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SECURITIES AND EXCHANGE COMMISSION

SCHEDULE 13D

UNDER THE SECURITIES EXCHANGE ACT OF 1934

(Amendment No. 5)¹

PARTY CITY CORPORATION

COMMON STOCK, PAR VALUE $.01 PER SHARE

702145103

SPECIAL VALUE BOND FUND, LLC
C/O SPECIAL VALUE INVESTMENT MANAGEMENT, LLC
11100 SANTA MONICA BOULEVARD, SUITE 210
LOS ANGELES, CALIFORNIA 90025
(310) 566-1000

SEPTEMBER 28, 2001

     If the filing person has previously filed a statement on Schedule 13G to report the acquisition that is the subject of this Schedule 13D, and is filing this schedule because of Sections 240.13d-1(e), 240.13d-1(f) or 240.13d-1(g), check the following box: [   ].

(Continued on the following pages)

Page 1 of 14 Pages

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SCHEDULE 13D

CUSIP No. 702145103		Page 2 of 14

1		NAME OF REPORTING PERSONS I.R.S. IDENTIFICATION NO. OF ABOVE PERSONS (ENTITIES ONLY)
		SPECIAL VALUE BOND FUND, LLC IRS No.: 95-4758920
2		CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP		(a) [   ]
				(b) [X]
3		SEC USE ONLY
4		SOURCE OF FUNDS*
		OO, WC
5		CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) or 2(e)		[   ]
6		CITIZENSHIP OR PLACE OF ORGANIZATION
		DELAWARE

NUMBER OF SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON WITH
		7		SOLE VOTING POWER
				0
		8		SHARED VOTING POWER
				2,953,061 SHARES (1)
		9		SOLE DISPOSITIVE POWER
				0
		10		SHARED DISPOSITIVE POWER
				2,953,061 SHARES (1)

11		AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
		2,953,061 SHARES (1)
12		CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES*		[   ]
13		PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
		18.7% (2)
14		TYPE OF REPORTING PERSON*
		OO

(1)		AN AGGREGATE OF 2,496,000 SHARES ARE ISSUABLE UPON EXERCISE OF THE WARRANT (DESCRIBED IN ITEMS 3 AND 4 BELOW).
(2)		BASED ON 12,755,205 SHARES OF COMMON STOCK OUTSTANDING AS OF SEPTEMBER 17, 2001, AS REPORTED BY PARTY CITY CORPORATION IN ITS ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 2001 AND COMPUTED IN ACCORDANCE WITH RULE 13d-3(d)(1).

*SEE INSTRUCTIONS BEFORE FILLING OUT!

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SCHEDULE 13D

CUSIP No. 702145103		Page 3 of 14

1		NAME OF REPORTING PERSONS I.R.S. IDENTIFICATION NO. OF ABOVE PERSONS (ENTITIES ONLY)
		SPECIAL VALUE BOND FUND II, LLC IRS No.: 52-2263020
2		CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP		(a) [   ]
				(b) [X]
3		SEC USE ONLY
4		SOURCE OF FUNDS*
		OO, WC
5		CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) or 2(e)		[   ]
6		CITIZENSHIP OR PLACE OF ORGANIZATION
		DELAWARE

NUMBER OF SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON WITH
		7		SOLE VOTING POWER
				0
		8		SHARED VOTING POWER
				2,953,061 SHARES (1)
		9		SOLE DISPOSITIVE POWER
				0
		10		SHARED DISPOSITIVE POWER
				2,953,061 SHARES (1)

11		AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
		2,953,061 SHARES (1)
12		CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES*		[   ]
13		PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
		18.7% (2)
14		TYPE OF REPORTING PERSON*
		OO

(1)		AN AGGREGATE OF 2,496,000 SHARES ARE ISSUABLE UPON EXERCISE OF THE WARRANT (DESCRIBED IN ITEMS 3 AND 4 BELOW).
(2)		BASED ON 12,755,205 SHARES OF COMMON STOCK OUTSTANDING AS OF SEPTEMBER 17, 2001, AS REPORTED BY PARTY CITY CORPORATION IN ITS ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 2001 AND COMPUTED IN ACCORDANCE WITH RULE 13d-3(d)(1).

*SEE INSTRUCTIONS BEFORE FILLING OUT!

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SCHEDULE 13D

CUSIP No. 702145103		Page 4 of 14

1		NAME OF REPORTING PERSONS I.R.S. IDENTIFICATION NO. OF ABOVE PERSONS (ENTITIES ONLY)
		SVIM/MSM, LLC IRS No.: 95-4760193
2		CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP		(a) [   ]
				(b) [X]
3		SEC USE ONLY
4		SOURCE OF FUNDS*
		OO, WC
5		CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) or 2(e)		[   ]
6		CITIZENSHIP OR PLACE OF ORGANIZATION
		DELAWARE

NUMBER OF SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON WITH
		7		SOLE VOTING POWER
				0
		8		SHARED VOTING POWER
				2,953,061 SHARES (1)
		9		SOLE DISPOSITIVE POWER
				0
		10		SHARED DISPOSITIVE POWER
				2,953,061 SHARES (1)

11		AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
		2,953,061 SHARES (1)
12		CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES*		[   ]
13		PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
		18.7% (2)
14		TYPE OF REPORTING PERSON*
		OO

(1)		AN AGGREGATE OF 2,496,000 SHARES ARE ISSUABLE UPON EXERCISE OF THE WARRANT (DESCRIBED IN ITEMS 3 AND 4 BELOW).
(2)		BASED ON 12,755,205 SHARES OF COMMON STOCK OUTSTANDING AS OF SEPTEMBER 17, 2001, AS REPORTED BY PARTY CITY CORPORATION IN ITS ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 2001 AND COMPUTED IN ACCORDANCE WITH RULE 13d-3(d)(1).

*SEE INSTRUCTIONS BEFORE FILLING OUT!

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SCHEDULE 13D

CUSIP No. 702145103		Page 5 of 14

1		NAME OF REPORTING PERSONS I.R.S. IDENTIFICATION NO. OF ABOVE PERSONS (ENTITIES ONLY)
		SVIM/MSMII, LLC IRS No.: 52-2263031
2		CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP		(a) [   ]
				(b) [X]
3		SEC USE ONLY
4		SOURCE OF FUNDS*
		OO, WC
5		CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) or 2(e)		[   ]
6		CITIZENSHIP OR PLACE OF ORGANIZATION
		DELAWARE

NUMBER OF SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON WITH
		7		SOLE VOTING POWER
				0
		8		SHARED VOTING POWER
				2,953,061 SHARES (1)
		9		SOLE DISPOSITIVE POWER
				0
		10		SHARED DISPOSITIVE POWER
				2,953,061 SHARES (1)

11		AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
		2,953,061 SHARES (1)
12		CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES*		[   ]
13		PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
		18.7% (2)
14		TYPE OF REPORTING PERSON*
		OO

(1)		AN AGGREGATE OF 2,496,000 SHARES ARE ISSUABLE UPON EXERCISE OF THE WARRANT (DESCRIBED IN ITEMS 3 AND 4 BELOW).
(2)		BASED ON 12,755,205 SHARES OF COMMON STOCK OUTSTANDING AS OF SEPTEMBER 17, 2001, AS REPORTED BY PARTY CITY CORPORATION IN ITS ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 2001 AND COMPUTED IN ACCORDANCE WITH RULE 13d-3(d)(1).

*SEE INSTRUCTIONS BEFORE FILLING OUT!

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SCHEDULE 13D

CUSIP No. 702145103		Page 6 of 14

1		NAME OF REPORTING PERSONS I.R.S. IDENTIFICATION NO. OF ABOVE PERSONS (ENTITIES ONLY)
		SPECIAL VALUE INVESTMENT MANAGEMENT, LLC IRS NO.: 95-4759860
2		CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP		(A) [   ]
				(B) [X]
3		SEC USE ONLY
4		SOURCE OF FUNDS*
		OO, WC
5		CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) or 2(e)		[   ]
6		CITIZENSHIP OR PLACE OF ORGANIZATION
		DELAWARE

NUMBER OF SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON WITH
		7		SOLE VOTING POWER
				0
		8		SHARED VOTING POWER
				2,953,061 SHARES (1)
		9		SOLE DISPOSITIVE POWER
				0
		10		SHARED DISPOSITIVE POWER
				2,953,061 SHARES (1)

11		AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
		2,953,061 SHARES (1)
12		CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES*		[   ]
13		PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
		18.7% (2)
14		TYPE OF REPORTING PERSON*
		OO

(1)		AN AGGREGATE OF 2,496,000 SHARES ARE ISSUABLE UPON EXERCISE OF THE WARRANT (DESCRIBED IN ITEMS 3 AND 4 BELOW).
(2)		BASED ON 12,755,205 SHARES OF COMMON STOCK OUTSTANDING AS OF SEPTEMBER 17, 2001, AS REPORTED BY PARTY CITY CORPORATION IN ITS ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 2001 AND COMPUTED IN ACCORDANCE WITH RULE 13d-3(d)(1).

*SEE INSTRUCTIONS BEFORE FILLING OUT!

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SCHEDULE 13D

CUSIP No. 702145103		Page 7 of 14

1		NAME OF REPORTING PERSONS I.R.S. IDENTIFICATION NO. OF ABOVE PERSONS (ENTITIES ONLY)
		TENNENBAUM & CO., LLC IRS NO.: 95-4587347
2		CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP		(A) [   ]
				(B) [X]
3		SEC USE ONLY
4		SOURCE OF FUNDS*
		OO, WC
5		CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) or 2(e)		[   ]
6		CITIZENSHIP OR PLACE OF ORGANIZATION
		DELAWARE

NUMBER OF SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON WITH
		7		SOLE VOTING POWER
				0
		8		SHARED VOTING POWER
				2,953,061 SHARES (1)
		9		SOLE DISPOSITIVE POWER
				0
		10		SHARED DISPOSITIVE POWER
				2,953,061 SHARES (1)

11		AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
		2,953,061 SHARES (1)
12		CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES*		[   ]
13		PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
		18.7% (2)
14		TYPE OF REPORTING PERSON*
		OO

(1)		AN AGGREGATE OF 2,496,000 SHARES ARE ISSUABLE UPON EXERCISE OF THE WARRANT (DESCRIBED IN ITEMS 3 AND 4 BELOW).
(2)		BASED ON 12,755,205 SHARES OF COMMON STOCK OUTSTANDING AS OF SEPTEMBER 17, 2001, AS REPORTED BY PARTY CITY CORPORATION IN ITS ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 2001 AND COMPUTED IN ACCORDANCE WITH RULE 13d-3(d)(1).

*SEE INSTRUCTIONS BEFORE FILLING OUT!

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SCHEDULE 13D

CUSIP No. 702145103		Page 8 of 14

1		NAME OF REPORTING PERSONS I.R.S. IDENTIFICATION NO. OF ABOVE PERSONS (ENTITIES ONLY)
		MICHAEL E. TENNENBAUM
2		CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP		(A) [   ]
				(B) [X]
3		SEC USE ONLY
4		SOURCE OF FUNDS*
		OO, WC
5		CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) or 2(e)		[   ]
6		CITIZENSHIP OR PLACE OF ORGANIZATION
		UNITED STATES

NUMBER OF SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON WITH
		7		SOLE VOTING POWER
				0
		8		SHARED VOTING POWER
				2,953,061 SHARES (1)
		9		SOLE DISPOSITIVE POWER
				0
		10		SHARED DISPOSITIVE POWER
				2,953,061 SHARES (1)

11		AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
		2,953,061 SHARES (1)
12		CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES*		[   ]
13		PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
		18.7% (2)
14		TYPE OF REPORTING PERSON*
		IN

(1)		AN AGGREGATE OF 2,496,000 SHARES ARE ISSUABLE UPON EXERCISE OF THE WARRANT (DESCRIBED IN ITEMS 3 AND 4 BELOW).
(2)		BASED ON 12,755,205 SHARES OF COMMON STOCK OUTSTANDING AS OF SEPTEMBER 17, 2001, AS REPORTED BY PARTY CITY CORPORATION IN ITS ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 2001 AND COMPUTED IN ACCORDANCE WITH RULE 13d-3(d)(1).

*SEE INSTRUCTIONS BEFORE FILLING OUT!

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Page 9 of 14

     This Amendment No. 5 to Schedule 13D relating to Party City Corporation, a Delaware corporation (“Party City”), is being filed on behalf of the undersigned to amend the Schedule 13D filed with the Commission on August 26, 1999, as amended by Amendment No. 1 thereto filed with the Commission on September 13, 1999, Amendment No. 2 thereto filed with the Commission on January 21, 2000, Amendment No. 3 thereto filed with the Commission on October 23, 2000 and Amendment No. 4 thereto filed with the Commission on March 12, 2001 (together, the “Schedule 13D”). Terms defined in the Schedule 13D and not otherwise defined herein have the same meaning herein as in the Schedule 13D.

Item 1. Security and Issuer.

     The information in Item 1 is hereby amended and restated as follows:

     This statement relates to the beneficial ownership of 2,953,061 shares of common stock, par value $.01 per share (“Common Stock”), of Party City. The principal executive offices of Party City are located at 400 Commons Way, Rockaway, New Jersey 07866.

Item 2. Identity and Background.

     The information in Item 2 is hereby amended and restated as follows:

     Special Value Bond Fund, LLC (“SVBF”) and Special Value Bond Fund II, LLC (“SVBFII”) are each Delaware limited liability companies. SVBF’s and SVBFII’s addresses are both 11100 Santa Monica Boulevard, Suite 210, Los Angeles, California 90025. The principal business of each of SVBF and SVBFII is making investments and managing assets.

     The managing member of SVBF is SVIM/MSM, LLC (“SVIM/MSM”), a Delaware limited liability company. The managing member of SVBFII is SVIM/MSMII, LLC (“SVIM/MSMII”), a Delaware limited liability company. The investment advisor to each of SVBF and SVBFII is Special Value Investment Management, LLC (“SVIM”), a Delaware limited liability company. In addition, SVIM manages a separate account (the “Separate Account”). The managing member of each of SVIM/MSM, SVIM/MSMII and SVIM is Tennenbaum & Co., LLC, a Delaware limited liability company (“TCO”). The managing member of TCO is Michael E. Tennenbaum, a United States citizen. Each of SVIM/MSM, SVIM/MSMII, SVIM and TCO have the same principal business and address as that of SVBF and SVBFII. Mr. Tennenbaum’s principal occupation is serving as managing member of TCO and his address is the same as that of SVBF and SVBFII. SVBF, SVBFII, SVIM/MSM, SVIM/MSMII, SVIM, TCO and Mr. Tennenbaum are collectively referred to herein as the “Reporting Persons.”

     During the last five years, the Reporting Persons have not been (i) convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors) or (ii) a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of the proceeding was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, federal or state securities laws or finding any violation with respect to such laws.

Item 3. Source and Amount of Funds or Other Consideration.

     The information in Item 3 is hereby amended and restated as follows:

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     The statement relates to the partial exercise of the Warrant described in this Item 3 below and subsequent distribution of a portion of the shares of Common Stock of Party City received upon such exercise to third party investors in the Reporting Party. SVBF partially exercised the Warrant for an aggregate of 600,000 shares of Common Stock of Party City. Exercise of the Warrant was effected on a net exercise basis. At the time of the exercise the last sale price of Party City Common Stock as reported on the Nasdaq National Market was $6.40 per share. The exercise price under the terms of the Warrant was $1.07 per share. Under the terms of the Warrant, such net exercise resulted in an aggregate of 499,687 shares of Party City Common Stock issued to SVBF. SVBF immediately distributed an aggregate of 385,626 shares of Party City Common Stock to third party direct and indirect investors in SVBF and distributed an aggregate of 114,061 shares of Party City Common Stock to TCO. No funds were used in the partial exercise of the Warrant due to such exercise being effected on a net exercise basis.

     The Reporting Persons previously acquired 343,000 shares of Common Stock of Party City and a warrant dated as of August 16, 1999, as amended on January 14, 2000 (the “Warrant”), to purchase 3,096,000 shares of Common Stock of Party City. Under the terms of the Warrant, as a result of the partial exercise of the Warrant described above, Party City Corporation cancelled the Warrant and reissued a warrant in substantially identical form for the remaining balance of the shares of Common Stock of Party City covered by the Warrant (the “New Warrant”). The sole source of funds used in purchasing said 343,000 shares of Common Stock of Party City was the working capital of SVBFII, except for $88,250 funded by the Separate Account. The aggregate amount of funds used in all such purchases was $1,158,353 (including brokerage commissions).

     Party City issued the Warrant pursuant to that certain Securities Purchase Agreement between Party City and TCO dated as of August 16, 1999 (the “Securities Purchase Agreement”) as amended by that certain First Amendment to Securities Purchase Agreement dated as of January 14, 2000 (the “First Amendment”) and by that certain Second Amendment to Securities Purchase Agreement dated as of April 1, 2001 (the “Second Amendment, and together with the First Amendment, the “Amendments”). The Warrant was acquired by TCO along with certain secured notes of Party City in the aggregate principal amount of $6,750,000. The aggregate purchase price for the Warrant and such secured notes from Party City was $6,750,000. The source of funds for the purchase of the Warrant and the secured notes by TCO was a margin account of the Reporting Persons with Jefferies & Company, Inc.

     On September 1, 1999, SVBF purchased the Warrant and the secured notes from TCO for aggregate consideration of $6,750,000. The source of funds for the purchase of the Warrant and the secured notes from TCO was the working capital of SVBF.

     Upon exercise of the New Warrant, SVBF must pay an exercise price of $1.07 per share for an aggregate exercise price of $2,670,720, or reduce the number of shares into which the New Warrant is exercisable if it is exercised on a net exercise basis. It is presently anticipated that the source of funds for payment of the exercise price (if not exercised on a net exercise basis) will be SVBF’s general working capital.

Item 5. Interest in Securities of the Issuer.

     The information in Item 5 is hereby amended and restated as follows:

     The shares of Common Stock identified in Item 1 constitute approximately 18.7% of the outstanding Common Stock of Party City, based upon 12,755,205 shares of Common Stock outstanding as of September 17, 2001, as reported by Party City Corporation in its Annual Report on Form 10-K for the fiscal year ended June 30, 2001, and computed in accordance with Rule 13d-3(d)(1). SVIM has the

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Page 11 of 14

sole power of voting and disposition with respect to the 343,000 shares of Common Stock of Party City acquired by SVBFII and the Separate Account. TCO has the sole power of voting and disposition with respect to the 114,061 shares of Common Stock of Party City distributed to TCO in connection with SVBF’s partial exercise of the Warrant. Upon exercise of the New Warrant, SVBF will have the sole power of voting and disposition with respect to the 2,496,000 shares of Common Stock issuable upon such exercise. By reason of (i) Mr. Tennenbaum’s position as managing member of TCO, (ii) TCO’s position as managing member of SVIM/MSM, SVIM/MSMII and SVIM, (iii) SVIM/MSM’s position as managing member of SVBF, (iv) SVIM/MSMII’s position as managing member of SVBFII and (v) SVIM’s position as investment advisor to SVBF, SVBFII and the Separate Account, each of Mr. Tennenbaum, TCO, SVIM/MSM, SVIM/MSMII and SVIM may be deemed to share such powers of voting and disposition.

     Except as described in this statement, the Reporting Persons have not effected transactions in Party City’s Common Stock within 60 days prior to the date of this statement.

Item 6. Contracts, Arrangements, Understandings or Relationships with Respect to Securities of the Issuer.

     The information in Item 6 is hereby amended and restated as follows:

     On September 28, 2001, SVBF partially exercised the Warrant as described in Item 3 of Schedule 13D. Under the terms of the Warrant, Party City Corporation cancelled the Warrant and issued the New Warrant.

     Effective as of April 1, 2001, Party City, SVBF, SVBFII, Enhanced Retail Funding, LLC, Goldman, Sachs & Co., Goldman Sachs Credit Partners L.P., Clyde Street Investment, LLC and Richmond Associates, L.P., entered into the Second Amendment which provided for the elimination of certain restrictions on Party City’s ability to issue options to purchase its Common Stock.

     Effective as of January 14, 2000, Party City, SVBF, Enhanced Retail Funding, LLC, Goldman, Sachs & Co., Goldman Sachs Credit Partners L.P., TCO/Party City, LLC, Clyde Street Investment, LLC and Richmond Associates, L.P., entered into the First Amendment which, among other things, provided for the amendment of the Warrant and Party City’s other warrants issued under the Agreement.

     Effective as of October 11, 2000 (the “First Investor Rights Amendment”) and November 20, 2000 (the “Second Investor Rights Amendment”), Party City Corporation, Special Value Bond Fund, LLC, Special Value Bond Fund II, LLC, Special Value Investment Management, LLC, Enhanced Retail Funding, LLC, Goldman, Sachs & Co., Goldman Sachs Credit Partners L.P., Richmond Associates, L.P., Clyde Street Investment, LLC and Jack Futterman amended the Investor Rights Agreement permitting the investors party thereto to purchase 1,500,000 additional shares of Party City Corporation common stock and permitting the transfer of the securities among the investors thereto.

     Except for the Warrant (and the New Warrant covering 2,496,000 shares of Common Stock of Party City Corporation issued upon the cancellation of the Warrant), the Securities Purchase Agreement, the Amendments, the Investor Rights Agreement, as amended by the First Investor Rights Amendment and the Second Investor Rights Amendment, and related documents executed in connection therewith, to the knowledge of the Reporting Persons, there are no contracts, arrangements, understandings or relationships (legal or otherwise) between the Reporting Persons and any other person with respect to any securities of Party City, including, but not limited to, transfer or voting of any of the

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securities, finder’s fees, joint ventures, loan or option arrangements, puts or calls, guarantees of profits, division of profits or loss, or the giving or withholding of proxies. Copies of the form of Warrant and the First Amendment have been filed as exhibits to Party City’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 19, 2000 (File No. 0-27826) and are incorporated by reference herein. Copies of the form of Securities Purchase Agreement and Investor Rights Agreement have been filed as exhibits to Party City’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 25, 1999 (File No. 0-27826) and are incorporated by reference herein. Copies of the First Investor Rights Amendment, the Second Investor Rights Amendment and the Second Amendment have been filed as exhibits to Party City’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 15, 2001 (File No. 0-27826). A copy of the New Warrant is attached as an Exhibit hereto.

Item 7. Material to be Filed as Exhibits.

     The information in Item 7 is hereby amended and restated as follows:

	Exhibit 1		Joint Filing Agreement.
	Exhibit 2		Form of Amended and Restated Warrant, dated January 14, 2000, of Party City Corporation, incorporated herein by reference to Exhibit 4.1 to Current Report on Form 8-K of Party City Corporation filed with the Securities and Exchange Commission on January 19, 2000 (File No. 0-27826)
	Exhibit 3		Form of Securities Purchase Agreement, dated August 16, 1999 by and between Party City Corporation and Tennenbaum & Co., LLC., incorporated herein by reference to Exhibit 4.6 to Current Report on Form 8-K of Party City Corporation filed with the Securities and Exchange Commission on August 25, 1999 (File No. 0-27826)
	Exhibit 4		First Amendment to Securities Purchase Agreement, dated as of January 14, 2000 by and among Party City Corporation, Special Value Bond Fund, LLC, Enhanced Retail Funding, LLC, Goldman, Sachs & Co., Goldman Sachs Credit Partners L.P., TCO/Party City, LLC, Clyde Street Investment, LLC and Richmond Associates, L.P., incorporated herein by reference to Exhibit 4.3 to Current Report on Form 8-K of Party City Corporation filed with the Securities and Exchange Commission on January 19, 2000 (File No. 0-27826)
	Exhibit 5		Investor Rights Agreement, dated August 16, 1999 by and between Party City Corporation, Tennenbaum & Co., LLC, TCO/Party City, LLC, Enhanced Retail Funding, LLC, Goldman, Sachs & Co., Goldman Sachs Credit Partners L.P., Richmond Associates, L.P. and Jack Futterman, incorporated herein by reference to Exhibit 10.1 to Current Report on Form 8-K of Party City Corporation filed with the Securities and Exchange Commission on August 25, 1999 (File No. 0-27826)
	Exhibit 6		First Amendment to Investor Rights Agreement, dated as of October 11, 2000, by and among Party City Corporation, Special Value Bond Fund, LLC, Special Value Bond Fund II, LLC, Special Value Investment Management, LLC, Enhanced Retail Funding, LLC, Goldman, Sachs & Co., Goldman Sachs Credit Partners L.P., Richmond Associates, L.P., Clyde Street Investment, LLC and

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			Jack Futterman, incorporated herein by reference to Exhibit 10.9 to Quarterly Report on Form 10-Q of Party City filed with the Securities and Exchange Commission on May 15, 2001 (File No. 0-27826)
	Exhibit 7		Second Amendment to Investor Rights Agreement, dated as of November 20, 2000, by and among Party City Corporation, Special Value Bond Fund, LLC, Special Value Bond Fund II, LLC, Special Value Management, LLC, Enhanced Retail Funding, LLC, Goldman, Sachs & Co., Goldman Sachs Credit Partners L.P., Richmond Associates, L.P., Clyde Street Investment, LLC and Jack Futterman, incorporated herein by reference to Exhibit 10.10 to Quarterly Report on Form 10-Q of Party City filed with the Securities and Exchange Commission on May 15, 2001 (File No. 0-27826)
	Exhibit 8		Second Amendment to Securities Purchase Agreement, dated as of April 1, 2001, by and among Party City Corporation, Special Value Bond Fund, LLC, Special Value Bond Fund II, LLC, Enhanced Retail Funding, LLC, Goldman, Sachs & Co., Goldman Sachs Credit Partners L.P., Clyde Street Investment, LLC and Richmond Associates, L.P., incorporated herein by reference to Exhibit 4.10 to Quarterly Report on Form 10-Q of Party City filed with the Securities and Exchange Commission on May 15, 2001 (File No. 0-27826)
	Exhibit 9		Warrant to Purchase Common Stock, dated September 28, 2001, of Party City Corporation.

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SIGNATURES

     After reasonable inquiry and to the best of their knowledge and belief, the undersigned each certifies that the information set forth in this statement is true, complete and correct.

Dated: October 12, 2001

SPECIAL VALUE BOND FUND, LLC

By:

SVIM/MSM, LLC, its Managing Member

By:

Tennenbaum & Co., LLC, its Managing Member

By:

/s/     Michael E. Tennenbaum Michael E. Tennenbaum, its Managing Member

SPECIAL VALUE BOND FUND II, LLC

By:

SVIM/MSMII, LLC, its Managing Member

By:

Tennenbaum & Co., LLC, its Managing Member

By:

/s/     Michael E. Tennenbaum Michael E. Tennenbaum, its Managing Member

SVIM/MSM, LLC

By:

Tennenbaum & Co., LLC, its Managing Member

By:

/s/     Michael E. Tennenbaum Michael E. Tennenbaum, its Managing Member

SVIM/MSMII, LLC

By:

Tennenbaum & Co., LLC, its Managing Member

By:

/s/     Michael E. Tennenbaum Michael E. Tennenbaum, its Managing Member

SPECIAL VALUE INVESTMENT MANAGEMENT, LLC

By:

Tennenbaum & Co., LLC, its Managing Member

By:

/s/     Michael E. Tennenbaum Michael E. Tennenbaum, its Managing Member

TENNENBAUM & CO., LLC

By:

/s/     Michael E. Tennenbaum Michael E. Tennenbaum, its Managing Member

/s/     Michael E. Tennenbaum MICHAEL E. TENNENBAUM

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EXHIBIT INDEX

Exhibit 1		Joint Filing Agreement
Exhibit 2		Form of Amended and Restated Warrant, dated January 14, 2000, of Party City Corporation, incorporated herein by reference to Exhibit 4.1 to Current Report on Form 8-K of Party City Corporation filed with the Securities and Exchange Commission on January 19, 2000 (File No. 0-27826)
Exhibit 3		Form of Securities Purchase Agreement, dated August 16, 1999 by and between Party City Corporation and Tennenbaum & Co., LLC., incorporated herein by reference to Exhibit 4.6 to Current Report on Form 8-K of Party City Corporation filed with the Securities and Exchange Commission on August 25, 1999 (File No. 0-27826)
Exhibit 4		First Amendment to Securities Purchase Agreement, dated as of January 14, 2000 by and among Party City Corporation, Special Value Bond Fund, LLC, Enhanced Retail Funding, LLC, Goldman, Sachs & Co., Goldman Sachs Credit Partners L.P., TCO/Party City, LLC, Clyde Street Investment, LLC and Richmond Associates, L.P., incorporated herein by reference to Exhibit 4.3 to Current Report on Form 8-K of Party City Corporation filed with the Securities and Exchange Commission on January 19, 2000 (File No. 0-27826)
Exhibit 5		Investor Rights Agreement, dated August 16, 1999 by and between Party City Corporation, Tennenbaum & Co., LLC, TCO/Party City, LLC, Enhanced Retail Funding, LLC, Goldman, Sachs & Co., Goldman Sachs Credit Partners L.P., Richmond Associates, L.P. and Jack Futterman, incorporated herein by reference to Exhibit 10.1 to Current Report on Form 8-K of Party City Corporation filed with the Securities and Exchange Commission on August 25, 1999 (File No. 0-27826)
Exhibit 6		First Amendment to Investor Rights Agreement, dated as of October 11, 2000, by and among Party City Corporation, Special Value Bond Fund, LLC, Special Value Bond Fund II, LLC, Special Value Investment Management, LLC, Enhanced Retail Funding, LLC, Goldman, Sachs & Co., Goldman Sachs Credit Partners L.P., Richmond Associates, L.P., Clyde Street Investment, LLC and Jack Futterman, incorporated herein by reference to Exhibit 10.9 to Quarterly Report on Form 10-Q of Party City filed with the Securities and Exchange Commission on May 15, 2001 (File No. 0-27826)
Exhibit 7		Second Amendment to Investor Rights Agreement, dated as of November 20, 2000, by and among Party City Corporation, Special Value Bond Fund, LLC, Special Value Bond Fund II, LLC, Special Value Management, LLC, Enhanced Retail Funding, LLC, Goldman, Sachs & Co., Goldman Sachs Credit Partners L.P., Richmond Associates, L.P., Clyde Street Investment, LLC and Jack Futterman, incorporated herein by reference to Exhibit 10.10 to Quarterly Report on Form 10-Q of Party City filed with the Securities and Exchange Commission on May 15, 2001 (File No. 0-27826)
Exhibit 8		Second Amendment to Securities Purchase Agreement, dated as of April 1, 2001, by and among Party City Corporation, Special Value Bond Fund, LLC, Special

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		Value Bond Fund II, LLC, Enhanced Retail Funding, LLC, Goldman, Sachs & Co., Goldman Sachs Credit Partners L.P., Clyde Street Investment, LLC and Richmond Associates, L.P., incorporated herein by reference to Exhibit 4.10 to Quarterly Report on Form 10-Q of Party City filed with the Securities and Exchange Commission on May 15, 2001 (File No. 0-27826)
Exhibit 9		Warrant to Purchase Common Stock, dated September 28, 2001, of Party City Corporation.

  EX-1 3 a76302a5ex1.txt EXHIBIT 1 1 Exhibit 1 JOINT FILING AGREEMENT In accordance with Rule 13d-1(f) of the Securities Exchange Act of 1934, as amended, the undersigned agree to the joint filing on behalf of each of them of Amendment No. 5 to Statement on Schedule 13D (including any and all further amendments thereto) with respect to the Common Stock, par value $.01 per share, of Party City Corporation, and further agree that this Agreement shall be included as an Exhibit to such joint filing. The undersigned further agree that each party hereto is responsible for timely filing of such Statement on Schedule 13D and any amendments thereto, and for the completeness and accuracy of the information concerning such party contained therein; provided that no party is responsible for the completeness or accuracy of the information concerning the other party, unless such party knows or has reason to believe that such information is inaccurate. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original instrument, but all of such counterparts together shall constitute but one agreement. 2 Exhibit 1 In evidence thereof the undersigned, being duly authorized, hereby execute this agreement this 12th day of October, 2001. SPECIAL VALUE BOND FUND, LLC By: SVIM/MSM, LLC, its Managing Member By: Tennenbaum & Co., LLC, its Managing Member By: /s/ Michael E. Tennenbaum ------------------------------------------ Michael E. Tennenbaum, its Managing Member SPECIAL VALUE BOND FUND II, LLC By: SVIM/MSMII, LLC, its Managing Member By: Tennenbaum & Co., LLC, its Managing Member By: /s/ Michael E. Tennenbaum ------------------------------------------ Michael E. Tennenbaum, its Managing Member SVIM/MSM, LLC By: Tennenbaum & Co., LLC, its Managing Member By: /s/ Michael E. Tennenbaum ----------------------------------------------- Michael E. Tennenbaum, its Managing Member SVIM/MSMII, LLC By: Tennenbaum & Co., LLC, its Managing Member By: /s/ Michael E. Tennenbaum ----------------------------------------------- Michael E. Tennenbaum, its Managing Member SPECIAL VALUE INVESTMENT MANAGEMENT, LLC By: Tennenbaum & Co., LLC, its Managing Member By: /s/ Michael E. Tennenbaum ----------------------------------------------- Michael E. Tennenbaum, its Managing Member TENNENBAUM & CO., LLC By: /s/ Michael E. Tennenbaum --------------------------------------------------- Michael E. Tennenbaum, its Managing Member /s/ Michael E. Tennenbaum -------------------------------------------------------- MICHAEL E. TENNENBAUM EX-9 4 a76302a5ex9.txt EXHIBIT 9 1 EXHIBIT 9 THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS, AND MAY NOT BE OFFERED OR SOLD, UNLESS THEY HAVE BEEN REGISTERED UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE AND THEN ONLY IN COMPLIANCE WITH THE RESTRICTIONS ON TRANSFER SET FORTH IN THE SECURITIES PURCHASE AGREEMENT DATED AS OF AUGUST 16, 1999, AS AMENDED ON JANUARY 14, 2000, A COPY OF WHICH MAY BE OBTAINED FROM PARTY CITY CORPORATION AT ITS PRINCIPAL OFFICE. PARTY CITY CORPORATION WARRANT TO PURCHASE COMMON STOCK No. W-5A September 28, 2001 THIS WARRANT ("Warrant") entitles SPECIAL VALUE BOND FUND, LLC or its transferees and assigns (collectively, the "Holder"), for value received, to purchase from PARTY CITY CORPORATION, a corporation organized and existing under the laws of the State of Delaware (the "Company"), during the period commencing as of the date hereof and ending at 5:00 p.m. (New York City time) on August 16, 2006 (the "Expiration Date") TWO MILLION FOUR HUNDRED NINETY-SIX THOUSAND (2,496,000) shares of Common Stock, par value $0.01 per share, of the Company (the "Common Stock" and such number of shares, as adjusted, being referred to herein as the "Shares") at a price of $1.07 per share (as adjusted, the "Exercise Price"). Effective as of the date hereof, the Holder partially exercised Amended and Restated Warrant No. W-5 of the Company dated as of January 14, 2000 (the "Existing Warrant"). The Existing Warrant covered 3,096,000 shares of Common Stock and the Holder exercised the Existing Warrant for 600,000 shares of Common Stock. The Existing Warrant amended, restated and superseded that certain warrant No. W-1 of the Company, dated as of August 16, 1999, issued to Tennenbaum & Company, LLC. In accordance with Section 1.1 of the Existing Warrant, upon the Holder's partial exercise of the Existing Warrant, the Company cancelled the Existing Warrant and executed and delivered this Warrant in substantially identical form for the remaining shares of Common Stock subject to the Existing Warrant. The Company acknowledges that the effective issuance date of this Warrant shall continue to be deemed to be August 16, 1999. The Holder of this Warrant agrees with the Company that this Warrant is issued and all rights hereunder shall be held subject to all of the conditions, limitations and provisions set forth herein. 1. EXERCISE OF WARRANT. 1.1 EXERCISE BY PAYMENT OF CASH OR SURRENDER OF NOTES. The Holder may exercise this Warrant at any time or from time to time on any business day prior to or on the Expiration Date, for the full or any lesser number of shares of Common Stock purchasable hereunder, by surrendering this Warrant to the Company at its principal office, together with a duly executed Notice of Exercise (in substantially the form attached hereto as Annex I), and: (a) payment in cash or by check of the aggregate Exercise Price then in effect for the number of shares for which this Warrant is being exercised; or (b) the surrender for cancellation at the principal office of the Company of any Note (as defined in that certain Securities Purchase Agreement dated as of August 16, 1999 by and 2 among the Company and certain investors named therein, as amended on January 14, 2000 (collectively, the "Purchase Agreement")) or portion thereof, in a principal amount equal to the Exercise Price then in effect for the number of shares for which this Warrant is being exercised. Promptly after such exercise, the Company shall issue and deliver to the Holder a certificate or certificates representing the number of shares of Common Stock issuable upon such exercise. Upon issuances by the Company in accordance with the terms of this Warrant, all such shares of Common Stock shall be validly issued, fully paid and non-assessable, and free from all taxes, liens and encumbrances with respect to the issuance thereof, except as set forth in the Company's Certificate of Incorporation or bylaws, each as may be amended, any applicable restrictions on sale set forth therein or pursuant to federal or state securities laws and any restrictions on transfer set forth herein, in the Purchase Agreement or in that certain Investors Rights Agreement by and among the Company, the Holder and the other parties set forth therein (the "Investors Rights Agreement"). To the extent permitted by law, this Warrant shall be deemed to have been exercised immediately prior to the close of business on the date of its surrender for exercise as provided herein, even if the Company's stock transfer books are at that time closed and the Holder shall be treated for all purposes as the holder of record of the Common Stock to be issued upon such exercise as of the close of business on such date. Upon any exercise of this Warrant for fewer than all Shares represented by this Warrant, the Company shall cancel this Warrant and execute and deliver a new Warrant or Warrants in substantially identical form for the remaining shares of Common Stock subject to this Warrant. 1.2 NET ISSUE EXERCISE. Notwithstanding any provisions herein to the contrary, if the Current Market Price (as defined in Section 2.5 hereof) of one share of the Company's Common Stock is greater than the Exercise Price (at the date of calculation as set forth below), in lieu of exercising this Warrant by payment with cash, certified or cashier's check, the Holder may elect to make a cash-free exercise of this Warrant and thereby to receive Shares equal to the value (as determined below) of this Warrant (or the portion thereof being canceled) by surrender of this Warrant at the principal office of the Company together with the properly endorsed Notice of Exercise and notice of such election, in which event the Company shall issue to the Holder a number of Shares of Common Stock computed using the following formula: X = Y (A-B) --------- A Where X = the number of Shares of Common Stock to be issued to the Holder Y = the gross number of Shares of Common Stock purchasable under this Warrant or, if only a portion of this Warrant is being exercised, the gross number of Shares purchased under this Warrant being canceled (at the date of such calculation) A = the Current Market Price (as defined in Section 2.5 hereof) of one share of the Company's Common Stock (at the date of such calculation) B = Exercise Price (as adjusted to the date of such calculation) 2. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES ISSUABLE. The Exercise Price and the number of Shares issuable upon the exercise of the Warrant are subject to adjustment from time to time upon the occurrence of the events enumerated in this Section 2. For purposes of this Section 2, "Common Stock" means shares now or hereafter authorized of any class of common stock of the Company and any other stock of the Company, however designated, that has the right (subject to any prior rights of any class or 2 3 series of preferred stock) to participate in any distribution of the assets or earnings of the Company without limit as to per share amount. 2.1 ADJUSTMENT FOR CHANGE IN CAPITAL STOCK. If the Company: (a) declares or pays a dividend or makes a distribution on its Common Stock in shares of its Common Stock; (b) subdivides its outstanding shares of Common Stock into a greater number of shares; (c) combines its outstanding shares of Common Stock into a smaller number of shares; (d) makes a distribution on its Common Stock in shares of its capital stock other than Common Stock or preferred stock; or (e) issues by reclassification of its Common Stock any shares of its capital stock; then the Exercise Price and the number and kind of shares of capital stock of the Company issuable upon the exercise of the Warrant as in effect immediately prior to such action shall be proportionately adjusted so that the Holder may receive the aggregate number and kind of shares of capital stock of the Company which the Holder would have owned immediately following such action if the Warrant had been exercised immediately prior to such action. The adjustment shall become effective immediately after the record date in the case of a dividend or distribution and immediately after the effective date in the case of a subdivision, combination or reclassification. If after an adjustment the Holder upon exercise of the Warrant may receive shares of two or more classes of capital stock of the Company, the Company shall determine the allocation of the adjusted Exercise Price between the classes of capital stock. After such allocation, which shall be made by the Board of Directors of the Company in good faith and on a reasonable basis, the exercise privilege and the Exercise Price of each class of capital stock shall thereafter be subject to adjustment on terms comparable to those applicable to Common Stock in this Section 2. The above adjustments shall be made successively whenever any event listed above shall occur. 2.2 ADJUSTMENT FOR RIGHTS ISSUE. If the Company sets a record date for the distribution of any rights, options or warrants to all holders of its Common Stock entitling them for a period expiring within sixty (60) days after the record date mentioned below to purchase shares of Common Stock at a price per share less than the Current Market Price per share on that record date, the Exercise Price shall be adjusted in accordance with the formula: O +(N x P) ----- E' = E x M ------------ O + N Where E' = the adjusted Exercise Price. E = the current Exercise Price. 3 4 O = the number of shares of Common Stock outstanding on the record date. N = the number of additional shares of Common Stock offered pursuant to such rights issuance. P = the offering price per share of the additional shares. M = the Current Market Price per share of Common Stock on the record date. The adjustment shall be made successively whenever any such rights, options or warrants are issued and shall become effective immediately after the record date for the determination of stockholders entitled to receive the rights, options or warrants. If no rights, options or warrants are distributed or at the end of the period during which such rights, options or warrants are exercisable, not all rights, options or warrants shall have been exercised, the Exercise Price shall be immediately readjusted to what it would have been if "N" in the above formula had been the number of shares actually issued. 2.3 ADJUSTMENT FOR CERTAIN OTHER DISTRIBUTIONS. If the Company sets a record date for distribution to all holders of its Common Stock any of its assets (including but not limited to cash, but excluding ordinary dividends), debt securities, preferred stock, or any rights or warrants to purchase debt securities, preferred stock, assets or other securities of the Company, the Exercise Price shall be adjusted in accordance with the formula: E' = E x (M - F) ------- M Where E' = the adjusted Exercise Price. E = the current Exercise Price. M = the Current Market Price per share of Common Stock on the record date mentioned above. F = the fair market value on the record date of the assets, securities, rights or warrants applicable to one share of Common Stock. The Board of Directors shall determine the fair market value in good faith and on a reasonable basis. The adjustment shall be made successively whenever any such distribution is made and shall become effective immediately after the record date for the determination of stockholders entitled to receive the distribution. If such distribution is not made, the Exercise Price shall be immediately readjusted to what it would have been without regard to such distribution. This subsection does not apply to rights, options or warrants referred to in Section 2.2. 2.4 ADJUSTMENT FOR DISTRIBUTION IN SETTLEMENT OF LEGAL CLAIMS. In the event the Company agrees to issue, grant or otherwise distribute shares of its Common Stock or any securities exercisable for, or exchangeable into, shares of its Common Stock in respect of any claims by its stockholders under that certain litigation filed in the United States District Court for the District of New Jersey under the caption In re Party City Corp. Securities Litigation, or other claims from stockholders of the Company arising out of similar facts or circumstances, the number of shares of Common Stock (calculated to 4 5 the nearest hundredth) issuable upon exercise of this Warrant and the Exercise Price shall be adjusted in accordance with the following formulas: N' = N + (S * N ) - I E' = E * N ----- N' Where N' = the adjusted number of Shares issuable upon exercise of the Warrant by payment of the adjusted Exercise Price. N = the number of Shares issuable upon exercise of the Warrant prior to the adjustment. S = the number of shares of Common Stock issued in respect of the claim (or shares of Common Stock issuable upon conversion of securities issued in respect of the claim). I = the aggregate number of issued and outstanding shares of Common Stock prior to the issuance of shares of Common Stock (or convertible securities) in respect of the claim. E' = the adjusted Exercise Price. E = the current Exercise Price. The adjustment shall be made successively whenever any such distribution is made and shall become effective immediately after the record date for the determination of stockholders entitled to receive the distribution. If such distribution is not made, the Exercise Price shall be immediately readjusted to what it would have been without regard to such distribution. 2.5 CURRENT MARKET PRICE. The "Current Market Price" per share of the Common Stock is the last reported sales price of the Common Stock as reported by the Nasdaq National Market ("NMS"), or the primary national securities exchange on which the Common Stock is then quoted; provided, however, that if the Common Stock is neither traded on the NMS nor on a national securities exchange, the price referred to above shall be the price reflected on Nasdaq, or if the Common Stock is not then traded on Nasdaq, the price reflected in the over-the-counter market as reported by the National Quotation Bureau, Inc. or any organization performing a similar function, and provided, further, that if the Common Stock is not publicly traded, the Current Market Price of the Common Stock shall be the fair market value as determined in good faith by the Board of Directors of the Company. 2.6 WHEN DE MINIMIS ADJUSTMENT MAY BE DEFERRED. No adjustment in the Exercise Price and/or the number of Shares subject to this Warrant shall be made if such adjustment would result in a change in (a) the Exercise Price of less than one cent ($0.01) per share or (b) the number of Shares represented by this Warrant of less than one share (the "Adjustment Threshold Amount"). Any adjustment not made because the Adjustment Threshold Amount is not satisfied shall be carried forward and made, together with any subsequent adjustments, at such time as (i) the aggregate amount of all such adjustments is at least equal to the Adjustment Threshold Amount or (ii) this Warrant is exercised. 5 6 2.7 WHEN NO ADJUSTMENT REQUIRED. (a) No adjustment need be made for a transaction referred to in Sections 2.1, 2.2 or 2.3 to the extent the Holder participates in the transaction by virtue of the Holder's position as the holder of this Warrant. (b) No adjustment need be made for rights to purchase Common Stock pursuant to a Company plan for reinvestment of dividends or interest approved by the Board of Directors of the Company. (c) No adjustment need be made for a change in the par value or no par value of the Common Stock. 2.8 VOLUNTARY REDUCTION. The Company from time to time may reduce the Exercise Price by any amount for any period of time if the period is at least twenty (20) days and if the reduction is irrevocable during the period; provided, however, that in no event may the Exercise Price be less than the par value of a share of Common Stock. Whenever the Exercise Price is reduced, the Company shall provide the Holder a notice of the reduction. The Company shall provide notice at least fifteen (15) days before the date the reduced Exercise Price takes effect. The notice shall state the reduced Exercise Price and the period it will be in effect. A reduction hereunder of the Exercise Price does not change or adjust the Exercise Price otherwise in effect for purposes of Sections 2.1, 2.2 and 2.3. 2.9 NOTICE OF CERTAIN TRANSACTIONS. If: (a) The Company takes any action that would require an adjustment in the Exercise Price pursuant to Sections 2.1, 2.2 or 2.3; (b) The Company takes any action that would require a supplemental warrant pursuant to Section 2.10; or (c) there is a liquidation or dissolution of the Company; the Company shall provide the Holder a notice stating the proposed record date for a dividend or distribution or the proposed effective date of a subdivision, combination, reclassification, consolidation, merger, transfer, lease, liquidation or dissolution. The Company shall provide notice at least fifteen (15) days before such date. Failure to provide the notice or any defect in it shall not affect the validity of the transaction or the rights of the Holder hereunder. 2.10 REORGANIZATION OF COMPANY. If the Company consolidates or merges with or into, or transfers or leases all or substantially all its assets to, any person, upon consummation of such transaction the Warrant shall automatically become exercisable for the kind and amount of securities, cash or other assets which the Holder would have owned immediately after the consolidation, merger, transfer or lease if the Holder had exercised the Warrant immediately before the effective date of the transaction. Concurrently with, and as a condition to effectiveness of, the consummation of such transaction, the corporation formed by or surviving any such consolidation or merger if other than the Company, or the person to which such sale or conveyance shall have been made, shall enter into a supplemental warrant so providing and further providing 6 7 for adjustments which shall be as nearly equivalent as may be practical to the adjustments provided for in this Section 2. The successor Company shall provide the Holder a notice describing the supplemental warrant. If the issuer of securities deliverable upon exercise of warrants under the supplemental warrant is an affiliate of the formed, surviving, transferee or lessee corporation, that issuer shall join in the supplemental warrant. If this Section 2.10 applies, Sections 2.1, 2.2 and 2.3 do not apply. 2.11 COMPANY DETERMINATION FINAL. Any determination that the Company or the Board of Directors must make pursuant to this Section 2 must be made by consent of at least three-fourths of the members of the Board of Directors. Any such determination shall be deemed presumptively correct absent manifest error. 2.12 ADJUSTMENT IN NUMBER OF SHARES. Upon each adjustment of the Exercise Price pursuant to this Section 2, the Warrant shall thereafter evidence the right to receive upon payment of the adjusted Exercise Price that number of shares of Common Stock (calculated to the nearest hundredth) obtained from the following formula (other than Section 2.4 in which case the number of Shares will be adjusted in accordance with the provisions of said section): N' = N x E - E' Where N' = the adjusted number of Shares issuable upon exercise of the Warrant by payment of the adjusted Exercise Price. N = the number or Shares previously issuable upon exercise of the Warrant by payment of the Exercise Price prior to adjustment. E' = the adjusted Exercise Price. E = the Exercise Price prior to adjustment. 2.13 NOTICE OF ADJUSTMENT OF EXERCISE PRICE. Whenever the Company shall take any action resulting in any adjustment provided for in this Section 2, the Company shall forthwith deliver or cause to be delivered notice of such action to the Holder, which notice shall set forth the number of Shares then subject to the Warrant and the purchase price thereof resulting from such adjustment. Written notice shall be delivered in accordance with the provisions of Section 10. 3. RIGHTS OF THE HOLDER. 3.1 NO RIGHTS AS STOCKHOLDER. The Holder shall not, by virtue hereof, be entitled to any rights of a stockholder in the Company, either at law or equity, and the rights of the Holder are limited to those expressed in this Warrant. Nothing contained in this Warrant shall be construed as conferring upon the Holder the right to vote or to consent or to receive notice as a stockholder of the Company on any matters or with respect to any rights whatsoever as a shareholder of the Company. No dividends or interest shall be payable or accrued in respect of this Warrant or the interest represented hereby or the shares of Common Stock purchasable hereunder until, and only to the extent that, this Warrant shall have been exercised in accordance with its terms. 7 8 3.2 REGISTRATION RIGHTS. The Holder shall have those registration rights and obligations as defined in the applicable provisions of the Investor Rights Agreement. 4. NO IMPAIRMENT. The Company will not, by any voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but shall at all times in good faith assist in effecting the terms of this Warrant and in taking all actions necessary or appropriate in order to protect the rights of the Holder against dilution or other impairment of its rights hereunder. 5. NO FRACTIONAL SHARES. No fractional shares shall be issued upon exercise of this Warrant. In lieu of issuing any fractional share, the Company shall pay the Holder entitled to such fraction a sum in cash equal to such fraction multiplied by the Current Market Price. 6. RESERVATION OF STOCK ISSUABLE UPON EXERCISE OF WARRANT. The Company covenants and agrees that during the period of time during which this Warrant is exercisable, it will at all times have authorized and reserved solely for issuance and delivery upon the exercise of this Warrant, all such shares of Common Stock and other stock, securities and property as from time to time are receivable upon the exercise of this Warrant. If at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the exercise of this Warrant, the Company will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes. The Company further covenants that all shares issuable upon exercise of this Warrant and payment of the Exercise Price, all as set forth herein, will be free from all taxes, liens and charges in respect of the issue of such shares (other than taxes in respect of any transfer occurring contemporaneously with such exercise and payment or otherwise specified herein). The Company agrees that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for Shares of Common Stock upon the exercise of this Warrant and covenants that all such Shares, when issued, sold and delivered in accordance with the terms of this Warrant for the consideration expressed herein, will be duly and validly issued, fully paid and nonassessable, and will be free of restrictions on transfer other than restrictions on transfer set forth in this Warrant and applicable state and federal securities laws. 7. ISSUE TAX. The issuance of certificates for shares of Common Stock upon the exercise of this Warrant shall be made without charge to the Holder of this Warrant for any issue tax (other than applicable income taxes) in respect thereof, provided, however, that the Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than that of the then Holder of this Warrant being exercised. 8. TRANSFER RESTRICTIONS. This Warrant may be transferred in whole or in part. Any transfer of this Warrant permitted under this Section 8 shall be made only upon surrender for exchange of this Warrant (in negotiable form, if not surrendered by the Holder named on the face hereof) to the Company at its principal office, in which event the Company will issue and deliver a new warrant or warrants in substantially identical form representing in the aggregate, the same number of shares of Common Stock, in the denomination or denominations requested, to or on the order of such Holder upon payment by such Holder of any applicable transfer taxes; and provided further that all reasonable expenses incurred in connection with such re-issuance and delivery shall be borne by the Holder. The terms of this Warrant shall be binding upon the executors, administrators. heirs, successors and assigns of the Holder. 9. REPLACEMENT OF WARRANT. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) upon delivery of an indemnity agreement in such reasonable amount as the Company may 8 9 determine, or (in the case of mutilation) upon surrender and cancellation hereof, the Company, at its expense, shall issue a new warrant in substantially identical form in replacement hereof. 10. NOTICES. Notices and other communications under this Warrant shall be in writing and shall be delivered by facsimile transmission, hand or courier service, or mailed by registered or certified mail, return receipt requested, addressed, (a) if to the original Holder, at the address set forth in Schedule A to the Purchase Agreement or at such other address as the Holder shall have furnished to the Company in writing, or (b) if to any other Holder, at such address as such other Holder shall have furnished to the Company in writing, or, until any such other Holder so furnishes to the Company an address, then to and at the address of the last Holder of such Note who has furnished an address to the Company, or (c) if to the Company, at its address set forth in the Purchase Agreement, to the attention of Corporate Secretary, or at such other address, or to the attention of such other officer, as the Company shall have furnished to the Holder in writing. Any notice so addressed and delivered by facsimile transmission, hand or courier shall be deemed to be given when received, and any notice so addressed and mailed by registered or certified mail shall be deemed to be given three business days after being so mailed. 11. GOVERNING LAW. This Warrant shall be construed in accordance with and governed by the laws of the State of New York. 12. EXPIRATION DATE. If the last day on which this Warrant may be exercised, or on which it may be exercised at a particular Exercise Price, is a Saturday, Sunday or a legal holiday or a day on which banking institutions doing business in Los Angeles or the City of New York are authorized by law to close, this Warrant may be exercised prior to 5:00 p.m. (New York City time) on the next full business day with the same force and effect and at the same Exercise Price as if exercised on such last day specified herein. 13. MODIFICATION AND WAIVER. The terms of this Warrant or any term hereof may be changed, waived, discharged or terminated only by the written consent of the Holder. 14. HEADINGS. The descriptive headings in this Warrant are included for convenience only, and do not constitute a part hereof. IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed and delivered on the date first set forth above. PARTY CITY CORPORATION 400 Commons Way Rockaway, New Jersey 07866 By: /s/ Thomas E. Larson ------------------------------- Name: Thomas E. Larson Title: Chief Financial Officer 9 10 ANNEX I NOTICE OF EXERCISE (To be signed only upon exercise of Warrant) To: Party City Corporation 400 Commons Way Rockaway, New Jersey 07866 Attn: Corporate Secretary The undersigned, Holder of the attached Warrant No. W-____, hereby irrevocably elects to exercise the purchase right represented by this Warrant as follows: [ ] The undersigned elects to purchase _________ shares of Common Stock of Party City Corporation for cash or check and herewith makes payment of $_______ for those shares. [ ] The undersigned elects to purchase _________ shares of Common Stock of Party City Corporation through the surrender of Notes (as such term is used in the Warrant) in the principal amount of $_______ as payment for those shares. [ ] The undersigned elects to effect a net exercise of this Warrant, exercising this Warrant as to the following gross number of shares: ___________. The undersigned understands that the actual number of shares issuable will be determined in accordance with Section 1.2 of this Warrant. The undersigned requests that the certificates for the shares be issued in the name of, and delivered to, _______________________*, whose address is _____________________________________________________________________. Dated: , ---------------------- ------ -------------------------------- Signature (Signature must conform in all respects to name of Holder as specified on the face of the attached Warrant.) Holder: --------------------------- By: ------------------------------- Title: ---------------------------- ---------------------------------- Address ---------------------------------- ---------------------------------- * If the stock is to be issued to anyone other than the registered Holder of this Warrant, this Notice of Exercise must be accompanied by an opinion of counsel to the effect that such transfer may be effected without compliance with the registration and prospectus delivery requirements of the Securities Act of 1933, as amended.