<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A)
OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
PARTY CITY CORPORATION
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(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
--------------------------------------------------------------------------------
(2) Aggregate number of securities to which transactions applies:
--------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
--------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
--------------------------------------------------------------------------------
(5) Total fee paid:
--------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
--------------------------------------------------------------------------------
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
<PAGE>
PARTY CITY CORPORATION
NOTICE OF 2000 ANNUAL MEETING OF STOCKHOLDERS
November 15, 2000
TO THE STOCKHOLDERS:
NOTICE IS HEREBY GIVEN that the 2000 Annual Meeting of Stockholders of
Party City Corporation, a Delaware corporation (the "Company"), will be held on
Wednesday, November 15, 2000, at 9:00 a.m., Eastern Time, at the Sheraton Newark
Airport, 128 Frontage Road, Newark, New Jersey 07114, for the following
purposes:
1. To elect six directors to the Board of Directors who shall serve until
the 2001 Annual Meeting of Stockholders, or until their successors are
elected and qualified;
2. To approve an amendment and restatement of the Company's 1999 Stock
Incentive Plan, increasing the number of shares of the Company's
common stock issuable pursuant to options and awards granted under the
Plan from 500,000 to 2,000,000; and
3. To transact such other business as may properly come before the Annual
Meeting or any adjournment thereof.
The foregoing items are more fully described in the Proxy Statement
accompanying this Notice.
Only stockholders of record at the close of business on October 13, 2000,
are entitled to notice of and to vote at the Annual Meeting. A complete list of
the stockholders entitled to vote at the Annual Meeting will be open to the
examination of any stockholder, for any purpose germane to the Annual Meeting,
during ordinary business hours for the ten-day period ending immediately
preceding the date of the Annual Meeting, at the Company's offices at 400
Commons Way, Rockaway, New Jersey 07866. Attendance at the Annual Meeting will
be limited to stockholders and guests of the Company.
STOCKHOLDERS UNABLE TO ATTEND THE MEETING ARE URGED TO COMPLETE, DATE AND
SIGN THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE. IF YOU ATTEND
THE MEETING, YOU MAY REVOKE YOUR PROXY AND VOTE IN PERSON IF YOU WISH.
By Order of the Board of Directors
/s/ Thomas E. Larson
--------------------
Thomas E. Larson
Secretary
Rockaway, New Jersey
October 26, 2000
PLEASE MAIL YOUR PROXY PROMPTLY
<PAGE>
PARTY CITY CORPORATION
400 COMMONS WAY
ROCKAWAY, NEW JERSEY 07866
-----------------------------------
PROXY STATEMENT
2000 ANNUAL MEETING OF STOCKHOLDERS
November 15, 2000
-----------------------------------
INFORMATION CONCERNING SOLICITATION AND VOTING
General
The enclosed Proxy is solicited on behalf of the Board of Directors of
Party City Corporation (the "Company"), for use at the 2000 Annual Meeting of
Stockholders to be held on Wednesday, November 15, 2000, at 9:00 a.m., Eastern
Time, or at any adjournment thereof (the "Annual Meeting"). The purposes of the
Annual Meeting are set forth herein and in the accompanying notice of 2000
Annual Meeting of Stockholders (the "Notice"). The Annual Meeting will be held
at the Sheraton Newark Airport, 128 Frontage Road, Newark, New Jersey 07114. The
Company's telephone number is (973) 983-0888.
This Proxy Statement and the accompanying Annual Report, Notice and Proxy
are being mailed on or about October 26, 2000, to all stockholders entitled to
vote at the Annual Meeting.
Record Date
Stockholders of record at the close of business on October 13, 2000 (the
"Record Date"), are entitled to notice of and to vote at the Annual Meeting.
Deadline for Receipt of Stockholder Proposals for 2001 Annual Meeting
Proposals of stockholders of the Company which are intended to be presented
at the Company's 2001 Annual Meeting of Stockholders must be received by the
Company no later than June 27, 2001, and must otherwise be in compliance with
the Company's Certificate of Incorporation and Bylaws and with applicable laws
and regulations in order to be included in the proxy statement and form of proxy
relating to that meeting.
If a stockholder intends to present a stockholder proposal at the 2001
Annual Meeting in a manner other than the inclusion of the proposal in the
Company's proxy statement and form of proxy relating to that meeting, unless the
stockholder notifies the Company of such intention by
<PAGE>
September 11, 2001, the proxy holders named by the Company may exercise their
discretionary voting authority on the matter in accordance with their best
judgment.
Revocability of Proxy
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before its use by delivering to the Company a written
notice of revocation or a duly executed proxy bearing a later date or by
attending the Annual Meeting and voting in person. If your shares are held in
"street name" by your broker, you must contact your broker for instructions on
how to revoke your proxy.
Please note that merely attending the Annual Meeting without voting will
not revoke your proxy. Also, if you want to attend the Annual Meeting and vote
in person and your shares of the Company's common stock are held of record by a
broker, bank or other nominee, you will need to bring to the Annual Meeting a
letter from the broker, bank or other nominee confirming your beneficial
ownership of the shares.
Independent Accountants
The Company's independent accountants are Deloitte & Touche LLP.
Representatives from Deloitte & Touche LLP are expected to be available at the
2000 Annual Meeting to respond to appropriate questions from stockholders and
will have the opportunity to make a statement if they wish.
Solicitation
The cost of solicitation will be borne by the Company. In addition, the
Company may reimburse brokerage firms and other persons representing beneficial
owners of shares for their expenses in forwarding solicitation materials to such
beneficial owners. Proxies may be solicited by the Company's directors, officers
and employees, without additional compensation, personally or by telephone,
facsimile or telegram.
VOTING SECURITIES AND PRINCIPAL HOLDERS
Outstanding Shares
The Company has only one class of stock outstanding, the Company's common
stock, $.01 par value per share (the "Common Stock"). At October 13, 2000,
12,722,205 shares of the Company's Common Stock were issued and outstanding.
Voting Rights
Under the Delaware General Corporation Law and the Company's Certificate of
Incorporation and Bylaws, each stockholder will be entitled to one vote for each
share of Common Stock held at the Record Date for all matters, including the
election of directors. Holders of Common Stock have no cumulative voting rights
in the election of directors. The required quorum for the transaction of
business at the Annual Meeting is a majority of the votes eligible to be cast by
holders of shares of Common Stock issued and outstanding on the Record
-2-
<PAGE>
Date. The election of each director requires a plurality of the votes present at
the Annual Meeting and entitled to vote. The adoption of the amendment and
restatement of the Company's 1999 Stock Incentive Plan requires the affirmative
vote of the holders of a majority of the shares of Common Stock represented at
the Annual Meeting and entitled to vote.
Shares that are voted "FOR," "AGAINST," "WITHHELD" or "ABSTAIN" are treated
as being present at the Annual Meeting for the purposes of establishing a quorum
and are also treated as shares entitled to vote at the Annual Meeting with
respect to such matter.
If a broker indicates on the proxy that it does not have discretionary
authority as to certain shares of Common Stock to vote on a particular matter,
those shares will not be considered as present and entitled to vote with respect
to that matter; however, such shares will be considered present for purposes of
determining the presence of a quorum. As a result, abstentions, shares that are
voted "withheld", and broker non-votes in each case will have no effect on
determinations of plurality, except to the extent that they affect the total
votes received by any particular candidate. For amending and restating the
Company's Incentive Plan, and for any other matter properly brought before the
Annual Meeting requiring approval of a specified percentage of the outstanding
shares represented at the Annual Meeting and entitled to vote on such matter,
abstentions will have the effect of negative votes, but broker non-votes will
have no effect since they are not treated as shares entitled to vote on such
matter.
Voting of Proxies
The shares of Common Stock represented by all properly executed proxies
received in time for the Annual Meeting will be voted in accordance with the
directions given by the stockholders. IF NO INSTRUCTIONS ARE GIVEN, THE SHARES
WILL BE VOTED (i) FOR each of the nominees named herein as directors, or their
respective substitutes as may be appointed by the Board of Directors; (ii) FOR
the approval of the amendment and restatement of the Company's 1999 Stock
Incentive Plan (the "Incentive Plan") to increase the number of shares of Common
Stock issuable pursuant to options and awards granted thereunder from 500,000 to
2,000,000; and (iii) at the discretion of the proxy holders with respect to any
other matter properly brought before the Annual Meeting.
-3-
<PAGE>
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information regarding the beneficial
ownership of the Common Stock, as of October 13, 2000, for individuals or
entities in the following categories: (i) each of the Company's Directors, (ii)
each executive officer of the Company named in the Summary Compensation Table
(each, a "Named Executive Officer"); (iii) each person known by the Company to
be a beneficial owner of more than 5% of the Common Stock; and (iv) all
Directors and Named Executive Officers as a group. Unless indicated otherwise,
each of the stockholders has sole voting and investment power with respect to
the shares beneficially owned.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
----------------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT
-------------------------------------------------------------------------------- ----------------- -------------
<S> <C> <C>
Steven Mandell**....................................................... 2,545,000(1)(2) 20.0%
P.O. Box 85
New Vernon, New Jersey 07976
Special Value Bond Fund, LLC........................................... 3,096,000(3)(4) 19.6%
11100 Santa Monica Boulevard, Suite 210
Los Angeles, California 90025
Goldman, Sachs & Co.................................................... 2,867,000(5)(6) 18.4%
85 Broad Street
New York, New York 10004
Craig Enterprises, Inc................................................. 1,107,000(7) 8.7%
11355 North Torrey Pines Road
La Jolla, California 92037
Jack Futterman......................................................... 1,029,000(1)(8) 8.1%
400 Commons Way
Rockaway, New Jersey 07866
Wellington Management Company, LLP..................................... 825,400(9) 6.5%
75 State Street
Boston, Massachusetts 02109
Ralph Dillon........................................................... 307,666(10) 2.4%
Gordon Keil............................................................ 136,000(11) 1.1%
Duayne Weinger......................................................... 120,350(12) *
Thomas E. Larson....................................................... 60,000(13) *
Raymond C. Hemmig***................................................... 52,500(14) *
L.R. Jalenak, Jr....................................................... 47,925 *
James Shea............................................................. 50,000 *
John A. Bickel......................................................... 0 *
Edward Mule............................................................ 2,867,000(15) 18.4%
Howard Levkowitz....................................................... 3,116,000(16) 19.7%
Michael Tennenbaum..................................................... 3,096,000(17) 19.6%
All Directors and Named Executive Officers as a group (12 persons)..... 7,788,981(18) 40.3%
---------------
* Less than 1%
** Resigned as Director on September 12, 1999.
*** Resigned as Director on December 10, 1999.
(1) Includes 1,000,000 shares of Common Stock owned by Steven Mandell for which
Jack Futterman has an immediately exercisable option to purchase such
shares pursuant to an Option Agreement dated as of June 8, 1999, by and
between Messrs. Mandell and Futterman.
(2) Includes 750,000 shares of Common Stock (representing approximately 6% of
the Company's outstanding Common Stock) transferred by Mr. Mandell to the
Mandell Family Limited Partnership of which Mr. Mandell is General Partner.
(3) Includes 3,096,000 shares subject to outstanding warrants to purchase
Common Stock which are exercisable within the next 60 days.
<PAGE>
(4) As reported in the Amendment to Schedule 13D filed by Special Value Bond
Fund, LLC with the Securities and Exchange Commission on January 21, 2000.
(5) Includes 2,867,000 shares subject to outstanding warrants to purchase
Common Stock which are exercisable within the next 60 days.
(6) As reported in the Amendment to Schedule 13G filed by Goldman, Sachs & Co.
with the Securities and Exchange Commission on August 30, 1999.
(7) As reported in the Amendment to Schedule 13G filed by Craig Enterprises,
Inc. with the Securities and Exchange Commission on April 23, 1999.
(8) Includes 27,500 shares subject to outstanding options to purchase Common
Stock which are exercisable within the next 60 days.
(9) As reported in the Schedule 13G filed by Wellington Management Company, LLP
with the Securities and Exchange Commission on February 11, 2000.
(10) Includes 53,333 shares subject to outstanding options to purchase Common
Stock which are exercisable within the next 60 days and 229,333 shares
subject to outstanding warrants to purchase Common Stock, which are
exercisable within the next 60 days, owned by Clyde Street Investment, LLC
of which Ralph Dillon is the Managing Member.
(11) Includes 101,000 shares subject to outstanding options to purchase Common
Stock which are exercisable within the next 60 days.
(12) Includes 52,500 shares subject to outstanding options to purchase Common
Stock which are exercisable within the next 60 days.
(13) Includes 60,000 shares subject to outstanding options to purchase Common
Stock which are exercisable within the next 60 days.
(14) Includes 52,500 shares subject to outstanding options to purchase Common
Stock which are exercisable within the next 60 days.
(15) Includes 2,867,000 shares subject to outstanding warrants to purchase
Common Stock, which are exercisable within the next 60 days, owned by The
Goldman, Sachs & Co., of which Mr. Mule is a Managing Director.
(16) Includes 3,096,000 shares subject to outstanding warrants to purchase
Common Stock, which are exercisable within the next 60 days, owned by
Special Value Bond Fund, LLC, of which the Managing Member is SVIM/MSM,
LLC, of which the Managing Member is Tennenbaum & Co., of which Mr.
Levkowitz is a Principal. Voting power with respect to such 3,096,000
shares is held by the Investment Committee of Special Value Investment
Management, LLC, of which Mr. Levkowitz is a Partner. Special Value
Investment Management, LLC is the investment advisor to Special Value Bond
Fund, LLC. Also includes 20,000 shares subject to outstanding options to
purchase Common Stock which are exercisable within the next 60 days.
(17) Includes 3,096,000 shares subject to outstanding warrants to purchase
Common Stock, which are exercisable within the next 60 days, owned by
Special Value Bond Fund, LLC, of which the Managing Member is SVIM/MSM,
LLC, of which the Managing Member is Tennenbaum & Co., of which Mr.
Tennenbaum is the Managing Member.
(18) Includes (a) 1,578,481 shares which the Directors and Named Executive
Officers of the Company have the right to acquire within the next 60 days
through the exercise of outstanding options and warrants to purchase Common
Stock ; (b) warrants to purchase 3,096,000 shares of Common Stock
beneficially owned by Special Value Bond Fund, LLC, of which the Managing
Member is SVIM/MSM, LLC, of which the Managing Member is Tennenbaum & Co.,
of which Mr. Tennenbaum is the Managing Member and Mr. Levkowitz is a
Member; (c) warrants to purchase 2,867,000 shares of Common Stock
beneficially owned by Goldman, Sachs & Co., of which Mr. Mule is a Managing
Director; and (d) 229,333 shares subject to outstanding warrants to
purchase Common Stock, which are exercisable within the next 60 days, owned
by Clyde Street Investment, LLC of which Ralph Dillon is the Managing
Member.
</TABLE>
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<PAGE>
BUSINESS TO BE TRANSACTED
1. ELECTION OF DIRECTORS
Nominees
The Board of Directors currently is comprised of seven directors, including
each of the six nominees listed below, and Mr. Duayne Weinger. The Board of
Directors has resolved that, upon the completion of the Annual Meeting, the size
of the Board of Directors will be reduced from seven to six directors.
Unless otherwise instructed, the proxy holders will vote the proxies
received by them for the six nominees named below, all of whom are presently
directors of the Company. In the event that any nominee is unable or declines to
serve as a director at the time of the Annual Meeting, the proxies will be voted
for any nominee who shall be designated by the present Board of Directors to
fill the vacancy. In the event that additional persons are nominated for
election as directors, the proxy holders intend to vote all proxies received by
them in such a manner as will ensure the election of as many of the nominees
listed below as possible. It is not expected that any nominee will be unable or
will decline to serve as a director. The names of the six nominees, their ages,
the respective years in which each first became a Director of the Company, and
their respective principal occupations during the past five years are as
follows:
SERVED AS
A DIRECTOR
NAME OF NOMINEE AGE POSITION WITH THE COMPANY SINCE
------------------------- ------- -------------------------- ----------
Ralph Dillon 60 Non-Executive Chairman 1999
of the Board of Directors
Jack Futterman(1)(2) 67 Director 1997
L.R. Jalenak, Jr.(2)(3) 70 Director 2000
Howard Levkowitz(1)(2) 33 Director 1999
Edward Mule 37 Director 2000
Michael Tennenbaum 65 Director 2000
-------------------------
(1) Member of Nominating Committee.
(2) Member of Audit Committee.
(3) Member of Compensation Committee.
RALPH DILLON has been the Non-Executive Chairman of the Board of Directors
since December 10, 1999 and has been a Director of the Company since October 1,
1999. Prior to becoming a Director of the Company, Mr. Dillon served as Chief
Executive Officer of Cost Plus, Inc. ("Cost Plus") from September 1990 to
February 1998, President of Cost Plus from September 1990 to August 1995 and
Chairman of the Board of Cost Plus from August 1995 to February 1998. He also
served as a Director of Cost Plus from September 1990 to May 1999, and has
served as an advisor to the Chief Executive Officer of Cost Plus since May 1999.
Mr. Dillon holds his current seat on the Board of Directors of the Company and
is being nominated
-6-
<PAGE>
for re-election in connection with the investment and restructuring of the
Company's obligations which occurred on August 17, 1999 (which transactions are
described below in "Certain Relationships and Related Transactions").
JACK FUTTERMAN has been a Director of the Company since October 1997. From
June 8, 1999 until December 10, 1999 he was Chairman of the Board of Directors
and Chief Executive Officer of the Company. From 1989 until his retirement in
1996, Mr. Futterman was Chairman and Chief Executive Officer of Pathmark Stores.
From 1973 until his appointment as Chairman and Chief Executive Officer, Mr.
Futterman served as Vice President of Supermarkets General (the parent company
of Pathmark Stores) and occupied a number of positions before becoming Chairman
and Chief Executive Officer. A Registered Pharmacist, Mr. Futterman also serves
as a Director of Hain-Celestial Group as well as several not-for-profit
corporations.
L.R. JALENAK, JR. has been a director of the Company since February 17,
2000. Prior to becoming a Director of the Company, Mr. Jalenak was Chairman of
the Board of Cleo, Inc. from 1990 until his retirement in December 1993. From
1977 to 1990, he was President of Cleo, Inc. Mr. Jalenak also serves as a
Director of Lufkin Industries, Inc., Dyersburg Corporation and Perrigo Company.
He is also a trustee of First Funds, a mutual fund company.
HOWARD LEVKOWITZ has been a Director of the Company since August 17, 1999.
Mr. Levkowitz has been a Partner in Special Value Investment Management, LLC, an
investment management company focused on special situation investments since
1999 and since 1997, has been a principal of Tennenbaum & Co., LLC (with which
Special Value Investment Management, LLC is affiliated). He was an attorney with
Dewey Ballantine LLP from 1993 to 1997. Mr. Levkowitz holds his current seat on
the Board of Directors of the Company and is being nominated for re-election in
connection with the investment and restructuring of the Company's obligations
which occurred on August 17, 1999 (which transactions are described below in
"Certain Relationships and Related Transactions").
EDWARD MULE has been a Director of the Company since October 5, 2000. Mr.
Mule has been employed by Goldman, Sachs & Co., an investment bank, serving in
various departments including mergers and acquisitions, proprietary investing
and in the office of the Chairman. Mr. Mule has been a Managing Director of
Goldman, Sachs & Co. since 1994.
MICHAEL TENNENBAUM has been a Director of the Company since October 5,
2000. Mr. Tennenbaum has been the Managing Member of Tennenbaum & Co., LLC since
its inception in June 1996. Mr. Tennenbaum is also the Managing Member of
Special Value Investment Management, LLC, an investment management company
focused on special situation investments. Previously, from February, 1993 until
June, 1996, Mr. Tennenbaum was a Senior Managing Director of Bear, Stearns &
Co., Inc. and also held the position of Vice Chairman, Investment Banking. Mr.
Tennenbaum's responsibilities at Bear, Stearns & Co., Inc. included managing the
firm's Risk Arbitrage, Investment Research and Options Departments. Mr.
Tennenbaum currently serves on the board of directors of Pemco Aviation Group,
Inc., and is also a director of certain privately-held companies.
-7-
<PAGE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities and Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own beneficially
more than ten percent (10%) of the Common Stock of the Company, to file reports
of ownership and changes of ownership with the Securities and Exchange
Commission and the NASDAQ. Copies of all filed reports are required to be
furnished to the Company pursuant to Section 16(a). Based solely on the reports
received by the Company and on written representations from reporting persons,
the Company believes that the directors, executive officers, and greater than
ten percent (10%) beneficial owners complied with all Section 16(a) filing
requirements during the fiscal year ended July 1, 2000, with the exception of
the late filing of one Form 3 filed on behalf of Ralph Dillon.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On July 27, 2000, the Company purchased substantially all of the assets of
Party City of Hoffman Estates, Inc. ("PCHE"), an Illinois corporation, for an
aggregate purchase price of approximately $516,000, subject to certain
adjustments. All of the outstanding capital stock of PCHE is owned by Steven
Mandell, the Company's founder and former Chief Executive Officer. Mr. Mandell
was also a Director of the Company until his resignation on September 12, 1999.
Mr. Mandell acquired the shares of capital stock of PCHE from his son, Erik
Mandell. Erik Mandell is currently the Vice President of Marketing/Sales
Promotion of the Company. In connection with the Company's purchase of PCHE's
assets, the Company and PCHE agreed to release each other from all claims either
of them might have against the other arising under the franchise agreement
between the Company and PCHE (which agreement was terminated upon the closing of
the transaction). Also, the Company and Erik Mandell agreed to release each
other from all claims either of them might have against the other arising out of
the ownership and operation of the store operated by PCHE.
On August 17, 1999, the Company received $30 million in financing from a
group of investors (the "Investors") led by Tennenbaum & Co., LLC (which is the
Managing Member of Special Value Investment Management, LLC, which, in turn, is
the Investment Manager of Special Value Bond Fund, LLC). Messrs. Tennenbaum and
Levkowitz, each of whom is a Director of the Company and a nominee for Director
at the 2000 Annual Meeting, are principals of Tennenbaum & Co. and partners of
Special Value Investment Management, LLC, and Mr. Tennenbaum is the Managing
Member of Tennenbaum & Co., LLC and Special Value Investment Management, LLC.
The Investors also include Goldman, Sachs & Co. Mr. Edward Mule, who is a
Director of the Company and a nominee for Director at the 2000 Annual Meeting,
is a Managing Director of Goldman, Sachs & Co. Also among the Investors is
Enhanced Retail Funding. Mr. Matthew Kahn, who was appointed as a Director of
the Company on August 17, 1999 and who resigned as a Director effective as of
October 1, 1999, is a Managing Director of Gordon Brothers Group, the parent
company of Enhanced Retail Funding, and President of GB Equity Partners, an
affiliate of Enhanced Retail Funding. Also among the Investors is Clyde Street
Investment, LLC. Mr. Dillon, Non-Executive Chairman of the Board of Directors,
is the Managing Member of Clyde Street Investment, LLC.
The Investors purchased senior secured notes and warrants pursuant to
separate securities purchase agreements (the "Securities Purchase Agreements")
each dated as of August
-8-
<PAGE>
16, 1999. Under these Securities Purchase Agreements, the Company issued (i) $10
million of its 12.5% Secured Notes due 2003 (the "A Notes"); (ii) $5 million of
its 13.0% Secured Notes due 2003 (the "B Notes"); (iii) $5 million of its 13.0%
Secured Notes due 2002 (the "C Notes"); (iv) $10 million of its 14.0% Secured
Notes due 2004 (the "D Notes", and together with the A Notes, the B Notes and
the C Notes, the "Notes"); and (v) warrants (the "Warrants") to purchase
6,880,000 shares of the Company's common stock at an initial exercise price of
$3.00 per share. The Warrants were valued at $1,965,000 based on management's
estimate using certain fair value methodologies and represent an original issue
discount to the C Notes and D Notes. Up to $15 million of the Notes was secured
by a first lien that was pari pasu with the liens under the Company's
then-existing credit agreement. The Notes are secured by a junior lien on all of
the Company's assets. The Company issued the Warrants in connection with the
sale of the C Notes and the D Notes. The Warrants may be exercised before the
close of business on August 16, 2006. The shares of Common Stock reserved for
issuance under the Warrants represent approximately 35% of the shares of Common
Stock outstanding after giving effect to the exercise of the Warrants.
The Company also entered into an Investor Rights Agreement, dated as of
August 16, 1999 (the "Investor Rights Agreement") with the Investors and Jack
Futterman, then the Chief Executive Officer of the Company. Mr. Futterman is a
Director of the Company and is a nominee for Director at the 2000 Annual
Meeting. In the Investor Rights Agreement, the Company granted registration
rights with respect to shares of its Common Stock and agreed to nominate two
individuals designated by the Investors to its Board of Directors. Under the
Investor Rights Agreement, the Investors agreed that they will not, without the
prior written consent of the Board of Directors, (i) acquire or agree to
acquire, publicly offer or make any public proposal with respect to the possible
acquisition of (a) beneficial ownership of any securities of the Company, (b)
any substantial part of the Company's assets, or (c) any rights or options to
acquire any of the foregoing from any person; (ii) make or in any way
participate in any "solicitation" of "proxies" (as such terms are defined in the
rules of the Securities Exchange Act of 1934, as amended) to vote, or seek to
advise or influence any person with respect to the voting of any voting
securities of the Company; or (iii) make any public announcement with respect to
any transaction between the Company or any of its securities holders and the
Investors, including without limitation, any tender or exchange offer, merger or
other business combination of a material portion of the assets of the Company.
These standstill provisions terminate if the Company's consolidated earnings
before interest, taxes, depreciation and amortization and exclusive of special
charges, as defined in the Investor Rights Agreement, do not meet specified
calendar year targets. The Company achieved its target EBITDA for calendar year
1999. Also, in connection with these transactions, one outside director of the
Company resigned and two representatives of the Investors joined the Board of
Directors. The Company has amended the restriction that prohibited the Investors
from purchasing the Company's stock to permit purchase up to 1,500,000
additional shares of the Company's Common Stock and amended the restrictions on
securities purchases to exclude purchases of debt by other debt holders.
On January 14, 2000, the Company replaced its existing credit agreement
with a new Loan and Security Agreement (the "Loan Agreement") with Congress
Financial Corporation ("Congress"), as lender. Also, on January 14, 2000, Party
City received $7 million in cash proceeds from the sale to certain of its
existing Investors (the "Investor Group") of a new series of senior secured
notes pursuant to a First Amendment (the "First Amendment") to the Securities
-9-
<PAGE>
Purchase Agreements. Pursuant to the First Amendment, the Company issued $7
million in aggregate principal amount of its 14.0% Secured Notes due 2002 (the
"E Notes"). The E Notes are secured by a lien on substantially all of the
Company's assets. The Investor Group, together with other existing Investors and
Congress, entered into an intercreditor agreement. In consideration for waivers
and forbearances granted by the Investors to various defaults under the terms of
the Company's A Notes, B Notes, C Notes and D Notes, the Company also agreed to
amend and restate the terms of the Warrants. The amended and restated warrants
(the "Amended Warrants") provide for an exercise price of $1.07 per share and
were issued upon surrender of the Warrants which had an exercise price of $3.00
per share. The Amended Warrants were valued at $3,156,000 based on management's
estimate using certain fair value methodologies and represent an original issue
discount to the C Notes and D Notes. This discount is being amortized using the
effective interest method. The effective yield is 28.6% and 28.9% on the C Notes
and D Notes, respectively.
Messrs. Jason Craig and Steven Craig, sons of Mr. Sidney Craig, President
of Craig Enterprises, Inc., own and operate six and four franchised stores,
respectively, located in California. Craig Enterprises, Inc. owned approximately
8.7% of the Company's Common Stock, based on information contained in the
Amendment to Schedule 13G filed by Craig Enterprises, Inc. with the SEC on April
23, 1999.
The Company entered into a consulting agreement with Mr. Dillon pursuant to
which Mr. Dillon is to receive a consulting fee of $10,000 per month in exchange
for advising and consulting with the Company regarding strategic planning,
general operations and merchandising programs.
John Oberdorf, who resigned as a Director of the Company on August 17,
1999, is a member of the law firm of St. John & Wayne, L.L.C., which provided
legal services to the Company during the fiscal year ended July 1, 2000.
On September 12, 1999, Steven Mandell resigned from the Board of Directors
of the Company. Following Mr. Mandell's resignation, the Company retained Mr.
Mandell as an advisor and agreed to pay Mr. Mandell $50,000 per month for his
services. This arrangement was terminated in November, 1999.
-10-
<PAGE>
Board of Directors Meetings and Committees
The Board of Directors met thirteen times during the fiscal year ended July
1, 2000. The Compensation Committee met two times during the fiscal year ended
July 1, 2000 and is comprised of Messrs. Jalenak and Weinger. In addition to its
other responsibilities, the Compensation Committee is responsible for the
administration of the Company's 1999 Stock Incentive Plan and for the grant of
stock options and other awards under such plan. The Audit Committee, which is
composed of Messrs. Futterman, Jalenak and Levkowitz, 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 during the Company's fiscal year ended July 1, 2000. The Nominating
Committee met once during the fiscal year ended July 1, 2000. The Nominating
Committee is composed of Messrs. Futterman, Levkowitz and Weinger. The
Nominating Committee is responsible for recommending persons to be nominees for
the Company's Board of Directors. The Nominating Committee does not consider
nominees recommended by the Company's stockholders. In addition to meeting, the
Compensation Committee and the Nominating Committee as well as the full Board of
Directors acted by unanimous written consent on numerous occasions during the
Company's fiscal year ended July 1, 2000.
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.
Shea, Larson, Kirk and Keil by the Company is subject to the provisions of their
respective employment agreements.
Resignations
On August 17, 1999, John Oberdorf resigned from the Board of Directors of
the Company.
On September 12, 1999, Steven Mandell resigned from the Board of Directors
of the Company. On September 17, 1999, the Company issued a press release
announcing Mr. Mandell's resignation. Following Mr. Mandell's resignation, the
Company retained Mr. Mandell as an advisor and agreed to pay Mr. Mandell $50,000
per month for his services. This arrangement was terminated in November, 1999.
On December 10, 1999, Raymond C. Hemmig resigned from the Board of
Directors of the Company.
-11-
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
NAME AGE POSITION(S)
---- --- -----------
James Shea 55 Chief Executive Officer
Thomas E. Larson 53 Senior Vice President, Chief Financial
Officer, and Secretary
James Kirk 48 Senior Vice President of Store
Operations
Gordon Keil 51 Senior Vice President, Franchising and
Administration
Andrew Bailen 44 Executive Vice President of
Merchandising/Marketing
All executive officers are chosen by the Company's Board of Directors and
serve at the Board's discretion. Set forth below is information concerning the
business experience of the executive officers of the Company.
JAMES SHEA was appointed Chief Executive Officer on December 10, 1999. From
November, 1995 until his appointment as Chief Executive Officer of the Company,
Mr. Shea held positions as Senior Vice President for Merchandise and Marketing,
Executive Vice President and, most recently, President, of Lechters, Inc., a
chain of over 500 houseware specialty stores located nationwide.
THOMAS E. LARSON has been the Company's Senior Vice President and Chief
Financial Officer since June 18, 1999. Prior to joining the Company, Mr. Larson
was an independent financial and information systems consultant. Prior to that
time, Mr. Larson served as Chief Financial Officer of Ace Cash Express, Inc., a
chain of over 1,000 company-owned and franchise stores, from 1991 to 1996.
JAMES KIRK was appointed Senior Vice President of Store Operations at the
Company on April 17, 2000. From 1999 to the date he joined the Company, Mr. Kirk
was Senior Vice President of Store Operations at SuperStand Entertainment
Company. From 1997 to 1999, Mr. Kirk was the Chief Executive Officer of
Cybersmith Inc. From 1991 to 1997, Mr. Kirk was Vice President of Store
Operations for Barnes & Noble, Inc.
GORDON KEIL has been the Senior Vice President, Franchising and
Administration of the Company since July 2, 1999. Prior to that time, Mr. Keil
served in a variety of executive positions with the Company. From 1987 to 1996,
Mr. Kiel was the Founder and President of Gordon's Stores, Inc., a deep discount
drugstore chain.
-12-
<PAGE>
ANDREW BAILEN was appointed Executive Vice President of
Merchandising/Marketing of the Company on August 8, 2000. From January, 1999
until his appointment, Mr. Bailen was the Chief Executive Officer of Net
Connections, Inc., an Internet advertising firm. From February, 1998 to
December, 1998, Mr. Bailen was Executive Vice President/Chief Operating Officer
of Hollywood.com and from February, 1995 to October, 1997, Vice President of
Merchandising and Senior Vice President/General Merchandise Manager-Retail of
Blockbuster Entertainment Group. Prior to that, he held a variety of executive
positions with Greenman Brothers Inc. and KayBee Toys.
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
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 (A) during the period
from July 1, 1997 to June 30, 1998, (B) during the period from July 1, 1998 to
July 3, 1999 and (C) during the Company's fiscal year beginning on July 4, 1999
and ending on July 1, 2000, to (i) all individuals serving as the Chief
Executive Officer during the fiscal year ended July 1, 2000 and (ii) each of the
four next most highly compensated executive officers of the Company who were
serving as executive officers at July 1, 2000 (the persons described in clauses
(i) and (ii) together, the "Named Executive Officers"):
<TABLE>
<CAPTION>
Summary Compensation Table
LONG-TERM
PERIOD COMPENSATION
COMPENSATION(1) AWARDS
-------------------------- ------------------
# SECURITIES
NAME AND UNDERLYING ALL OTHER
PRINCIPAL POSITION PERIOD(2) SALARY BONUS STOCK OPTIONS COMPENSATION
---------------------------------- ------------------ ------------ ---------- ------------------ --------------
<S> <C> <C> <C> <C> <C>
James Shea(3) 7/4/99-7/1/00 $192,500 $ -- 200,000 $ 4,387(9)
Chief Executive Officer 7/1/98-7/3/99 -- -- -- --
7/1/97-6/30/98 -- -- -- --
Jack Futterman(4) 7/4/99-7/1/00 259,615 291,667 -- --
Director, Former Chairman of 7/1/98-7/3/99 81,143(5) -- -- 7,500
the Board and Former Chief 7/1/97-6/30/98 -- -- -- 22,500
Executive Officer
Thomas E. Larson 7/4/99-7/1/00 250,000 125,000 -- 7,200(9)
Senior Vice President, Chief 7/1/98-7/3/99 104,903(6) -- 60,000 --
Financial Officer and Secretary 7/1/97-6/30/98 -- -- -- --
James Kirk(7) 7/4/99-7/1/00 43,269 -- 50,000 --
Senior Vice President of Store 7/1/98-7/3/99 -- -- -- --
Operations 7/1/97-6/30/98 -- -- -- --
Gordon Keil 7/4/99-7/1/00 218,077 -- 5,000 8,783(9)
Senior Vice President, 7/1/98-7/3/99 216,923 -- -- 2,550
Franchising and Administration 7/1/97-6/30/98 212,961 -- 16,500 --
John A. Bickel(8) 7/4/99-7/1/00 43,846 -- 25,000 --
Vice President and Chief 7/1/98-7/3/99 -- -- -- --
Information Officer 7/1/97-6/30/98 -- -- -- --
----------------------
-13-
<PAGE>
(1) No Named Executive Officer 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) Effective July 3, 1999, the Company changed its fiscal year end for
financial reporting from December 31 to the Saturday nearest to June 30.
(3) Mr. Shea became Chief Executive Officer on December 10, 1999.
(4) Mr. Futterman became Chairman of the Board and Chief Executive Officer of
the Company on June 8, 1999 and resigned as Chairman of the Board and Chief
Executive Officer on December 10, 1999. Mr. Futterman continues to serve as
a director.
(5) This amount includes $48,509 paid to Mr. Futterman pursuant to a consulting
agreement for the period from April 12, 1999 until Mr. Futterman began his
employment with the Company on June 8, 1999.
(6) This amount includes $97,047 paid to Mr. Larson pursuant to a consulting
arrangement for the period from April 3, 1999 until Mr. Larson began his
employment with the Company on June 18, 1999.
(7) Mr. Kirk became Senior Vice President of Store Operations on April 17,
2000.
(8) Mr. Bickel became Vice President and Chief Information Officer on April 3,
2000.
(9) These amounts represent automobile allowances for Messrs. Shea, Larson and
Keil, respectively.
</TABLE>
Option Grants During the Fiscal Year Ended July 1, 2000
The following table presents information regarding grants of options to
purchase shares of the Company's Common Stock for each of the Named Executive
Officers receiving option grants during the fiscal year ended July 1, 2000:
<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
OPTIONS EMPLOYEES IN PER EXPIRATION ----------------------
NAME GRANTED FISCAL YEAR SHARE DATE 5% 10%
---------------------- ----------- ------------ -------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
James Shea 200,000(3) 25.63% $2.00(1) 2009 $ -- $118,748
James Kirk 50,000(3) 6.41% 1.67(2) 2010 52,513 133,077
Gordon Keil 5,000(3) 0.64% 3.00(2) 2010 9,433 23,906
John A. Bickel 25,000(3) 3.20% 2.00(2) 2010 31,445 79,687
-------------------
(1) Options issued at prices higher than fair market value at the date of grant.
(2) The price represents the fair market value at the date of grant.
(3) The options become exercisable over three (3) years, with one-third (1/3) becoming exercisable annually.
</TABLE>
-14-
<PAGE>
Aggregated Option Exercises in the Fiscal Year Ended July 1, 2000
and July 1, 2000 Option Values
The following table presents information regarding options exercised during
the fiscal year ended July 1, 2000 and the value of options outstanding at July
1, 2000 for each of the Named Executive Officers:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-
UNDERLYING UNEXERCISED OPTIONS THE-MONEY OPTIONS AT
SHARES AT FISCAL YEAR-END FISCAL YEAR-END(1)
ACQUIRED VALUE -------------------------------- ------------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------------- ----------- -------- -------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
James Shea -- -- -- 200,000 -- $140,000
Jack Futterman -- $ -- 27,500 2,500 $ --
Thomas E. Larson -- -- 60,000 -- -- --
James Kirk -- -- -- 50,000 -- 51,500
Gordon Keil -- -- 101,000 10,500 -- --
John A. Bickel -- -- -- 25,000 -- 17,500
-------------------
(1) Value is based upon a fair market value of $2.70 per share on June 30, 2000.
</TABLE>
Compensation of Directors
Directors who are employees of the Company receive no additional or special
remuneration for their service as directors. Effective September 26, 2000,
Directors who are not employees of the Company are entitled to receive an annual
retainer of $12,000 and $1,000 for each Board of Directors meeting attended and
$500 for each committee meeting. Previously, Directors who were not employees of
the Company were entitled to receive a director fee of $2,000 for each Board of
Directors meeting attended and $500 for each committee meeting. The Company also
reimburses directors for travel and lodging expenses, if any, incurred in
connection with attendance at the Board of Directors meetings.
On September 29, 1999, the Company approved a one-time grant of 20,000
stock options to each of Messrs. Hemmig and Weinger for the services which they
had rendered to the Company during the previous nine months and a grant of
10,000 stock options to each of Messrs. Dillon, Hemmig, Levkowitz and Weinger as
compensation for their prospective services until the Company's next Annual
Meeting of Stockholders. On December 10, 1999, the Company approved a one-time
grant of 150,000 stock options to Ralph Dillon in connection with his
appointment as Non-Executive Chairman of the Board. On May 11, 2000, the Company
approved a one-time grant of 20,000 stock options to L.R. Jalenak, Jr. for
prospective services until the Company's next Annual Meeting of Stockholders. On
September 26, 2000, the Company approved a one-time grant of 10,000 stock
options to each of Messrs. Dillon and Levkowitz to provide them equal stock
option compensation with other members of the Board of Directors.
The Company entered into a consulting agreement with Mr. Dillon pursuant to
which Mr. Dillon is to receive a consulting fee of $10,000 per month in exchange
for advising and consulting with the Company regarding strategic planning,
general operations and merchandising programs.
Following the resignation of Steven Mandell from the Board of Directors of
the Company on September 12, 1999, the Company retained Mr. Mandell as an
advisor to assist with
<PAGE>
merchandising and other related functions and agreed to pay Mr. Mandell $50,000
per month for his services. This arrangement was terminated in November, 1999.
Employment Agreements and Termination of Employment
The Company is party to an employment agreement with James Shea, Chief
Executive Officer of the Company, dated December 10, 1999 (the "Shea
Agreement"). The Shea Agreement provides for Mr. Shea to serve as the Company's
Chief Executive Officer for a term which commenced on December 8, 1999 and which
ends on December 8, 2002. The Shea Agreement provides that Mr. Shea will receive
an annual base salary of $350,000, subject to annual review and adjustment at
the discretion of the Board. The Shea Agreement also provides for performance
bonuses, the target amount of which is fifty percent (50%) of Mr. Shea's annual
base salary, and up to a maximum of seventy five percent (75%) of the annual
base salary, provided Mr. Shea meets certain performance goals. In addition, Mr.
Shea received a grant of 200,000 stock options to purchase Common Stock of the
Company, which options vest over a three-year period.
The Shea Agreement provides that, under certain circumstances, the Company
will make severance payments to Mr. Shea upon the termination of his employment.
Upon termination by Mr. Shea for "good reason" or by the Company for any reason
other than Mr. Shea's "disability" or "for cause," the Company will pay to Mr.
Shea his base salary for one year following the date of termination or the
remaining period of the term of the Shea Agreement.
The Company was party to an employment agreement with Jack Futterman, a
Director of the Company and the former Chairman of the Board and Chief Executive
Officer, dated June 8, 1999 (the "Futterman Agreement"). The Futterman Agreement
provided for Mr. Futterman to serve as the Chairman of the Board of the Company
and the Company's Chief Executive Officer for a term commencing on June 8, 1999
and ending on June 8, 2002. The Futterman Agreement provided for Mr. Futterman
to receive an annual base salary of $500,000. The Futterman Agreement also
provided for performance bonuses of at least $500,000 for the year ending June
8, 2000 and at least $250,000, but with the opportunity to earn at least
$500,000, for the years ending on June 8, 2001 and June 8, 2002.
On December 10, 1999, Mr. Futterman resigned as Chief Executive Officer and
Chairman of the Board. Under the terms of an amendment to the Futterman
Agreement, Mr. Futterman agreed to accept a pro rata portion of his annual bonus
equal to $291,667 which was paid in June, 2000 and is not entitled to severance
payments. Under the terms of the amended Futterman Agreement, Mr. Futterman is
covered by the Company's medical and dental insurance plans indefinitely.
The Company is party to an employment agreement with Thomas E. Larson,
Senior Vice President and Chief Financial Officer of the Company, dated June 18,
1999 (the "Larson Agreement"). The Larson Agreement provides for Mr. Larson to
serve as the Chief Financial Officer of the Company for a term which commenced
on June 18, 1999 and which ends on June 18, 2002 and which may be extended for
additional one year periods. The Larson Agreement provides for an annual minimum
base salary of $250,000, the amount of which may be adjusted upward by the Board
of Directors in its sole discretion. The Larson Agreement also provides
-16-
<PAGE>
that Mr. Larson is eligible for a guaranteed bonus of $125,000 which was paid in
June 2000 and for annual bonuses in each subsequent year, the target amount of
which is fifty percent (50%) of his base salary, provided that Mr. Larson meets
certain performance goals. In addition, Mr. Larson received a grant of 60,000
stock options to purchase Common Stock of the Company, which options originally
were to vest over a three-year period. However, these options became vested in
connection with Mr. Futterman's resignation.
The Larson Agreement provides that, under certain circumstances, the
Company will make severance payments to Mr. Larson upon the termination of his
employment. If Mr. Larson's employment is terminated by the Company without
"cause" prior to June 18, 2002 or by Mr. Larson prior to May 1, 2001 because Mr.
Futterman has resigned as Chief Executive Officer of the Company, the Company
will make severance payments to Mr. Larson which shall include accrued and
unpaid salary up to the date of his termination and a severance payment equal to
six months of Mr. Larson's base salary. In the event that Mr. Larson's
employment is terminated by the Company without "cause" subsequent to December
18, 2001, Mr. Larson will receive a severance payment equal to his base salary
for the remaining period of the term of the Larson Agreement.
The Company is party to an employment agreement with James Kirk, Senior
Vice President of Store Operations, dated May 2, 2000 (the "Kirk Agreement").
The Kirk Agreement provides for Mr. Kirk to serve as the Company's Senior Vice
President of Store Operations for "at-will" employment. The Kirk Agreement
provides that Mr. Kirk will receive an annual base salary of $225,000. The Kirk
Agreement also provides for performance bonuses, the target amount of which is
forty percent (40%) of Mr. Kirk's base salary, provided that Mr. Kirk meets
certain performance goals. In addition, Mr. Kirk received a grant of 50,000
stock options to purchase Common Stock of the Company, which options vest over a
four-year period.
The Kirk Agreement provides that, under certain circumstances, the Company
will make severance payments to Mr. Kirk upon the termination of his employment.
Upon termination by the Company without "cause," the Company will pay to Mr.
Kirk his base salary for six months following the date of termination.
The Company is party to an employment agreement with Gordon A. Keil, Senior
Vice President, Administrative and Franchise, dated April 12, 2000 (the "Keil
Agreement"). The Keil Agreement provides for Mr. Keil to serve as the Company's
Senior Vice President, Administrative and Franchise for a term which commenced
on April 12, 2000 and which ends on April 12, 2002. The Keil Agreement provides
that Mr. Keil will receive an annual base salary of $218,400, subject to annual
review and adjustment at the discretion of the Board. The Keil Agreement also
provides for performance bonuses, the target amount of which is forty percent
(40%) of Mr. Keil's base salary, and up to a maximum of sixty percent (60%) of
the annual base salary, provided Mr. Keil meets certain performance goals.
The Keil Agreement provides that, under certain circumstances, the Company
will make severance payments to Mr. Keil upon the termination of his employment.
Upon termination by Mr. Keil because he ceases to report directly to the Chief
Executive Officer of the Company or by the Company without "cause," the Company
will pay to Mr. Keil his base salary for six months following the date of
termination.
-17-
<PAGE>
Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, that might incorporate future filings,
including this Proxy Statement, in whole or in part, the following report and
the performance graph set forth herein shall not be incorporated by reference
into any such filings.
REPORT OF THE BOARD OF DIRECTORS
REGARDING EXECUTIVE COMPENSATION
Compensation Committee
The Compensation Committee was formed in 1996 and is presently is composed
of Messrs. Jalenak and Weinger. The Compensation Committee meets at least
annually or more frequently as the Company's Board of Directors may request.
Generally, the Compensation Committee's primary responsibilities include the
review of compensation, consisting of salary, bonuses, benefits and other
compensation, of the Company's executive officers. However, compensation for the
Company's officers during the fiscal year ended July 1, 2000, including base
salary, performance bonuses, stock option grants, and other compensation, was
determined by the Company's Board of Directors.
Executive Officer Compensation
The executive officer compensation programs utilized by the Company are
described below for the purpose of providing a general understanding of the
various components of executive officer compensation. These executive officer
compensation programs are designed to attract, retain and reward highly
qualified executive officers who are important to the Company's success and to
provide incentives relating directly to the financial performance and long-term
growth of the Company. The various components of the executive officer
compensation programs used by the Company are, in most cases, the same as those
made available generally to employees of the Company. The following is a summary
of the executive officer compensation programs:
Cash Compensation
Base Salary. Base salaries are established primarily upon an evaluation of
the executive officer's position and contributions to the Company, including (i)
individual performance, (ii) level of responsibility, (iii) technical expertise,
(iv) length of service, (v) Company performance and (vi) industry compensation
levels. The base salary levels for Messrs. Shea, Larson, Kirk and Keil are
established by their respective employment agreements described above in
"Compensation of Executive Officers and Directors--Employment Agreements and
Termination of Employment."
Incentive Bonuses. From time to time, incentive cash bonuses may be
approved for payment to employees, including executive officers, for the
achievement of milestones, the completion of projects identified as contributing
substantially to the Company's success, and the attainment of certain goals.
-18-
<PAGE>
Equity Compensation
In order to provide long-term incentives to the executive officers and
employees of the Company related to long-term growth in the value of the
Company's Common Stock, the Company has issued incentive stock options and
non-qualified stock options to such persons under the Company's Amended and
Restated 1994 Stock Option Plan (which has since terminated) and under its 1999
Stock Incentive Plan. The Company proposes to amend and restate the terms of its
1999 Stock Incentive Plan to permit additional options and other awards to be
issued thereunder. The determination of who receives stock options under the
Stock Incentive Plan and the number of stock options granted to each such
recipient is made by the Compensation Committee and based upon the same criteria
utilized to determine base salary.
In an effort to encourage employees and executive officers to remain
employed by the Company and to promote Company performance, stock options
granted to executive officers typically vest in an equivalent percentage over a
period of three to four years from the date of grant.
Chief Executive Officer Compensation
The Chief Executive Officer of the Company is eligible to participate in
the same executive compensation plans available to other executive officers. The
Compensation Committee's general approach in setting the Chief Executive
Officer's annual compensation (including base pay, incentive bonuses and
long-term equity incentives) is to seek to be competitive with other comparably
sized companies in the same industry group, and to have a percentage of his
annual compensation based upon objective, long-term performance criteria. This
approach incentivizes the Company's senior executive toward clearly defined
long-term goals while providing certainty to the Chief Executive Officer as to
that portion of his compensation that is nonperformance based.
Jack Futterman, a Director of the Company since 1997, served as Chief
Executive Officer from June 8, 1999 until December 10, 1999. At that time, Mr.
Futterman resigned, and James Shea was appointed as the Chief Executive Officer.
Mr. Futterman's and Mr. Shea's base salaries were established by the Company's
Board of Directors and set forth in their respective employment agreements with
the Company. Mr. Shea is eligible for a bonus of up to 75% of his annual base
salary for the period from July 1, 1999 to June 30, 2000. Under the terms of an
amendment to Mr. Futterman's employment agreement, Mr. Futterman received a pro
rata portion of his annual bonus equal to $291,667 on June 15, 2000.
In conclusion, the Board believes that the compensation policies and
practices of the Company as described above are fair and reasonable and are in
keeping with the best interests of the Company, its employees and its
shareholders.
Internal Revenue Code Section 162(m)
Section 162(m) of the Internal Revenue Code, as amended (the "Code"),
generally disallows a tax deduction to public companies for annual compensation
over $1 million paid to each of the Company's Chief Executive Officer and four
other most highly compensated executive officers, except to the extent such
compensation qualifies as "performance-based."
-19-
<PAGE>
None of the Named Executive Officers has received compensation in excess of the
Section 162(m) limits and all such compensation has been fully deductible by the
Company. While the Board's policy has always been to pursue a strategy for
maximizing deductibility of compensation for the Named Executive Officers, it
also believes it is important to maintain the flexibility to take actions it
considers in the best interests of the Company and its stockholders, which are
necessarily based on considerations in addition to Section 162(m).
Submitted October 26, 2000 and signed by the members of the Board of
Directors,
Ralph R. Dillon Edward Mule
Jack Futterman Michael Tennenbaum
L.R. Jalenak, Jr. Duayne Weinger
Howard Levkowitz
COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
Steven Mandell, the Company's founder and a former Chief Executive Officer,
served as a Director of the Company until September 12, 1999. Following Mr.
Mandell's resignation from the Board, the Company retained Mr. Mandell as an
advisor and agreed to pay Mr. Mandell $50,000 per month for his services. This
arrangement was terminated in November, 1999.
Jack Futterman served as Chief Executive Officer and Chairman of the Board
of the Company until his resignation therefrom on December 10, 1999. Mr.
Futterman continues to serve as a Director and is a nominee for Director at the
2000 Annual Meeting.
John J. Oberdorf, who served as a Director of the Company and a member of
the Company's Compensation Committee until his resignation on August 17, 1999,
is a member of the law firm of St. John & Wayne, L.L.C., general counsel to the
Company. During the period from July 4, 1999 to July 1, 2000, St. John & Wayne,
L.L.C. represented the Company as counsel in certain real estate transactions.
PERFORMANCE GRAPH
The following graph provides a comparison on a cumulative basis of the
percentage change from March 27, 1996 (the date on which the Company's Common
Stock first traded on the NASDAQ National Market System ("NMS")) through July 1,
2000 in (a) the total stockholder return on the Company's Common Stock with (b)
the total return on the NASDAQ Stock Market of all domestic issuers traded on
the NASDAQ NMS and Small-Cap Markets ("NASDAQ Market Index") and (c) the total
return of domestic issuers having the same Standard Industrial Classification
("SIC") Industry Group Number as the Company (SIC 5943) and traded on NASDAQ's
NMS or Small-Cap Markets (the "Industry Index"). Such percentage change has been
measured by dividing: (i) the sum of (A) the cumulative amount of dividends for
the measurement period assuming dividend reinvestment, and (B) the difference
between the price per share at the end and at the beginning of the measurement
period by (ii) the price per share at
-20-
<PAGE>
the beginning of the measurement period. The price of each investment unit has
been set at $100 on March 27, 1996 for purposes of preparing this graph. All
Stock price information for the Company has been retroactively adjusted to give
effect to a three-for-two stock split which occurred on January 16, 1998.
Trading in the Company's Common Stock was halted on May 6, 1999 and the
Company was delisted from the NASDAQ NMS on July 20, 1999. The Common Stock now
trades on the OTC Bulletin Board, an electronic quotation service for NASD
Market Makers.
[Performance Graph containing the following data points]
Measurement Period PARTY CITY SIC CODE 5943 NASDAQ
(Fiscal Year Covered) CORPORATION INDEX MARKET INDEX
3/27/96 100.0 100.00 100.00
12/31/96 130.77 80.73 115.56
12/31/97 248.08 96.73 141.36
12/31/98 166.50 81.60 199.37
7/3/99 44.33 74.94 242.38
7/1/00 31.14 28.26 364.70
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2. APPROVAL OF AMENDMENT AND RESTATEMENT OF 1999 STOCK INCENTIVE PLAN
On October 19, 1999, the Board adopted the Company's Incentive Plan, with
respect to which 500,000 shares of Common Stock were reserved for issuance . At
the Company's annual shareholder meeting on November 15, 1999, the Company's
shareholders approved the Incentive Plan.
Following shareholder approval, the Company has granted options under the
Incentive Plan with respect to 350,000 of the 500,000 shares issuable
thereunder. As a result, options or other awards excercisable for only an
additional 150,000 shares of Common Stock may be issued under the Incentive Plan
unless such plan is amended and restated to increase the number of shares for
which options and other awards may be issued.
On October 5, 2000, the Board approved an amendment and restatement of the
Incentive Plan, increasing the number of shares of Common Stock reserved for
issuance thereunder from 500,000 to 2,000,000. The Company now seeks the
approval of the shareholders for this amendment and restatement.
The Company is seeking stockholder approval for this amendment and
restatement of the Incentive Plan in order to comply with the requirements of
Sections 162(m) and 422 of the Code. The following summary of the Incentive Plan
is qualified in its entirety by express reference to the text of the Incentive
Plan, a copy of which was filed with the Securities and Exchange Commission.
Under the Incentive Plan, options to purchase the Common Stock may be granted
which are qualified as "incentive stock options" within the meaning of Section
422 of the Code ("ISOs") and which are not so qualified ("NSOs") (collectively
or individually, ISOs and NSOs may be referred to as "Options"), restricted
stock and other stock-based awards (collectively or individually, "Awards").
Purpose and Eligibility
The purpose of the Incentive Plan is to promote the long-term financial
success of the Company by enhancing the ability of the Company to attract,
retain and reward individuals who can and do contribute to such success and to
further align the interests of the Company's key personnel with its
stockholders. Key employees, directors and consultants of the Company and its
subsidiaries are eligible to receive Options under, and participate in, the
Incentive Plan. The number of individuals eligible to participate in the
Incentive Plan is approximately 1,330.
Administration
The Incentive Plan is administered by the Compensation Committee. The
Compensation Committee, in its sole discretion, determines which individuals may
participate in the Incentive Plan and the type, extent and terms of the Awards
to be granted. In addition, the Compensation Committee interprets the Incentive
Plan and makes all other determinations with respect to the administration of
the Incentive Plan.
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Awards
The Incentive Plan provides for the grants of Options and restricted stock
and other stock-based awards as the Compensation Committee may from time to time
deem appropriate, including, but not limited to, stock appreciation rights,
limited stock appreciation rights, phantom stock awards, the bargain purchase of
stock and stock bonuses. The terms and conditions of Awards granted under the
Incentive Plan are set out from time to time in agreements between the Company
and the individuals receiving such awards. Such terms include vesting conditions
and the expiration dates for the awards. The exercise price of the Options is
determined by the Compensation Committee at the time of grant; however, the
exercise price of an Option may not be less than the fair market value of the
Common Stock on the date of grant. Options will vest and become exercisable
within such period or periods (not to exceed 10 years) as determined by the
Compensation Committee and set forth in the Stock Option Agreement. Unless
otherwise set forth in the Stock Option Agreement, all Options expire on the
earlier of (i) ten years after grant, (ii) three months after (A) retirement,
(B) termination of employment or service with the Company or a subsidiary due to
complete and permanent disability, (C) any termination of employment or service
with the written approval of the Compensation Committee, (D) termination of
employment or service by the Company without cause (each a "Normal
Termination"), (iii) immediately upon termination of employment or service for
cause, (iv) twelve months after the death of the optionee while still employed
or within three months of a Normal Termination, or (v) the expiration date set
forth in the Stock Option Agreement. Unless otherwise set forth in the Stock
Option Agreement, Options will vest and become exercisable only during the
period of employment or service with the Company and its subsidiaries such that
upon such termination of employment or service the unvested portion of any
outstanding Option will expire. Options that have become exercisable may be
exercised by delivery of written notice of exercise to the Compensation
Committee accompanied by full payment of the Option exercise price and any
applicable withholding. The Option exercise price may be paid in cash, by check
acceptable to the Compensation Committee and/or delivery of shares of Common
Stock having a value equal to the aggregate exercise price or, in the discretion
of the Compensation Committee, either (i) in other property having a value equal
to the aggregate exercise price, or (ii) through a brokered exercise.
The Compensation Committee may permit the voluntary surrender of any NSO to
be conditioned upon the granting of a new Option for the same or a different
number of shares as the surrendered Option or require such voluntary surrender
as a condition precedent to a grant of a new Option to such optionee. Any new
Option granted may have terms different from the surrendered Option.
Grants of Restricted Stock vest in accordance with periods set by the
Compensation Committee. Certificates in respect of Restricted Stock are not
issued to the recipient at the time of grant; instead, the certificates are held
by the Company during the restricted period. In addition, during the applicable
restricted period, shares of Restricted Stock are subject to transfer
restrictions and forfeiture in the event of termination of employment with the
Company. The Compensation Committee may impose other conditions at the time the
award is granted.
The Compensation Committee may grant any other cash, stock or stock-related
Awards to any Eligible Participant under the Plan that the Compensation
Committee deems appropriate,
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including, but not limited to, stock appreciation rights, limited stock
appreciation rights, phantom stock Awards, the bargain purchase of Common Stock
and Common Stock bonuses. Any such Award will have such terms and conditions as
the Compensation Committee, in its sole discretion, so determines.
Adjustments for Recapitalization, Merger, etc. of the Company
Awards granted under the Plan and any agreements evidencing such Awards,
the maximum number of shares of Common Stock subject to all such Awards under
the Plan and the maximum number of shares of Common Stock with respect to which
any one person may be granted Options or stock appreciation rights during any
year may be subject to adjustment or substitution, as determined by the
Compensation Committee in its sole discretion, as to the number, price or kind
of a share of Common Stock or other consideration subject to such Awards or as
otherwise determined by the Compensation Committee to be equitable (i) in the
event of changes in the outstanding Common Stock or in the capital structure of
the Company by reason of stock dividends, stock splits, recapitalizations,
reorganizations, mergers, consolidations, combinations, exchanges, or other
relevant changes in capitalization occurring after the date of grant of any such
Award or (ii) in the event of any change in applicable laws or any change in
circumstances which results in or would result in any substantial dilution or
enlargement of the rights granted to, or available for, participants in the
Incentive Plan, or (iii) upon the occurrence of any other event which otherwise
warrants equitable adjustment because it interferes with the intended operation
of the Incentive Plan. In the event of any such adjustments or substitution, the
aggregate number of shares of Common Stock available under the Incentive Plan
and the maximum number of shares of Common Stock with respect to which any one
person may be granted in connection with Options during any year shall be
appropriately adjusted by the Compensation Committee, whose determination shall
be conclusive. In addition, in the event of (i) the merger of the Company into
or with another corporation, (ii) a sale of all or substantially all of the
assets of the Company to another entity, or (iii) the reorganization or
liquidation of the Company, the Compensation Committee may upon 10 days notice
to optionees cancel and cash out any or all outstanding Options for their fair
market value.
Shares Subject to the Incentive Plan
As noted above, a maximum of 500,000 shares of Common Stock are available
for issuance pursuant to the exercise of Options or other Awards under the
Incentive Plan. To date, Options for 350,000 of these shares have already been
granted. Under the amended and restated Incentive Plan, an additional 1,500,000
shares would be available for issuance, bringing the maximum number of shares
available to 2,000,000 shares. Under the Incentive Plan, no more than 400,000
shares of Common Stock may be issued to any one person pursuant to awards of
Options or stock appreciation rights during any one year.
Market Value
The closing price of the Common Stock on October 13, 2000 was $3.25 per
share.
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Nontransferability
Except as otherwise determined by the Compensation Committee, a person's
rights and interest under the Plan, including any amounts payable pursuant to an
Award, may not be sold, assigned, donated, or transferred or otherwise disposed
of, mortgaged, pledged or encumbered except, in the event of a participant's
death, to a designated beneficiary to the extent permitted by the Plan, or in
the absence of such designation, by will or the laws of descent and
distribution.
Amendment and Termination
The Board may at any time terminate the Plan. With the express written
consent of an individual participant (subject to any other allowable adjustments
under the Plan to outstanding Awards without the consent of any participant),
the Board or the Compensation Committee may cancel or reduce or otherwise alter
the outstanding Awards thereunder if, in its judgment, the tax, accounting, or
other effects of the Plan or potential payouts thereunder would not be in the
best interest of the Company. The Board or the Compensation Committee may, at
any time, or from time to time, amend or suspend and, if suspended, reinstate,
the Plan in whole or in part, subject to any limitations set forth in the Plan.
Federal Tax Consequences
The following is a brief discussion of the Federal income tax consequences
of transactions with respect to Options under the Incentive Plan based on the
Code, as in effect as of the date of this summary. This discussion is not
intended to be exhaustive and does not describe any state or local tax
consequences.
ISOs. No taxable income is realized by the optionee upon the grant or
exercise of an ISO. If Common Stock is issued to an optionee pursuant to the
exercise of an ISO, and if no disqualifying disposition of such shares is made
by such optionee within two years after the date of grant or within one year
after the transfer of such shares to such optionee, then (1) upon the sale of
such shares, any amount realized in excess of the Option price will be taxed to
such optionee as a long-term capital gain and any loss sustained will be a
long-term capital loss, and (2) no deduction will be allowed to the Company for
Federal income tax purposes.
If the Common Stock acquired upon the exercise of an ISO is disposed of
prior to the expiration of either holding period described above, generally, (1)
the optionee will realize ordinary income in the year of disposition in an
amount equal to the excess (if any) of the Fair Market Value of such shares at
exercise (or, if less, the amount realized on the disposition of such shares)
over the Option price paid for such shares and (2) the Company will be entitled
to deduct such amount for Federal income tax purposes if the amount represents
an ordinary and necessary business expense. Any further gain (or loss) realized
by the optionee upon the sale of the Common Stock will be taxed as short-term or
long-term capital gain (or loss), depending on how long the shares have been
held, and will not result in any deduction by the Company.
If an ISO is exercised more than three months following termination of
employment (subject to certain exceptions for disability or death), the exercise
of the Option will generally be taxed as the exercise of a NSO, as described
below.
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For purposes of determining whether an optionee is subject to an
alternative minimum tax liability, an optionee who exercises an ISO generally
would be required to increase his or her alternative minimum taxable income, and
compute the tax basis in the stock so acquired, in the same manner as if the
optionee had exercised a NSO. Each optionee is potentially subject to the
alternative minimum tax. In substance, a taxpayer is required to pay the higher
of his/her alternative minimum tax liability or his/her "regular" income tax
liability. As a result, a taxpayer has to determine his/her potential liability
under the alternative minimum tax.
NSOs. With respect to NSOs: (1) no income is realized by the optionee at
the time the Option is granted; (2) generally, at exercise, ordinary income is
realized by the optionee in an amount equal to the excess, if any, of the Fair
Market Value of the shares on such date over the exercise price, and the Company
is generally entitled to a tax deduction in the same amount, subject to
applicable tax withholding requirements; and (3) at sale, appreciation (or
depreciation) after the date of exercise is treated as either short-term or
long-term capital gain (or loss) depending on how long the shares have been
held.
Special Rules Applicable to Corporate Insiders
As a result of the rules under Section 16(b) of the Exchange Act ("Section
16(b)"), and depending upon the particular exemption from the provisions of
Section 16(b) utilized, officers and directors of the Company and persons owning
more than 10 percent of the outstanding shares of stock of the Company
(together, "Insiders") may not receive the same tax treatment as set forth above
with respect to the grant and/or exercise of Options. Generally, Insiders will
not be subject to taxation until the expiration of any period during which they
are subject to the liability provisions of Section 16(b) with respect to any
particular Option. Insiders should check with their own tax advisers to
ascertain the appropriate tax treatment for any particular Option.
New Plan Benefits
Because the grant of awards under the Incentive Plan is entirely within the
discretion of the Compensation Committee, the Company cannot forecast the extent
or nature of awards that will be granted in the future. Therefore, the Company
has omitted the tabular disclosure of the benefits or amounts allocated under
the Incentive Plan. Information with respect to compensation paid and other
benefits, including Options granted in respect of the fiscal year ended July 1,
2000 to the Named Executive Officers is set forth in the Summary Compensation
Table.
Recommendation and Vote
Approval of the proposal to amend and restate the Incentive Plan requires
the affirmative vote of a majority of the shares of Common Stock present, in
person or by proxy, at the Annual Meeting, and entitled to vote thereon.
The Board unanimously recommends a vote FOR the approval of the proposal to
amend and restate the Company's 1999 Stock Incentive Plan to increase the number
of shares reserved for issuance upon exercise of options and other awards
granted thereunder from 500,000 to 2,000,000.
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The Company knows of no other matters to be submitted at the Annual
Meeting. If any other matters properly come before the Annual Meeting, the
persons named in the accompanying form of Proxy will vote, in their discretion,
the shares of common stock they represent.
By Order of the Board of Directors
/s/ Thomas E. Larson
--------------------
THOMAS E. LARSON
Secretary
Dated: October 26, 2000
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PARTY CITY CORPORATION
1999 STOCK INCENTIVE PLAN
(Amended and Restated as of October 25, 2000)
1. Purpose
The purpose of the Plan is to provide a means through which the Company and
its Subsidiaries may attract highly qualified persons to become and remain
directors of the Company and enter and remain in the employ of the Company and
its Subsidiaries and to provide a means whereby employees, directors and
consultants of the Company and its Subsidiaries can acquire and maintain Common
Stock ownership, or be paid incentive compensation measured by reference to the
value of Common Stock, thereby strengthening their commitment to the welfare of
the Company and its Subsidiaries and promoting an identity of interest between
stockholders and these employees, directors and consultants. The Plan is
intended to operate in compliance with the provisions of Rule 16b-3 of the
General Rules and Regulations of the Exchange Act.
So that the appropriate incentive can be provided, the Plan provides for
granting Incentive Stock Options, Nonqualified Stock Options, Restricted Stock
Awards, and other Stock-based Awards, or any combination of the foregoing.
2. Definitions
The following definitions shall be applicable throughout the Plan.
(a) "Affiliate" of any individual or entity means an individual or entity
that is directly or indirectly through one or more intermediaries controlled by
or under common control with the individual or entity specified.
(b) "Award" means, individually or collectively, any Incentive Stock
Option, Nonqualified Stock Option, Restricted Stock Award, or other Stock-based
Award.
(c) "Board" means the Board of Directors of Party City Corporation.
(d) "Cause" means the Company or a Subsidiary having cause to terminate a
Participant's employment or service under any existing employment, consulting or
any other agreement between the Participant and the Company or a Subsidiary. In
the absence of any such an employment, consulting or other agreement, a
Participant shall be deemed to have been terminated for Cause if the Committee
determines that his termination of employment with the Company or a Subsidiary
is on account of (A) incompetence, fraud, personal dishonesty, embezzlement,
defalcation or acts of gross negligence or gross misconduct on the part of
Participant in the course of his employment or services, (B) a material breach
of Participant's fiduciary duty of loyalty to the Company or a Subsidiary, (C) a
Participant's engagement in conduct that is materially injurious to the Company
or a Subsidiary, (D) a Participant's conviction by a court of competent
jurisdiction of, or pleading "guilty" or "no contest" to, (x) a felony, or (y)
<PAGE>
any other criminal charge (other than minor traffic violations) which could
reasonably be expected to have a material adverse impact on Company's or a
Subsidiary's reputation and standing in the community; (E) public or consistent
drunkenness by a Participant or his illegal use of narcotics which is, or could
reasonably be expected to become, materially injurious to the reputation or
business of the Company or a Subsidiary or which impairs, or could reasonably be
expected to impair, the performance of a Participant's duties to the Company or
a Subsidiary; or (F) willful failure by a Participant to follow the lawful
directions of a superior officer or the Board, representing disloyalty to the
goals of the Company or a Subsidiary.
(e) "Code" means the Internal Revenue Code of 1986, as amended. Reference
in the Plan to any section of the Code shall be deemed to include any amendments
or successor provisions to such section and any regulations under such section.
(f) "Committee" means the Compensation Committee of the Board or such other
committee of at least two people as the Board may appoint to administer the
Plan; provided, however, that each member of the Committee is a Disinterested
Person.
(g) "Common Stock" means the common stock par value $0.01 per share, of
Party City Corporation.
(h) "Company" means Party City Corporation.
(i) "Date of Grant" means the date on which the granting of an Award is
authorized or such other date as may be specified in such authorization.
(j) "Disability", with respect to any particular Participant, means
disability as defined in such Participant's employment, consulting or other
relevant agreement with the Company or a Subsidiary or, in the absence of any
such agreement, disability as defined in the long-term disability plan of the
Company or a Subsidiary, as may be applicable to the Participant in question,
or, in the absence of such a plan, the complete and permanent inability by
reason of illness or accident to perform the duties of the occupation at which a
Participant was employed or served when such disability commenced or, if the
Participant was retired when such disability commenced, the inability to engage
in any substantial gainful activity, in either case as determined by the
Committee based upon medical evidence acceptable to it.
(k) "Disinterested Person" means a person who is (i) a "non-employee
director" within the meaning of Rule 16b-3 under the Exchange Act, or any
successor rule or regulation and (ii) an "outside director" within the meaning
of Section 162(m) of the Code.
(l) "Eligible Person" means any (i) person regularly employed by the
Company or a Subsidiary; provided, however, that no such employee covered by a
collective bargaining agreement shall be an Eligible Person unless and to the
extent that such eligibility is set forth in such collective bargaining
agreement or in an agreement or instrument relating thereto; (ii) director of
the Company or a Subsidiary; or (iii) consultant to the Company or a Subsidiary.
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(m) "Exchange Act" means the Securities Exchange Act of 1934.
(n) "Fair Market Value" on a given date means the closing price on the
primary exchange with which the Stock is listed and traded on the date prior to
such date, or, if there is no such sale on that date, then on the last preceding
date on which such a sale was reported.
(o) "Holder" means a Participant who has been granted an Award.
(p) "Incentive Stock Option" means an Option granted by the Committee to a
Participant under the Plan which is designated by the Committee as an Incentive
Stock Option pursuant to Section 422 of the Code.
(q) "Nonqualified Stock Option" means an Option granted under the Plan
which is not designated as an Incentive Stock Option.
(r) "Normal Termination" means termination of employment or service with
the Company and all Subsidiaries:
(i) Upon retirement pursuant to the retirement plan of the Company or
a Subsidiary, as may be applicable at the time to the Participant
in question;
(ii) On account of Disability;
(iii) With the written approval of the Committee; or
(iv) By the Company or a Subsidiary without Cause.
(s) "Option" means an Award granted under Section 7 of the Plan.
(t) "Option Period" means the period described in Section 7(c).
(u) "Option Price" means the exercise price set for an Option described in
Section 7(a).
(v) "Participant" means an Eligible Person who has been selected by the
Committee to participate in the Plan and to receive an Award.
(w) "Plan" means the Company's 1999 Stock Incentive Plan.
(x) "Restricted Period" means, with respect to any share of Restricted
Stock, the period of time determined by the Committee during which such Award is
subject to the restrictions set forth in Section 8.
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(y) "Restricted Stock" means shares of Stock issued or transferred to a
Participant subject to forfeiture and the other restrictions set forth in
Section 8.
(z) "Restricted Stock Award" means an Award of Restricted Stock granted
under Section 8 of the Plan.
(aa) "Securities Act" means the Securities Act of 1933, as amended.
(bb) "Stock" means the Common Stock or such other authorized shares of
stock of the Company as from time to time may be authorized for use under the
Plan.
(cc) "Stock Option Agreement" means the agreement between the Company and a
Participant who has been granted an Option pursuant to Section 7 which
defines
the rights and obligations of the parties as required in Section 7(d).
(dd) "Subsidiary" means any subsidiary of the Company as defined in Section
424(f) of the Code.
3. Effective Date, Duration and Shareholder Approval
The Plan is effective as of October 19, 1999, the date on which the Plan
was adopted by the Board.
The expiration date of the Plan, after which no Awards may be granted
hereunder, shall be October 19, 2009; provided, however, that the administration
of the Plan shall continue in effect until all matters relating to the payment
of Awards previously granted have been settled.
4. Administration
The Committee shall administer the Plan. Unless otherwise determined by the
Board, each member of the Committee shall, at the time he takes any action with
respect to an Award under the Plan, be a Disinterested Person. The majority of
the members of the Committee shall constitute a quorum. The acts of a majority
of the members present at any meeting at which a quorum is present or acts
approved in writing by a majority of the Committee shall be deemed the acts of
the Committee.
Subject to the provisions of the Plan, the Committee shall have exclusive
power to:
(a) Select the Eligible Persons to participate in the Plan;
(b) Determine the nature and extent of the Awards to be made to each
Eligible Person;
(c) Determine the time or times when Awards will be made to Eligible
Persons;
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(d) Determine the duration of each Option Period and Restricted Period;
(e) Determine the conditions to which the payment of Awards may be subject;
(f) Prescribe the form of Stock Option Agreement or other form or forms
evidencing Awards; and
(g) Cause records to be established in which there shall be entered, from
time to time as Awards are made to Participants, the date of each Award, the
number of Incentive Stock Options, Nonqualified Stock Options, shares of
Restricted Stock and other Stock-based Awards granted by the Committee to each
Participant, the expiration date, the Option Period and the duration of any
applicable Restricted Period.
The Committee shall have the authority to interpret the Plan and, subject
to the provisions of the Plan, to establish, adopt, or revise such rules and
regulations and to make all such determinations relating to the Plan as it may
deem necessary or advisable for the administration of the Plan. The Committee's
interpretation of the Plan or any documents evidencing Awards granted pursuant
thereto and all decisions and determinations by the Committee with respect to
the Plan shall be final, binding, and conclusive on all parties unless otherwise
determined by the Board.
5. Grant of Awards; Shares Subject to the Plan
The Committee may, from time to time, grant Awards of Options, Restricted
Stock and other Stock-based Awards to one or more Eligible Persons; provided,
however, that:
(a) Subject to Section 11, the maximum aggregate number of shares of Stock
available for issuance or distribution pursuant to Awards under the Plan is
2,000,000;
(b) Except as set forth in Section 5(d), such shares shall be deemed to
have been used in payment of Awards only to the extent they are actually
delivered and not where the Fair Market Value equivalent of such shares for a
Stock-based Award is paid in cash. In the event any Award shall be surrendered,
terminate, expire, or be forfeited, the number of shares of Stock no longer
subject thereto shall thereupon be released and shall thereafter be available
for new Awards under the Plan;
(c) Stock delivered by the Company in settlement of Awards under the Plan
may be authorized and unissued Stock or Stock held in the treasury of the
Company or may be purchased on the open market or by private purchase; and
(d) No Participant may receive Options or stock appreciation rights under
the Plan with respect to more than 400,000 shares of Stock in any one year. For
this purpose, such shares shall be deemed to have been used in payment of Awards
whether they are actually delivered or where the Fair Market Value equivalent of
such shares for a stock appreciation right is paid in cash.
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6. Eligibility
Participation shall be limited to Eligible Persons who have received
written notification from the Committee, or from a person designated by the
Committee, that they have been selected to participate in the Plan.
7. Discretionary Grant of Stock Options
The Committee is authorized to grant one or more Incentive Stock Options or
Nonqualified Stock Options to any Eligible Person; provided, however, that no
Incentive Stock Options shall be granted to any Eligible Person who is not an
employee of the Company. Each Option so granted shall be subject to the
following conditions, or to such other conditions as may be reflected in the
applicable Stock Option Agreement.
(a) Option price. The exercise price ("Option Price") per share of Stock
for each Option shall be set by the Committee at the time of grant but shall not
be less than the Fair Market Value of a share of Stock at the Date of Grant.
(b) Manner of exercise and form of payment. Options which have become
exercisable may be exercised by delivery of written notice of exercise to the
Committee accompanied by payment of the Option Price. The Option Price may be
payable in cash, by bank check (acceptable to the Committee) and/or shares of
Stock (valued at the Fair Market Value at the time the Option is exercised),
having in the aggregate a value equal to the aggregate Option Price or, in the
discretion of the Committee, either (i) in other property having a fair market
value on the date of exercise equal to the aggregate Option Price, or (ii) by
delivering to the Committee a copy of irrevocable instructions to a stockbroker
to deliver promptly to the Company an amount of sale or loan proceeds sufficient
to pay the aggregate Option Price.
(c) Option Period and Expiration. Options shall vest and become exercisable
in such manner and on such date or dates determined by the Committee and shall
expire after such period, not to exceed ten years, as may be determined by the
Committee (the "Option Period"); provided, however, that notwithstanding any
vesting dates set by the Committee, the Committee may in its sole discretion
accelerate the exercisability of any Option, which acceleration shall not affect
the terms and conditions of any such Option other than with respect to
exercisability. Unless otherwise specifically determined by the Committee, the
vesting of an Option shall occur only while the Participant is employed or
rendering services to the Company or its Subsidiaries and all vesting shall
cease upon a Holder's termination of employment or services for any reason. If
an Option is exercisable in installments, such installments or portions thereof
which become exercisable shall remain exercisable until the Option expires.
Unless otherwise stated in the applicable Option Agreement, the Option shall
expire earlier than the end of the Option Period in the following circumstances:
(i) If prior to the end of the Option Period, the Holder shall
undergo a Normal Termination, the Option shall expire on the
earlier of the last day
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of the Option Period or the date that is three months after the
date of such Normal Termination. In such event, the Option shall
remain exercisable by the Holder until its expiration, but only
to the extent the Option was vested and exercisable at the time
of such Normal Termination.
(ii) If the Holder dies prior to the end of the Option Period and
while still in the employ or service of the Company or a
Subsidiary, or within three months of Normal Termination, the
Option shall expire on the earlier of the last day of the Option
Period or the date that is twelve months after the date of death
of the Holder. In such event, the Option shall remain exercisable
by the person or persons to whom the Holder's rights under the
Option pass by will or the applicable laws of descent and
distribution until its expiration, but only to the extent the
Option was vested and exercisable by the Holder at the time of
death.
(iii) If the Holder ceases employment or service with the Company and
all Subsidiaries for reasons other than Normal Termination or
death, the Option shall expire immediately upon such cessation of
employment or service.
(d) Stock Option Agreement - Other Terms and Conditions. Each Option
granted under the Plan shall be evidenced by a Stock Option Agreement, which
shall contain such provisions as may be determined by the Committee and, except
as may be specifically stated otherwise in such Stock Option Agreement, which
shall be subject to the following terms and conditions:
(i) Each Option issued pursuant to this Section 7 or portion thereof
that is exercisable shall be exercisable for the full amount or
for any part thereof.
(ii) Each share of Stock purchased through the exercise of an Option
issued pursuant to this Section 7 shall be paid for in full at
the time of the exercise. Each Option shall cease to be
exercisable, as to any share of Stock, when the Holder purchases
the share or when the Option expires.
(iii) Options issued pursuant to this Section 7 shall not be
transferable by the Holder except by will or the laws of descent
and distribution and shall be exercisable during the Holder's
lifetime only by him; provided, however, that the Committee may
at any time upon the request of a Holder allow for the transfer
of any Option, subject to such conditions or limitations as it
may establish.
(iv) Each Option issued pursuant to this Section 7 shall vest and
become exercisable by the Holder in accordance with the vesting
schedule
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<PAGE>
established by the Committee and set forth in the Stock Option
Agreement.
(v) Each Stock Option Agreement may contain a provision that, upon
demand by the Committee for such a representation, the Holder
shall deliver to the Committee at the time of any exercise of an
Option issued pursuant to this Section 7 a written representation
that the shares to be acquired upon such exercise are to be
acquired for investment and not for resale or with a view to the
distribution thereof. Upon such demand, delivery of such
representation prior to the delivery of any shares issued upon
exercise of an Option issued pursuant to this Section 7 shall be
a condition precedent to the right of the Holder or such other
person to purchase any shares. In the event certificates for
Stock are delivered under the Plan with respect to which such
investment representation has been obtained, the Committee may
cause a legend or legends to be placed on such certificates to
make appropriate reference to such representation and to restrict
transfer in the absence of compliance with applicable federal or
state securities laws.
(vi) Each Incentive Stock Option Agreement shall contain a provision
requiring the Holder to notify the Company in writing immediately
after the Holder makes a disqualifying disposition of any Stock
acquired pursuant to the exercise of such Incentive Stock Option.
A disqualifying disposition is any disposition (including any
sale) of such Stock before the later of (a) two years after the
Date of Grant of the Incentive Stock Option or (b) one year after
the date the Holder acquired the Stock by exercising the
Incentive Stock Option.
(e) Incentive Stock Option Grants to 10% Stockholders. Notwithstanding
anything to the contrary in this Section 7, if an Incentive Stock Option is
granted to a Holder who owns stock representing more than 10% of the voting
power of all classes of stock of the Company or of a Subsidiary, the Option
Period shall not exceed five years from the Date of Grant of such Option and the
Option Price shall be at least 110% of the Fair Market Value (on the Date of
Grant) of the Stock subject to the Option.
(f) $100,000 Per Year Limitation for Incentive Stock Options. To the extent
the aggregate Fair Market Value (determined as of the Date of Grant) of Stock
for which Incentive Stock Options are exercisable for the first time by any
Participant during any calendar year (under all plans of the Company and its
Subsidiaries) exceeds $100,000, such excess Incentive Stock Options shall be
treated as Nonqualified Stock Options.
(g) Voluntary Surrender. The Committee may permit the voluntary surrender
of all or any portion of any Nonqualified Stock Option issued pursuant to this
Section 7 to be conditioned upon the granting to the Holder of a new Option for
the same or a different number of shares as the Option surrendered or require
such voluntary surrender as a condition precedent
8
<PAGE>
to a grant of a new Option to such Participant. Such new Option shall be
exercisable at an Option Price, during an Option Period, and in accordance with
any other terms or conditions specified by the Committee at the time the new
Option is granted, all determined in accordance with the provisions of the Plan
without regard to the Option Price, Option Period, or any other terms and
conditions of the Nonqualified Stock Option surrendered.
8. Restricted Stock Awards
(a) Award of Restricted Stock.
(i) The Committee shall have the authority (1) to grant Restricted
Stock, (2) to issue or transfer Restricted Stock to Eligible
Persons, and (3) to establish terms, conditions and restrictions
applicable to such Restricted Stock, including the Restricted
Period, which may differ with respect to each grantee, the time
or times at which Restricted Stock shall be granted or become
vested and the number of shares to be covered by each grant.
(ii) The Holder of a Restricted Stock Award shall execute and deliver
to the Company an Award agreement with respect to the Restricted
Stock setting forth the restrictions applicable to such
Restricted Stock. If the Committee determines that the Restricted
Stock shall be held in escrow rather than delivered to the Holder
pending the release of the applicable restrictions, the Holder
additionally shall execute and deliver to the Company (i) an
escrow agreement satisfactory to the Committee, and (ii) the
appropriate blank stock powers with respect to the Restricted
Stock covered by such agreements. If a Holder shall fail to
execute a Restricted Stock agreement and, if applicable, an
escrow agreement and stock powers, the Award shall be null and
void. Subject to the restrictions set forth in Section 8(b), the
Holder shall generally have the rights and privileges of a
stockholder as to such Restricted Stock, including the right to
vote such Restricted Stock. At the discretion of the Committee,
cash dividends and stock dividends, if any, with respect to the
Restricted Stock may be either currently paid to the Holder or
withheld by the Company for the Holder's account. Unless
otherwise determined by the Committee no interest will accrue or
be paid on the amount of any cash dividends withheld. Unless
otherwise determined by the Committee, cash dividends or stock
dividends so withheld by the Committee shall be subject to
forfeiture to the same degree as the shares of Restricted Stock
to which they relate.
(iii) Upon the Award of Restricted Stock, the Committee shall cause a
stock certificate registered in the name of the Holder to be
issued and, if it so determines, deposited together with the
stock powers with an escrow agent designated by the Committee. If
an escrow arrangement is used, the Committee shall cause the
escrow agent to issue to the Holder a
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<PAGE>
receipt evidencing any stock certificate held by it registered in
the name of the Holder.
(b) Restrictions.
(i) Restricted Stock awarded to a Participant shall be subject to the
following restrictions until the expiration of the Restricted
Period, and to such other terms and conditions as may be set
forth in the applicable Award agreement: (1) if an escrow
arrangement is used, the Holder shall not be entitled to delivery
of the stock certificate; (2) the shares shall be subject to the
restrictions on transferability set forth in the Award agreement;
(3) the shares shall be subject to forfeiture to the extent
provided in Section 8(d) and the Award Agreement and, to the
extent such shares are forfeited, the stock certificates shall be
returned to the Company, and all rights of the Holder to such
shares and as a shareholder shall terminate without further
obligation on the part of the Company.
(ii) The Committee shall have the authority to remove any or all of
the restrictions on the Restricted Stock whenever it may
determine that, by reason of changes in applicable laws or other
changes in circumstances arising after the date of the Restricted
Stock Award, such action is appropriate.
(c) Restricted Period. The Restricted Period of Restricted Stock shall
commence on the Date of Grant and shall expire from time to time as to that part
of the Restricted Stock indicated in a schedule established by the Committee and
set forth in a written Award agreement.
(d) Forfeiture Provisions. Except to the extent determined by the Committee
and reflected in the underlying Award agreement, in the event a Holder
terminates employment with the Company and all Subsidiaries during a Restricted
Period, that portion of the Award with respect to which restrictions have not
expired ("Non-Vested Portion") shall be treated as follows.
(i) Upon the voluntary resignation of a Participant or discharge by
the Company or a Subsidiary for Cause, the Non-Vested Portion of
the Award shall be completely forfeited.
(ii) Upon Normal Termination, the Non-Vested Portion of the Award
shall be prorated for service during the Restricted Period and
shall be received as soon as practicable following termination.
(iii) Upon death, the Non-Vested Portion of the Award shall be
prorated for service during the Restricted Period and paid to the
Participant's beneficiary as soon as practicable following death.
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<PAGE>
(e) Delivery of Restricted Stock. Upon the expiration of the Restricted
Period with respect to any shares of Stock covered by a Restricted Stock Award,
the restrictions set forth in Section 8(b) and the Award agreement shall be of
no further force or effect with respect to shares of Restricted Stock which have
not then been forfeited. If an escrow arrangement is used, upon such expiration,
the Company shall deliver to the Holder, or his beneficiary, without charge, the
stock certificate evidencing the shares of Restricted Stock which have not then
been forfeited and with respect to which the Restricted Period has expired (to
the nearest full share) and any cash dividends or stock dividends credited to
the Holder's account with respect to such Restricted Stock and the interest
thereon, if any.
(f) Stock Restrictions. Each certificate representing Restricted Stock
awarded under the Plan shall bear the following legend until the end of the
Restricted Period with respect to such Stock:
"Transfer of this certificate and the shares represented hereby is
restricted pursuant to the terms of a Restricted Stock Agreement, dated as
of , between Party City Corporation and . A copy of such Agreement is on
file at the offices of Party City Corporation."
Stop transfer orders shall be entered with the Company's transfer agent and
registrar against the transfer of legended securities.
9. Other Stock-Based Awards
The Committee may grant any other cash, stock or stock-related Awards to
any eligible individual under this Plan that the Committee deems appropriate,
including, but not limited to, stock appreciation rights, limited stock
appreciation rights, phantom stock Awards, the bargain purchase of Stock and
Stock bonuses. Any such benefits and any related agreements shall contain such
terms and conditions as the Committee deems appropriate. Such Awards and
agreements need not be identical. With respect to any benefit under which shares
of Stock are or may in the future be issued for consideration other than prior
services, the amount of such consideration shall not be less than the amount
(such as the par value of such shares) required to be received by the Company in
order to comply with applicable state law.
10. General
(a) Additional Provisions of an Award. Awards under the Plan also may be
subject to such other provisions (whether or not applicable to the benefit
awarded to any other Participant) as the Committee determines appropriate
including, without limitation, provisions to assist the Participant in financing
the purchase of Stock upon the exercise of Options, provisions for the
forfeiture of or restrictions on resale or other disposition of shares of Stock
acquired under any Award, provisions giving the Company the right to repurchase
shares of Stock acquired under any Award in the event the Participant elects to
dispose of such shares, and provisions to comply with Federal and state
securities laws and Federal and state tax withholding requirements. Any such
provisions shall be reflected in the applicable Award agreement.
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<PAGE>
(b) Privileges of Stock Ownership. Except as otherwise specifically
provided in the Plan, no person shall be entitled to the privileges of stock
ownership in respect of shares of Stock which are subject to Awards hereunder
until such shares have been issued to that person.
(c) Government and Other Regulations. The obligation of the Company to make
payment of Awards in Stock or otherwise shall be subject to all applicable laws,
rules, and regulations, and to such approvals by governmental agencies as may be
required. Notwithstanding any terms or conditions of any Award to the contrary,
the Company shall be under no obligation to offer to sell or to sell and shall
be prohibited from offering to sell or selling any shares of Stock pursuant to
an Award unless such shares have been properly registered for sale pursuant to
the Securities Act with the Securities and Exchange Commission or unless the
Company has received an opinion of counsel, satisfactory to the Company, that
such shares may be offered or sold without such registration pursuant to an
available exemption therefrom and the terms and conditions of such exemption
have been fully complied with. The Company shall be under no obligation to
register for sale under the Securities Act any of the shares of Stock to be
offered or sold under the Plan. If the shares of Stock offered for sale or sold
under the Plan are offered or sold pursuant to an exemption from registration
under the Securities Act, the Company may restrict the transfer of such shares
and may legend the Stock certificates representing such shares in such manner as
it deems advisable to ensure the availability of any such exemption.
(d) Tax Withholding. Notwithstanding any other provision of the Plan, the
Company or a Subsidiary, as appropriate, shall have the right to deduct from all
Awards cash and/or Stock, valued at Fair Market Value on the date of payment, in
an amount necessary to satisfy all Federal, state or local taxes as required by
law to be withheld with respect to such Awards and, in the case of Awards paid
in Stock, the Holder or other person receiving such Stock may be required to pay
to the Company or a Subsidiary, as appropriate, prior to delivery of such Stock,
the amount of any such taxes which the Company or Subsidiary is required to
withhold, if any, with respect to such Stock. Subject in particular cases to the
disapproval of the Committee, the Company may accept shares of Stock of
equivalent Fair Market Value in payment of such withholding tax obligations if
the Holder of the Award elects to make payment in such manner.
(e) Claim to Awards and Employment Rights. No individual shall have any
claim or right to be granted an Award under the Plan or, having been selected
for the grant of an Award, to be selected for a grant of any other Award.
Neither the Plan nor any action taken hereunder shall be construed as giving any
individual any right to be retained in the employ or service of the Company or a
Subsidiary.
(f) Designation and Change of Beneficiary. Each Participant may file with
the Committee a written designation of one or more persons as the beneficiary
who shall be entitled to receive the rights or amounts payable with respect to
an Award due under the Plan upon his death. A Participant may, from time to
time, revoke or change his beneficiary designation without the consent of any
prior beneficiary by filing a new designation with the Committee.
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<PAGE>
The last such designation received by the Committee shall be controlling;
provided, however, that no designation, or change or revocation thereof, shall
be effective unless received by the Committee prior to the Participant's death,
and in no event shall it be effective as of a date prior to such receipt. If no
beneficiary designation is filed by the Participant, the beneficiary shall be
deemed to be his or her spouse or, if the Participant is unmarried at the time
of death, his or her estate.
(g) Payments to Persons Other Than Participants. If the Committee shall
find that any person to whom any amount is payable under the Plan is unable to
care for his affairs because of illness or accident, or is a minor, or has died,
then any payment due to such person or his estate (unless a prior claim therefor
has been made by a duly appointed legal representative) may, if the Committee so
directs the Company, be paid to his spouse, child, relative, an institution
maintaining or having custody of such person, or any other person deemed by the
Committee to be a proper recipient on behalf of such person otherwise entitled
to payment. Any such payment shall be a complete discharge of the liability of
the Committee and the Company therefor.
(h) No Liability of Committee Members. No member of the Committee shall be
personally liable by reason of any contract or other instrument executed by such
member or on his behalf in his capacity as a member of the Committee nor for any
mistake of judgment made in good faith, and the Company shall indemnify and hold
harmless each member of the Committee and each other employee, officer or
director of the Company to whom any duty or power relating to the administration
or interpretation of the Plan may be allocated or delegated, against any cost or
expense (including counsel fees) or liability (including any sum paid in
settlement of a claim) arising out of any act or omission to act in connection
with the Plan unless arising out of such person's own fraud or willful bad
faith; provided, however, that approval of the Board shall be required for the
payment of any amount in settlement of a claim against any such person. The
foregoing right of indemnification shall not be exclusive of any other rights of
indemnification to which such persons may be entitled under the Company's
Articles of Incorporation or By-Laws, as a matter of law, or otherwise, or any
power that the Company may have to indemnify them or hold them harmless.
(i) Governing law. The Plan shall be governed by and construed in
accordance with the internal laws of the State of Delaware without regard to the
principles of conflicts of law thereof.
(j) Funding. No provision of the Plan shall require the Company, for the
purpose of satisfying any obligations under the Plan, to purchase assets or
place any assets in a trust or other entity to which contributions are made or
otherwise to segregate any assets, nor shall the Company maintain separate bank
accounts, books, records or other evidence of the existence of a segregated or
separately maintained or administered fund for such purposes. Holders shall have
no rights under the Plan other than as unsecured general creditors of the
Company, except that insofar as they may have become entitled to payment of
additional compensation by performance of services, they shall have the same
rights as other employees under general law.
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(k) Nontransferability. A person's rights and interest under the Plan,
including amounts payable, may not be sold, assigned, donated, or transferred or
otherwise disposed of, mortgaged, pledged or encumbered except, in the event of
a Holder's death, to a designated beneficiary to the extent permitted by the
Plan, or in the absence of such designation, by will or the laws of descent and
distribution; provided, however, the Committee may, in its sole discretion,
allow for transfer of Awards other than Incentive Stock Options to other persons
or entities, subject to such conditions or limitations as it may establish.
(l) Reliance on Reports. Each member of the Committee and each member of
the Board shall be fully justified in relying, acting or failing to act, and
shall not be liable for having so relied, acted or failed to act in good faith,
upon any report made by the independent public accountant of the Company and its
Subsidiaries and upon any other information furnished in connection with the
Plan by any person or persons other than himself.
(m) Relationship to Other Benefits. No payment under the Plan shall be
taken into account in determining any benefits under any pension, retirement,
profit sharing, group insurance or other benefit plan of the Company or any
Subsidiary except as otherwise specifically provided in such other plan.
(n) Expenses. The expenses of administering the Plan shall be borne by the
Company and its Subsidiaries.
(o) Pronouns. Masculine pronouns and other words of masculine gender shall
refer to both men and women.
(p) Titles and Headings. The titles and headings of the sections in the
Plan are for convenience of reference only, and in the event of any conflict,
the text of the Plan, rather than such titles or headings shall control.
(q) Termination of Employment. For all purposes herein, a person who
transfers from employment or service with the Company to employment or service
with a Subsidiary or vice versa shall not be deemed to have terminated
employment or service with the Company or a Subsidiary.
11. Changes in Capital Structure
Awards granted under the Plan and any agreements evidencing such Awards,
the maximum number of shares of Stock subject to all Awards under the Plan and
the maximum number of shares of Stock with respect to which any one person may
be granted Options or stock appreciation rights during any year may be subject
to adjustment or substitution, as determined by the Committee in its sole
discretion, as to the number, price or kind of a share of Stock or other
consideration subject to such Awards or as otherwise determined by the Committee
to be equitable (i) in the event of changes in the outstanding Stock or in the
capital structure of Company by reason of stock dividends, stock splits, reverse
stock splits, recapitalizations, reorganizations, mergers, consolidations,
combinations, exchanges, or other relevant changes in
14
<PAGE>
capitalization occurring after the Date of Grant of any such Award or (ii) in
the event of any change in applicable laws or any change in circumstances which
results in or would result in any substantial dilution or enlargement of the
rights granted to, or available for, Participants in the Plan, or (iii) for any
other reason which the Committee, in its sole discretion, determines otherwise
warrants equitable adjustment because it interferes with the intended operation
of the Plan. Any such adjustment may provide for the elimination of any
fractional share which might otherwise become subject to an Award. With respect
to Awards intended to qualify as "performance-based compensation" under Section
162(m) of the Code, such adjustments or substitutions shall, unless otherwise
determined by the Committee in its sole discretion, be made only to the extent
that the Committee determines that such adjustments or substitutions may be made
without a loss of deductibility for such Awards under Section 162(m) of the
Code. The Company shall give each Participant notice of an adjustment hereunder
and, upon notice, such adjustment shall be conclusive and binding for all
purposes.
Notwithstanding the above, in the event of (i) a merger or consolidation such
that after such merger or consolidation the Company is not the surviving entity
or the ultimate parent of the surviving entity, (ii) the sale of all or
substantially all of the assets of the Company, or (iii) the reorganization or
liquidation of the Company, the Committee may, in its discretion and upon at
least 10 days advance notice to the affected persons, cancel any outstanding
Awards and pay to the Holders thereof, in cash or Stock, the value of such
Awards based upon the price per share of Stock received or to be received by
other shareholders of the Company in the event.
12. Nonexclusivity of the Plan
Neither the adoption of this Plan by the Board nor the submission of this
Plan to the stockholder of the Company for approval shall be construed as
creating any limitations on the power of the Board to adopt such other incentive
arrangements as it may deem desirable, including, without limitation, the
granting of stock options otherwise than under this Plan, and such arrangements
may be either applicable generally or only in specific cases.
13. Amendments and Termination
The Board may at any time terminate the Plan. Subject to Section 11, with
the express written consent of an individual Participant, the Board or the
Committee may cancel or reduce or otherwise alter outstanding Awards if, in its
judgment, the tax, accounting, or other effects of the Plan or potential payouts
thereunder would not be in the best interest of the Company. The Board or the
Committee may, at any time, or from time to time, amend or suspend and, if
suspended, reinstate, the Plan in whole or in part; provided, however, that
without further stockholder approval neither the Board nor the Committee shall
make any amendment to the Plan which would:
(a) Materially increase the maximum aggregate number of shares of Stock
which may be issued or distributed pursuant to Awards, except as provided in
Section 11;
(b) Extend the maximum Option Period;
15
<PAGE>
(c) Extend the termination date of the Plan; or
(d) Change the class of persons eligible to receive Awards under the Plan.
* * *
As adopted by the Board of Directors of
Party City Corporation as of
October 19, 1999 and amended
and restated as of October 25, 2000.
By: /s/ Thomas E. Larson
------------------------------
Name: Thomas E. Larson
Title: Chief Financial Officer and Secretary
16
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TO OUR SHAREHOLDERS
We are pleased to announce our fiscal 2000 results and our major accomplishments
in the past year. They include the recapitalization of the Company, building of
our infrastructure and finally and most importantly, turning our sales trend
around and rebuilding credibility with our customers.
At the start of fiscal 2000, Party City faced numerous challenges. The most
significant challenge was the critical need for working capital to restore our
corporate financial integrity and to fund our ongoing business. The loss of
normal trade terms from our vendors resulted in low in-stock positions through
the fall of 1999 that negatively impacted sales.
Our first round of recapitalization was completed in August 1999 and raised $30
million in new capital. Together with the cooperation of our vendors and banks,
the new investment provided the needed funding for our 1999 Halloween orders. We
completed a second phase of recapitalization in January 2000. This
recapitalization paid off the remaining amounts due to our former bank group and
put in place a revolving credit facility of $40 million based on inventory
levels and included a $7 million term loan. The refinancing and strong year-end
performance restored our credibility with the vendor community and enabled us to
receive normal trade terms.
THE BUSINESS AND THE CUSTOMER
Despite all Party City's internal financial challenges, our customers have
continued to remain loyal. Recent marketing research has clearly indicated a
strong consumer preference for our stores. We believe that Party City customers
feel that our complete assortment of merchandise and our value pricing are our
two greatest strengths. In addition, the party and Halloween markets are both
projected to continue to grow. Our customers celebrate birthday parties,
weddings, seasonal occasions and most dramatically Halloween, which has become
America's #2 holiday after Christmas.
While Company-owned store sales were hurt by inventory shortages in the fall of
1999, the franchise business continued to do well, reinforcing our belief in the
strength of the Party City concept. We are very pleased with the franchise store
business.
As we go forward there are several areas that will drive our business.
Merchandising: Our focus is to continue to improve our assortment of merchandise
while offering great values. We have strengthened our merchandising staff with
the addition of two key senior buyers. Merchandise planning is being addressed
by investing in our merchandising systems and adding experienced professional
merchants. We are developing the ability to place orders centrally to improve
our in-stock positions and to reduce the ordering workload of the store
managers. Finally, a number of new categories are being tested to gain
incremental sales while continuing to remain consistent with our position in the
marketplace.
Marketing: Several new advertising vehicles are being tested including newspaper
inserts and radio commercials, as well as customer specific marketing on our
Internet site to develop our brand name. Marketing research shows us that when
customers are aware of Party City they are likely to shop in our store.
Store organization: We are focused on improving in-store execution, improving
in-store signing and merchandising. Our objective is to enhance our customers'
shopping experience. While predominantly a self-service environment, our stores
provide appropriate levels of customer assistance and support. Specific tracking
programs have also been initiated to measure our actual in-store performance
compared with our stated objectives.
<PAGE>
GROWTH
Our objective this year is to improve our infrastructure while upgrading our
execution skills in order to be prepared for future expansion. Our growth of
Company-owned stores will be done within our ability to manage and finance that
growth.
We plan to add over twenty-five franchise stores this year. Our future franchise
plans include balanced growth of franchise and corporate stores. Franchisees
offer Party City the opportunity to grow in markets where we see only limited
opportunity for Company-owned stores, while preempting competition in those
markets. This growth does not require significant capital investments by the
Company. However, we will pursue opportunities for larger expansion, if it can
be carried out on a prudent basis.
RELATIONSHIPS
There are a number of key relationships that we recognize are critical to our
success and we will strive to strengthen those relationships to the best of our
ability.
Our employees We are committed to recruiting and retaining top retail talent.
Our employees are the key to the success of our business. The work environment
must be challenging as well as offer attractive opportunities and appropriate
rewards for performance.
Our suppliers Our suppliers have been very supportive over the past year. We
believe we have earned that support and are pleased that we delivered on our
payment commitments.
Our franchisees We are pleased with the performance of the franchisee community
over the past year and are committed to continue to support our franchisee
partners.
Our shareholders We are committed to consistent, predictable performance with
continuing improvement. The Party City strategy works. Our market is attractive
and growing. With effective management, Party City can deliver outstanding and
consistent results over the long term and it is our plan to do so.
We have an aggressive agenda in front of us, but our commitment to grow and
improve Party City is clear.
Finally, I wish to thank all those who have helped the Company during this past
year. In addition, I welcome our newest directors, Edward Mule and Michael
Tennenbaum, to Party City.
Yours truly,
/s/ James Shea
James Shea
Chief Executive Officer
October 13, 2000
<PAGE>
PARTY CITY CORPORATION
PROXY
THE UNDERSIGNED HEREBY APPOINTS JAMES SHEA AND THOMAS E. LARSON, AND EACH
OF THEM, WITH FULL POWER OF SUBSTITUTION AS PROXIES FOR THE UNDERSIGNED, TO
ATTEND THE ANNUAL MEETING OF SHAREHOLDERS OF PARTY CITY CORPORATION TO BE HELD
AT THE SHERATON NEWARK AIRPORT, 128 FRONTAGE ROAD, NEWARK, NEW JERSEY, 07114, ON
WEDNESDAY, NOVEMBER 15, 2000 AT 9:00 A.M., EASTERN TIME, OR ANY ADJOURNMENT
THEREOF, AND TO VOTE THE NUMBER OF SHARES OF COMMON STOCK OF THE COMPANY THAT
THE UNDERSIGNED WOULD BE ENTITLED TO VOTE, AND WITH ALL THE POWER THE
UNDERSIGNED WOULD POSSESS, IF PERSONALLY PRESENT, AS FOLLOWS:
1. [ ] FOR or [ ] WITHHOLD AUTHORITY to vote for the following nominees
for election as directors: RALPH DILLON, JACK FUTTERMAN, L.R. JALENAK,
JR., HOWARD LEVKOWITZ, EDWARD MULE AND MICHAEL TENNENBAUM.
(INSTRUCTION: To withhold authority to vote for any individual nominee,
write that nominee's name on the line provided below.)
--------------------------------------------------------------------------------
2. Approval of the proposal to amend and restate the Company's 1999 Stock
Incentive Stock Option Plan to increase the number of shares of the
Company's common stock issuable pursuant to options and awards granted
under the Plan from 500,000 to 2,000,000.
[ ] FOR [ ] AGAINST or [ ] ABSTAIN
3. In their discretion, on such other business as may properly come
before the meeting or any adjournment thereof.
(continued on the other side)
<PAGE>
(continued from other side)
THE PROXIES WILL VOTE AS SPECIFIED ABOVE, OR IF A CHOICE IS NOT SPECIFIED,
THEY WILL VOTE (i) FOR THE NOMINEES LISTED IN ITEM 1 (ii) FOR THE PROPOSAL
LISTED IN ITEM 2 AND (iii) IN THEIR DISCRETION ON ANY OTHER MATTERS THAT MAY
PROPERLY COME BEFORE THE MEETING AND ANY ADJOURNMENTS THEREOF.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF THE COMPANY.
Receipt of (a) the Notice of Annual Meeting
of Shareholders, dated October 26, 2000,
(b) the accompanying Proxy Statement, dated
October 26, 2000 and (c) the Company's
Annual Report for the fiscal year ended
July 1, 2000, are each hereby acknowledged:
Dated ___________________, 2000
Signature(s)
------------------------
------------------------
(Please sign exactly as your name or names
appear hereon, indicating, where proper,
official position or representative
capacity.)
