PARTY CITY CORP.

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.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:

As of February 2, 2004, there were outstanding 17,726,849 shares of Common Stock, $.01 par value.

(1)

The June 28, 2003 condensed consolidated balance sheet was derived from the Company’s audited consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(Unaudited)

The condensed consolidated financial statements are unaudited. In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the financial position of the Company as of December 27, 2003 and December 28, 2002 and the results of operations for the quarters and six months ended December 27, 2003 and December 28, 2002 and cash flows for the six months ended December 27, 2003 and December 28, 2002. Because of the seasonality of the party goods industry, operating results of the Company on a quarterly or six month basis may not be indicative of operating results for the full fiscal year.

These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended June 28, 2003, which are included in the Company’s Annual Report on Form 10-K with respect to such period filed with the Securities and Exchange Commission on September 26, 2003. All significant intercompany accounts and transactions have been eliminated. The June 28, 2003 condensed consolidated balance sheet amounts are derived from the Company’s audited condensed consolidated financial statements.

Our Fiscal Year (“Fiscal Year”) refers to the 52 or 53 weeks, as applicable, ending the Saturday nearest to June 30. The year ended July 3, 2004 (“Fiscal 2004”) is a 53 week year as compared to the years ended June 28, 2003 (“Fiscal 2003”) and June 29, 2002 (“Fiscal 2002”), which were each 52 week years.

Certain reclassifications have been made to the condensed consolidated financial statements in prior periods to conform to the current period presentation.

The Company periodically grants stock options to employees. Pursuant to Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, the Company accounts for stock-based employee compensation arrangements using the intrinsic value method. The Company has adopted the disclosure only provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock Based Compensation”, as amended by SFAS No. 148, “Accounting for Stock Based Compensation - Transition and Disclosure, an Amendment of SFAS No. 123”. If compensation cost for the Company’s stock option plans had been determined in accordance with the fair value method prescribed by SFAS No. 123 the Company’s net income would have been (in thousands, except per share data):

The weighted average fair value of options granted during the second quarter of Fiscal 2004 and 2003 was $6.48 and $6.25, respectively.

The weighted average fair value of options granted during the six months ended Fiscal 2004 and 2003 was $5.15 and $7.53, respectively.

The following table sets forth the computations of basic and diluted earnings per share (in thousands, except per share amounts):

(a)		Options to purchase 577,908 and 703,391 shares of common stock at prices ranging from $13.80 to $30.88 per share were outstanding for the quarter and six months ended December 27, 2003 but were not included in the computation of earnings per share because to do so would have been antidilutive.

(b)		Options to purchase 701,069 and 534,358 shares of common stock at prices ranging from $13.83 to $32.50 per share were outstanding for the quarter and six months ended December 28, 2002 but were not included in the computation of earnings per share because to do so would have been antidilutive.

In January 2003, the Company entered into a $65 million revolving credit facility (“Loan Agreement”) with Wells Fargo Retail Finance, LLC, as the arranger, collateral agent and administrative agent, and Fleet Retail Finance, Inc., as the documentation agent. Under the terms of the Loan Agreement, the Company may borrow amounts based on a percentage of its eligible inventory and credit card receivables, subject to certain borrowing conditions and customary sub-limits, reserves and other limitations. Interest on advances is charged, at the Company’s option, (i) at the adjusted Eurodollar rate plus the applicable margin, which was set initially at 1.50%, and is currently at 1.25%, per annum or (ii) at the prime rate less the applicable margin, which was initially set at and is currently 0.25% per annum, totaling 3.75% at December 27, 2003. The term of the Loan Agreement is through April 30, 2006 and is secured by a lien on substantially all of the Company’s assets. The Company had a standby letter of credit of $3.7 million outstanding at December 27, 2003. At December 27, 2003 and February 2, 2004, the Company had no borrowings outstanding under the Loan Agreement. Based on a percentage of current eligible inventory and credit card receivables, the Company had $19.2 million available to be borrowed under the Loan Agreement at February 2, 2004.

The Company’s authorized capital stock was increased from 25,000,000 shares to 40,000,000 shares of its common stock, $0.01 par value per share, at the annual shareholders’ meeting on November 12, 2003. At December 27, 2003 and December 28, 2002 there were 17,721,850 shares and 17,113,873 shares, respectively, of the Company’s common stock issued and outstanding.

In September 2001, the Board of Directors authorized the Company to repurchase up to $15 million of its outstanding common stock. Stock repurchases are made at the discretion of management. There was no stock repurchase activity during the first six months of Fiscal 2004 and during the first six months of Fiscal 2003. As of December 27, 2003, the Company had purchased 747,012 shares for an aggregate amount of $5.9 million or 39.6% of the total amount to be purchased.

There were no warrant exercises in the first six months of Fiscal 2004. In the first six months of Fiscal 2003, 688,000 warrants to purchase the Company’s common stock were exercised. This included an exercise of 458,667 warrants for which proceeds of $490,774 were received and a cashless exercise of the remaining 229,333 warrants for which the warrant holders received 213,792 shares of common stock. The remaining 15,541 shares were surrendered in connection with this exercise. These 15,541 shares of the Company’s common stock had a market value of $245,386 at the time of surrender.

A lawsuit was filed on September 25, 2001 against Party City in Los Angeles Superior Court by an assistant manager in one of the Company’s California stores for himself and on behalf of other members of an alleged class of Party City store managers (the “Class”) who claim the Company misclassified the Class members as exempt from California overtime wage and hour laws. The Class members seek the disgorgement of overtime wages allegedly owed by the Company to them but not paid and they also seek punitive damages and statutory penalties. If a class is certified, liability is found, and a judgment is entered, such a judgment may adversely affect the Company.

In addition to the foregoing, from time to time the Company is involved in routine litigation incidental to the conduct of the business, which is not, individually or in the aggregate, material to the Company.

The following table contains key financial information of the Company’s business segments (in thousands):

During Fiscal 2003, the Company acquired two stores from a franchisee. The aggregate consideration paid in connection with this acquisition was $1,603,000. The consolidated balance sheets include allocations of the purchase price related to this transaction of approximately $1,002,000 in goodwill, $195,000 in fixed assets and $406,000 in inventory.

In Fiscal 2002, the Company completed the acquisition of thirteen stores in the Seattle, Washington market from Paper Warehouse, Inc. The conversion of these locations to the Party City store format was completed and all stores were opened by the first quarter of Fiscal 2003. Additional goodwill of $155,000 was recorded in Fiscal 2003 related to the completion of the conversion of these locations.

The acquisitions have been accounted for under the purchase method of accounting. The results of operations of the acquired stores are included in the financial statements from the date the stores were opened.

The were no changes in the carrying amount of goodwill of $18.6 million for the six months ended December 27, 2003.

Assuming the stores acquired during the six months ended December 28, 2002 were acquired on June 30, 2002, the beginning of Fiscal 2003, the pro forma results would have been as follows (in thousands, except per share amounts):

In November 2002, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” The Interpretation elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under the guarantee and must disclose that information in its interim and annual financial statements. The provisions related to recognizing a liability at inception of the guarantee for the fair value of the guarantor’s obligations do not apply to product warranties or to guarantees accounted for as derivatives. The initial recognition and initial measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002.

The Company has unconditionally guaranteed the lease payments of 24 leases associated with franchise stores and locations sublet. The majority of the guarantees were given when the Company sold stores in 1999 as part of its restructuring. The guarantees continue until the expiration date of the leases, which range from 2004 through 2011. The maximum amount of the guarantees may vary, but is limited to the sum of the total amount due under the lease. As of December 27, 2003, the maximum aggregate amount of the guarantees was approximately $18.5 million.

In January 2003, the FASB issued FASB Interpretation (FIN) No. 46, “Consolidation of Variable Interest Entities.” FIN 46 addresses how to identify variable interest entities and provides guidance as to how a company may assess its interests in a variable interest entity for purposes of deciding whether consolidation of that entity is required. FIN 46 is effective for all variable interest entities created after January 31, 2003. The Company is required to adopt the provisions of FIN 46 for any variable interest entity created prior to February 1, 2003 by the end of the current fiscal year. The Company is reviewing the provisions of this interpretation and currently does not expect its implementation to have a material effect on its financial position, results of operations or cash flows.

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

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

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

Our accounting policies are more fully described in Note 1 to the consolidated financial statements contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on September 26, 2003. We have identified certain critical accounting policies that are described below.

Merchandise inventory. Inventory is valued using the cost method which values inventory at the lower of the actual cost or market, at the individual item level. Cost is determined using the weighted average method. Inventory levels are reviewed to identify slow-moving and closeout merchandise that will no longer be carried. Market is determined by the estimated net realizable value, based upon the merchandise selling price.

Finite long-lived assets. In the evaluation of the fair value and future benefits of finite long-lived assets, we perform an analysis of the anticipated undiscounted future net cash flows of the related finite long-lived assets. Various factors including future sales growth and profit margins are included in this analysis. To the extent these future projections or strategies change, the conclusion regarding impairment may differ from the current estimates.

Insurance accruals. Our consolidated balance sheets include liabilities with respect to self-insured workers’ compensation and general liability claims. We estimate the required liability of such claims utilizing an actuarial method, based upon various assumptions, which include, but are not limited to, our historical loss experience, projected loss development factors, actual payroll and other data. The required liability is also subject to adjustment in the future based upon changes in claims experience, including changes in the number of incidents (frequency) and changes in the ultimate cost per incident (severity).

Goodwill. We evaluate goodwill annually or whenever events and changes in circumstances suggest that the carrying amount may not be recoverable from its estimated future cash flows. In making this assessment, management relies on a number of factors including operating results, business plans, economic projections, anticipated future cash flows and marketplace data. A change in these underlying assumptions may cause a change in the results of the tests and, as such, could cause fair value to be less than the carrying value. In such event, we would then be required to record a charge, which would impact earnings.

Sales Returns. We estimate future sales returns and, when material, record a provision in the period that the related sales are recorded based on historical information. Should actual returns differ from our estimates, we would be required to revise estimated sales returns.

Store Closure Costs. We record estimated store closure costs, such as estimated lease commitment costs net of estimated sublease income and other miscellaneous store closing costs, when the liability is incurred. Such estimates may be subject to change should actual costs differ.

(a)

Our definition of EBITDA is earnings before interest, taxes, depreciation and amortization. We believe EBITDA provides additional information for determining our ability to meet future debt service requirements. EBITDA should not be construed as a substitute for net income or net cash provided by operating activities (all as determined in accordance with generally accepted accounting principles) for the purpose of analyzing our operating performance, financial position and cash flows as EBITDA is not defined by generally accepted accounting principles. We have presented EBITDA, however, because it is commonly used by certain investors and analysts to analyze and compare companies on the basis of operating performance and to determine a company’s ability to service and/or incur debt. Our computation of EBITDA may not be comparable to similar titled measures of other companies.

Because we also consider EBITDA useful as an operating measure, a reconciliation of EBITDA to net income follows for the periods indicated:

Because we also consider EBITDA useful as a liquidity measure, we present the following reconciliation of EBITDA to our net cash provided by operating activities:

We use EBITDA to determine our executive compensation which bases incentive compensation payments on our EBITDA performance measured against budget. EBITDA is also widely used by us and others in our industry to evaluate and price potential acquisitions.

EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

	•		EBITDA does not reflect our current or future requirements for capital expenditures or contractual commitments;

	•		EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

	•		EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debts;

	•		Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements; and

	•		Other companies in our industry may calculate EBITDA differently than we do, limiting its usefulness as a comparative measure.

Because of these limitations, EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA only supplementally. See the Statements of Cash Flows included in our financial statements.

Net Sales. Net sales include same store sales and new store sales. Same store sales include sales for those stores that were in operation for a full period in both the current month and the corresponding month for the prior year. New store sales include sales in the current fiscal year from stores opened during the previous fiscal year before they are considered same stores, and new stores opened in the current fiscal year.

Cost of goods sold and occupancy costs. Cost of goods sold and occupancy costs includes the cost of merchandise, freight to the stores and store occupancy costs. Store occupancy costs include rent, common area maintenance, real estate taxes, repairs and maintenance, depreciation, insurance and utilities.

Store operating and selling expenses. Store operating and selling expenses consist of selling and store management payroll, employee benefits, medical insurance, employment taxes, advertising, pre-opening expenses which are expensed when incurred and other store level expenses.

General and administrative expenses. General and administrative expenses include payroll and employee benefits, employment

taxes, management information systems, marketing, insurance, legal and other corporate level expenses. Corporate level expenses are primarily attributable to our corporate office in Rockaway, New Jersey, and district and regional offices throughout the country.

Franchising. Franchising revenue is composed of the initial franchise fees, which are recorded as revenue when a franchise store opens, plus ongoing royalty fees, which are generally 4.0% of the store’s net sales. Franchise expenses include direct and indirect expenses. The direct expenses include salaries, travel and other direct expenses of the franchise operations department in addition to legal fees, bad debt expense, insurance expense and other miscellaneous charges. The indirect expenses include pro-rata allocations of corporate expenses for salaries, including bonuses, occupancy and depreciation, based on time spent on franchise support.

Interest expense. Interest and debt expense includes interest relating to our senior notes and credit facility. Interest also includes amortization of financing intangibles, bank service charges and interest on capital lease obligations.

Quarter Ended December 27, 2003 Compared to Quarter Ended December 28, 2002

Retail. Net sales from Company-owned stores increased 8.4% to $175.3 million for the second quarter of Fiscal 2004 from $161.6 million for the second quarter of the prior fiscal year. Of the 8.4% increase in net sales, 3.7% resulted from a same store sales increase and the remaining 4.7% related to the stores that have not been open for one year. The customer count in company-owned stores, on a same store basis, increased 1.5%, and the average sale increased 2.2%. With nine stores joining the same store sales group during this quarter of Fiscal 2004, same store sales increased 4.9% in the western region, 4.0% in the eastern region and 2.6% in the central region. Same store sales for Company-owned stores increased 1.9% for the second quarter of Fiscal 2003. The Company opened no new stores during the second quarter of Fiscal 2004 and five in the same period last year.

Gross profit, which is net sales minus cost of goods sold and occupancy costs, increased 7.5% to $70.6 million in the second quarter of Fiscal 2004 from $65.7 million in the same period last year. The increase was primarily due to increased sales volume. Gross margin as a percent of sales was 40.3% for the second quarter of Fiscal 2004 compared with 40.6% for the same period last year.

Store operating and selling expenses increased 5.8% to $36.3 million for the second quarter of Fiscal 2004 from $34.3 million in the same period last year. The increase in store operating expenses is attributable to same store sales increases and the increase in the number of stores. Store operating and selling expenses were 20.7% and 21.2% of sales for the second quarter of Fiscal 2004 and Fiscal 2003, respectively. The decrease as a percent of sales is due mainly to a decrease in store opening expenses.

The pre-opening expenses incurred in the second quarter of Fiscal 2004 for the new stores and stores to be opened later in the fiscal year amounted to $20,000 compared with $314,000 incurred during the same period last year.

Company-owned store profit contribution, which is gross profit minus store operating and selling expenses, was $34.3 million for the second quarter of Fiscal 2004 compared with $31.4 million for the same period last year. The improvement over the prior year is primarily the result of same store sales increases and the increase in the number of stores. Store profit contribution as a percent of sales was 19.6% for the second quarter of Fiscal 2004 compared with 19.4% in the same period last year. New stores in their first or second Halloween season reported store contribution of $3.3 million, an increase of $2.9 million over the comparable period last year. Of this $2.9 million increase, $400,000 was attributable to the 12 stores in the Seattle market acquired in 2002.

General and administrative expenses decreased 10.8% to $7.5 million in the second quarter of Fiscal 2004 from $8.4 million in the same period last year. General and administrative expenses were 4.3% and 5.2% of sales for the second quarter of Fiscal 2004 and Fiscal 2003, respectively. This decrease is primarily due to unusual expenses associated with the Company’s new logistics initiative and professional fees related to the implementation of a new information system incurred in the second quarter of Fiscal 2003 which were not incurred in Fiscal 2004.

Franchising. Franchise fees recognized on one store opening was $40,000 in the second quarter of Fiscal 2004 and $40,000 for one store opening in the same period last year. Royalty fees increased 10.9% to $7.2 million in the second quarter of Fiscal 2004 from $6.5 million in the same period last year. This was primarily due to an increased franchise store base and a same store sales increase of 7.0% for the franchise stores in the second quarter of Fiscal 2004, as compared with 2.9% for the same period last year.

Expenses attributable to franchise revenue decreased 5.1% to $1.6 million for the second quarter of Fiscal 2004 from $1.6 million for the second quarter of the prior fiscal year. As a percentage of franchise revenue, franchise expenses were 21.5% and 25.2% for the second quarter of Fiscal 2004 and Fiscal 2003, respectively.

Franchise profit contribution, which is franchise revenue minus expenses related to franchise revenue, increased 16.3% to $5.7

million in second quarter of Fiscal 2004 from $4.9 million in the same period last year. The increase in franchise profit contribution is due to the increase in royalty fees combined with a decrease in franchise expenses.

Interest Expense. Interest expense decreased to $112,000 for the second quarter of Fiscal 2004 from $2.8 million in the same period last year. This decrease in interest expense is due to the repurchase of outstanding senior notes in the second quarter of Fiscal 2003. The repurchase of these notes was completed using working capital and borrowings under the Company’s asset-based revolving credit agreement.

Income Taxes. An income tax expense of $13.1 million or 40.5% of pre-tax income, and $10.0 million or 39.9% of pre-tax income was recorded in the second quarter of Fiscal 2004 and Fiscal 2003, respectively. The change in tax rate from 39.9% to 40.5% is due to an increase in the overall state tax rate.

Net Income. As a result of the above factors, net income increased to $19.3 million, or $0.98 per diluted share, in the second quarter of Fiscal 2004, as compared to net income of $15.1 million, or $0.76 per diluted share in Fiscal 2003. Weighted average diluted shares outstanding decreased to 19.6 million in the second quarter of Fiscal 2004 from 19.9 million in the same period last year. This decrease is mainly due to the 463,000 shares of company stock that were purchased by the Company during the third quarter of Fiscal 2003, the warrant and stock option exercises during the twelve months ending December 27, 2003.

Six Months Ended December 27, 2003 Compared with Six Months Ended December 28, 2002

Retail. Net sales from Company-owned stores increased 10.0% to $277.9 million for the six-months ended December 27, 2003 from $252.8 million for the same period last year. Of the 10.0% increase in net sales, 3.8% resulted from a same store sales increase and the remaining 6.2% related to the stores that have not been open for one year. The customer count in company-owned stores, on a same store basis, increased 1.4%, and the average sale increased 2.2%. With 31 stores joining the same store sales group during the six months ended December 27, 2003, same store sales increased 4.6% in the western region, 4.3% in the eastern region and 2.8% in the central region. Same store sales for Company-owned stores increased 2.5% for the same period last year. The Company opened six new stores and closed one store during the six-months ended December 27, 2003 and opened 28 stores, acquired two stores from franchises and closed no stores during the same period last year.

Gross profit, which is net sales minus cost of goods sold and occupancy costs, increased 7.1% to $98.9 million in the six-months ended December 27, 2003 from $92.4 million in the same period last year. The increase was primarily due to increased sales volume. Gross margin as a percent of sales was 35.6% for the six-months ended December 27, 2003 compared with 36.5% for the same period last year. The decrease in gross margin percent was related primarily to a high level of promotional activity in July and August, the continued emphasis on the clearance of discontinued merchandise as part of the Company’s strategic focus.

Store operating and selling expenses increased 7.2% to $62.2 million for the six-months ended December 27, 2003 from $58.0 million in the same period last year. The increase in store operating expenses is attributable to increased expenses related to the additional stores opened since the same period last year. Store operating and selling expenses were 22.4% and 22.9% of sales for the six-months ended December 27, 2003 and December 28, 2002, respectively. The decrease as a percent of sales is due mainly to a decrease in store opening expenses.

The pre-opening expenses incurred in the six-months ended December 27, 2003 for the new stores and stores to be opened later in the fiscal year amounted to $323,000 compared with $796,000 incurred during the same time period last year.

Company-owned store profit contribution, which is gross profit minus store operating and selling expenses, was $36.7 million for the six-months ended December 27, 2003 compared with $34.4 million for the same period last year. The improvement over the prior year is primarily the result of same store sales increases and the increase in the number of stores. Store profit contribution as a percent of sales was 13.2% for the six-months ended December 27, 2003 compared with 13.6% of sales in the same period last year due to the decrease in gross margin as described above. New stores in their first or second Halloween season reported store contribution of $1.3 million, an increase of $3.7 million over the comparable period last year. Of this $3.7 million increase, approximately $900,000 was attributable to our Seattle stores.

General and administrative expenses decreased 0.3% to $15.7 million in the six-months ended December 27, 2003 from $15.7 million in the same period last year. General and administrative expenses were 5.6% and 6.2% of sales for the six-months ended December 27, 2003 and December 28, 2002, respectively. This decrease is primarily due to unusual expenses associated with the Company’s new logistics initiative and professional fees related to the implementation of a new information system incurred during the six months ended December 27, 2002 which were not incurred during the same time period this year.

Franchising. Franchising fees recognized on 13 store openings was $488,000 in the six-months ended December 27, 2003 as compared with $275,000 recognized for eight store openings in the same period last year. Royalty fees increased 9.6% to $11.1 million in the six-months ended December 27, 2003 from $10.2 million in the same period last year. This was primarily due to an increased franchise store base and a same store

sales increase of 5.7% for the franchise stores in the six-months ended December 27, 2003, as compared with 4.0% for the same period last year.

Expenses attributable to franchise revenue for the six-months ended December 27, 2003 remained relatively flat with last year at $3.2 million. As a percentage of franchise revenue, franchise expenses were 27.7% and 30.8% for the six-months ended December 27, 2003 and December 28, 2002, respectively.

Franchise profit contribution, which is franchise revenue minus expenses related to franchise revenue, increased 16.3% to $8.4 million for the six months ended December 27, 2003 from $7.2 million in the same period last year. The increase in franchise profit contribution is due to the increase in royalty fees as well as a decrease in franchise expenses.

Interest Expense. Interest expense decreased to $312,000 for the six-months ended December 27, 2003 from $3.7 million in the same period last year. This decrease in interest expense is due to the repurchase of outstanding senior notes. The repurchase of these notes was completed using working capital and borrowings under the Company’s asset-based revolving credit agreement.

Income Taxes. An income tax expense of $11.8 million or 40.5% of pre-tax income, and $8.9 million or 40.0% of pre-tax income, was recorded in the six-months ended December 27, 2003 and December 28, 2002, respectively. The change in tax rate from 40.0% to 40.5% is due to an increase in the overall state tax rate.

Net Income. As a result of the above factors, net income increased to $17.3 million or $0.88 per diluted share in the six-months ended December 27, 2003, as compared to net income of $13.3 million, or $0.67 per diluted share in the same period last year. Weighted average diluted shares outstanding decreased to 19.6 million in the six-months ended December 27, 2003 from 19.9 million in the same period last year. This decrease is mainly due to the 463,000 shares of company stock that were purchased by the Company during the third quarter of Fiscal 2003, the warrant and stock option exercises during the twelve months ending December 27, 2003 and a slight decrease in average stock price for the six months ending December 27, 2003.

The Company’s cash requirements are primarily for working capital, the opening of new stores, the improvement and expansion of existing facilities and the improvement of information systems. Historically, these cash requirements have been met through cash flow from operations and borrowings under our credit facilities. At December 27, 2003, working capital was $35.6 million compared to $14.5 million in the same period last year.

For the six months ended December 27, 2003, cash provided by operating activities was $30.6 million, compared to $19.9 million for the same period last year. The increase in cash provided by operating activities was primarily attributable to a decrease in inventory. The decrease in average inventory level per store of 15.7% from the same period last year was attributed to management’s efforts to control inventory and enable the Company to focus on product assortment, merchandise presentation and identify and discontinue slower moving SKU’s. There was also an increase in net income and a decrease in accounts payable and other current liabilities.

Cash used in investment activities for the six months ended December 27, 2003 was $3.5 million compared to $15.2 million in the same period in the last fiscal year. The decrease in cash used in investing activities was primarily attributable to the opening of six Company-owned stores this year as compared with 28 new store openings and the acquisition of two stores from a franchisee during the same period last year.

Cash used in financing activities was $9.9 million for the six months ended December 27, 2003 compared with $4.9 million for the same period last year. Cash generated from operations was used to pay down our revolving credit facility.

At December 27, 2003, the Company had no balance outstanding under the Loan Agreement. Under the terms of the Loan Agreement, the Company may from time to time borrow amounts based on a percentage of its eligible inventory, up to a maximum of $65 million at any time outstanding. Advances bear interest, at the Company’s option, (i) at the adjusted Eurodollar rate plus the applicable margin, which was set initially at 1.50% and is currently at 1.25%, per annum or (ii) at the prime rate less the applicable margin, which was initially set at and is currently 0.25% per annum, totaling 3.75% at December 27, 2003. The term of the Loan Agreement is three years, and is secured by a lien on substantially all of the assets of the Company. At December 27, 2003 and February 2, 2004, the

Company had no borrowings outstanding under the Loan Agreement. Based on a percentage of current eligible inventory and credit card receivables, the Company had $19.2 million available to be borrowed under the Loan Agreement at February 2, 2004.

Company management currently believes that the cash generated by operations, together with the borrowing availability under the Loan Agreement, will be sufficient to meet the Company’s working capital needs for the next twelve months, including planned new store openings. The Company is currently free of debt. This permits the Company to consider a wide variety of corporate initiatives intended to improve shareholder value, although there is no assurance that any specific initiative will be pursued or consummated.

To facilitate an understanding of our contractual obligations and commercial commitments, the following data is provided as of December 27, 2003:

As of December 27, 2003 and February 2, 2004, we had a contingent liability related to severance payments for 14 employees. The total contingent liability ranges from zero to approximately $2.0 million. As of December 27, 2003 and February 2, 2004, we had a standby letter of credit of $3.7 million pursuant to the Loan Agreement.

We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating our business.

This Form 10-Q (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 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, and include among others, the following: 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. Additional information concerning certain 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 Securities and Exchange Commission filings and our public announcements.

We, in the normal course of doing business, are exposed to interest rate change and market risk. As borrowing patterns are cyclical, we borrow only during certain times of the year. Therefore, a sudden increase in interest rates (which under the Loan Agreement is dependent on, at the Company’s option, (i) at the adjusted Eurodollar rate plus the applicable margin, which was set

initially at 1.50% per annum, and is currently at 1.25% per annum, or (ii) at the prime rate less the applicable margin, which was set initially at and is 0.25% per annum) may, during peak borrowing, have a negative impact on short-term results.

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by SEC Rule 13a-15(b), the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the three months covered by this report. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

There has been no change in the Company’s internal controls over financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

A lawsuit was filed on September 25, 2001 against Party City in Los Angeles Superior Court by an assistant manager in one of the Company’s California stores for himself and on behalf of other members of an alleged class of Party City store managers (the “Class”) who claim the Company misclassified the Class members as exempt from California overtime wage and hour laws. The Class members seek the disgorgement of overtime wages allegedly owed by the Company to them but not paid and they also seek punitive damages and statutory penalties. If a class is certified, liability is found and a judgment is entered, such a judgment may adversely affect the Company.

In addition to the foregoing, from time to time the Company is involved in routine litigation incidental to the conduct of the business which is not, individually or in the aggregate, material to the Company.

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

The Company’s 2003 Annual Meeting of Stockholders was held on Wednesday, November 12, 2003 for the following purposes:

	1.	To elect eight directors to the Board of Directors who shall serve until the 2004 Annual Meeting of Stockholders, or until their successors are elected and qualified (“Proposal 1”).

		The voting as to Proposal 1 was as follows:

	2.	To approve an amendment to the Company’s Certificate of Incorporation increasing the number of the Company’s authorized shares of Common Stock from 25,000,000 to 40,000,000 (“Proposal 2”).

		The voting as to Proposal 2 was as follows:

	3.	To approve an amendment and restatement of the Company’s 1999 Stock Incentive Plan, increasing the number of shares of the Company’s common stock issuable pursuant to options and awards granted under the plan from 2,000,000 to 7,500,000, and increasing the limit on the number of shares of the Company’s common stock which may be subject to options or stock appreciation rights granted to a single participant in any given year from 400,000 to 750,000 (“Proposal 3”).

		The voting as to Proposal 3 was as follows:

(a)		The exhibits required to be filed as part of this report on Form 10-Q are listed in the attached Exhibit Index.

(b)		Reports on Form 8-K:

		The Company furnished a Current Report on Form 8-K dated November 12, 2003 in reference to a press release dated November 12, 2003 reporting certain information regarding the Company’s sales results for the five week period ended November 1, 2003, which includes the Halloween selling season.

		The Company furnished a Current Report on Form 8-K dated November 7, 2003 in reference to a press release dated November 7, 2003 reporting certain information regarding the Company’s operating results for the first quarter ended September 27, 2003.

		The Company furnished a Current Report on Form 8-K dated October 9, 2003 in reference to a press release dated October 9, 2003 reporting certain information regarding the Company’s sales results for the first quarter ended September 27, 2003.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

25 EX-10.12 3 y93620exv10w12.htm EMPLOYMENT AGREEMENT OF RICHARD H. GRINER EMPLOYMENT AGREEMENT OF RICHARD H. GRINER

THIS EMPLOYMENT AGREEMENT (the “Agreement”), dated as of January 12, 2004, is made and entered into by and between Party City Corporation, a Delaware corporation (the “Company”), and Richard H. Griner (the “Executive”).

WHEREAS, the Company wishes to employ the Executive, and the Executive wishes to serve the Company, in the capacities and on the terms and conditions set forth in this Agreement;

(a) Agreement to Employ. Upon the terms and subject to the conditions of this Agreement, the Company hereby agrees to employ the Executive and the Executive hereby agrees to accept his employment by the Company.

(b) Employment Period. The Company shall employ the Executive and the Executive shall serve the Company, on the terms and conditions set forth herein, for the period commencing on January 12, 2004 (the “Commencement Date”) and ending on the third anniversary of the Commencement Date (the “Employment Period”); provided, that (i) the Employment Period will automatically be extended for successive one year periods thereafter upon the terms and conditions set forth herein, unless either party gives the other party written notice of such party’s intention not to renew this Agreement at least three months prior to the end of the original three-year period or any such successive one-year renewal period, and (ii) the Employment Period may be terminated earlier as provided hereinafter.

2. Duties. During the Employment Period, the Executive shall serve as Chief Operating Officer of the Company. Executive shall report to the Company’s Chief Executive Officer (the “CEO”). Executive shall have such duties and responsibilities as are consistent with and customarily assigned to his position with the Company as determined by the CEO. Executive shall also have such other duties and responsibilities as may from time to time be assigned to him by the CEO. During the Employment Period, the Executive shall devote his full attention and time to the business and affairs of the Company and shall carry out such duties and responsibilities faithfully and to the best of his ability.

3. Salary. For the services rendered by the Executive under and during the Employment Period, the Company shall pay to Executive as compensation, subject to any applicable withholding and deductions, an annual base salary of $300,000 (the “Base Salary”). In addition, in consideration for Executive’s agreement to abide by the provisions of Paragraph 8 herein, the Company shall pay to Executive, subject to any applicable withholding and deductions, an annual stipend of $65,000 (the “Restrictive Covenant Stipend”) (the Base Salary and the Restrictive Covenant Stipend hereafter referred to as the “Salary”). The Salary shall be subject to annual review and adjustment at the direction of the Board. The Salary shall be payable in accordance with the Company’s regular payroll practice for its senior executives, as in effect from time to time.

4. Incentive Compensation. (i) In addition to Salary, the Executive shall be entitled to earn an annual bonus for each full Fiscal Year (as defined below) of the Company during the Employment Period pursuant to the Company’s annual incentive bonus plan as in effect from time to time and based on attaining certain performance objectives thereunder (the “Performance Bonus”). The target amount of the Performance Bonus for each Fiscal Year during the Employment Period shall be fifty percent (50%) of Executive’s Salary, at the rate in effect as of the last day of the Fiscal Year for which such bonus is paid. The actual Performance Bonus may be more or less than 50% of Salary, based on actual performance according to the reasonable performance objectives established, provided that the maximum bonus may not exceed 100% of Salary. The objectives for Fiscal Year ending July 3, 2004 are set forth on Exhibit A annexed hereto. The actual amount of the Performance Bonus for any Fiscal Year shall be payable as soon as practicable after completion of the Company’s audited financial statements. For purposes of this Agreement, “Fiscal Year” means each twelve month period ending June 30 or such other date as hereinafter adopted. Notwithstanding the foregoing, with respect to the Fiscal Year ending June 30, 2004, the Executive shall be entitled to earn a bonus equal to one-half (1/2) of the Performance Bonus.

(ii) Stock Options. The Executive shall be granted on the Commencement Date, nonqualified stock options (the “Stock Options”) to acquire 150,000 shares of common stock of the Company, $0.01 par value per share (the “Common Stock”), at an exercise price per share equal to a share of Common Stock at the market close on the Commencement Date. The Options shall have a term of ten years from the date of grant and shall vest and become exercisable as follows:

50,000 shares shall vest and become fully exercisable on January 12, 2005, provided Executive is employed by the Company on such date;

33,333 shares shall vest and become fully exercisable on January 12, 2006, provided Executive is employed by the Company on such date;

33,333 shares shall vest and become fully exercisable on January 12, 2007, provided Executive is employed by the Company on such date; and

33,334 shares shall vest and become fully exercisable on January 12, 2008, provided Executive remained employed by the Company through January 12, 2008.

(iii) Vacation. During the Employment Period, the Executive shall be entitled to three weeks of paid vacation per year of employment.

(iv) Automobile Allowance. During the Employment Period, the Executive shall be reimbursed for the actual cost of leasing and insuring an automobile, up to a maximum of $675.00 per month.

5. Benefit Plans. The Executive shall be eligible to participate in any health insurance plan, dental insurance plan, retirement plan, fringe benefit plan, or other employee benefit plan generally made available by the Company to all employees or to other executive officers of the Company in the same class as the Executive. Participation in any such plan or program shall be subject to the terms and conditions of such plan, including any waiting periods

6. Reimbursement of Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by him in performing services hereunder, in accordance with the Company’s policies and procedures established for reimbursement of expenses of executive officers in the same class as the Executive. Reimbursement shall be subject to prompt presentation by Executive of expense statements, receipts or such other supporting information as the Company may require or as may be required for tax purposes.

(a) Termination of the Employment Period. Notwithstanding Paragraph 1(b), the Company reserves the right at any time during the Employment Period to terminate Executive’s employment with or without Cause. The Employment Period shall end upon the earliest to occur of (i) Executive’s death or a termination of Executive’s employment by the Company due to Disability (as defined below), (ii) a termination of Executive’s employment by the Company for Cause, (iii) a termination of Executive’s employment by the Company without Cause, (iv) a resignation by the Executive other than in accordance with Paragraph 7(a)(vi); provided, that Executive shall provide the Company with at least 30 days’ prior written notice of such resignation, (v) the end of the final Employment Period, or (vi) a resignation by the Executive following a Change in Control (as defined below); provided, however, that such resignation shall be tendered, if at all, within 30 days of the occurrence of such Change in Control.

(b) Benefits Payable Upon Termination. (i) In the event of the termination of Executive’s employment on account of Executive’s death or the termination of Executive’s employment by the Company due to Disability, Executive’s resignation other than in accordance with Paragraph 7(a)(vi), the Company’s termination of Executive’s employment for Cause, or the end of the final Employment Period, the Company shall pay to Executive, or Executive’s estate in the event of his death, in a lump sum within ten business days following Executive’s termination, all earned but unpaid then-existing Salary and Performance Bonus; provided, however, that, whether any Performance Bonus is earned at the time of Executive’s termination will be determined by reference to the terms of the Company’s respective bonus or performance-based compensation plans or programs, if any, or, if not set forth therein, as determined by the Company in its sole discretion (such earned but unpaid Salary and Performance Bonus hereafter referred to as “Earned Compensation”). (ii) In the event of the termination of Executive’s employment by the Company without Cause, or a resignation by the Executive in accordance with Paragraph 7(a)(vi), the Company shall (A) pay to Executive, in a lump sum within 10 business days following such termination, all Earned Compensation and (B) continue to pay Executive’s then-existing Salary, in accordance with the Company’s regular payroll practices, for the 26 weeks immediately following such termination. In the event of a resignation by the Executive in accordance with Paragraph 7(a)(vi), any Options scheduled to vest within the subsequent twelve (12) month period shall fully vest.

(c) Notwithstanding anything herein to the contrary, to the degree that a Performance Bonus has been earned but cannot be calculated because the performance objectives

applicable to such Performance Bonus cannot yet be calculated then payment of the earned Performance Bonus shall occur in a lump sum within 10 business days following the date on which such performance goals are calculated.

(d) Definitions. For the purposes of this Agreement the following capitalized terms shall have the following meanings:

(i) “Cause” shall mean any of the following: (A) fraud, personal dishonesty, embezzlement, defalcation or acts of gross negligence or gross misconduct on the part of Executive in the course of his employment; (B) a material breach of Executive’s fiduciary duty of loyalty to the Company; (C) a material breach of this Agreement by Executive that is injurious to the Company; (D) Executive’s commission of (x) a felony, or (y) any other crime (other than minor traffic violations) which could reasonably be expected to have, or which actually has, a material adverse financial impact on the Company or a material adverse impact on the Company’s reputation and standing in the community; (E) use of alcohol, narcotics or other controlled substances by the Executive which is, or could reasonably be expected to become, materially injurious to the reputation or business of the Company or which impairs, or could reasonably be expected to impair, the performance of Executive’s duties hereunder; (F) any breach of Paragraph 8 hereunder; or (G) willful failure by Executive to follow the lawful directions of the Board.

(ii) “Disability” shall mean Executive’s inability to perform the material duties required of him by the Company and historically performed by him due to a mental or physical illness or incapacity for a period of three consecutive months or for shorter periods aggregating four months during any twelve-month period.

(1)

The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) of 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (a “Person”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more (on a fully diluted basis) of either (x) the then outstanding shares of Common Stock, taking into account as outstanding for this purpose such shares issuable upon the exercise of options or warrants, the conversion of convertible shares or debt, and the exercise of any similar right to acquire shares (the “Outstanding Company Common Stock”) or (y) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors or member managers (the “Outstanding Company Voting Securities”); provided, however, that for purposes of this Paragraph 7(d)(iii), the following acquisitions shall not constitute a Change in Control: (A) any acquisition by the Company or any “affiliate” of the Company, within the meaning of 17 C.F.R. §230.405 (an “Affiliate”), (B) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company

or any Affiliate of the Company, (C) any acquisition by any corporation pursuant to a transaction which complies with clauses (x), (y) and (z) of Paragraph 7(d)(iii)(2), or (D) any acquisition by any entity in which the Executive has a direct or indirect equity interest of greater than five percent; or

(2)

Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a “Business Combination”), in each case, unless, following such Business Combination, (x) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of the then outstanding shares of common stock or interests and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation or other entity resulting from such Business Combination (including, without imitation, a corporation or entity which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, and (y) no Person (excluding (A) any employee benefit plan (or related trust) sponsored or maintained by the Company or any Affiliate of the Company, or such corporation resulting from such Business Combination or any Affiliate of such corporation, or (b) any entity in which the Executive has a direct or indirect equity interest of greater than five percent or any Affiliate of such entity) beneficially owns, directly or indirectly, 50% or more (on a fully diluted basis) of, respectively, the then outstanding shares of common stock or interests of the corporation or entity resulting from such Business Combination, taking into account as outstanding for this purpose such common stock or interests issuable upon the exercise of options or warrants, the conversion of convertible stock, interests or debt, and the exercise of any similar right to acquire such common stock or interests, or the combined voting power of the then outstanding voting securities of such corporation or other entity except to the extent that such ownership existed prior to the Business Combination and (z) at least a majority of the members of the board of directors or equivalent governing body of the corporation or other entity resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination, or

(3)

Approval by the shareholders or equityholders of the Company of a complete liquidation or dissolution of the Company.

(e) Full Discharge of Company Obligations. The amounts payable to the Executive pursuant to this Paragraph 7 following termination of his employment shall be in full and complete satisfaction of the Executive’s rights under this Agreement and any other claims he may have in respect of his employment by the Company or any of its subsidiaries. Such amounts shall constitute liquidated damages with respect to any and all such rights and claims and, upon the commencement of Executive’s receipt of such amounts, and contingent on the full payment of such amounts, the Company shall be released and discharged from any and all liability to the Executive in connection with this Agreement or otherwise in connection with the Executive’s employment with the Company and its subsidiaries. Executive agrees to enter into a release and waiver of claims agreement satisfactory to the Company at the time of Executive’s termination of employment in order to implement the purpose of this Paragraph 7(e).

8. Restrictive Covenants. By and in consideration of the Restrictive Covenant Stipend and Base Salary and other benefits to be provided by the Company hereunder, the Executive agrees that:

(a) Noncompetition. During the Employment Period and during the six month period following termination of the Executive’s employment for any reason (the “Restriction Period”), the Executive shall not, directly or indirectly, whether as a principal, partner, employee, agent, consultant, shareholder (other than shares purchased prior to the effective date of this Agreement or as a holder, or a member of a group which is a holder, of not in excess of five percent (5%) of the outstanding voting shares of any publicly traded company) or in any other relationship or capacity be affiliated with any business corporation, partnership, enterprise or entity in any geographic area, which competes with the Company’s Business (as defined below). For purposes of this Agreement, the “Company’s Business” at any time means the sale of party goods, including costumes, and any other line of business which the Company or any of its subsidiaries (collectively, the “Company Group”) is engaged in or has substantial plans to become engaged in at the time.

(b) Confidentiality. Unless specifically authorized in writing by the Company to do so, except to the extent required by an order of a court having competent jurisdiction or under subpoena from an appropriate government agency, the Executive shall not disclose (i) any information disclosed or made available to the Executive or known by the Executive as a direct or indirect consequence of or through employment by the Company, or (ii) any other information related to the Company’s referral sources, business practices, trade secrets, operating methods, techniques, products, processes, services or other operations (individually or collectively “Operations”), including, but not limited to, information relating to research, development, inventions, accounting, engineering or marketing of such Operations and including any such information of any third party which the Company is under an obligation to keep confidential (individually or collectively, “Confidential Information”) to any third person unless such Confidential Information has been previously disclosed to the public by the Company or is in the public domain (other than by reason of the Executive’s breach of this Paragraph 8(b)). Notwithstanding the foregoing, if the Executive is required by an order of a court having competent jurisdiction or under subpoena from an appropriate government agency to disclose

Confidential Information, the Executive shall provide the Company with prompt written notice of such requirement and shall assist the Company to seek a protective order or other appropriate remedy protecting its interests. In any event, the Executive will furnish only that part of the Confidential Information that is required to be disclosed by the court order or subpoena and will use reasonable efforts to obtain reliable assurances that confidential treatment will be accorded to any Confidential Information so furnished.

(c) Nonsolicitation of Employees. During the Employment Period and the Restriction Period, the Executive shall not directly or indirectly solicit, encourage or induce any employee of the Company Group to terminate employment with the Company Group, and shall not directly or indirectly, either individually or as owner, agent, employee, consultant or otherwise, employ or offer employment to any person who is or was employed by the Company Group unless such person shall have ceased to be employed by the Company Group for a period of at least six months.

(d) Company Property. Except as expressly provided herein, at the time of the Executive’s termination of employment or at any other time as the Board may request, the Executive shall return to the Company all property of the Company Group, including any credit cards, keys or entry cards, automobile and other machinery, all computers, cell phones or other electronic equipment and all memoranda, notes, records, reports, manuals, drawings and blueprints, including electronic versions, concerning the Company’s Business (and all copies thereof) in the Executive’s possession or under his control.

(e) Developments the Property of the Company. All discoveries, inventions, ideas, technology, formulas, designs, software, programs, algorithms, products, systems, applications, processes, procedures, methods and improvements and enhancements conceived, developed or otherwise made or created or produced by the Executive alone or with others, and in any way relating to the Company’s Business, whether or not subject to patent, copyright or other protection and whether or not reduced to tangible form, at any time during the Employment Period (“Developments”), shall be the sole and exclusive property of the Company. The Executive agrees to, and hereby does, assign to the Company, without any further consideration, all of the Executive’s right, title and interest throughout the world in, and to, all Developments. The Executive agrees that all such Developments that are copyrightable may constitute works made for hire under the copyright laws of the United States and, as such, acknowledges that the Company is the author of such Developments and owns all of the rights comprised in the copyright of such Developments and the Executive hereby assigns to the Company without any further consideration all of the rights comprised in the copyright and other proprietary rights the Executive may have in such Developments to the extent that it might not be considered a work made for hire. The Executive shall make and maintain adequate and current written records of all Developments and shall disclose all Developments fully, and in writing, to the Company promptly after the development of same, and at any time upon request.

(f) Protection of Legitimate Business Interests. Executive acknowledges that (i) Executive’s position with the Company requires the performance of services which are special, unique and extraordinary in character and places him in a position of confidence and trust with the customers and employees of the Company, through which, among other things, he will obtain knowledge of the Company’s technical information and know-how and become

acquainted with its customers, in which matters the Company has substantial proprietary interests, (ii) the restrictive covenants in this Paragraph 8 are necessary in order to protect and maintain such proprietary interests and other legitimate business interests of the Company, and (iii) the Company would not have entered into this Agreement unless such covenants were included herein.

(g) Injunctive Relief and Other Remedies with Respect to Covenants. The Executive acknowledges and agrees that the covenants and obligations of the Executive with respect to noncompetition, nonsolicitation, confidentiality, Company property, developments and nondisparagement relate to special, unique and extraordinary matters and that a violation of any of the terms of such covenants and obligations will cause the Company irreparable injury for which adequate remedies are not available at law. Therefore, the Executive agrees that the Company shall (i) be entitled to an injunction, restraining order or such other equitable relief (without the requirement to post bond) restraining the Executive from committing any violation of the covenants and obligations contained in this Paragraph 8 and (ii) have no further obligation to make any payments to the Executive hereunder following any material violation of the covenants and obligations contained in this Paragraph 8. These remedies are cumulative and are in addition to any other rights and remedies the Company may have at law or in equity. The Executive (x) acknowledges and agrees that the covenants set forth in Paragraph 8 are reasonable and valid in geographical and temporal scope and in all other respects and (y) represents that his economic means and circumstances are such that such covenants will not prevent him from providing for himself and his family on a basis satisfactory to him.

(h) Option Claw-Back. Executive acknowledges that, in addition to the Restrictive Covenant Stipend, any and all options to acquire Common Stock granted to Executive by the Company, (the “Options”) are and were granted to Executive in consideration for Executive’s covenants pursuant to subparagraphs 8(a), (b), (c), (d) and (e) herein. In the event the Executive breaches any of the covenants set forth in subparagraphs 8(a), (b), (c), (d) or (e) herein, in addition to any other remedy that may be available to the Company in law or equity and/or pursuant to the other provisions of this Paragraph 8, (i) all Options (whether vested or not) then held by Executive shall expire and terminate immediately and (ii) the Executive shall be required to repay to the Company an amount equal to all Option Gain (as defined below) that the Executive has received during the six-month period immediately preceding (or at any time after) the date the Executive first breaches such covenant(s). For purposes of this Paragraph 8, (i) the determination of any breach by the Executive of any provision of this Paragraph 8 shall be made by the Board of Directors of the Company in its sole discretion, and such determination shall be final and binding on the Company and Executive, and (ii) the term “Option Gain” shall mean, with respect to any specified period of time, the product of (A) the number of shares of Common Stock purchases upon the exercise of any Options during such period and (B) the excess of (x) the fair market value per share of Common Stock as of the date of such exercise over (y) the exercise price per share of Common Stock subject to such Options.

(i) Non-Disparagement. Executive shall not at any time after the date hereof disparage the Company Group or any of its officers, directors, shareholders or any of their respective affiliates. The obligations of Executive under this Paragraph 8(i) shall not apply to truthful disclosures that are required by applicable law, regulation or order of a court or governmental agency.

(j) Notifications. The Executive agrees that prior to becoming employed by any entity during the Restriction Period, the Executive will (i) provide notice to the Company of such employment and (ii) provide copies of Paragraphs 8(a), (b) and (c) to such prospective employer. The Executive further agrees that the Company may provide notice to such prospective employer of the Executive’s obligations under this Agreement, including, without limitation, the Executive’s obligations pursuant to this Paragraph 8.

(a) Survival. Paragraphs 7 (relating to early termination of employment), 8 (containing the restrictive covenants ), and all the provisions of this Paragraph 9 shall survive the termination of this Agreement (and the Executive’s employment hereunder) in accordance with their terms.

(b) Validity and Enforceability. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision or provisions of this Agreement, which shall remain in full force and effect. If any provision of this Agreement is held to be invalid, void or unenforceable in any jurisdiction, any court or arbitrator so holding shall substitute a valid, enforceable provision that preserves, to the maximum lawful extent, the terms and intent of such provisions of this Agreement. If any of the provisions of, or covenants contained in, this Agreement are hereafter construed to be invalid or unenforceable in any jurisdiction, the same shall not affect the remainder of the provisions or the enforceability thereof in any other jurisdiction, which shall be given full effect, without regard to the invalidity or unenforceability in such other jurisdiction. Any such holding shall affect such provision of this Agreement, solely as to that jurisdiction, without rendering that or any other provision of this Agreement invalid, illegal, or unenforceable in any other jurisdiction. If any covenant should be deemed invalid, illegal or unenforceable because its scope, either geographical or temporal, is considered excessive, such covenant will be modified so that the scope of the covenant is reduced only to the minimum extent necessary to render the modified covenant valid, legal and enforceable.

(c) Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be resolved by binding arbitration; provided, that any dispute or controversy relating to Paragraph 8 (including any claim for specific performance) may be brought by any party hereto in any court of competent jurisdiction; provided, further, that, if the state or federal courts of New Jersey have jurisdiction, such disputes or controversies shall be litigated in New Jersey. The arbitration shall be held in Morris County, New Jersey and except to the extent inconsistent with this Agreement, shall be conducted in accordance with the Labor Arbitration Rules of the American Arbitration Association then in effect at the time of the arbitration, and otherwise in accordance with principles which would be applied by a court of law or equity. The arbitrator shall be acceptable to both the Company and the Executive. If the parties cannot agree on an acceptable arbitrator, the dispute shall be heard by a panel of three arbitrators, one appointed by each of the parties and the third appointed by the other two arbitrators. Judgments on any award may be entered in and enforced by any court of appropriate jurisdiction. Each party shall pay his or its own costs for the arbitration or litigation, as the case may be, with the cost of the arbitrator, if applicable, to be equally divided between the parties.

(d) Binding Effect. This Agreement shall be binding on, and shall inure to the benefit of, the Company and any person or entity that succeeds to the interest of the Company (regardless of whether such succession does or does not occur by operation of law) by reason of the sale of all or a portion of the Company’s stock, a merger, consolidation or reorganization involving the Company, or unless the Company otherwise elects in writing, a sale of the assets of the business of the Company (or portion thereof) in which the Executive performs a majority of his services. This Agreement shall also inure to the benefit of the Executive’s heirs, executors, administrators and legal representatives.

(e) Assignment. This Agreement, and the Executive’s rights and obligations hereunder, may not be assigned by the Executive. The Company may assign its rights, together with its obligations, hereunder in connection with any sale, transfer or other disposition of all or substantially all of the business assets with respect to which Executive is performing a majority of his services at any such time.

(f) Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the matters referred to herein. No other agreement relating to the terms of the Executive’s employment by the Company, oral or otherwise, shall be binding between the parties unless it is in writing and signed by the party against whom enforcement is sought. There are no promises, representations, inducements or statements between the parties relating to the terms of Executive’s employment with the Company other than those that are expressly contained herein. The Executive acknowledges that he is entering into this Agreement of his own free will and accord, and with no duress, that he has read this Agreement and that he understands it and its legal consequences.

(g) Waiver. Waiver by any party hereto of any breach or default by the other party of any of the terms of this Agreement shall not operate as a waiver of any other breach or default, whether similar to or different from the breach or default waived. No waiver of any provision of this Agreement shall be implied from any course of dealing between the parties hereto or from any failure by either party hereto to assert its or his rights hereunder on any occasion or series of occasions.

(h) Notices. Any notice required or desired to be delivered under this Agreement shall be in writing and shall be delivered personally, by courier service, by registered mail, return receipt requested, or by telecopy and shall be effective upon actual receipt by the party to which such notice shall be directed; provided, that, a refusal by a party to accept delivery shall constitute receipt. Notices shall be addressed as follows (or to such other address as the party entitled to notice shall hereafter designate in accordance with the terms hereof):


		If to the Company:		Party City Corporation 400 Commons Way
				Rockaway, New Jersey 07866
				Attention: Vice President
				of Human Resources

		with a copy to:		Party City Corporation
				400 Commons Way
				Rockaway, New Jersey 07866
				Attention: Vice President
				and General Counsel

		If to the Executive:		Richard H. Griner
				155 West 68th Street
				New York, NY 10023

(i) No Conflicting Obligations. The Executive represents that his performance of the terms of this Agreement and his employment by the Company does not and will not breach any agreement to which the Executive is a party including (without limitation) any agreement to keep in confidence proprietary information or trade secrets acquired by the Executive in confidence or in trust prior to the date of this Agreement. The Executive has not entered into, and hereby agrees not to enter into, any agreement whether written or oral in conflict with this Agreement. The Executive further agrees not to use in the performance of his duties for the Company any confidential materials or documents of a present or former employer of the Executive, or any materials or documents obtained by the Executive under a binder of confidentiality imposed by reason of any of the Executive’s consulting relationships, if any, unless such materials or documents are generally available to the public or the Executive has authorization from such present or former employer or client for the possession and unrestricted use of such materials.

(j) Right of Offset. The Company may offset any payment to be made to the Executive pursuant to this Agreement by any amount the Executive owes to the Company (including, without limitation, any amount that the Executive may be required to pay to the Company pursuant to Paragraph 8(h)) as of the time such payment would otherwise be made.

(k) Amendments. This Agreement may not be altered, modified or amended except by a written instrument signed by each of the parties hereto.

(l) Headings. Headings to paragraphs in this Agreement are for the convenience of the parties only and are not intended to be part of or to affect the meaning or interpretation hereof.

(m) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument.

(n) Withholding. Any payments provided for herein shall be reduced by any amounts required to be withheld by the Company from time to time under applicable Federal, State or local income or employment tax laws or similar statutes or other provisions of law then in effect.

(o) Governing Law. This Agreement shall be governed by the laws of the State of New Jersey, without reference to principles of conflicts or choice of law under which the law of any other jurisdiction would apply.

IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer and the Executive has hereunto set his hand as of the day and year first above written.


						Bonus Payout
EBITDA			Bonus %			Based on Salary		Net Income					EPS
% of Goal	EBITDA $		of Salary			$ 365,000		% of Goal			Net Income		% of Goal			EPS

90%	$	43,590,340		13	%	$	45,625		85	%	$	16,426,044		85	%	$	0.86
95%	$	46,012,025		25	%	$	91,250		92	%	$	17,879,055		92	%	$	0.93
100%	$	48,433,711		50	%	$	182,500		100	%	$	19,332,066		100	%	$	1.01
101%	$	48,918,048		53	%	$	194,667		102	%	$	19,622,669		101	%	$	1.02
102%	$	49,402,385		57	%	$	206,833		103	%	$	19,913,271		103	%	$	1.04
103%	$	49,886,722		60	%	$	219,000		105	%	$	20,203,873		104	%	$	1.05
104%	$	50,371,059		63	%	$	231,167		106	%	$	20,494,476		106	%	$	1.07
105%	$	50,855,396		67	%	$	243,333		108	%	$	20,785,078		107	%	$	1.08
106%	$	51,339,733		70	%	$	255,500		109	%	$	21,075,680		109	%	$	1.10
107%	$	51,824,071		73	%	$	267,667		111	%	$	21,366,282		110	%	$	1.11
108%	$	52,308,408		77	%	$	279,833		112	%	$	21,656,885		112	%	$	1.13
109%	$	52,792,745		80	%	$	292,000		114	%	$	21,947,487		113	%	$	1.14
110%	$	53,277,082		83	%	$	304,167		115	%	$	22,238,089		115	%	$	1.16
111%	$	53,761,419		87	%	$	316,333		117	%	$	22,528,691		116	%	$	1.17
112%	$	54,245,756		90	%	$	328,500		118	%	$	22,819,294		118	%	$	1.19
113%	$	54,730,093		93	%	$	340,667		120	%	$	23,109,896		119	%	$	1.20
114%	$	55,214,430		97	%	$	352,833		121	%	$	23,400,498		121	%	$	1.22
115%	$	55,698,767		100	%	$	365,000		123	%	$	23,691,100		122	%	$	1.23

The wholly owned subsidiary of the Company is Party City Michigan, Inc. incorporated on October 23, 1997, in the State of Delaware. This subsidiary does business under the name Party City Michigan, Inc. EX-23.1 5 y93620exv23w1.htm INDEPENDENT ACCOUNTANTS' REPORT INDEPENDENT ACCOUNTANTS' REPORT

To the Board of Directors and Stockholders of
Party City Corporation
Rockaway, New Jersey

We have reviewed the accompanying Condensed Consolidated Balance Sheets of Party City Corporation and Subsidiary as of December 27, 2003 and December 28, 2002, and the related Condensed Consolidated Statements of Income for the quarters and six months ended December 27, 2003 and December 28, 2002 and Cash Flows for the six months ended December 27, 2003 and December 28, 2002. These interim financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the Consolidated Balance Sheet of Party City Corporation and Subsidiary as of June 28, 2003, and the related Consolidated Statements of Income, Shareholders’ Equity, and Cash Flows for the year then ended (not presented herein); and in our report dated August 21, 2003, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying Consolidated Balance Sheet as of June 28, 2003 is fairly stated, in all material respects, in relation to the Consolidated Balance Sheet from which it has been derived.

26 EX-31.1 6 y93620exv31w1.htm SECTION 302 CERTIFICATION OF THE CEO SECTION 302 CERTIFICATION OF THE CEO

1. I have reviewed this quarterly report on Form 10-Q of Party City Corporation;

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 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)) 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)		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

c)		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

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

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.

27 EX-31.2 7 y93620exv31w2.htm SECTION 302 CERTIFICATION OF THE CFO SECTION 302 CERTIFICATION OF THE CFO

1. I have reviewed this quarterly report on Form 10-Q of Party City Corporation;

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)		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

c)		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.

28 EX-32.1 8 y93620exv32w1.htm SECTION 906 CERTIFICATION OF THE CEO SECTION 906 CERTIFICATION OF THE CEO

Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Party City Corporation (the “Company”) hereby certifies, to such officer’s knowledge, that:

(i) the Quarterly Report on Form 10-Q of the Company for the quarterly period ended December 27, 2003 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. § 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

29 EX-32.2 9 y93620exv32w2.htm SECTION 906 CERTIFICATION OF THE CFO SECTION 906 CERTIFICATION OF THE CFO

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


Delaware (State or other jurisdiction of incorporation or organization)		22-3033692 (I.R.S. Employer Identification No.)

400 Commons Way Rockaway, New Jersey (Address of Principal Executive Offices)		07866 (Zip Code)


PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF INCOME
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
	Item 3. Defaults Upon Senior Securities
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K
EXHIBIT INDEX
SIGNATURES
EMPLOYMENT AGREEMENT OF RICHARD H. GRINER
SUBSIDIARIES
INDEPENDENT ACCOUNTANTS' REPORT
SECTION 302 CERTIFICATION OF THE CEO
SECTION 302 CERTIFICATION OF THE CFO
SECTION 906 CERTIFICATION OF THE CEO
SECTION 906 CERTIFICATION OF THE CFO


		Page No.

Part I	Financial Information
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets - December 27, 2003 (Unaudited) December 28, 2002 (Unaudited) and June 28, 2003		3
	Condensed Consolidated Statements of Income (Unaudited) for the quarters and six months ended December 27, 2003 and December 28, 2002		4
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended December 27, 2003 and December 28, 2002		5
	Notes to Condensed Consolidated (Unaudited) Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		19
Item 4.	Controls and Procedures		19
Part II	Other Information
Item 1.	Legal Proceedings		20
Item 2.	Changes in Securities, Use of Proceeds, and Issuer Purchases of Equity Securities		20
Item 3.	Defaults Upon Senior Securities		21
Item 4.	Submission of Matters to a Vote of Security Holders		21
Item 5.	Other Information		21
Item 6.	Exhibits and Reports on Form 8-K
	Exhibit Index
	Signatures


			December 27,			December 28,			June 28,
			2003			2002			2003(1)

			(Unaudited)			(Unaudited)
ASSETS
	Current assets:
	Cash and cash equivalents		$	20,550		$	3,273		$	3,372
	Merchandise inventory			60,281			69,189			65,908
	Other current assets, net			25,263			26,339			21,900

		Total current assets		106,094			98,801			91,180
	Property and equipment, net			48,715			55,878			52,819
	Goodwill			18,614			19,172			18,614
	Other assets			5,201			4,087			5,386

		Total assets	$	178,624		$	177,938		$	167,999

LIABILITIES AND STOCKHOLDERS’ EQUITY
	Current liabilities:
	Accounts payable		$	34,458		$	44,890		$	37,960
	Accrued expenses and other current liabilities			36,062			28,656			24,998
	Book overdraft			—			6,654			4,126
	Advances under Loan Agreement			—			4,114			11,229

		Total current liabilities		70,520			84,314			78,313
	Long-term liabilities:
	Deferred rent and other long-term liabilities			9,905			10,683			10,264
	Commitments and contingencies
	Stockholders’ equity:
	Common stock, $.01 par value, authorized 40,000,000 shares; issued 17,721,850, 17,113,873 and 17,296,807 shares, respectively			177			171			173
	Additional paid-in capital			44,611			41,366			43,178
	Retained earnings			59,351			43,233			42,011
	Treasury stock, at cost (747,012, 284,000 and 747,012 shares, respectively)			(5,940	)		(1,829	)		(5,940	)

		Total stockholders’ equity		98,199			82,941			79,422

		Total liabilities and stockholders’ equity	$	178,624		$	177,938		$	167,999


			Quarter ended						Six months ended

			December 27,			December 28,			December 27,			December 28,
			2003			2002			2003			2002

Revenues:
	Net sales		$	175,304		$	161,648		$	277,924		$	252,772
	Royalty fees			7,216			6,503			11,123			10,150
	Franchise fees			40			40			488			275

		Total revenues		182,560			168,191			289,535			263,197
Expenses:
	Cost of goods sold and occupancy costs			104,705			95,974			179,033			160,399
	Company-owned stores operating and selling expense			36,290			34,288			62,169			57,986
	Franchise expense			1,562			1,646			3,221			3,208
	General and administrative expense			7,498			8,403			15,657			15,705

		Total expenses		150,055			140,311			260,080			237,298

Operating income				32,505			27,880			29,455			25,899

	Interest income			(26	)		(17	)		(30	)		(24	)
	Interest expense			138			2,841			342			3,733

	Interest expense, net			112			2,824			312			3,709

Income before income taxes				32,393			25,056			29,143			22,190
	Provision for income taxes			13,103			10,006			11,803			8,876

Net income			$	19,290		$	15,050		$	17,340		$	13,314

	Basic earnings per share		$	1.14		$	0.90		$	1.03		$	0.80

		Weighted average shares outstanding — basic		16,867			16,803			16,856			16,600

	Diluted earnings per share		$	0.98		$	0.76		$	0.88		$	0.67

		Weighted average shares outstanding — diluted		19,624			19,896			19,620			19,904

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


For the quarterly period ended December 27, 2003		Commission file number 0-27826


		Payments Due By Period (in thousands)

		Total		1 Year		2-3 Years		4-5 Years		After 5 years

Contractual Obligations Operating leases		$	244,830	$	46,229	$	86,258	$	81,701	$	30,642
	Severance Arrangements		13		13		—		—		—
	Capital lease Obligations		10		10		—		—		—

Total Contractual Obligations		$	244,853	$	46,252	$	86,258	$	81,701	$	30,642


Name	For		Against

Ralph D. Dillon		13,956,159		597,819
Richard H. Griner		13,956,159		597,819
L.R. Jalenak, Jr.		13,818,261		735,717
Franklin R. Johnson		13,956,111		597,867
Howard Levkowitz		13,643,053		910,919
Nancy Pedot		13,888,111		665,867
Walter J. Salmon		13,943,059		610,919
Michael E. Tennenbaum		13,497,361		1,056,657


For	Against		Abstained		Broker Non-Vote

7,167,274		3,606,793		7,671		3,772,240


Exhibit No.

3.1		Certificate of Incorporation of the Company.

3.2		Bylaws of the Company as amended, incorporated by reference from the Company’s Quarterly Report on Form 10-Q as filed with the Commission on November 12, 2003 (the “November 2003 10-Q”).

4.1		Specimen stock certificate evidencing the Common Stock, incorporated by reference from the Company’s Registration Statement as amended on Form S-1 Number 333-00350 as filed with the Commission on January 18, 1996 (the “S-1”).

4.2		Form of Amended and Restated Warrant, incorporated by reference from the Company’s Current Report on Form 8-K as filed with the Commission on January 19, 2000 (the “January 2000 8-K”).

4.3		Form of Securities Purchase Agreement, dated as of August 16, 1999, by and between the Company and each of the Investors, incorporated by reference from the Company’s Current Report on Form 8-K as filed with the Commission on August 25, 1999 (the “August 1999 8-K”).

4.4		First Amendment to Securities Purchase Agreement, dated as of January 14, 2000, by and between the Company and each of the Investors, incorporated by reference from the January 2000 8-K.

4.5		Second Amendment to Securities Purchase Agreement, dated as of April 1, 2001, by and among the Company and each of the Investors, incorporated by reference from the Company’s Quarterly Report on Form 10-Q as filed with the Commission on May 15, 2001 (the “May 2001 10-Q”).

10.1		Form of Unit Franchise Agreement entered into by the Company and franchisees, incorporated by reference from the S-1.

10.2		Option Agreement, dated as of June 8, 1999, between Steven Mandell and Jack Futterman, incorporated by reference from Amendment No. 1 to Schedule 13D as filed by Jack Futterman with the Commission on June 17, 1999 (“Futterman’s 13D”).

10.3		Stock Pledge Agreement, dated as of June 8, 1999, between Steven Mandell and Jack Futterman, incorporated by reference from Futterman’s 13D.

10.4		Amended and Restated Investor Rights Agreement, dated as of August 18, 2003, by and among the Company and the Investors, incorporated by reference from the Company’s Annual Report on Form 10-K as filed with the Commission on September 26, 2003 (the “September 2003 10-K”).

10.5		Description of oral consulting agreement between the Company and Ralph Dillon, incorporated by reference from the Company’s Quarterly Report on Form 10-Q as filed with the Commission on February 13, 2001.

10.6		General Release and Severance Agreement of James Shea, dated as of May 28, 2003, by and between the Company and James Shea, incorporated by reference from the September 2003 10-K.

10.7		Separation Agreement of Andrew Bailen, dated as of July 14, 2003, by and between the Company and Andrew Bailen, incorporated by reference from the September 2003 10-K.


Exhibit No.

10.8		Separation Agreement of Thomas Larson, dated as of August 26, 2002, by and between the Company and Thomas Larson, incorporated by reference from the September 2003 10-K.

10.9		Employment Agreement of Steven Skiba, dated as of November 29, 2002, by and between the Company and Steven Skiba, incorporated by reference from the September 2003 10-K.

10.10		Employment Agreement of Linda Siluk, dated as of November 7, 2003, by and between the Company and Linda M. Siluk, incorporated by reference from the November 2003 10-Q.

10.11		Employment Agreement of Warren Jeffrey, dated as of November 7, 2003, by and between the Company and Warren Jeffery, incorporated by reference from the November 2003 10-Q.

10.12		Employment Agreement of Richard H. Griner dated as of January 12, 2004, by and between the Company and Richard H. Griner.

10.13		Management Stock Purchase Plan of the Company, incorporated by reference from the Registration of Form S-8 as filed with the Commission on July 23, 2001.

10.14		Employee Stock Purchase Plan of the Company, incorporated by reference from the Company’s Definitive Proxy Statement for the 2001 Annual Meeting of Stockholders, included within Form 14-A as filed with the Commission on October 18, 2001.

10.15		Amended and Restated 1994 Stock Option Plan, incorporated by reference from the Registration of Form S-8 as filed with the Commission on January 9, 1997.

10.16		1999 Stock Incentive Plan (Amended and Restated as of October 17, 2003), incorporated by reference from the Company’s Definitive Proxy Statement for the 2003 Annual Meeting of Stockholders included within Form 14-A as filed with the Commission on October 20, 2003.

10.17		Loan and Security Agreement (the “Loan Agreement”), dated January 9, 2003, by and between the Company and Wells Fargo Retail Finance, LLC (“WFRF”), as the arranger, collateral agent and administrative agent, and Fleet Retail Finance, Inc., as the documentation agent, incorporated by reference from the Company’s Current Report on Form 8-K as filed with the Commission on January 10, 2003.

10.18		Stock Pledge Agreement, dated January 9, 2003, by and among the Company, Party City Michigan, Inc. (“PCMI”) and WFRF, as the arranger, collateral agent and administrative agent for the lender group under the Loan Agreement, incorporated by reference from the September 2003 10-K.

10.19		Trademark Security Agreement, dated January 9, 2003, by and between the Company and WFRF, as the arranger, collateral agent and administrative agent for the lender group under the Loan Agreement, incorporated by reference from the September 2003 10-K.

10.20		Copyright Security Agreement, dated January 9, 2003, by and between the Company and WFRF, as the arranger, collateral agent and administrative agent for the lender group under the Loan Agreement, incorporated by reference from the September 2003 10-K.

10.21		Guaranty and Security Agreement, dated January 9, 2003, by and between PCMI and WFRF, as the arranger, collateral agent and administrative agent for the lender group under the Loan Agreement, incorporated by reference from the September 2003 10-K.


Exhibit No.

21.1		Subsidiaries.

23.1		Consent of Deloitte & Touche LLP.

31.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


				PARTY CITY CORPORATION

		By		/s/ NANCY PEDOT

				(Nancy Pedot)
				Chief Executive Officer

		By		/s/ LINDA M. SILUK

				(Linda M. Siluk)
				Chief Financial Officer


PARTY CITY CORPORATION

By:		/s/ Linda M. Siluk

Its:		Chief Financial Officer


EXECUTIVE

/s/ Richard H. Griner
Richard H. Griner


Cascading Bonus Eligibility		100% EBITDA = 50% Payout at 100% Max Payout


For	Against		Abstained

13,512,000		1,035,303		6,605


	6 Month		Full Year 2004
	Goal		Goal

Company EBITDA Goal	$	36,969,901	$	48,433,711
Net Income	$	17,304,173	$	19,332,075
EPS	$	0.90	$	1.01


Calculations

Shares outstanding	19,211,173
Percent increase from 100% to 115%	3.3	%
Depreciation and Amortization	15,571,600
Interest	642,000
Taxes	40	%