0000950123-01-507342.txt : 20011026
0000950123-01-507342.hdr.sgml : 20011026
ACCESSION NUMBER: 0000950123-01-507342
CONFORMED SUBMISSION TYPE: DEF 14A
PUBLIC DOCUMENT COUNT: 1
CONFORMED PERIOD OF REPORT: 20011114
FILED AS OF DATE: 20011018
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: PARTY CITY CORP
CENTRAL INDEX KEY: 0001005972
STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-MISCELLANEOUS SHOPPING GOODS STORES [5940]
IRS NUMBER: 223033692
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0630
FILING VALUES:
FORM TYPE: DEF 14A
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-27826
FILM NUMBER: 1761441
BUSINESS ADDRESS:
STREET 1: 450 COMMONS WAY
STREET 2: BLDG C
CITY: ROCKAWAY
STATE: NJ
ZIP: 07860
BUSINESS PHONE: 9739830888
MAIL ADDRESS:
STREET 1: 400 COMMONS WAY
CITY: ROCKAWAY
STATE: NJ
ZIP: 07866
DEF 14A
1
y53987def14a.txt
PARTY CITY CORPORATION
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
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 Section 240.14a-12
Party City Corporation
--------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
--------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than 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)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction 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:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
------------------------------------------------------------------------
PARTY CITY CORPORATION
NOTICE OF 2001 ANNUAL MEETING OF STOCKHOLDERS
NOVEMBER 14, 2001
TO THE STOCKHOLDERS:
NOTICE IS HEREBY GIVEN that the 2001 Annual Meeting of Stockholders of
Party City Corporation, a Delaware corporation (the "Company"), will be held on
Wednesday, November 14, 2001, at 9:00 a.m., Eastern Time, at the New York Palace
Hotel, 455 Madison Avenue, New York, New York 10022, for the following purposes:
1. To elect nine directors to the Board of Directors who shall serve until
the 2002 Annual Meeting of Stockholders, or until their successors are
elected and qualified;
2. To approve the Company's Employee Stock Purchase Plan; 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 5, 2001 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 and at the New York Palace Hotel.
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 17, 2001
PLEASE MAIL YOUR PROXY PROMPTLY
PARTY CITY CORPORATION
400 COMMONS WAY
ROCKAWAY, NEW JERSEY 07866
---------------------------
PROXY STATEMENT
2001 ANNUAL MEETING OF STOCKHOLDERS
NOVEMBER 14, 2001
---------------------------
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 2001 Annual Meeting of
Stockholders to be held on Wednesday, November 14, 2001, 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 2001
Annual Meeting of Stockholders (the "Notice"). The Annual Meeting will be held
at the New York Palace Hotel, 455 Madison Avenue, New York, New York 10022. 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 17, 2001, to all stockholders entitled to
vote at the Annual Meeting.
RECORD DATE
Stockholders of record at the close of business on October 5, 2001 (the
"Record Date"), are entitled to notice of and to vote at the Annual Meeting.
DEADLINE FOR RECEIPT OF STOCKHOLDER PROPOSALS FOR 2002 ANNUAL MEETING
Proposals of stockholders of the Company which are intended to be presented
at the Company's 2002 Annual Meeting of Stockholders must be received by the
Company no later than June 17, 2002, 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 Company's proxy statement and
form of proxy relating to that meeting.
If a stockholder intends to present a stockholder proposal at the 2002
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 August 29, 2002, the proxy
holders named by the Company may exercise their discretionary voting authority
on the matter in accordance with their best judgment.
ATTENDANCE AT THE ANNUAL MEETING
Because of the recent World Trade Center tragedy, stockholders of the
Company who wish to attend the 2001 Annual Meeting in person may experience
travel delays in and around New York City. In addition, upon arrival to the
Annual Meeting, you may be required to undergo heightened security screening
prior to entry. Therefore, the Company encourages you to arrive to the Annual
Meeting early and to bring with you valid identification, such as a state issued
driver's license or identification card.
1
VOTING YOUR SHARES AT THE ANNUAL MEETING
If you want to vote your shares in person at the Annual Meeting and your
shares 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. If you fail to bring such a
letter, you will not be permitted to vote such shares at the Annual Meeting.
REVOCABILITY OF PROXY
Any proxy given by a record holder 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 of record by a broker, bank or other nominee, you must contact the broker,
bank or nominee for instructions on how to revoke your proxy.
Please note that merely attending the Annual Meeting without voting will
not revoke your proxy. Also, as noted above, 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
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. The Company has contracted with Georgeson Shareholder
Communications, Inc. to solicit proxies. The anticipated cost of this service is
expected to be less than $5,000. Proxies may also be solicited by the Company's
directors, officers and employees, without additional compensation, personally
or by telephone, facsimile, e-mail or telegram.
2
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 5, 2001,
13,002,017 shares of the Company's Common Stock were issued and outstanding.
VOTING RIGHTS; REQUIRED VOTE
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 presence, in person or by proxy, of
stockholders holding a majority of the outstanding shares of Common Stock on the
Record Date and entitled to vote is required in order to constitute a quorum for
the Annual Meeting. The election of each director requires a plurality of the
votes present at the Annual Meeting and entitled to vote. The approval of the
Employee Stock Purchase Plan (the "Employee 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 proposal,
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 will have no effect on the voting on the
election of directors, except to the extent that they affect the total votes
received by any particular candidate. For approving the Employee Plan, and for
any other matter properly brought before the Annual Meeting requiring approval
by the holders of a majority of the shares of Common Stock represented at the
Annual Meeting and entitled to vote, abstentions will have the effect of
negative votes, but broker non-votes will have no effect.
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 Employee Plan; and (iii) at the discretion of the proxy
holders with respect to any other matter properly brought before the Annual
Meeting.
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 5, 2001, 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.
3
BENEFICIAL OWNERSHIP OF COMMON STOCK BY
DIRECTORS, OFFICERS AND KNOWN 5% OR GREATER STOCKHOLDERS
SHARES BENEFICIALLY OWNED
--------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT
------------------------ --------- -------
Special Value Bond Fund, LLC....................... 2,953,061(1)(2) 19.1%
11100 Santa Monica Boulevard, Suite 210
Los Angeles, California 90025
Goldman, Sachs & Co. .............................. 2,867,000(3)(4) 18.1%
85 Broad Street
New York, New York 10004
Steven Mandell..................................... 2,030,278(5)(6) 15.6%
P.O. Box 85
New Vernon, New Jersey 07976
Craig Enterprises, Inc. ........................... 1,121,802(7) 8.6%
11355 North Torrey Pines Road
La Jolla, California 92037
Wellington Management Company, LLP................. 995,000(8) 7.7%
75 State Street
Boston, Massachusetts 02109
Jewel Investments, LLC............................. 911,099(10) 7.0%
605 Third Avenue, 19th Floor
New York, New York 10158
Ralph Dillon....................................... 410,332(11) 3.1%
Jack Futterman..................................... 1,037,500(6)(9) 7.6%
Michael Gatto...................................... 2,870,000(12) 18.1%
L.R. Jalenak, Jr. ................................. 73,632(13) *
Howard Levkowitz................................... 2,868,526(14) 18.5%
Nancy Pedot........................................ 9,666(15) *
Walter Salmon...................................... 3,000(17) *
James Shea......................................... 124,316(18) *
Michael Tennenbaum................................. 2,965,727(16) 19.1%
Thomas E. Larson................................... 61,500(19) *
Andrew Bailen...................................... 35,500(20) *
All Directors and Named Officers as a group (11
persons)......................................... 7,620,514 40.1%
---------------
* Less than 1%
(1) Includes 2,496,000 shares subject to outstanding warrants to purchase
Common Stock which are exercisable within the next 60 days, 343,000 shares
of Common Stock owned by Special Value Bond Fund II, LLC and 114,061 shares
of Common Stock owned by Tennenbaum & Co. (See footnotes 14 and 16 of this
chart.).
(2) As reported in the Amendment to Schedule 13D filed by Special Value Bond
Fund, LLC with the Securities and Exchange Commission on March 12, 2001. On
September 28, 2001, Special Value Bond Fund, LLC exercised its right under
the warrant with respect to 600,000 shares of Common Stock. As permitted
under the terms of the warrant, Special Value Bond Fund, LLC elected a
cashless net exercise with respect to the 600,000 shares and the Company
issued 499,687 shares of Common Stock pursuant to such exercise. All of
these 499,687 shares were issued to certain investors in Special Value Bond
Fund, LLC.
(3) Includes 2,867,000 shares of Common Stock subject to outstanding warrants
which are exercisable within the next 60 days.
(4) As reported in the Amendment to Schedule 13G filed by Goldman, Sachs & Co.
with the Securities and Exchange Commission on August 30, 1999.
(5) According to an Amendment to Schedule 13D filed by Mr. Mandell with the
Securities and Exchange Commission on June 11, 1999, Mr. Mandell
beneficially owned, at that time, 2,457,500 shares of
4
Common Stock, including 750,000 shares of Common Stock transferred by Mr.
Mandell to the Mandell Family Limited Partnership, of which Mr. Mandell is
the General Partner. According to a Form 4 filed by Mr. Mandell with the
Securities and Exchange Commission on August 9, 2001, Mr. Mandell sold
127,222 shares of Common Stock, leaving him with 2,330,278 shares
beneficially owned as of the date of such filing. Recently, Mr. Futterman
exercised his option to purchase 300,000 shares of Common Stock from Mr.
Mandell pursuant to the Option Agreement. (See footnote 6 of this chart.).
(6) Includes 700,000 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. Mr. Futterman recently exercised his
option with respect to 300,000 shares of Common Stock pursuant to this
Option Agreement. The 700,000 remaining shares subject to this option are
net of such 300,000 shares.
(7) The Amendment to Schedule 13G filed by Craig Enterprises, Inc. with the
Securities and Exchange Commission on April 23, 1999 indicates that Craig
Enterprises, Inc. owns 1,107,000 shares of Common Stock. In addition,
14,802 shares of Common Stock were distributed to an affiliate of Craig
Enterprises, Inc. by Special Value Bond Fund, LLC pursuant to the exercise
of its warrant. (See footnote 2 of this chart).
(8) As reported in the Amendment to Schedule 13G filed by Wellington
Management, LLP with the Securities and Exchange Commission on February 14,
2001.
(9) Includes 36,000 shares of Common Stock subject to outstanding options which
are exercisable within the next 60 days. Also includes 1,500 shares of
Common Stock transferred to the Jack Futterman Trust, of which Mr.
Futterman is the investment advisor.
(10) As reported in the Schedule 13G filed by Jewel Investments, LLC with the
Securities and Exchange Commission on January 18, 2001.
(11) Includes 155,999 shares of Common Stock subject to outstanding options
which are exercisable within the next 60 days and 229,333 shares of Common
Stock subject to outstanding warrants which are exercisable within the next
60 days owned by Clyde Street Investment, LLC, of which Ralph Dillon is the
Managing Member.
(12) Includes 2,867,000 shares of Common Stock subject to outstanding warrants
which are exercisable within the next 60 days that are owned by Goldman,
Sachs & Co., of which Mr. Gatto is an employee and includes 3,000 shares of
Common Stock subject to outstanding options which are exercisable within
the next 60 days. Mr. Gatto disclaims beneficial ownership of the 2,867,000
shares issuable upon exercise of the warrants.
(13) Includes 12,667 shares of Common Stock subject to outstanding options which
are exercisable within the next 60 days.
(14) Includes 2,496,000 shares of Common Stock subject to outstanding warrants
which are exercisable within the next 60 days that are owned by Special
Value Bond Fund, LLC, 343,000 shares of Common Stock that are owned by
Special Value Bond Fund II, LLC and a separate account managed by Special
Value Investment Management, LLC. In addition, 13,527 shares of Common
Stock were distributed to Mr. Levkowitz and an affiliate entity pursuant to
the exercise of a warrant. (See footnote 2 of this chart.). The Managing
Member of each of Special Value Bond Fund, LLC and Special Value Bond Fund
II, LLC is SVIM/MSM, LLC and SVIM/MSM II, LLC, respectively, of which the
Managing Member of both is Tennenbaum & Co., LLC, of which Mr. Levkowitz is
a principal. Voting power with respect to such 343,000 shares is held by
the Investment Committee of Special Value Investment Management, LLC, of
which Mr. Levkowitz is a member. Special Value Investment Management, LLC
is the investment advisor to Special Value Bond Fund, LLC and to Special
Value Bond Fund II, LLC. Also includes 15,999 shares of Common Stock
subject to outstanding options which are exercisable within the next 60
days.
(15) Includes 9,666 shares of Common Stock subject to outstanding options which
are exercisable within the next 60 days.
5
(16) Includes 2,496,000 shares of Common Stock subject to outstanding warrants
which are exercisable within the next 60 days that are owned by Special
Value Bond Fund, LLC, 343,000 shares of Common Stock that are owned by
Special Value Bond Fund II, LLC and a separate account managed by Special
Value Investment Management, LLC and 114,061 shares of Common Stock owned
by Tennenbaum & Co., LLC. The Managing Member of each of Special Value Bond
Fund, LLC and Special Value Bond Fund II, LLC is SVIM/MSM, LLC and SVIM/MSM
II, LLC, respectively, of which the Managing Member of both is Tennenbaum &
Co., LLC, of which Mr. Tennenbaum is the Managing Member. Voting power with
respect to such 343,000 shares is held by the Investment Committee of
Special Value Investment Management, LLC, of which Mr. Tennenbaum is a
member. Also includes 12,666 shares of Common Stock subject to outstanding
options which are exercisable within the next 60 days.
(17) Includes 3,000 shares of Common Stock subject to outstanding options which
are exercisable within the next 60 days.
(18) Includes 66,666 shares of Common Stock subject to outstanding options which
are exercisable within the next 60 days.
(19) Includes 60,000 shares of Common Stock subject to outstanding options which
are exercisable within the next 60 days.
(20) Includes 25,000 shares of Common Stock subject to outstanding options which
are exercisable within the next 60 days.
6
BUSINESS TO BE TRANSACTED
1. ELECTION OF DIRECTORS
NOMINEES
The Board of Directors currently is comprised of nine directors consisting
of the nine nominees named below.
Unless otherwise instructed, the proxy holders will vote the proxies
received by them for the nine 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 nine 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............ 61 Non-Executive Chairman of the Board of Directors 1999
Jack Futterman(1)(2).... 68 Director 1997
Michael A.
Gatto(1)(3)........... 34 Director 2001
L.R. Jalenak,
Jr.(3)(4)............. 71 Director 2000
Howard
Levkowitz(2)(5)....... 34 Director 1999
Nancy Pedot(2).......... 49 Director 2000
Walter J. Salmon........ 70 Director 2001
James Shea.............. 56 Director and Chief Executive Officer 2001
Michael Tennenbaum(6)... 66 Director 2000
---------------
(1) Member of Nominating Committee.
(2) Member of Audit Committee.
(3) Member of Compensation Committee.
(4) Chairman of Audit Committee.
(5) Chairman of Nominating Committee.
(6) Chairman 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"), a specialty retailer of
casual home living and entertainment products, 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 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,
which operates a chain of more than 140 supermarkets. From 1973 until his
appointment as
7
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.
MICHAEL A. GATTO has been a director of the Company since February 20,
2001. Mr. Gatto is a Vice President in the Special Situations Investing Group of
Goldman, Sachs & Co., where he has been employed since 1998. Mr. Gatto's
previous experience includes serving as a Principal of Stroble & Associates, a
financial consulting firm, from 1997 to 1998 and as a Corporate Finance
Associate in the Retail Industry Group of Citibank, N.A. from 1992 to 1997.
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., a manufacturer of Christmas wrapping paper and related
products, 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").
NANCY PEDOT has been a Director of the Company since November 27, 2000.
Between 1989 and 1993, Ms. Pedot served in various executive positions with The
Gymboree Corporation, a designer, manufacturer and retailer of children's
apparel and accessories that operates a chain of more than 500 stores. She
joined Gymboree in 1989 as Senior Vice President of Merchandising and in 1994
was named President and CEO. Ms. Pedot left Gymboree in 1997 to devote more time
to her family and to pursue personal interests. Ms. Pedot also serves on the
boards of directors of several not-for-profit entities.
WALTER J. SALMON has been a Director of the Company since July 25, 2001.
Mr. Salmon is presently the Stanley Roth, Sr., Professor of Retailing, Emeritus,
at the Harvard University Graduate School of Business Administration. He as been
a member of the Harvard Business School faculty since 1956. Professor Salmon
presently serves on the boards of The Neiman Marcus Group, PetsMart, Inc.,
Harrah's Entertainment, Inc., Cole National Corporation, Luby's, Inc. and the
Harvard Business School Publishing Company.
JAMES SHEA has been a Director of the Company since October 1, 2001. Mr.
Shea has been the Company's Chief Executive Officer since 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. Prior
to that, Mr. Shea held various executive positions with the May Department
Stores Company and Target Corporation.
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. Tennenbaum & Co., LLC is the Managing Member of
Special Value Investment Management, LLC, an investment management company
focused on special situation investments. 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
currently is Chairman of the board of directors of Pemco Aviation Group, Inc.,
and is also a director of various privately-held companies.
8
RECOMMENDATION AND VOTE
The election of each nominee as a director requires a plurality of the
votes present at the Annual Meeting and entitled to vote.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR THE NOMINEES.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
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 June 30, 2001. The Company
notes that a Form 4 by Goldman Sachs & Co. for the period of January, 2000
regarding the issuance of replacement warrants in connection with the First
Amendment (as defined below) was filed late.
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 and Everyday Merchandise 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 and Special Value Bond
Fund II, LLC). Messrs. Tennenbaum and Levkowitz, each of whom is a Director of
the Company and a nominee for Director at the 2001 Annual Meeting, are
principals of Special Value Investment Management, LLC, and Mr. Tennenbaum is
the Managing Member of Tennenbaum & Co., LLC. The Investors also include
Goldman, Sachs & Co. Mr. Gatto, who is a Director of the Company and a nominee
for Director at the 2001 Annual Meeting, is an employee of Goldman, Sachs & Co.
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 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. The Notes
are secured by a lien on substantially all of the Company's assets. The Company
issued the Warrants in
9
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 represented approximately 35% of
the shares of Common Stock outstanding at the time of the issuance 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 2001 Annual
Meeting. In the Investor Rights Agreement, the Company granted registration
rights with respect to shares of its Common Stock. The Company also agreed that
the Investors would be permitted to nominate two individuals to be members of
the Company's Board of Directors, as well as one or more additional persons as
needed to provide that the number of directors nominated by the Investors
represents at least 30% of the number of directors on the Board of Directors at
any time. 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 Exchange Act) 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. The
restriction in the Investor Rights Agreement prohibiting the Investors from
purchasing the Company's securities was amended to permit the purchase of up to
1,500,000 additional shares of the Company's Common Stock and to permit
purchases of notes by other noteholders.
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, the
Company 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
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. Under the terms of the First Amendment, the interest rate on
the A Notes, the B Notes, the C Notes and the D Notes was increased by 4.5%. 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 A Notes, the
B Notes, the C Notes and the 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.
On September 28, 2001, Special Value Bond Fund, LLC exercised its warrant
with respect to 600,000 of the 3,096,000 shares issuable pursuant to this
warrant. As permitted under the terms of the Amended Warrants, Special Value
Bond Fund, LLC elected a cashless net exercise with respect to the 600,000
shares and the Company issued 499,687 shares of Common Stock pursuant to such
exercise. All of these 499,687 shares were issued to certain investors in
Special Value Bond Fund, LLC, including certain affiliates of Special Value Bond
Fund, LLC. The Company has issued a new Amended Warrant to Special Value Bond
Fund, LLC for the remaining 2,496,000 shares subject to the warrant.
Messrs. Jason Craig and Steven Craig, sons of Mr. Sidney Craig, President
of Craig Enterprises, Inc., own and operate six and five franchised stores,
respectively, located in California. The Amendment to Schedule 13G filed by
Craig Enterprises, Inc. with the Securities and Exchange Commission on April 23,
10
1999 indicates that Craig Enterprises, Inc. owns 1,107,000 shares of Common
Stock. In addition, 14,802 shares of Common Stock were distributed to an
affiliate of Craig Enterprises, Inc. by Special Value Bond Fund, LLC pursuant to
the exercise of its warrant.
The Company entered into a consulting arrangement with Mr. Dillon pursuant
to which Mr. Dillon receives 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. On June 22, 2001, the Company
granted options on 90,000 shares of Common Stock to Mr. Dillon in compensation
for his services to the Company. These options were granted at $6.25 per share
and vested immediately. In addition, if Mr. Dillon remains the Non-Executive
Chairman of the Board of Directors of the Company and if certain other
requirements are met, future grants of 50,000 shares will be made in January,
2002, July, 2002 and January, 2003 at the fair market value of the Common Stock
on the date of the grant. All options will be fully vested as of the grant date.
BOARD OF DIRECTORS MEETINGS AND COMMITTEES
The Board of Directors met seven times during the fiscal year ended June
30, 2001. The Compensation Committee met two times during the fiscal year ended
June 30, 2001 and is comprised of Messrs. Gatto, Jalenak and Tennenbaum. 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 as well as
the administration of the Management Stock Purchase Plan (the "Management Plan")
and grants thereunder. The Audit Committee, which is composed of Ms. Pedot and
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 five times
during the Company's fiscal year ended June 30, 2001. 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. The Nominating Committee met three times during the
fiscal year ended June 30, 2001. The Nominating Committee is comprised of
Messrs. Futterman, Gatto and Levkowitz. 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 June 30, 2001.
All Directors are elected at each annual meeting of stockholders and hold
office until the election and qualification of their successors at the next
annual meeting of stockholders.
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 and Bailen by the Company is subject to the provisions of their
respective employment agreements.
RESIGNATIONS
On February 20, 2001, Edward Mule resigned from the Board of Directors of
the Company.
11
EXECUTIVE OFFICERS OF THE COMPANY
NAME AGE POSITION(S)
---- --- -----------
James Shea........................... 56 Director and Chief Executive Officer
Thomas E. Larson..................... 54 Senior Vice President, Chief Financial Officer, and
Secretary
Andrew Bailen........................ 45 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. He
has been a director of the Company since October 1, 2001. 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. Prior to that, Mr. Shea held
various executive positions with the May Department Stores Company and Target
Corporation.
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. From 1991 to
1996, Mr. Larson served as Chief Financial Officer of Ace Cash Express, Inc., a
chain of over 1,000 company-owned and franchise stores.
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.
12
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 that began on July 1, 1998 and ended on July 3, 1999, (B) during the
Company's fiscal year that began on July 4, 1999 and ended on July 1, 2000, and
(C) during the Company's fiscal year that began on July 2, 2000 and ended on
June 30, 2001, to each of the Named Executive Officers:
SUMMARY COMPENSATION TABLE
PERIOD LONG-TERM COMPENSATION
COMPENSATION --------------------------
--------------------------------------- RESTRICTED # SECURITIES
NAME AND OTHER ANNUAL STOCK UNDERLYING
PRINCIPAL POSITION PERIOD(2) SALARY BONUS(6) COMPENSATION(5) AWARDS(1) STOCK OPTIONS
------------------ -------------- -------- -------- --------------- ---------- -------------
James Shea(3)............. 7/2/00-6/30/01 $356,191 $ 34,920 $ 73,222 $227,500 --
Chief Executive Officer 7/4/99-7/1/00 192,500 -- -- -- 200,000
7/1/98-7/3/99 -- -- -- -- --
Thomas E. Larson.......... 7/2/00-6/30/01 257,739 38,818 $ 51,763 155,245 --
Senior Vice President, 7/4/99-7/1/00 250,000 125,000 -- -- --
Chief Financial Officer 7/1/98-7/3/99 104,903(4) -- -- -- 60,000
and Secretary
Andrew Bailen............. 7/2/00-6/30/01 243,269 165,001 $116,909 41,249 100,000
Executive Vice President 7/4/99-7/1/00 -- -- -- -- --
7/1/98-7/3/99 -- -- -- -- --
---------------
(1) Amounts in this column represent a portion of the Named Executive Officers'
respective bonuses foregone pursuant to the Management Plan. The Management
Plan provides for a mechanism through which certain executive officers of
the Company may forego all or a portion of their annual bonus such that it
may be used to purchase restricted stock units linked on a one-to-one basis
to the value of the Company's Common Stock. Depending on the amount of the
annual bonus foregone by an eligible executive officer who participates in
the Management Plan, the Company offers the restricted stock units at a 20%
to 25% discount.
(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) 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.
(5) These amounts include: (i) with respect to Mr. Shea, $8,517 in automobile
allowances and $64,705 representing the value of the discount applicable to
the purchase of restricted stock units under the Management Plan; (ii) with
respect to Mr. Larson, $8,100 in automobile allowances and $43,663
representing the value of the discount applicable to the purchase of
restricted stock units under the Management Plan; and (iii) with respect to
Mr. Bailen, $6,750 in automobile allowances, $99,847 for moving expenses and
$10,312 representing the value of the discount applicable to the purchase of
restricted stock units under the Management Plan.
(6) Amounts in this column do not include any portion of the Named Executive
Officers' respective bonuses foregone under the Management Plan.
13
OPTION GRANTS DURING THE FISCAL YEAR ENDED JULY 30, 2001
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 June 30, 2001:
POTENTIAL
REALIZABLE
INDIVIDUAL GRANTS VALUE AT
---------------------------------------------------- ASSUMED ANNUAL
PERCENT OF RATES OF STOCK
NUMBER OF TOTAL 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%
---- ---------- ------------ -------- ---------- -- ---
Andrew Bailen.............. 100,000(1) 25.45% 3.40(2) 2010 213,824 541,872
---------------
(1) The options become exercisable over four (4) years, with one-quarter ( 1/4)
becoming exercisable annually.
(2) The price represents the fair market value at the date of grant.
AGGREGATED OPTION EXERCISES IN THE FISCAL YEAR ENDED JUNE 30, 2001
AND JUNE 30, 2001 OPTION VALUES
The following table presents information regarding the value of options
outstanding at June 30, 2001 for each of the Named Executive Officers. None of
the Named Executive Officers exercised any options during the fiscal year ended
June 30, 2001:
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
James Shea................................. 66,666 133,334 $243,998 $488,002
Thomas E. Larson........................... 60,000 -- 108,960 --
Andrew Bailen.............................. -- 100,000 -- 226,000
---------------
(1) Value is based upon a fair market value of $5.66 per share on June 30, 2001.
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. The Company also reimburses directors for
travel and lodging expenses, if any, incurred in connection with attendance at
the Board of Directors meetings. All directors each receive annual option grants
on September 26 of each fiscal year of 3,000 options which are fully vested at
the time of grant.
On November 15, 2000 and July 18, 2001, the Company approved a one-time
grant of 20,000 stock options to Nancy Pedot and to Walter Salmon, respectively,
for prospective services until the Company's next Annual Meeting of
Stockholders.
The Company entered into a consulting arrangement with Mr. Dillon pursuant
to which Mr. Dillon receives 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. On June 22, 2001, the Company
granted options on 90,000 shares of Common Stock to Mr. Dillon in compensation
for his services to the Company. These options were granted at $6.25 per share
and vested immediately. In addition, if Mr. Dillon remains the Non-Executive
Chairman of the Board of Directors of the Company and if certain other
requirements are met, future grants of 50,000 shares will be made in January
2002, July 2002 and January
14
2003 at the fair market value of the Common Stock on the date of the grant. All
options will be fully vested as of the date of grant.
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 ends
on December 8, 2002, which term automatically renews for one-year periods. The
Shea Agreement provides that Mr. Shea will receive an annual base salary of at
least $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 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 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 the resignation of Jack Futterman as Chief Executive Officer and
Chairman of the Board in December 1999.
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, 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 Andrew Bailen,
Executive Vice President, Merchandising and Marketing, dated as of August 7,
2000 (the "Bailen Agreement"). The Bailen Agreement provides for Mr. Bailen to
serve the Company (on an at-will basis) in such capacity for an initial term
which commenced on August 7, 2000 and ended on August 6, 2001, which term has
been automatically extended for an additional one-year term. The Bailen
Agreement provides for an annual minimum base salary of $275,000, the amount of
which may be adjusted upward by the Board of Directors in its sole discretion.
Under the Bailen Agreement, Mr. Bailen received a signing bonus of $25,000 and a
guaranteed minimum bonus of $16,000, which was paid in August, 2001. The Bailen
Agreement further provides for annual bonuses in each subsequent year, the
target amount of which is fifty percent (50%) of his base salary, provided that
Mr. Bailen meets certain performance goals. In addition, Mr. Bailen received a
grant of 100,000 stock options to purchase Common Stock of the Company, which
options vest over a four-year period.
15
The Bailen Agreement provides that, under certain circumstances, the
Company will make severance payments to Mr. Bailen upon the termination of his
employment. If Mr. Bailen's employment is terminated by the Company with
"cause," the Company will make severance payments to Mr. Bailen which shall
include accrued and unpaid salary up to the date of his termination and a
severance payment equal to six months of Mr. Bailen's base salary. In the event
that Mr. Bailen's employment is terminated by the Company without "cause," in
addition to a severance payment equal to six months of his base salary, Mr.
Bailen will continue to receive certain employee benefits for such period
(including health and life insurance benefits, a car allowance and payment for
unused vacation time), a payment of any accrued and unpaid bonuses to the date
of termination and all unvested options that are scheduled to vest during the
then current employment year shall immediately vest.
16
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 that might incorporate future filings, including this Proxy
Statement, in whole or in part, neither the Report of the Compensation Committee
Regarding Executive Compensation, nor the Report of the Audit Committee, nor the
Performance Graph shall be incorporated by reference into any such filings.
REPORT OF THE COMPENSATION COMMITTEE
REGARDING EXECUTIVE COMPENSATION
COMPENSATION COMMITTEE
The Compensation Committee of the Company's Board of Directors (the
"Compensation Committee") was formed in 1996 and is presently composed of
Messrs. Gatto, Jalenak and Tennenbaum. The Compensation Committee meets at least
annually or more frequently as the Company's Board of Directors may request. The
Compensation Committee's primary responsibilities include the review and
approval of compensation, consisting of salary, bonuses, benefits and other
compensation, for the Company's executive officers. 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 as well as
the administration of the Management Plan and grants thereunder.
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 minimum base salary levels for Messrs. Shea, Larson and Bailen are
established by their respective employment agreements described above in
"Compensation of Executive Officers and Directors -- Employment Agreements and
Termination of Employment." The Compensation Committee annually reviews these
base salary compensation levels and makes adjustments based on a subjective
evaluation of the above factors.
Incentive Bonuses. The Company has established a cash-based annual bonus
program to provide annual incentives to the executive officers to meet or exceed
expected performance objectives. This program provides cash compensation, based
on a percentage of base salary, for the achievement of EBITDA targets set by the
Company and, for certain executive officers, the attainment of specific
short-term corporate and individual performance objectives which contribute to
the success of the Company.
Equity Compensation
In order to provide long-term incentives to the executive officers of the
Company and to further align their interests with those of the Company's
stockholders, the Company implemented several equity-based incentive
compensation plans. Among these plans, the Company's Amended and Restated 1994
Stock Option Plan and 1999 Stock Incentive Plan allow for the grant of both
incentive and nonqualified stock options as well as restricted stock and other
equity-based awards. Equity awards under these plans are granted on a
discretionary basis by the Compensation Committee. The Compensation Committee
makes a subjective determination as to the award recipients and their level of
award after review of the performance factors for
17
the executive officers noted above for base salary determinations. In order to
encourage and reward continued employment, these awards typically vest over a
period of three to four years after the date of grant.
In June of 2001, the Company implemented the Management Plan through which
executive officers may elect to forgo all or a portion of their annual bonus to
be used to purchase restricted stock units linked on a one-to-one basis with the
value of the Company's Common Stock. To encourage participation in this plan,
the Company offers the units at a 20% to 25% discount depending on the amount of
bonus forgone. These forgone bonuses are held by the Company for three or seven
years, as elected by the executive officer, and typically paid out in shares of
Common Stock. The recent adoption of the Employee Plan, for which stockholder
approval is being sought at the Annual Meeting, will add yet another mechanism
to further align the interests of all employees, including executive officers,
with those of the stockholders of the Company. The Employee Plan is structured
to offer shares of Company Common Stock for sale on a bi-annual basis through
salary deductions at a 15% discount. The Management Plan and Employee Plan were
adopted after consultation with and on the recommendation of the executive
compensation consulting firm of Watson Wyatt Worldwide.
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 salary, annual incentive bonuses
and long-term equity-based incentives) is to seek to be competitive with other
comparably sized companies in the same industry group, and to tie a portion of
his annual compensation to the performance of the common stock. This approach is
intended to incentivize the Company's senior executive through clearly defined
long-term goals while providing certainty as to that portion of his compensation
that is nonperformance based.
Mr. Shea's base salary for the 2001 fiscal year was established by the
Company's Board of Directors and set forth in his employment agreement with the
Company. As noted above, pursuant to the terms of his employment agreement, Mr.
Shea was eligible for a bonus of up to 75% of his annual base salary for the
last fiscal year based on the attainment of the Company's EBITDA goals. After
the close of the 2001 fiscal year the Compensation Committee determined that
these goals had been exceeded and awarded Mr. Shea a bonus equal to
approximately 75% of his base salary.
In conclusion, the Compensation Committee 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
stockholders.
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 Named Executive Officers, except to the
extent such compensation qualifies as "performance-based." 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.
Moreover, the Company's stock option plans are structured and administered to
comply with the Section 162(m) performance-based exemption. While the Company'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 may necessarily be based on
considerations in addition to Section 162(m).
The Compensation Committee:
Michael Tennenbaum
Michael A. Gatto
L.R. Jalenak, Jr.
18
COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
On August 17, 1999, the Company received $30 million in financing from the
Investors, who were 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). Mr. Tennenbaum, a member of the
Compensation Committee, is a principal of Tennenbaum & Co. and of Special Value
Investment Management, LLC, and the Managing Member of Tennenbaum & Co., LLC and
Special Value Investment Management, LLC. See "Certain Relationships and Related
Transactions" above.
REPORT OF THE AUDIT COMMITTEE
The Audit Committee of the Company's Board of Directors acts under a
written charter, as adopted and approved in September, 2001. A copy of this
charter is attached to this Proxy Statement as Appendix A. All of the current
members of the Audit Committee are considered to be "independent directors" as
defined by the charter and the rules of the Nasdaq Marketplace Rules, with the
exception of Mr. Futterman, who is not "independent" because he served as the
Chief Executive Officer of the Company within the last three years. The
Company's Board of Directors has determined that, because of Mr. Futterman's
long experience in the retail industry and his extensive knowledge of the
Company, Mr. Futterman's membership on the Audit Committee is required by the
best interests of the Company and its stockholders.
The Audit Committee reviewed the Company's audited financial statements for
the fiscal year ended June 30, 2001 and discussed these financial statements
with management and the independent accountants.
The Audit Committee has also discussed with the independent accountants the
matters required to be discussed by the Statement on Auditing Standards 61,
Communications with Audit Committees, as amended, by the Auditing Standards
Board of the American Institute of Certified Public Accountants, referred to as
SAS 61. SAS 61 requires the independent auditors to discuss with the Audit
Committee, among other things, the following:
- methods to account for significant unusual transactions;
- the effect of significant accounting policies in controversial or
emerging areas for which there is a lack of authoritative guidance or
consensus;
- the process used by management in formulating particularly sensitive
accounting estimates and the basis for the auditors' conclusions
regarding the reasonableness of those estimates; and
- disagreements with management over the application of accounting
principles, the basis for management's accounting estimates and the
disclosures in the financial statements.
The independent accountants provided the Audit Committee with the written
disclosures and the letter required by Independence Standards Board Standard No.
1 (Independence Discussions with Audit Committees), as amended. Independence
Standards Board Standard No. 1 requires accountants to disclose annually in
writing all relationships that in the auditor's professional opinion may
reasonably be thought to bear on independence, confirm their perceived
independence and engage in a discussion of independence. In addition, the Audit
Committee discussed with the independent accountants their independence from the
Company. The Audit Committee also considered whether the independent
accountants' provision of certain other, non-audit related services to the
Company is compatible with maintaining such accountants' independence.
Based on its discussions with management and the independent accountants,
and its review of the representations and information provided by management and
the independent accountants, the Audit
19
Committee has recommended to the Company's Board of Directors that the audited
financial statements be included in the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 2001.
The Audit Committee:
L.R. Jalenak, Jr.
Howard Levkowitz
Jack Futterman
Nancy Pedot
INDEPENDENT AUDITORS FEES AND OTHER MATTERS
Audit Fees. Deloitte & Touche LLP billed the Company an aggregate of
$335,000 in fees for professional services rendered in connection with the audit
of the financial statements for the most recent fiscal year and the reviews of
the financial statements included in each of the Quarterly Reports on Form 10-Q
during the fiscal year ended June 30, 2001.
Financial Information Systems Design and Implementation Fees. Deloitte &
Touche LLP did not bill the Company for any professional services rendered for
the fiscal year ended June 30, 2001 in connection with financial information
systems design or implementation, the operation of the Company's information
system or the management of its local area network.
All Other Fees. Deloitte & Touche LLP billed the Company an aggregate of
$263,000 in fees for other services rendered to the Company and its affiliates
for the fiscal year ended June 30, 2001. Of this amount, $191,000 relates to the
preparation and amendment of tax returns.
20
PERFORMANCE GRAPH
The following graph provides a comparison on a cumulative basis of the
percentage change from June 30, 1996 through June 30, 2001 in (a) the total
stockholder return on the Company's Common Stock with (b) the total return on
the common equity of all domestic issuers traded on the Nasdaq National Market
and the Nasdaq SmallCap Market ("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 the Nasdaq
National Market or Small-Cap Market (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 the beginning of the
measurement period. The price of each investment unit has been set at $100 on
June 30, 1996 for purposes of preparing this graph. All share price information
for the Common Stock has been retroactively adjusted to give effect to a
three-for-two stock split which occurred on January 16, 1998.
The Company's Common Stock has traded on the Nasdaq National Market under
the symbol "PCTY" since its relisting in July, 2001. From July, 1999 until its
relisting on the Nasdaq National Market, the Common Stock was traded on the OTC
Bulletin Board, an electronic quotation service for NASD Market Makers. From
March, 1996 until July, 1999, the Company's Common Stock was traded on the
Nasdaq National Market.
PARTY CITY CORPORATION INDUSTRY INDEX NASDAQ MARKET INDEX
---------------------- -------------- -------------------
6/30/96 100.00 100.00 100.00
12/31/96 95.82 77.24 107.59
12/31/97 181.78 92.55 131.61
12/31/98 122.01 78.07 185.62
7/3/99 32.48 71.70 225.66
7/1/00 22.82 27.04 339.54
6/30/01 47.80 19.49 188.03
21
2. APPROVAL OF EMPLOYEE PLAN
On June 12, 2001, the Company's Board of Directors adopted the Employee
Plan. The primary purpose of the Employee Plan is to provide employees of the
Company and subsidiaries of the Company designated by the Board of Directors of
the Company ("Designated Subsidiaries") with an opportunity to purchase Common
Stock through accumulated payroll deductions.
The Company is seeking stockholder approval of the Employee Plan in order
to comply with the requirements of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), and with requirements applicable to companies
which have securities listed on the Nasdaq National Market. The following
summary of the Employee Plan is qualified in its entirety by express reference
to the text of the Employee Plan, a copy of which was filed with the Securities
and Exchange Commission.
The Employee Plan is intended to qualify as an "Employee Stock Purchase
Plan" under Section 423 of the Code. The Company has reserved 250,000 shares of
Common Stock for issuance under the Employee Plan.
ADMINISTRATION
The Employee Plan is administered by the Compensation Committee of the
Board of Directors of the Company (the "Board") or such other committee as may
be appointed by the Board (the "Committee"). The Committee, subject to the
provisions of the Employee Plan, has the authority to make rules and regulations
for the administration of the Employee Plan and its interpretation.
ELIGIBILITY
Employees of the Company and its Designated Subsidiaries are eligible to
participate if they are customarily employed by the Company for at least 20
hours per week. However, no employee is eligible to participate who, after the
grant of options under the Employee Plan, owns (including all shares of Common
Stock which may be purchased under any outstanding options under the Employee
Plan) 5% or more of the total combined voting power or value of all classes of
stock of the Company or of any subsidiary of the Company. There are
approximately 2,500 employees eligible to participate in the Employee Plan.
PARTICIPATION
An eligible employee may become a participant in the Employee Plan (a
"Participant") for an Offering Period (as defined below) by completing a
subscription agreement ("Subscription Agreement") authorizing payroll deductions
and filing it with the Company by the 21st day of the month prior to the
Offering Period. In general, Offering Period means each six-month period,
commencing on each January 1st and July 1st of each calendar year (each, an
"Enrollment Date") and ending with the last such day of such six-month period
(each, an "Exercise Date"). The first Offering Period will commence on January
1, 2002.
PAYROLL DEDUCTIONS
A Participant may authorize payroll deductions of a specific percentage of
his compensation between 1% and 15%, in increments of 1%, up to a limit of the
amount that will purchase no more than $25,000 of Common Stock (based on the
fair market value of the Common Stock measured as of each Enrollment Date) in
any one calendar year.
Payroll deductions will commence on the first payroll date on or following
the applicable Enrollment Date and will end on the last payroll date in the
Offering Period to which such Subscription Agreement applies, unless terminated
sooner by the Participant as described below. Deductions are accumulated in a
Participant's account ("Account") during the applicable Offering Period.
A Participant may discontinue participation in the Employee Plan, as
described below, at any time during the Offering Period prior to the Exercise
Date. Once an Offering Period has begun, a Participant may not increase or
decrease the rate of payroll deductions for that Offering Period, but may,
during that Offering
22
Period, increase or decrease the rate of payroll deductions for the next
succeeding Offering Period by filing a new Subscription Agreement with the
Company by the 21st day of the month prior to the end of the current Offering
Period.
In the event that any Participant's payroll deductions exceed the limits
under the Code, such Participant's payroll deductions will automatically be
decreased, until such limits are satisfied.
GRANT OF OPTION
The Company will grant to each Participant an option, effective on each
Enrollment Date, to purchase on the Exercise Date at a price determined as
described below (the "Purchase Price") the number of full shares of Common Stock
which his accumulated payroll deductions on the Exercise Date will purchase at
the Purchase Price. The Purchase Price for each Offering Period will be 85% of
the lesser of (i) the fair market value of the Common Stock on the Enrollment
Date, or (ii) the fair market value of the Common Stock on the Exercise Date.
The maximum number of shares which may be purchased by any Participant during
any Offering Period is the number of shares having a value of $25,000 minus the
fair market value of the number of shares of Common Stock previously purchased
during such calendar year, such fair market value determined as of each such
prior Enrollment Date during the calendar year with respect to which the shares
were previously purchased, divided by the fair market value of the Common Stock
on the Enrollment Date for the current Offering Period.
EXERCISE OF OPTION
Unless a Participant withdraws from the Employee Plan, his option for the
purchase of shares will be exercised automatically on the Exercise Date, and the
maximum number of full shares subject to the option will be purchased for such
Participant at the applicable Purchase Price with the accumulated payroll
deductions in his Account.
No Participant may, in any calendar year, purchase a number of shares of
Common Stock under this Employee Plan which, together with all other shares of
stock of the Company which he may be entitled to purchase in such year under all
other employee stock purchase plans of the Company and its subsidiaries which
meet the requirements of Section 423(b) of the Code, have an aggregate fair
market value (measured as of the Enrollment Date of each such Offering Period)
in excess of $25,000.
DELIVERY
The shares of Common Stock purchased by a Participant will, for all
purposes, be deemed to have been issued and sold at the close of business on the
Exercise Date. As promptly as practicable after each Exercise Date on which a
purchase of shares occurs, the Company will arrange for the full shares of
Common Stock purchased to be issued in the name of each Participant and held by
the Company on behalf of such Participant. The shares of Common Stock so
purchased will be held by the Company and will be non-transferable for six
months following the respective Exercise Date (the "Restricted Period"). As soon
as practicable following the expiration of the Restricted Period, the Company
shall cause stock certificates representing whole shares of Common Stock held
during the Restricted Period to be issued to each such Participant. All shares
of Common Stock held in a Participant's account by the Company on behalf of a
Participant shall be voted by such Participant. Dividends accruing on shares of
Common Stock, if any, held in a Participant's account shall be paid to such
Participant in the normal course as if such Participant held the shares.
WITHDRAWAL; TERMINATION OF EMPLOYMENT
A Participant may withdraw all but not less than all of the payroll
deductions credited to his Account and not yet used to exercise his option under
the Employee Plan at any time prior to the Exercise Date by giving written
notice to the Company. Once a Participant withdraws from the Employee Plan
during an Offering Period, he may not resume participation until the next
Offering Period. Except as set forth below, upon a Participant's ceasing to be
an employee of the Company for any reason, he will be deemed to have elected to
23
withdraw from the Employee Plan, all unused payroll deductions credited to his
Account will be returned to the Participant or, in the case of his death, his
designated beneficiary or executor, and his options will be automatically
terminated. In the event that a Participant ceases to be an employee by reason
of death, his beneficiary or executor may choose not to withdraw from the
Employee Plan and allow the Participant's option to be exercised on the next
Exercise Date based on the payroll deductions credited to the Participant's
Account as of the date of termination.
ADJUSTMENTS RELATING TO SHARES
The aggregate number of shares of Common Stock which may be purchased
pursuant to options granted under the Employee Plan, the number of shares of
Common Stock covered by each outstanding option, and the purchase price thereof
for each such option will be appropriately adjusted for any increase or decrease
in the number of outstanding shares of Common Stock resulting from (i) a stock
split or other subdivision or consolidation of shares of Common Stock or for
other capital adjustments or payments of stock dividends or distributions or
other increases or decreases in the outstanding shares of Common Stock affected
without receipt of consideration by the Company or (ii) any other change in the
laws or circumstances which results in any substantial dilution or enlargement
of the rights granted under the Employee Plan or for any other reason that
warrants equitable adjustment because it frustrates the intended purpose of the
Employee Plan.
In the event of a proposed sale of all or substantially all of the assets
of the Company, the merger of the Company with or into another corporation or
any event which the Board determines, in its sole discretion, to be a change in
control of the Company, each option under the Plan shall be assumed or an
equivalent option shall be substituted by such successor corporation or a parent
or subsidiary of such successor corporation, unless the Board determines, in the
exercise of its sole discretion and in lieu of such assumption or substitution,
to shorten the Offering Period then in progress by setting a new Exercise Date
(the "New Exercise Date").
In the event of the proposed dissolution or liquidation of the Company, the
Offering Period will terminate immediately prior to the consummation of such
proposed action, unless otherwise provided by the Board.
AMENDMENT AND TERMINATION OF THE EMPLOYEE PLAN
The Board may at any time and for any reason terminate or amend the
Employee Plan. Except as provided in "Adjustments Relating to Shares" above, no
such termination may adversely affect options previously granted; provided, that
an Offering Period may be terminated by the Board on any Exercise Date if the
Board determines that the termination of the Employee Plan is in the best
interests of the Company and its stockholders.
Without stockholder consent and without regard to whether any Participant
rights may be considered to have been "adversely affected," the Board (or the
Committee) may change the Offering Periods, limit the frequency or number of
changes in the amount withheld during an Offering Period, establish the exchange
ratio applicable to amounts withheld in a currency other than U.S. dollars,
permit payroll withholding in excess of the amount designated by a Participant
in order to adjust for delays or mistakes in the Company's processing of
properly completed withholding elections, establish reasonable waiting and
adjustment periods or accounting and crediting procedures to ensure that amounts
applied toward the purchase of Common Stock for each Participant properly
correspond with amounts withheld from the Participant's compensation, and
establish such other limitations or procedures as the Board (or the Committee)
finds, in its sole discretion, advisable and consistent with the Employee Plan.
REQUIREMENT FOR STOCKHOLDER APPROVAL
In the event that the Company's stockholders do not approve the Employee
Plan, the Employee Plan will not qualify as an Employee Stock Purchase Plan
under Section 423 of the Code and the options granted under the Employee Plan
will not receive the special tax treatment afforded options granted under such
Employee Stock Purchase Plans.
24
TERM OF EMPLOYEE PLAN
The Employee Plan became effective upon its adoption by the Board on June
12, 2001. It will continue in effect for a term of ten years thereafter unless
terminated sooner.
MARKET VALUE
The closing price of the Common Stock on NASDAQ on October 5, 2001 was
$6.64 per share.
FEDERAL INCOME TAX CONSEQUENCES
The following is a brief discussion of the Federal income tax consequences
of transactions under the Employee Plan based on the Code. The Employee Plan is
not qualified under Section 401(a) of the Code. This discussion does not address
all aspects of Federal income taxation and does not describe state or local tax
consequences.
Under Section 423(a) of the Code, the transfer of a share of Common Stock
to a Participant pursuant to the Employee Plan is entitled to the benefits of
Section 421(a) of the Code. Under that Section, a Participant will not be
required to recognize income at the time the option is granted (the "Enrollment
Date") or at the time the option is exercised (the "Exercise Date"). Section
423(c) of the Code requires that, provided the holding periods described below
are met, when the shares of Common Stock acquired during an Offering Period
pursuant to the Employee Plan are sold or otherwise disposed of in a taxable
transaction (or in the event of the death of the Participant while owning such
shares whether or not the holding period requirements are met), the Participant
will recognize income subject to Federal income tax as "ordinary income," for
the taxable year in which disposition or death occurs, in an amount equal to the
lesser of (i) the excess of the fair market value of the Common Stock at the
time of such disposition or death over the amount paid for such shares, and (ii)
the excess of the fair market value of the Common Stock on the Enrollment Date
of the applicable Offering Period over the Purchase Price, determined on the
Enrollment Date. Such recognition of income upon disposition shall have the
effect of increasing the taxable basis of the shares in the Participant's
possession by an amount equal to the income subject to Federal income tax. Any
additional gain or loss resulting from the disposition (provided it is not a
disqualifying disposition), measured by the difference between the amount paid
for the shares and the amount realized (less the amount recognized as income as
described above), will be recognized by the Participant as long-term capital
gain or loss. No portion of the amount received pursuant to such a disposition
will be subject to withholding for Federal income taxes, or be subject to FICA
or FUTA taxes.
The Company will not be entitled to any deduction in the determination of
its taxable income with respect to the Employee Plan, except in connection with
a disqualifying disposition as discussed below.
In order for a Participant to receive the favorable tax treatment provided
in Section 421(a) of the Code, Section 423(a) requires that the Participant make
no disposition of the shares acquired during an Offering Period within two years
from the Enrollment Date nor within one year from the Exercise Date of the
Offering Period.
If a Participant disposes of Common Stock acquired pursuant to the Employee
Plan before the expiration of the holding period requirements set forth above (a
"disqualifying disposition"), the Participant will realize, at the time of the
disposition, "ordinary income" to the extent the fair market value of the Common
Stock on the Exercise Date exceeds the amount paid for the shares. The
difference between the fair market value of the Common Stock on the Exercise
Date and the amount realized on disposition is treated as long-term or short-
term capital gain or loss, depending on the Participant's holding period in the
Common Stock. The amount treated as "ordinary income" will not be subject to the
income tax or FICA or FUTA withholding requirements of the Code.
If the stockholders of the Company fail to approve the Employee Plan within
twelve months of the date of the Employee Plan's adoption by the Board, a
Participant will realize, with respect to each option granted under the Employee
Plan, "ordinary income" in the year of exercise to the extent the fair market
value of the Common Stock on the Exercise Date exceeds the amount paid for the
shares. The difference between the fair
25
market value of the Common Stock on the Exercise Date and the amount realized on
any subsequent disposition is treated as long-term or short-term capital gain or
loss, depending on the Participant's holding period in the Common Stock.
NEW PLAN BENEFITS
Because participation in the Employee Plan is entirely within the
discretion of the eligible employees of the Company and any Designated
Subsidiary, the Company cannot forecast the extent of participation in the
future. Therefore, the Company has omitted the tabular disclosure of the
benefits or amounts allocated under the Employee Plan.
RECOMMENDATION AND VOTE
Approval of the Employee Plan Proposal 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 EMPLOYEE
PLAN PROPOSAL.
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 17, 2001
26
APPENDIX A
PARTY CITY CORPORATION
AMENDED AND RESTATED
AUDIT COMMITTEE CHARTER
This charter shall be reviewed, updated and approved annually by the Board
of Directors (the "Board") of Party City Corporation (the "Company").
MEMBERSHIP, ROLE AND INDEPENDENCE
The membership of the Audit Committee (the "Audit Committee") of the Board
shall consist of at least three directors of the Company who are elected by a
vote of a majority of the entire Board. Members of the Audit Committee shall be
generally knowledgeable in financial and auditing matters, including at least
one member with accounting or related financial management expertise. Each
member of the Audit Committee shall be free of any relationship that, in the
opinion of the Board, would interfere with his or her individual exercise of
independent judgment, and shall meet the applicable director independence
requirements for serving on the audit committee of a corporation set forth in
the corporate governance standards of the New York Stock Exchange, the Nasdaq
National Market, the American Stock Exchange and any other national exchange or
over-the-counter trading system on which the securities of the Company are
listed, provided that, to the extent permitted under such corporate governance
standards, up to one person that does not meet such director independence
requirements may serve on the Audit Committee if the Board determines that the
membership of such person is required by the best interests of the Company and
its shareholders. The Audit Committee shall assist the Board in fulfilling its
responsibility for oversight of the quality and integrity of the accounting,
auditing and reporting practices of the Company and any other duties delegated
thereto by the Board. The Audit Committee is expected to maintain free and open
communication (including private executive sessions at least annually) with the
Company's independent accountants, internal auditors and management. In
discharging this oversight role, the Audit Committee is hereby empowered to
investigate any matter brought to its attention, with full power to retain
outside counsel or other experts for this purpose.
The Board shall appoint one member of the Audit Committee as Chairperson,
who shall be responsible for the leadership of the Audit Committee, including,
but not limited to, preparing the agenda and presiding over meetings, assigning
members of the Audit Committee to any sub-committees thereof and reporting to
the Board. The Chairperson of the Audit Committee will also maintain regular
communications with the Company's Chairman, CEO and CFO and the lead independent
audit partner of the Company's independent accountants.
RESPONSIBILITIES
The Audit Committee's responsibilities include, but are not limited to:
- Recommending to the Board the independent accountants to be selected or
retained to audit the financial statements of the Company. In so doing,
the Audit Committee will request from the independent auditors of the
Company's financial statements a written affirmation that such auditors
are in fact independent, discuss with such auditors any relationships
that may detrimentally impact their independence and recommend to the
Board any actions necessary to ensure the Company's auditors'
independence.
- Overseeing the relationship between the Company and its independent
auditors by discussing with such auditors the nature and rigor of the
audit process, receiving and reviewing audit reports and providing the
auditors full access to the Audit Committee (and the Board) to report on
any and all appropriate matters.
A-1
- Reviewing the Company's audited financial statements and discussing them
with the Company's management and independent auditors. These discussions
shall include the consideration of the quality of the Company's
accounting principles as applied in its financial statements and reports,
including a review of significant estimates, reserves, accruals,
subjective analyses and audit adjustments, whether or not recorded, and
such other inquiries as may be appropriate. Based on such review, the
Audit Committee shall make its recommendation to the Board as to the
inclusion of the Company's audited financial statements in the Company's
annual report on Form 10-K.
- Reviewing with the Company's management and independent auditors
quarterly financial information prior to the Company's filing of any Form
10-Q. This review may be performed by the Audit Committee or its
Chairperson.
- Discussing with the Company's management and independent auditors the
quality and adequacy of the Company's internal accounting controls.
- Discussing with the Company's management the status of any pending
litigation, tax and other matters within the purview of the Audit
Committee's oversight authority in connection with the Company's
compliance with applicable law.
- Reporting the Audit Committee's activities to the entire Board and
issuing annual reports (including appropriate conclusions) for inclusion
in each proxy statement of the Company that is submitted to its
stockholders.
A-2
Appendix B
Please mark [X]
your votes as
indicated in
this example.
FOR WITHHOLD AUTHORITY
all nominees listed to vote for the following
(except as marked to the nominees for
contrary) election as directors:
1. Ralph Dillon, Jack Futterman, [ ] [ ]
Michael A. Gatto, L.R. Jalenak,
Jr., Howard Levkowitz, Nancy Pedot,
Walter J. Salmon, James Shea and
Michael Tennenbaum.
Instruction: To withhold authority to vote for any individual nominee, write
that nominee's name on the line provided below.
_____________________________________________________________________________
FOR AGAINST ABSTAIN
2. Approval of the Employee Stock Purchase Plan [ ] [ ] [ ]
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 AND (II) FOR THE PROPOSAL LISTED
IN ITEM 2. THE PROXIES WILL VOTE 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 STOCKHOLDERS FOR THE 2001 ANNUAL
MEETING OF STOCKHOLDERS OF THE COMPANY, (B) THE ACCOMPANYING PROXY STATEMENT FOR
SUCH ANNUAL MEETING AND (C) THE COMPANY'S ANNUAL REPORT FOR THE FISCAL YEAR
ENDED JUNE 30, 2001, ARE EACH HEREBY ACKNOWLEDGED:
Dated ___________________________, 2001
Signature(s)___________________________________________
___________________________________________
IMPORTANT: Please sign exactly as your name or names appear hereon, indicating,
where proper, official position or representative capacity.
--------------------------------------------------------------------------------
-FOLD AND DETACH HERE-
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 STOCKHOLDERS OF PARTY CITY CORPORATION TO BE HELD AT THE
NEW YORK PALACE HOTEL, 455 MADISON AVENUE, NEW YORK, NEW YORK, 10022, ON
WEDNESDAY, NOVEMBER 14, 2001 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:
(Continued on the other side)
--------------------------------------------------------------------------------
-FOLD AND DETACH HERE-
Exhibit 1
PARTY CITY CORPORATION
EMPLOYEE STOCK PURCHASE PLAN
1. Purpose. The purpose of the Plan is to provide Employees of the Company and
its Designated Subsidiaries with an opportunity to purchase Common Stock of the
Company through accumulated payroll deductions. It is the intention of the
Company to have the Plan qualify as an "Employee Stock Purchase Plan" under
Section 423 of the Code. The provisions of the Plan, accordingly, shall be
construed so as to extend and limit participation in a manner consistent with
the requirements of that section of the Code.
2. Definitions.
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(c) "Committee" shall mean the Compensation Committee of the Board or
its designees, or such other committee as may be appointed by the Board, which
shall be the administrative committee for the Plan.
(d) "Common Stock" shall mean the Common Stock of the Company, $0.01
par value per share.
(e) "Company" shall mean Party City Corporation, a Delaware
corporation.
(f) "Compensation" shall mean all wages, salary, overtime, bonuses, and
commissions.
(g) "Designated Subsidiaries" shall mean the Subsidiaries which have
been designated by the Board, from time to time in its sole discretion as
eligible to participate in the Plan, as set forth on Schedule A attached hereto.
(h) "Employee" shall mean any individual who is an employee of the
Company or a Designated Subsidiary for purposes of tax withholding under the
Code whose customary employment with the Company or any Designated Subsidiary is
at least twenty (20) hours per week. For purposes of the Plan, the employment
relationship shall be treated as continuing intact while the individual is on
sick leave or other leave of absence approved by the Company. Where the period
of leave exceeds 90 days and the individual's right to reemployment is not
guaranteed either by statute or by contract, the employment relationship will be
deemed to have terminated on the 91st day of such leave.
(i) "Enrollment Date" for any Offering Period, shall mean first Trading
Day of the Offering Period.
(j) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(k) "Exercise Date" shall mean the last Trading Day of each Offering
Period.
(l) "Fair Market Value" shall mean, as of any date, the value of Common
Stock determined as follows:
(1) if the Common Stock is listed on a national securities
exchange, the average of the high and low sales prices of the Common
Stock on the primary exchange with which the Common Stock is listed
and traded on the determination date;
(2) if the Common Stock is not listed on any national securities
exchange but is quoted in the NASDAQ National Market System, average
of the high and low sales prices of the Common on the determination
date; or
(3) if the Common Stock is not listed on a national securities
exchange nor quoted in the NASDAQ National Market System on a last
sale basis, the amount determined by the Committee to be the fair
market value based upon a good faith attempt to value the Common Stock
accurately and computed in accordance with applicable regulations of
the Internal Revenue Service.
(m) "Offering Period" shall mean, subject to the second sentence of
Section 4 hereof, each six-month period commencing on each January 1 and July 1
of each calendar year; provided, however that, unless otherwise determined by
the Committee, the first Offering Period shall commence on May 1, 2001 and shall
end on June 30, 2001.
(n) "Parent" shall mean a corporation which is a "parent corporation"
of the Company within the meaning of section 424(e) of the Code.
(o) "Plan" shall mean this Party City Corporation Employee Stock
Purchase Plan.
(p) "Purchase Price" for any Offering Period shall mean an amount equal
to the lesser of (i) 85% of the Fair Market Value of a share of Common Stock on
the Enrollment Date of such Offering Period or (ii) 85% of the Fair Market Value
of a share of Common Stock on the Exercise Date of such Offering Period.
(q) "Reserves" shall mean the number of shares of Common Stock covered
by each option under the Plan which have not yet been exercised and the number
of shares of Common Stock which have been authorized for issuance under the Plan
but not yet placed under option.
(r) "Restricted Period" shall mean the six-month period after purchase
that the shares of Common Stock purchased hereunder shall be nontransferable and
held by the Company as set forth in 9 hereof.
(s) "Subsidiary" shall mean a corporation which is a "subsidiary
corporation" of the Company within the meaning of section 424(f) of the Code.
2
(t) "Trading Day" shall mean a day on which national stock exchanges
and NASDAQ are open for trading.
3. Eligibility.
(a) Each person who is an Employee, on a given Enrollment Date, shall
be eligible to participate in the Plan.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) if, immediately after the
grant, such Employee would own Common Stock (together with stock owned by any
other person or entity that would be attributed to such Employee pursuant to
section 424(d) of the Code) of the Company (including, for this purpose, all
shares of stock subject to any outstanding options to purchase such stock,
whether or not currently exercisable and irrespective of whether such options
are subject to the favorable tax treatment of section 421(a) of the Code)
possessing five percent (5%) or more of the total combined voting power or value
of all classes of stock of the Company or of any Parent or Subsidiary, or (ii)
which permits his or her rights to purchase stock under all employee stock
purchase plans (within the meaning of section 423 of the Code) of the Company
and its Parents and Subsidiaries to accrue at a rate which exceeds Twenty-Five
Thousand Dollars ($25,000) worth of Common Stock (determined at the Fair Market
Value of the Common Stock at the time such option is granted) for each calendar
year in which such option is outstanding at any time. The limitation described
in clause (ii) of the preceding sentence shall be applied in a manner consistent
with Section 423(b)(8) of the Code.
4. Offering Periods. The Plan shall be implemented by consecutive Offering
Periods continuing from the first Offering Period until terminated in accordance
with Section 19 hereof. The Committee shall have the power to change the
duration of Offering Periods (including the commencement dates thereof) with
respect to future offerings without stockholder approval if such change is
announced at least ten (10) days prior to the scheduled beginning of the first
Offering Period to be affected thereafter.
5. Participation.
(a) An Employee may become a participant in the Plan for an Offering
Period by completing a subscription agreement authorizing payroll deductions in
the form of Exhibit A to this Plan and filing it with the Committee no earlier
than the first day and no later than the 21st day of the month immediately prior
to the applicable Enrollment Date, unless a later time for filing the
subscription agreement is set by the Committee for all Employees with respect to
a given Offering Period.
(b) Payroll deductions for a participant shall commence on the first
payroll date on or following the Enrollment Date and shall end on the last
payroll date in the Offering Period to which such authorization is applicable,
unless sooner terminated by the participant as provided in Section 10 hereof.
6. Payroll Deductions.
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(a) At the time a participant files his or her subscription agreement,
he or she shall elect to have payroll deductions made on each pay day during the
Offering Period in an amount (expressed as a whole number percentage) not
exceeding fifteen percent (15%) of the Compensation (in 1% increments) which he
or she receives on each pay day during the Offering Period; provided, however,
that the maximum number of shares which may be purchased by any participant
during any Offering Period is the number of shares equal to $25,000 minus the
fair market value of the number of shares of Common Stock previously purchased
during such calendar year, such fair market value determined as of each such
prior Enrollment Date during the calendar year with respect to which the shares
were previously purchased, divided by the fair market value of the Common Stock
on the Enrollment Date for the current Offering Period.
(b) All payroll deductions made for a participant shall be credited to
his or her account under the Plan and will be withheld in whole percentages
only. A participant may not make any additional payments into such account.
(c) A participant may discontinue his or her participation in the Plan
with respect to any Offering Period only as provided in Section 10 hereof. Once
an Offering Period has commenced, a participant may not increase or decrease the
rate of his or her payroll deductions for that Offering Period, but may, during
that Offering Period, increase or decrease the rate of his or her payroll
deductions for the next succeeding Offering Period, by completing or filing with
the Committee a new subscription agreement, no later than the 21st day of the
month immediately prior to the Enrollment Date for such Offering Period,
authorizing a change in payroll deduction rate. A participant's subscription
agreement shall remain in effect for successive Offering Periods unless
terminated as provided in Section 10 hereof or superseded by a subsequently
filed subscription agreement.
(d) Notwithstanding the foregoing, a participant's payroll deductions
may be decreased to 0% (i) at any time, to the extent necessary to comply with
Section 423(b)(8) of the Code and Section 3(b) hereof, and (ii) for each
Offering Period, at such time during such Offering Period that the aggregate
Purchase Price of the shares of Common Stock previously purchased during the
calendar year when added to the aggregate Purchase Price of the shares of Common
Stock to be purchased with respect to such then current Offering Period equals
or would exceed $25,000 in such calendar year. Subject to the preceding
sentence, payroll deductions shall recommence at the rate provided in such
participant's subscription agreement at the beginning of the next succeeding
Offering Period, unless terminated by the participant as provided in Section 10
hereof or superseded by a subsequently filed subscription agreement.
(e) At the time some or all of the Common Stock issued under the Plan
is disposed of, the participant must make adequate provisions for the Company's
federal, state, or other tax withholding obligations, if any, which arise upon
the disposition of the Common Stock. At any time, the Company may, but will not
be obligated to, withhold from the participant's compensation the amount
necessary for the Company to meet applicable withholding obligations, including
any withholding required to make available to the Company any tax deductions or
benefits attributable to sale or early disposition of Common Stock by the
Employee.
4
7. Grant of Option. On the Enrollment Date of each Offering Period, each
Employee participating in such Offering Period shall be granted an option to
purchase on the Exercise Date of such Offering Period (at the applicable
Purchase Price) up to a number of whole shares of the Company's Common Stock
determined by dividing such Employee's payroll deductions accumulated prior to
such Exercise Date and retained in the participant's account as of the Exercise
Date by the applicable Purchase Price; provided, however, that the maximum
number of shares which may be purchased by any participant during any Offering
Period is the number of shares having an aggregate Purchase Price equal to (i)
$25,000 minus (ii) the aggregate Purchase Price of all shares of Common Stock
previously purchased during such calendar year, and provided, further, that such
purchase shall be subject to the limitations set forth in Sections 3(b) and 12
hereof. Exercise of the option shall occur as provided in Section 8 hereof,
unless the participant has withdrawn pursuant to Section 10 hereof, and shall
expire on the last day of the Offering Period.
8. Exercise of Option. Unless a participant withdraws from the Plan as
provided in Section 10 hereof, his or her option for the purchase of whole
shares will be exercised automatically on the Exercise Date, and, subject to the
limitations set forth in Sections 3(b), 7 and 12 hereof, the maximum number of
full shares subject to option shall be purchased for such participant at the
applicable Purchase Price with the accumulated payroll deductions in his or her
account. Any amount remaining in a participant's account after purchase
representing fractional shares may, at the discretion of the Committee, either
be held by the Company and applied towards the purchase of shares in a
subsequent Offering Period or returned to such participant as soon as reasonably
practicable following the respective Exercise Date. During a participant's
lifetime, a participant's option to purchase shares hereunder is exercisable
only by the participant.
9. Crediting of Shares and Delivery or Sale of Shares. As promptly as
practicable after each Exercise Date on which a purchase of shares occurs, the
Company shall arrange for the full shares of Common Stock purchased for each
participant to be issued in the name of each respective participant and held by
the Company on behalf of such participant. The shares of Common Stock so
purchased hereunder shall be held by the Company and shall be nontransferable
for six-months following the Exercise Date (the "Restricted Period"). As soon as
practicable following the expiration of the Restricted Period, the Company shall
cause stock certificates representing the whole shares of Common Stock held
during the Restricted Period to be issued to such participant.
10. Withdrawal; Termination of Employment.
(a) A participant may withdraw all but not less than all the payroll
deductions credited to his or her account and not yet used to exercise his or
her option under the Plan at any time prior to the Exercise Date of an Offering
Period by giving written notice to the Committee in the form of Exhibit B to
this Plan. All of the participant's payroll deductions credited to his or her
account will be paid to such participant as promptly as practicable after
receipt of notice of withdrawal and such participant's option for the Offering
Period will be automatically terminated, and no further payroll deductions for
the purchase of shares will be made during the Offering Period. If a participant
withdraws from the Plan during an Offering Period, he or she may not resume
participation until the next Offering Period. He or she may resume participation
for any other Offering Period by delivering to the Company a new subscription
agreement no
5
later than the 21st day of the month immediately prior to the Enrollment Date
for such Offering Period.
(b) Upon a participant's ceasing to be an Employee, for any reason, he
or she will be deemed to have elected to withdraw from the Plan and the payroll
deductions credited to such participant's account during the Offering Period but
not yet used to exercise the option will be distributed to such participant or,
in the case of his or her death, to the person or persons entitled thereto under
Section 14 hereof, and such participant's option will be automatically
terminated; provided, however, that in the event a participant ceases to be an
Employee by reason of his or her death, the person or persons entitled thereto
under Section 14 hereof, may choose not to withdraw from the Plan and allow the
participant's option to be exercised on the next Exercise Date based upon the
payroll deductions credited to the participant's account as of the date of
termination.
(c) A participant's withdrawal from an Offering Period will not have
any effect upon his or her eligibility to participate in any similar plan which
may hereafter be adopted by the Company.
11. Interest.
No interest or other increment shall accrue or be payable with
respect to any of the payroll deductions of a participant in the Plan.
12. Stock.
(a) The maximum number of shares of Common Stock which shall be made
available for sale under the Plan shall be 250,000 shares, subject to adjustment
upon changes in capitalization of the Company as provided in Section 18 hereof.
Such shares may be shares to be newly issued by the Company, shares acquired on
the open market solely for the purpose of satisfying the exercise of options
hereunder or treasury shares reacquired and held by the Company. If on a given
Exercise Date the number of shares with respect to which options are to be
exercised exceeds the number of shares then available under the Plan, the
Committee shall make a pro rata allocation of the shares remaining available for
purchase in as uniform a manner as shall be practicable and as it shall
determine to be equitable.
(b) No participant will have an interest or voting right in shares
covered by his option until such option has been exercised. All full shares of
Common Stock held by the Company shall be voted by such participant. Dividends
accruing on shares of Common Stock, if any, held by the Company shall be paid to
such participant in the normal course as if such participant held the shares.
(c) Shares of Common Stock held by the Company until issuance of a
certificate to the participant representing the shares will be registered in the
name of the participant.
13. Administration.
6
(a) Administrative Body. The Plan shall be administered by the
Committee. The Committee shall have full and exclusive discretionary authority
to construe, interpret and apply the terms of the Plan, to determine eligibility
and to adjudicate all disputed claims filed under the Plan. The Committee shall
also have authority to develop, amend and terminate rules governing the
operation of the Plan in conformity with the terms of the Plan. Every finding,
decision and determination made by the Committee shall, to the full extent
permitted by law, be final and binding upon all parties.
14. Designation of Beneficiary.
(a) A participant may file a written designation of a beneficiary who
is to receive the rights to any shares of Common Stock held by the Company in
the event of such participant's death subsequent to an Exercise Date on which
the option is exercised but prior to distribution of such shares to such
participant. In addition, a participant may file a written designation of a
beneficiary who is to receive any cash from the participant's account under the
Plan or who may elect to exercise the option in the event of the participant's
death prior to an Exercise Date, as provided in Section 10 hereof.
(b) Such designation of beneficiary may be changed by the participant
at any time by written notice. In the event of the death of a participant and in
the absence of a beneficiary validly designated under the Plan who is living at
the time of such participant's death, the executor or administrator of the
estate of the participant shall have all the rights to the cash, shares of
Common Stock and/or exercise of an option attributable to such participant.
15. Transferability. Neither payroll deductions credited to a participant's
account nor any rights with regard to the exercise of an option or to receive
shares under the Plan may be assigned, transferred, pledged or otherwise
disposed of in any way (other than by will, the laws of descent and distribution
or as provided in Section 14 hereof) by the participant. Any such attempt at
assignment, transfer, pledge or other disposition shall be without effect,
except that the Company may treat such act as an election to withdraw from the
Plan in accordance with Section 10 hereof.
16. Use of Funds. All payroll deductions received or held by the Company
under the Plan may be used by the Company for any corporate purpose, and the
Company shall not be obligated to segregate such payroll deductions.
17. Reports. Individual accounts will be maintained for each participant in
the Plan. Statements of account will be made available to participating
Employees at least annually, within such time as the Committee may reasonably
determine, which statements will set forth the amounts of payroll deductions,
the Purchase Price, the number of shares purchased and held on behalf of the
participant.
18. Adjustments Upon Changes in Capitalization.
(a) Changes in Capitalization. Subject to any required action by the
stockholders of the Company, the Reserves as well as the price per share of
Common Stock covered by each option under the Plan which has not yet been
exercised shall be proportionately adjusted for (i) any increase or decrease in
the number of issued shares of Common Stock
7
resulting from a stock split, reverse stock split, stock dividend, combination
or reclassification of the Common Stock, or any other increase or decrease in
the number of shares of Common Stock effected without receipt of consideration
by the Company 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 which otherwise warrants equitable adjustment because it
interferes with the intended operation of the Plan; provided, however, that
conversion of any convertible securities of the Company shall not be deemed to
have been "effected without receipt of consideration." Such adjustment shall be
made by the Board, whose determination in that respect shall be final, binding
and conclusive. Except as expressly provided herein, no issuance by the Company
of shares of stock of any class, or securities convertible into shares of stock
of any class, shall affect, and no adjustment by reason thereof shall be made
with respect to, the number or price of shares of Common Stock subject to an
option.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Offering Period will terminate
immediately prior to the consummation of such proposed action and all amounts
held by the Company hereunder shall be returned to the participants, unless
otherwise provided by the Board.
(c) Merger or Asset Sale. In the event of a proposed sale of all or
substantially all of the assets of the Company, the merger of the Company with
or into another corporation or any event which the Board determines, in its sole
discretion, to be a change in control of the Company, each option under the Plan
shall be assumed or an equivalent option shall be substituted by such successor
corporation or a parent or subsidiary of such successor corporation, unless the
Board determines, in the exercise of its sole discretion and in lieu of such
assumption or substitution, to shorten the Offering Period then in progress by
setting a new Exercise Date (the "New Exercise Date"). For purposes of this
paragraph, an option granted under the Plan shall be deemed to be assumed if,
following the sale of assets, merger or other event, the option confers the
right to purchase, for each share of Common Stock subject to the option
immediately prior to the sale of assets or merger, the consideration (whether
stock, cash or other securities or property) received in the sale of assets,
merger or other event by holders of Common Stock for each share of Common Stock
held on the effective date of the transaction (and if such holders were offered
a choice of consideration, the type of consideration chosen by the holders of a
majority of the outstanding shares of Common Stock); provided, however, that if
such consideration received in the sale of assets, merger or other event was not
solely common stock of the successor corporation or its parent (as defined in
Section 424(e) of the Code), the Board may, with the consent of the successor
corporation and the participant, provide for the consideration to be received
upon exercise of the option to be solely common stock of the successor
corporation or its parent equal in Fair Market Value to the per share
consideration received by holders of Common Stock in the sale of assets, merger
or other event.
The Board may, if it so determines in the exercise of its sole
discretion, also make provision for adjusting the Reserves, as well as the price
per share of Common Stock covered by each outstanding option, in the event the
Company effects one or more reorganizations, recapitalizations, rights offerings
or other increases or reductions of shares of its outstanding Common Stock, and
in the event of the Company being consolidated with or merged into any other
corporation.
8
19. Amendment or Termination.
(a) The Board may at any time and for any reason terminate or amend the
Plan. Except as provided in Section 18 hereof, no such termination may adversely
affect options previously granted; provided, that an Offering Period may be
terminated by the Board on any Exercise Date if the Board determines that the
termination of the Plan is in the best interests of the Company and its
stockholders. Except as provided in Section 18 hereof, no amendment may make any
change in any option theretofore granted which adversely affects the rights of
any participant. To the extent necessary to comply with Section 423 of the Code
(or any successor rule or provision or any other applicable law or regulation),
the Company shall obtain stockholder approval in such a manner and to such a
degree as required.
(b) Without stockholder consent and without regard to whether any
participant rights may be considered to have been "adversely affected," the
Board (or the Committee) shall be entitled to change the Offering Periods, limit
the frequency or number of changes in the amount withheld during an Offering
Period, establish the exchange ratio applicable to amounts withheld in a
currency other than U.S. dollars, permit payroll withholding in excess of the
amount designated by a participant in order to adjust for delays or mistakes in
the Company's processing of properly completed withholding elections, establish
reasonable waiting and adjustment periods or accounting and crediting procedures
to ensure that amounts applied toward the purchase of Common Stock for each
participant properly correspond with amounts withheld from the participant's
Compensation, and establish such other limitations or procedures as the Board
(or the Committee) finds, in its sole discretion, advisable and consistent with
the Plan.
20. Notices. All notices or other communications by a participant to the
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
21. Conditions Upon Issuance of Shares. Shares shall not be issued with
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Exchange Act, the rules and regulations
promulgated thereunder and the requirements of any stock exchange upon which the
shares may then be listed, and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
As a condition to the exercise of an option, the Company may require
the person exercising such option to represent and warrant at the time of any
such exercise that the shares are being purchased only for investment and
without any present intention to sell or distribute such shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned applicable provisions of law.
22. Term of Plan. The Plan shall become effective upon the earlier to occur
of its adoption by the Board or its approval by the stockholders of the Company.
It shall continue in effect for a term of ten (10) years thereafter unless
sooner terminated under Section 19 hereof.
9
23. Governing Law. The Plan shall be governed by and construed in
accordance with the internal laws of the State of New Jersey applicable to
contracts made and performed within such state, without regard to the principles
of conflicts of law thereof, except as such laws may be supplanted by the
federal laws of the United States of America, which laws shall then govern its
effect and its construction to the extent they supplant New Jersey law.
10
EXHIBIT A
PARTY CITY CORPORATION
EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
____ Original Application Enrollment Date:________________
____ Change in Payroll Deduction Rate
____ Change of Beneficiary(ies)
1. ________________________________________________________ hereby elects to
participate in the Party City Corporation Employee Stock Purchase Plan (the
"Stock Purchase Plan") and subscribes to purchase shares of the Company's
Common Stock in accordance with this Subscription Agreement and the Stock
Purchase Plan.
2. I hereby authorize payroll deductions from each paycheck in the amount of
____% (a whole number not to exceed 15%) of my Compensation on each payday
during the Offering Period in accordance with the Stock Purchase Plan.
(Please note that no fractional percentages are permitted.)
3. I understand that said payroll deductions will be accumulated for the
purchase of whole shares of Common Stock at the applicable Purchase Price
determined in accordance with the Stock Purchase Plan. I understand that if
I do not withdraw from an Offering Period, any accumulated payroll
deductions will be used to automatically exercise my option on the Exercise
Date.
4. A complete copy of the Stock Purchase Plan has been made available to me. I
understand that my participation in the Stock Purchase Plan is in all
respects subject to its terms.
5. Shares purchased for me under the Stock Purchase Plan should be issued in
the name of (Employee
Only):____________________________________________________________________
_______________________________________________________________________. I
understand that shares purchased by me under the Stock Purchase Plan will
be held in an account for me by the Company until the end of a six-month
Restricted Period, during which time any such shares may not be transferred
or disposed of.
6. I understand that, under current Federal income tax law, if I dispose of
any shares received by me pursuant to the Stock Purchase Plan within two
years after the Enrollment Date (i.e., within two years after the first
trading day of the Offering Period during which I purchased such shares), I
will be treated for Federal income tax purposes as having made a
disqualifying disposition, and as having received ordinary income at the
time of such disposition in an amount equal to the excess of the Fair
Market Value of the shares at the time such shares were delivered to me
over the price which I paid for the shares.
1
The remainder of the gain, if any, recognized on such disqualifying
disposition will be taxed as capital gain. I hereby agree to notify the
Company in writing within 30 days after the date of any disqualifying
disposition of my shares and I will make adequate provision for federal,
state or other tax withholding obligations, if any, which arise upon such
disqualifying disposition. The Company may, but will not be obligated to,
withhold from my compensation the amount necessary to meet any applicable
withholding obligation including any withholding necessary to make
available to the Company any tax deductions or benefits attributable to
sale or disqualifying disposition of Common Stock by me. ANY DISPOSITION OF
SHARES ACQUIRED PURSUANT TO THE PLAN SHALL AT ALL TIMES BE SUBJECT TO ANY
THEN CURRENT COMPANY POLICY ON SELLING SHARES OF THE COMPANY'S COMMON
STOCK.
7. I hereby agree to be bound by the terms of the Stock Purchase Plan. The
effectiveness of this Subscription Agreement is dependent upon my
eligibility to participate in the Stock Purchase Plan.
8. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under the Stock
Purchase Plan and/or to exercise any then-existing option on the Exercise
Date immediately following my death pursuant to the terms of the Stock
Purchase Plan:
Name: (Please Print)
________________________________________________________________________________
(Last) (First) (Middle)
_____________________________________ _______________________________________
Relationship
_______________________________________
(Address)
2
Name (Please Print)
________________________________________________________________________________
(Last) (First) (Middle)
_____________________________________ _______________________________________
Relationship
_______________________________________
(Address)
Employee's Social Security Number: _______________________________________
Employee's Address: _______________________________________
_______________________________________
_______________________________________
I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT
SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME.
Dated:______________________ _______________________________________
Signature of Employee
3
EXHIBIT B
PARTY CITY CORPORATION
EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
The undersigned participant in the Party City Corporation Employee
Stock Purchase Plan (the "Plan") hereby notifies the Company that he or she
hereby withdraws from the Plan. The undersigned understands that no payroll
deductions will be made for the purchase of shares in the Offering Period that
begins following the date hereof and for any succeeding Offering Periods and the
undersigned shall be eligible to participate in succeeding Offering Periods only
by delivering to the Company a new Subscription Agreement within the time period
set forth in Section 5 of the Plan.
Name and Address of Participant
___________________________________
___________________________________
___________________________________
Signature:
___________________________________
Date: _____________________________
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