<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 4, 1997
REGISTRATION NUMBER 333-22893
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PARTY CITY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 5943 22-3033692
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
400 COMMONS WAY
ROCKAWAY, NEW JERSEY 07866
(201) 983-0888
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
STEVEN MANDELL
PARTY CITY CORPORATION
400 COMMONS WAY
ROCKAWAY, NEW JERSEY 07866
(201) 983-0888
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
Copies to:
<TABLE>
<S> <C>
WILLIAM P. OBERDORF, ESQ. EDWARD W. MOORE, ESQ.
ST. JOHN & WAYNE, L.L.C. CALFEE, HALTER & GRISWOLD LLP
TWO PENN PLAZA EAST 1400 MCDONALD INVESTMENT CENTER
NEWARK, NEW JERSEY 07105 800 SUPERIOR AVENUE
TELEPHONE: (201) 491-3600 CLEVELAND, OHIO 44114
TELEPHONE: (216) 622-8200
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
promptly as practicable after the effective date of
this Registration Statement.
If any of the securities being registered on this form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE> 2
As Filed Pursuant to Rule 424(b)(4)
Registration No. 333-22893
PROSPECTUS
2,240,000 SHARES
[PARTY CITY LOGO]
COMMON STOCK
------------------
Of the 2,240,000 shares of Common Stock offered hereby (the "Offering"),
1,200,000 shares are being offered by Party City Corporation (the "Company") and
1,040,000 shares are being offered by certain stockholders of the Company (the
"Selling Stockholders"). See "Principal and Selling Stockholders." The Company
will not receive any of the proceeds from the sale of the shares by the Selling
Stockholders.
The Company's Common Stock is traded on the Nasdaq National Market
("Nasdaq") under the symbol "PCTY." The last reported sale price of the
Company's Common Stock as reported on the Nasdaq National Market on April 8,
1997, was $13 11/16 per share.
------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING AN INVESTMENT IN THE
COMMON STOCK OFFERED HEREBY.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
<TABLE>
<S> <C> <C> <C> <C>
CRIMINAL OFFENSE.
==================================================================================================
UNDERWRITING PROCEEDS
DISCOUNTS AND PROCEEDS TO TO SELLING
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS(3)
- - --------------------------------------------------------------------------------------------------
Per Share..................... $13.00 $.75 $12.25 $12.25
- - --------------------------------------------------------------------------------------------------
Total(3)...................... $29,120,000 $1,680,000 $14,700,000 $12,740,000
==================================================================================================
</TABLE>
(1) For information regarding indemnification of the Underwriters, see
"Underwriting."
(2) Before deducting expenses estimated at $500,000, all of which are payable
by the Company.
(3) Certain Selling Stockholders have granted the Underwriters a 30-day option
to purchase up to 336,000 additional shares of Common Stock solely to
cover over-allotments, if any. See "Underwriting." If such option is
exercised in full, the total "Price to Public," "Underwriting Discounts
and Commissions," "Proceeds to Company" and "Proceeds to Selling
Stockholders" will be $33,488,000, $1,932,000, $14,700,000 and
$16,856,000, respectively.
------------------
The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected that certificates for the shares
of Common Stock offered hereby will be available for delivery on or about April
14, 1997, at the office of Smith Barney Inc., 333 West 34th Street, New York,
New York 10001.
------------------
SMITH BARNEY INC.
TUCKER ANTHONY
INCORPORATED
MORGAN KEEGAN & COMPANY, INC.
April 8, 1997
<PAGE> 3
[PICTURES, INCLUDING A MAP WHICH DIFFERENTIATES BETWEEN COMPANY-OWNED AND
FRANCHISE STORES TO BE INSERTED]
- - ---------------
(1) Barcelona and Madrid, Spain locations not shown.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON
STOCK OF THE COMPANY ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103
OF REGULATION M PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE
"UNDERWRITING."
------------------------
This Prospectus contains certain of the Company's trademarks, including
Party City,(R) The Discount Party Super Store(R) and Halloween Costume
Warehouse.(R)
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Financial Statements and notes appearing elsewhere in this
Prospectus. Except as otherwise specified, all information in this Prospectus
assumes no exercise of the Underwriters' over-allotment option. See
"Underwriting."
THE COMPANY
Party City Corporation ("Party City" or the "Company") is a rapidly growing
specialty retailer of party supplies through its network of discount Super
Stores. The Company believes that its store system -- composed of 44
Company-owned and 159 franchise locations in 29 states coast-to-coast, Puerto
Rico, Canada and Spain as of February 28, 1997 -- makes Party City one of the
largest party supplies superstore chains in the world. The first franchise store
was authorized in 1989 and the first Company-owned store was opened in January
1994. For the year ended December 31, 1996, system-wide sales totaled $269.7
million, an increase of 47.5% over the year ended December 31, 1995. During the
year ended December 31, 1996, the Company significantly accelerated its
Company-owned Super Store expansion program and opened 20 Company-owned Super
Stores. Primarily as a result of this expansion, the Company's total revenue
increased from approximately $23.1 million in 1995 to approximately $48.5
million in 1996, an increase of 110%. During this same period, income from
operations increased 164% from approximately $2.1 million in 1995 to
approximately $5.6 million in 1996.
The Company believes it has transformed the party supplies business by
introducing increased product and marketing focus and greater mass merchandising
sophistication to a business traditionally served by single owner-operated party
supplies stores, specialty party supplies retailers (including superstores), and
designated departments in drug stores, general mass merchandisers, supermarkets
and department stores of local, regional and national chains. Party City seeks
to offer customers a "one-stop" party store that provides a wide selection of
merchandise at everyday low prices. A key element of delivering customer
satisfaction is stocking inventory of sufficient depth and breadth to satisfy
customer needs for parties and events of virtually all sizes and types. Party
City Super Stores offer a broad selection of merchandise (branded as well as
private label) for a wide variety of celebratory occasions, including birthday
parties, weddings, and baby showers, as well as seasonal events including
Halloween, Christmas, New Year's Eve, graduation, Easter, Valentine's Day,
Thanksgiving, St. Patrick's Day, the Super Bowl and the Fourth of July. Company
research indicates that its typical customer is a female between the ages of 24
and 55 and, during 1996, purchased items totalling $17.00 per visit. Party City
generally offers products priced from under $1.00 to $100.
The Company's objective is to continue to expand its position as a leading
category-dominant national chain of party supplies Super Stores. Key elements of
the Company's business strategy are as follows:
Pursue Super Store Expansion. The Company's expansion strategy is to
rapidly increase its Company-owned store base, while continuing to add franchise
stores. The Company believes that opportunities for substantial expansion exist
by opening additional Super Stores in both new and existing markets nationwide.
In addition, the Company recently purchased six franchise stores and anticipates
selectively acquiring additional franchise stores in the future where they will
be accretive to the Company's net income per share. See "Recent Events." The
Company anticipates opening approximately 45 to 50 Company-owned Super Stores
and 20 franchise stores in 1997 and approximately 70 to 75 Company-owned Super
Stores and 12 franchise stores in 1998.
Offer the Broadest Selection of Merchandise in an Exciting Shopping
Environment. With approximately 20,000 stock keeping units ("SKUs"), the Party
City stores provide party-planners and party-goers with convenient one-stop
shopping for party supplies. Within each product category, the Company offers a
wide variety of patterns, colors and styles.
3
<PAGE> 5
Establish Convenient Store Locations. The Company seeks to maximize
customer traffic and quickly build the visibility of new stores by situating its
stores in highly traveled areas. The Company carefully considers site selection
and analyzes population density, demographics, traffic counts, complementary
retailers, storefront visibility and presence, competition, lease rates and the
availability of parking before deciding on a specific location.
Maintain Everyday Low Pricing. The Company reinforces customers'
expectations of savings by offering everyday low pricing. In addition, the
Company maintains a lowest price guaranty policy which states that Party City
will meet and discount the advertised price of a competitor.
Provide Excellent Customer Service. The Company views the quality of its
customers' shopping experience as critical to its continued success. To this
end, well-trained sales associates provide customers with personalized shopping
assistance.
Utilize Sophisticated Merchandising Systems. The Company's customized
management information system ("MIS") enables Party City to quickly analyze the
performance of Company-owned and franchise stores and thus react more rapidly to
changing customer preferences. The MIS system further assists management in
evaluating the sales performance of individual stores and in analyzing and
deciding upon the proper mix of merchandise. The Company continually evaluates
and updates its systems.
Capitalize on Direct Marketing and Advertising. The Company solicits zip
code information from customers at the time of their purchases. This information
allows the Company to effect 10 to 12 direct mailings per year to residents in
those targeted areas. Direct mail advertising has enabled the Company and its
franchisees to successfully open stores in any area of the country without the
need to cluster stores.
Investment in Infrastructure to Support Growth. As the Company has
increased its base of Company-owned Super Stores, it has made additions to its
management team. During 1996, the Company added a chief operating officer as
well as key people in the Company's MIS, real estate, merchandising,
administrative support and construction departments.
The Party City Super Store concept was developed in 1986 by the Company's
Chairman of the Board and President, Steven Mandell. The Company was founded as
a New Jersey corporation in 1990 and was re-incorporated in Delaware in January
1996. The Company's corporate headquarters are located at 400 Commons Way,
Rockaway, New Jersey 07866, and its telephone number is (201) 983-0888.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company..................... 1,200,000 shares
Common Stock offered by the Selling Stockholders........ 1,040,000 shares
Common Stock to be outstanding after the Offering (1)... 8,174,500 shares
Use of proceeds......................................... To open new Company-owned Super
Stores, to acquire existing
franchisee-owned stores and to
provide for working capital and
other general corporate purposes.
See "Use of Proceeds."
Nasdaq National Market Symbol........................... PCTY
</TABLE>
- - ---------------
(1) Does not include 505,750 shares of Common Stock reserved for issuance upon
the exercise of stock options outstanding as of April 8, 1997.
4
<PAGE> 6
RECENT EVENTS
On February 28, 1997, the Company acquired six franchise stores. Four of
the stores acquired were owned by Steven Mandell, the Company's Chairman and
President, and the remaining two stores were owned by Perry Kaplan, a former
executive officer and a Director of the Company. Total sales of the six
franchise stores in 1996 were approximately $12.8 million, or an average of
$2,142,000 per store. The aggregate purchase price for the six stores was
approximately $5.9 million, subject to post closing adjustments for inventory
and payable levels. The Company believes the acquired stores will be accretive
to net income per share. The Company's expansion strategy, in addition to
continuing to open additional Company-owned Super Stores in both new and
existing markets while continuing to add franchise stores, includes the
selective acquisition of franchise stores. See "Business -- Expansion Plans" and
"Certain Transactions."
The Company is in the process of improving store appearance by updating
signage and window displays in its Company-owned stores. These changes will
include the addition of new store front window signs, larger and more
informative aisle markers, department identification signage and the removal of
store front window blinds, to provide a brighter and more attractive display of
merchandise. The Company believes these improvements will be completed in all of
the Company-owned stores by the end of the second quarter of 1997.
On March 3, 1997, the Company signed a commitment letter to replace the
Company's existing $5,000,000 credit facility with a $20,000,000 revolving line
of credit maturing June 30, 2000. The new credit facility provides a lower rate
of interest on advances and more favorable financial covenants. The terms of the
commitment letter are subject to the negotiation and execution of definitive
loan documents. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
5
<PAGE> 7
SUMMARY FINANCIAL AND STORE DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1992 1993 1994 1995 1996
---------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total revenue.............................. $1,060,890 $2,408,828 $8,852,796 $23,120,342 $48,528,385
Income before interest and income taxes.... 15,002 258,109 946,402 2,140,304 5,648,920
Net income................................. $ 7,738 $ 234,737 $ 542,523 $ 1,299,965 $ 3,755,525
========== ========== ========== ========== ===========
Net income per share....................... $ 0.24 $ 0.56
========== ===========
Pro Forma(1):
Net income............................... $ 5,701 $ 132,218 $ 598,434
========== ========== ==========
Net income per share..................... -- $ 0.03 $ 0.12
========== ========== ==========
Weighted average shares outstanding(2)..... 3,323,904 4,098,333 5,008,333 5,322,333 6,664,202
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1992 1993 1994 1995 1996
----- ----- ------ ---------- ----------
<S> <C> <C> <C> <C> <C>
STORE DATA:
Company-owned:
Number of stores opened during period........ 7 9 20
Number of stores closed during period........ 0 0 0
Number of stores open at end of period....... 7 16 36
Franchise:
Number of stores opened during period........ 16 26 42 35 32
Number of stores closed during period........ 0 0 1 2 0
Number of stores open at end of period....... 32 58 99 132 164
----- ----- ------ ---------- ----------
Total stores open at end of period............. 32 58 106 148 200
Increase in Company-owned same store
sales(3)..................................... 26.6% 17.9%
Increase in franchise same store sales(3)...... 17.1% 8.1% 19.1% 10.3% 13.5%
System-wide store sales ($ millions)........... $28.1 $56.9 $113.0 $182.8 $269.7
Average sales per Company-owned store(4)....... $1,510,000 $1,662,000
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------
ACTUAL AS ADJUSTED(5)
----------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital.......................................................... $17,418,467 $ 31,618,467
Total assets............................................................. 34,603,107 48,803,107
Long-term obligations.................................................... 1,665,624 1,665,624
Total stockholders' equity............................................... 23,561,141 37,761,141
</TABLE>
- - ---------------
(1) Until April 27, 1994, the Company elected to be taxed as an S Corporation
under the Internal Revenue Code. As a result, the pro forma income statement
data for each of the three years in the period ended December 31, 1994
reflect adjustments to the historical income statement data assuming the
Company had not elected S Corporation status.
(2) In April 1994, the stockholders of the Company approved a 26,667-for-1
Common Stock split. All share information has been restated to give
retroactive effect to the stock split.
(3) Increases in Company-owned and franchise same store sales have been
calculated for stores that were open for at least 13 months as of the end of
such applicable period.
(4) For stores open at least one full calendar year. Includes seven stores and
16 stores in 1995 and 1996, respectively.
(5) As adjusted to give effect to the sale by the Company of 1,200,000 shares of
Common Stock offered hereby at an offering price of $13.00 per share less
the underwriting discount and estimated offering expenses payable by the
Company. See "Use of Proceeds" and "Capitalization."
6
<PAGE> 8
RISK FACTORS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in such forward-looking statements as a result of a variety of
factors, including those set forth in the following risk factors and elsewhere
in this Prospectus. In addition to the other information contained in this
Prospectus, the following factors should be considered carefully in evaluating
an investment in the Common Stock.
EXPANSION PLANS. The Company opened seven Company-owned stores in 1994, an
additional nine such stores in 1995 and an additional 20 stores in 1996. The
Company currently anticipates opening approximately 45 to 50 new Company-owned
stores in 1997 and approximately 70 to 75 such stores in 1998. In addition, the
Company acquired six franchise stores in 1997 and may seek to purchase
additional existing stores from franchisees. The Company's quarterly results of
operations have been, and are expected to continue to be, affected by the amount
and timing of sales contributed by new stores, the costs associated with the
opening of new stores, the integration of new stores into the operations of the
Company and expenses incurred to support the Company's expansion strategy.
Accomplishment of the Company's planned expansion is dependent upon many factors
including, but not limited to, general economic conditions, the identification
of suitable markets, the availability of suitable sites on acceptable lease
terms, the construction or improvement of sites, the hiring, training and
retention of qualified management and other store personnel and the integration
of new stores into the Company's information systems and operations. As a
result, there can be no assurance that the Company will be able to achieve its
targets for opening new stores or that such new stores, when opened, will
operate profitably. Moreover, the opening of additional stores in a market could
reduce sales from existing Company-owned stores located in that market. Although
the Company believes it has planned carefully for the implementation of its
expansion program, there can be no assurance that such plans can be executed as
presently envisioned or that the implementation of those plans will not have an
adverse effect on results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Business -- Expansion Plans."
SEASONALITY AND QUARTERLY FLUCTUATIONS. The Company's business is
seasonal, with its highest revenue levels occurring in the fourth quarter. This
period, which includes the Halloween selling season, accounted for approximately
49.2% and 50.2% of the Company's total revenues in 1995 and 1996, respectively.
Consequently, 91.0% and 85.9% of the Company's income from operations was
derived in the fourth quarter of 1995 and 1996, respectively. A significant
decrease in sales at Company-owned and franchise stores during the fourth
quarter would have a material adverse effect on the Company's results of
operations for the full year. Further, as a result of the seasonality of the
Company's store sales, the Company expects to incur a loss in the first quarter
of each year for the foreseeable future. In addition, the timing of new store
openings, related pre-opening expenses and the amount of revenue contributed by
new and existing stores may cause the Company's quarterly results of operations
to fluctuate. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Quarterly Financial Information."
DEPENDENCE ON FRANCHISEES. Royalties from franchisees' sales are a
significant component of the Company's revenue base. Thus, the Company's success
is partially dependent upon the ability of its franchisees to promote and
capitalize upon the Party City concept. There can be no assurance that the
Company will be able to recruit franchisees who have the business abilities and
financial resources necessary to open Party City Super Stores on schedule or
that present and future franchisees will conduct operations successfully. See
"Business -- Franchise Operations."
The Company is subject to various state and federal laws relating to the
offer and sale of franchises and the franchisor-franchisee relationship. In
addition, the Company believes that the franchising industry is experiencing an
increasing trend of franchisees filing complaints with state and federal
governmental authorities and instituting lawsuits against franchisors claiming,
among other things, that franchisors have violated federal and state franchise
laws, engaged in unfair trade practices or violated express or implied
agreements with franchisees. The failure by the Company to comply with such laws
could subject the Company to liability to franchisees and to fines or other
penalties imposed by governmental authorities. The Company believes that it is
in material compliance with these laws and regulations and its agreements with
franchisees.
7
<PAGE> 9
DEPENDENCE ON KEY PERSONNEL. The success of the Company is largely
dependent on the efforts of Steven Mandell, its Chairman of the Board and
President. The Company has entered into an employment agreement with Mr. Mandell
which has terms extending through December 31, 1998, and non-competition
provisions applying for one year following the termination of employment. The
Company does not have key man life insurance for the above individual. The loss
of the services of Mr. Mandell or other key managers could have a material
adverse effect on the Company's business and results of operations. See
"Management."
MERCHANDISE TRENDS. The Company's success depends, in part, on its ability
to anticipate and respond to changing merchandise trends and consumer demands in
a timely manner. Accordingly, any delay or failure by the Company in identifying
and responding to emerging trends could adversely affect consumer acceptance of
the merchandise in the Company's stores. If the Company is required to sell a
significant amount of unsold inventory at below average mark-ups over the
Company's cost or below cost, such action could have an adverse effect on the
Company's financial condition and results of operations.
COMPETITION. The party supplies retailing business is highly competitive.
The Company competes against single owner-operated party supplies stores,
specialty party supplies retailers (including superstores), and designated
departments in drug stores, general mass merchandisers, supermarkets and
department stores of local, regional and national chains. Many of the Company's
competitors have substantially greater financial resources than the Company. See
"Business -- Competition."
VOTING CONTROL BY PRINCIPAL STOCKHOLDERS. Upon completion of the Offering,
the Company's Directors and executive officers will own or have the right to
vote and control the disposition of approximately 26.1% of the Company's
outstanding shares of Common Stock. As a result, such stockholders could, if
they were to act together, exercise significant influence on the business and
affairs of the Company. See "Principal and Selling Stockholders" and "Certain
Transactions."
GOVERNMENT REGULATION. The Company, as a franchisor, is subject to
regulation by the United States Federal Trade Commission and also must comply
with state laws relating to the offer, sale and termination of franchises and
the refusal to renew franchises. The failure to obtain or maintain approvals to
sell franchises could adversely affect the Company and the Company's
franchisees. Increases in the minimum wage rate, employee benefit costs or other
costs associated with employees could adversely affect the Company and its
franchisees. See "Business -- Government Regulation."
POSSIBLE VOLATILITY OF STOCK PRICE. The trading price of the Common Stock
could be subject to wide fluctuations in response to variations in the Company's
quarterly operating results, changes in earnings estimates by analysts,
conditions in the Company's business or general market or economic conditions.
In addition, in recent years the stock market in general, and the market for
shares of small capitalization stocks in particular, have experienced extreme
price fluctuations, which have often been unrelated to the operating performance
of affected companies. Such fluctuations could have a material adverse effect on
the market price of the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of Common
Stock in the public market after the Offering, or the perception that such sales
could occur, may adversely affect prevailing market prices of the Common Stock
and could impair the future ability of the Company to raise capital through an
offering of its equity securities. The Company, its officers and Directors and
the Selling Stockholders, holding in the aggregate 43.1% of the Company's
outstanding Common Stock, after giving effect to the Offering, have agreed not
to offer, sell, contract to sell or otherwise dispose of any shares of Common
Stock, or any securities convertible into or exercisable or exchangeable for
Common Stock, for a period of 120 days after the date of this Prospectus without
the prior written consent of Smith Barney Inc. (subject in the case of the
Company, to an exception for the grant of options and issuance of shares
pursuant to the Company's stock option plans). See "Underwriting."
8
<PAGE> 10
USE OF PROCEEDS
The net proceeds from the sale of the 1,200,000 shares of Common Stock
offered hereby by the Company are estimated to be $14,200,000 (after deducting
the underwriting discount and estimated offering expenses payable by the
Company), based on a public offering price of $13.00 per share. The Company
intends to use a portion of such net proceeds to open new Company-owned stores.
In addition, the Company may use a portion of the net proceeds to buy existing
stores from franchisees. At present, the Company has no agreement to buy any
existing stores. Any excess net proceeds from the Offering will be used for
working capital requirements and for general corporate purposes. Pending such
uses by the Company, proceeds will be invested in short-term investment grade
securities. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and
"Business -- Expansion Plans."
The Company will not receive any of the proceeds from the sale of the
shares by the Selling Stockholders.
STOCK PRICE AND DIVIDEND POLICY
The Company's Common Stock has traded on the Nasdaq National Market under
the symbol "PCTY" since the Company's initial public offering. The following
table sets forth the high and low closing sale prices of the Company's Common
Stock as reported on the Nasdaq National Market for the periods indicated.
<TABLE>
<CAPTION>
1996 YEAR HIGH LOW
---- ---
<S> <C> <C>
First Quarter (beginning March 27, 1996)............................... 14 3/4 11 1/2
Second Quarter......................................................... 19 1/4 13 1/2
Third Quarter.......................................................... 22 1/4 16 1/4
Fourth Quarter......................................................... 19 3/4 14
1997 YEAR
First Quarter.......................................................... 16 3/4 15
Second Quarter (through April 8, 1997)................................. 15 13 11/16
</TABLE>
On April 8, 1997, the last sale price of the Common Stock reported on the
Nasdaq National Market was $13 11/16 per share. At February 28, 1997, the
approximate number of holders of record of the Common Stock was 55.
Except for the S Corporation distribution of a portion of previously
undistributed earnings to the Company's stockholders in 1994 upon the Company's
election to be taxed as a C Corporation, the Company has never paid cash
dividends on its capital stock and does not intend to pay cash dividends for the
foreseeable future. The Company expects that earnings will be retained for the
continued growth and development of the Company's business. Future dividends, if
any, will depend upon the Company's earnings, financial condition, working
capital requirements, compliance with covenants in agreements to which the
Company is or may be subject, future prospects and other factors deemed relevant
by the Company's Board of Directors. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
9
<PAGE> 11
CAPITALIZATION
The following table sets forth the total short-term debt and capitalization
of the Company as of December 31, 1996 and as adjusted to reflect the sale by
the Company of 1,200,000 shares of Common Stock offered by the Company (based on
a public offering price of $13.00 per share) and the application by the Company
of the estimated net proceeds therefrom. See "Use of Proceeds." This table
should be read in conjunction with the Financial Statements of the Company,
including the notes thereto, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------
ACTUAL AS ADJUSTED
----------- -----------
<S> <C> <C>
Short-term debt(1)........................................ $ 0 $ 0
=========== ==========
Long-term debt:(1)........................................ $ 0 $ 0
Stockholders' equity:
Common Stock, $0.01 par value, 25,000,000 shares
authorized, 6,960,667 shares issued and outstanding;
and 8,160,667 shares issued and outstanding, as
adjusted(2).......................................... 69,607 81,607
Additional paid-in capital.............................. 17,748,034 31,936,034
Retained earnings....................................... 5,743,500 5,743,500
----------- ----------
Total stockholders' equity...................... 23,561,141 37,761,141
----------- ----------
Total capitalization....................... $23,561,141 $37,761,141
=========== ==========
</TABLE>
- - ---------------
(1) For a description of the Company's obligations under its existing debt
agreements, see Note 4 of notes to Financial Statements.
(2) Does not include (i) 358,333 shares of Common Stock reserved for issuance
upon exercise of outstanding stock options as of December 31, 1996, (ii)
149,917 shares of Common Stock reserved for issuance upon exercise of
outstanding stock options granted between January 1, 1997 and April 8, 1997,
and (iii) 13,833 shares issued upon the exercise of stock options between
January 1, 1997 and April 8, 1997. See "Management -- Stock Option Plans."
10
<PAGE> 12
SELECTED FINANCIAL DATA
The following selected financial data for each of the years ended December
31, 1992 and 1993 are derived from financial statements of the Company not
included herein. The selected financial data for the three years in the period
ended December 31, 1996 are derived from the financial statements of the
Company, included elsewhere in this Prospectus, which have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report appearing
elsewhere herein. The financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements, including the notes
thereto, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1992 1993 1994 1995 1996
---------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total revenue............................................. $1,060,890 $2,408,828 $8,852,796 $23,120,342 $48,528,385
========== ========== ========== =========== ===========
Company-owned stores:
Net sales............................................... $3,991,589 $16,118,163 $39,143,625
Cost of goods sold and occupancy costs.................. 2,686,881 10,758,209 25,937,444
---------- ----------- -----------
Gross profit............................................ 1,304,708 5,359,954 13,206,181
Store operating and selling expense..................... 1,239,769 4,254,475 10,116,160
---------- ----------- -----------
Company-owned stores profit contribution................ 64,939 1,105,479 3,090,021
---------- ----------- -----------
Franchise stores:
Royalty fees............................................ $ 733,390 $1,793,828 $3,836,207 $ 6,074,679 $ 8,449,760
Franchise fees.......................................... 327,500 615,000 1,025,000 927,500 935,000
---------- ---------- ---------- ----------- -----------
Total franchise revenue................................. 1,060,890 2,408,828 4,861,207 7,002,179 9,384,760
Total franchise expense................................. 758,000 1,580,644 2,049,894 2,943,814 3,729,050
---------- ---------- ---------- ----------- -----------
Franchise profit contribution........................... 302,890 828,184 2,811,313 4,058,365 5,655,710
---------- ---------- ---------- ----------- -----------
General and administrative expense........................ 287,888 570,075 1,929,850 3,023,540 3,096,811
---------- ---------- ---------- ----------- -----------
Income before interest and income taxes................... 15,002 258,109 946,402 2,140,304 5,648,920
Interest income (expense), net............................ (5,349) 4,128 62,121 22,861 475,805
---------- ---------- ---------- ----------- -----------
Income before income taxes................................ 9,653 262,237 1,008,523 2,163,165 6,124,725
Provision for income taxes................................ 1,915 27,500 466,000 863,200 2,369,200
---------- ---------- ---------- ----------- -----------
Net income................................................ $ 7,738 $ 234,737 $ 542,523 $ 1,299,965 $ 3,755,525
========== ========== ========== =========== ===========
Net income per share...................................... $ 0.24 $ 0.56
=========== ===========
Pro forma(1):
Income before income taxes.............................. $ 9,653 $ 262,237 $1,008,523
Income taxes............................................ 3,952 130,019 410,089
---------- ---------- ----------
Net income.............................................. $ 5,701 $ 132,218 $ 598,434
========== ========== ==========
Net income per share.................................... $ -- $ 0.03 $ 0.12
========== ========== ==========
Weighted average shares outstanding(2).................... 3,323,904 4,098,333 5,008,333 5,322,333 6,664,202
STORE DATA:
Number of Company-owned stores (end of period).......... 7 16 36
Increase in Company-owned same store sales(3)........... 26.6% 17.9%
Number of franchise stores (end of period).............. 32 58 99 132 164
Increase in franchise same store sales(3)............... 17.1% 8.1% 19.1% 10.3% 13.5%
Average sales per Company-owned store(4)................ $ 1,510,000 $ 1,662,000
BALANCE SHEET DATA (AT END OF PERIODS):
Working capital......................................... $ (35,412) $ 381,759 $2,087,769 $ 1,998,988 $17,418,467
Total assets............................................ 558,290 1,459,643 6,009,133 10,307,572 34,603,107
Long-term obligations................................... 65,306 276,506 489,176 996,093 1,665,624
Stockholders' equity.................................... 48,141 326,659 3,232,394 4,581,707 23,561,141
</TABLE>
- - ---------------
(1) Until April 27, 1994, the Company elected to be taxed as an S Corporation
under the Internal Revenue Code. As a result, the pro forma income statement
data for each of the five years in the period ended December 31, 1994
reflect adjustments to the historical income statement data assuming the
Company had not elected S Corporation status.
(2) In April 1994, the stockholders of the Company approved a 26,667-for-1
Common Stock split. All share information has been restated to give
retroactive effect to the stock split.
(3) Increases in Company-owned and franchise same store sales have been
calculated for stores that were open for at least 13 months as of the end of
such applicable period.
(4) For stores open at least one full calendar year. Includes seven stores and
16 stores in 1995 and 1996, respectively.
11
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the information set forth under "Selected Financial Data" and the Financial
Statements and notes thereto included elsewhere herein.
GENERAL
During the first four years of operations, the Company concentrated its
efforts on building the base of its franchise stores, evaluating the performance
of product categories and suppliers, improving store merchandising and refining
its store design, procedures and systems. In late 1993, the Company made the
strategic decision to begin opening Company-owned stores due to the successful
store model developed in the franchise system. In January 1994, the first
Company-owned store was opened in Orlando, Florida. Six additional Company-owned
stores were opened in the third and fourth quarters of 1994. Nine Company-owned
stores were opened in 1995, and twenty Company-owned stores were opened in 1996.
Franchise revenues are generated from royalties received on sales and
initial franchise fees which are recognized at the time a store opens. All
stores opened after January 1, 1993 pay a royalty fee of 4.0% of net sales.
Stores opened prior to 1993 have royalty rates ranging from 2.0% to 4.0% of net
sales. Initial franchise fees are currently $35,000 to open a new store.
Franchise expenses are those costs directly related to the Company's management
of franchise operations and consist primarily of payroll, travel, advertising
and legal expenses as well as an allocation of home office occupancy expenses.
The Company's business is seasonal, with its highest revenue levels
occurring in the fourth quarter. This period, which includes the Halloween,
Thanksgiving, Christmas, Hanukkah and New Year's Eve selling seasons, accounts
for a significant portion of the Company's total revenues and profitability. In
addition, the timing of new store openings, coupled with the related pre-opening
expenses, may cause the Company's quarterly results to fluctuate.
Through April 27, 1994, the Company operated as an S Corporation for
Federal income tax purposes. As a result, through this period the Company did
not record or pay any Federal income taxes. For the purpose of discussion and
analysis, the Company has presented a pro forma tax provision and pro forma net
income. These pro forma amounts represent what the income tax provision and the
net income would have been if the Company had been a C Corporation and thus was
subject to Federal income taxation for the entire period. Net income per share
is computed using the weighted average common stock equivalent shares
outstanding during each period. The 26,667-for-1 stock split which occurred in
April 1994 has been given retroactive effect for all periods discussed.
Same store sales increases or decreases are calculated for stores open at
least thirteen full months. Company-owned same store sales increased 26.6% in
1995 and 17.9% in 1996. The Company's 16 stores that were in operation for all
of 1996 generated average net sales of approximately $1,662,000 and average
store-level profit contribution of approximately $200,000, or 12.0% of average
net sales.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Company-owned Stores
Net sales from Company-owned stores increased to $39,143,625 in the year
ended December 31, 1996 from $16,118,163 in the year ended December 31, 1995.
The 1996 results include 16 stores which were open at the beginning of that year
plus 20 stores opened during the year, four of which were opened in the second
quarter, 10 in the third quarter and six in the month of October. The 1995
amount represents sales from seven stores which were open at the beginning of
the year plus nine stores opened during the year, five of which were opened in
September and two in October. Of the total sales increase, 54% is attributable
to new store openings in 1996. Same store sales increased 17.9% in 1996. Gross
profit reflects the cost of goods sold and store occupancy costs including rent,
common area maintenance, real estate taxes, repair and maintenance,
12
<PAGE> 14
depreciation and utilities. Gross profit for the year ended December 31, 1996
was $13,206,181 compared to $5,359,954 for 1995. The increase in 1996 was due to
increased sales volume. Gross margin was 33.7% and 33.3% of sales for the years
ended December 31, 1996 and 1995, respectively.
Store operating and selling expenses were $10,116,160 for the year ended
December 31, 1996 compared to $4,254,475 in 1995. The increase in store
operating expenses is attributable to the increased number of stores operated by
the Company during 1996. Store operating expenses were 25.8% and 26.4% of sales
for December 31, 1996 and 1995, respectively. Company-owned store profit
contribution was $3,090,021 for the year ended December 31, 1996, compared to a
profit contribution of $1,105,479 for 1995.
Franchise Operations
Franchise revenue is composed of the initial franchise fees which are
recorded as revenue when the store opens, and ongoing royalty fees, generally
4.0% of the store's net sales. Franchise fees, recognized on 32 store openings
during the year ended December 31, 1996 were $935,000 compared to $927,500
during 1995, which represents 35 store openings. Royalty fees increased 39.1% to
$8,449,760 in the year ended December 31, 1996 from $6,074,679 in 1995.
Franchise same store sales increases for the years ended December 31, 1996 and
1995 were 13.5% and 10.3%, respectively.
Expenses directly related to franchise revenue increased to $3,729,050 for
the year ended December 31, 1996 from $2,943,814 for the year ended December 31,
1995. This increase is primarily attributable to additional franchise personnel
required to operate this portion of the Company's business and the necessary
infrastructure to support such employees. As a percentage of franchise revenue,
franchise expenses were 39.7% and 42.0% for the years ended December 31, 1996
and 1995, respectively.
Franchise profit contribution was $5,655,710 for the year ended December
31, 1996 compared to $4,058,365 for the year ended December 31, 1995. The 39.4%
increase in franchise profit contribution is due to the increase in royalty fees
and franchise fees offset in part by an increase in franchise expenses, as
discussed above.
General and Administrative
General and administrative expenses increased 2.4% to $3,096,811 in the
year ended December 31, 1996 compared to $3,023,540 in the year ended December
31, 1995. The increase is primarily attributable to an increase in payroll and
related benefits, recruitment and moving of new employees and increased travel
as a result of establishing the necessary organizational infrastructure to allow
the Company to build the Company-owned store base. General and administrative
expenses for 1995 included a one time severance expense of $275,000 and a
litigation settlement expense of $200,000. As a percentage of revenue, general
and administrative expenses were 6.4% and 13.1% for the years ended December 31,
1996 and 1995, respectively. This decrease as a percentage of revenue resulted
from increased leverage of general and administrative expenses over a larger
sales base.
Net Income
Net income increased 189% to $3,755,525, or $0.56 per share, in the year
ended December 31, 1996 as compared to net income of $1,299,965, or $0.24 per
share in the year ended December 31, 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Company-owned Stores
Net sales from Company-owned stores were $16,118,163 for the year ended
December 31, 1995 compared to $3,991,589 for the year ended December 31, 1994.
The 1995 results include seven stores which were open at the beginning of that
year plus nine stores opened during the year, five of which were opened in
September and two in October. The 1994 amount represents sales from one store
opened in January, one in August, four in September and one in October of that
year. Of the total sales increase, 46% is attributable to new store openings in
1995. Same store sales increased 26.6% in 1995. Gross profit for the year ended
13
<PAGE> 15
December 31, 1995 was $5,359,954 compared to $1,304,708 for the year ended
December 31, 1994. The increase in 1995 was due to increased sales volume. Gross
margin was 33.3% and 32.7% of sales for the years ended December 31, 1995 and
1994, respectively.
Store operating and selling expenses were $4,254,475 for the year ended
December 31, 1995 compared to $1,239,769 in the comparable 1994 period. The
increase in store operating expenses is attributable to the increased number of
stores operated by the Company during the year ended December 31, 1995. Company-
owned store profit contribution was $1,105,479 for the year ended December 31,
1995 compared to $64,939 for the comparable 1994 period.
Franchise Operations
Franchise fees, recognized on the 35 store openings during the year ended
December 31, 1995 were $927,500 compared to $1,025,000, representing 42 store
openings, during the year ended December 31, 1994. The reduction in franchise
fees caused by fewer store openings was partially offset by the increase in such
fees to $30,000 from $25,000 per store with respect to franchise agreements
signed after January 1, 1995. Royalty fees of $6,074,679 in the year ended
December 31, 1995 represented an increase of 58.4% over the $3,836,207 royalty
fees generated in the year ended December 31, 1994. Approximately 42.3% of the
increase was attributable to sales at the 35 stores opened in 1995. The balance
of the increase was caused by increases in sales at stores open as of December
31, 1994. Franchise same store sales increases for the years ended December 31,
1995 and 1994 were 10.3% and 19.1%, respectively.
Expenses directly related to franchise revenue increased $893,920 to
$2,943,814 for the year ended December 31, 1995 from $2,049,894 for the year
ended December 31, 1994. This increase is primarily attributable to additional
franchise personnel required to operate this portion of the Company's business
and the necessary infrastructure to support such employees. As a percentage of
revenue, franchise expenses were 42.0% and 42.2% for the years ended December
31, 1995 and 1994, respectively.
Franchise profit contribution increased 44.4% to $4,058,365 for the year
ended December 31, 1995 from $2,811,313 for the year ended December 31, 1994.
The increase in franchise profit contribution is due to the increase in royalty
fees attributable to the opening of 35 new franchises and increases in existing
franchise store sales offset in part by a decrease in franchise fees and an
increase in franchise expenses, as discussed above.
General and Administrative
General and administrative expenses increased 56.7% to $3,023,540 in the
year ended December 31, 1995 compared to $1,929,850 in the year ended December
31, 1994. The increase is primarily attributable to an increase in payroll and
related benefits of approximately $458,000 as a result of establishing the
necessary organizational infrastructure to allow the Company to build the
Company-owned store base, professional fee increases of approximately $196,000
due primarily to increases in legal and consulting fees and the accrual of
$275,000 related to a severance agreement for a senior executive paid through
August 31, 1996. As a percentage of revenue, general and administrative expenses
were 13.1% and 21.8% for the years ended December 31, 1995 and 1994,
respectively. This decrease as a percentage of revenue resulted from increased
leverage of general and administrative expenses over a larger sales base.
Income Tax
In April 1994, the Company changed its tax status from an S Corporation to
a federally taxable C Corporation. As a result of the change, certain tax losses
sustained by the Company through the period it was an S Corporation were not
available to offset income earned subsequently as a C Corporation. Therefore,
because of these non-deductible losses, the Company's effective tax rate was
46.2% in 1994 compared to 39.9% in 1995. Pro forma income taxes, assuming that
the Company was a C Corporation for the entire year ended December 31, 1994,
were $410,089 compared to $863,200 for the year ended December 31, 1995.
14
<PAGE> 16
Net Income
Net income increased 139.6% to $1,299,965, or $0.24 per share, in the year
ended December 31, 1995 compared to $542,523 in the year ended December 31,
1994. On a pro forma basis, which assumes the Company was always organized as a
C Corporation, net income for the year ended December 31, 1994 would have been
$598,434 and net income per share for the year ended December 31, 1994 would
have been $0.12.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash provided by operating activities was $3,557,529,
$1,600,975 and $40,965 in the years ended December 31, 1996, 1995 and 1994,
respectively. The increase in cash provided by operating activities in 1996
compared to 1995 was primarily attributable to an increase in net income. The
increase in cash provided by operating activities in 1995 compared to 1994 was
primarily attributable to increases in net income and accounts payable.
Cash used in investing activities was $4,872,000, $2,082,158 and $1,396,214
in the years ended December 31, 1996, 1995 and 1994, respectively. The increases
in cash used in investing activities in 1996 compared to 1995 and in 1995
compared to 1994 were attributable to increased purchases of property and
equipment necessary to support the accelerating growth in Company-owned stores.
Such purchases were substantially funded by the Company's available cash.
Cash provided by financing activities was $15,151,619, $100,138 and
$2,299,031 for the years ended December 31, 1996, 1995 and 1994, respectively.
Cash provided by financing activities in 1996 was primarily attributable to the
proceeds of the Company's initial public offering. Cash provided by financing
activities in 1994 was primarily attributable to a private placement of the
Company's Common Stock.
Prior to 1994, the Company financed its business activities primarily with
funds generated from operating activities. The Company has a revolving
credit/term loan facility in the amount of $5,000,000 expiring June 30, 1998.
Advances under the revolving credit/term loan facility bear interest at the
bank's prime rate (8.25% at February 28, 1997) minus 1/2 of 1% and are
collateralized by all assets of the Company. The Company must pay a quarterly
commitment fee of 1/4 of 1% of the unused amount of the available facility. The
credit facility contains various covenants including, among others, restrictions
on capital expenditures, the maintenance of a defined minimum tangible net
worth, interest coverage ratio, total liabilities to tangible net worth ratio
and current ratio. At December 31, 1996, the Company was in compliance with such
loan agreement covenants. There was no outstanding balance under the facility at
December 31, 1996.
On March 3, 1997, the Company signed a commitment letter (the "Commitment
Letter") to refinance and replace its existing loan facility with a $20,000,000
committed revolving line of credit facility maturing on June 30, 2000. Advances
under the line will bear interest, at the Company's option, at 1/2 of 1% below
the bank's prime rate (8.25% as of February 28, 1997) or LIBOR plus 1.25% (which
margin for the LIBOR rate option is subject to reduction to .75% or increase to
1.75% based on the Company's ratio of total liabilities to tangible net worth).
The Commitment Letter requires a facility fee of $50,000 and a quarterly
commitment fee equal to .125% of the average unused portion of the line and is
secured by substantially all of the assets of the Company. The Commitment Letter
also provides various covenants including, among others, restrictions on capital
expenditures, the maintenance of a defined minimum tangible net worth, interest
coverage ratio, total liabilities to tangible net worth ratio and current ratio.
The terms of the Commitment Letter are subject to the negotiation and execution
of definitive loan documents.
Over the next several years, the Company intends to devote greater
resources to the opening of Company-owned stores and therefore believes that its
revenue growth increasingly will be derived from the opening of Company-owned,
rather than franchise, Super Stores. Based on its current planning and marketing
information, the Company plans to open approximately 45 to 50 Company-owned
stores in 1997. Therefore, it is anticipated that approximately $16,875,000 to
$18,750,000 of its existing cash and the proceeds of the Offering will be used
to open these stores in 1997. In addition, the Company anticipates that new and
existing franchisees will open approximately 20 additional stores in 1997. The
Company anticipates opening approximately 70 to 75 Company-owned stores during
1998, using a combination of its existing cash and operating cash flow, funds
available under the Company's revolving credit facility, and/or any remaining
15
<PAGE> 17
proceeds from the Offering for these openings. In addition, the Company may seek
to acquire existing stores from franchises. At present, the Company has no
agreement to acquire any franchise store. The Company expects that the average
new store cost for Company-owned stores will continue to be approximately
$375,000. These expenditures include $163,000 for equipment and fixtures,
including point of sale equipment, $52,000 for leasehold improvements and
approximately $125,000 for store inventory, net of accounts payable. Pre-opening
expenses are estimated to be $35,000 per store. The Company typically leases
space ranging from 10,000 to 12,000 square feet and seeks to lease sites rather
than own the real estate.
Out of its planned 45 to 50 Company-owned stores to be opened during 1997,
as of February 28, 1997, the Company had opened two stores and had signed leases
for 23 locations. In addition, as of February 28, 1997, the Company had signed a
lease for a Company-owned store to be opened in 1998. Most of such leases are
for ten-year terms, each with two five-year renewal options. One lease has a
term of 20 years. The minimum lease obligation for these 26 leases is
approximately $51,678,000 over the life of the leases.
The Company believes the proceeds from the Offering, its cash flows from
operations and its borrowing capacity under the proposed credit facility will be
adequate to fund its cash requirements for at least the next 24 months.
Impact of Inflation
The Company believes that inflation did not have a material impact on its
operations for the periods reported. Significant increases in labor, employee
benefits and other operating expenses could have a material adverse effect on
the Company's performance.
QUARTERLY FINANCIAL INFORMATION
The following table sets forth unaudited financial information derived from
the Company's quarterly statements of operations for the four quarters of the
years ended December 31, 1995 and December 31, 1996, respectively. This
information includes all adjustments (consisting only of normal recurring
accruals) which management considers necessary for a fair presentation.
The Company's quarterly results reflect a significant profit contribution
in the fourth quarter, primarily due to the Halloween selling season. Quarterly
results are also significantly impacted by pre-opening expenses for new
Company-owned stores. Approximately $35,000 in pre-opening expenses are recorded
for each new store. Five new stores were opened in the third quarter of 1995 and
10 new stores were opened in the third quarter of 1996.
During 1995, the Company reported a slightly above break-even performance
in the first quarter, $207,921 of net income in the second quarter, followed by
a loss of $101,861 in the third quarter. Results for the third quarter of 1995
include a pre-tax charge of $275,000 related to a termination agreement with a
senior executive of the Company which was paid out through August 31, 1996 as
well as the pre-opening expenses for new Company-owned stores. Net income for
the fourth quarter of 1995 was $1,176,780 or 90.5% of the full year's net
income. During 1996, the Company experienced a loss in the first quarter, but
remained profitable in the remaining three quarters of the year. Net income in
the fourth quarter of 1996 represented 81.9% of the full year's net income.
As a result of the seasonality of the Company's store sales, the Company
expects to incur a loss in the first quarter of each year for the foreseeable
future.
16
<PAGE> 18
PARTY CITY CORPORATION
QUARTERLY OPERATING DATA
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1996
------------------------------------------------ ------------------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
---------- ---------- ---------- ----------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue............... $2,851,423 $4,165,342 $4,725,203 $11,378,374 $5,981,012 $8,286,418 $9,907,766 $24,353,189
========== ========== ========== =========== ========== ========== ========== ===========
Company-owned stores:
Net sales................. 1,782,905 2,659,151 3,051,352 8,624,755 4,562,271 6,338,685 7,507,165 20,735,504
Cost of goods sold and
occupancy costs......... 1,257,446 1,822,532 2,228,843 5,449,388 3,334,320 4,362,640 5,339,627 12,900,857
---------- ---------- ---------- ----------- ---------- ---------- ---------- -----------
Gross profit.............. 525,459 836,619 822,509 3,175,367 1,227,951 1,976,045 2,167,538 7,834,647
Store operating and
selling expense......... 495,165 633,436 974,732 2,151,142 1,301,699 1,581,278 2,427,441 4,805,742
---------- ---------- ---------- ----------- ---------- ---------- ---------- -----------
Company-owned stores
profit (loss)
contribution............ 30,294 203,183 (152,223) 1,024,225 (73,748) 394,767 (259,903) 3,028,905
Franchise stores:
Royalty fees.............. 893,518 1,276,191 1,303,851 2,601,119 1,328,741 1,772,733 1,785,601 3,562,685
Franchise fees............ 175,000 230,000 370,000 152,500 90,000 175,000 615,000 55,000
---------- ---------- ---------- ----------- ---------- ---------- ---------- -----------
Total franchise revenue... 1,068,518 1,506,191 1,673,851 2,753,619 1,418,741 1,947,733 2,400,601 3,617,685
Total franchise expense... 576,815 721,487 734,862 910,650 852,364 919,585 969,622 987,479
---------- ---------- ---------- ----------- ---------- ---------- ---------- -----------
Franchise profit
contribution............ 491,703 784,704 938,989 1,842,969 566,377 1,028,148 1,430,979 2,630,206
---------- ---------- ---------- ----------- ---------- ---------- ---------- -----------
General and administrative
expense................... 497,607 649,146 956,937 919,850 759,514 761,968 767,246 808,083
---------- ---------- ---------- ----------- ---------- ---------- ---------- -----------
Income (loss) before
interest and income
taxes..................... 24,390 338,741 (170,171) 1,947,344 (266,885) 660,947 403,830 4,851,028
Interest income (expense),
net....................... 3,735 8,180 1,310 9,636 (10,321) 170,021 171,830 144,275
---------- ---------- ---------- ----------- ---------- ---------- ---------- -----------
Income before income
taxes..................... 28,125 346,921 (168,861) 1,956,980 (277,206) 830,968 575,660 4,995,303
Provision (benefit) for
income taxes.............. 11,000 139,000 (67,000) 780,200 (110,700) 331,800 230,000 1,918,100
---------- ---------- ---------- ----------- ---------- ---------- ---------- -----------
Net income (loss)........... $ 17,125 $ 207,921 $(101,861) $ 1,176,780 $(166,506) $ 499,168 $ 345,660 $ 3,077,203
========== ========== ========== =========== ========== ========== ========== ===========
Net income (loss) per
share..................... $ 0.00 $ 0.04 $ (0.02) $ 0.22 $ (0.03) $ 0.07 $ 0.05 $ 0.43
========== ========== ========== =========== ========== ========== ========== ===========
</TABLE>
17
<PAGE> 19
BUSINESS
GENERAL
The Company is a rapidly growing specialty retailer of party supplies
through its network of discount Super Stores. At February 28, 1997, the Company
owned and operated 44 Party City Super Stores in the United States and its
franchisees operated an additional 159 stores in the United States, Puerto Rico,
Canada, and Spain. The Company, based in Rockaway, New Jersey, believes it is
one of the largest party supplies specialty superstore chains. The Company
authorized the first franchise store in 1989 and opened its first Company-owned
store in January 1994. System-wide sales (including net sales at Company-owned
and franchised stores) for the year ended December 31, 1996 totaled $269.7
million, an increase of 47.5% over the year ended December 31, 1995. During the
year ended December 31, 1996, the Company significantly accelerated its
Company-owned Super Store expansion program and opened 20 Company-owned Super
Stores. Primarily as a result of this expansion, the Company's total revenue
increased from approximately $23.1 million in 1995 to approximately $48.5
million in 1996, an increase of 110%. During this same period, income from
operations increased 164% from approximately $2.1 million in 1995 to
approximately $5.6 million in 1996. The Company expects to open approximately 45
to 50 Company-owned Super Stores in 1997 and approximately 70 to 75
Company-owned Super Stores in 1998.
The Company believes that, under its "Party City, The Discount Party Super
Store" trademark, it has transformed the party supplies business by introducing
increased product and marketing focus and greater mass merchandising
sophistication. Pursuant to its merchandising concept, the Company operates and
franchises party supplies Super Stores that typically range in size from 10,000
square feet to 12,000 square feet. These Super Stores offer a broad selection of
merchandise (branded as well as private label) for a wide variety of celebratory
occasions, including birthday parties, weddings, and baby showers as well as
seasonal events such as Halloween, Christmas, New Year's Eve, graduation,
Easter, Valentine's Day, Thanksgiving, St. Patrick's Day, the Super Bowl and the
Fourth of July. Party City seeks to offer customers a "one-stop" party store
that provides a wide selection of merchandise at everyday low prices. A key
element of delivering customer satisfaction is stocking inventory in sufficient
quantities to satisfy customer needs for parties of virtually all sizes and
types.
INDUSTRY OVERVIEW
The retail party supplies business has traditionally been a fragmented one,
with consumers purchasing party-related products from single owner-operated
party supplies stores and designated departments in drug stores, general mass
merchandisers, supermarkets, and department stores of local, regional and
national chains. According to Party and Paper Retailer, a retail trade
publication, the market for party and special occasion merchandise, comprised of
party supplies, greeting cards, gift wrap and related items, had estimated
retail sales of $8.85 billion in 1996.
The Company believes that the increasing breadth of party supplies
merchandise produced by manufacturers over the past few years has been a driving
factor in the marketplace's acceptance of the party supplies superstore concept.
Further, the Company believes that the significant revenues experienced by its
Company-owned and franchise Super Stores in the fourth quarter can be
attributed, to a large extent, to the growth in the number of persons
celebrating Halloween and the increased demand for costumes and party supplies
utilized in such celebrations.
The Company has noted the marketplace's acceptance of other types of
superstores and mega-retailers in various categories such as food, home
furnishings and pet supplies, among others. The success of such superstores and
mega-retailers in other industries has prompted the Company to expand its
product lines to include a wider breadth of merchandise in order to make its
Super Stores increasingly attractive destination shopping locations for party
supplies. In addition, the Company believes that the increased breadth of
related and integrated merchandise available to customers in superstores and
mega-retailers influences consumers to increase the number of purchases in a
given trip to a retailer. As such, the Company believes that the broad
18
<PAGE> 20
selection, and relatively low price points, of merchandise offered by its Super
Stores often stimulates customers to purchase additional items on impulse.
BUSINESS STRATEGY
The Company's objective is to continue to expand its position as a leading
category-dominant national chain of party supplies superstores. The Company
believes that it has transformed the party supplies business by introducing
increased product and marketing focus and greater mass merchandising
sophistication. Key components of the Company's strategy are:
Pursue Super Store Expansion. The Company believes that opportunities for
substantial expansion exist by opening additional Super Stores in both new and
existing markets and believes that numerous sites are available for such
expansion. The Company's expansion strategy is to rapidly increase its
Company-owned store base while continuing to add franchise stores. In addition,
the Company recently purchased six franchise stores and anticipates selectively
acquiring additional franchise stores in the future where they will be accretive
to the Company's net income per share. See "Recent Events." Based on this
expansion plan, the Company anticipates opening approximately 45 to 50 new
Company-owned stores and 20 franchise stores in 1997 and approximately 70 to 75
new Company-owned stores and 12 franchise stores in 1998, bringing the total
stores in operation to approximately 87 to 92 Company-owned Super Stores and
approximately 178 franchise Super Stores by the end of 1997 and approximately
157 to 167 Company-owned Super Stores and approximately 190 franchise Super
Stores by the end of 1998.
Offer the Broadest Selection of Merchandise in an Exciting Shopping
Environment. The Company strives to provide party-planners and party-goers with
convenient one-stop shopping for party supplies and offers what it believes is
one of the most extensive selections of party supplies. A typical Party City
Super Store contains approximately 20,000 SKUs. Within its many product
categories, Party City offers a wide variety of patterns, colors and styles. The
Company has been expanding the range of items which it offers in order to create
consumer loyalty and generate repeat business by striving to maintain a new and
exciting product selection. Further, the Company believes that its broad
selection of merchandise and relatively low price points often stimulates
consumers to purchase additional party supplies on impulse.
Establish Convenient Store Locations. While the Company believes that its
stores typically are destination shopping locations, it seeks to maximize
customer traffic and quickly build the visibility of new stores by situating its
stores in high traffic areas. Site selection criteria include: population
density; demographics; traffic counts; complementary retailers; storefront
visibility and presence (either in a stand-alone building or in a strip or power
shopping center); competition; lease rates; and accessible parking. The Company
believes there is an extensive number of suitable locations available for future
stores.
Maintain Everyday Low Pricing. The Company, using the buying power of its
more than 200 Company-owned and franchise Super Stores, obtains volume discounts
from its vendors on most products, allowing the Super Stores to offer a broad
line of high quality merchandise at competitive prices. The Company reinforces
customers' expectations of savings by prominently displaying signs announcing
its everyday low prices. The Company also maintains a lowest price guaranty
policy, to which it suggests its franchisees adhere; this policy guarantees that
Party City will meet and discount the advertised prices of a competitor's
products. The Company believes that this policy has helped foster the Company's
image of offering consumers exceptional value for their money.
Provide Excellent Customer Service. The Company views the quality of its
customers' shopping experience as critical to its continued success. The Company
is committed to making shopping in its Super Stores an enjoyable experience
through the employment of friendly, knowledgeable and energetic sales associates
who provide customers with personalized shopping assistance. At Halloween, an
important selling season for the Company, each store increases significantly the
number of sales associates in the store to ensure prompt service. Sales
associates assist customers in selecting or finding a certain item, which
provides the sales associates with a cross-selling opportunity to suggest
accessories or other complementary products. The
19
<PAGE> 21
Company believes that the compensation of its store managers and other personnel
is competitive and enables the Company to attract and retain well-qualified,
motivated employees who are committed to providing excellent customer service.
Utilize Sophisticated Merchandising Systems. The Company believes that the
daily use of its customized MIS system enables the Company to quickly analyze
the performance of Company-owned and franchise stores in order to allow it to
more rapidly react to changing consumer preferences. The MIS system is a
critical element in management's efforts to evaluate the sales performance of
individual stores and to assist in analyzing and deciding upon the proper mix of
merchandise. In addition, the MIS system is essential in assisting the
individual store managers in constantly replenishing their shelves, which is
consistent with the Company's goal of having shelves fully stocked in order to
make the stores more exciting to consumers and to take advantage of sales
opportunities. The Company continually evaluates and updates its systems.
Capitalize on Direct Marketing and Advertising. The Company believes that
its advertising and marketing strategy allows it to open stores in any area of
the country without the need to cluster stores. Direct mailings to potential
customers are the principal form of advertising. The Company accomplishes this
by soliciting zip code information from customers at the time of their
purchases. This information is input into the MIS system and is used to
determine the geographical area where the most likely potential customers live.
With this information, in conjunction with major seasonal events, each store
effects approximately 10 to 12 direct mailings per year to residents in those
targeted areas.
Investment in Infrastructure to Support Growth. As the Company has
increased its base of Company-owned Super Stores, it has made additions to its
management team. During 1996, the Company added a chief operating officer as
well as key people in the Company's MIS, real estate, merchandising,
administrative support and construction departments. The Company believes it
will not require significant additions to its management team to realize its
expansion plans for Company-owned stores.
EXPANSION PLANS
The Company's expansion strategy is to increase its market share in
existing markets and to penetrate new markets with a goal of maintaining a
leading position as a category-dominant retailer of party supplies merchandise.
Over the next few years, the Company intends to continue to devote greater
resources to the opening of Company-owned stores and therefore believes that for
the next several years its revenue growth increasingly will be derived from the
opening of Company-owned, rather than franchise Super Stores. The Company is
experienced in overseeing a large number of stores which are geographically
disbursed. The Company believes that there is an extensive number of suitable
locations available for future sites. As of February 28, 1997, the Company had
opened two Company-owned stores and acquired six franchise stores in 1997. In
1996, the Company opened 20 Company-owned stores and its franchisees opened an
additional 32 stores. During 1995, the Company owned nine Company-owned stores
and its franchisees opened an additional 35 stores. Based on its current
planning and market information, the Company plans to open approximately 43 to
48 additional Company-owned stores in 1997, and believes that new and existing
franchisees will open approximately 20 stores. The Company has signed leases for
23 of its planned Company-owned locations to be opened in 1997, and one of its
planned Company-owned locations to be opened in 1998, which are detailed below.
COMPANY-OWNED STORES OPENED IN 1997
-------------------------------------------
<TABLE>
<CAPTION>
LOCATIONS SQUARE FOOTAGE
--------------------------------------------------------------- --------------
<S> <C>
Encinitas, CA.................................................. 8,658
Lighthouse Point, FL........................................... 8,000
</TABLE>
20
<PAGE> 22
COMPANY-OWNED STORES TO BE OPENED IN 1997
<TABLE>
<CAPTION>
SIGNED LOCATIONS SQUARE FOOTAGE
--------------------------------------------------------------- --------------
<S> <C>
Atlantic City, NJ.............................................. 12,000
Bronx, NY...................................................... 10,000
Bronx (Co-Op City), NY......................................... 7,500
Brooklyn (Nostrand), NY........................................ 10,000
Centereach, NY................................................. 15,000
Cincinnati (Waterstone), OH.................................... 10,000
Las Vegas (Rainbow), NV........................................ 10,500
Lauderhill, FL................................................. 12,700
Livonia, MI.................................................... 14,400
Madison, WI.................................................... 12,316
National City, CA.............................................. 7,500
New Hyde Park, NY.............................................. 10,000
Olivette, MO................................................... 14,204
Pasadena, CA................................................... 11,200
Rochester Hills, MI............................................ 10,200
Roseville, CA.................................................. 11,314
St. Louis (Mirr Mead), MO...................................... 10,400
St. Louis (Sun Hills), MO...................................... 12,000
South Miami, FL................................................ 9,704
Stamford, CT................................................... 10,000
Tustin, CA..................................................... 9,729
West Paterson, NJ.............................................. 11,800
Woodbury, NY................................................... 10,000
</TABLE>
COMPANY-OWNED STORES TO BE OPENED IN 1998
<TABLE>
<CAPTION>
SIGNED LOCATIONS SQUARE FOOTAGE
--------------------------------------------------------------- --------------
<S> <C>
Baldwin Park, CA............................................... 10,147
</TABLE>
In addition to opening new Company-owned stores, the Company may purchase
selected existing franchised locations from its franchisees. (See "Prospectus
Summary -- Recent Events" and "Certain Transactions.") As of February 28, 1997,
the Company had purchased the following six stores from its franchisees in 1997:
FRANCHISE STORES ACQUIRED BY THE COMPANY IN 1997
<TABLE>
<CAPTION>
LOCATIONS SQUARE FOOTAGE
--------------------------------------------------------------- --------------
<S> <C>
Livingston, NJ................................................. 8,426
Randolph, NJ................................................... 7,479
East Brunswick, NJ............................................. 7,700
Wayne, NJ...................................................... 9,500
North Iselin, NJ............................................... 8,700
Parsippany, NJ................................................. 11,400
</TABLE>
The Company anticipates that approximately 20 new franchise Super Stores
will be opened in 1997. As of February 28, 1997, one new franchise store was
opened in Texas and nine leases for new stores had been signed by franchisees in
California, Florida, Texas, Oregon, North Carolina and Canada.
21
<PAGE> 23
STORE ECONOMICS
The Company believes that the Party City Super Store concept offers
attractive unit economics and is conducive to the Company's planned expansion of
its store base. The Company's 16 Company-owned stores that were in operation for
all of 1996 generated average sales revenue of $1,662,000 and an average store
contribution of $200,000, or 12% of net sales. The stores included in such
average are comprised of seven and nine stores opened in 1994 and 1995,
respectively. No assurance can be given that in the future average sales revenue
and profit contribution per store will not vary from historical results.
The Company expects that the average cost for new Company-owned stores will
continue to be approximately $375,000 for a typical 10,000 to 12,000 square feet
leased store. The Company's cost of leasehold improvements in its present stores
has ranged from $0 to $250,000, with an average cost of $52,000. The average
cost of the investment in equipment and fixtures in Company-owned stores has
been $163,000. Pre-opening costs, which are expensed as incurred, have averaged
$35,000 per Company-owned store. These pre-opening expenses primarily consist of
labor, supplies, and occupancy charges. Each new store spends approximately
$125,000 for inventory, net of accounts payable.
STORE LOCATIONS
As of February 28, 1997, there were 203 Party City Discount Super Stores
open in the United States, Canada, Puerto Rico, and Spain. Of these, 44 were
Company-owned and 159 were operated by the Company's independent franchisees.
Since the opening of its first franchise store, the Company has grown
rapidly. The following table shows the growth in the Company's network of stores
during the last six years.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Company-owned:
Number of stores opened during period............. -- -- -- 7 9 20
Number of stores closed during period............. -- -- -- 0 0 0
Number of stores open at end of period............ -- -- -- 7 16 36
Franchise:
Number of stores opened during period............. 5 16 26 42 35 32
Number of stores closed during period............. 0 0 0 1 2 0
Number of stores open at end of period............ 16 32 58 99 132 164
-- -- --
--- --- ---
Total stores open at end of period.................. 16 32 58 106 148 200
</TABLE>
The Company typically seeks sites for new Super Stores that are stand-alone
buildings or which are located in a strip or power shopping center near high
traffic routes. The Company seeks to lease sites rather than own the real
estate. Often the site may be a shopping center under construction or renovation
and may be available for occupancy typically in a period ranging from three
months to one year. The Company visits numerous sites throughout the year in the
United States and in several foreign countries. The Company's site selection
criteria include, but are not limited to: population density and/or
demographics; traffic count; complementary retailers; store-front visibility and
presence; competition; lease rates; and accessible parking. In addition, the
Company carefully considers the presence of existing, and the potential for
future, competition in the market when selecting a site. The Company believes
there is an extensive number of suitable locations available for future sites.
MERCHANDISING
SUPER STORE LAYOUT. Party City Super Stores are designed to give the
shopper a feeling of excitement and create a festive atmosphere. The Company's
goal is for the customer to be pleasantly surprised by his or her shopping
experience. The Company's strategy to achieve this goal is to maintain an
in-stock position of the
22
<PAGE> 24
widest selection of party supplies; this helps ensure that the Company will
reduce the possibility of missed sale opportunities.
Party City Super Stores range in size from 6,750 to 13,320 square feet with
a typical store size between 10,000 and 12,000 square feet. A typical store
stocks over 20,000 SKUs on its shelves. The stores are divided into various
sections of different categories of party supplies, displayed to emphasize the
everyday low prices and breadth of merchandise available. The floor plan is
designed to impress the customer with the breadth of selection in each product
category.
PRODUCT CATEGORIES. The typical Party City Super Store offers a broad
selection of merchandise consisting of over 20,000 SKUs divided into the
following categories:
Halloween. An important merchandising concept for Party City Super Stores
is to provide an extensive selection of costumes for Halloween through its
"Halloween Costume Warehouse" department. The stores also carry a broad array of
decorations and accessories for the Halloween season. The Halloween merchandise
is prominently displayed to provide an exciting and fun shopping experience for
customers. The Company, because of the buying power of the Party City system, is
often able to obtain supplies of some of the most sought after Halloween-related
merchandise. The stores display Halloween-related merchandise throughout the
year to position the Company as the customer's Halloween shopping resource. The
Company believes that the importance of Halloween, among both young children and
adults, is growing significantly.
Seasonal. Customer purchases made for seasonal holiday events compose a
significant part of Party City's business. The seasonal category includes
products which are carried for the Super Bowl, Valentine's Day, St. Patrick's
Day, Passover, Easter, First Communion, graduation, the Fourth of July,
Christmas, Hanukkah and New Year's Eve. Some of the major items within this
category are tableware, decorations, cutouts, lights and balloons tailored to
the particular event.
Birthdays. The birthday product category includes a wide assortment of
merchandise to fulfill customer needs for celebrating birthdays, including
special ones such as "first," "sweet sixteen" and other milestone birthdays such
as 40th and 50th birthdays. Some of the products in this category include
invitations, thank you cards, tableware, hats, horns, banners, cascades,
balloons, novelty gifts, pinatas and candles.
Party Favors. The Company maintains a party favors department which
includes a broad selection of packaged and bulk favors appealing to different
age groups. The assortment includes different product lines varying in price
points designed to offer customers a variety of purchasing options.
Candy. The candy product category includes novelty and packaged candy sold
to enhance children's parties or to be used as pinata fillers. Candy is sold
both in individual units and in bulk packaging for customers' convenience.
Balloons. The Company maintains a balloon department which carries a vast
selection of basic and decorative latex balloons in many sizes, qualities,
colors and package sizes. The mylar balloon department consists of numerous
sizes, shapes and designs relating to birthday, seasonal, anniversary and other
themes.
Baby Shower. The Company maintains a baby shower department, which
includes tableware, decorations, balloons, favors, centerpieces and garlands.
Bridal/Wedding/Anniversary. This product category includes personalized
invitations, tableware, balloons, favors, place setting cards, confetti,
honeycomb bells and personalized ribbons. Personalized invitation books, which
contain numerous samples of customizable event invitations, are carried from the
leading invitation stationers at discounted prices.
Catering Supplies. Party City stores offer a broad selection of catering
supplies that consists of trays, platters, foil, bowls, warming racks and fuel.
Gift Wrap. This product category includes wide assortments of gift bags,
bows, tissue paper, ribbons (both solid and printed), glossy printed bags, solid
gift wrap, printed gift wrap and foil gift wrap.
23
<PAGE> 25
Greeting Cards. This product category includes greeting cards from a
quality national card vendor at everyday low prices.
General. The Company carries a wide range of other products, including
decorative tableware, solid tableware, plastic and paper table covers, cutlery,
crepe paper, cups and tumblers. Party City stores carry private label items, as
well as its typical branded merchandise.
PRODUCT SELECTION, PURCHASING AND SUPPLIERS. The Company's management
continuously reviews new and existing product selections to provide the widest
and most current assortment of party supplies. In pursuit of this goal,
management attends various industry trade shows including the National Annual
Halloween Trade Show in Rosemont, Illinois and the Toy Fair in New York. In an
effort to keep abreast of new and popular merchandise, management views
presentations given specifically for the Company by its major vendors. The
Company utilizes its inventory tracking system to give the purchasing staff
constant feedback on customers' preferences.
Each Super Store typically purchases inventory from approximately 300
suppliers. The Company does not have long-term purchase commitments or exclusive
contracts with any particular manufacturer or supplier. The Company considers
numerous factors in supplier selection, including price, credit terms, product
offerings and quality. The Company negotiates pricing with suppliers on behalf
of all stores in the system (both Company-owned and franchise) and believes that
such buying power enables it to not only receive the most favorable pricing
terms, but as importantly, to more readily obtain high demand merchandise,
especially popular Halloween costumes. As the Company continues to add new
stores, the Company believes it will increase the volume of its inventory
purchases and thereby may benefit further from increased discounts and more
favorable trade credit terms from its suppliers.
In order to maintain consistency throughout its store system, the Company
has established an approved list of items that are permitted to be sold in Super
Stores. Pursuant to the terms of the Company's franchise agreements, franchise
stores must adhere to these guidelines. The Company establishes a standard store
merchandise layout and presentation format to be followed by Company-owned and
franchise Super Stores. Any layout or format changes developed by the Company
are communicated to the managers of Super Stores on a periodic basis.
All of the merchandise purchased by Super Stores is shipped directly from
suppliers to the stores. The purchasing decisions and inventory control are
facilitated by the use of sophisticated point-of-sale inventory control
technology. Almost all merchandise is bar coded either by the supplier prior to
delivery or at the time of receipt at the store. Consistent with the Party City
Super Store concept, almost all inventory is displayed on the shelves with
little or no space used for stocking. Excess merchandise is stored above the
gondola fixtures on the store sales floor.
STORE OPERATIONS
Each Super Store is typically managed by a general manager and two
assistant managers who are responsible for all aspects of the store's day-to-day
operations, including employee hiring and training, work scheduling, inventory
control, expense control, maintenance activities and communications with central
office staff. The sales and stocking staff ranges from three to eight people,
except during certain holiday selling seasons when additional store employees
are used. The Company seeks to pay its store managers at the top end of the
competitive pay scale in order to hire and retain experienced and dedicated
managers. In addition, the Company has instituted its Amended and Restated 1994
Stock Option Plan pursuant to which managers of Company-owned stores are
eligible for stock option awards.
MANAGEMENT INFORMATION SYSTEMS. The MIS system is a vital tool for
increasing the efficiency of store operations. The Company believes that its
management information system is an important factor in allowing the Company to
support its rapid growth and enhance its competitive position in the industry.
Through the MIS system, store managers are able to quickly evaluate the sales
performance of their stores and of individual items in their stores, while also
replenishing stock shelves in a timely fashion. Typically, merchandise is
24
<PAGE> 26
received already bar coded, enabling managers to control inventory and pricing
by SKU, to manage assortment within a category, and to analyze gross margins and
inventory turnover.
Each Super Store uploads transaction information into the Company's
corporate headquarters' MIS system on a daily basis. The headquarters' system
has all of the functionality of the individual store's system and can
consolidate information into multiple store groupings. All file information
(i.e., vendor, item price, etc.) is maintained and downloaded nightly to each
store location. The Company's MIS system allows it to monitor daily sales and
gross profit across its entire store base.
TRAINING. In Company-owned stores, corporate store managers are trained
for a minimum of two weeks prior to the opening of a store. During the store
set-up, a manager receives additional training from the Company's store set-up
team. During the first few days after the initial opening of a store, corporate
headquarters' personnel spend concentrated time in the store overseeing the
operations.
In franchise locations, all franchisees go through an intense training
program consisting of one week in the classroom and one week in the store to
learn the fundamentals of the store's operation. During the set up of their
store, the franchisee receives additional training from the team leader of the
set-up crew that is dispatched by the Company to assist the franchisee with the
store opening. Shortly after a store opens, a representative from the Company
visits the franchise and spends several days assisting with the day-to-day
operations of running the store. To ensure efficient operations and that the
systems, policies and processes are being followed, subsequent visits are
scheduled on a regular basis to review what was covered during the initial
training.
CUSTOMER SERVICE
Customer service and shopping convenience are integral components of Party
City's one-stop shopping concept. The Company views the quality of its
customers' shopping experience as critical to its continued success. To this
end, the Company employs friendly, knowledgeable and energetic sales associates
who provide customers with personalized shopping assistance. For example, at
Halloween, an important selling season for the Company, each store increases
significantly the number of sales associates in the store. These employees will
assist customers in selecting a costume, which provides the sales associates
with a cross-selling opportunity to suggest various accessories and other
complementary products. Also, at Halloween the associates utilize two-way
radios, which the Company believes help stock personnel to quickly fill
requested items, thus expediting sales and reducing lost business caused by slow
service.
The Company believes that the compensation of its store managers and other
personnel is highly competitive and enables the Company to attract and retain
well-qualified, highly motivated employees who are committed to providing
excellent customer service.
MARKETING AND ADVERTISING
For each Company-owned store, the Company budgets approximately five
percent of annual sales for advertising. Under the Company's current franchise
agreement, each franchisee is required to allocate a minimum of $5,500 to
promote the store's grand opening and the lesser of 3.0% of net sales or $60,000
per year for local advertising and promotions. To promote the Party City Super
Store concept on a larger scale and to produce professional quality advertising
for system use, franchisees must also pay an additional one percent of gross
sales per year to a Party City group advertising fund.
Direct mailings to potential customers are the principal form of
advertising. The Company believes that direct mail advertising has enabled the
Company and its franchisees to successfully open stores in any location without
the need to cluster stores. The overall success the Company and its franchisees
have experienced with direct mailings can be attributed to targeting potential
customers in the areas surrounding stores. The Company accomplishes this by
soliciting zip code information from customers at the time of their purchases.
This information is entered into the MIS system and used to determine the
geographical area where the most likely potential customers live. With this
information, in conjunction with major seasonal events, each store effects
approximately ten to twelve direct mailings per year to residents in those
targeted areas.
25
<PAGE> 27
COMPANY-OWNED STORES
The Company believes that an increasing amount of the growth in its
operations in the future will continue to come from Company-owned Super Stores.
At February 28, 1997 there were 44 Company-owned Party City Super Stores,
including two Super Stores opened in 1997 and six franchised Super Stores
purchased by the Company in February 1997. The Company plans to open
approximately 43 to 48 additional stores in 1997 and approximately 70 to 75
stores in 1998. The table below lists certain information with respect to
Company-owned Super Stores open as of February 28, 1997.
<TABLE>
<CAPTION>
DATE OPENED SQUARE
LOCATIONS OR ACQUIRED FOOTAGE
----------------------------------------------------------------- ------------ -------
<S> <C> <C>
Orlando (East), FL............................................... 01/29/94 9,760
Norristown, PA................................................... 08/03/94 9,975
Chicago (Ford City), IL.......................................... 09/22/94 12,000
Middletown, NY................................................... 09/27/94 9,000
Orlando (West), FL............................................... 09/28/94 10,000
Hamden, CT....................................................... 09/30/94 12,100
Chula Vista, CA.................................................. 10/03/94 8,260
Parma Heights, OH................................................ 04/21/95 7,782
Roseville, MI.................................................... 07/29/95 12,000
Miami (Kendall), FL.............................................. 09/06/95 10,125
Greenbelt, MD.................................................... 09/14/95 8,500
Long Island City, NY............................................. 09/16/95 6,750
Pico Sepulveda, CA............................................... 09/28/95 13,169
Dearborn, MI..................................................... 09/29/95 7,560
Royal Oak, MI.................................................... 10/06/95 11,926
Lathrup Village, MI.............................................. 10/06/95 6,960
Miami Gardens, FL................................................ 05/19/96 9,000
Lansing, IL...................................................... 06/29/96 13,200
Lawrence, NY..................................................... 06/29/96 10,000
Anaheim, CA...................................................... 06/29/96 9,400
Towson, MD....................................................... 08/02/96 12,136
Boca Raton, FL................................................... 08/10/96 10,680
Alhambra, CA..................................................... 09/04/96 13,125
Fresno, CA....................................................... 09/20/96 12,000
Carle Place, NY.................................................. 09/21/96 11,049
Chicago Ridge, IL................................................ 09/24/96 13,320
LaHabra, CA...................................................... 09/24/96 9,000
El Cajon, CA..................................................... 09/25/96 10,000
Hicksville, NY................................................... 09/28/96 10,147
Del Ray Beach, FL................................................ 09/29/96 11,550
Las Vegas (Mission), NV.......................................... 10/01/96 12,000
Turnersville, NJ................................................. 10/03/96 10,080
Sterling Heights, MI............................................. 10/04/96 11,508
Milpitas, CA..................................................... 10/04/96 9,870
Brooklyn, NY..................................................... 10/04/96 8,140
Buffalo, NY...................................................... 10/18/96 11,115
Lighthouse Point, FL............................................. 01/31/97 8,000
Encinitas, CA.................................................... 02/03/97 8,658
Livingston, NJ................................................... 02/28/97 8,426
Randolph, NJ..................................................... 02/28/97 7,479
East Brunswick, NJ............................................... 02/28/97 7,700
Wayne, NJ........................................................ 02/28/97 9,500
North Iselin, NJ................................................. 02/28/97 8,700
Parsippany, NJ................................................... 02/28/97 11,400
</TABLE>
26
<PAGE> 28
None of the leases for the 44 stores listed above expires before 2003. As
of February 28, 1997, the Company had signed leases for an additional 23
Company-owned locations to be opened during 1997 and one store to be opened
during 1998.
FRANCHISE OPERATIONS
Until opening its first Company-owned store in January 1994, the Company
operated exclusively as a franchisor. As of February 28, 1997, the Company was
the franchisor for 159 Super Stores throughout the United States, Puerto Rico,
Canada and Spain. A Party City Super Store run by a franchisee utilizes the
Company's format, design specifications, methods, standards, operating
procedures, systems and trademarks.
The Company's 159 franchise stores are located in the following states and
foreign countries:
<TABLE>
<CAPTION>
NUMBER
OF
STATE STORES
- - ------------------------------------ ------
<S> <C>
Alabama............................. 3
Arizona............................. 4
Arkansas............................ 1
California.......................... 9
Colorado............................ 1
Connecticut......................... 4
Delaware............................ 1
Florida............................. 11
Georgia............................. 9
Hawaii.............................. 1
Illinois............................ 6
Kansas.............................. 2
Louisiana........................... 4
Maryland............................ 4
Mississippi......................... 1
<CAPTION>
NUMBER
OF
STATE STORES
- - ------------------------------------ ------
<S> <C>
Missouri............................ 1
New Jersey.......................... 16
New Mexico.......................... 2
New York............................ 12
North Carolina...................... 8
Ohio................................ 3
Oregon.............................. 2
Pennsylvania........................ 9
South Carolina...................... 2
Tennessee........................... 7
Texas............................... 19
Virginia............................ 8
Canada.............................. 3
Puerto Rico......................... 4
Spain............................... 2
</TABLE>
The following table summarizes the Company's franchise operations history
through December 31, 1996:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1991 1992 1993 1994 1995 1996
----- ----- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Number of stores open at end of period....... 16 32 58 99 132 164
Total sales of franchise stores ($
millions).................................. $14.8 $28.1 $56.9 $109.0 $166.7 $230.6
</TABLE>
The Company receives revenue from its franchisees, including an initial
one-time fee (currently at $35,000) and an ongoing royalty fee (currently 4.0%
of net sales for new franchisees, payable monthly). In addition, each franchisee
has a mandated advertising budget, which consists of a minimum of $5,500 to
promote the initial store opening and thereafter the lesser of 3.0% of net sales
or $60,000 per year for local advertising and promotions. Further, the
franchisee must pay an additional 1.0% of net sales to a Party City group
advertising fund to cover common advertising materials related to the Party City
Super Store concept. The Company does not offer financing for a franchisee's
initial investment. Franchise start-up expenses include the franchise fee, rent,
leasehold improvements, equipment and furniture, initial inventory, opening
promotion, signs, other deposits, insurance, training expenses and professional
fees.
Current franchise agreements provide for an assigned area or territory that
typically equals a three-mile radius from the franchisee's store location and
the right to use the Party City logo type and trademark "The Discount Party
Super Store." In most stores, the franchisee or the majority shareholder of a
corporate franchisee devotes full time to the management, operation and
on-premises supervision of the franchise.
Pursuant to the franchise agreement entered into with franchisees, all site
locations must be approved by the Company, which approval is based primarily on
demographic studies and proximity to heavily traveled highways or interchanges.
As franchisor, Party City also supplies valuable and proprietary information
pertaining to the operation of the Party City Super Store business, as well as
advice regarding location,
27
<PAGE> 29
improvements and promotion. The Company also supplies consultation in the areas
of purchasing, inventory control, pricing, marketing, merchandising, hiring,
training, improvements and new developments in the franchisee's business and
general business operations, as well as the provision of assistance in opening
and initially promoting the store.
As of February 28, 1997 the Company had eight territory agreements with
certain franchisees. These agreements permit the holder of the territory rights
to open a minimum of two and in some cases three or more stores within a stated
time period. If stores are not opened pursuant to the schedule, the territory
agreement may be terminated. The following areas are governed by territory
agreements: North Carolina; Louisiana/Alabama; Phoenix, AZ and Santa
Fe/Albuquerque, NM; Atlanta, GA; Dallas, TX; Canada; Spain and Puerto Rico.
COMPETITION
The party supplies retailing business is highly competitive. Party City
Super Stores compete with a variety of smaller and larger retailers, including
single owner-operated party supplies stores, specialty party supplies retailers
(including superstores), designated departments in drug stores, general mass
merchandisers, supermarkets and department stores of local, regional and
national chains. Many of these competitors have substantially greater financial
resources than the Company.
Management believes that Party City Super Stores maintain a leading
position in the party supplies business by offering a wider breadth of
merchandise, greater selection within merchandise class and discount prices
offered on most items in the stores. The Company believes that the significant
buying power resulting from the size of the Party City Super Store System is an
integral advantage.
PROPERTIES
As of February 28, 1997, the Company leased 44 stores and had signed leases
for 24 additional stores in the locations mentioned earlier in this Prospectus.
The Company maintains its headquarters at 400 Commons Way, Rockaway, New Jersey
07866. The Company occupies approximately 10,610 square feet of office space for
its headquarters under a lease expiring in 2005.
TRADEMARKS
The Company has registered a number of trademarks and service marks with
the United States Patent and Trademark Office, including the names Party
City,(R) The Discount Party Super Store(R) and Halloween Costume Warehouse.(R)
GOVERNMENT REGULATION
As a franchisor, the Company must comply with regulations adopted by the
Federal Trade Commission (the "FTC") and with several state laws that regulate
the offer and sale of franchises. The Company also must comply with a number of
state laws that regulate certain substantive aspects of the
franchisor-franchisee relationship. The FTC's Trade Regulation Rule on
Franchising (the "FTC Rule") requires that the Company furnish prospective
franchisees with a franchise offering circular containing information prescribed
by the FTC Rule. State laws that regulate the offer and sale of franchises
require the Company to register before the offer and sale of a franchise can be
made in that state.
State laws that regulate the franchisor-franchisee relationship presently
exist in a substantial number of states. Those laws regulate the franchise
relationship, for example, by requiring the franchisor to deal with its
franchisees in good faith, by prohibiting interference with the right of free
association among franchisees and by regulating discrimination among franchisees
with regard to charges, royalties or fees. Those laws also restrict a
franchisor's rights with regard to the termination of a franchise agreement (for
example, by requiring "good cause" to exist as a basis for the termination) by
requiring the franchisor to give advance notice to the franchisee of the
termination and give the franchisee an opportunity to cure any default, and by
requiring the franchisor to repurchase the franchisee's inventory or provide
other compensation. To date, those laws have
28
<PAGE> 30
not precluded the Company from seeking franchisees in any given area and have
not had a material adverse effect on the Company's operations.
Each Party City Super Store must comply with regulations adopted by federal
agencies and with licensing and other regulations enforced by state and local
health, sanitation, safety, fire and other departments. Difficulties or failures
in obtaining the required licenses or approvals can delay and sometimes prevent,
the opening of a new store.
Party City stores must comply with federal and state environmental
regulations, but the cost of complying with those regulations has not been
material. More stringent and varied requirements of local governmental bodies
with respect to zoning, land use, and environmental factors can delay, and
sometimes prevent, development of new stores in particular locations.
The Company and its franchisees must comply with the Fair Labor Standards
Act and various state laws governing various matters such as minimum wages,
overtime and other working conditions. The Company and its franchisees also must
comply with the provisions of the Americans with Disabilities Act, which require
that employers provide reasonable accommodation for employees with disabilities
and that stores be accessible to customers with disabilities.
EMPLOYEES
As of February 28, 1997, the Company employed 312 full-time and 503
part-time employees. The Company considers its relationships with its employees
to be good. None of the Company's employees is covered by a collective
bargaining agreement.
LEGAL PROCEEDINGS
The Company is from time to time involved in routine litigation incidental
to the conduct of its business. As of the date of this Prospectus, the Company
is aware of no material existing or threatened litigation to which it is or may
be a party.
29
<PAGE> 31
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and Directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- - ------------------------- --- -----------------------------------------------------
<S> <C> <C>
Steven Mandell........... 52 Chairman of the Board and President
Vice President, Chief Financial Officer and a
David Lauber............. 41 Director
Valerie Szymaniak........ 41 Vice President of Real Estate
Gordon Keil.............. 48 Chief Operating Officer
Richard Yockelson........ 47 Vice President of Human Resources
Jules Cohn............... 50 Vice President of Management Information Systems
David M. Hendler......... 42 Vice President of Store Operations
John Oberdorf............ 50 Director
Ray Hemmig............... 47 Director
Duayne Weinger........... 47 Director
</TABLE>
STEVEN MANDELL is the Chairman of the Board and President of the Company,
positions he has held since the Company's inception in 1990. Prior to the
Company's purchase of all franchised Super Stores owned by Mr. Mandell in
February 1997, Mr. Mandell was an owner and the President of Les Fetes, Inc.,
Party Town USA, Inc., Party City of Parsippany, Inc. and Party City of Wayne,
Inc., which operate Party City Super Stores ("Affiliate Stores"). See "Certain
Transactions." From January 1972 through May 1986, Mr. Mandell was the President
of The Marketing Group, an independent sales representative firm, selling, among
other products, party supplies to mass merchandisers. From 1986 to 1990, he
founded and originated the Party City concept with his ownership and management
of the Affiliate Stores.
DAVID LAUBER has been Vice President and Chief Financial Officer of the
Company since October 1994 and a Director of the Company since February 1997. He
was Executive Vice President and Chief Financial Officer of Mother's Stores,
Inc., a 170-store maternity and children's clothing retail chain, from April
1992 until that company's acquisition in October 1993. He worked on a consulting
basis for Mother's Stores, Inc. from October 1993 until May 1994. After the
acquisition, in January 1994, Mother's Stores, Inc. filed a voluntary petition
for bankruptcy proceedings under Chapter 11 of the United States Bankruptcy
Code. From January 1987 to April 1992, he was employed by The Limited, Inc., a
clothing retailer, in various positions and ultimately as Controller of the
940-store Lerner New York division. Mr. Lauber is a certified public accountant.
VALERIE SZYMANIAK has been Vice President of Real Estate of the Company
since October 1995. From June 1993 until October 1995, she served as the
Director of Franchise Development & Real Estate of the Company. From October
1992 to June 1993, she was an independent leasing agent for Majestic Realty,
Inc., a California-based real estate developer. From May 1990 to June 1992, she
was Vice President of Janss Corporation, a California-based real estate
developer, where she was responsible for the leasing and management of a real
estate portfolio. From December 1986 to April 1990, she was Regional Director of
Leasing of Schurgin Development Company, a California-based real estate
developer.
GORDON KEIL has been the Chief Operating Officer of the Company since June
1996. From 1987 until June 1996, Mr. Keil served as founder and president of
Gordon's Stores, a deep discount drug superstore chain. From 1982 to 1987, Mr.
Keil was Director of Non-Foods Buying at the Pathmark Division of Supermarkets
General Corporation.
RICHARD YOCKELSON has been Vice President of Human Resources since joining
the Company in July 1994. From 1991 to July 1994, he was Director of Human
Resources of NBO Stores, Inc., a clothing retailer. In January 1995, NBO Stores
filed a voluntary petition for bankruptcy proceedings under Chapter 11 of the
30
<PAGE> 32
United States Bankruptcy Code. From 1988 to 1991, he was Director of Human
Resources of Workbench Furniture, Inc., a furniture retailer.
JULES COHN has been the Vice President of Management Information Systems
since August 1996. From 1992 until August 1996 he was Director of MIS for
Barneys New York, a clothing retailer. In January 1996, Barneys New York filed a
voluntary petition for bankruptcy proceedings under Chapter 11 of the United
States Bankruptcy Code. From October 1989 to January 1992, Mr. Cohn was Director
of Systems and Programs for Saks Fifth Avenue, a clothing retailer.
DAVID M. HENDLER has been Vice President of Store Operations since October
1996. From June 1995 to October 1996, Mr. Hendler served as President of Hendler
Associates, a management consulting firm. From July 1988 to May 1995, Mr.
Hendler served as Senior Vice-President of Stores and Operations of Sportmart,
Inc., a sporting goods retailer.
JOHN OBERDORF has been a Director of the Company since April 1994. Since
1990, he has been a member of the law firm of St. John & Wayne, L.L.C., legal
counsel to the Company.
RAY HEMMIG has been a Director of the Company since May 1996. Since 1988,
Mr. Hemmig has served as Chairman of the Board, and from September 1988 to
October 1994, served as Chief Executive Officer of ACE Cash Express, Inc., a
publicly held chain of retail financing services stores. Mr. Hemmig serves as a
director of the National Association of Check Cashers of America and has served
as President of the Texas Association of Check Cashers, Inc. since its inception
in November 1991, and as a member of the American Express MoneyGram Agent
Advisory Board since February 1991. Since December 1995, Mr. Hemmig has served
as the Chairman of the Board and Chief Executive Officer of Retail and
Restaurant Growth Capital, a licensed Small Business Investment Corporation and
a provider of financing to emerging retail and restaurant companies. From 1990
until May 1994, Mr. Hemmig also served as a director of On The Border Cafes,
Inc., a restaurant chain.
DUAYNE WEINGER has been a Director of the Company since May 1996. Mr.
Weinger helped start Jenny Craig Weight Loss Center in 1983. By 1994 he owned 50
Jenny Craig franchises which have since been sold. Mr. Weinger currently
operates three Party City franchise stores. See "Certain Transactions."
The Board of Directors met four times in 1996. On January 10, 1996, the
Board of Directors established a Compensation Committee and an Audit Committee.
The Compensation Committee, which is presently composed of Mr. Oberdorf, Mr.
Hemmig and Mr. Weinger, is responsible for establishing salaries, bonuses and
other compensation for the Company's executive officers. The Compensation
Committee met two times in 1996. The Audit Committee, which is presently
composed of Mr. Oberdorf, Mr. Hemmig and Mr. Weinger, is responsible for
recommending independent auditors, reviewing with the independent auditors the
scope and results of the audit engagement and establishing and monitoring the
Company's financial policies and control procedures. The Audit Committee met two
times in 1996. All Directors attended each of the meetings of the Board of
Directors in 1996 and all members of the Compensation Committee and the Audit
Committee attended each of their respective meetings in 1996.
Directors who are employees of the Company are not compensated separately
for their service as Directors. Each non-employee Director receives $2,000 per
director's meeting and $500 per committee meeting. All Directors receive
reimbursement for reasonable out-of-pocket expenses incurred in connection with
meetings of the Board and committees thereof.
All Directors are elected at each annual meeting of shareholders and hold
office until the election and qualification of their successors at the next
annual meeting of shareholders.
All executive officers of the Company are elected annually by, and serve at
the discretion of, the Board of Directors, although the employment of Messrs.
Lauber and Mandell by the Company is subject to the provisions of their
respective employment agreements. See "-- Employment Agreements and Termination
of Employment."
31
<PAGE> 33
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
John J. Oberdorf, a Director of the Company and a member of the Company's
Compensation Committee, is a member of the law firm of St. John & Wayne, L.L.C.,
general counsel to the Company. During 1996, St. John & Wayne, L.L.C.
represented the Company as general counsel and in connection with the Company's
initial public offering.
EXECUTIVE COMPENSATION
The following table sets forth a summary of the compensation paid by the
Company for services rendered in all capacities to the Company during 1996 and
1995 to the chief executive officer and other executive officers (the "named
executive officers") of the Company whose total annual compensation for 1996
exceeded $100,000:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
AWARDS
ANNUAL ----------------------
COMPENSATION(1) SECURITIES
------------------- UNDERLYING STOCK ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION
- - -------------------------------- ---- -------- ------- ---------------------- ------------
<S> <C> <C> <C> <C> <C>
Steven Mandell
Chairman of the Board and
President.................. 1996 $195,000 $ 0 -- --
1995 175,000 0
Perry Kaplan(2)
Executive Vice President...... 1996 195,000 0 -- --
1995 175,000 0
David Lauber
Vice President, Chief
Financial Officer and a
Director................... 1996 223,044 50,000 6,000 --
1995 189,230 15,000 --
Lawrence Fine(3)
Senior Vice President of
Merchandising.............. 1996 204,615 0 6,000 $129,883(3)(4)
1995 19,231 0 50,000(4) --
Valerie Szymaniak
Vice President of Real
Estate..................... 1996 164,500 0 6,000 --
1995 99,384 61,000 -- --
Richard Yockelson
Vice President of Human
Resources.................. 1996 110,999 0 9,000 --
1995 103,173 0 5,000 --
</TABLE>
- - ---------------
(1) No named executive officers received perquisites or other personal benefits
in excess of the lesser of $50,000 or 10% of such individual's salary plus
annual bonus.
(2) Mr. Kaplan retired from his position as Executive Vice President of the
Company on December 31, 1996 and resigned as a Director of the Company in
February 1997.
(3) Mr. Fine resigned from the Company in 1996. All Other Compensation of
$129,883 is attributable to a disqualifying disposition of shares underlying
an incentive stock option granted under the Company's Amended and Restated
1994 Stock Option Plan.
(4) Mr. Fine exercised the option to the extent vested at the time of his
resignation to acquire and simultaneously sell 16,667 shares of Common
Stock. The option for the remaining 33,333 shares terminated following Mr.
Fine's resignation and such shares are available for grant under the
Company's Amended and Restated 1994 Stock Option Plan.
STOCK OPTION PLANS
The Company currently maintains the Amended and Restated 1994 Stock Option
Plan (the "1994 Plan") pursuant to which options may be granted to employees for
the purchase of Common Stock. The Company in the past has used, and will
continue to use, stock options to attract and retain key employees in
32
<PAGE> 34
the belief that employee stock ownership and stock-related compensation devices
encourage a community of interest between employees and stockholders.
THE 1994 PLAN. The 1994 Plan permits the Company to grant incentive and
non-qualified stock options to purchase an aggregate of 600,000 shares of the
Company's Common Stock. The 1994 Plan is currently administered by Messrs.
Hemmig and Weinger (the "Committee") each of whom are non-employee Directors.
All named executive officers, other key employees, Directors (including members
of the Committee) and consultants of the Company or any subsidiary of the
Company are eligible for selection to participate in the 1994 Plan. Each option
granted under the 1994 Plan shall have a term as selected by the Committee.
No incentive or non-qualified stock option is exercisable more than thirty
days (or such other period of time as is determined by the Committee) from the
date of the optionee's termination of employment with the Company for any reason
other than disability or death. If such termination of employment is due to
disability of the employee, the optionee shall be entitled to exercise the
option for a period of three months (or such other period of time not exceeding
12 months as is determined by the Committee) from the date of disability. If
such termination of employment is due to the death of the employee, the
optionee's estate or the beneficiaries thereof shall be entitled to exercise the
option for a period of one year from the date of the optionee's death.
Grants of incentive or non-qualified stock options to the named executive
officers have been made at the fair market value of the Common Stock on the date
of grant and the Company intends for such options to be performance-based
options (in accordance with Internal Revenue Code rules and regulations).
The 1994 Plan will remain in place after the Offering and options may be
granted thereunder up to an aggregate of 600,000 shares. The 1994 Plan may be
amended by the Board of Directors, although certain amendments would require
stockholder approval. The 1994 Plan will terminate on September 4, 2000 unless
earlier terminated by the Board of Directors.
OPTION GRANTS IN 1996
The following table presents information regarding 1996 grants of options
to purchase shares of the Company's Common Stock for each of the named executive
officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------- VALUE AT
PERCENT OF ASSUMED ANNUAL
NUMBER OF TOTAL RATES OF STOCK PRICE
SECURITIES OPTIONS EXERCISE APPRECIATION FOR
UNDERLYING GRANTED TO PRICE OPTION TERM(2)
OPTIONS EMPLOYEES IN PER EXPIRATION ----------------------
NAME GRANTED FISCAL YEAR SHARE(1) DATE 5% 10%
- - ------------------------------- ---------- ------------ -------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
David Lauber................... 6,000 3.23% $17.75 2006 $66,977 $169,734
Valerie Szymaniak.............. 6,000 3.23% 17.75 2006 66,977 169,734
Lawrence Fine(3)............... 6,000 3.23% 17.75 2006 66,977 169,734
Richard Yockelson.............. 5,000 2.69% 10.00 2006 31,445 79,687
Richard Yockelson.............. 4,000 2.15% 17.75 2006 44,652 113,156
</TABLE>
- - ---------------
(1) The price represents the fair market value at the date of grant.
(2) The dollar amounts in these columns represent the potential realizable value
of each option assuming that the market price of the Common Stock
appreciates in value from the date of grant at the 5% and 10% annual rates
prescribed by regulation and therefore are not intended to forecast possible
future appreciation, if any, of the price of the Common Stock.
(3) Mr. Fine's stock options were terminated in accordance with their terms
following his resignation in November 1996.
33
<PAGE> 35
YEAR-END OPTION VALUES
The following table presents information regarding options exercised in
1996 and the value of options outstanding at December 31, 1996 for each of the
named executive officers:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-
UNEXERCISED OPTIONS AT FISCAL MONEY OPTIONS
YEAR END AT FISCAL YEAR END(1)
------------------------------- -------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - --------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
David Lauber........................... 20,000 46,000 $ 290,000 $ 580,000
Valerie Szymaniak...................... 10,000 26,000 145,000 290,000
Lawrence Fine.......................... 0 0 0 0
Richard Yockelson...................... 1,666 12,334 22,491 80,009
</TABLE>
- - ---------------
(1) Value is based upon a fair market value of $17.00 per share at December 31,
1996.
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT
The Company entered into an employment agreement with Steven Mandell,
President of the Company, dated August 3, 1992, as amended as of January 1, 1996
and on March 5, 1997 (the "Mandell Agreement"). The Mandell Agreement provides
for Mr. Mandell to serve as the Company's President for a term which commenced
on August 3, 1992 and which ends on December 31, 1998. The Mandell Agreement
provides for an annual salary of $200,000 in 1996 and 1997, and $300,000 in
1998.
The Company entered into an employment agreement with Perry Kaplan, the
Company's Executive Vice President, dated August 3, 1992, as amended as of
January 1, 1996 (the "Kaplan Agreement"). Mr. Kaplan retired on December 31,
1996 as the Company's Executive Vice-President. The Kaplan Agreement provided
for an annual salary of $200,000 in 1996.
The Company has entered into an employment agreement with David Lauber,
dated June 12, 1995 (the "Lauber Agreement"). The Lauber Agreement provides for
Mr. Lauber to serve as the Company's Vice President and Chief Financial Officer
for three years with an option to be extended one year, provided that on or
before 30 days prior to the then applicable termination date, both parties
thereto enter into a written agreement to extend the term of the Lauber
Agreement for a period of one year. The Lauber Agreement further provides for a
minimum annual base salary of $210,000 for the period from June 2, 1995 to June
12, 1996; $235,500 for the period from June 12, 1996 to June 12, 1997; and
$260,000 for the period from June 12, 1997 to June 12, 1998. In addition to base
salary, Mr. Lauber is eligible to receive an annual cash bonus, subject to
certain Company and individual performance criteria devised by the Company, not
to exceed $50,000 in calendar year 1995; $60,000 in calendar year 1996; $70,000
in calendar year 1997, and $75,000 in calendar year 1998, if his term is
renewed, or $33,000 if his term is not renewed. Mr. Lauber also has been granted
options, exercisable over a three-year period, to purchase a total of 60,000
shares of the Company's Common Stock. In the event Mr. Lauber is terminated
without "cause" (as such term is defined in the Lauber Agreement) prior to
September 11, 1997, he shall receive a severance payment, in addition to any
base salary owed as of that date, equal to nine months of his salary at the date
of such termination. In the event Mr. Lauber is terminated without "cause" on or
after September 11, 1997, Mr. Lauber shall receive any salary that remains
payable for the balance of the term of the Lauber Agreement.
34
<PAGE> 36
CERTAIN TRANSACTIONS
During 1996, Steven Mandell, the Chairman of the Board and President of the
Company, and Perry Kaplan, then Executive Vice President and a Director of the
Company, owned and operated a total of six Party City Super Stores as
franchises. Mr. Mandell owns all of the outstanding shares of two corporations,
Les Fetes, Inc. and Party Town USA, Inc., each of which operated a Party City
Super Store during 1996, which was opened before the Company began its franchise
operations. Les Fetes, Inc. and Party Town USA, Inc. did not pay a royalty to
the Company on sales realized. The amount of such royalties that would have been
paid was $67,441, $79,901, and $93,551 for the years ended 1994, 1995 and 1996,
respectively assuming a 2.0% royalty rate on sales. Mr. Mandell is also the
majority owner of two corporations, Party City of Wayne, Inc. and Party City of
Parsippany, Inc., each of which operated a Party City Super Store during 1996.
The two stores each paid a 3.0% royalty to the Company on sales, the rate for
all franchises sold at the time of Mr. Mandell's acquisition of these
franchises. Mr. Kaplan owns all of the outstanding shares of Perry's Party City,
Inc. and Barbara's Party City, Inc., both franchises in the Party City Super
Store system. These stores paid a 2.0% royalty on sales to the Company, the rate
for all franchises sold at the time of Mr. Kaplan's acquisition of his initial
franchise and the rate for certain franchises at the time of Mr. Kaplan's
acquisition of his second franchise. Mr. Kaplan was neither an officer, director
nor shareholder of the Company at the time he acquired his franchises. In 1995,
a Super Store jointly owned by Messrs. Mandell and Kaplan was closed. All of the
aforementioned seven stores were in existence prior to the opening of the first
Company-owned store. The Company will not sell any new franchises to Mr. Mandell
or Mr. Kaplan.
On February 28, 1997, the Company purchased substantially all of the assets
of each franchise store owned by Mr. Mandell and Mr. Kaplan. The approximate
aggregate purchase price for the four stores owned by Mr. Mandell was $4,750,000
and the aggregate approximate purchase price for the two stores owned by Mr.
Kaplan was $1,150,000, such purchase prices being subject to adjustment based on
variations between the Company's estimates of inventory value and payable
amounts at closing and actual amounts determined after a post-closing review.
The Company believes the terms of the purchase, which were determined based on
arm's-length negotiations between the parties, were fair to the Company. The
Company received a fairness opinion from Tucker Anthony Incorporated that the
consideration paid by the Company for the franchise stores was fair from a
financial point of view to the stockholders of the Company, other than Messrs.
Mandell and Kaplan.
Certain of the stores owned by Mr. Mandell, his son and Mr. Kaplan made use
of certain bookkeeping personnel of the Company for which they paid the Company
approximately $70,500, $74,200 and $94,500 for the years ended December 31,
1994, 1995 and 1996, respectively.
A portion of the space leased by the Company at its headquarters is
warehouse space. During 1996, Mr. Mandell subleased this space, which
approximates 2,080 square feet, at a pass-through rate of $1,603 per month.
Messrs. Jason Craig and Steven Craig, sons of Mr. Sidney Craig, President
of Craig Enterprises, Inc., each owns and operates two franchised stores located
in California. Jason Craig paid royalties to the Company of $18,424 in 1995 and
$76,067 in 1996. Steven Craig paid royalties to the Company of $37,969 in 1995
and $144,647 in 1996. Mr. Duayne Weinger, a Director of the Company and
son-in-law of Mr. Sidney Craig, owns and operates three franchised store
locations in Illinois. Mr. Weinger paid royalties to the Company of $69,488 in
1995 and $185,233 in 1996. Craig Enterprises, Inc. owned approximately 15% of
the Company's Common Stock as of February 28, 1997. Erik Mandell, son of Steven
Mandell, the Company's Chairman and President, owns and operates one franchise
store located in Illinois. Erik Mandell paid royalties to the Company of $44,725
in 1996. The royalties paid by Messrs. Weinger, Mandell, Jason Craig and Steven
Craig, were at the same rate as all franchises acquired at the times their
respective franchises were acquired.
The law firm of St. John & Wayne, L.L.C., of which Mr. Oberdorf is a
member, provided legal services to the Company in 1996 and during the current
fiscal year. See also "Management -- Compensation Committee Interlocks and
Insider Participation."
35
<PAGE> 37
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of the Common Stock, as of the date of this Prospectus, and as
adjusted to reflect the sale of the shares of Common Stock offered hereby, by
(i) each of the Company's Directors and the named executive officers; (ii) all
Directors and executive officers as a group; (iii) each person known by the
Company to be a beneficial owner of more than 5% of the Common Stock; and (iv)
each Selling Stockholder. Unless indicated otherwise, each of the stockholders
has sole voting and investment power with respect to the shares beneficially
owned.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING OFFERING
------------------- COMMON STOCK -------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
- - --------------------------------------------- ---------- ------- ------------ ---------- -------
<S> <C> <C> <C> <C> <C>
Steven Mandell (1)(2)........................ 2,366,667 33.9% 400,000 1,966,667 24.1%
400 Commons Way
Rockaway, New Jersey 07866
Perry Kaplan (1)............................. 945,233 13.6% 400,000 545,233 6.7%
400 Commons Way
Rockaway, New Jersey 07866
Craig Enterprises, Inc. (1).................. 1,044,000 15.0% 200,000 844,000 10.3%
445 Marine View Avenue
Suite 300
Del Mar, California 92014
Duayne Weinger (3)........................... 120,000 1.7% 40,000 80,000 1.0%
Ray Hemmig (3)............................... 15,000 * -- 15,000 *
John Oberdorf (3)(4)......................... 22,000 * -- 22,000 *
David Lauber (5)............................. 41,000 * -- 41,000 *
Valerie Szymaniak............................ 30,000 * -- 30,000 *
Richard Yockelson (6)........................ 3,332 * -- 3,332 *
Lawrence Fine(7)............................. 0 -- -- 0 --
All Directors and executive officers as a
group (10 persons) (8)..................... 2,597,999 36.8% 1,040,000 2,157,999 26.1%
</TABLE>
- - ---------------
* Less than 1%
(1) If the over-allotment option is exercised by the Underwriters, Mr. Mandell,
Craig Enterprises, Inc. and Mr. Weinger will sell an additional 220,000,
106,000 and 10,000 shares of Common Stock, respectively, reducing their
beneficial ownership to 1,746,667, 738,000 and 70,000 shares of Common
Stock, respectively.
(2) Includes 500,000 shares of Common Stock (representing 7.2% and 6.1% of the
Company's outstanding Common Stock before and after the Offering,
respectively) transferred by Mr. Mandell to the Mandell Family Limited
Partnership of which Mr. Mandell is General Partner.
(3) Includes 15,000, 15,000 and 10,000 shares subject to outstanding options to
purchase Common Stock granted to each of Messrs. Weinger, Hemmig and
Oberdorf, respectively, which are exercisable within the next 60 days.
(4) Includes 12,000 shares of Common Stock owned by Mr. Oberdorf's wife and for
which Mr. Oberdorf disclaims beneficial ownership.
(5) Includes 40,000 shares subject to outstanding options to purchase Common
Stock which are exercisable within the next 60 days.
(6) Includes 3,332 shares subject to outstanding options to purchase Common
Stock which are exercisable within the next 60 days.
(7) Mr. Fine resigned his position as Senior Vice President of Merchandising in
November 1996.
(8) Includes 83,332 shares of Common Stock which the Directors and executive
officers of the Company have the right to acquire within the next 60 days
through the exercise of outstanding stock options.
36
<PAGE> 38
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company is authorized to issue up to 25,000,000 shares of Common Stock.
As of the date of this Prospectus, 6,974,500 shares of Common Stock are issued
and outstanding. An additional 505,750 shares of Common Stock are issuable upon
exercise of outstanding stock options.
The following description provides a summary of the material rights and
limitations relating to ownership of the Company's capital stock. For a complete
legal description of the Company's capital stock, reference should be made to
the Company's Restated Certificate of Incorporation, as amended, and Bylaws,
copies of which are included as exhibits to the Registration Statement of which
this Prospectus is a part.
COMMON STOCK
All outstanding shares of Common Stock are, and the shares to be issued in
this Offering will be, fully paid and non-assessable. There are no preemptive,
conversion, subscription, redemption or repurchase rights associated with the
shares of Common Stock. Each holder of Common Stock is entitled to one vote for
each share owned of record on matters submitted to a vote of the stockholders.
Holders of Common Stock are not entitled to cumulative voting rights in the
election of Directors. Upon liquidation of the Company, the holders of Common
Stock are entitled to participate ratably in the assets available for
distribution after satisfaction of all claims of the Company's creditors. The
holders of Common Stock are entitled to receive ratably such dividends as the
Board of Directors, in its discretion, may declare out of funds legally
available therefor.
CERTAIN BYLAW PROVISIONS
The Company's Bylaws provide that stockholders may act by written consent,
without prior notice and without a vote, if a consent is signed by stockholders
having not less than the minimum number of votes that would be necessary to
authorize such action at a meeting of stockholders. The Bylaws may be amended by
a majority vote of the stockholders or Board of Directors. The foregoing summary
of material provisions is qualified in its entirety by reference to the
Company's Bylaws, which are filed as an exhibit to the Registration Statement of
which this Prospectus is a part.
ANTI-TAKEOVER MATTERS
A Delaware corporation may not engage in a business combination with any
person acquiring 15% or more of the voting stock of such Delaware corporation
(an "interested stockholder") for a period of three years following the date of
such acquisition, unless: (i) prior to the date the stockholder became an
interested stockholder, the board of directors of the corporation approved
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder, (ii) the interested stockholder
acquired 85% or more of the corporation's voting stock in the transaction in
which he became an interested stockholder or (iii) on or subsequent to the date
the stockholder became an interested stockholder, the board of directors and
stockholders owning two-thirds of the outstanding voting stock, other than the
interested stockholder's stock, approve the business combination. The
corporation may opt out of the effect of this statute by: (i) including a
provision to such effect in the corporation's original certificate of
incorporation, (ii) amendment to the corporation's bylaws made by the board of
directors within 90 days after the effective date of the statute or (iii)
amendment of the corporation's certificate of incorporation or bylaws approved
by holders of a majority of the shares entitled to vote; provided that such
amendment shall not take effect until 12 months after its adoption and shall not
effect any business combinations with interested stockholders which are effected
during such 12 months.
LIMITATION OF DIRECTOR AND OFFICER LIABILITY
The Company's Restated Certificate of Incorporation includes a provision
stating that the Directors of the Company shall not be personally liable to the
Company or its stockholders for damages for breach of any duty owed to the
Company or its stockholders; provided, however, a Director shall not be relieved
from
37
<PAGE> 39
liability for any breach of duty based upon an act or omission (i) in breach of
such Director's duty or loyalty to the Company or its stockholders, (ii) not in
good faith or involving a knowing violation of law, or (iii) resulting in the
receipt by such person of an improper personal benefit.
TRANSFER AGENT
First City Transfer Company is the transfer agent and registrar for the
Common Stock.
38
<PAGE> 40
UNDERWRITING
Under the terms and subject to the conditions stated in the Underwriting
Agreement dated the date hereof, each underwriter named below (the
"Underwriters"), has severally agreed to purchase, and the Company and the
Selling Stockholders have agreed to sell to each Underwriter, the number of
shares of Common Stock set forth opposite the name of such Underwriter below:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
--------------------------------------------------------------------- ----------------
<S> <C>
Smith Barney Inc..................................................... 747,000
Tucker Anthony Incorporated.......................................... 746,500
Morgan Keegan & Company, Inc......................................... 746,500
---------
Total...................................................... 2,240,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock are
subject to approval of certain legal matters by counsel and to certain other
conditions. The Underwriters are obligated to take and pay for all shares of
Common Stock offered hereby (other than those covered by the over-allotment
option described below) if any such shares are taken.
The Underwriters for whom Smith Barney Inc., Tucker Anthony Incorporated
and Morgan Keegan & Company, Inc. are acting as the representatives (the
"Representatives"), propose to offer part of the shares of Common Stock directly
to the public at the public offering price set forth on the cover page of this
Prospectus and part of the shares of Common Stock to certain dealers at a price
which represents a concession not in excess of $.45 per share under the public
offering price. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $.10 per share to certain other dealers. After the
initial offering of the shares of Common Stock to the public, the public
offering price and such concessions may be changed by the Representatives.
Certain of the Selling Stockholders have granted to the Underwriters an
option, exercisable for 30 days from the date of this Prospectus, to purchase up
to 336,000 additional shares of Common Stock at the price to public set forth on
the cover page of this Prospectus minus the underwriting discounts and
commissions. The Underwriters may exercise such option solely for the purpose of
covering over-allotments, if any, in connection with the offering of the shares
of Common Stock offered hereby. To the extent such option is exercised, each
Underwriter will be obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares of Common Stock as
the number of shares set forth opposite each Underwriter's name in the preceding
table bears to the total number of shares listed in such table.
The Company, the Selling Stockholders and the Company's officers and
Directors have agreed that, for a period of 120 days after the date of this
Prospectus, they will not, without the prior written consent of Smith Barney
Inc., offer, sell, contract to sell or otherwise dispose of any shares of Common
Stock or any securities convertible into, or exercisable or exchangeable for,
Common Stock of the Company (subject, in the case of the Company, to an
exception for the grant of options and issuance of shares pursuant to the
Company's stock option plans).
In connection with the Offering, certain Underwriters and selling group
members (if any) who are qualified market makers on the Nasdaq National Market
may engage in passive market making transactions in the Common Stock on the
Nasdaq National Market in accordance with Rule 103 of Regulation M under the
Securities Exchange Act of 1934, as amended, during the business day prior to
the pricing of the Offering before the commencement of offers or sales of the
Common Stock. Passive market makers must comply with applicable volume and price
limitations and must be identified as such. In general, a passive market maker
must display its bid at a price not in excess of the highest independent bid for
such security; if all independent bids are lowered below the passive market
maker's bid, however, such bid may exceed the highest independent bid until
certain purchase limits are exceeded.
39
<PAGE> 41
In connection with the Offering and in compliance with applicable law, the
Underwriters may overallot or effect transactions which stabilize, maintain, or
otherwise affect the market price of the Common Stock at levels above those
which might otherwise prevail in the open market, including by entering
stabilizing bids, effecting syndicate covering transactions or imposing penalty
bids. A stabilizing bid means the placing of any bid, or the effecting of any
purchase, for the purpose of pegging, fixing or maintaining the price of a
security. A syndicate covering transaction means the placing of any bid on
behalf of the underwriting syndicate or the effecting of any purchase to reduce
a short position created in connection with the Offering. A penalty bid means an
arrangement that permits Smith Barney Inc., as managing underwriter, to reclaim
a selling concession from a syndicate member in connection with the Offering
when securities originally sold by the syndicate member are purchased in
stabilizing or syndicate covering transactions. Such transactions may be
effected on the Nasdaq National Market or otherwise. The Underwriters are not
required to engage in any of these activities. Any such activities, if
commenced, may be discontinued at any time.
The Company, the Selling Stockholders, and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.
Tucker Anthony Incorporated rendered a fairness opinion in connection with
the purchase by the Company of the six stores owned by Mr. Mandell and Mr.
Kaplan. See "Certain Transactions."
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by St. John & Wayne, L.L.C., Newark, New
Jersey. John J. Oberdorf, a Director of the Company, is a member of the law firm
of St. John & Wayne, L.L.C., legal counsel to the Company. Members of the firm
own less than one percent of the outstanding shares of Common Stock of the
Company. Certain legal matters will be passed upon for the Underwriters by
Calfee, Halter & Griswold LLP, Cleveland, Ohio.
EXPERTS
The financial statements included in this prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report appearing
herein, and is so included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
AVAILABLE INFORMATION
A Registration Statement on Form S-1 relating to the Common Stock offered
hereby has been filed by the Company with the Commission in Washington, D.C.
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto, certain portions
having been omitted from this Prospectus in accordance with the rules and
regulations of the Commission. For further information with respect to the
Company and the Common Stock offered hereby, reference is made to such
Registration Statement, exhibits and schedules.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith, the Company files
reports, and other information with the Commission. Such reports and other
information may be inspected and copied at the public reference facilities of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, Northwest
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and
7 World Trade Center, New York, New York 10048. Copies of such materials,
including the Registration Statement, can be obtained from the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. at
prescribed rates. In addition, such reports and other information may be
electronically accessed at the Commission's site on the World Wide Web located
at http://www.sec.gov.
40
<PAGE> 42
INDEX TO FINANCIAL STATEMENTS
PARTY CITY CORPORATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................................... F-2
Balance Sheets........................................................................ F-3
Statements of Income.................................................................. F-4
Statements of Stockholders' Equity.................................................... F-5
Statements of Cash Flows.............................................................. F-6
Notes to Financial Statements......................................................... F-7
</TABLE>
F-1
<PAGE> 43
INDEPENDENT AUDITORS' REPORT
The Stockholders of
Party City Corporation
Rockaway, New Jersey
We have audited the accompanying balance sheets of Party City Corporation
as of December 31, 1995 and 1996 and the related statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Party City Corporation as of December 31,
1995 and 1996, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
February 17, 1997
Parsippany, New Jersey
F-2
<PAGE> 44
PARTY CITY CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................................... $ 1,112,566 $ 14,949,714
Restricted assets for advertising fund.......................... 541,919 101,573
Receivables from franchisees:
Royalty fees (net of allowance for doubtful accounts of
$40,000 at December 31, 1995 and $32,847 at December 31,
1996)....................................................... 652,961 1,015,161
Other........................................................ 108,343 178,571
Merchandise inventory........................................... 3,840,926 9,305,027
Due from affiliates............................................. 5,794 35,815
Deferred income taxes -- current................................ 150,631 193,188
Prepaid expenses and other current assets....................... 315,620 1,015,760
------------ ------------
TOTAL CURRENT ASSETS.................................... 6,728,760 26,794,809
Property and equipment -- net..................................... 3,195,738 7,310,740
Deferred income taxes............................................. 109,176 218,224
Other assets...................................................... 273,898 279,334
------------ ------------
TOTAL ASSETS............................................ $ 10,307,572 $ 34,603,107
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable -- trade....................................... $ 1,960,873 $ 4,977,430
Accrued expenses................................................ 1,225,635 1,980,696
Advertising fund................................................ 541,919 101,573
Income taxes payable............................................ 514,458 1,904,562
Current portion -- long term debt............................... 22,725 --
Due to affiliates............................................... 1,779 --
Deferred revenue................................................ 462,383 412,081
------------ ------------
TOTAL CURRENT LIABILITIES............................... 4,729,772 9,376,342
------------ ------------
LONG TERM LIABILITIES:
Long-term debt -- net of current portion........................ 49,565 --
Deferred rent................................................... 464,653 1,170,624
Deferred revenue................................................ 481,875 495,000
------------ ------------
TOTAL LONG TERM LIABILITIES............................. 996,093 1,665,624
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value: authorized shares -- 10,000,000 at
December 31, 1995 and 25,000,000 at December 31, 1996; shares
issued and outstanding -- 5,224,000 at December 31, 1995 and
6,960,667 at December 31, 1996............................... 52,240 69,607
Additional paid-in capital...................................... 2,541,492 17,748,034
Retained earnings............................................... 1,987,975 5,743,500
------------ ------------
TOTAL STOCKHOLDERS' EQUITY.............................. 4,581,707 23,561,141
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............. $ 10,307,572 $ 34,603,107
============ ============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 45
PARTY CITY CORPORATION
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Net sales............................................. $ 3,991,589 $16,118,163 $39,143,625
Royalty fees.......................................... 3,836,207 6,074,679 8,449,760
Franchise fees........................................ 1,025,000 927,500 935,000
----------- ----------- ----------
TOTAL REVENUES................................ 8,852,796 23,120,342 48,528,385
EXPENSES:
Cost of goods sold and occupancy costs................ 2,686,881 10,758,209 25,937,444
Company-owned stores operating and selling expense.... 1,239,769 4,254,475 10,116,160
Franchise expense..................................... 2,049,894 2,943,814 3,729,050
General and administrative expense.................... 1,929,850 3,023,540 3,096,811
----------- ----------- ----------
TOTAL EXPENSES................................ 7,906,394 20,980,038 42,879,465
----------- ----------- ----------
INCOME BEFORE INTEREST AND INCOME TAXES....... 946,402 2,140,304 5,648,920
Interest income, net.................................... 62,121 22,861 475,805
----------- ----------- ----------
INCOME BEFORE INCOME TAXES.............................. 1,008,523 2,163,165 6,124,725
Provision for income taxes.............................. 466,000 863,200 2,369,200
----------- ----------- ----------
NET INCOME.............................................. $ 542,523 $ 1,299,965 $ 3,755,525
=========== =========== ==========
NET INCOME PER SHARE.................................... $ 0.24 $ 0.56
=========== ==========
Weighted average shares outstanding..................... 5,322,333 6,664,202
Pro Forma:
Income before income taxes............................ $ 1,008,523
Provision for income taxes............................ 410,089
-----------
Net income............................................ $ 598,434
===========
Net income per share.................................. $ 0.12
===========
Weighted average shares outstanding..................... 5,008,333
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE> 46
PARTY CITY CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
--------------------- ADDITIONAL RETAINED NOTE RECEIVABLE-
SHARES AMOUNT PAID-IN-CAPITAL EARNINGS SALE OF STOCK
--------- ------- --------------- ---------- ------------------
<S> <C> <C> <C> <C> <C>
Balance -- January 1, 1994...... 4,000,000 $40,000 $ 137,000 $ 245,487 $ (95,828)
Distribution to stockholders.... (100,000)
Sale of common shares........... 1,200,000 12,000 2,488,000
Expenses incurred on sale of
common shares................. (133,268)
Sale of common shares........... 24,000 240 49,760
Proceeds from note receivable... 46,480
Net income...................... 542,523
--------- ------- ----------- ---------- ----------
Balance -- December 31, 1994.... 5,224,000 52,240 2,541,492 688,010 (49,348)
Proceeds from note receivable... 49,348
Net income...................... 1,299,965
--------- ------- ----------- ---------- ----------
Balance -- December 31, 1995.... 5,224,000 52,240 2,541,492 1,987,975
Sale of common shares........... 1,700,000 17,000 16,983,000
Expenses incurred on sale of
common shares................. (1,989,661)
Exercise of stock options....... 36,667 367 174,628
Tax effect of non-qualified
options....................... 38,575
Net income...................... 3,755,525
--------- ------- ----------- ---------- ----------
Balance -- December 31, 1996.... 6,960,667 $69,607 $17,748,034 $5,743,500 $ --
========= ======= =========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 47
PARTY CITY CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash Flow from Operating Activities:
Net income........................................................ $ 542,523 $ 1,299,965 $ 3,755,525
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................. 99,158 321,936 745,889
Loss on abandonment/sale of property and equipment............ 64,918 -- 11,109
Deferred tax benefit.......................................... (96,000) (160,499) (151,605)
Changes in assets and liabilities:
Sale of marketable securities................................. 223,552 20,558 --
Royalty fees receivable....................................... (201,904) (256,118) (362,200)
Other receivable.............................................. (24,593) (83,750) (70,228)
Merchandise inventory......................................... (1,486,399) (2,354,527) (5,464,101)
Due to/from affiliates........................................ 28,689 8,607 (31,800)
Prepaid expenses and other current assets..................... (138,032) (103,333) (700,140)
Other assets.................................................. (125,257) (131,521) (5,436)
Accounts payable.............................................. 271,319 1,689,554 3,016,557
Accrued expenses.............................................. 702,318 347,814 755,061
Income taxes payable.......................................... 89,333 397,218 1,390,104
Deferred revenue.............................................. (47,767) 279,525 (37,177)
Deferred rent................................................. 139,107 325,546 705,971
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES......................... 40,965 1,600,975 3,557,529
----------- ----------- -----------
Cash Flow from Investment Activities:
Purchases of property and equipment............................. (1,396,214) (2,082,158) (4,875,877)
Proceeds from sale of property and equipment.................... -- -- 3,877
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES............................. (1,396,214) (2,082,158) (4,872,000)
----------- ----------- -----------
Cash Flow from Financing Activities:
Net proceeds from sale of stock................................. 2,463,212 49,348 15,010,339
Proceeds from exercise of stock options......................... -- -- 174,995
Tax effect of non-qualified stock options....................... -- -- 38,575
Proceeds from long term debt.................................... -- 288,127 --
Repayments of long term debt.................................... (27,834) (237,337) (72,290)
Repayment of note payable-officer............................... (36,347) -- --
Distribution to stockholders.................................... (100,000) -- --
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES......................... 2,299,031 100,138 15,151,619
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.............. 943,782 (381,045) 13,837,148
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.................... 549,829 1,493,611 1,112,566
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.......................... $ 1,493,611 $ 1,112,566 $14,949,714
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income Taxes Paid................................................. $ 555,893 $ 375,850 $ 1,147,812
Interest Paid..................................................... $ 3,284 $ 8,956 $ 41,009
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 48
PARTY CITY CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Party City Corporation (the "Company"), which is incorporated in the State
of Delaware, operates retail party goods stores within the continental United
States and sells franchises on an individual store and area franchise basis
throughout the United States, Puerto Rico, Spain and Canada. In April, 1994, the
Shareholders approved an increase in the authorized Common Stock from 2,500 to
10,000,000 shares and a 26,667-for-1 common stock split. All share information
has been restated to give retroactive effect to the stock split. On January 16,
1996, the Company increased its authorized Common Stock from 10,000,000 to
25,000,000 shares. On March 27, 1996, the Company completed an initial public
offering of 1,700,000 shares of common stock, $.01 par value, issued by the
Company, at an initial offering price of $10 per share. Proceeds to the Company,
net of offering expenses of $1,989,661 were $15,010,339.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Franchising Revenue Recognition -- The Company is obligated in accordance
with the terms of each franchisee's respective agreement to provide the
following initial services: advice on site location, store design and layout,
training and pre-opening assistance. Revenue from individual franchise sales,
recorded as franchise fees, is recognized by the Company upon completion of the
aforementioned initial services, which normally coincide with the opening of the
franchisee's store. On an ongoing basis, the Company provides assistance
regarding sources of supply, pricing, advertising and promotion programs and
other defined assistance. Royalty fees are recorded on a monthly basis as a
percentage of the franchisee's net sales.
Area franchise sales represent agreements with franchisees to open a
specified number of franchises within defined geographic areas and development
periods. The Company's policy is to receive in advance, a deposit for each of
the potential stores, based on its standard initial franchise fee at the time
the contract is signed. Upon receipt, the deposit is recorded as deferred
revenue. When the Company satisfies its initial obligations to the franchisee
and the store is opened, the Company recognizes the deposit as revenue.
Information regarding franchise activity follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Number of franchises in operation at beginning of the period............ 58 99 132
Number of franchises opened in the period............................... 42 35 32
Number of franchises closed during the period........................... (1) (2) --
--- --- ---
Number of franchises in operation at end of the period.................. 99 132 164
=== === ===
</TABLE>
Cash and Cash Equivalents -- The Company considers all highly liquid
investments with initial maturities of three months or less at the time of
purchase to be cash equivalents. Cash equivalents consist of an investment in a
certificate of deposit and money market funds.
Marketable Securities -- The Company classifies its investments as trading
securities, carries the securities at fair market value and recognizes
unrealized gains and losses in earnings. Realized gains and losses are
determined on the first-in, first-out method. There were no marketable
securities held at December 31, 1995 and 1996.
Fair Value of Financial Instruments -- Financial instruments consist
primarily of investments in cash, trade account receivables, accounts payable
and debt obligations. The Company estimates the fair value of financial
instruments based on interest rates available to the Company and by comparison
to quoted market
F-7
<PAGE> 49
PARTY CITY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
prices. At December 31, 1995 and 1996, the fair value of the Company's financial
instruments approximated the carrying value.
Inventory -- The Company values its inventory at the lower of average cost
or market.
Advertising Fund -- Pursuant to its franchise agreements, the Company
collects 1% of the net sales of its franchise stores, which is restricted to use
for advertising on their behalf. Receipts and disbursements are not recorded as
income or expense since the Company does not have complete discretion over the
use of the funds. The Company also contributes 1% of net sales of its owned
stores into the Advertising Fund. To cover the expenses of administering the
Advertising Fund, the Company charges the fund a management fee equal to 5% of
the funds contributed by franchisees. During 1995 and 1996, $90,715 and
$133,542, respectively, of Advertising Fund management fees were collected by
the Company and credited to general and administrative expense.
Property and Equipment -- Property and equipment are carried at cost less
accumulated depreciation. The Company uses the straight-line method of
depreciation for property and equipment placed in service on or after January 1,
1993. Property and equipment placed in service prior to January 1, 1993 are
depreciated using an accelerated method. The difference between the two methods
is not material. Property and equipment are depreciated over their estimated
useful lives as follows: automobiles, five years; furniture and equipment, 5-7
years. Leasehold improvements are amortized over the remaining period of the
lease or the estimated useful life of the asset, whichever is less.
Intangibles -- Trademarks, which are included in other assets, consist
primarily of capitalized legal costs and are being amortized using the
straight-line method over the estimated useful lives of the assets.
Income Taxes -- Prior to April 27, 1994 the Company had elected to be taxed
under the S corporation regulations of the Internal Revenue Code, thereby
exempting it from federal income taxes. Effective April 27, 1994, the Company's
election was terminated and the Company commenced paying tax as a C Corporation.
The Company provides for the tax effects of transactions reported in the
financial statements which and consist of taxes currently due plus deferred
taxes as a result of temporary differences. Temporary differences in the basis
of assets and liabilities for financial statements and income tax reporting
arise from using different methods and lives to calculate depreciation, certain
costs related to the start up of store operations, inventory capitalization,
deferred rent, accrued expenses and the recognition of vacation pay.
Net Income Per Share -- Net income per share is computed using the weighted
average common and common equivalent shares outstanding during each period.
Pro forma Data -- Pro forma net income reflects the income tax expense the
Company would have incurred assuming it was taxed as a C corporation for all
periods presented.
Pre-opening Store Costs -- The costs associated with opening a store are
expensed as incurred.
Advertising Costs -- The costs associated with store advertising are
expensed in the period in which the related promotion and sales occur.
Advertising expense was approximately $327,700, $1,034,800 and $2,342,000 for
the years ended December 31, 1994, 1995 and 1996, respectively.
Accounting and Reporting Changes -- Effective January 1, 1996, the Company
adopted Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." SFAS No. 121 establishes accounting standards for the recognition of an
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used, and for long-lived assets and
certain identifiable intangibles to be disposed. The
F-8
<PAGE> 50
PARTY CITY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
adoption of SFAS No. 121 did not have a material effect on the Company's
financial position or results of operations.
Reclassifications -- Certain reclassifications have been made to the prior
period financial statements, the most significant of which is the
reclassification of store occupancy costs from Company-owned store operating and
selling expenses to cost of sales and occupancy costs, to be consistent with the
prevailing practice in the retail industry and to conform the current period
presentation.
NOTE 2 -- RESTRICTED ASSETS FOR ADVERTISING FUND
Amounts restricted for advertising include:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1996
-------- --------
<S> <C> <C>
Cash and cash equivalents........................................ $ 99,042 $101,573
Marketable securities............................................ 442,877 --
-------- --------
$541,919 $101,573
======== ========
</TABLE>
NOTE 3 -- PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1996
---------- ----------
<S> <C> <C>
Equipment................................................. $1,298,646 $2,974,980
Furniture................................................. 1,102,979 2,773,322
Leasehold improvements.................................... 1,175,817 2,687,462
Automobiles............................................... 94,793 94,793
---------- ----------
3,672,235 8,530,557
Less: Accumulated depreciation and amortization........... 476,497 1,219,817
---------- ----------
$3,195,738 $7,310,740
========== ==========
</TABLE>
NOTE 4 -- DEBT
Long-term debt consisted of four installment notes with an outstanding
balance of $72,290 at December 31, 1995. The notes were collateralized by
equipment and have interest rates ranging from 1.00% to 1.25% above the bank's
base rate (8.50% at December 31, 1995) and were repaid in full during March
1996. At December 31, 1996 there was no long-term debt outstanding.
During February 1995, the Company obtained a revolving credit/term loan
facility in the amount of $2,500,000, which was amended in September 1995 and
again in December 1996. Under the second amendment, the Company has available
borrowings of $5,000,000 as of December 31, 1996 until June 30, 1998. The
amended facility expires June 30, 1998. The Company has the option to convert
its outstanding borrowings at June 30, 1996, 1997 and 1998 to a four-year term
loan with a corresponding reduction in the amount available under the credit
facility. Both the revolving credit facility and term loans bear interest at the
bank's prime rate minus 1/2 of 1% and are collateralized by all assets of the
Company. The Company must pay a quarterly commitment fee of 1/4 of 1% of the
unused amount of the available facility. The credit facility contains various
covenants including, among others, restriction on capital expenditures, the
maintenance of a
F-9
<PAGE> 51
PARTY CITY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- DEBT -- (CONTINUED)
defined minimum tangible net worth, interest coverage ratio, total liabilities
to tangible net worth ratio and current ratio. At December 31, 1996, the Company
was in compliance with such loan agreement covenants. There was no outstanding
balance under the facility at December 31, 1996.
NOTE 5 -- STOCK OPTIONS
In September 1994, the Company adopted the Party City Corporation 1994
Stock Option Plan (the "Plan") pursuant to which options may be granted to
employees for the purchase of common stock. The Plan, which was amended and
restated in December 1996, permits the Company to grant incentive and non-
qualified stock options to purchase an aggregate of 600,000 shares of the
Company's common stock. Such options may be incentive stock options or
non-qualified options. The term of an option is determined by the Stock Option
Committee. The exercise price of the shares covered by an incentive stock option
may not be less than the fair value of the shares at the time of grant. The
exercise price of the shares covered by a non-qualified option need not be equal
to the fair value of the stock at the date of grant, but may be granted with an
exercise price as determined by the Stock Option Committee. The options granted
generally vest one-third each year, over a period of three years.
A summary of the Plan's status and changes during the years then ended, is
presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------
1995 1996
-------------------------- --------------------------
WEIGHTED- AVERAGE WEIGHTED- AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------- ---------------- ------- ----------------
<S> <C> <C> <C> <C>
Outstanding at January 1...................... 102,240 $ 2.50 180,000 $ 4.08
Granted....................................... 79,760 6.10 281,500 14.31
Exercised..................................... 0 0 (36,666) 4.77
Cancelled..................................... (2,000) 3.50 (66,501) 8.69
------- ----- ------- ------
Outstanding December 31....................... 180,000 $ 4.08 358,333 $11.19
======= ===== ======= ======
Options exercisable at December 31............ 0 31,666
Weighted average fair value of options granted
during the year ended December 31, (per
option)..................................... $ 1.84 $ 7.32
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1996
---------- ----------
<S> <C> <C>
Expected volatility................................. 0 35%
Expected lives...................................... 6 years 6 years
Risk-free interest rate............................. 6.40% 6.50%
Expected dividend yield............................. 0% 0%
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1996
---------- ----------
<S> <C> <C>
Net Income:
As reported....................................... $1,299,965 $3,755,525
Pro-forma......................................... $1,294,791 $3,345,385
Net income per share:
As reported....................................... 0.24 0.56
Pro-forma......................................... 0.24 0.52
</TABLE>
F-10
<PAGE> 52
PARTY CITY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- STOCK OPTIONS (CONTINUED)
The pro forma effect of applying FAS 123 is not necessarily indicative of
the effect on reported net income for future years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in the periods ended December 31, 1995 and 1996.
The following table summarizes information about options outstanding under
the Plan as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- --------------------------
NUMBER WEIGHTED NUMBER WEIGHTED
OUTSTANDING WEIGHTED AVERAGE AVERAGE EXERCISABLE AVERAGE
AT DECEMBER 31, REMAINING EXERCISE AT DECEMBER 31, EXERCISE
RANGE OF EXERCISE PRICES 1996 CONTRACTUAL LIFE PRICE 1996 PRICE
--------------- ---------------- -------- --------------- --------
<S> <C> <C> <C> <C> <C>
$2.50 to $5.00.................... 98,333 8.3 years $ 2.58 31,666 $ 2.55
$10.00 to $15.00.................. 126,500 9.3 years 11.42 -- --
$15.25 to $20.00.................. 113,500 9.6 years 16.74 -- --
$21.00 to $22.00.................. 20,000 9.6 years 21.11 -- --
------- ------ ------ -----
$2.50 to $22.00................... 358,333 $11.19 31,666 $ 2.55
======= ====== ====== =====
</TABLE>
NOTE 6 -- PROVISION FOR TAXES
The provision for taxes consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------------------
1994 1995 1996
-------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal........................................... $416,000 $ 751,427 $1,962,511
State............................................. 146,000 272,272 558,294
---------- ---------- ----------
562,000 1,023,699 2,520,805
---------- ---------- ----------
Deferred:
Federal........................................... (76,000) (120,967) (127,311)
State............................................. (20,000) (39,532) (24,294)
---------- ---------- ----------
(96,000) (160,499) (151,605)
---------- ---------- ----------
$466,000 $ 863,200 $2,369,200
========== ========== ==========
</TABLE>
The deferred income tax provision results from temporary differences
between amounts of assets and liabilities for financial reporting purposes
and amounts as measured by tax laws.
F-11
<PAGE> 53
PARTY CITY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- PROVISION FOR TAXES -- (CONTINUED)
The components of the net deferred tax assets at December 31, 1995 and 1996
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1996
--------- ---------
<S> <C> <C>
Current Assets:
Inventory.................................................. $ -- $ 123,751
Severance pay accrual...................................... 79,847 --
Vacation pay accrual....................................... 30,282 35,104
Start-up costs............................................. 14,582 14,958
Reserve for doubtful accounts.............................. 16,240 30,085
Advertising accrual........................................ 9,680 --
--------- ---------
Current Liabilities:
Advertising accrual........................................ -- (10,710)
--------- ---------
Current Deferred Tax Asset................................. $ 150,631 $ 193,188
========= =========
Non-current Assets:
Deferred rent.............................................. $ 188,650 $ 471,240
Start-up costs............................................. 45,249 28,008
Non-current Liabilities:
Property and equipment..................................... (124,723) (281,024)
--------- ---------
Non-current Deferred Tax Asset............................. $ 109,176 $ 218,224
========= =========
</TABLE>
The Company's effective income tax rate differs from the statutory federal
rate as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate......................................... 34.0% 34.0% 34.0%
State income taxes net of federal benefit...................... 8.2 7.1 5.6
Other.......................................................... 2.0 (1.2) (.9)
Nondeductible S-corporation losses............................. 2.0 0 0
---- ---- ----
Effective tax rate............................................. 46.2% 39.9% 38.7%
==== ==== ====
</TABLE>
NOTE 7 -- RELATED PARTY TRANSACTIONS
The President, a major stockholder of the Company, owns all of the
outstanding shares of two party supplies stores for which no royalty fees are
charged. This individual is also the majority owner of two additional franchise
stores and was a 50% owner of one franchise through 1995. The Company receives
royalty fees based on 3.0% of net sales from the majority owned stores. In
addition, a Director of the Company owns two franchises and was a 50% owner of
one franchise through 1995, for which he pays royalty fees of 2.0% on net sales.
F-12
<PAGE> 54
PARTY CITY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- RELATED PARTY TRANSACTIONS -- (CONTINUED)
Furthermore, an individual who was a Senior Vice President of the Company
through August 1995 owns two franchises. The amounts included in the
accompanying financial statements relating to the above are:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Royalty fees....................................... $259,130 $260,818 $208,227
Royalty fees receivable (at end of period)......... $ 27,581 $ 16,572 $ 18,551
</TABLE>
The Company shared office space with an affiliate until July 1, 1995. The
affiliate charged the Company for rent and real estate taxes, utilities,
insurance and telephone. The Company was charged approximately $63,000 and
$30,400 for the years ended December 31, 1994 and 1995, respectively, of which,
approximately $12,300 and $27,000, respectively, was for rent. Beginning January
1, 1996, the Company shared warehouse space with an affiliate. The Company
charged the affiliate approximately $19,200 for rent for the year end December
31, 1996. In addition, the Company and its affiliates employ common bookkeeping
personnel, for which the Company charged its affiliates approximately $70,500,
$74,200 and $94,500 for the years ended December 31, 1994, 1995 and 1996,
respectively. Office expenses allocated from the affiliate to the Company are
based upon the square footage occupied by the Company. Personnel costs allocated
to the affiliate are based upon an analysis of the percentage of time
individuals devote to services for the affiliate stores. Management believes
that both allocation methods are reasonable to determine the appropriate
expenses to be allocated.
Amounts receivable and payable from related companies represent
non-interest bearing advances between affiliates with no specific repayment
terms. Amounts outstanding at December 31, 1995 and 1996 were paid in January
1996 and 1997, respectively.
In August 1992, the Company sold shares of its Common Stock for $172,000 to
the Company's Executive Vice President. The Company received a cash payment of
$32,391 and a promissory note for $139,609 for such shares. This note which bore
interest at 6.0%, was paid in three annual installments of $52,391 and was
collateralized by the shares sold. The final payment was made in October 1995.
NOTE 8 -- COMMITMENTS
Employment Agreements -- The Company has entered into various employment
agreements with two of its senior executives for periods of up to three years
expiring no later than June 12, 1998. Under the agreements, the covered
individuals are entitled to specified salaries over the contract periods;
bonuses are provided contingent upon certain Company and individual performance
criteria devised by the Company for each period. The commitments relating to
future services from such executives under the contracts as of December 31, 1996
are approximately $1,196,800.
OPERATING LEASES
Real Estate -- The Company leases real estate in connection with the
operation of corporate retail stores as well as its corporate office. The store
leases are for properties ranging in size from 6,750 to 13,320 square feet. The
terms range from ten years to twenty years, and expire by 2016. The leases
contain escalation clauses, renewal options from five years to ten years and
obligations for reimbursement of common area maintenance and real estate taxes.
Certain leases contain contingent rent based upon specified sales volume. For
the years ended December 31, 1994, 1995 and 1996, no such contingent rent was
paid.
Other -- The Company leases a motor vehicle, expiring July 1999 and a
telephone system for the corporate office, expiring December 1997.
F-13
<PAGE> 55
PARTY CITY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- COMMITMENTS -- (CONTINUED)
Rent expense for all operating leases was $384,825, $1,554,015 and
$3,779,292 for the years ended December 31, 1994, 1995 and 1996, respectively.
Future minimum payments under operating leases at December 31, 1996 are as
follows:
<TABLE>
<S> <C>
1997............................................................ $ 5,473,737
1998............................................................ 5,585,650
1999............................................................ 5,637,546
2000............................................................ 5,780,208
2001............................................................ 5,990,092
Thereafter...................................................... 28,930,546
-----------
$57,397,779
===========
</TABLE>
The Company has guaranteed a lease obligation of three of its franchises.
One lease, expiring in 2001, has future minimum payments of $687,225, the second
lease, expiring in 2007, has future minimum payments of $2,686,667 and the
remaining lease, expiring in 2007, has future minimum payments of $1,646,957.
NOTE 9 -- SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------
1995 MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
- - ---------------------------------------- ---------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
Net sales of Company-owned stores....... $1,782,905 $2,659,151 $ 3,051,342 $ 8,624,755
Total franchise revenues................ 1,068,518 1,506,191 1,673,851 2,753,619
Cost of goods sold and occupancy
costs................................. 1,257,446 1,822,532 2,228,843 5,449,388
Net Income/(Loss)....................... 17,125 207,921 (101,861) 1,176,780
Net Income/(Loss) per share............. $ 0.00 $ 0.04 $ (0.02) $ 0.22
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------
1996 MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
- - ---------------------------------------- ---------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
Net sales of Company-owned stores....... $4,562,271 $6,338,685 $ 7,507,165 $ 20,735,504
Total franchise revenues................ 1,418,741 1,947,733 2,400,601 3,617,685
Cost of goods sold and occupancy
costs................................. 3,334,320 4,362,640 5,339,627 12,900,857
Net Income/(Loss)....................... (166,506) 499,168 345,660 3,077,203
Net Income/(Loss) per share............. $ (.03) $ .07 $ .05 $ .43
</TABLE>
- - --------------------------------------------------------------------------------
SUBSEQUENT EVENTS (UNAUDITED)
On February 28, 1997, the Company acquired six franchise stores. Four of
the stores acquired, having total sales of $9,100,000 in 1996, were owned by
Steven Mandell, the Company's Chairman and President for an aggregate purchase
price of $4,750,000, subject to post-closing adjustments for inventory and
payables. The remaining two stores, having total sales of $3,700,000 in 1996,
were owned by Perry Kaplan, a former executive officer and a Director of the
Company for an aggregate purchase price of $1,150,000, subject to similar
post-closing adjustments.
On March 3, 1997, the Company signed a commitment letter to refinance and
replace the Company's existing $5,000,000 credit facility with a $20,000,000
revolving line of credit maturing June 30, 2000. The terms of the commitment
letter are subject to the negotiation and execution of definitive loan
documents.
On March 5, 1997, the Company and Steven Mandell, the Chairman and
President of the Company, executed an amendment to Mr. Mandell's employment
agreement. The amendment extends the term of Mr. Mandell's employment agreement
one year to December 31, 1998 and provides for an annual salary of $300,000 for
1998.
F-14
<PAGE> 56
======================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, ANY OF THE SELLING STOCKHOLDERS, OR BY ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY, THOSE TO WHICH IT RELATES IN ANY STATE TO ANY PERSON TO WHOM IT
IS NOT LAWFUL TO MAKE SUCH OFFER IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS
AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
Use of Proceeds....................... 9
Stock Price and Dividend Policy....... 9
Capitalization........................ 10
Selected Financial Data............... 11
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 12
Business.............................. 18
Management............................ 30
Certain Transactions.................. 35
Principal and Selling Stockholders.... 36
Description of Capital Stock.......... 37
Underwriting.......................... 39
Legal Matters......................... 40
Experts............................... 40
Available Information................. 40
Index to Financial Statements......... F-1
</TABLE>
======================================================
======================================================
2,240,000 SHARES
LOGO
COMMON STOCK
------------
PROSPECTUS
APRIL 8, 1997
------------
SMITH BARNEY INC.
TUCKER ANTHONY
INCORPORATED
MORGAN KEEGAN & COMPANY, INC.
======================================================
<PAGE> 57
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following sets forth expenses and costs (other than underwriting
discounts and commissions) expected to be incurred in connection with the
issuance and distribution of the securities offered hereby:
<TABLE>
<S> <C>
Commission registration fee............................................... $ 12,685
NASD filing fee........................................................... 4,686
Nasdaq Stock Market additional listing fee................................ 17,500
Accounting fees and expenses.............................................. 90,000
Legal fees and expenses................................................... 175,000
Blue sky fees and expenses (including fees and expenses of counsel)....... 10,000
Printing and engraving fees and expenses.................................. 125,000
Fees of transfer agent and registrar...................................... 3,000
Miscellaneous............................................................. 62,129
--------
Total................................................................... $ 500,000
========
</TABLE>
All of the foregoing, except the Commission registration fee, the NASD
filing fee and the Nasdaq Stock Market additional listing fee are estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Pursuant to the provisions of the Delaware General Corporation Law
("Delaware GCL"), the Registrant has adopted provisions in its Certificate of
Incorporation and Bylaws which require the Registrant to indemnify its officers
and directors to the fullest extent permitted by law, and eliminate the personal
liability of its Directors to the Registrant or its stockholders for monetary
damages for breach of their duty of due care except (i) for any breach of the
duty of loyalty; (ii) for acts or omissions not in good faith or which involve
intentional misconduct or knowing violations of law; (iii) for liability under
Section 174 of the Delaware GCL (relating to certain unlawful dividends, stock
repurchases or stock redemptions); or (iv) for any transaction from which the
Director derived any improper personal benefit. In addition, the Registrant's
Certificate of Incorporation and Bylaws require the Registrant to indemnify its
Directors and officers, permit the Registrant to insure its Directors and
officers and permit the Registrant to indemnify or insure its employees or
agents to the fullest extent permitted by Delaware law, including those
circumstances in which indemnification would otherwise be discretionary, except
that the Registrant shall not be obligated to advance expenses or to indemnify
any such person (i) with respect to proceedings, claims or actions initiated or
brought voluntarily by any such person and not by way of defense, (ii) for any
amounts paid in settlement or an action indemnified against by the Registrant
without the prior written consent of the Registrant, or (iii) in connection with
any event in which the person did not act in good faith and in a manner
reasonably believed to be in or not opposed to the best interest of the
Registrant.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Within the past three years, the Registrant has sold the following
securities which were not registered under the Securities Act:
On April 27, 1994, the Registrant sold 1,200,000 shares of Common Stock in
a private placement to four individuals for an aggregate principal price of
$2,500,000 based upon an exemption from registration under Section 4(2) of the
Securities Act.
On August 12, 1994, the Registrant sold 24,000 shares of Common Stock in a
private placement to two individuals for an aggregate purchase price of $50,000
based upon an exemption from registration under Section 4(2) of the Securities
Act.
II-1
<PAGE> 58
During 1996 the Registrant sold 36,667 shares of Common Stock pursuant to
the exercise of stock options for an aggregate purchase price of $175,003 based
upon an exemption from registration under Section 4(2) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<S> <C> <C>
1.1 -- Underwriting Agreement.
3.1 -- Certificate of Incorporation of the Registrant.**
3.2 -- Bylaws of the Registrant.**
4.1 -- Specimen stock certificate evidencing the Common Stock.**
5.1 -- Opinion of St. John & Wayne, L.L.C.**
10.1 -- Form of Unit Franchise Agreement entered into by the Registrant and
franchisees.**
10.2 -- Employment Agreement, dated January 1, 1994 and amended as of January 16, 1996,
by and between the Registrant and Steven Mandell.**
10.3 -- Amendment to Employment Agreement dated March 5, 1997, by and between the
Registrant and Steven Mandell.**
10.4 -- Employment Agreement, dated January 1, 1994 and amended as of January 16, 1996,
by and between the Registrant and Perry Kaplan.**
10.5 -- Employment Agreement of David Lauber, dated June 12, 1995, by and between
Registrant and David Lauber.**
10.6 -- Employment Agreement of Lawrence Fine, dated October 13, 1995, by and between
Registrant and Lawrence Fine.**
10.7 -- Amended Stock Option Plan of the Registrant.**
10.8 -- Amended and Restated 1994 Stock Option Plan of the Registrant.**
10.9 -- Loan and Security Agreement, dated February 15, 1995 and amended as of October
6, 1995, by and between Registrant and Midlantic Bank, N.A.**
10.10 -- Commitment letter between PNC Bank and the Registrant.**
23.1 -- Consent of Deloitte & Touche LLP.
23.2 -- Consent of St. John & Wayne, L.L.C. (included in Exhibit 5.1)**
24.1 -- Power of Attorney (contained on the signature page of this Registration
Statement).
27.1 -- Financial Data Schedule.**
</TABLE>
- - ---------------
* To be filed by Amendment.
** Previously filed.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Securities Act or otherwise, the Registrant has been
advise that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
II-2
<PAGE> 59
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
the Registration Statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of the
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered herein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 60
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to the Registration Statement
No. 333-22893 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Township of Rockaway, State of New Jersey, on April 4, 1997.
PARTY CITY CORPORATION
By: *
------------------------------------
Steven Mandell
Chairman of the Board and President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to the Registration Statement has been signed by the
following persons in the capacities on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- - ------------------------------------------ ------------------------------ ------------------
<C> <S> <C>
* Chairman of the Board and April 4, 1997
- - ------------------------------------------ President, Director (principal
Steven Mandell executive officer)
/s/ DAVID LAUBER Vice President and Chief April 4, 1997
- - ------------------------------------------ Financial Officer, Director
David Lauber (principal financial and
accounting officer)
* Director April 4, 1997
- - ------------------------------------------
John J. Oberdorf
* Director April 4, 1997
- - ------------------------------------------
Ray Hemmig
* Director April 4, 1997
- - ------------------------------------------
Duayne Weinger
</TABLE>
* By David Lauber as attorney-in-fact.
II-4
<PAGE> 61
REGISTRATION STATEMENT NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
EXHIBITS
FILE WITH
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PARTY CITY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
================================================================================
<PAGE> 62
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- - ------ ---------------------------------------------------------------------- ------------
<C> <C> <S> <C>
1.1 -- Underwriting Agreement.
3.1 -- Certificate of Incorporation of the Registrant.**
3.2 -- Bylaws of the Registrant.**
4.1 -- Specimen stock certificate evidencing the Common Stock.**
5.1 -- Opinion of St. John & Wayne, L.L.C.**
10.1 -- Form of Unit Franchise Agreement entered into by the Registrant and
franchisees.**
10.2 -- Employment Agreement, dated January 1, 1994 and amended as of January
16, 1996, by and between the Registrant and Steve Mandell.**
10.3 -- Amendment to Employment Agreement dated March 5, 1997, by and between
the Registrant and Steven Mandell.**
10.4 -- Employment Agreement, dated January 1, 1994 and amended as of January
16, 1996, by and between the Registrant and Perry Kaplan.**
10.5 -- Employment Agreement of David Lauber, dated June 12, 1995, by and
between Registrant and David Lauber.**
10.6 -- Employment Agreement of Lawrence Fine, dated October 13, 1995, by and
between Registrant and Lawrence Fine.**
10.7 -- Amended Stock Option Plan of the Registrant.**
10.8 -- Amended and Restated 1994 Stock Option Plan of the Registrant.**
10.9 -- Loan and Security Agreement, dated February 15, 1995 and amended as of
October 6, 1995, by and between Registrant and Midlantic Bank, N.A.**
10.10 -- Commitment letter between PNC Bank and the Registrant.**
23.1 -- Consent of Deloitte & Touche LLP.
23.2 -- Consent of St. John & Wayne L.L.C. (included in Exhibit 5.1)**
24.1 -- Power of Attorney (contained on the signature page of this
Registration Statement).
27.1 -- Financial Data Schedule.**
</TABLE>
- - ---------------
* To be filed by Amendment.
** Previously filed.
<PAGE> 1
Exhibit 1.1
2,240,000 Shares
PARTY CITY CORPORATION
Common Stock
UNDERWRITING AGREEMENT
April ___, 1997
SMITH BARNEY INC.
TUCKER ANTHONY INCORPORATED
MORGAN KEEGAN & COMPANY, INC.
As Representatives of the Several Underwriters
c/o SMITH BARNEY INC.
388 Greenwich Street
New York, New York 10013
Dear Sirs:
Party City Corporation, a Delaware corporation (the "Company"),
proposes to issue and sell an aggregate of 1,200,000 shares of its common stock,
$.01 par value per share, to the several Underwriters named in Schedule II
hereto (the "Underwriters") and the persons named in Part A of Schedule I hereto
(the "Selling Stockholders") propose to sell to the several Underwriters an
aggregate of 1,040,000 shares of common stock of the Company. The Company and
the Selling Stockholders are hereinafter sometimes referred to as the "Sellers".
The Company's common stock, $.01 par value, is hereinafter referred to as the
"Common Stock" and the 1,200,000 shares of Common Stock to be issued and sold to
the Underwriters by the Company and the 1,040,000 shares of Common Stock to be
sold to the Underwriters by the Selling Stockholders are hereinafter referred to
as the "Firm Shares". The Selling Stockholders listed in Part B of Schedule I
hereto also propose to sell to the Underwriters, upon the terms and conditions
set forth in Section 2 hereof, up to an additional 336,000 shares (the
"Additional Shares") of Common Stock. The Firm Shares and the Additional Shares
are hereinafter collectively referred to as the "Shares".
The Company and the Selling Stockholders wish to confirm as follows
their respective agreements with you (the "Representatives") and the other
several Underwriters on whose behalf you are acting, in connection with the
several purchases of the Shares by the Underwriters.
1. Registration Statement and Prospectus. The Company has prepared and
<PAGE> 2
filed with the Securities and Exchange Commission (the "Commission") in
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder (collectively, the
"Act"), a registration statement on Form S-1 under the Act (the "registration
statement"), including a prospectus subject to completion relating to the
Shares. The term "Registration Statement" as used in this Agreement means the
registration statement (including all financial schedules and exhibits), as
amended at the time it becomes effective, or, if the registration statement
became effective prior to the execution of this Agreement, as supplemented or
amended prior to the execution of this Agreement. If it is contemplated, at the
time this Agreement is executed, that a post-effective amendment to the
registration statement will be filed and must be declared effective before the
offering of the Shares may commence, the term "Registration Statement" as used
in this Agreement means the registration statement as amended by said
post-effective amendment. If an abbreviated registration statement is prepared
and filed with the Commission in accordance with Rule 462(b) under the Act ("an
Abbreviated Registration Statement"), the term "Registration Statement" as used
in this Agreement includes the Abbreviated Registration Statement. The term
"Prospectus" as used in this Agreement means the prospectus in the form included
in the Registration Statement, or, if the prospectus included in the
Registration Statement omits information in reliance on Rule 430A under the Act
and such information is included in a prospectus filed with the Commission
pursuant to Rule 424(b) under the Act, the term "Prospectus" as used in this
Agreement means the prospectus in the form included in the Registration
Statement as supplemented by the addition of the Rule 430A information contained
in the prospectus filed with the Commission pursuant to Rule 424(b). The term
"Prepricing Prospectus" as used in this Agreement means the prospectus subject
to completion in the form included in the registration statement at the time of
the initial filing of the registration statement with the Commission, and as
such prospectus shall have been amended from time to time prior to the date of
the Prospectus.
2. Agreements to Sell and Purchase. Subject to such adjustments as you
may determine in order to avoid fractional shares, the Company hereby agrees,
subject to all the terms and conditions set forth herein, to issue and sell to
each Underwriter and, upon the basis of the representations, warranties and
agreements of the Company and the Selling Stockholders herein contained and
subject to all the terms and conditions set forth herein, each Underwriter
agrees, severally and not jointly, to purchase from the Company, at a purchase
price of $______ per Share (the "purchase price per share"), the number of Firm
Shares which bears the same proportion to the aggregate number of Firm Shares to
be issued and sold by the Company as the number of Firm Shares set forth
opposite the name of such Underwriter in Schedule II hereto (or such number of
Firm Shares increased as set forth in Section 12 hereof) bears to the aggregate
number of Firm Shares to be sold by the Company and the Selling Stockholders.
Subject to such adjustments as you may determine in order to avoid
fractional shares, each Selling Stockholder agrees, subject to all the terms and
conditions set forth herein, to sell to each Underwriter and, upon the basis of
the representations,
<PAGE> 3
warranties and agreements of the Company and the Selling Stockholders herein
contained and subject to all the terms and conditions set forth herein, each
Underwriter, severally and not jointly, agrees to purchase from each Selling
Stockholder at the purchase price per share that number of Firm Shares which
bears the same proportion to the number of Firm Shares set forth opposite the
name of such Selling Stockholder in Schedule I hereto as the number of Firm
Shares set forth opposite the name of such Underwriter in Schedule II hereto (or
such number of Firm Shares increased as set forth in Section 12 hereof) bears to
the aggregate number of Firm Shares to be sold by the Company and the Selling
Stockholders.
The Selling Stockholders listed in Part B of Schedule I hereto also
agree, subject to all the terms and conditions set forth herein, to sell to the
Underwriters, and, upon the basis of the representations, warranties and
agreements of the Company and the Selling Stockholders herein contained and
subject to all the terms and conditions set forth herein, the Underwriters shall
have the right to purchase from the Selling Stockholders listed in Part B of
Schedule I hereto, at the purchase price per share, pursuant to an option (the
"over-allotment option") which may be exercised at any time and from time to
time prior to 9:00 P.M., New York City time, on the 30th day after the date of
the Prospectus (or, if such 30th day shall be a Saturday or Sunday or a holiday,
on the next business day thereafter when the New York Stock Exchange is open for
trading), up to an aggregate of 336,000 Additional Shares from the Selling
Stockholders listed in Part B of Schedule I hereto (the maximum number of
Additional Shares which each of them agrees to sell upon the exercise by the
Underwriters of the over-allotment option is set forth opposite their respective
names in Part B of Schedule I). Additional Shares may be purchased only for the
purpose of covering over-allotments made in connection with the offering of the
Firm Shares. The number of Additional Shares which the Underwriters elect to
purchase upon any exercise of the over-allotment option shall be provided by
each Selling Stockholder who has agreed to sell Additional Shares in proportion
to the respective maximum numbers of Additional Shares which each such Selling
Stockholder has agreed to sell. Upon any exercise of the over-allotment option,
each Underwriter, severally and not jointly, agrees to purchase from each
Selling Stockholder who has agreed to sell Additional Shares the number of
Additional Shares (subject to such adjustments as you may determine in order to
avoid fractional shares) which bears the same proportion to the number of
Additional Shares to be sold by each Selling Stockholder who has agreed to sell
Additional Shares as the number of Firm Shares set forth opposite the name of
such Underwriter in Schedule II hereto (or such number of Firm Shares increased
as set forth in Section 12 hereof) bears to the aggregate number of Firm Shares
to be sold by the Selling Stockholders.
Certificates in transferable form for the Shares (including any
Additional Shares) which each of the Selling Stockholders agrees to sell
pursuant to this Agreement have been placed in custody with First City Transfer
Company (the "Custodian") for delivery under this Agreement pursuant to a
Custody Agreement and Power of Attorney (the "Custody Agreement") executed by
each of the Selling Stockholders appointing William P. Oberdorf and John J.
Oberdorf as agents and attorneys-in-fact (the "Attorneys-in-Fact"). Each Selling
Stockholder agrees that (i) the Shares represented by the certificates held in
custody pursuant to the Custody Agreement are subject to the
<PAGE> 4
interests of the Underwriters, the Company and each other Selling Stockholder,
(ii) the arrangements made by the Selling Stockholders for such custody are,
except as specifically provided in the Custody Agreement, irrevocable, and (iii)
the obligations of the Selling Stockholders hereunder and under the Custody
Agreement shall not be terminated by any act of such Selling Stockholder or by
operation of law, whether by the death or incapacity of any Selling Stockholder
or the occurrence of any other event. If any Selling Stockholder shall die or be
incapacitated or if any other event shall occur before the delivery of the
Shares hereunder, certificates for the Shares of such Selling Stockholder shall
be delivered to the Underwriters by the Attorneys-in-Fact in accordance with the
terms and conditions of this Agreement and the Custody Agreement as if such
death or incapacity or other event had not occurred, regardless of whether or
not the Attorneys-in-Fact or any Underwriter shall have received notice of such
death, incapacity or other event. Each Attorney-in-Fact is authorized, on behalf
of each of the Selling Stockholders, to execute this Agreement and any other
documents necessary or desirable in connection with the sale of the Shares to be
sold hereunder by such Selling Stockholder, to make delivery of the certificates
for such Shares, to receive the proceeds of the sale of such Shares, to give
receipts for such proceeds, to pay therefrom any expenses to be borne by such
Selling Stockholder in connection with the sale and public offering of such
Shares, to distribute the balance thereof to such Selling Stockholder, and to
take such other action as may be necessary or desirable in connection with the
transactions contemplated by this Agreement. Each Attorney-in-Fact agrees to
perform his duties under the Custody Agreement.
3. Terms of Public Offering. The Sellers have been advised by you that
the Underwriters propose to make a public offering of their respective portions
of the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable and initially to offer the
Shares upon the terms set forth in the Prospectus.
4. Delivery of the Shares and Payment Therefor. Delivery to the
Underwriters of and payment for the Firm Shares shall be made at the office of
Smith Barney Inc., 388 Greenwich Street, New York, NY 10013, at 10:00 A.M., New
York City time, on April ___, 1997 (the "Closing Date"). The place of closing
for the Firm Shares and the Closing Date may be varied by agreement among you,
the Company and the Attorneys-in-Fact.
Delivery to the Underwriters of and payment for any Additional Shares
to be purchased by the Underwriters shall be made at the aforementioned office
of Smith Barney Inc. at such time on such date (the "Option Closing Date"),
which may be the same as the Closing Date but shall in no event be earlier than
the Closing Date nor earlier than two nor later than ten business days after the
giving of the notice hereinafter referred to, as shall be specified in a written
notice from you on behalf of the Underwriters to the Company and the
Attorneys-in-Fact of the Underwriters' determination to purchase a number,
specified in such notice, of Additional Shares. The place of closing for any
Additional Shares and the Option Closing Date for such Shares may be varied by
agreement among you, the Company and the
<PAGE> 5
Attorneys-in-Fact.
Certificates for the Firm Shares and for any Additional Shares to be
purchased hereunder shall be registered in such names and in such denominations
as you shall request prior to 9:30 A.M., New York City time, on the second
business day preceding the Closing Date or any Option Closing Date, as the case
may be. Such certificates shall be made available to you in New York City for
inspection and packaging not later than 9:30 A.M., New York City time, on the
business day next preceding the Closing Date or the Option Closing Date, as the
case may be. The certificates evidencing the Firm Shares and any Additional
Shares to be purchased hereunder shall be delivered to you on the Closing Date
or the Option Closing Date, as the case may be, against payment of the purchase
price therefor in immediately available funds.
5. Agreements of the Company. The Company agrees with the several
Underwriters as follows:
(a) If, at the time this Agreement is executed and delivered,
it is necessary for the Registration Statement or a post-effective amendment
thereto to be declared effective before the offering of the Shares may commence,
the Company will endeavor to cause the Registration Statement or such
post-effective amendment to become effective as soon as possible and will advise
you promptly and, if requested by you, will confirm such advice in writing, when
the Registration Statement or such post-effective amendment has become
effective.
(b) The Company will advise you promptly and, if requested by
you, will confirm such advice in writing: (i) of any request by the Commission
for amendment of or a supplement to the Registration Statement, any Prepricing
Prospectus or the Prospectus or for additional information; (ii) of the issuance
by the Commission of any stop order suspending the effectiveness of the
Registration Statement or of the suspension of qualification of the Shares for
offering or sale in any jurisdiction or the initiation of any proceeding for
such purpose; and (iii) within the period of time referred to in paragraph (f)
below, of any change in the Company's condition (financial or other), business,
prospects, properties, net worth or results of operations, or of the happening
of any event, which makes any statement of a material fact made in the
Registration Statement or the Prospectus (as then amended or supplemented)
untrue or which requires the making of any additions to or changes in the
Registration Statement or the Prospectus (as then amended or supplemented) in
order to state a material fact required by the Act or the regulations thereunder
to be stated therein or necessary in order to make the statements therein not
misleading, or of the necessity to amend or supplement the Prospectus (as then
amended or supplemented) to comply with the Act or any other law. If at any time
the Commission shall issue any stop order suspending the effectiveness of the
Registration Statement, the Company will make every reasonable effort to obtain
the withdrawal of such order at the earliest possible time.
(c) The Company will furnish to you, without charge, four
signed copies of the registration statement as originally filed with the
Commission and of each amendment thereto, including financial statements and all
exhibits thereto, and will also
<PAGE> 6
furnish to you, without charge, such number of conformed copies of the
registration statement as originally filed and of each amendment thereto, but
without exhibits, as you may request.
(d) The Company will not (i) file any amendment to the
Registration Statement or make any amendment or supplement to the Prospectus of
which you shall not previously have been advised or to which you shall object
after being so advised or (ii) so long as, in the opinion of counsel for the
Underwriters, a Prospectus is required to be delivered in connection with sales
by any Underwriter or dealer, file any information, documents or reports
pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act")
without delivering a copy of such information, documents or reports to you, as
Representatives of the Underwriters, prior to or concurrently with such filing.
(e) Prior to the execution and delivery of this Agreement, the
Company has delivered to you, without charge, in such quantities as you have
requested, copies of each form of the Prepricing Prospectus. The Company
consents to the use, in accordance with the provisions of the Act and with the
securities or Blue Sky laws of the jurisdictions in which the Shares are offered
by the several Underwriters and by dealers, prior to the date of the Prospectus,
of each Prepricing Prospectus so furnished by the Company.
(f) As soon after the execution and delivery of this Agreement
as possible and thereafter from time to time for such period as in the opinion
of counsel for the Underwriters a prospectus is required by the Act to be
delivered in connection with sales by any Underwriter or dealer, the Company
will expeditiously deliver to each Underwriter and each dealer, without charge,
as many copies of the Prospectus (and of any amendment or supplement thereto) as
you may request. The Company consents to the use of the Prospectus (and of any
amendment or supplement thereto) in accordance with the provisions of the Act
and with the securities or Blue Sky laws of the jurisdictions in which the
Shares are offered by the several Underwriters and by all dealers to whom Shares
may be sold, both in connection with the offering and sale of the Shares and for
such period of time thereafter as the Prospectus is required by the Act to be
delivered in connection with sales by any Underwriter or dealer. If during such
period of time any event shall occur that in the judgment of the Company or in
the opinion of counsel for the Underwriters is required to be set forth in the
Prospectus (as then amended or supplemented) or should be set forth therein in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading, or if it is necessary to supplement or
amend the Prospectus to comply with the Act or any other law, the Company will
forthwith prepare and, subject to the provisions of paragraph (d) above, file
with the Commission an appropriate supplement or amendment thereto, and will
expeditiously furnish to the Underwriters and dealers a reasonable number of
copies thereof. In the event that the Company and you, as Representatives of the
several Underwriters, agree that the Prospectus should be amended or
supplemented, the Company, if requested by you, will promptly issue a press
release announcing or disclosing the matters to be covered by the proposed
<PAGE> 7
amendment or supplement.
(g) The Company will cooperate with you and with counsel for
the Underwriters in connection with the registration or qualification of the
Shares for offering and sale by the several Underwriters and by dealers under
the securities or Blue Sky laws of such jurisdictions as you may designate and
will file such consents to service of process or other documents necessary or
appropriate in order to effect such registration or qualification; provided that
in no event shall the Company be obligated to qualify to do business in any
jurisdiction where it is not now so qualified or to take any action which would
subject it to service of process in suits, other than those arising out of the
offering or sale of the Shares, in any jurisdiction where it is not now so
subject.
(h) The Company will make generally available to its security
holders a consolidated earnings statement, which need not be audited, covering a
twelve-month period commencing after the effective date of the Registration
Statement and ending not later than 15 months thereafter, as soon as practicable
after the end of such period, which consolidated earnings statement shall
satisfy the provisions of Section 11(a) of the Act.
(i) During the period of five years hereafter, the Company
will furnish to you (i) as soon as available, a copy of each report of the
Company mailed to stockholders or filed with the Commission, and (ii) from time
to time such other information of a public nature concerning the Company as you
may reasonably request.
(j) If this Agreement shall terminate or shall be terminated
after execution pursuant to any provisions hereof (otherwise than pursuant to
the second paragraph of Section 12 hereof or by notice given by you terminating
this Agreement pursuant to Section 12 or Section 13 hereof) or if this Agreement
shall be terminated by the Underwriters because of any failure or refusal on the
part of the Company or the Selling Stockholders to comply with the terms or
fulfill any of the conditions of this Agreement, the Company agrees to reimburse
the Representatives for all out-of-pocket expenses (including fees and expenses
of counsel for the Underwriters) incurred by you in connection herewith.
(k) The Company will apply the net proceeds from the sale of
the Shares to be sold by it hereunder substantially in accordance with the
description set forth in the Prospectus.
(l) If Rule 430A of the Act is employed, the Company will
timely file the Prospectus pursuant to Rule 424(b) under the Act and will advise
you of the time and manner of such filing.
(m) The Company will not (and except as may be disclosed in
the Prospectus, will not announce or disclose any intention to) sell, contract
to sell or otherwise transfer or dispose of any Common Stock, or any securities
convertible into or exercisable or exchangeable for Common Stock, for a period
of 120 days after the date of the Prospectus, without the prior written consent
of Smith Barney Inc., other
<PAGE> 8
than the Company's issuance of options or Common Stock under the Company's
currently authorized 1994 Amended and Restated Stock Option Plan.
(n) The Company has furnished or will furnish to you "lock-up"
letters, in form and substance satisfactory to you, signed by each of the
officers named in the Prospectus, each of its directors and each of the Selling
Stockholders.
(o) Except as stated in this Agreement and in the Prepricing
Prospectus and Prospectus, the Company has not taken, nor will it take, directly
or indirectly, any action designed to or that might reasonably be expected to
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Shares.
(p) The Company will use its best efforts to have the Common
Stock listed, subject to notice of issuance, on the Nasdaq National Market
concurrently with the effectiveness of the registration statement.
6. Agreements of the Selling Stockholders. Each of the Selling
Stockholders agrees with the several Underwriters as follows:
(a) Such Selling Stockholder will cooperate to the extent
necessary to cause the registration statement or any post-effective amendment
thereto to become effective at the earliest possible time.
(b) Such Selling Stockholder will pay all Federal and other
taxes, if any, on the transfer or sale of the Shares being sold by the Selling
Stockholder to the Underwriters.
(c) Such Selling Stockholder will do or perform all things
required to be done or performed by the Selling Stockholder prior to the Closing
Date or any Option Closing Date, as the case may be, to satisfy all conditions
precedent to the delivery of the Shares pursuant to this Agreement.
(d) Such Selling Stockholder has executed or will execute a
"lock-up" letter as provided in Section 5(n) above and will not (and except as
may be disclosed in the Prospectus, will not announce or disclose any intention
to) sell, contract to sell or otherwise transfer or dispose of any Common Stock,
or any securities convertible into or exercisable or exchangeable for Common
Stock, for a period of 120 days after the date of the Prospectus, without the
prior written consent of Smith Barney Inc. Prior to the expiration of such
period, such Selling Stockholder will not announce or disclose any intention to
do anything after the expiration of such period which such Selling Shareholder
is prohibited, as provided in the preceding sentence, from doing during such
period.
(e) Except as stated in this Agreement and in the Prepricing
Prospectus and the Prospectus, such Selling Stockholder will not take, directly
or indirectly, any action designed to or that might reasonably be expected to
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the
<PAGE> 9
sale or resale of the Shares.
(f) Such Selling Stockholder will advise you promptly, and if
requested by you, will confirm such advice in writing, within the period of time
referred to in Section 5(f) hereof, of any change in the Company's condition
(financial or other), business, prospects, properties, net worth or results of
operations or of any change in information relating to such Selling Stockholder
or the Company or any new information relating to the Company or relating to any
matter stated in the Prospectus or any amendment or supplement thereto which
comes to the attention of such Selling Stockholder that suggests that any
statement made in the Registration Statement or the Prospectus (as then amended
or supplemented, if amended or supplemented) is or may be untrue in any material
respect or that the Registration Statement or Prospectus (as then amended or
supplemented, if amended or supplemented) omits or may omit to state a material
fact or a fact necessary to be stated therein in order to make the statements
therein not misleading in any material respect, or of the necessity to amend or
supplement the Prospectus (as then amended or supplemented, if amended or
supplemented) in order to comply with the Act or any other law.
7. Representations and Warranties of the Company. The Company
represents and warrants to each Underwriter that:
(a) Each Prepricing Prospectus included as part of the
registration statement as originally filed or as part of any amendment or
supplement thereto, or filed pursuant to Rule 424 under the Act, complied when
so filed in all material respects with the provisions of the Act. The Commission
has not issued any order preventing or suspending the use of any Prepricing
Prospectus.
(b) The registration statement in the form in which it became
or becomes effective and also in such form as it may be when any post-effective
amendment thereto shall become effective and the prospectus and any supplement
or amendment thereto when filed with the Commission under Rule 424(b) under the
Act, complied or will comply in all material respects with the provisions of the
Act and did not or will not at any such times contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, except that this
representation and warranty does not apply to statements in or omissions from
the registration statement or the prospectus made in reliance upon and in
conformity with information relating to any Underwriter furnished to the Company
in writing by or on behalf of any Underwriter through you expressly for use
therein.
(c) All the outstanding shares of Common Stock of the Company
have been duly authorized and validly issued, are fully paid and nonassessable
and are free of any preemptive or similar rights; the Shares to be issued and
sold by the Company have been duly authorized and, when issued and delivered to
the Underwriters against payment therefor in accordance with the terms hereof,
will be validly issued, fully paid and nonassessable and free of any preemptive
or similar rights; and the capital stock of the Company conforms to the
description thereof in the registration statement and the
<PAGE> 10
prospectus.
(d) The Company is a corporation duly organized and validly
existing in good standing under the laws of the State of Delaware. The Company
is duly registered and qualified to conduct its business and is in good standing
in each jurisdiction or place where the nature of its properties or the conduct
of its business requires such registration or qualification, except where the
failure so to register or qualify does not have a material adverse effect on the
condition (financial or other), business, properties, net worth or results of
operations of the Company. The Company has all requisite power and authority
(corporate, partnership and other), and has obtained any and all necessary
authorizations, approvals, orders, licenses, certificates, franchises and
permits of and from all governmental or regulatory officials and bodies
(including, without limitation, the United States Federal Trade Commission (the
"FTC") and those other officials and bodies having jurisdiction over similar
matters), to own or lease its properties and conduct its business as described
in the Prospectus (collectively, "Government Approvals), except such Government
Approvals which the failure to obtain would not have a material adverse effect
on the condition, financial or otherwise, or in the business affairs, position,
prospects, value, operation, properties, business or results of operation of the
Company whether or not arising in the ordinary course of business; the Company
is and has been doing business in compliance with all such Government Approvals,
except where the failure to so comply would not have a material adverse effect
on the condition, financial or otherwise, or in the business affairs, position,
prospects, value, operation, properties, business or results of operation of the
Company whether or not arising in the ordinary course of business; and the
Company has received no notice of proceedings relating to the revocation or
modification of any such Government Approvals. The disclosures in the
Registration Statement concerning the effects of federal, state, local, and
foreign laws, rules and regulations on the Company's business as currently
conducted and as contemplated are correct in all material respects and do not
omit to state a material fact necessary to make the statements contained therein
not misleading in light of the circumstances in which they were made.
(e) There are no direct or indirect subsidiaries (as defined
in Rule 405 of the Act) of the Company. The Company owns, directly or
indirectly, no interest in any corporation, partnership, trust, joint venture or
other business entity.
(f) There are no legal or governmental proceedings pending or,
to the knowledge of the Company, threatened, against the Company or to which any
of the properties or assets (tangible or intangible) of the Company is subject,
that are required to be described in the Registration Statement or the
Prospectus but are not described as required, and there are no agreements,
contracts, indentures, leases or other instruments that are required to be
described in the Registration Statement or the Prospectus or to be filed as an
exhibit to the Registration Statement that are not described or filed as
required by the Act.
(g) The Company is not in violation of its certificate of
incorporation or by-laws, or of any law, ordinance, administrative or
governmental rule or regulation
<PAGE> 11
applicable to the Company or of any decree of any court or governmental agency
or body having jurisdiction over the Company, or in default in any material
respect in the performance of any obligation, agreement or condition contained
in any bond, debenture, note or any other evidence of indebtedness or in any
material agreement, indenture, lease or other instrument to which the Company is
a party or by which the properties or assets (tangible or intangible) of the
Company may be bound.
(h) Neither the issuance and sale of the Shares, the
execution, delivery or performance of this Agreement by the Company nor the
consummation by the Company of the transactions contemplated hereby (A) requires
any consent, approval, authorization or other order of or registration or filing
with, any court, regulatory body, administrative agency or other governmental
body, agency or official (except such as may be required for the registration of
the Shares under the Act and the Exchange Act and compliance with the securities
or Blue Sky laws of various jurisdictions, all of which have been or will be
effected in accordance with this Agreement) or conflicts or will conflict with
or constitutes or will constitute a breach of, or a default under, the
certificate of incorporation or bylaws, of the Company or (B) conflicts or will
conflict with or constitutes or will constitute a breach of, or a default under,
any agreement, indenture, lease or other instrument to which the Company is a
party or by which any of the properties or assets (tangible or intangible) of
the Company may be bound, or violates or will violate any statute, judgment,
decree, order, rule or regulation applicable to the Company of any arbitrator,
court, regulatory body or administrative agency or other governmental agency or
body (including, without limitation, those having jurisdiction over franchising
or similar matters), domestic or foreign, having jurisdiction over the Company
or any of its activities or properties, or will result in the creation or
imposition of any lien, charge or encumbrance upon any properties or assets
(tangible or intangible) of the Company pursuant to the terms of any agreement
or instrument to which the Company is a party or by which any of the properties
or assets (tangible or intangible) of the Company is subject.
(i) The accountants, Deloitte & Touche LLP, who have certified
or shall certify the financial statements included in the Registration Statement
and the Prospectus (or any amendment or supplement thereto) are independent
public accountants as required by the Act.
(j) The financial statements, together with related schedules
and notes, included in the Registration Statement and the Prospectus (and any
amendment or supplement thereto), present fairly the consolidated financial
position, results of operations and changes in financial position of the Company
on the basis stated in the Registration Statement at the respective dates or for
the respective periods to which they apply; such statements and related
schedules and notes have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods involved,
except as disclosed therein; and the other financial and statistical information
and data included in the Registration Statement and the Prospectus (and any
amendment or supplement thereto) are accurately presented and prepared on a
basis consistent with such financial statements and the books and
<PAGE> 12
records of the Company.
(k) The execution and delivery of, and the performance by the
Company of its obligations under, this Agreement have been duly and validly
authorized by the Company, and this Agreement has been duly executed and
delivered by the Company and constitutes the valid and legally binding agreement
of the Company, enforceable against the Company in accordance with its terms,
except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general application
relating to or affecting enforcement of creditors' rights and the application of
equitable principles in any action, legal or equitable, and except as rights to
indemnity and contribution hereunder may be limited by federal or state
securities laws.
(l) Except as disclosed in the Registration Statement and the
Prospectus (or any amendment or supplement thereto), subsequent to the
respective dates as of which such information is given in the Registration
Statement and the Prospectus (or any amendment or supplement thereto), the
Company has not incurred any liability or obligation, direct or contingent, or
entered into any transaction, not in the ordinary course of business, that is
material to the Company and there has not been any change in the capital stock,
or material increase in the short-term debt or long-term debt, of the Company,
or any material adverse change, or any development involving or which may
reasonably be expected to involve, a prospective material adverse change, in the
condition (financial or other), business, net worth or results of operations of
the Company.
(m) The Company has good and marketable title to, or valid and
enforceable leasehold estates in, all items of real and personal property stated
in the Prospectus to be owned or leased by it free and clear of all liens,
charges, claims, encumbrances, pledges, security interests, defects, or other
restrictions on equity of any kind whatsoever, other than (1) those referred to
in the Prospectus or (2) liens for taxes not yet due and payable.
(n) The Company has not distributed and, prior to the later to
occur of (i) the Closing Date and (ii) completion of the distribution of the
Shares, will not distribute any offering material in connection with the
offering and sale of the Shares other than the Registration Statement, the
Prepricing Prospectus, the Prospectus or other materials, if any, permitted by
the Act.
(o) The Company has such permits, licenses, franchises and
authorizations of governmental or regulatory authorities (including, without
limitation, the United States Federal Trade Commission and those other
governmental or regulatory authorities having jurisdiction over similar matters)
as are necessary to own its properties and to conduct its business in the manner
described in the Prospectus (collectively, the "permits"), subject to such
qualifications as may be set forth in the Prospectus; the Company has fulfilled
and performed all its material obligations with respect to such permits and no
event has occurred which allows, or after notice or lapse of time would allow,
revocation or termination thereof or results in any other material
<PAGE> 13
impairment of the rights of the holder of any such permit, subject in each case
to such qualification as may be set forth in the Prospectus; and, except as
described in the Prospectus, none of such permits contains any restriction that
is materially burdensome to the Company.
(p) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(q) To the Company's knowledge, neither the Company nor any
employee or agent of the Company has made any payment of funds of the Company or
received or retained any funds in violation of any law, rule or regulation,
which payment, receipt or retention of funds is of a character required to be
disclosed in the Prospectus.
(r) The Company has filed all Federal, State, local and
foreign tax returns required to be filed, which returns are complete and
correct, and the Company is not in default in the payment of any taxes which
were payable pursuant to said returns or any assessments with respect thereto.
(s) No holders of any securities of the Company or of any
options, warrants or other convertible or exchangeable securities of the Company
exercisable for or convertible or exchangeable for securities of the Company
have the right to include any securities issued by the Company in the
Registration Statement or any registration statement to be filed by the Company
within 120 days of the date hereof or to require the Company to file a
registration statement under the Act during such 120-day period.
(t) Except to the extent disclosed in the Prospectus, (i) the
Company owns or possesses, or has a license or other right to use, the patents,
patent rights, licenses, inventions, copyrights, know-how (including trade
secrets and other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures), technology, trademarks, service marks and
trade names, together with all applications for any of the foregoing, presently
used or held for use by it in connection with the business of the Company, (ii)
the Company has not received any notice of infringement of or conflict with
asserted rights of others with respect to any of the foregoing, and (iii) the
Company is not obligated or under any liability whatsoever to make any material
payments by way of royalties, fees or otherwise to any owner or licensee of, or
other claimant to, any patent, patent right, license, invention, trademark,
service mark, trade name, copyright, know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential information, systems
or procedures), technology or other intangible asset, with respect to the use
thereof or in
<PAGE> 14
connection with the conduct of its business or otherwise.
(u) The Company is not now, and after sale of the Shares to be
sold by it hereunder and application of the net proceeds from such sale as
described in the Prospectus under the caption "Use of Proceeds" will not be, an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended.
(v) The Company has filed in a timely manner each document or
report required to be filed by it pursuant to the Exchange Act and the rules and
regulations thereunder; each such document or report at the time it was filed
conformed to the requirements of the Exchange Act and the rules and regulations
thereunder; and none or such documents or reports contained an untrue statement
of any material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading.
(w) The Company has complied with all provisions of Florida
Statutes, 517.075, relating to issuers doing business with Cuba.
(x) No transfer tax, stamp duty or other similar tax is
payable by or on behalf of the Underwriters in connection with (i) the issuance
by the Company of the Shares, (ii) the purchase by the Underwriters of the
Shares, (iii) the consummation by the Company of any of its obligations under
this Agreement, or (iv) resales of the Shares by the Underwriters in connection
with the distribution contemplated hereby.
(y) The Company maintains insurance of the types and in the
amounts which it reasonably believes to be adequate for its business, all of
which insurance is in full force and effect.
(z) The Company has a generally satisfactory employer-employee
relationship with its employees and is in compliance with all federal, state,
local, and, where applicable, foreign, laws and regulations respecting
employment and employment practices, terms and conditions of employment and
wages and hours, except where the failure to comply would not have a material
adverse effect in the condition (financial or other), business net worth or
results of operations of the Company. There are no pending investigations
involving the Company by the United States Department of Labor, or any other
governmental agency responsible for the enforcement of such federal, state,
local or foreign laws and regulations. There is no unfair labor practice charge
or complaint against the Company pending before the National Labor Relations
Board or any strike, picketing, boycott, dispute, slowdown or stoppage pending
or threatened against or involving the Company, or any predecessor entity, and
no such strike, picketing, boycott, dispute, slowdown or stoppage has ever
occurred. No representation question exists respecting the employees of the
Company, and no collective bargaining agreement or modification thereof is
currently being negotiated by the Company. There are no expired or existing
collective bargaining agreements of the Company.
(aa) The Company does not maintain, sponsor or contribute to
any
<PAGE> 15
program or arrangement that is an "employee pension benefit plan," an "employee
welfare benefit plan," or a "multiemployer plan" (collectively, the "ERISA
Plans") as such terms are defined in Sections 3(2), 3(1) and 3(37),
respectively, of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"). The Company does not maintain or contribute, now or at any time
previously, to a "defined benefit plan," as defined in Section 3(35) of ERISA.
The Company has never completely or partially withdrawn from a "multiemployer
plan."
(bb) The Company has taken or will take, directly or
indirectly (except for any action that may be taken by the Underwriters), no
action designed to or which has constituted or which might reasonably be
expected to cause or result in, under the Exchange Act, or otherwise,
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Shares or otherwise.
(cc) The Shares are duly authorized for quotation and trading,
subject to official notice of issuance, on the Nasdaq National Market.
(dd) Except as described in the Prospectus under
"Underwriting" and on the cover page thereof, there are no claims, payments,
issuances, arrangements or understandings for services in the nature of a
finder's or origination fee with respect to the sale of the Shares hereunder or
any other arrangements, agreements, understandings, payments or issuance with
respect to the Company or any of its officers, directors, employees or
affiliates that may affect the Underwriters' compensation, as determined by the
National Association of Securities Dealers, Inc. ("NASD")
(ee) Any certificate signed by any officer of the Company and
delivered to the Underwriters or to the Underwriters' Counsel (as hereinafter
defined) shall be deemed a representation and warranty by the Company to the
Underwriters as to the matters covered thereby.
8. Representations and Warranties of the Selling Stockholders. Each
Selling Stockholder represents and warrants to each Underwriter that:
(a) Such Selling Stockholder now has, and on the Closing Date
and any Option Closing Date will have, valid and marketable title to the Shares
to be sold by such Selling Stockholder, free and clear of any lien, claim,
security interest or other encumbrance, including, without limitation, any
restriction on transfer.
(b) Such Selling Stockholder now has, and on the Closing Date
and any Option Closing Date will have, full legal right, power and
authorization, and any approval required by law, to sell, assign, transfer and
deliver such Shares in the manner provided in this Agreement, and upon delivery
of and payment for such Shares hereunder, the several Underwriters will acquire
valid and marketable title to such Shares free and clear of any lien, claim,
security interest, or other encumbrance.
(c) This Agreement and the Custody Agreement have been duly
<PAGE> 16
authorized, executed and delivered by or on behalf of such Selling Stockholder
and are the valid and binding agreements of such Selling Stockholder enforceable
against such Selling Stockholder in accordance with their terms, except as the
enforcement thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating to or
affecting enforcement of creditors' rights and the application of equitable
principles in any action, legal or equitable, and except as rights to indemnity
or contribution may be limited by applicable law.
(d) Neither the execution and delivery of this Agreement or
the Custody Agreement by or on behalf of such Selling Stockholder nor the
consummation of the transactions herein or therein contemplated by or on behalf
of such Selling Stockholder requires any consent, approval, authorization or
order of, or filing or registration with, any court, regulatory body,
administrative agency or other governmental body, agency or official (except
such as may be required under the Act or such as may be required under state
securities or Blue Sky laws governing the purchase and distribution of the
Shares) or conflicts or will conflict with or constitutes or will constitute a
breach of, or default under, or violates or will violate, any agreement,
indenture or other instrument to which such Selling Stockholder is a party or by
which such Selling Stockholder is or may be bound or to which any of such
Selling Stockholder's property or assets is subject, or any statute, law, rule,
regulation, ruling, judgment, injunction, order or decree applicable to such
Selling Stockholder or to any property or assets of such Selling Stockholder.
(e) The Registration Statement and the Prospectus, insofar as
they relate to such Selling Stockholder, do not and will not contain an untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading.
(f) Such Selling Stockholder does not have any knowledge or
any reason to believe that the Registration Statement or the Prospectus (or any
amendment or supplement thereto) contains any untrue statement of a material
fact or omits to state any material fact required to be stated therein or
necessary to make the statements therein not misleading.
(g) The representations and warranties of such Selling
Stockholder in the Custody Agreement are, and on the Closing Date and any Option
Closing Date will be, true and correct.
(h) Such Selling Stockholder has not taken, directly or
indirectly, any action designed to or that might reasonably be expected to cause
or result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Shares, except for the lock-up arrangements
described in the Prospectus.
(i) Such Selling Stockholder will not (and, except as may be
disclosed in the Prospectus, will not announce or disclose any intention to),
for a period ending 120 days after the date of the Prospectus, sell, offer to
sell, solicit an offer to buy, contract to sell, grant any option to purchase,
or otherwise transfer or dispose of, any
<PAGE> 17
shares of Common Stock, or any securities convertible into or exercisable or
exchangeable for Common Stock, without the prior written consent of Smith Barney
Inc. Prior to the expiration of such period, such Selling Stockholder will not
announce or disclose any intention to do anything after the expiration of such
period which such Selling Stockholder is prohibited, as provided in the
preceding sentence, from doing during such period. Such Selling Stockholder
agrees and consents to the entry of stop transfer instructions with the
Company's transfer agent against the transfer of shares of Common Stock held by
such Selling Stockholder except in compliance with the foregoing restrictions.
(j) Certificates in negotiable form for all Shares to be sold
by such Selling Stockholder under this Agreement, together with a stock power or
powers duly endorsed in blank by such Selling Stockholder, have been placed in
custody with the Custodian for the purpose of effecting delivery hereunder.
(k) Such Selling Stockholder does not have, or has waived
prior to the date hereof, any preemptive right, co-sale right or right of first
refusal or other similar right to purchase any of the Shares that are to be sold
by the Company or by the other Selling Stockholders to the Underwriters pursuant
to this Agreement; and, except as may exist under the Company's 1994 Amended and
Restated Stock Option Plan, such Selling Stockholder does not own any warrants,
options or similar rights to acquire, and does not have any right or arrangement
to acquire, any capital stock, rights, warrants, options or other securities
from the Company.
(l) Such Selling Stockholder is not aware that any of the
representations and warranties of the Company set forth in Section 7 above is
untrue or inaccurate.
9. Indemnification and Contribution. (a) The Company and each Selling
Stockholder, severally but not jointly, agree to indemnify and hold harmless
each of you and each other Underwriter and each person, if any, who controls any
Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act from and against any and all losses, claims, damages, liabilities
and expenses (including reasonable costs of investigation) arising out of or
based upon any untrue statement or alleged untrue statement of a material fact
contained in any Prepricing Prospectus or in the Registration Statement or the
Prospectus or in any amendment or supplement thereto, or arising out of or based
upon any omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
except insofar as such losses, claims, damages, liabilities or expenses arise
out of or are based upon any untrue statement or omission or alleged untrue
statement or omission which has been made therein or omitted therefrom in
reliance upon and in conformity with the information relating to such
Underwriter furnished in writing to the Company by or on behalf of any
Underwriter through you expressly for use in connection therewith; provided,
however, that the indemnification contained in this paragraph (a) with respect
to any Prepricing Prospectus shall not inure to the benefit of any Underwriter
(or to the benefit of any person controlling such Underwriter) on account of any
such loss, claim, damage,
<PAGE> 18
liability or expense arising from the sale of the Shares by such Underwriter to
any person if a copy of the Prospectus shall not have been delivered or sent to
such person within the time required by the Act and the regulations thereunder,
and the untrue statement or alleged untrue statement or omission or alleged
omission of a material fact contained in such Prepricing Prospectus was
corrected in the Prospectus, provided that the Company has delivered the
Prospectus to the several Underwriters in requisite quantity on a timely basis
to permit such delivery or sending. The foregoing indemnity agreement shall be
in addition to any liability which the Company or any Selling Stockholder may
otherwise have.
(b) If any action, suit or proceeding shall be brought against
any Underwriter or any person controlling any Underwriter in respect of which
indemnity may be sought against the Company or any Selling Stockholder, such
Underwriter or such controlling person shall promptly notify the parties against
whom indemnification is being sought (the "indemnifying parties"), and such
indemnifying parties shall assume the defense thereof, including the employment
of counsel and payment of all fees and expenses. Such Underwriter or any such
controlling person shall have the right to employ separate counsel in any such
action, suit or proceeding and to participate in the defense thereof, but the
fees and expenses of such counsel shall be at the expense of such Underwriter or
such controlling person unless (i) the indemnifying parties have agreed in
writing to pay such fees and expenses, (ii) the indemnifying parties have failed
to assume the defense and employ counsel, or (iii) the named parties to any such
action, suit or proceeding (including any impleaded parties) include both such
Underwriter or such controlling person and the indemnifying parties and such
Underwriter or such controlling person shall have been advised by its counsel
that representation of such indemnified party and any indemnifying party by the
same counsel would be inappropriate under applicable standards of professional
conduct (whether or not such representation by the same counsel has been
proposed) due to actual or potential differing interests between them (in which
case the indemnifying party shall not have the right to assume the defense of
such action, suit or proceeding on behalf of such Underwriter or such
controlling person). It is understood, however, that the indemnifying parties
shall, in connection with any one such action, suit or proceeding or separate
but substantially similar or related actions, suits or proceedings in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the reasonable fees and expenses of only one separate firm of
attorneys (in addition to any local counsel) at any time for all such
Underwriters and controlling persons not having actual or potential differing
interests with you or among themselves, which firm shall be designated in
writing by Smith Barney Inc., and that all such fees and expenses shall be
reimbursed as they are incurred. The indemnifying parties shall not be liable
for any settlement of any such action, suit or proceeding effected without their
written consent, but if settled with such written consent, or if there be a
final judgment for the plaintiff in any such action, suit or proceeding, the
indemnifying parties agree to indemnify and hold harmless any Underwriter, to
the extent provided in the preceding paragraph, and any such controlling person
from and against any loss, claim, damage, liability or expense by reason of such
settlement or judgment.
(c) Each Underwriter agrees, severally and not jointly, to
indemnify and
<PAGE> 19
hold harmless the Company, its directors, its officers who sign the Registration
Statement, each Selling Stockholder, and any person who controls the Company
within the meaning of Section 15 of the Act or Section 20(a) of the Exchange
Act, to the same extent as the foregoing indemnity from the Company and the
Selling Stockholders to each Underwriter, but only with respect to information
relating to such Underwriter furnished in writing by or on behalf of such
Underwriter through you expressly for use in the Registration Statement, the
Prospectus or any Prepricing Prospectus, or any amendment or supplement thereto.
If any action, suit or proceeding shall be brought against the Company, any of
its directors, any such officer, any Selling Stockholder, or any such
controlling person based on the Registration Statement, the Prospectus or any
Prepricing Prospectus, or any amendment or supplement thereto, and in respect of
which indemnity may be sought against any Underwriter pursuant to this paragraph
(c), such Underwriter shall have the rights and duties given to the Company by
paragraph (b) above (except that if the Company shall have assumed the defense
thereof such Underwriter shall not be required to do so, but may employ separate
counsel therein and participate in the defense thereof, but the fees and
expenses of such counsel shall be at such Underwriter's expense), and the
Company, its directors, any such officer, the Selling Stockholder, and any such
controlling person shall have the rights and duties given to the Underwriters by
paragraph (b) above. The foregoing indemnity agreement shall be in addition to
any liability which any Underwriter may otherwise have.
(d) If the indemnification provided for in this Section 9 is
unavailable to an indemnified party under paragraphs (a) or (c) hereof in
respect of any losses, claims, damages, liabilities or expenses referred to
therein, then an indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages, liabilities or expenses (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company and the Selling Stockholders on the one hand and the Underwriters on the
other hand from the offering of the Shares, or (ii) if the allocation provided
by clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company and the Selling Stockholders on
the one hand and the Underwriters on the other in connection with the statements
or omissions that resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The relative
benefits received by the Company and the Selling Stockholders on the one hand
and the Underwriters on the other shall be deemed to be in the same proportion
as the total net proceeds from the offering (before deducting expenses) received
by the Company and the Selling Stockholders bear to the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover page of
<PAGE> 20
the Prospectus; provided that, in the event that the Underwriters shall have
purchased any Additional Shares hereunder, any determination of the relative
benefits received by the Company, the Selling Stockholders or the Underwriters
from the offering of the Shares shall include the net proceeds (before deducting
expenses) received by the Company and the Selling Stockholders, and the
underwriting discounts and commissions received by the Underwriters, from the
sale of such Additional Shares, in each case computed on the basis of the
respective amounts set forth in the notes to the table on the cover page of the
Prospectus. The relative fault of the Company and the Selling Stockholders on
the one hand and the Underwriters on the other hand shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or the Selling Stockholders on
the one hand or by the Underwriters on the other hand and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.
(e) The Company, the Selling Stockholders and the Underwriters
agree that it would not be just and equitable if contribution pursuant to this
Section 9 were determined by a pro rata allocation (even if the Underwriters
were treated as one entity for such purpose) or by any other method of
allocation that does not take account of the equitable considerations referred
to in paragraph (d) above. The amount paid or payable by an indemnified party as
a result of the losses, claims, damages, liabilities and expenses referred to in
paragraph (d) above shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating any claim or defending any such action,
suit or proceeding. Notwithstanding the provisions of this Section 9, no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price of the Shares underwritten by it and distributed to the
public exceeds the amount of any damages which such Underwriter has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute pursuant to this
Section 9 are several in proportion to the respective numbers of Firm Shares set
forth opposite their names in Schedule II hereto (or such numbers of Firm Shares
increased as set forth in Section 12 hereof) and not joint.
(f) No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement of any pending or
threatened action, suit or proceeding in respect of which any indemnified party
is or could have been a party and indemnity could have been sought hereunder by
such indemnified party, unless such settlement includes an unconditional release
of such indemnified party from all liability on claims that are the subject
matter of such action, suit or proceeding.
(g) Any losses, claims, damages, liabilities or expenses for
which an indemnified party is entitled to indemnification or contribution under
this Section 9 shall be paid by the indemnifying party to the indemnified party
as such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 9 and the
representations and warranties of the Company and the Selling Stockholders set
forth in this Agreement shall remain operative and in full force and effect,
regardless of (i) any investigation made by or on behalf of any Underwriter or
any person controlling any Underwriter, the Company, its directors or officers
or the Selling Stockholders or any person controlling the Company, (ii)
acceptance of any Shares and payment therefor hereunder, and (iii) any
termination of this Agreement. A successor to any Underwriter or any person
controlling any
<PAGE> 21
Underwriter, or to the Company, its directors or officers, or any person
controlling the Company, shall be entitled to the benefits of the indemnity,
contribution and reimbursement agreements contained in this Section 9.
10. Conditions of Underwriters' Obligations. The several obligations of
the Underwriters to purchase the Firm Shares hereunder are subject to the
following conditions:
(a) If, at the time this Agreement is executed and delivered,
it is necessary for the registration statement or a post-effective amendment
thereto to be declared effective before the offering of the Shares may commence,
the registration statement or such post-effective amendment shall have become
effective not later than 5:30 P.M., New York City time, on the date hereof, or
at such later date and time as shall be consented to in writing by you, and all
filings, if any, required by Rules 424 and 430A under the Act shall have been
timely made; no stop order suspending the effectiveness of the registration
statement shall have been issued and no proceeding for that purpose shall have
been instituted or, to the knowledge of the Company or any Underwriter,
threatened by the Commission, and any request of the Commission for additional
information (to be included in the registration statement or the prospectus or
otherwise) shall have been complied with to your satisfaction.
(b) Subsequent to the effective date of this Agreement, there
shall not have occurred (i) any change, or any development involving a
prospective change, in or affecting the condition (financial or other),
business, properties, net worth, or results of operations of the Company not
contemplated by the Prospectus, which in your opinion, as Representatives of the
several Underwriters, would materially, adversely affect the market for the
Shares, or (ii) any event or development relating to or involving the Company or
any officer or director of the Company or any Selling Stockholder which makes
any statement made in the Prospectus untrue or which, in the opinion of the
Company and its counsel or the Underwriters and their counsel, requires the
making of any addition to or change in the Prospectus in order to state a
material fact required by the Act or any other law to be stated therein or
necessary in order to make the statements therein not misleading, if amending or
supplementing the Prospectus to reflect such event or development would, in your
opinion, as Representatives of the several Underwriters, materially adversely
affect the market for the Shares.
(c) You shall have received on the Closing Date, an opinion of
St. John & Wayne L.L.C., counsel for the Company and the Selling Stockholders,
dated the Closing Date and addressed to you, as Representatives of the several
Underwriters, and in form and substance satisfactory to the Underwriters'
counsel to the effect that:
(i) The Company is a corporation duly incorporated
and validly existing in good standing under the laws of the State of Delaware
with full corporate power and authority to own, lease and operate its properties
and to conduct its business as described in the Registration Statement and the
Prospectus (and any amendment or supplement thereto), and is duly registered and
qualified to conduct its business and is in good standing in each jurisdiction
or place where the nature of its properties or the conduct of its
<PAGE> 22
business requires such registration or qualification, except where the failure
so to register or qualify does not have a material adverse effect on the
condition (financial or other), business, properties, net worth or results of
operations of the Company;
(ii) To such counsel's knowledge, the Company does
not own, directly or indirectly, an interest in any corporation, partnership,
trust, joint venture or other business entity;
(iii) The authorized and outstanding capital stock
of the Company is as set forth under the caption "Capitalization" in the
Prospectus; and the authorized capital stock of the Company conforms in all
material respects as to legal matters to the description thereof contained in
the Prospectus under the caption "Description of Capital Stock";
(iv) All the shares of capital stock of the Company
outstanding prior to the issuance of the Shares to be issued and sold by the
Company hereunder, have been duly authorized and validly issued, and are fully
paid and nonassessable, and none of such shares were issued in violation of any
preemptive right, co-sale right, registration right, right of first refusal, or
other similar right;
(v) The Shares to be issued and sold to the
Underwriters by the Company hereunder have been duly authorized and, when issued
and delivered to the Underwriters against payment therefor in accordance with
the terms hereof, will be validly issued, fully paid and nonassessable and free
of any preemptive, or to the best knowledge of such counsel after reasonable
inquiry, similar rights that entitle or will entitle any person to acquire any
Shares upon the issuance thereof by the Company;
(vi) The form of certificates for the Shares
conforms to the requirements of the Delaware General Corporation Law;
(vii) The Registration Statement and all
post-effective amendments, if any, have become effective under the Act and, to
the best knowledge of such counsel after reasonable inquiry, no stop order
suspending the effectiveness of the Registration Statement has been issued and
no proceedings for that purpose are pending before or contemplated by the
Commission; and any required filing of the Prospectus pursuant to Rule 424(b)
has been timely made in accordance with Rule 424(b);
(viii) The Company has corporate power and authority
to enter into this Agreement and to issue, sell and deliver the Shares to be
sold by it to the Underwriters as provided herein, and this Agreement has been
duly authorized, executed and delivered by the Company and is a valid, legal and
binding agreement of the Company, enforceable against the Company in accordance
with its terms, except as enforcement of rights to indemnity and contribution
hereunder may be limited by Federal or state securities laws or principles of
public policy and subject to the
<PAGE> 23
qualification that the enforceability of the Company's obligations hereunder may
be limited by bankruptcy, fraudulent conveyance, insolvency, reorganization,
moratorium, and other laws relating to or affecting creditors' rights generally
and by general equitable principles;
(ix) The Company is not in violation of any
provision of its certificate of incorporation or bylaws, or to the best
knowledge of such counsel after reasonable inquiry, is in default in the
performance of any material obligation, agreement or condition contained in any
bond, debenture, note or other evidence of indebtedness, except as may be
disclosed in the Prospectus;
(x) Neither the offer, sale or delivery of the
Shares, the execution, delivery or performance of this Agreement, compliance by
the Company with the provisions hereof, nor consummation by the Company of the
transactions contemplated hereby conflicts or will conflict with or constitutes
or will constitute a breach of, or a default under, the certificate of
incorporation or bylaws of the Company or any agreement, indenture, lease or
other instrument to which the Company is a party or by which it is bound that is
an exhibit to the Registration Statement, or is known to such counsel after
reasonable inquiry, or will result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company, nor will any
such action result in any violation of any existing law, regulation, ruling
(assuming compliance with all applicable state securities and Blue Sky laws),
judgment, injunction, order or decree known to such counsel after reasonable
inquiry, applicable to the Company, or any of the Company's properties;
(xi) No consent, approval, authorization or other
order of, or registration or filing with, any court, regulatory body,
administrative agency or other governmental body, agency, or official is
required on the part of the Company (except as have been obtained under the Act
and the Exchange Act or such as may be required under state securities or Blue
Sky laws governing the purchase and distribution of the Shares) for the valid
issuance and sale of the Shares to the Underwriters as contemplated by this
Agreement;
(xii) The Registration Statement and the Prospectus
and any supplements or amendments thereto (except for the financial statements
and the notes thereto and the schedules and other financial and statistical data
included therein, as to which such counsel need not express any opinion) comply
as to form in all material respects with the requirements of the Act;
(xiii) To the best knowledge of such counsel after
reasonable inquiry, (A) other than as described or contemplated in the
Prospectus (or any supplement thereto), there are no legal or governmental
proceedings pending or threatened against the Company, or to which the Company,
or any of its property, is subject, which are required to be described in the
Registration Statement or Prospectus (or any amendment or supplement thereto)
and (B) there are no agreements, contracts, indentures, leases or other
instruments, that are required to be described in the Registration Statement or
the Prospectus (or any amendment or supplement thereto) or
<PAGE> 24
to be filed as an exhibit to the Registration Statement that are not described
or filed as required, as the case may be;
(xiv) To the best knowledge of such counsel after
reasonable inquiry, the Company is not in violation of any law, ordinance,
administrative or governmental rule or regulation applicable to the Company or
of any decree of any court or governmental agency or body having jurisdiction
over the Company, which would be required to be described in the Registration
Statement or Prospectus (or any amendment or supplement thereto);
(xv) The statements in the Registration Statement
and Prospectus, insofar as they are descriptions of contracts, agreements or
other legal documents, or refer to statements of law or legal conclusions, are
accurate and present fairly the information required to be shown;
(xvi) Such counsel is not aware of any pending or
threatened action, suit, proceeding or claim by others that the Company is
infringing or otherwise violating any patents, trademarks, trade secrets,
know-how or other proprietary rights;
(xvii) Such counsel is not aware of any infringement
on the part of any third party of the patents or patent applications of the
Company, patents licensed to the Company, or trademarks, trade secrets, know-how
or other proprietary rights of the Company;
(xviii) The Company is not an "investment company"
or an "affiliated person" or "promoter" of, or "principal underwriter" for, an
"investment company," as defined in the 1940 Act or subject to regulation under
such Act;
(xix) Except as described in the Prospectus, to the
best knowledge of such counsel after reasonable inquiry, there are no
outstanding options, warrants or other rights calling for the issuance of, or
any commitment, plan or arrangement to issue, any shares of capital stock of the
Company or any security convertible into or exchangeable or exercisable for
capital stock of the Company;
(xx) Except as described in the Prospectus, to the
best knowledge of such counsel after reasonable inquiry, there is no holder of
any security of the Company or any other person who has the right, contractual
or otherwise, to cause the Company to sell or otherwise issue to them, or to
permit them to underwrite the sale of, the Shares or the right to have any
Common Stock or other securities of the Company included in the registration
statement (other than such rights which have been waived) or the right, as a
result of the filing of the registration statement, to require registration
under the Act of any shares of Common Stock or other securities of the Company.
(xxi) This Agreement and the Custody Agreement have
each been duly executed and delivered by or on behalf of each of the Selling
Stockholders and are valid and binding agreements of each Selling Stockholder
enforceable against
<PAGE> 25
each Selling Stockholder in accordance with their terms;
(xxii) To the knowledge of such counsel, each
Selling Stockholder has full legal right, power and authorization, and any
approval required by law, to sell, assign, transfer and deliver good and
marketable title to the Shares which such Selling Stockholder has agreed to sell
pursuant to this Agreement;
(xxiii) The execution and delivery of this Agreement
and the Custody Agreement by the Selling Stockholders and the consummation of
the transactions contemplated hereby and thereby will not conflict with,
violate, result in a breach of or constitute a default under the terms or
provisions of any agreement, indenture, mortgage or other instrument known to
such counsel to which any Selling Stockholder is a party or by which any of them
or any of their assets or property is bound, or any court order or decree or any
law, rule, or regulation applicable to any Selling Stockholder or to any of the
property or assets of any Selling Stockholder;
(xxiv) Upon delivery of the Shares pursuant to this
Agreement, and payment therefor as contemplated herein, the Underwriters will
acquire good and marketable title to the Shares free and clear of any lien,
claim, security interest, or other encumbrance, restriction on transfer or other
defect in title; and
(xxv) Although counsel has not undertaken, except as
otherwise indicated in their opinion, to determine independently, and does not
assume any responsibility for, the accuracy or completeness of the statements in
the Registration Statement, such counsel has participated in the preparation of
the Registration Statement and the Prospectus, including review and discussion
of the contents thereof, and nothing has come to the attention of such counsel
that has caused it to believe that the Registration Statement at the time the
Registration Statement became effective, or the Prospectus, as of its date and
as of the Closing Date or the Option Closing Date, as the case may be, contained
an untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading or that any amendment or supplement to the Prospectus, as of its
respective date, and as of the Closing Date or the Option Closing Date, as the
case may be, contained any untrue statement of a material fact or omitted to
state a material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading (it being
understood that such counsel need express no opinion with respect to the
financial statements and the notes thereto and the schedules and other financial
and statistical data included in the Registration Statement or the Prospectus).
In rendering their opinion as aforesaid, counsel may rely upon an
opinion or opinions, each dated the Closing Date, of other counsel retained by
them or the Company or the Selling Stockholders as to laws of any jurisdiction
other than the United States or the States of New York, New Jersey and the
corporate laws of Delaware, provided that (1) each such local counsel is
acceptable to the Representatives, (2) such reliance is expressly authorized by
each opinion so relied upon and a copy of each such opinion is delivered to the
Representatives and is, in form and substance
<PAGE> 26
satisfactory to them and their counsel, and (3) counsel shall state in their
opinion that they believe that they and the Underwriters are justified in
relying thereon.
(d) You shall have received on the Closing Date an opinion of
Calfee, Halter & Griswold LLP, counsel for the Underwriters, dated the Closing
Date and addressed to you, as Representatives of the several Underwriters, with
respect to the matters referred to in clauses (v), (vii), (viii), (xii) and
(xxv) of the foregoing paragraph (c) and such other related matters as you may
request.
(e) You shall have received letters addressed to you, as
Representatives of the several Underwriters, and dated the date hereof and the
Closing Date from Deloitte & Touche LLP, independent certified public
accountants, substantially in the forms heretofore approved by you.
(f) (i) No stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been taken or, to the knowledge of the Company, shall be
contemplated by the Commission at or prior to the Closing Date; (ii) there shall
not have been any change in the capital stock of the Company nor any material
increase in the short-term or long-term debt of the Company (other than in the
ordinary course of business) from that set forth or contemplated in the
Registration Statement or the Prospectus (or any amendment or Supplement
thereto); (iii) there shall not have been, since the respective dates as of
which information is given in the Registration Statement and the Prospectus (or
any amendment or supplement thereto), except as may otherwise be stated in the
Registration Statement and Prospectus (or any amendment or supplement thereto),
any material adverse change in the condition (financial or other), business,
prospects, properties, net worth or results of operations of the Company; (iv)
the Company shall not have any liabilities or obligations, direct or contingent
(whether or not in the ordinary course of business), that are material to the
Company, other than those reflected in the Registration Statement or the
Prospectus (or any amendment or supplement thereto); and (v) all the
representations and warranties of the Company contained in this Agreement shall
be true and correct on and as of the date hereof and on and as of the Closing
Date as if made on and as of the Closing Date, and you shall have received a
certificate, dated the Closing Date and signed by the chief executive officer
and the chief financial officer of the Company (or such other officers as are
acceptable to you), to the effect set forth in this Section 10(f) and in Section
10(g) hereof.
(g) The Company shall not have failed at or prior to the
Closing Date to have performed or complied with any of its agreements herein
contained and required to be performed or complied with by it hereunder at or
prior to the Closing Date.
(h) All the representations and warranties of the Selling
Stockholders contained in this Agreement shall be true and correct on and as of
the date hereof and on and as of the Closing Date as if made on and as of the
Closing Date, and you shall have received a certificate, dated the Closing Date
and signed by or on behalf of the Selling Stockholders to the effect set forth
in this Section 10(h) and in Section 10(i)
<PAGE> 27
hereof.
(i) The Selling Stockholders shall not have failed at or prior
to the Closing Date to have performed or complied with any of their agreements
herein contained and required to be performed or complied with by them hereunder
at or prior to the Closing Date.
(j) The Shares shall have been listed or approved for listing
upon notice of issuance on the Nasdaq National Market.
All such opinions, certificates, letters and other documents will be in
compliance with the provisions hereof only if they are satisfactory in form and
substance to you and your counsel.
Any certificate or document signed by any officer of the Company or any
Attorney-in-Fact or any Selling Stockholder and delivered to you, as
Representatives of the Underwriters, or to counsel for the Underwriters, shall
be deemed a representation and warranty by the Company, the Selling Stockholders
or the particular Selling Stockholder, as the case may be, to each Underwriter
as to the statements made therein.
The several obligations of the Underwriters to purchase Additional
Shares hereunder are subject to the satisfaction on and as of any Option Closing
Date of the conditions set forth in this Section 10, except that, if any Option
Closing Date is other than the Closing Date, the certificates, opinions and
letters referred to in paragraphs (c) through (h) shall be dated the Option
Closing Date in question and the opinions called for by paragraphs (c) and (d)
shall be revised to reflect the sale of Additional Shares.
11. Expenses. The Company agrees to pay the following costs and
expenses and all other costs and expenses incident to the performance by the
Company and the Selling Stockholders of their obligations hereunder (other than
the obligations of the Selling Stockholders under Section 9 hereof): (i) the
preparation, printing or reproduction, and filing with the Commission of the
registration statement (including financial statements and exhibits thereto),
each Prepricing Prospectus, the Prospectus, and each amendment or supplement to
any of them; (ii) the printing (or reproduction) and delivery (including
postage, air freight charges and charges for counting and packaging) of such
copies of the registration statement, each Prepricing Prospectus, the
Prospectus, and all amendments or supplements to any of them as may be
reasonably requested for use in connection with the offering and sale of the
Shares; (iii) the preparation, printing, authentication, issuance and delivery
of certificates for the Shares, including any stamp taxes in connection with the
original issuance and sale of the Shares; (iv) the printing (or reproduction)
and delivery of this Agreement, the preliminary and supplemental Blue Sky
Memoranda and all other agreements or documents printed (or reproduced) and
delivered in connection with the offering of the Shares; (v) the registration of
the Shares under the Exchange Act and the listing of the Shares on the Nasdaq
National Market; (vi) the registration or qualification of the Shares for offer
and sale under the securities or Blue Sky laws of the several states as
<PAGE> 28
provided in Section 5(g) hereof (including the reasonable fees, expenses and
disbursements of counsel for the Underwriters relating to the preparation,
printing or reproduction, and delivery of the preliminary and supplemental Blue
Sky Memoranda and such registration and qualification); (vii) the filing fees
and the fees and expenses of counsel for the Underwriters in connection with any
filings required to be made with the National Association of Securities Dealers,
Inc.; (viii) the transportation and other expenses incurred by or on behalf of
Company representatives in connection with presentations to prospective
purchasers of the Shares; and (ix) the fees and expenses of the Company's
accountants and the fees and expenses of counsel (including local and special
counsel) for the Company and the Selling Stockholders.
12. Effective Date of Agreement. This Agreement shall become
effective: (i) upon the execution and delivery hereof by the parties hereto; or
(ii) if, at the time this Agreement is executed and delivered, it is necessary
for the registration statement or a post-effective amendment thereto to be
declared effective before the offering of the Shares may commence, when
notification of the effectiveness of the registration statement or such
post-effective amendment has been released by the Commission. Until such time as
this Agreement shall have become effective, it may be terminated by the Company,
by notifying you, or by you, as Representatives of the several Underwriters, by
notifying the Company and the Selling Stockholders.
If any one or more of the Underwriters shall fail or refuse to
purchase Shares which it or they are obligated to purchase hereunder on the
Closing Date, and the aggregate number of Shares which such defaulting
Underwriter or Underwriters are obligated but fail or refuse to purchase is not
more than one-tenth of the aggregate number of Shares which the Underwriters are
obligated to purchase on the Closing Date, each non-defaulting Underwriter shall
be obligated, severally, in the proportion which the number of Firm Shares set
forth opposite its name in Schedule II hereto bears to the aggregate number of
Firm Shares set forth opposite the names of all non-defaulting Underwriters or
in such other proportion as you may specify in accordance with Section 20 of the
Master Agreement Among Underwriters of Smith Barney Inc., to purchase the Shares
which such defaulting Underwriter or Underwriters are obligated, but fail or
refuse, to purchase. If any one or more of the Underwriters shall fail or refuse
to purchase Shares which it or they are obligated to purchase on the Closing
Date and the aggregate number of Shares with respect to which such default
occurs is more than one-tenth of the aggregate number of Shares which the
Underwriters are obligated to purchase on the Closing Date and arrangements
satisfactory to you and the Company for the purchase of such Shares by one or
more non-defaulting Underwriters or other party or parties approved by you and
the Company are not made within 36 hours after such default, this Agreement will
terminate without liability on the part of any non-defaulting Underwriter or the
Company. In any such case which does not result in termination of this
Agreement, either you or the Company shall have the right to postpone the
Closing Date, but in no event for longer than seven days, in order that the
required changes, if any, in the Registration Statement and the Prospectus or
any other documents or arrangements may be effected. Any action taken under this
paragraph shall not relieve any defaulting Underwriter from liability in respect
of any such default of any such Underwriter under this Agreement. The term
<PAGE> 29
"Underwriter" as used in this Agreement includes, for all purposes of this
Agreement, any party not listed in Schedule II hereto who, with your approval
and the approval of the Company, purchases Shares which a defaulting Underwriter
is obligated, but fails or refuses, to purchase.
Any notice under this Section 12 may be given by telegram, telecopy or
telephone but shall be subsequently confirmed by letter.
13. Termination of Agreement. This Agreement shall be subject to
termination in your absolute discretion, without liability on the part of any
Underwriter to the Company or any Selling Stockholder, by notice to the Company,
if prior to the Closing Date or any Option Closing Date (if different from the
Closing Date and then only as to the Additional Shares), as the case may be, (i)
trading in securities generally on the New York Stock Exchange, American Stock
Exchange or the Nasdaq National Market shall have been suspended or materially
limited, (ii) a general moratorium on commercial banking activities in New York
or New Jersey shall have been declared by either federal or state authorities,
or (iii) there shall have occurred any outbreak or escalation of hostilities or
other international or domestic calamity, crisis or change in political,
financial or economic conditions, the effect of which on the financial markets
of the United States is such as to make it, in your judgment, impracticable or
inadvisable to commence or continue the offering of the Shares at the offering
price to the public set forth on the cover page of the Prospectus or to enforce
contracts for the resale of the Shares by the Underwriters. Notice of such
termination may be given to the Company by telegram, telecopy or telephone and
shall be subsequently confirmed by letter.
14. Information Furnished by the Underwriters. The statements set forth
in the last paragraph on the cover page, the stabilization [and passive market
making] legends on the inside cover page, and the statements in the first,
third[, sixth and seventh] paragraphs under the caption "Underwriting" in any
Prepricing Prospectus and in the Prospectus, constitute the only information
furnished by or on behalf of the Underwriters through you as such information is
referred to in Sections 7(b) and 9 hereof.
15. Miscellaneous. Except as otherwise provided in Sections 5, 12 and
13 hereof, notice given pursuant to any provision of this Agreement shall be in
writing and shall be delivered (i) if to the Company, to Party City Corporation,
400 Commons Way, Rockaway, New Jersey 07866, Attention: Steven H. Mandell,
President, with a copy to St. John & Wayne, L.L.C., Two Penn Plaza East, Newark,
New Jersey 07105-2249, Attention: William P. Oberdorf, Esq.; or (ii) if to the
Selling Stockholders, to William P. Oberdorf and John J. Oberdorf, as
attorneys-in-fact, c/o St. John & Wayne, L.L.C., Two Penn Plaza East, Newark,
New Jersey 07105-2249, or (iii) if to you, as Representatives of the several
Underwriters, care of Smith Barney Inc., 388 Greenwich Street, New York, New
York 10013, Attention: Manager, Investment Banking Division, with a copy to
Calfee, Halter & Griswold LLP, 1400 McDonald Investment Center, 800 Superior
Avenue, Cleveland, Ohio 44114, Attention: Edward W. Moore, Esq..
<PAGE> 30
This Agreement has been and is made solely for the benefit of the
several Underwriters, the Company, its directors and officers, and the other
controlling persons referred to in Section 9 hereof and their respective
successors and assigns, to the extent provided herein, and no other person shall
acquire or have any right under or by virtue of this Agreement. Neither the term
"successor" nor the term "successors and assigns" as used in this Agreement
shall include a purchaser from any Underwriter of any of the Shares in his
status as such purchaser.
16. Applicable Law; Counterparts. This Agreement shall be governed by
and construed in accordance with the laws of the State of New York applicable to
contracts made and to be performed within the State of New York.
This Agreement may be signed in various counterparts which together
constitute one and the same instrument. If signed in counterparts, this
Agreement shall not become effective unless at least one counterpart hereof
shall have been executed and delivered on behalf of each party hereto.
Please confirm that the foregoing correctly sets forth the agreement
among the Company, the Selling Stockholders and the several Underwriters.
Very truly yours,
PARTY CITY CORPORATION
By_______________________________________
Steven Mandell, President
Each of the Selling Stockholders named in
Schedule I hereto
By_______________________________________
Attorney-in-Fact
By_______________________________________
Attorney-in-Fact
Confirmed as of the date first above mentioned on behalf of themselves and the
other several Underwriters named in Schedule II hereto.
SMITH BARNEY INC.
TUCKER ANTHONY INCORPORATED
MORGAN KEEGAN & COMPANY, INC.
<PAGE> 31
As Representatives of the Several Underwriters
By SMITH BARNEY INC.
By___________________________________________
Managing Director
<PAGE> 32
SCHEDULE I
PARTY CITY CORPORATION
Part A - Firm Shares
<TABLE>
<CAPTION>
Number of
Selling Stockholders Firm Shares
- - -------------------- -----------
<S> <C>
Steven Mandell 400,000
Perry Kaplan 400,000
Craig Enterprises, Inc. 200,000
Duayne Weinger 40,000
---------
Total ......... 1,040,000
---------
</TABLE>
Part B - Additional Shares
<TABLE>
<CAPTION>
Number of
Selling Stockholders Additional Shares
- - -------------------- -----------------
<S> <C>
Steven Mandell 220,000
Craig Enterprises, Inc. 106,000
Duayne Weinger 10,000
-------
Total ... 336,000
-------
</TABLE>
<PAGE> 33
SCHEDULE II
PARTY CITY CORPORATION
<TABLE>
<CAPTION>
Number of Number of
Underwriter Firm Shares Underwriter Firm Shares
- - ----------- ----------- ----------- -----------
<S> <C> <C> <C>
Smith Barney Inc.
Tucker Anthony
Incorporated
Morgan Keegan &
Company, Inc.
Total.....
---------- ----------
</TABLE>
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-22893 of Party City Corporation of our report dated February 17, 1997,
appearing in the Prospectus, which is part of such Registration Statement, and
to the reference to us under the headings "Selected Financial Data" and
"Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Parsippany, NJ
April 2, 1997
