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SECURITIES AND EXCHANGE COMMISSION

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

Commission file number 0-27826

Party City Corporation

Registrant’s telephone number, including area code:

Securities Registered Pursuant to Section 12(b) of the Act:

Securities Registered Pursuant to Section 12(g) of the Act:

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

          Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).     Yes þ          No o

          The aggregate market value of voting stock held by non-affiliates of the Registrant on December 26, 2003, based on the closing sale price on such date, was approximately $169,191,552.

      The number of outstanding shares of the Registrant’s common stock, $0.01 par value, as of August 30, 2004 was 17,103,161.

DOCUMENTS INCORPORATED BY REFERENCE

          Portions of the Registrant’s Proxy Statement for the 2004 Annual Meeting of Stockholders for the fiscal year ended July 3, 2004 are incorporated by reference into Part III.

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      References throughout this document to the “Company” include Party City Corporation and its wholly owned subsidiary. In accordance with the Securities and Exchange Commission’s “Plain English” guidelines, this Annual Report on Form 10-K has been written in the first person. In this document the words “we,” “our,” “ours” and “us” refer only to Party City Corporation and its wholly-owned subsidiary and not to any other person.

      Our website — www.partycity.com — provides access, free of charge, to our Securities and Exchange Commission (“SEC”) reports as soon as reasonably practicable after we electronically file such reports with, or furnish such reports to, the SEC, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports.

      You may also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, 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.

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PART I

Forward-Looking Statements

      This Annual Report on Form 10-K (including the information incorporated herein by reference) contains forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. The statements are made a number of times throughout the document and may be identified by forward-looking terminology such as “estimate,” “project,” “expect,” “believe,” “may,” “will,” “intend” or similar statements or variations of such terms. Such forward-looking statements are based on many assumptions that are subject to certain risks and uncertainties, including, but not limited to: levels of sales, store traffic, acceptance of product offerings, competitive pressures from other party supplies retailers and other retailers, availability of qualified personnel, availability of suitable future store locations, schedules of store expansion plans and other factors beyond our control. As a result of the foregoing risks and uncertainties, actual results and performance may differ materially from those projected or suggested herein. See Part I, Item 1. “Business — Risk Factors” beginning on page 9 for further information on such risks and uncertainties. Furthermore, additional information concerning other risks and uncertainties that could cause our actual results to differ materially from those projected or suggested may be identified from time to time in our SEC filings and our public announcements.

      Party City Corporation is based in Rockaway, New Jersey and was incorporated in the State of Delaware in 1996. We operate retail party supplies stores in the United States and we sell franchises on an individual store and area franchise basis throughout the United States and Puerto Rico.

General

      We are a specialty retailer of party supplies with a network of more than 500 stores. At August 30, 2004, we owned and operated 249 stores in the United States and our franchisees operated an additional 258 stores in the United States, including five stores in Puerto Rico. We believe that we are America’s largest retail party goods chain. We authorized our first franchise store in 1989 and opened our first Company-owned store in January 1994.

      We report two segments — retail and franchising. The retail segment generates revenue primarily through the sale of third-party branded party goods through Company-owned stores. The franchising segment generates revenue through the imposition of an initial one-time franchise fee and ongoing royalty payments based on retail sales.

      We operate and franchise party supplies stores that typically range in size from 10,000 square feet to 12,000 square feet. Our stores offer a broad selection of brand name and private label merchandise for a wide variety of celebratory occasions, including birthday parties, weddings and baby showers, as well as holiday and seasonal events such as Halloween, Christmas, New Year’s Eve, Graduation, Easter, Valentine’s Day, Thanksgiving, St. Patrick’s Day, the Super Bowl and the Fourth of July. We seek to offer customers a “one-stop” party store that provides a wide selection of merchandise at a compelling value.

      Our fiscal year ends the Saturday nearest to June 30. As used herein, the term “Fiscal Year” or “Fiscal” refers to the 52- or 53-week period, as applicable, ending the Saturday nearest to June 30. Unless otherwise stated, the financial results presented for the year ended July 3, 2004 are based on a 53-week period, while the financial results for the years ended June 28, 2003 and June 29, 2002 are based on a 52-week period.

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Business Strategy and Initiatives

      Our objective is to maintain and expand our position as a leading national chain of party supply stores. To that end, we have undertaken initiatives to make fundamental improvements in the underlying components and operation of our business, including initiatives to: develop coordinated assortments of our product lines; increase exclusive product offerings; enhance our product and in-store presentation through new product packaging, in-store signage and displays, and shorter aisles; improve customer service; strengthen our employee base; upgrade and improve information systems; and centralize our distribution systems. We believe these initiatives will improve our operating efficiencies, profitability and cash flows, which will improve shareholder value in the long-term. Key components of our business strategy include:

      Offer a Broad Selection of Merchandise, Including Many Exclusive Products. We provide party-planners and party-goers with convenient one-stop shopping for party supplies, and we offer what we believe is one of the most extensive selections of party supplies available. The typical Party City store offers a broad selection of brand name and private label merchandise consisting of over 19,000 active items. We are in the process of transitioning our product base through the development of new, coordinated assortments within selected product categories.

      Enhance Merchandise Presentation and Create an Exciting Shopping Environment. We are enhancing our in-store product presentation to provide a more compelling shopping experience. We have begun to upgrade the presentation in our stores, including cutting through long aisles to allow customers to navigate the stores more easily and us to merchandise more effectively by highlighting more products around the end of each shortened aisle. We are also evaluating our product placement in connection with our new, coordinated assortment strategy to simplify the customers’ shopping experience and to increase synergistic selling opportunities.

      Establish Convenient Store Locations. Although we believe that our stores typically are destination shopping locations, we seek to maximize customer traffic and build quickly the visibility of new stores by situating our stores in high traffic areas. Site selection criteria include: population density, demographics, traffic counts, location of complementary retailers, storefront visibility and presence (either in a stand-alone building or in dominant power strip shopping centers), competition, lease rates and accessible parking. We believe there are an extensive number of suitable domestic locations available for future stores.

      Maintain Value Price Position. We use the aggregate buying power of our more than 500 Company-owned and franchise store network which allows us to offer a broad line of high quality merchandise at low prices. We believe we reinforce customers’ expectations of value through our advertising media, with a balanced message of product newness, exclusivity and savings. We also maintain a lowest price guaranty policy in Company-owned stores, and we suggest our franchisees adhere to such a policy. This policy guarantees that Party City stores will meet the advertised prices of competitor’s products.

      Provide Excellent Customer Service. We view the quality of our customers’ shopping experience as critical to our continued success, and we are committed to making shopping in our stores an enjoyable experience. For example, at Halloween, our most important selling season, each store significantly increases the number of sales associates. We believe that the compensation of our store managers and other personnel is competitive and enables us to attract and retain well-qualified, motivated employees who are committed to providing excellent customer service. In Fiscal 2004, we took significant steps to improve our customer service and to increase the ability of our in-store employees to assist customers as party consultants. To implement this strategy, we hired a full-time Director of Training and launched a sales and service training program in every region.

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      Logistics Initiative. Through the end of Fiscal 2004, merchandise purchases were shipped directly to stores. Starting in July 2004, we began shifting product flow for certain products through centralized distribution centers in order to facilitate lower freight costs through shipping efficiencies and lower purchase prices. This will also facilitate improved inventory management and reduce store labor requirements. We anticipate the full transition from direct-to-store delivery to centralized distribution to span the next two to three years.

      Expansion Plans. Our long-term goal is to increase our market share in existing markets and penetrate new markets to expand our position as a leading retailer of party supplies merchandise. Our growth strategy is based upon the opening of new Company-owned and franchise stores. While we continuously evaluate acquisition opportunities, we have no present commitments or agreements with respect to material acquisitions. Franchise store growth is subject to the ability and interest on the part of the franchisees to open stores according to our expansion plans. To manage continued store growth, we intend to continue to invest in our human resources, management information systems and supply-chain to further improve our infrastructure.

Store Counts and Locations

      As of July 3, 2004 and August 30, 2004, there were 506 and 507 Party City stores open in the United States and Puerto Rico, respectively. Of these, 249 were Company-owned as of July 3, 2004 and August 30, 2004, and 257 and 258 were operated by our franchisees as of July 3, 2004 and August 30, 2004, respectively. The following table shows the growth in Party City’s network of stores for the Fiscal Years 2000 through 2004.

(a)	Our Canadian master franchisee filed for bankruptcy protection under Canadian law, closing 28 stores in fiscal 2002.

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      As of July 3, 2004, Party City stores were located in the following states and Puerto Rico:

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Merchandising

     Store Layout and Product Selection

      Our stores are designed to be festive and create a compelling shopping experience for the customer. Our stores range in size from 6,750 to 19,800 square feet with a typical store size between 10,000 and 12,000 square feet. The stores are divided into various sections based upon product categories (see below), displayed to emphasize the breadth of merchandise available at a good value. We have begun to upgrade the presentation in our stores, including cutting through long aisles to allow customers to navigate the stores more easily and to provide increased exposure for featured products. We have also designed new packaging for many Party City products and in-store graphics and signage that make it easier to shop.

      To maintain consistency throughout our store network, we have established a list of approved items that are permitted to be sold in our stores. Franchise stores are required to follow these guidelines according to the terms of their franchise agreements. We establish a standard store merchandise layout and presentation format to be followed by Company-owned and franchise stores. Any layout or format changes developed by us are communicated to the managers of stores on a periodic basis. See Part I, Item 1. “Business — Risk Factors — An effective franchise program is key to our success” for limitations on our ability to control our franchisees.

     Product Categories

      Although product assortment and strategies are in transition, our general product categories remain consistent with our historical selection. The typical Party City store offers a broad selection of brand name and private label merchandise consisting of over 19,000 active items. Our product categories include the following:

	Halloween. The stores display Halloween-related merchandise throughout the year to position us as the customer’s Halloween shopping resource. Our Halloween merchandise is prominently displayed to provide an exciting and fun shopping experience for customers. As a key component of our sales strategy, our stores provide an extensive selection of Halloween products. The stores also carry a broad array of related decorations and accessories for the Halloween season. For Fiscal 2004, 2003 and 2002, our Halloween business represented 20%, 19% and 20% of our net sales, respectively.
	Summer Luau. Our Summer Luau category includes tableware, decorations, accessories, toys and games, and apparel for indoor and outdoor summer entertainment. Sales of Summer Luau products occur primarily from March through July.
	Other Seasonal. Customer purchases for other seasonal holidays and events compose a significant part of our business. The other seasonal category includes products for the Super Bowl, Valentine’s Day, St. Patrick’s Day, Fall, Thanksgiving, Passover, Easter, First Communion, the Fourth of July, Christmas, Hanukkah and New Year’s Eve. Some of the major items within this category are tableware, decorations, cutouts, lights and balloons tailored to the particular event.
	Baby Shower. We maintain a baby shower department, which includes tableware, decorations, balloons, favors, centerpieces and garlands.
	Balloons. The balloon department carries a wide selection of basic and decorative latex balloons in various sizes, qualities, colors and package sizes. The balloon department also carries Mylar balloons in numerous sizes, shapes and designs relating to birthday, seasonal, anniversary and other themes.
	Birthdays. The birthday product category includes a wide assortment of merchandise to fulfill customer needs for celebrating birthdays, including milestone birthdays such as “first,” “sweet sixteen” and 50th birthdays. Some of the products in this category include invitations, thank you cards, tableware, hats, horns, banners, cascades, balloons, novelty gifts, piñatas and candies.
	Bridal/Wedding/Anniversary. This product category includes personalized invitations, tableware, balloons, favors, place setting cards, confetti, honeycomb bells and personalized ribbons. We also carry personalized invitation books containing numerous samples of customizable invitations from the leading invitation stationers for sale at discount prices.

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	Candy. The candy product category includes novelty and packaged candy sold to enhance parties or to be used as piñata fillers. Candy is sold both in individual units and in bulk packaging for customers’ convenience.
	Catering Supplies. Our stores offer a broad selection of catering supplies, including trays, platters, foil, bowls, warming racks and fuel.
	Gift Wrap. This product category includes a wide assortment of gift bags, bows, tissue paper, ribbons, printed bags and wrapping paper.
	Greeting Cards. This product category includes greeting cards from quality national card vendors.
	Party Favors. We offer a broad selection of packaged and bulk favors appealing to different age groups. The assortment includes different product lines varying in prices designed to offer customers a variety of purchasing options.
	Party Basics. We carry a range of brand name and private label merchandise, including tableware, table covers, cutlery, crepe paper, cups and tumblers.

     Suppliers and Inventory

      The following represents suppliers from whom we purchased at least 5% of our merchandise:

      The loss of any of these suppliers could materially adversely affect our business, results of operations, financial condition and cash flow. We consider numerous factors in supplier selection, including, but not limited to, price, credit terms, product offerings and quality.

      We strive to maintain sufficient inventory to enable us to provide a high level of service to our customers. Inventory levels, accounts receivable and accounts payable levels, payment terms and return policies are in accordance with the general practices of the retail party supplies industry and standard business procedures.

      Through the end of Fiscal 2004, all of the merchandise purchased by stores was shipped directly to the stores. Pursuant to our logistics initiative to optimize inventory management, beginning in July 2004 we have begun to implement a centralized inventory distribution system for Company-owned stores. We are currently receiving a portion of our merchandise at two distribution centers, one in California and one in Pennsylvania. Phase I of our logistics initiative, which we believe will be completed by the end of the first quarter of Fiscal 2005, will support the weekly scheduling of store deliveries for merchandise being delivered to/from the distribution centers. We believe that our logistics initiatives, when fully implemented and operational, will reduce store labor requirements and improve inventory accuracy while reducing overall inventory levels. See Part I, Item 1. “Business — Risk Factors — If we lose any of our key vendors or any of our key vendors fail to supply us with merchandise, we may not be able to meet the demands of our customers and our sales could decline” for risks and uncertainties related to our suppliers.

      We negotiate pricing with suppliers on behalf of all stores in our network (Company-owned and franchise). We believe that our buying power enables us to receive favorable pricing terms and enhances our ability to obtain high demand merchandise.

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Franchise Operations

      As of August 30, 2004, we had 258 franchise stores throughout the United States and Puerto Rico. A Party City store run by a franchisee utilizes our format, design specifications, methods, standards, operating procedures, systems and trademarks.

      We receive revenue from our franchisees, consisting of an initial, one-time fee and an ongoing royalty fee. In addition, each franchisee has a mandated advertising budget, which consists of a minimum initial store opening promotion and ongoing local advertising and promotions. Further, the franchisee must pay an additional 1% of net sales to a Party City group advertising fund to cover common advertising materials related to the Party City store concept. Historically and during Fiscal 2004, to cover the expenses of fund administration, the Company has charged the Advertising Fund a management fee equal to 5% of the contributions. We do not offer financing to our franchisees.

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

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

      We have increased our focus on the management of our franchise operations, focusing on collaborative improvement efforts in several key operating areas such as merchandising, advertising and information systems.

      As of August 30, 2004, we had nine territory agreements with certain franchisees. These agreements grant the holder of the territory the right to open one or more stores within a stated time period.

Competition

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

      Management believes that Party City stores maintain a leading position in the party supplies business by offering a wider breadth of merchandise, greater selection within merchandise classes and low prices on most items in our stores. We believe that our significant buying power, which results from the size of our Party City store network, is an integral advantage.

Trademarks

      We license a number of trademarks and service marks registered with the United States Patent and Trademark Office, including Party City®, The Discount Party Super Store® and Halloween Costume Warehouse®.

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Government Regulation

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

      State laws that regulate the franchisor-franchisee relationship presently exist in a substantial number of states. Those laws regulate the franchise relationship, for example, by requiring the franchisor to deal with its franchisees in good faith, by prohibiting interference with the right of free association among franchisees and by regulating discrimination among franchisees with regard to charges, royalties or fees. In some cases, those laws also restrict a franchisor’s rights with regard to the termination of a franchise agreement (for example, by requiring “good cause” to exist as a basis for the termination and the franchisor’s decision to refuse to permit the franchisee to exercise its transfer or renewal rights) by requiring the franchisor to give advance notice to the franchisee of the termination and give the franchisee an opportunity to cure most defaults, and by requiring the franchisor to repurchase the franchisee’s inventory or provide other compensation upon termination. To date, those laws have not precluded us from seeking franchisees in any given area and have not had a material adverse effect on our operations.

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

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

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

Employees

      As of August 30, 2004, we employed approximately 1,600 full-time and 2,900 part-time employees. We consider our relationships with our employees to be good. None of our employees are covered by a collective bargaining agreement.

      During fiscal 2004, we filled a number of positions that were essential for our strategic transition. This included appointing Nancy Pedot as our permanent Chief Executive Officer and hiring a new Chief Operating Officer, Chief Merchandising Officer, Vice President of Finance, Creative Director and Director of Training. We also added people in key departments that had been understaffed, including Merchandising, Planning and Allocation and Logistics.

Risk Factors

      In addition to other matters identified or described by us from time to time in filings with the Securities and Exchange Commission, there are several important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or results that are reflected from time to time in any forward-looking statement that may be made by us or on our behalf. Some of these important factors, but not necessarily all of the important factors, are described below.

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     Inability to successfully execute our key initiatives

      We have undertaken key initiatives which focus primarily on our breadth and quality of products; product pricing; financial, distribution and inventory systems; and employee base.

      In connection with the implementation of these initiatives, we have generated significant initial investment expenses that are disproportionate to our sales performance. However, we anticipate these expenses will normalize over time. Most importantly, these initiatives are anticipated to improve customer experience and solidify brand recognition which we believe will ultimately result in increased sales, reduced expenses and, accordingly, greater net income. Should our customers respond less favorably to our merchandise offerings, we may need to reduce our prices resulting in a negative impact on our net income.

     An effective franchise program is key to our success

      Our growth and success depends in part upon our ability to contract with and retain qualified franchisees, as well as the ability of those franchisees to operate their stores and promote and develop our store concept. Although we have established criteria to evaluate prospective franchisees and our franchise agreements include certain operating standards, each franchisee operates inde