10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)


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

For the quarterly period ended June 30, 2008


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

For the transition period from to

Commission file number 000-21827

Amscan Holdings, Inc.

(Exact Name of Registrant as Specified in Its Charter)


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

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


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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer o

Non-accelerated filer þ
(Do not check if a smaller reporting company)

Smaller reporting company o

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

As of August 14, 2008, 1,000.00 shares of Registrant’s common stock were outstanding.

AMSCAN HOLDINGS, INC.
FORM 10-Q

June 30, 2008

TABLE OF CONTENTS


	Page
PART I

Item 1 Condensed Consolidated Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets at June 30, 2008 and December 31, 2007		3

Condensed Consolidated Statements of Operations for the Three Months Ended June 30, 2008 and 2007		4

Condensed Consolidated Statements of Operations for the Six Months Ended June 30, 2008 and 2007		5

Condensed Consolidated Statement of Stockholders’ Equity for the Six Months Ended June 30, 2008		6

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2008 and 2007		7

Notes to Condensed Consolidated Financial Statements		8

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations		24

Item 3 Quantitative and Qualitative Disclosures About Market Risk		29

Item 4 Controls and Procedures		29

PART II

Item 6 Exhibits		30

Signature		31
EX -31.1 Section 302 Certification of CEO
EX-31.2 Section 302 Certification of CFO
EX-32 Section 906 Certification of CEO and CFO
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32: CERTIFICATIONS

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

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

AMSCAN HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)


	June 30,		December 31,
	2008		2007
	(Unaudited)		(Note 3)

ASSETS
Current assets:
Cash and cash equivalents	$	9,566	$	17,274
Accounts receivable, net of allowances		99,485		98,425
Inventories, net of allowances		339,893		319,621
Prepaid expenses and other current assets		53,828		62,046

Total current assets		502,772		497,366
Property, plant and equipment, net		177,036		174,198
Goodwill		547,920		558,943
Trade names		172,883		186,187
Other intangible assets, net		66,823		42,526
Other assets, net		30,759		39,625


Total assets	$	1,498,193	$	1,498,845


LIABILITIES, REDEEMABLE COMMON SECURITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Loans and notes payable	$	172,904	$	153,170
Accounts payable		94,321		120,293
Accrued expenses		92,881		94,328
Income taxes payable		12,852		12,581
Current portion of long-term obligations		8,751		8,620

Total current liabilities		381,709		388,992
Long-term obligations, excluding current portion		580,128		584,336
Deferred income tax liabilities		99,133		94,360
Deferred rent and other long-term liabilities		11,887		21,789

Total liabilities		1,072,857		1,089,477

Redeemable common securities		37,859		33,782

Commitments and contingencies

Stockholders’ equity:
Common Stock ($0.01 par value; 40,000.00 shares authorized; 30,436.96 shares issued and outstanding at both June 30, 2008 and December 31, 2007)		—		—
Additional paid-in capital		326,358		326,741
Retained earnings		58,627		46,494
Accumulated other comprehensive income		2,492		2,351


Total stockholders’ equity		387,477		375,586


Total liabilities, redeemable common securities and stockholders’ equity	$	1,498,193	$	1,498,845

See accompanying notes to unaudited condensed consolidated financial statements.

AMSCAN HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)


	Six Months Ended June 30,
	2008			2007
Cash flows provided by (used in) operating activities:
Net income (loss)	$	12,133		$	(6,862	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization expense		21,890			19,111
Amortization of deferred financing costs		977			1,141
Provision for doubtful accounts		875			429
Deferred income tax benefit		(2,512	)		(1,034	)
Deferred rent		876			2,218
Undistributed income in unconsolidated joint venture		(605	)		(49	)
Loss on disposal of equipment		65			95
Equity based compensation		1,195			853
Debt retirement costs		—			3,783
Write-off of deferred financing costs		—			6,364
Changes in operating assets and liabilities:
Increase in accounts receivable		(1,421	)		(4,044	)
Increase in inventories		(20,272	)		(3,826	)
Decrease (increase) in prepaid expenses and other current assets		10,519			(10,756	)
Decrease in accounts payable, accrued expenses and income taxes payable		(23,614	)		(40,006	)
Other, net		—			9

Net cash provided by (used in) operating activities		106			(32,574	)

Cash flows used in investing activities:
Cash paid in connection with acquisitions		—			(8,085	)
Capital expenditures		(24,488	)		(10,432	)
Proceeds from disposal of property and equipment		50			1,737

Net cash used in investing activities		(24,438	)		(16,780	)

Cash flows provided by financing activities:
Repayment of loans, notes payable and long-term obligations		(4,695	)		(394,946	)
Proceeds from loans, notes payable and long-term obligations, net of debt issuance costs		18,652			449,136
Debt retirement costs		—			(6,218	)
Proceeds from sale of additional minority interest in PCFG		2,500			—
Capital contributions and proceeds from issuance of common stock and exercise of options, net of retirements		—			2,067

Net cash provided by financing activities		16,457			50,039
Effect of exchange rate changes on cash and cash equivalents		167			705

Net (decrease) increase in cash and cash equivalents		(7,708	)		1,390
Cash and cash equivalents at beginning of period		17,274			4,966

Cash and cash equivalents at end of period	$	9,566		$	6,356

See accompanying notes to unaudited condensed consolidated financial statements.

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

Note 1 — Description of Business

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

Note 2 — Acquisitions

Party City Franchise Group Transaction

Party City completed the acquisition of 55 stores from franchisees in a series of transactions involving Party City, Party City Franchise Group Holdings, LLC (“Party City Holdings”), a majority owned subsidiary of Party City, and Party City Franchise Group, LLC (“PCFG”), a wholly-owned subsidiary of Party City Holdings, on November 2, 2007. PCFG operates the acquired 55 stores together with 11 previously owned stores in the Florida and Georgia regions.

PCFG and Party City Holdings are unrestricted subsidiaries under the Company’s existing credit facilities and the new PCFG credit facility (See Note 12) is a stand alone facility which is not guaranteed by the Company or its other subsidiaries. As part of an ongoing review of purchase price allocation, during the first quarter of 2008, the Company re-allocated $28,429 of the purchase price to other intangible assets, representing franchise rights. Trade names were reduced by $13,305 and deferred tax liability was increased by $5,550. As a result, goodwill decreased by $9,574.

The Factory Card & Party Outlet Acquisition

The Company completed its acquisition of Factory Card & Party Outlet Corp. (“FCPO”), on November 16, 2007.

Note 3 — Basis of Presentation

The accompanying unaudited condensed consolidated financial statements as of June 30, 2008 and for the three and six months ended June 30, 2008 and 2007, and the audited balance sheet as of December 31, 2007, 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 and reclassification of prior year amounts to conform to current year presentation) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2008 are not necessarily indicative of the results to be expected for the year ending December 31, 2008. Our business is subject to substantial seasonal variations, as our retail segment has realized a significant portion of its net sales, cash flow and net income in the fourth quarter of each year, principally due to its Halloween season sales in October and, to a lesser extent, other holiday season sales at the end of the calendar year. We expect that this general pattern will continue. Our results of operations may also be affected by industry factors that may be specific to a particular period, such as movement in and the general level of raw material costs. For further information, see the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, as filed with the Securities and Exchange Commission.

Note 4 — Inventories

Inventories consisted of the following:


	June 30,		December 31,
	2008		2007
Finished goods	$	319,633	$	299,436
Raw materials		13,326		13,690
Work in process		6,934		6,495

	$	339,893	$	319,621

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

Inventories are valued at the lower of cost or market. The Company determines the cost of inventory at its retail stores using either the weighted average or retail inventory method, which approximate the first-in, first-out method. All other inventory cost is determined using the first-in, first-out method.

Note 5 — Income Taxes

The consolidated income tax expense (benefit) for the three and six months ended June 30, 2008 and 2007 were determined based upon estimates of the Company’s consolidated effective income tax rates for the years ending December 31, 2008 and 2007, respectively. The differences between the consolidated effective income tax rate and the U.S. federal statutory rate are primarily attributable to state income taxes and available domestic manufacturing deductions.

Note 6 — Restructuring

In connection with the acquisition of Party America in 2006, $4,100 has been accrued related to plans to restructure Party America’s administrative operations and involuntarily terminate a limited number of Party America personnel. To date the Company has incurred $3,755 in restructuring and exit costs, including $1,755 in the six months ended June 30, 2008, with the balance expected to be incurred during the remainder of 2008. The Company also incurred $1,700 in employee retention expense to date.

In connection with the Factory Card & Party Outlet Acquisition in 2007, $4,100 has been accrued related to plans to restructure Factory Card & Party Outlet’s merchandising assortment and administrative operations and involuntarily terminate a limited number of Factory Card & Party Outlet personnel. Charges of $760 were taken against this reserve in the first six months of 2008.

In connection with the Party City Franchise Group Transaction in 2007, $1,000 has been accrued related to plans to restructure PCFG’s merchandising assortment and administrative operations and involuntarily terminate a limited number of PCFG personnel. We anticipate fully utilizing this reserve during 2008.

Note 7 — Comprehensive Income (Loss)

Comprehensive income (loss) consisted of the following:


	Three months ended June 30,						Six months ended June 30,
	2008			2007			2008			2007
Net income (loss)	$	14,669		$	(2,458	)	$	12,133		$	(6,862	)
Cumulative change from adoption of FIN 48					—						(31	)

Net change in cumulative translation adjustment		(14	)		636			100			815
Change in fair value of interest rate swap contracts, net of income tax expense (benefit) of $199, $120, $(40), and $35		339			203			(68	)		59
Change in fair value of foreign exchange contracts, net of income tax expense (benefit) of $117, $(23), $64, and $(104)		199			(39	)		109			(178	)

Comprehensive income (loss)	$	15,193		$	(1,658	)	$	12,274		$	(6,197	)

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

Note 8 — Capital Stock

At June 30, 2008 and December 31, 2007, the Company’s authorized capital stock consisted of 10,000.00 shares of preferred stock, $0.01 par value, of which no shares were issued or outstanding and 40,000.00 shares of common stock, $0.01 par value, of which 30,436.96 were issued and outstanding.

Certain employee stockholders owned 893.79 shares of AAH common stock at both June 30, 2008 and December 31, 2007. Under the terms of the AAH stockholders’ agreement dated April 30, 2004, as amended, the Company has an option to purchase all of the shares of common stock held by former employees and, under certain circumstances, former employee stockholders can require the Company to purchase all of their shares. 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 is classified as redeemable common securities on the consolidated balance sheet, with a corresponding adjustment to stockholders’ equity. As there is no active market for the Company’s common stock, the Company estimated the fair value of its common stock based on a valuation calculated using a multiple of earnings.

At June 30, 2008 and December 31, 2007, the aggregate amount that may be payable by the Company to employee stockholders and option holders, based on the estimated market value, was approximately $21,915 and $20,338, respectively.

Certain employee shareholders of PCFG owned 15,944 shares of PCFG common stock. Under certain circumstances, if those shareholders are terminated, they can require PCFG to repurchase all of their shares.

At June 30, 2008 and December 31, 2007, the aggregate amount that may be payable to PCFG employee stockholders, based on the estimated market value, was approximately $15,944 and $13,444, respectively.

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

Note 9 — Segment Information

Industry Segments

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

The Company’s industry segment data for the three months ended June 30, 2008 and June 30, 2007 is as follows:


	Wholesale			Retail		Consolidated
Three Months Ended June 30, 2008
Revenues:
Net sales	$	154,407		$	258,407	$	412,814
Royalties and franchise fees		—			6,350		6,350


Total revenues		154,407			264,757		419,164
Eliminations		(47,640	)		—		(47,640	)

Net Revenues	$	106,767		$	264,757	$	371,524


Income from operations	$	8,183		$	27,328	$	35,511

Interest expense, net							12,029
Other income, net							(237	)


Income before income taxes and minority interests						$	23,719


Long-lived assets	$	412,138		$	583,283	$	995,421


	Wholesale			Retail		Consolidated
Three Months Ended June 30, 2007
Revenues:
Net sales	$	148,770		$	164,909	$	313,679
Royalties and franchise fees		—			5,747		5,747


Total revenues		148,770			170,656		319,426
Eliminations		(40,255	)		—		(40,255	)


Net Revenues	$	108,515		$	170,656	$	279,171


Income from operations	$	6,082		$	19,805	$	25,887

Interest expense, net							13,907
Other expense, net							15,841


Loss before income tax benefit and minority interests						$	(3,861	)


Long-lived assets	$	450,432		$	399,569	$	850,001

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

The Company’s industry segment data for the six months ended June 30, 2008 and June 30, 2007 is as follows:


	Wholesale			Retail		Consolidated
Six Months Ended June 30, 2008
Revenues:
Net sales	$	318,726		$	472,564	$	791,290
Royalties and franchise fees					11,692		11,692


Total revenues		318,726			484,256		802,982
Eliminations		(101,084	)				(101,084	)


Net Revenues	$	217,642		$	484,256	$	701,898


Income from operations	$	18,918		$	25,372	$	44,290

Interest expense, net							26,336
Other (income) , net							(722	)


Income before income taxes and minority interests						$	18,676


Long-lived assets	$	412,138		$	583,283	$	995,421


	Wholesale			Retail		Consolidated
Six Months Ended June 30, 2007
Revenues:
Net sales	$	288,763		$	300,318	$	589,081
Royalties and franchise fees		—			10,642		10,642


Total revenues		288,763			310,960		599,723
Eliminations		(72,128	)				(72,128	)


Net Revenues	$	216,635		$	310,960	$	527,595

Income from operations	$	14,765		$	17,959	$	32,724

Interest expense, net							27,982
Other expense, net							15,705


Loss before income tax benefit and minority interests						$	(10,963	)


Long-lived assets	$	450,432		$	399,569	$	850,001

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

Geographic Segments

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

Note 10 — Legal Proceedings

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

Note 11 — Stock Option Plan

The Company recorded $597 and $288 of stock-based compensation in general and administrative expenses during the three-month periods ended June 30, 2008 and 2007, respectively, and $1,195 and $654 during the six-month periods ended June 30, 2008 and 2007, respectively.

There were no options exercised during the six-month period ended June 30, 2008. There are options to purchase 3,572.1448 shares of common stock outstanding at June 30, 2008.

Note 12 — Long Term Obligations

On May 25, 2007, the Company and its parent company AAH Holdings, Inc., entered into (i) a Term Loan Credit Agreement (the “Term Loan Credit Agreement”), and (ii) an ABL Credit Agreement (the “ABL Credit Agreement”).

Term Loan Credit Agreement

The Term Loan Credit Agreement consists of a $375,000 term loan, the proceeds of which were used to refinance certain existing indebtedness and to pay transactions costs.

The Company is required to repay the term loan in quarterly installments of 0.25% of their funded total principal amount, each quarter until March 31, 2013, with the remaining amount payable on the maturity date of May 25, 2013.

At June 30, 2008, the balance of the Term Loan was $370,313.

ABL Credit Agreement

The Company has a committed revolving credit facility in an aggregate principal amount of up to $250,000 (as amended) for working capital, general corporate purposes and the issuance of letters of credit. The ABL Credit Agreement provides for (a) extension of credit in the form of revolving loans at any time and from time to time during the period ending May 25, 2012 (the “Availability Period”), in an aggregate principal amount at any time outstanding not in excess of $250,000, subject to the borrowing base described below, (b) commitments to obtain credit, at any time and from time to time during the Availability Period, in the form of swing line loans, in an aggregate principal amount at any time outstanding not in excess of $10,000 and (c) the ability to utilize letters of credit, in an aggregate face amount at any time outstanding not in excess of $25,000 to support payment obligations incurred in the ordinary course of business by the Company and its subsidiaries.

The ABL Credit Agreement also contains certain customary affirmative covenants and events of default.

Borrowings under the ABL Credit Agreement were $166,079, and outstanding standby letters of credit under the ABL Credit Agreement totaled $12,872 at June 30, 2008.

PCFG Credit Agreement

On November 2, 2007, PCFG entered into a credit agreement (the “PCFG Credit Agreement”), among PCFG, CIT Group/Business Credit, Inc., as Administrative Agent and Collateral Agent, Newstar Financial, Inc., as Syndication Agent, CIT Capital Securities LLC, as Sole Arranger, and the Lenders party thereto. PCFG and Party City Franchise Group Holdings, LLC (“Party City Holdings”), the sole member of PCFG and an indirect majority owned subsidiary of the Company, have been designated by the Board of Directors of the Company as “Unrestricted Subsidiaries” pursuant to the Company’s existing ABL Credit Agreement and the indenture governing its 8.75% Senior Subordinated Notes. Neither PCFG nor Party City Holdings is a guarantor of the Company’s existing credit facilities or indenture. In addition, PCFG’s credit facility is a stand alone facility for PCFG and is not guaranteed by the Company or its other subsidiaries. At June 30, 2008, the balance of the PCFG Term Loan was $28,500. Borrowings under the PCFG Revolver were $6,825, and there were no outstanding standby letters of credit.

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

Note 13 — Recently Issued Accounting Standards

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations and SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements — an amendment of Accounting Research Bulletin No. 51. SFAS No. 141(R) will change how business acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. SFAS No. 160 will change the accounting and reporting for minority interests, which will be re-characterized as non-controlling interests and classified as a component of equity. SFAS No. 141(R) and SFAS No. 160 are effective for fiscal years beginning after December 15, 2008. Early adoption is not permitted. The Company is currently evaluating the impact, if any, that the adoption of SFAS No. 141(R) and SFAS No. 160 would have on its financial position or results of operations.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115. SFAS No. 159 allows an entity to choose to measure many financial instruments and certain other items at fair value. The objective of SFAS No. 159 is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The provisions of SFAS No. 159 are effective for fiscal years beginning after November 15, 2007. The Company did not elect to measure any additional assets or liabilities at fair value that are not already measured at fair value under existing standards. Therefore, the adoption of SFAS No. 159 had no impact on the consolidated financial statements of the Company.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 provides a common fair value hierarchy for companies to follow in determining fair value measurements in the preparation of financial statements and expands disclosure requirements relating to how such fair value measurements were developed. SFAS No. 157 clarifies the principle that fair value should be based on the assumptions that the marketplace would use when pricing an asset or liability, rather than company-specific data. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. However, on February 12, 2008, the FASB issued Staff Position 157-2 which delays the effective date of SFAS No. 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. For items within its scope, this Staff Position defers the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008. The Company does not believe that the adoption of SFAS No. 157 for its non-financial assets and liabilities, effective January 1, 2009, will have a material impact on the consolidated financial statements. The Company adopted SFAS No. 157 effective January 1, 2008 for its financial assets and liabilities and this adoption did not have a material impact on the condensed consolidated financial statements.

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

Note 14 — Condensed Consolidating Financial Information

Borrowings under the Term Loan Credit Agreement, the ABL Credit Agreement and the Company’s 8.75% $175,000 senior subordinated notes issued in April 30, 2004 and due in April 30, 2014 are guaranteed jointly and severally, fully and unconditionally, by the following wholly-owned domestic subsidiaries of the Company (the “Guarantors”):

•		Amscan Inc.

•		Am-Source, LLC

•		Anagram Eden Prairie Property Holdings LLC

•		Anagram International, Inc.

•		Anagram International Holdings, Inc.

•		Anagram International, LLC

•		Gags & Games, Inc.

•		JCS Packaging Inc.

•		M&D Industries, Inc.

•		Party City Corporation

•		PA Acquisition Corporation

•		Factory Card & Party Outlet Corp.

•		SSY Realty Corp.

•		Trisar, Inc.

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

•		Amscan (Asia-Pacific) Pty. Ltd.

•		Amscan de Mexico, S.A. de C.V.

•		Amscan Distributors (Canada) Ltd.

•		Anagram Espana, S.A.

•		Anagram France S.C.S.

•		Amscan Holdings Limited

•		Anagram International (Japan) Co., Ltd.

•		Amscan Partyartikel GmbH

•		JCS Hong Kong Ltd.

•		Party City Franchise Group Holdings, LLC

The following information presents condensed consolidating balance sheets at June 30, 2008 and December 31, 2007, and the condensed consolidating statements of operations for the three and six months ended June 30, 2008 and 2007, and the related condensed consolidating statements of cash flows for the six months ended June 30, 2008 and 2007, 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)
(Dollars in thousands, except per share amounts)
(Unaudited)

CONDENSED CONSOLIDATING BALANCE SHEET
June 30, 2008


	AHI and		Combined
	Combined		Non-
	Guarantors		Guarantors			Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	4,479	$	5,086		$	—		$	9,566
Accounts receivable, net of allowances		72,358		27,127			—			99,485
Inventories, net of allowances		302,594		38,235			(935	)		339,893
Prepaid expenses and other current assets		50,114		3,714			—			53,828

Total current assets		429,545		74,162			(935	)		502,772
Property, plant and equipment, net		167,997		9,039			—			177,036
Goodwill		505,683		42,237			—			547,920
Trade names		172,883		—						172,883
Other intangible assets, net		39,706		27,117			—			66,823
Other assets, net		105,837		(22,829	)		(52,249	)		30,759


Total assets	$	1,421,651	$	129,726		$	(53,184	)	$	1,498,193


LIABILITIES, REDEEMABLE COMMON SECURITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Loans and notes payable	$	166,079	$	6,825		$	—		$	172,904
Accounts payable		78,711		15,610			—			94,321
Accrued expenses		83,456		9,425			—			92,881
Income taxes payable		13,212		(215	)		(145	)		12,852
Current portion of long-term obligations		6,709		2,042			—			8,751

Total current liabilities		348,167		33,687			(145	)		381,709
Long-term obligations, excluding current portion		553,625		26,503			—			580,128
Deferred income tax liabilities		87,473		11,660			—			99,133
Other		19,980		42,572			(50,665	)		11,887

Total liabilities		1,009,245		114,422			(50,810	)		1,072,857

Redeemable common securities		21,915		15,944			—			37,859

Commitments and contingencies

Stockholders’ equity:
Common Stock		—		339			(339	)		—
Additional paid-in capital		326,312		46			—			326,358
Retained earnings		61,688		(1,075	)		(1,986	)		58,627
Accumulated other comprehensive income (loss)		2,492		50			(50	)		2,492


Total stockholders’ equity		390,492		(640	)		(2,375	)		387,477

Total liabilities, redeemable common securities and stockholders’ equity	$	1,421,652	$	129,726		$	(53,185	)	$	1,498,193

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

CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2007


	AHI and
	Combined		Combined
	Guarantors		Non-Guarantors			Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	8,391	$	8,883		$	—		$	17,274
Accounts receivable, net of allowances		81,057		17,368			—			98,425
Inventories, net of allowances		282,954		37,368			(701	)		319,621
Prepaid expenses and other current assets		54,810		7,236			—			62,046


Total current assets		427,212		70,856			(701	)		497,366
Property, plant and equipment, net		168,033		6,165			—			174,198
Goodwill		509,114		49,829			—			558,943
Trade names		172,883		13,304						186,187
Other intangible assets, net		42,526		—			—			42,526
Other assets, net		111,428		(20,137	)		(51,666	)		39,625


Total assets	$	1,431,195	$	120,017		$	(52,367	)	$	1,498,845


LIABILITIES, REDEEMABLE COMMON SECURITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Loans and notes payable	$	152,670	$	500		$	—		$	153,170
Accounts payable		100,467		19,826			—			120,293
Accrued expenses		81,600		12,728			—			94,328
Income taxes payable		12,958		(319	)		(58	)		12,581
Current portion of long-term obligations		6,524		2,096			—			8,620


Total current liabilities		354,219		34,831			(58	)		388,992
Long-term obligations, excluding current portion		556,817		27,519			—			584,336
Deferred income tax liabilities		93,523		837			—			94,360
Other		30,327		43,258			(51,796	)		21,789


Total liabilities		1,034,886		106,445			(51,854	)		1,089,477

Redeemable common securities		20,338		13,444			—			33,782

Commitments and contingencies

Stockholders’ equity:
Common Stock		—		339			(339	)		—
Additional paid-in capital		326,695		46			—			326,741
Retained earnings		46,925		(178	)		(254	)		46,494
Accumulated other comprehensive income (loss)		2,351		(80	)		80			2,351

Total stockholders’ equity		375,971		128			(514	)		375,586

Total liabilities, redeemable common securities and stockholders’ equity	$	1,431,195	$	120,017		$	(52,367	)	$	1,498,845

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

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Three Months Ended June 30, 2008


	AHI and
	Combined			Combined Non-
	Guarantors			Guarantors			Eliminations			Consolidated
Revenues:
Net sales	$	322,892		$	48,883		$	(6,601	)	$	365,174
Royalties and franchise fees		6,350			—			—			6,350

Total revenues		329,242			48,883			(6,601	)		371,524

Expenses:
Cost of sales		202,048			30,266			(6,554	)		225,760
Selling expenses		8,086			2,633			—			10,719
Retail operating expenses		52,437			10,128			—			62,565
Franchise expenses		3,392			—			—			3,392
General and administrative expenses		26,406			3,911			(330	)		29,987
Art and development costs		3,590			—			—			3,590


Total expenses		295,959			46,939			(6,884	)		336,013

Income from operations		33,283			1,944			283			35,511

Interest expense, net		11,555			474			—			12,029
Other income, net		(2,086	)		(90	)		1,940			(237	)

Income before income taxes and minority interests		23,815			1,561			(1,657	)		23,719

Income tax expense		8,479			529			(18	)		8,990
Minority interests		—			60			—			60


Net income	$	15,336		$	972		$	(1,639	)	$	14,669

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

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 2008


	AHI and
	Combined			Combined
	Guarantors			Non-Guarantors			Eliminations			Consolidated
Revenues:
Net sales	$	609,652		$	92,756		$	(12,202	)	$	690,206
Royalties and franchise fees		11,692			—			—			11,692

Total revenues		621,344			92,756			(12,202	)		701,898

Expenses:
Cost of sales		394,896			57,359			(11,811	)		440,444
Selling expenses		16,274			5,194			—			21,468
Retail operating expenses		100,341			20,150			—			120,491
Franchise expenses		7,023			—			—			7,023
General and administrative expenses		53,711			8,439			(660	)		61,490
Art and development costs		6,692			—			—			6,692

Total expenses		578,937			91,142			(12,471	)		657,608

Income from operations		42,407			1,614			269			44,290

Interest expense, net		24,909			1,427			—			26,336
Other income, net		(3,723	)		(68	)		3,069			(722	)

Income before income taxes and minority interests		21,221			255			(2,800	)		18,676

Income tax expense		6,363			860			(145	)		7,078
Minority interests		—			(535	)		—			(535	)

Net income (loss)	$	14,858		$	(70	)	$	(2,655	)	$	12,133

AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Three Months Ended June 30, 2007


	AHI and
	Combined			Combined
	Guarantors			Non-Guarantors			Eliminations			Consolidated
Revenues:
Net sales	$	259,951		$	19,495		$	(6,022	)	$	273,424
Royalties and franchise fees		5,747			—						5,747

Total revenues		265,698			19,495			(6,022	)		279,171

Expenses:
Cost of sales		167,634			13,302			(5,911	)		175,025
Selling expenses		8,116			2,370						10,486
Retail operating expenses		36,559			—						36,559
Franchise expenses		3,056			—						3,056
General and administrative expenses		23,228			2,225			(330	)		25,123
Art and development costs		3,035			—						3,035

Total expenses		241,628			17,897			(6,241	)		253,284

Income from operations		24,070			1,598			219			25,887

Interest expense, net		13,873			34						13,907
Other expense (income) , net		14,482			(170	)		1,529			15,841

(Loss) income before income taxes and minority interests		(4,285	)		1,734			(1,310	)		(3,861	)

Income tax (benefit) expense		(1,897	)		479			(41	)		(1,459	)
Minority interests		—			56						56

Net (loss) income	$	(2,388	)	$	1,199		$	(1,269	)	$	(2,458	)


	AHI and
	Combined			Combined
	Guarantors			Non-Guarantors			Eliminations			Consolidated
Revenues:
Net sales	$	490,177		$	37,222		$	(10,446	)	$	516,953
Royalties and franchise fees		10,642			—						10,642

Total revenues		500,819			37,222			(10,446	)		527,595

Expenses:
Cost of sales		325,638			25,674			(10,464	)		340,848
Selling expenses		16,227			4,739						20,966
Retail operating expenses		71,442			—						71,442
Franchise expenses		6,406			—						6,406
General and administrative expenses		45,570			4,345			(660	)		49,255
Art and development costs		5,954			—						5,954

Total expenses		471,237			34,758			(11,124	)		494,871

Income from operations		29,582			2,464			678			32,724

Interest expense, net		27,919			63						27,982
Other expense (income), net		13,517			(87	)		2,275			15,705

(Loss) income before income taxes and minority interests		(11,854	)		2,488			(1,597	)		(10,963	)

Income tax (benefit) expense		(4,982	)		810			7			(4,165	)
Minority interests		—			64						64

Net (loss) income	$	(6,872	)	$	1,614		$	(1,604	)	$	(6,862	)

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

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Six months Ended June 30, 2008


	AHI and
	Combined			Combined
	Guarantors			Non-Guarantors			Eliminations			Consolidated
Cash flows provided by (used in) operating activities:
Net income (loss)	$	14,858		$	(70	)	$	(2,655	)	$	12,133
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization expense		19,329			2,561			—			21,890
Amortization of deferred financing costs		977			—			—			977
Provision for doubtful accounts		744			131			—			875
Deferred income tax benefit		(2,512	)		—			—			(2,512	)
Deferred rent		876			—			—			876
Undistributed gain in unconsolidated joint venture		(605	)		—			—			(605	)
Loss (gain) on disposal of equipment		86			(21	)		—			65
Equity based compensation		1,195			—			—			1,195
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable		8,469			(9,890	)		—			(1,421	)
Increase in inventories		(19,796	)		(867	)		391			(20,272	)
Decrease in prepaid expenses and other current assets		7,112			3,407			—			10,519
Decrease in accounts payable, accrued expenses and income taxes payable		(25,165	)		(713	)		2,264			(23,614	)
Other, net		—			—			—			—

Net cash provided by (used in) operating activities		5,568			(5,462	)		—			106

Cash flows used in investing activities:
Capital expenditures		(20,654	)		(3,834	)		—			(24,488	)
Proceeds from disposal of property and equipment		—			50			—			50

Net cash used in investing activities		(20,654	)		(3,784	)		—			(24,438	)

Cash flows provided by financing activities:
Repayments of loans, notes payable and long-term obligations		(3,633	)		(1,062	)		—			(4,695	)
Proceeds from loans, notes payable and long-term obligations		12,327			6,325			—			18,652
Proceeds from sale of additional minority interest in PCFG		2,500			—			—			2,500

Net cash provided by financing activities		11,194			5,263			—			16,457

Effect of exchange rate changes on cash and cash equivalents		(20	)		187			—			167


Net decrease in cash and cash equivalents		(3,912	)		(3,797	)		—			(7,708	)
Cash and cash equivalents at beginning of period		8,391			8,883			—			17,274

Cash and cash equivalents at end of period	$	4,479		$	5,087		$	—		$	9,566

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

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 2007


	AHI and			Combined
	Combined			Non-
	Guarantors			Guarantors			Eliminations			Consolidated
Cash flows used in operating activities:
Net (loss) income	$	(6,872	)	$	1,614		$	(1,604	)	$	(6,862	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense		18,648			463			—			19,111
Amortization of deferred financing costs		1,141			—			—			1,141
Provision for doubtful accounts		308			121			—			429
Deferred income tax benefit		(1,034	)		—			—			(1,034	)
Deferred rent		2,218			—			—			2,218
Undistributed (gain) in unconsolidated joint venture		(49	)		—			—			(49	)
Loss on disposal of equipment		95			—			—			95
Equity based compensation		853			—			—			853
Debt retirement costs		3,783			—			—			3,783
Write-off of deferred financing costs		6,364			—			—			6,364
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable		1,068			(5,112	)		—			(4,044	)
(Increase) decrease in inventories		(5,383	)		1,575			(18	)		(3,826	)
(Increase) in prepaid expenses and other current assets		(10,134	)		(622	)		—			(10,756	)
(Decrease) increase in accounts payable, accrued expenses and income taxes payable		(43,471	)		1,844			1,622			(40,006	)
Other, net		9			—			—			9

Net cash used in operating activities		(32,456	)		(117	)		—			(32,574	)

Cash flows used in investing activities:
Cash paid in connection with store acquisitions		(8,085	)		—			—			(8,085	)
Capital expenditures		(10,217	)		(215	)		—			(10,432	)
Proceeds from disposal of property and equipment		1,737			—			—			1,737

Net cash used in investing activities		(16,565	)		(215	)		—			(16,780	)

Cash flows provided by financing activities:
Repayments of loans, notes payable and long-term obligations		(394,846	)		(100	)		—			(394,946	)
Proceeds from loans, notes payable and long-term obligations		449,136			—			—			449,136
Debt retirement costs		(6,218	)		—			—			(6,218	)
Proceeds from capital contributions and exercise of options		2,067			—			—			2,067

Net cash provided by (used in) financing activities		50,139			(100	)		—			50,039
Effect of exchange rate changes on cash and cash equivalents		5			700			—			705

Net increase in cash and cash equivalents		1,123			269			—			1,390
Cash and cash equivalents at beginning of period		4,395			571						4,966

Cash and cash equivalents at end of period	$	5,518		$	840		$	—		$	6,356

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s discussion will refer to the three-month and six-month periods ended June 30, 2008 as “2008” and the three-month and six-month periods ended June 30, 2007 as “2007”.

As described in more detail in Note 2, in the fourth quarter of 2007, the Company formed Party City Franchise Group LLC and acquired Factory Card & Party Outlet. Therefore, all comparisons between 2008 and 2007 reflect the facts that (1) sales to these entities by our wholesale segment were eliminated in 2008 but not in 2007, and (2) the operating results of these entities are included in our retail segment’s results in 2008 but not 2007.

THREE MONTHS ENDED JUNE 30, 2008 COMPARED TO THREE MONTHS ENDED JUNE 30, 2007

The following tables set forth the Company’s operating results as a percentage of total revenues.


	Three Months Ended June 30,
	2008			2007
Revenues:
Net sales		98.3	%		97.9	%
Royalties and franchise fees		1.7			2.1

Total revenues		100.0			100.0

Expenses:
Cost of sales		60.8			62.7
Selling expenses		2.9			3.8
Retail operating expenses		16.8			13.1
Franchise expenses		0.9			1.1
General and administrative expenses		8.0			9.0
Art and development costs		1.0			1.0

Total expenses		90.4			90.7

Income from operations		9.6			9.3

Interest expense, net		3.2			5.0
Other (income) expense, net		(0.0	)		5.7

Income (loss) before income taxes and minority interests		6.4			(1.4	)

Income tax expense (benefit)		2.5			(0.5	)
Minority interests		0.0			0.0

Net income (loss)		3.9	%		(0.9	)%


	Three Months Ended June 30,
	2008						2007
	$ in			% of Total			$ in			% of Total
	Thousands			Revenue			Thousands			Revenue
Revenues
Sales
Wholesale	$	154,407			41.6	%	$	148,770			53.3	%
Eliminations		(47,640	)		(12.8	)		(40,255	)		(14.4	)

Net wholesale		106,767			28.7			108,515			38.9
Retail		258,407			69.6			164,909			59.1

Total net sales		365,174			98.3			273,424			97.9
Franchise related		6,350			1.7			5,747			2.1

Total revenues	$	371,524			100.0	%	$	279,171			100.0	%

Wholesale Sales

Net sales for 2008, at wholesale, of $106.8 million were $1.7 million or 1.6% lower than sales for 2007. Net sales for 2008 reflect the elimination of inter-company sales to PCFG and FCPO as well as the inter-company sales to Party City and Party America. Had the PCFG and FCPO acquisitions occurred January 1, 2007, the Company would have eliminated an additional $8.5 million of inter-company sales during 2007. Accordingly, net sales for 2008, at wholesale, of $106.8 million were $6.8 million or 6.8% higher than adjusted sales for 2007.

Net sales to party superstores (including our franchisees) and independent party stores totaled $33.3 million and were $2.0 million or 5.8% lower than adjusted 2007 sales. The decrease in sales principally reflects a reduction in full case sales and the timing of 2007 synergy sales both to our franchisees. International sales totaled $22.3 million and were 14.5 % higher than in 2007, principally due to the strong demand for new party programs at several European national accounts. Net sales of metallic balloons were $25.1 million or 11.1% higher than in 2007, primarily due to growth in sales to international balloon distributors. Net sales to other retail channels (including card and gift stores, mass merchant, drug, craft and contract manufacturing) were $26.1 million, or 15.4% higher than 2007.

Retail Sales

Net retail sales for company-owned stores for 2008 of $258.4 million were $93.5 million or 56.7% higher than net retail sales for 2007, reflecting the additional sales of FCPO and PCFG of $95.9 million.

Net retail sales of Party City and Party America company-owned stores decreased by $1.9 million or 1.2% compared to 2007. The decrease reflects a 1.6% decrease in average store count compared to 2007, partly offset by a 0.4% increase in same store sales. Same store sales for Party City and Party America “Big Box” stores (i.e., generally greater than 8,000 square feet) increased 1.5% and were substantially offset by a 13.5% decrease in same stores sales at our outlet stores.

Gross Profit

The following table sets forth the Company’s consolidated gross profit on net sales.


	Three Months Ended June 30,
	2008					2007
	$ in		% of Associated			$ in		% of Associated
	Thousands		Sales			Thousands		Sales
Net Wholesale	$	34,671		32.5	%	$	31,185		28.7	%
Net Retail		104,743		40.5	%		67,215		40.8	%

Total Gross Profit	$	139,414		38.2	%	$	98,399		36.0	%

The gross profit margin on net sales at wholesale for 2008 was 32.5% or 380 basis points higher than in 2007. The increase in gross profit margin principally reflects reduced emphasis on full case sales, which have lower margin, other changes in product mix and lower distribution costs.

Retail gross profit margin for 2008 was 40.5% or 30 basis points lower than in 2007, primarily due to changes in product mix.

Operating expenses

Selling expenses of $10.7 million for 2008 were $0.2 million higher than for 2007 principally due to increases in base compensation and employee benefits. As a percent of total revenues, selling expenses were 2.9% for 2008, or 90 basis points lower than for 2007 as a result of increased sales.

Retail operating expenses for 2008 totaled $62.6 million, or $26.0 million higher than in the prior year quarter, principally due to the inclusion of PCFG and FCPO operating expenses of $24.1 million.

General and administrative expenses of $30.0 million for 2008 were $4.9 million higher than 2007, primarily due to the inclusion of PCFG and FCPO expenses of $6.7 million.

Interest expense, net

Interest expense of $12.0 million for 2008 was $1.9 million lower than for 2007, reflecting lower Libo rates as well as lower margin rates resulting from our May 2007 debt refinancing.

Other (income) expense, net

Other income, net, totaled $0.2 million in 2008 and principally consisted of our share of income from an unconsolidated balloon distribution joint venture located in Mexico. Other expense, net, totaled $15.8 million in 2007, reflecting financing costs related to the refinancing of our term debt that occurred in May 2007.

Income tax expense (benefit)

Income tax expense (benefit) for 2008 and 2007 were based upon the estimated consolidated effective income tax rates of 37.9% and 38.1% for the years ending December 31, 2008 and December 31, 2007, respectively. The decrease in the 2008 effective income tax rate is primarily attributable to a lower average state income tax rate.

SIX MONTHS ENDED JUNE 30, 2008 COMPARED TO SIX MONTHS ENDED JUNE 30, 2007

The following tables set forth the Company’s operating results as a percentage of total revenues.


	Six Months Ended June 30,
	2008			2007
Revenues:
Net sales		98.3	%		98.0	%
Royalties and franchise fees		1.7			2.0

Total revenues		100.0			100.0

Expenses:
Cost of sales		62.7			64.7
Selling expenses		3.0			4.0
Retail operating expenses		17.2			13.5
Franchise expenses		1.0			1.2
General and administrative expenses		8.8			9.3
Art and development costs		1.0			1.1

Total expenses		93.7			93.8

Income from operations		6.3			6.2

Interest expense, net		3.7			5.3
Other (income) expense, net		(0.1	)		3.0

Income (loss) before income taxes and minority interests		2.7			(2.1	)

Income tax expense (benefit)		1.0			(0.8	)
Minority interests		0.0			0.0

Net income (loss)		1.7	%		(1.3	)%


	Six Months Ended June 30,
	2008						2007
	$ in			% of Total			$ in			% of Total
	Thousands			Revenue			Thousands			Revenue
Revenues
Sales
Wholesale	$	318,726			45.4	%	$	288,763			54.7	%
Eliminations		(101,083	)		(14.4	)		(72,128	)		(13.7	)

Net wholesale		217,643			31.0			216,635			41.1
Retail		472,563			67.3			300,318			56.9

Total net sales		690,206			98.3			516,953			98.0
Franchise related		11,692			1.7			10,642			2.0

Total revenues	$	701,898			100.0	%	$	527,595			100.0	%

Wholesale Sales

Net sales, at wholesale, for 2008 of $217.6 million were $1.0 million or 0.5% higher than sales for 2007. Net sales for 2008 reflect the elimination of inter-company sales to PCFG and FCPO, in addition to the inter-company sales to Party City and Party America. Had the PCFG and FCPO acquisitions occurred January 1, 2007, the Company would have eliminated an additional $18.0 million of inter-company sales during 2007. Accordingly, net sales for 2008, at wholesale of $217.6 million were $19.0 million or 9.6% higher than adjusted sales for 2007.

Net sales to party superstores (including our franchisees) and independent party stores totaled $71.0 million and were $3.1 million or 4.6% higher than adjusted 2007 sales. The increase in sales principally reflects additional synergy sales to our franchisees, net of a reduction in full case sales. International sales totaled $42.7 million and were 14.8 % higher than in 2007, principally due to the strong demand for new party programs at several European national accounts. Net sales of metallic balloons were $50.6 million or 14.4% higher than in 2007, primarily due to increased Valentine’s Day sales and growth in sales to international balloon distributors. Net sales to other retail channels (including card and gift stores, mass merchant, drug, craft and contract manufacturing) were $53.3 million, or 8.0% higher than 2007.

Retail Sales

Net retail sales for company-owned stores for 2008 of $472.6 million were $172.2 million or 57.4% higher than net retail sales for 2007, reflecting the additional sales of $175.3 million of FCPO and PCFG.

Net retail sales of Party City and Party America company-owned stores decreased by $2.7 million or 0.9% compared to 2007. The decrease reflects a 2.2% decrease in average store count compared to 2007, partly offset by a 1.3% increase in same store sales. Same store sales for Party City and Party America “Big Box” stores (i.e., generally greater than 8,000 square feet) increased 2.4% and were partially offset by a 12.4% decrease in same stores sales at our outlet stores.

Gross Profit

The following table sets forth the Company’s consolidated gross profit on net sales.


	Six Months Ended June 30,
	2008					2007
			% of Associated					% of Associated
	$ in Thousands		Sales			$ in Thousands		Sales
Net Wholesale	$	70,911		32.6	%	$	63,913		29.5	%
Net Retail		178,851		37.8	%		112,192		37.4	%

Total Gross Profit	$	249,762		36.2	%	$	176,105		34.1	%

The gross profit margin on net sales at wholesale for 2008 was 32.6% or 310 basis points higher than in 2007. The increase in gross profit margin principally reflects reduced emphasis on full case sales, which have lower margin, other changes in product mix and lower distribution costs.

Retail gross profit margin for 2008 was 37.8%, or 40 basis points higher than in the six months ended June 30, 2007, primarily due to changes in product mix.

Operating expenses

Selling expenses of $21.5 million for 2008 were $0.5 million higher than for 2007. As a percent of total revenues, selling expenses were 3.1% for 2008, or 90 basis points lower than for 2007 as a result of increased sales.

Retail operating expenses for 2008 totaled $120.5 million, or $49.1 million higher than in 2007, principally due to the inclusion of PCFG and FCPO operating expenses of $46.9 million.

General and administrative expenses of $61.5 million for 2008 were $12.2 million higher than the prior year, primarily due to the inclusion of PCFG and FCPO expenses of $14.3 million.

Interest expense, net

Interest expense of $26.3 million for 2008 was $1.6 million lower than for 2007, reflecting lower Libo rates as well as lower margin rates resulting from our May 2007 debt refinancing.

Other (income) expense, net

Other income, net, totaled $0.7 million in 2008, and principally consisted of our share of income from an unconsolidated balloon distribution joint venture located in Mexico. Other expense, net, totaled $15.7 million in 2007 and principally consisted of financing costs related to the refinancing of our term debt that occurred in May 2007.

Income tax expense (benefit)

Income taxes expense (benefit) for 2008 and 2007 were based upon the estimated consolidated effective income tax rates of 37.9% and 38.1% for the years ending December 31, 2008 and December 31, 2007, respectively. The decrease in the 2008 effective income tax rate is primarily attributable to a lower average state income tax rate.

Liquidity and Capital Resources

References to 2008 and 2007 in this section refer only to the six-month periods ended June 30, 2008 and 2007.

Generally, due to the seasonal nature of the Company’s retail operations, lower operating results and building inventory for the later quarters causes a net use of cash in operations for the first six months of the year.

In 2008, net cash of $0.1 million was provided by operating activities compared to 2007 cash used in operating activities of $32.6 million.

Net income, after adjusting for non-cash charges, provided cash of $34.9 million in 2008 compared to $26.1 million in 2007. Changes in working capital resulted in use of cash of $34.8 million in 2008 compared to $58.6 million in 2007. Cash was used in both years to increase inventory in preparation for Halloween and to pay down suppliers following the prior year end.

Investing activities related to property additions for new stores, store improvements and renovations, and investments in our distribution facilities and computer systems, resulted in cash outlays for capital additions of $24. 5 million in 2008 compared to $10.4 million in 2007.

Cash flows from financing activities were $16.5 million in 2008 compared to $50.0 million in 2007. Proceeds from loans under our revolving credit facilities to fund our operating and investing activities noted above were the main sources in both years. Additionally, Party City received proceeds of $2.5 million in capital contributions from existing minority owners of PCFG for the purchase of additional equity.

Required repayments on our term debt for the remainder of the year will be $1.9 million. At June 30, 2008, we had $71.1 million of availability remaining on our primary revolving credit agreement, and PCFG had $13.2 million available under its separate revolving credit agreement.

We expect that cash generated from operating activities and availability under our credit agreements will be our principal sources of liquidity. Based on our current level of operations, we believe these sources will be adequate to meet our liquidity needs for at least the next twelve months. We cannot assure you, however, that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under our senior secured credit facilities in an amount sufficient to enable us to repay our indebtedness, including the 8.75% senior subordinated notes, or to fund our other liquidity needs.

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 the quarterly results of our wholesale operations has been limited. Promotional activities, including special dating terms, particularly with respect to Halloween and Christmas products sold in the third quarter and the introduction of our new everyday products and designs during the fourth quarter result in higher accounts receivables and inventory balances and higher interest costs to support these balances.

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 sales for end of year holidays. In addition, the results of retail 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 the acquisition and disposition of stores.

Cautionary Note Regarding Forward-Looking Statements

This quarterly report on Form 10-Q may contain “forward-looking statements.” 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, 2007.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our earnings are affected by changes in interest rates as a result of our variable rate indebtedness. However, we have utilized interest rate swap agreements to manage the market risk associated with fluctuations in interest rates. If market interest rates for our variable rate indebtedness averaged 2% more than the interest rate actually paid for the three months ended June 30, 2008 and 2007, our interest expense, after considering the effects of our interest rate swap agreements, would have increased, and the income (loss) before income taxes and minority interest for the quarters ended June 30, 2008 and 2007 would have decreased (increased) by $2.5 million and $1.9 million, respectively and the income (loss) before income taxes and minority interest for the six months ended June 30, 2008 and 2007 would have decreased (increased) by $5.0 million and $3.9 million, respectively . These amounts are determined by considering the impact of the hypothetical interest rates on our borrowings and interest rate swap agreements. This analysis does not consider the effects of the reduced level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management would likely take actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that we would take and their possible effects, the sensitivity analysis assumes no changes in our financial structure.

Our earnings are also affected by fluctuations in the value of the U.S. dollar as compared to foreign currencies, predominately in European countries, as a result of the sales of our products in foreign markets. Although we periodically enter into foreign currency forward contracts to hedge against the earnings effects of such fluctuations, we 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 gross profit and a decrease (increase) in operating income (loss) of $1.5 million and $1.3 million for the three months ended June 30, 2008 and 2007, respectively and $2.9 million and $2.6 million for the six months ended June 30, 2008 and 2007 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 December 31, 2007 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 fiscal quarter ended June 30, 2008, identified in connection with the evaluation by our management, including our Chief Executive Officer and Chief Financial Officer, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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.


	AMSCAN HOLDINGS, INC.
	By:	/s/ Michael A. Correale
		Michael A. Correale
Date: August 14, 2008		Chief Financial Officer (on behalf of the registrant and as principal financial and accounting officer)



Date: August 14, 2008	/s/ Michael A. Correale
	Michael A. Correale
	Chief Financial Officer



	/s/ Gerald C. Rittenberg
	Gerald C. Rittenberg
	Chief Executive Officer


	/s/ Michael A. Correale
	Michael A. Correale
	Chief Financial Officer

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents


										Accumulated
					Additional					Other
	Common		Common		Paid-in			Retained		Comprehensive
	Shares		Stock		Capital			Earnings		Income			Total

Balance at December 31, 2007		30,436.96	$	—	$	326,741		$	46,494	$	2,351		$	375,586
Net income									12,133					12,133
Net change in cumulative translation adjustment											100			100

Change in fair value of interest rate swap contracts, net of income tax benefit											(68	)		(68	)

Change in fair value of foreign exchange contracts, net of income tax expense											109			109

Comprehensive income														12,274
Revaluation of redeemable common securities						(1,578	)							(1,578	)
Equity based compensation expense						1,195								1,195

Balance at June 30, 2008		30,436.96	$	—	$	326,358		$	58,627	$	2,492		$	387,477

1.		I have reviewed this quarterly report on Form 10-Q of Amscan Holdings, Inc. ;

2.		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.		The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

	(a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	(b)		Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	(c)		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	(d)		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

	(a)		All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	(b)		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



	/s/ Gerald C. Rittenberg
	Gerald C. Rittenberg
	Chief Executive Officer (Principal executive officer)