,438		0.3			11,766	1.1


Net income		6,265		0.5			20,835	2.0
Less net income attributable to noncontrolling interests		219		0.0			184	0.0


Net income attributable to Amscan Holdings, Inc.	$	6,046		0.5	%	$	20,651	2.0	%

Revenues

Total revenues for the nine months ended September 30, 2011 were $1,212.4 million, or 17.9% higher than for the nine months ended September 30, 2010. The following table sets forth our total revenues for the nine months ended September 30, 2011 and 2010, respectively.


	Nine Months Ended September 30,
	2011						2010
				Percentage of						Percentage of
	Dollars in			Total			Dollars in			Total
	Thousands			Revenue			Thousands			Revenue
Revenues
Sales
Wholesale	$	707,478			58.4	%	$	564,400			54.9	%
Eliminations		(261,582	)		(21.6	)%		(216,794	)		(21.1	)%

Net wholesale		445,896			36.8	%		347,606			33.8	%
Retail		754,292			62.2	%		668,250			65.0	%

Total net sales		1,200,188			99.0	%		1,015,856			98.8	%
Franchise related		12,193			1.0	%		12,333			1.2	%

Total revenues	$	1,212,381			100.0	%	$	1,028,189			100.0	%

Wholesale

Net wholesale sales for the first nine months of 2011 of $445.9 million were $98.3 million or 28.3% higher than net sales for the first nine months of 2010. During the first nine months of 2011, net sales to domestic party goods retailers, including our franchisee network, and to other domestic party goods distributors totaled $222.1 million and were $8.8 million, or 4.1%, higher than during the corresponding period of 2010. The increase in sales was principally attributable to an increase in Halloween products shipped directly to our franchise stores under a distribution center bypass program including $3.1 million of synergistic sales of Christy’s Halloween and other costumes. In addition, sales for the nine months ended September 30, 2011 benefited from nearly three additional months of Designware product sales or $0.4 million compared to 2010. Net sales of metallic balloons of $77.8 million were $5.8 million or 8.1% higher than in the first nine months of 2010, with the sales growth occurring across most channels, including domestic and international balloon distributors, dollar stores and custom. International sales totaled $146.0 million and were $83.7 million higher than in the first nine months of 2010, principally reflecting the acquisition of the Christy’s Group in September 2010 and Riethmüller in late January 2011, which added sales of $38.9 million and $40.8 million, respectively, in the first nine months of 2011. 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 $261.6 million were $44.8 million, or 20.7%, higher than during the first nine months of 2010 and represented 37.0% of total wholesale sales in the first nine months of 2011, compared to 38.4% in the first nine months of 2010. The increase in intercompany sales also reflects an increase in Halloween products shipped under the distribution center bypass program, including $8.1 million of synergistic sales of Christy’s Halloween and other costumes and the re-merchandising, during the past twelve months, of an additional 34 FCPO retail stores to the Party City format, as such stores carry a greater percentage of our wholesale products. The increase in intercompany sales also reflects the benefit from nearly three additional months of Designware product sales compared to 2010, which represented an increase of $0.6 million in the nine months of 2011. During the first nine months of 2011, our wholesale sales to our permanent retail stores represented 62.1% of the retail stores’ total purchases, compared to 61.0% in 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 first nine months of 2011 of $754.3 million were $86.0 million or 12.9% higher than retail sales in the first nine months of 2010. The retail sales at our Party City stores (including converted FCPO stores) totaled $610.9 million and were $62.1 million or 11.3% higher than in 2010. Party City same-store sales increased 4.0% during the nine months ended September 30, 2011, driven by a 2.5% increase in average transaction dollar size and a 1.5% 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 29 new stores during the twelve months ended September 30, 2011, including the net acquisition of 23 stores from franchisees, and the conversion of 34 FCPO stores to the Party City format during that time period. During the first nine months of 2011, sales at stores converted from the FCPO format to Party City during the last twelve months were 17.4% higher than sales at these same stores during the first nine 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 $44.4 million in the first nine months of 2011 and were $23.4 million, or 118.2%, higher than in the first nine months of 2010, driven, in part, by our shift to the national broadcast advertising campaign coupled with other successful online initiatives implemented since our re-launch of the PartyCity.com website in August 2009. Net sales at our temporary Halloween City stores of $13.4 million, were $2.1 million higher than the nine months ended September 30, 2010. The Party Packagers stores acquired at the end of July 2011 added net sales of $8.2 million during the nine months of 2011. Sales at all other store formats, including unconverted FCPO and outlet stores, totaled $77.4 million and were $9.8 million or 11.3% lower than in 2010. The decrease principally reflects the net closure of 19 stores during the twelve months ended September 30, 2011.

Royalties and franchise fees

Royalties and franchise fees of $12.2 million for the first nine months of 2011 were comparable to the first nine months of 2010, as the negative impact on royalty income from our acquisition of 23 franchise stores, net, during the twelve months ended September 30, 2011 was offset by the impact of increased same-store sales at the remaining franchise stores.

Gross Profit

Our total margin on net sales for the nine months ended September 30, 2011 was 36.6% or 70 basis points lower than for the nine months ended September 30, 2010. The following table sets forth our gross profit on net sales for the nine months ended September 30, 2011 and 2010.


	Nine Months Ended September 30,
	2011					2010
	Dollars in		Percentage of			Dollars in		Percentage of
	Thousands		Sales			Thousands		Sales
Wholesale	$	154,906		34.7	%	$	128,210		36.9	%
Retail		284,335		37.7	%		250,546		37.5	%


Total	$	439,241		36.6	%		378,756		37.3	%

The gross profit margin on net sales at wholesale for the first nine months of 2011 was 34.7% or 220 basis points lower than for the first nine months of 2010. The decrease in wholesale gross profit margin reflects the dilutive impact of our recent international acquisitions, the Christy’s Group and Riethmüller, which have lower gross profit margins relative to our historical wholesale operations. The impact of the Christy’s Group and Riethmüller on wholesale gross profit margin was 200 basis points of the decline in the first nine months of 2011. The remaining 20 basis points of the decline reflected a combination of increased sales of lower margin products, including distribution center bypass sales, and increases in certain raw material, product and freight costs.

Retail gross profit margin for the first nine months of 2011 was 37.7% or 20 basis points higher than in the first nine months of 2010, as the impact of a greater percentage of our wholesale products sold at retail and the realization of higher previously deferred manufacturing and distribution margin in the first nine months of 2011 compared to the first nine months of 2010 were partially offset by the inclusion of lower margin Party Packager sales and the timing of temporary Halloween City store occupancy expenses. During the nine months ended

September 30, 2011, 64.3% of our domestic retail store sales were products supplied by our wholesale operations, compared to 63.6% for 2010.

Operating expenses

Wholesale selling expenses of $43.0 million for the first nine months of 2011 were $11.2 million, or 35.3%, higher than the first nine months of 2010. The increase in wholesale selling expenses principally reflects the additional expenses of the Christy’s Group and Riethmüller of $5.4 million and $3.6 million, respectively, as well as inflationary increases in compensation and employee benefits. Wholesale selling expenses were 6.1% of total wholesale sales in the first nine months of 2011, compared to 5.6% in the first nine months of 2010.

Retail operating expenses for the first nine months of 2011 of, $217.0 million, were $25.8 million higher than for the first nine months of 2010. The increase in retail operating expenses reflects the growth in our retail store base, including $2.8 million of expenses related to the acquisition of Party Packagers, and the growth in our e-commerce operations. E-commerce costs reflect additional distribution, website and customer service costs. The increase in retail operating expenses also reflects additional costs associated with a national broadcasting campaign and inflationary increases in retail expenses. As a percent of retail sales, retail operating expenses were 28.8% for the first nine months of 2011, compared to 28.6% for the first nine months of 2010. Franchise expenses for the first nine months of 2011 of, $10.3 million, were $1.1 million, or 11.9%, higher than for the first nine months of 2010, principally due to an increase in commissions paid to franchisees on e-commerce sales originating in their territories.

As a percentage of total revenues, general and administrative expenses decreased to 8.1% for the first nine months of 2011, compared to 8.4% for the first nine months of 2010. General and administrative expenses for the nine months ended September 30, 2011, $98.1 million, were $11.8 million, or 13.6% higher than for the first nine months of 2010, principally due to additional expenses from the acquisitions of the Christy’s Group, Riethmüller and Party Packagers of $2.0 million, $5.2 million and $0.9 million, respectively, as well as the timing of certain costs related to the Company’s temporary Halloween City store operations. The increase in general and administrative expenses for the third quarter of 2011 also reflects inflationary compensation and employee benefit cost increases, which were substantially offset by nonrecurring costs incurred in the nine months ended September 30, 2010 relating to the restructuring of the FCPO corporate offices.

Art and development costs of $12.3 million for the nine months ended September 30, 2011 were $1.2 million, or 11.0%, higher than the first nine 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 nine months of 2011 and 2010, respectively.

Interest expense, net

Interest expense of $60.3 million for the nine months ended September 30, 2011 was $32.0 million higher than for the first nine months of 2010. The increase was principally due to higher interest rates and the $326.6 million increase in our term loan borrowings following the New ABL Facility refinancing in August 2010 and the New Term Loan Credit Agreement refinancing in December 2010, the proceeds of which were used to make a dividend distribution.

Other expense, net

Other expense, net, was $1.0 million for the first nine months of 2011 compared to $0.8 million for the first nine 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 nine months ended September 30, 2011 and 2010 were determined based upon the Company’s estimated consolidated effective income tax rates of 36.2% and 36.4% 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 nine months ended September 30, 2011 reflects the settlement of the audits of the Company’s 2008 and 2009 federal tax returns and the settlement of the audits of several 2007 and 2008 state income tax returns. Also, the income tax expense for the nine months ended September 30, 2010 reflects the settlement of the audit of the Company’s 2007 federal tax return and the expiration of state statutes of limitations resolving previously unrecognized tax benefits.

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 — Nine Months Ended September 30, 2011 Compared To Nine Months Ended September 30, 2010

Net cash provided by (used in) operating activities totaled $26.6 million during the nine months ended September 30, 2011, as compared to $(1.5) million during the comparable nine months ended September 30, 2010. Net cash flow provided by operating activities before changes in operating assets and liabilities was $59.2 million during the nine months ended September 30, 2011 and $62.9 million during the comparable nine months ended September 30, 2010. Changes in operating assets and liabilities during the first nine months of 2011 and 2010 resulted in uses of cash of $32.6 million and $64.4 million, respectively, principally due to increases in inventories for both our permanent and temporary stores in preparation for the Halloween selling season.

Net cash used in investing activities totaled $131.8 million during the nine months ended September 30, 2011, as compared to $71.6 million during the comparable nine month period of 2010. Investing activities during the nine months ended September 30, 2011 included $47.1 million paid in connection with the acquisition of Riethmüller, $31.8 million paid in connection with the acquisition of Party Packagers, $4.0 million paid in connection with the acquisition of the Christy’s Group, and $12.7 million paid in connection with the purchase of retail franchise stores. Capital expenditures totaled $36.3 million during the nine months ended September 30, 2011 compared to $36.1 million in the nine months ended September 30, 2010. Retail capital expenditures totaled $26.6 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 $9.7 million.

Net cash provided by financing activities was $105.9 million during the nine months ended September 30, 2011, compared to $79.7 million in the nine months ended September 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 $1.7 million. At September 30, 2011, we had $84.1 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.

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 September 30, 2011 and 2010, our interest expense, after considering the effects of our interest rate swap agreements, would have increased by $4.5 million and $1.6 million, respectively. The income before income taxes for the quarters ended September 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 nine months ended September 30, 2011 and 2010, our interest expense, after considering the effects of our interest rate swap agreements, would have increased by $11.8 million and $4.8 million, respectively. The income before income taxes for the quarters ended September 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 $4.6 million and $1.6 million for the three months ended September 30, 2011 and 2010 and $11.6 million and $4.3 million for the nine months ended September 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 September 30, 2011 pursuant to Rules 13a-15(b) and 15d-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 13a-15(f) and 15d-15(f) under the Act) during the nine months ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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
Date: November 14, 2011		Chief Financial Officer (on behalf of the registrant and as principal financial and accounting officer)

AMSCAN HOLDINGS INC 10-Q