-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GaqJK6NBJV0eYN8ZOsODUs9eOx0Pg9kiIFT9W7lAQvUdpFUlmXOtLlVbjm3dkEyx UdOVK35onQuRVG7UYfvuXA== 0000899140-99-000462.txt : 19990826 0000899140-99-000462.hdr.sgml : 19990826 ACCESSION NUMBER: 0000899140-99-000462 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19990816 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19990825 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: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 000-27826 FILM NUMBER: 99699279 BUSINESS ADDRESS: STREET 1: 450 COMMONS WAY CITY: ROCKAWAY STATE: NJ ZIP: 07860 BUSINESS PHONE: 2019830888 MAIL ADDRESS: STREET 2: 400 COMMONS WAY CITY: ROCKAWAY STATE: NJ ZIP: 07866 8-K 1 CURRENT REPORT ON FORM 8-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------------------- FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): August 16, 1999 PARTY CITY CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 0-27826 22-3033692 ---------------- -------------- --------------- (State or other jurisdiction of (Commission File Number) (IRS Employer Identi- incorporation) fication No.) 400 Commons Way, Bldg. C Rockaway, New Jersey 07866 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (973) 983-0888 ------------------- (Registrant's telephone number, including area code) Not Applicable ---------------- (Former name or former address, if changed from last report) Item 5. Other Events. ------------ On August 17, 1999 Party City Corporation (the "Company" or "Party City") announced that it had received $30 million in financing from a group of new investors (the "Investors") led by Tennenbaum & Co., LLC, a Los Angeles-based investment firm, and that the Company had reached separate agreements with its existing bank group and a group consisting of many of its trade vendors. The Company received an infusion of $30 million from the proceeds from the sale of senior secured notes and warrants pursuant to separate securities purchase agreements (the "Securities Purchase Agreements") with the Investors, each dated as of August 16, 1999. Pursuant to these Securities Purchase Agreements, the Company issued (i) $10,000,000 in aggregate principal amount of its 12.5% Secured Notes due 2003 (the "A Notes"); (ii) $5,000,000 in aggregate principal amount of its 13.0% Secured Notes due 2003 (the "B Notes"); (iii) $5,000,000 in aggregate principal amount of its 13.0% Secured Notes due 2002 (the "C Notes"); (iv) $10,000,000 in aggregate principal amount of its 14.0% Secured Notes due 2004 (the "D Notes" and, 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, par value $0.01 per share; (the "Common Stock") at an initial exercise price of $3.00 per share. Up to $15 million of the Notes are secured by a shared first lien and and all of the Notes are secured by a second lien on all of the Company's assets. The Company issued the Warrants in connection with the sale of the C Notes and the D Notes. The Warrants may be exercised at any time before 5:00 p.m. (New York City time) on August 16, 2006. The shares of Common Stock reserved for issuance under the Warrants represent 35% of the shares of Common Stock outstanding after giving effect to the exercise of the Warrants. The form of warrant is attached hereto as Exhibit 4.1 and is incorporated herein by reference. The forms of Notes are attached hereto as Exhibits 4.2, 4.3, 4.4 and 4.5 and are incorporated herein by reference. The foregoing description is qualified in its entirety by reference to the Securities Purchase Agreements, a form of which is attached hereto as Exhibit 4.6 and is incorporated herein by reference. The Company also entered into an Investor Rights Agreement (the "Investor Rights Agreement") with the Investors and certain stockholders and/or optionholders of the Company, pursuant to which the Company granted registration rights with respect to shares of Common Stock. The Company has agreed to nominate two individuals to its Board of Directors designated by the Investors. Under the Investor Rights Agreement, the Investors agree that they will not, without the prior written consent of the Board of Directors, (i) acquire or agree to acquire, publicly offer or make any public proposal with respect to the possible acquisition of (a) beneficial ownership of any securities of the Company, (b) any substantial part of the Company's assets, or (c) any rights or options to acquire any of the foregoing from any person; (ii) make or in any way participate in any "solicitation" of "proxies" (as such terms are defined in the rules of the Securities Exchange Act of 1934, as amended) to vote, or seek to advise or influence any person with respect to the voting of any voting securities of the Company; or (iii) make any public announcement with respect to any transaction between the Company or any of its securities holders and the Investors, including without limitation, any tender or exchange offer, merger or other business combination of a material portion of the assets of the Company. These standstill provisions terminate if (a) the Company's Consolidated EBITDA (as such term is defined in the Securities Purchase Agreements) for the year ended December 31, 1999 is less than $22 million or (b) the Company's Consolidated EBITDA for the year ended December 31, 2000 is less than $32 million. The foregoing description is qualified in its entirety by reference to the Investor Rights Agreement which is attached hereto as Exhibit 10.1 and is incorporated herein by reference. In connection with the equity financing, the Company also entered into a Standstill and Forbearance Agreement (the "Bank Forbearance Agreement") with its existing bank lenders. Pursuant to the Bank Forbearance Agreement, the Banks, have agreed not to exercise rights and remedies based upon any existing defaults until June 30, 2000 unless an event of default occurs. The Company has agreed to reduce its outstanding bank borrowings from the $54 million currently outstanding to $15 million by October 30, 1999, to increase the interest rate on its bank debt, and to pay a restructuring fee. The foregoing description is qualified in its entirety by reference to the Bank Forbearance Agreement which is attached hereto as Exhibit 10.2 and is incorporated herein by reference. Party City's trade vendors representing approximately $30 million of trade debt have also entered into an agreement with the Company. Pursuant to a Vendor Standstill and Forbearance Agreement ("Vendor Forbearance Agreement"), these trade vendors agreed to forbear from taking any action against Party City until January 15, 2000, unless an event of default occurs. The trade vendors will receive promissory notes from Party City representing one-third of their unpaid signatory claims as of May 1, 1999. These notes will bear interest at a rate of 10% per annum and mature on November 15, 1999. Interest on the notes is due on January 15, 2000, unless the bank debt is refinanced before then. Separately, certain seasonal trade vendors have agreed to extend certain credit to Party City for 30% of purchases for the Halloween, Thanksgiving and year-end holiday season. Vendors that have agreed to extend credit will receive a shared lien on the Company's inventory for the amount of the credit. The foregoing description is qualified in its entirety by reference to the Vendor Forbearance Agreement which is attached hereto as Exhibit 10.3 and is incorporated herein by reference. The Company also announced that John Oberdorf resigned as a director and that two representatives of the noteholders, Howard Levkowitz and Matthew R. Kahn, have joined the Board of Directors. Mr. Levkowitz, a principal of Tennenbaum & Co., LLC, was previously a transactional attorney with Dewey Ballantine LLP. Mr. Kahn, President of GB Equity Partners, LLC, was previously a Managing Director of Gordon Brothers Group, Chief Financial Officer of Joseph A. Bank Clothiers, Inc. and Senior Financial Officer of Nature Food Centres, Inc. The Company also indicated that its audit was expected to be completed by September 30, 1999. The audit will cover the 18-month period ended July 3, 1999. A copy of the press release announcing the foregoing transactions is attached hereto as Exhibit 99.1 and is incorporated herein by reference. Item 7. Financial Statements and Exhibits. (a) Financial statements of business acquired: None (b) Pro forma financial information: None (c) Exhibits: 4.1 Form of Warrant. 4.2 Form of A Note. 4.3 Form of B Note. 4.4 Form of C Note. 4.5 Form of D Note. 4.6 Form of Securities Purchase Agreement, dated as of August 16, 1999, by and between Party City Corporation and the Purchasers identified therein. 10.1 Investor Rights Agreement, dated as of August 16, 1999, by and among Party City Corporation, each of the persons set forth on the Schedule of Investors attached thereto and certain stockholders and/or optionholders of Party City Corporation identified on the Schedule of Company Stockholders attached thereto. 10.2 Standstill and Forbearance Agreement, dated as of August 16, 1999, by and among Party City Corporation, Party City Michigan, Inc., PNC Bank, National Association, as agent, PNC Bank, National Association, The Chase Manhattan Bank, National City of Pennsylvania, Fleet Bank, N.A. and LaSalle Bank, N.A. 10.3 Vendor Forbearance and Standstill Agreement, dated as of August 16, 1999, by and among Party City Corporation and each of the vendors on the signature pages thereto. 99.1 Press Release issued by Party City Corporation on August 17, 1999. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. PARTY CITY CORPORATION By: /s/ Jack Futterman ------------------------------------ Chairman and Chief Executive Officer Date: August 24, 1999 EXHIBIT INDEX -------------- Exhibit Number Description - ------- ----------- 4.1 Form of Warrant. 4.2 Form of A Note. 4.3 Form of B Note. 4.4 Form of C Note. 4.5 Form of D Note. 4.6 Form of Securities Purchase Agreement, dated as of August 16, 1999, by and between Party City Corporation and the Purchasers identified therein. 10.1 Investor Rights Agreement, dated as of August 16, 1999, by and among Party City Corporation, each of the persons set forth on the Schedule of Investors attached thereto and certain stockholders and/or optionholders of Party City Corporation identified on the Schedule of Company Stockholders attached thereto. 10.2 Standstill and Forbearance Agreement, dated as of August 16, 1999, by and among Party City Corporation, Party City Michigan, Inc., PNC Bank, National Association, as agent, PNC Bank, National Association, The Chase Manhattan Bank, National City of Pennsylvania, Fleet Bank, N.A. and LaSalle Bank, N.A. 10.3 Vendor Forbearance and Standstill Agreement, dated as of August 16, 1999, by and among Party City Corporation and each of the vendors on the signature pages thereto. 99.1 Press Release issued by Party City Corporation on August 17, 1999. EX-4.1 2 FORM OF WARRANT [FORM OF WARRANT] 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 __, 1999, 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-____ August __, 1999 THIS WARRANT ("Warrant") entitles ___________ 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 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 __, 2006 (the "Expiration Date") ________ (_____) 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 $3.00 per share (as adjusted, the "Exercise Price"). 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 __, 1999 by and among the Company and certain investors named therein (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 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. 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 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. 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 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 of 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. 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 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:___________________________ Name:_________________________ Title:________________________ 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. EX-4.2 3 FORM OF A NOTE [FORM OF A NOTE] THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, as AMENDED, or any state SECURITIES laws, AND MAY NOT BE OFFERED OR SOLD, UNLESS IT HAS 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 __, 1999, A COPY OF WHICH MAY BE OBTAINED FROM PARTY CITY CORPORATION AT ITS PRINCIPAL OFFICE. PAYMENT OF THIS OBLIGATION IS SUBJECT TO THE TERMS AND CONDITIONS OF THAT CERTAIN INTERCREDITOR AGREEMENT EXECUTED BY AND AMONG THE SEASONAL TRADE CREDITORS, THE INVESTOR AND BANK LENDERS OF PARTY CITY DATED AS OF JULY 1, 1999. PARTY CITY CORPORATION 12.5% SECURED NOTE DUE JANUARY 31, 2003 No. A-_____ $___________ New York, New York August __, 1999 FOR VALUE RECEIVED, the undersigned, PARTY CITY CORPORATION, a corporation organized and existing under the laws of Delaware (the "Company"), hereby promises to pay to ___________, or registered assigns, the principal sum of _____________ DOLLARS ($_________) (the "Principal Amount") as set forth herein. This Note is one of the Company's 12.5% Secured Notes due 2003 issued pursuant to one or more Securities Purchase Agreements dated as of August __, 1999 by and between the Company and certain investors named therein (collectively, the "Purchase Agreement"), and is also entitled to the benefits thereof to the extent provided in the Purchase Agreement. 1. Payment of Principal and Interest. (a) Principal Amount. The Company shall pay to the holder of this Note: (i) fifty percent (50.0%) of the Principal Amount on January 31, 2001; (ii) twenty-five percent (25.0%) of the Principal Amount on January 31, 2002; and (iii) twenty-five percent (25.0%) of the Principal Amount and all accrued and unpaid interest on January 31, 2003 (the "Maturity Date"). (b) Interest. On the tenth (10th) day of each January, April, July and October during the term of this Note, commencing on the first such date to follow the date hereof, and continuing thereafter A-1 until the Maturity Date, the Company shall pay to holder of this Note all accrued interest as of the end of the immediately preceding calendar quarter at the rate of 12.5% per annum (computed on the basis of a 360-day year of twelve 30-day months). Payments of principal of and interest on this Note are to be made in lawful money of the United States of America at the address required by the Purchase Agreement. 2. Optional Prepayment. As provided in the Purchase Agreement, the principal amount of the Note is subject to prepayment, in whole or in part, at any time at the option of the Company. 3. Event of Default. If an Event of Default, as defined in the Purchase Agreement, occurs and is continuing, the principal of this Note may be declared or otherwise become due and payable in the manner, at the amount and with the effect provided in the Purchase Agreement. 4. Subordination. This Note is subordinated to the extent provided in that certain Intercreditor Agreement dated as of August __, 1999 by and among the Company and certain of its lenders and other noteholders (the "Intercreditor Agreement") in the form attached to the Purchase Agreement. 5. Security Interest and Guaranty. The obligations of the Company are secured by that certain Collateral Agent Security Agreement dated as of August __, 1999 in the form attached to the Purchase Agreement, subject to the provisions of the Intercreditor Agreement. The holder of this Note is further entitled to the benefits of a certain Guaranty Agreement dated as of _______, 1999 by the subsidiaries of the Company in the form attached to the Purchase Agreement. 6. Transfer. This Note is a registered Note and is transferable only upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the holder hereof or such holder's attorney duly authorized in writing. Reference in this Note to a "holder" shall mean the person in whose name this Note is at the time registered on the register kept by the Company as provided in the Purchase Agreement and the Company may treat such person as the owner of this Note for the purpose of receiving payment and for all other purposes, and the Company shall not be affected by any notice to the contrary. 7. Governing Law. This Note shall be construed and enforced in accordance with the laws of the State of New York. PARTY CITY CORPORATION By -------------------- Name: Title: A-2 EX-4.3 4 FORM OF B NOTE [FORM OF B NOTE] THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, as AMENDED, or any state SECURITIES laws, AND MAY NOT BE OFFERED OR SOLD, UNLESS IT HAS 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 __, 1999, A COPY OF WHICH MAY BE OBTAINED FROM PARTY CITY CORPORATION AT ITS PRINCIPAL OFFICE. PAYMENT OF THIS OBLIGATION IS SUBJECT TO THE TERMS AND CONDITIONS OF THAT CERTAIN INTERCREDITOR AGREEMENT EXECUTED BY AND AMONG THE SEASONAL TRADE CREDITORS, THE INVESTOR AND BANK LENDERS OF PARTY CITY DATED AS OF JULY 1, 1999. PARTY CITY CORPORATION 13.0% SECURED NOTE DUE JANUARY 31, 2003 No. B-_____ $___________ New York, New York August __, 1999 FOR VALUE RECEIVED, the undersigned, PARTY CITY CORPORATION, a corporation organized and existing under the laws of Delaware (the "Company"), hereby promises to pay to ___________, or registered assigns, the principal sum of _____________ DOLLARS ($_________) on January 31, 2003 (the "Maturity Date"). This Note is one of the Company's 13.0% Secured Notes due 2003 issued pursuant to one or more Securities Purchase Agreements dated as of August __, 1999 by and between the Company and certain investors named therein (collectively, the "Purchase Agreement"), and is also entitled to the benefits thereof to the extent provided in the Purchase Agreement. 1. Payment of Principal and Interest. On the tenth (10th) day of each January, April, July and October during the term of this Note, commencing on the first such date to follow the date hereof, and continuing thereafter until the Maturity Date, the Company shall pay to holder of this Note all accrued interest as of the end of the immediately preceding calendar quarter at the rate of 13.0% per annum (computed on the basis of a 360-day year of twelve 30-day months). On the Maturity Date, the Company shall pay to the holder in full the entire remaining balance of the principal sum and all accrued interest. Payments of principal of and interest on this Note are to be made in lawful money of the United States of America at the address required by the Purchase Agreement. 2. Optional Prepayment. As provided in the Purchase Agreement, the principal amount of the Note is subject to prepayment, in whole or in part, at any time at the option of the Company. B-1 3. Event of Default. If an Event of Default, as defined in the Purchase Agreement, occurs and is continuing, the principal of this Note may be declared or otherwise become due and payable in the manner, at the amount and with the effect provided in the Purchase Agreement. 4. Subordination. This Note is subordinated to the extent provided in that certain Intercreditor Agreement dated as of August __, 1999 by and among the Company and certain of its lenders and other noteholders (the "Intercreditor Agreement") in the form attached to the Purchase Agreement. 5. Security Interest and Guaranty. The obligations of the Company are secured by that certain Collateral Agent Security Agreement dated as of August __, 1999 in the form attached to the Purchase Agreement, subject to the provisions of the Intercreditor Agreement. The holder of this Note is further entitled to the benefits of a certain Guaranty Agreement dated as of _______, 1999 by the subsidiaries of the Company in the form attached to the Purchase Agreement. 6. Transfer. This Note is a registered Note and is transferable only upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the holder hereof or such holder's attorney duly authorized in writing. Reference in this Note to a "holder" shall mean the person in whose name this Note is at the time registered on the register kept by the Company as provided in the Purchase Agreement and the Company may treat such person as the owner of this Note for the purpose of receiving payment and for all other purposes, and the Company shall not be affected by any notice to the contrary. 7. Governing Law. This Note shall be construed and enforced in accordance with the laws of the State of New York. PARTY CITY CORPORATION By -------------------- Name: Title: B-2 EX-4.4 5 FORM OF C NOTE [FORM OF C NOTE] THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, as AMENDED, or any state SECURITIES laws, AND MAY NOT BE OFFERED OR SOLD, UNLESS IT HAS 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 __, 1999, A COPY OF WHICH MAY BE OBTAINED FROM PARTY CITY CORPORATION AT ITS PRINCIPAL OFFICE. PAYMENT OF THIS OBLIGATION IS SUBJECT TO THE TERMS AND CONDITIONS OF THAT CERTAIN INTERCREDITOR AGREEMENT EXECUTED BY AND AMONG THE SEASONAL TRADE CREDITORS, THE INVESTOR AND BANK LENDERS OF PARTY CITY DATED AS OF JULY 1, 1999. PARTY CITY CORPORATION 13.0% SECURED NOTE DUE JANUARY 31, 2002 No. C-_____ $___________ New York, New York August __, 1999 FOR VALUE RECEIVED, the undersigned, PARTY CITY CORPORATION, a corporation organized and existing under the laws of Delaware (the "Company"), hereby promises to pay to ___________, or registered assigns, the principal sum of _____________ DOLLARS ($_________) on January 31, 2002 (the "Maturity Date"). This Note is one of the Company's 13.0% Secured Notes due 2002 issued pursuant to one or more Securities Purchase Agreements dated as of August __, 1999 by and between the Company and certain investors named therein (collectively, the "Purchase Agreement"), and is also entitled to the benefits thereof to the extent provided in the Purchase Agreement. 1. Payment of Principal and Interest. On the tenth (10th) day of each January, April, July and October during the term of this Note, commencing on the first such date to follow the date hereof, and continuing thereafter until the Maturity Date, the Company shall pay to holder of this Note all accrued interest as of the end of the immediately preceding calendar quarter at the rate of 13.0% per annum (computed on the basis of a 360-day year of twelve 30-day months). On the Maturity Date, the Company shall pay to the holder in full the entire remaining balance of the principal sum and all accrued interest. Payments of principal of and interest on this Note are to be made in lawful money of the United States of America at the address required by the Purchase Agreement. 2. Optional Defeasance. As provided in the Purchase Agreement, the principal amount of the Note is subject to defeasance at any time at the option of the Company. C-1 3. Event of Default. If an Event of Default, as defined in the Purchase Agreement, occurs and is continuing, the principal of this Note may be declared or otherwise become due and payable in the manner, at the amount and with the effect provided in the Purchase Agreement. 4. Subordination. This Note is subordinated to the extent provided in that certain Intercreditor Agreement dated as of August __, 1999 by and among the Company and certain of its lenders and other noteholders (the "Intercreditor Agreement") in the form attached to the Purchase Agreement. 5. Security Interest and Guaranty. The obligations of the Company are secured by that certain Collateral Agent Security Agreement dated as of August __, 1999 in the form attached to the Purchase Agreement, subject to the provisions of the Intercreditor Agreement. The holder of this Note is further entitled to the benefits of a certain Guaranty Agreement dated as of _______, 1999 by the subsidiaries of the Company in the form attached to the Purchase Agreement. 6. Transfer. This Note is a registered Note and is transferable only upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the holder hereof or such holder's attorney duly authorized in writing. Reference in this Note to a "holder" shall mean the person in whose name this Note is at the time registered on the register kept by the Company as provided in the Purchase Agreement and the Company may treat such person as the owner of this Note for the purpose of receiving payment and for all other purposes, and the Company shall not be affected by any notice to the contrary. 7. Governing Law. This Note shall be construed and enforced in accordance with the laws of the State of New York. PARTY CITY CORPORATION By ----------------------- Name: Title: C-2 EX-4.5 6 FORM OF D NOTE [FORM OF D SENIOR NOTE] THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS, AND MAY NOT BE OFFERED OR SOLD, UNLESS IT HAS 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 __, 1999, A COPY OF WHICH MAY BE OBTAINED FROM PARTY CITY CORPORATION AT ITS PRINCIPAL OFFICE. PAYMENT OF THIS OBLIGATION IS SUBJECT TO THE TERMS AND CONDITIONS OF THAT CERTAIN INTERCREDITOR AGREEMENT EXECUTED BY AND AMONG THE SEASONAL TRADE CREDITORS, THE INVESTOR AND BANK LENDERS OF PARTY CITY DATED AS OF JULY 1, 1999. PARTY CITY CORPORATION 14.0% SECURED NOTE DUE JANUARY 31, 2004 No. D-1-_____ $___________ New York, New York August __, 1999 FOR VALUE RECEIVED, the undersigned, PARTY CITY CORPORATION, a corporation organized and existing under the laws of Delaware (the "Company"), hereby promises to pay to ___________, or registered assigns, the principal sum of _____________ DOLLARS ($_________) on January 31, 2004 (the "Maturity Date"). This Note is one of the Company's 14.0% Secured Notes due 2004 issued pursuant to one or more Securities Purchase Agreements dated as of August __, 1999 by and between the Company and certain investors named therein (collectively, the "Purchase Agreement"), and is also entitled to the benefits thereof to the extent provided in the Purchase Agreement. 1. Payment of Principal and Interest. On the tenth (10th) day of each January, April, July and October during the term of this Note, commencing on the first such date to follow the date hereof, and continuing thereafter until the Maturity Date, the Company shall pay to holder of this Note all accrued interest as of the end of the immediately preceding calendar quarter at the rate of 14.0% per annum (computed on the basis of a 360-day year of twelve 30-day months). On the Maturity Date, the Company shall pay to the holder in full the entire remaining balance of the principal sum and all accrued interest. Payments of principal of and interest on this Note are to be made in lawful money of the United States of America at the address required by the Purchase Agreement. 2. Optional Defeasance. As provided in the Purchase Agreement, the principal amount of the Note is subject to defeasance at any time at the option of the Company. D-1 3. Event of Default. If an Event of Default, as defined in the Purchase Agreement, occurs and is continuing, the principal of this Note may be declared or otherwise become due and payable in the manner, at the amount and with the effect provided in the Purchase Agreement. 4. Subordination. This Note is subordinated to the extent provided in that certain Intercreditor Agreement dated as of August __, 1999 by and among the Company and certain of its lenders and other noteholders (the "Intercreditor Agreement") in the form attached to the Purchase Agreement. 5. Security Interest and Guaranty. The obligations of the Company are secured by that certain Collateral Agent Security Agreement dated as of August __, 1999 in the form attached to the Purchase Agreement, subject to the provisions of the Intercreditor Agreement. The holder of this Note is further entitled to the benefits of a certain Guaranty Agreement dated as of _______, 1999 by the subsidiaries of the Company in the form attached to the Purchase Agreement. 6. Transfer. This Note is a registered Note and is transferable only upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the holder hereof or such holder's attorney duly authorized in writing. Reference in this Note to a "holder" shall mean the person in whose name this Note is at the time registered on the register kept by the Company as provided in the Purchase Agreement and the Company may treat such person as the owner of this Note for the purpose of receiving payment and for all other purposes, and the Company shall not be affected by any notice to the contrary. 7. Governing Law. This Note shall be construed and enforced in accordance with the laws of the State of New York. PARTY CITY CORPORATION By -------------------- Name: Title: D-2 EX-4.6 7 FORM OF SECURITIES PURCHASE AGREEMENT PARTY CITY CORPORATION $10,000,000 12.5% Secured Notes due 2003 ("A Notes") $5,000,000 13.0% Secured Notes due 2003 ("B Notes") $5,000,000 13.0% Secured Notes due 2002 ("C Notes") $10,000,000 14.0% Secured Notes due 2004 ("D Notes") Warrants to Purchase Common Stock ------------------ SECURITIES PURCHASE AGREEMENT ------------------ Dated as of August 16, 1999 TABLE OF CONTENTS ----------------- Page ---- 1. Authorization of Securities.................................................1 2. Sale and Purchase of Securities.............................................2 2.1 Purchase Price........................................................2 2.2 Issue Price...........................................................2 2.3 Detachable Warrants...................................................2 2.4 Security Interest.....................................................2 3. Closing; Fees..............................................................2 3.1 Closing...............................................................2 3.2 Funding Fees..........................................................3 3.3 Legal and Accounting Fees.............................................3 3.4 Obligation of Purchaser...............................................3 4. Conditions to Closing......................................................3 4.1 Representations and Warranties........................................3 4.2 Performance; No Default...............................................3 4.3 Compliance Certificate................................................4 4.4 Investor Rights Agreement.............................................4 4.5 Collateral and Security Agreements....................................4 4.6 Intercreditor Agreement...............................................4 4.7 Standstill Agreements.................................................5 4.8 Guaranty Agreement....................................................5 4.9 Opinions of Counsel...................................................5 4.10 Projections...........................................................5 4.11 Consents, Agreements..................................................5 4.12 Compliance with Securities Laws.......................................5 4.13 Purchase Permitted By Applicable Law, etc.............................5 4.14 No Adverse U.S. Legislation, Action or Decision, etc..................5 4.15 No Actions Pending....................................................6 4.16 Proceedings and Documents.............................................6 4.17 Sale of Other Securities..............................................6 4.18 Fees..................................................................6 4.19 Perfected Security Interest...........................................6 5. Representations and Warranties.............................................6 5.1 Corporate Organization and Authority; Valid and Binding Effect........6 5.2 Subsidiaries..........................................................6 5.3 Qualification.........................................................7 5.4 Financial Information.................................................7 5.5 Absence of Changes, etc...............................................7 5.6 Tax Returns and Payments..............................................7 5.7 Debt..................................................................8 5.8 Liens.................................................................8 5.9 Capital Stock and Related Matters.....................................8 5.10 Title to Properties; Liens............................................8 5.11 Insurance.............................................................8 5.12 Litigation............................................................8 5.13 Compliance with Other Instruments, etc................................9 5.14 Governmental Consent..................................................9 5.15 Patents, Trademarks, Authorizations, etc..............................9 5.16 Principal Corporate Office...........................................10 5.17 Corporate and Trade or Fictitious Names..............................10 5.18 Environmental Matters................................................11 5.19 Status Under Certain Federal Statutes................................11 5.20 Compliance with ERISA................................................12 5.21 Employee Matters.....................................................12 5.22 Withholding and Other Taxes..........................................13 5.23 Certain Fees.........................................................13 5.24 Year 2000 Compliance.................................................13 5.25 Payments Under Leases................................................13 5.26 Disclosure...........................................................13 6. Purchaser Representations.................................................14 6.1 Purchase Intent......................................................14 6.2 Status of Purchaser..................................................14 6.3 Source of Funds......................................................14 7. Prepayment and Defeasance of A Notes......................................14 7.1 Optional Prepayments of A Notes and B Notes..........................14 7.2 Defeasance of C Notes and D Notes....................................15 7.3 Contingent Prepayments Upon Change of Control........................18 7.4 Acquisition of Notes.................................................18 7.5 No Fraudulent Conveyance.............................................19 8. Inspection; Confidentiality...............................................19 8.1 Inspection...........................................................19 8.2 Confidentiality......................................................19 9. Covenants.................................................................19 9.1 Reporting Requirements...............................................19 9.2 Debt.................................................................21 9.3 Financial Covenants..................................................21 9.4 Liens, etc...........................................................23 9.5 Investments, Guaranties, etc.........................................23 9.6 Restricted Payments..................................................25 9.7 Transactions with Affiliates.........................................25 9.8 Consolidation, Merger, Sale of Assets, etc...........................25 9.9 Subsidiary Stock and Indebtedness....................................26 9.10 Corporate Existence, Business and Franchise Relations................27 9.11 Payment of Taxes and Claims..........................................27 9.12 Compliance with ERISA................................................27 9.13 Maintenance of Properties; Insurance.................................28 9.14 Additional Guaranties................................................28 9.15 Other Loan Agreements................................................28 ii 9.16 Restrictions Affecting Subsidiaries..................................29 9.17 Insurance............................................................29 9.18 Use of Proceeds......................................................29 9.19 Relocation; Use of Name..............................................30 9.20 Seasonal Orders......................................................30 9.21 Option Grants........................................................30 9.22 Note Ratings.........................................................30 9.23 Governance...........................................................30 9.24 Audited Financial Statements.........................................30 9.25 Payments to Vendors..................................................30 9.26 Perfection of Security Interest......................................30 9.27 Year 2000 Compliance.................................................30 10. Events of Default; Acceleration...........................................30 11. Remedies on Default, etc..................................................33 12. Security Interest and Intercreditor Arrangements..........................33 12.1 Security Agreement...................................................33 12.2 Intercreditor Agreement..............................................33 13. Definitions...............................................................33 13.1 Certain Definitions..................................................33 13.2 Table of Definitions.................................................39 14. Registration, Transfer and Substitution of Notes; Action by Noteholders...40 14.1 Note Register; Ownership of Notes....................................40 14.2 Transfer and Exchange of Notes.......................................40 14.3 Replacement of Notes.................................................40 14.4 Notes held by Company Deemed Not Outstanding.........................41 15. Payments on Notes.........................................................41 16. Expenses, etc.............................................................41 17. Survival of Representations and Warranties................................41 18. Amendments and Waivers....................................................41 19. Notices, etc..............................................................42 20. Indemnification...........................................................42 21. Miscellaneous.............................................................43 iii Exhibits, Annexes and Schedules EXHIBIT A Form of A Note EXHIBIT B Form of B Note EXHIBIT C Form of C Note EXHIBIT D Form of D Note EXHIBIT E Form of Warrant EXHIBIT F-1 Form of Security Agreement (Parent) EXHIBIT F-2 Form of Security Agreement (Subsidiary) EXHIBIT F-3 Form of Patent, Trademark and Copyright Assignment (Parent) EXHIBIT F-4 Form of Patent, Trademark and Copyright Assignment (Subsidiary) EXHIBIT F-5 Form of Collateral Assignment of Contract Rights (Franchise) EXHIBIT F-6 Form of Collateral Assignment of Contract Rights (Tomax) EXHIBIT F-7 Form of Guaranty and Suretyship Agreement EXHIBIT F-8 Form of Intercompany Subordination Agreement EXHIBIT F-9 Form of Stock Pledge Agreement EXHIBIT G Form of Investor Rights Agreement EXHIBIT H Form of Intercreditor Agreement EXHIBIT I Form of Bank Standstill Agreement EXHIBIT J Form of Vendor Standstill Agreement EXHIBIT K Form of Guaranty Agreement EXHIBIT L-1 Form of Opinion of Counsel to Company (Willkie Farr & Gallagher) EXHIBIT L-2 Form of Opinion of Counsel to Company (St. John & Wayne, LLC) ANNEX I Schedule of Purchasers ANNEX II Schedule of Vendors (parties to the Vendor Standstill Agreement) SCHEDULE 5.2 Schedule of Subsidiaries SCHEDULE 5.4(a) Schedule of Financial Statements SCHEDULE 5.4(b) Schedule of Financial Projections SCHEDULE 5.5 Schedule of Changes, etc. SCHEDULE 5.6 Schedule of Federal Tax Identification Numbers SCHEDULE 5.7(a) Schedule of Debt SCHEDULE 5.7(b) Schedule of Post-Closing Debt SCHEDULE 5.7(c) Schedule of Defaults on Debt SCHEDULE 5.8 Schedule of Liens SCHEDULE 5.9 Schedule of Outstanding Stock Options SCHEDULE 5.10 Schedule of Title to Properties SCHEDULE 5.11 Schedule of Insurance SCHEDULE 5.12 Schedule of Litigation SCHEDULE 5.13 Schedule of Compliance with Instruments SCHEDULE 5.15 Schedule of Proprietary Rights SCHEDULE 5.16 Schedule of Principal Corporate Offices SCHEDULE 5.17 Schedule of Tradenames SCHEDULE 5.21 Schedule of Employment Agreements SCHEDULE 5.23 Schedule of Fees SCHEDULE 5.24 Schedule of Year 2000 Compliance SCHEDULE 5.25 Schedule of Lease Payments SCHEDULE 9.8 Schedule of Contemplated Store Sales iv SCHEDULE 9.18 Schedule of Halloween Inventory v PARTY CITY CORPORATION 400 COMMONS WAY ROCKAWAY, NEW JERSEY 07866 $10,000,000 12.5% Secured Notes due 2003 ("A Notes") $5,000,000 13.0% Secured Notes due 2003 ("B Notes") $5,000,000 13.0% Secured Notes due 2002 ("C Notes") $10,000,000 14.0% Secured Notes due 2004 ("D Notes") Warrants to Purchase Common Stock Dated as of August 16, 1999 TO EACH OF THE PURCHASERS LISTED IN .........THE ATTACHED SCHEDULE A Ladies and Gentlemen: Party City Corporation, a Delaware corporation (the "Company"), agrees with you as follows: 1. Authorization of Securities. The Company will authorize the issue and sale of: (a) $10,000,000 aggregate principal amount of its 12.5% Secured Notes due 2003 ("A Notes"), to be substantially in the form of note attached hereto as Exhibit A, with such changes therefrom, if any, as may be approved by you and the Company; (b) $5,000,000 aggregate principal amount of its 13.0% Secured Notes due 2003 ("B Notes"), to be substantially in the form of note attached hereto as Exhibit B, with such changes therefrom, if any, as may be approved by you and the Company; (c) $5,000,000 aggregate principal amount of its 13.0% Secured Notes due 2002 ("C Notes"), to be substantially in the form of note attached hereto as Exhibit C, with such changes therefrom, if any, as may be approved by you and the Company; 1 (d) $10,000,000 aggregate principal amount of its 14.0% Secured Notes due 2004 ("D Notes"), to be substantially in the form of note attached hereto as Exhibit D, with such changes therefrom, if any, as may be approved by you and the Company; (e) Warrants to purchase 6,880,000 shares of Common Stock at an initial exercise price of $3.00 per share ("Warrants"), to be substantially in the form of warrant attached hereto as Exhibit E, with such changes therefrom, if any, as may be approved by you and the Company. Collectively, (i) the A Notes, the B Notes, the C Notes and the D Notes are referred to herein as the "Notes," and (ii) the Notes and the Warrants are referred to herein as the "Securities." Each of the A Notes, the B Notes, the C Notes and the D Notes is considered a separate "tranche" of Notes for purposes of this Agreement. Certain other capitalized terms used in this Agreement are defined in Section 13. 2. Sale and Purchase of Securities. 2.1 Purchase Price(a) . The Company will issue and sell to you and, subject to the terms and conditions of this Agreement, you will purchase from the Company, at the Closing provided for in Section 3, the Securities in the principal amount (in the case of the Notes) or exercisable for the number of shares of Common Stock (in the case of the Warrants) specified opposite your name in Annex I at the purchase price of 100% of the principal amount of the Notes specified opposite your name in Annex I. Contemporaneously with entering into this Agreement, the Company is entering into a separate Securities Purchase Agreement identical with this Agreement with the other purchasers named in Annex I (the "Other Purchasers"), providing for the sale to the Other Purchasers, at such Closing, of Securities in the principal amount (in the case of the Notes) or exercisable for the number of shares of Common Stock (in the case of the Warrants) specified opposite their names in Annex I. 2.2 Issue Price. Promptly after the Closing, the Company and you shall agree for U.S. federal income tax purposes (i) the present value as of the Closing Date of all payments under the C Notes and D Notes, using a discount rate which shall be based on a yield which the Company and you shall agree is the original yield of comparable debt instruments not issued as part of an investment unit (which rate shall not be less than the applicable federal rate on the date the C Notes and D Notes are issued), (ii) the aggregate "issue price" under Section 1273(b) of the Code of the C Notes and D Notes and (iii) the aggregate purchase price of the Warrants. All federal, state and local income tax returns shall be filed by the Company and you in a manner consistent in all material respects with the agreement reached to pursuant to this Section 2.2. 2.3 Detachable Warrants. The Warrants are being sold with the C Notes and D Notes and shall be fully detachable from each of the other Securities, may be transferred separately from each of the other Securities and need not be transferred with the other Securities. 2.4 Security Interest. Each of the Notes shall be secured obligations of the Company with the relative priorities as further set forth in that certain Security Agreement (Parent) between the Company and Enhanced Retail Funding, LLC, a Delaware limited liability company ("ERF"), as agent for you and the Other Purchasers attached hereto as Exhibit F-1 (the "Security Agreement (Parent)") and the related documents described in Section 4.5. 3. Closing; Fees. 2 3.1 Closing. The sales of the Securities to be purchased by you shall take place at the offices of Latham & Watkins, 855 Third Avenue, Suite 1000, New York, New York, at 10:00 a.m., New York City time, at a closing (the "Closing") on August 16, 1999 (the "Closing Date") or on such other Business Day thereafter as may be agreed upon by the Company and you. At the Closing the Company will deliver to you the Securities indicated opposite your name on Annex I hereto subject to the following: (a) the Notes to be issued to you shall be issued in the form of single notes (or such greater number of notes in denominations of at least $100,000 as shall be set forth in Annex I or as you may request) dated the date of the Closing and registered in your name (or in the name of your nominee); and (b) the Warrants to be issued to you, if applicable, shall be in the form of a single warrant certificate (or such greater number of warrant certificates as shall be set forth in Annex I or as you may request) dated the date of the Closing and registered in your name (or in the name of your nominee); against delivery by you to the Company or its order of immediately available funds in the amount of the purchase price therefor. If at the Closing the Company shall fail to tender such Securities to you as provided above in this Section 3, or any of the conditions specified in Section 4 shall not have been fulfilled to your satisfaction, you shall, at your election, be relieved of all further obligations under this Agreement, without thereby waiving any other rights you may have by reason of such failure or such nonfulfillment. 3.2 Funding Fees. On the date of the Closing, the Company will pay to you (or to the Person designated by you for payment in Annex I), in immediately available funds, a funding fee equal to 1.5% of the aggregate purchase price for the Securities purchased by you on the Closing Date, by crediting the account specified below your name in Annex I for the payment of funding fees. 3.3 Legal and Accounting Fees. Subject to the limitations of Section 16, whether or not the Securities are sold, on the date of the Closing, the Company will pay to you the reasonable fees and disbursements of your legal counsel and accountants and such other expenses including search fees, documentation fees and filing fees incurred by you and them in connection with the transactions contemplated by this Agreement and set forth in a statement delivered to the Company on or prior to the date of the Closing, and thereafter the Company will pay, promptly upon receipt of a supplemental statement therefor, additional reasonable fees and disbursements, if any, related to the foregoing and incurred in connection with such transactions. 3.4 Obligation of Purchaser. The Company hereby acknowledges and agrees that you shall have no obligation to purchase the Securities or otherwise consummate the transactions contemplated by this Agreement if any of the conditions to closing described in Section 4 have not been satisfied to your approval prior to the Closing. 4. Conditions to Closing. Your obligation to purchase and pay for the Securities to be sold to you at the Closing is subject to the fulfillment to your satisfaction, prior to or at the Closing, of the following conditions: 4.1 Representations and Warranties. The representations and warranties of the Company contained in this Agreement and those otherwise made in writing by or on behalf of the Company in connection with the transactions contemplated by this Agreement shall be correct in all material respects when made and at the time of the Closing, except as affected by the consummation of such transactions. 3 4.2 Performance; No Default. The Company shall have performed and complied in all material respects with all agreements and conditions contained in this Agreement required to be performed or complied with by it prior to or at the Closing and at the time of the Closing no Event of Default or Potential Event of Default shall have occurred and be continuing. 4.3 Compliance Certificate. The Company shall have delivered to you an Officers' Certificate, dated the date of the Closing, certifying that the conditions specified in Sections 4.1 and 4.2 have been fulfilled and demonstrating that, after giving effect to the issuance of all of the Securities, the Company will be in compliance in all material respects with the most stringent limitations on the incurrence or maintenance of Debt contained in any instrument or agreement applicable to or binding on the Company. 4.4 Investor Rights Agreement. That certain Investor Rights Agreement by and among the Company, you and the Other Purchasers shall have been executed in substantially the form attached hereto as Exhibit G (the "Investor Rights Agreement"). 4.5 Collateral and Security Agreements. (a) That certain Security Agreement (Parent) by and between the Company and ERF as agent for you and the Other Purchasers shall have been executed in substantially the form attached hereto as Exhibit F-1. (b) That certain Security Agreement (Subsidiary) by and between Party City Michigan, Inc., a Delaware corporation ("Party City Michigan"), and ERF as agent for you and the Other Purchasers shall have been executed in substantially the form attached hereto as Exhibit F-2 (the "Security Agreement (Subsidiary)"). (c) That certain Patent, Trademark and Copyright Assignment (Parent) by and between the Company and ERF as assignee for you and the Other Purchasers shall have been executed in substantially the form attached hereto as Exhibit F-3. (d) That certain Patent, Trademark and Copyright Assignment (Subsidiary) by and between Party City Michigan and ERF as assignee for you and the Other Purchasers shall have been executed in substantially the form attached hereto as Exhibit F-4. (e) That certain Collateral Assignment of Contract Rights (Franchise) by and between the Company and ERF as assignee for you and the Other Purchasers shall have been executed in substantially the form attached hereto as Exhibit F-5. (f) That certain Collateral Assignment of Contract Rights (Tomax) by and between Party City Michigan and ERF as assignee for you and the Other Purchasers shall have been executed in substantially the form attached hereto as Exhibit F-6. (g) That certain Guaranty Agreement by Party City Michigan in favor of ERF as agent for you and the Other Purchasers shall have been executed in substantially the form attached hereto as Exhibit F-7. (h) That certain Intercompany Subordination Agreement by and among the Company, Party City Michigan and ERF as agent for you and the Other Purchasers shall have been executed in substantially the form attached hereto as Exhibit F-8. 4 (i) That certain Stock Pledge Agreement by and between the Company and ERF as agent for you and the Other Purchasers shall have been executed in substantially the form attached hereto as Exhibit F-9. 4.6 Intercreditor Agreement. That certain Intercreditor Agreement by and among you, the Other Purchasers, PNC Bank, National Association, as agent under the Credit Agreement, and the other lenders named therein, and certain of the Company's vendors named in the Vendor Standstill Agreement (defined below) shall have been executed in substantially the form attached hereto as Exhibit H (the "Intercreditor Agreement"). The vendors who are parties to the Intercreditor Agreement shall include the entities listed on Annex II. 4.7 Standstill Agreements. (a) That certain Standstill and Forbearance Agreement by and among the Company, PNC Bank, National Association, as agent, and the lenders named therein shall have been executed in substantially the form attached hereto as Exhibit I (the "Bank Standstill Agreement"). (b) That certain Vendor Forbearance and Standstill Agreement by and among the Company and certain of its vendors named therein shall have been executed in substantially the form attached hereto as Exhibit J (the "Vendor Standstill Agreement"). 4.8 Guaranty Agreement. Each of the Company's Subsidiaries shall have entered into the Guaranty Agreement in substantially the form attached hereto as Exhibit K (the "Guaranty Agreement"). 4.9 Opinions of Counsel. You shall have received from each of Willkie Farr & Gallagher, special counsel for the Company, and St. John & Wayne, L.L.C., counsel for the Company, in connection with the transactions contemplated by this Agreement, a favorable opinion substantially in the form set forth in Exhibit L-1 and Exhibit L-2, respectively, addressed to you, dated the date of the Closing and otherwise satisfactory in substance and form to you. 4.10 Projections. Immediately prior to the Closing Date, the inventories, accounts payable, cash balances, trade debt and bank debt shall be at levels materially similar to those set forth in the Projections (as defined in Section 5.4(b)). 4.11 Consents, Agreements. The Company shall have obtained all consents and waivers, under any term of any material agreement or instrument to which it is a party or by which it or any of its properties is bound, or any term of any applicable law, ordinance, rule or regulation of any governmental authority, or any term of any applicable order, judgment or decree of any court, arbitrator or governmental authority, necessary or appropriate in connection with the transactions contemplated by this Agreement, and such consents and waivers shall be in full force and effect on the Closing Date. A complete and correct copy of each of such consents and waivers shall have been delivered to you. 4.12 Compliance with Securities Laws. Subject to the accuracy of the representations in Section 6, the offering and sale of the Securities to you and the Other Purchasers shall have complied with all applicable requirements of federal and state securities laws. 4.13 Purchase Permitted By Applicable Law, etc. On the date of the Closing your purchase of Securities (a) shall be permitted by the laws and regulations of each jurisdiction to which you are subject and (b) shall not subject you to any additional tax, penalty or, in your reasonable judgment, other onerous 5 condition by reason of any change after the date of this Agreement in any applicable law or governmental regulation. If requested by you, you shall have received, at least five (5) Business Days prior to the Closing, an Officers' Certificate certifying as to such matters of fact as you may reasonably specify to enable you to determine whether such purchase is so permitted. 4.14 No Adverse U.S. Legislation, Action or Decision, etc. No legislation shall have been enacted by either house of Congress or favorably reported by any committee thereof, no other action shall have been taken by any governmental authority, whether by order, regulation, rule, ruling or otherwise, and no decision shall have been rendered by any court of competent jurisdiction, which would materially and adversely affect the Notes or the Warrants being purchased by you hereunder. 4.15 No Actions Pending. There shall be no suit, action, investigation, inquiry or other proceeding by any governmental body or any other Person or any other legal or administrative proceeding pending or, to the Company's knowledge, threatened which questions the validity or legality of the transactions contemplated by this Agreement or the other Operative Agreements or which seeks damages or injunctive or other equitable relief in connection therewith. 4.16 Proceedings and Documents. All corporate and other proceedings in connection with the transactions contemplated by this Agreement and all documents and instruments incident to such transactions shall be reasonably satisfactory to you and your special counsel, and you and your special counsel shall have received all such counterpart originals or certified or other copies of such documents as you or they may reasonably request. 4.17 Sale of Other Securities. Contemporaneously with the Closing, the Other Purchasers shall purchase from, and the Company shall sell to the Other Purchasers, the Securities identified opposite the Other Purchasers' in Annex I. 4.18 Fees. The fees required to be paid by Sections 3.2 and 3.3 shall have been paid as therein provided. 4.19 Perfected Security Interest. The UCC-1 Financing Statements for the jurisdictions listed on the attached Schedule 4.19 shall have been duly executed by authorized official(s) of the Company. 5. Representations and Warranties. The Company represents and warrants that: 5.1 Corporate Organization and Authority; Valid and Binding Effect. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to own and operate its properties, to carry on its business as now conducted and as proposed to be conducted, to enter into the Operative Agreements to which the Company is a party, to issue and sell the Securities and to carry out the terms of the Operative Agreements to which the Company is a party. This Agreement and the other Operative Agreements to which the Company or any of its Subsidiaries is a party constitute the valid and legally binding obligations of each such party, enforceable against them in accordance with their respective terms, except that enforceability may be limited by bankruptcy, insolvency and other laws affecting creditor's rights generally and except that the availability of certain remedies may be limited by general principles of equity. 5.2 Subsidiaries. Schedule 5.2 correctly lists as to each Subsidiary on the date of this Agreement (a) its name, (b) the jurisdiction of its incorporation and (c) the percentage of its issued and outstanding shares owned by the Company or another Subsidiary (specifying such other Subsidiary). Each Subsidiary 6 is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has all requisite corporate power and authority to own and operate its properties, to carry on its business as now conducted and as proposed to be conducted, to enter into the Guaranty Agreement and to carry out the terms of the Guaranty Agreement. All the outstanding shares of capital stock of each Subsidiary are validly issued, fully paid and non assessable, and all such shares indicated in Schedule 5.2 as owned by the Company or by any other Subsidiary are so owned beneficially and of record by the Company or by such other Subsidiary free and clear of any Lien except as otherwise specified on Schedule 5.2. 5.3 Qualification. Each of the Company and its Subsidiaries is duly qualified and in good standing as a foreign corporation authorized to do business in each jurisdiction (other than the jurisdiction of its incorporation) in which the nature of its activities or the character of the properties it owns or leases makes such qualification necessary and in which the failure so to qualify would have a Material Adverse Effect. 5.4 Financial Information. (a) As of the date hereof, the Company has provided you with the unaudited consolidated financial statements of the Company and its consolidated Subsidiaries for the fiscal period from January 1, 1998 to July 3, 1999 including consolidated balance sheets, consolidated income statements and consolidated statements of cash flow, a copy of which is attached hereto as Schedule 5.4(a). Such financial statements have been prepared in accordance with GAAP and fairly present, as of the date thereof and for the periods covered thereby, the financial position and results of operations of the Company and its Subsidiaries. The Company agrees to promptly (and in no event later than September 30, 1999) provide you with audited consolidated financial statements of the Company and its consolidated Subsidiaries for the fiscal period from January 1, 1998 to July 3, 1999, which statements shall be prepared in accordance with GAAP and fairly present, as of the date thereof and for the periods covered thereby the financial position and results of operations of the Company and its Subsidiaries. (b) As of the date hereof, the forecasted financial statements of the Company and its Subsidiaries, consisting of balance sheets, income statements and cash flow statements for the Company and its Subsidiaries, and the projected schedules of excess availability, giving effect to the consummation of the transactions contemplated by this Agreement and the issuance of the Securities hereunder, dated August 12, 1999, and attached hereto as Schedule 5.4(b) (the "Projections"): (i) are based on reasonable estimates and assumptions and (ii) reflected, as of the date prepared, and continue to reflect, as of the date of this Agreement and the Closing Date, the reasonable estimate of the Company of the results of operations and other matters projected therein for the periods covered thereby, it being understood that the projections are subject to the uncertainty inherent in all financial forecasts, and do not constitute a representation or warranty that the results and other matters projected therein will in fact be achieved. 5.5 Absence of Changes, etc. Other than as specifically described in Schedule 5.5, since July 31, 1999, (a) there has been no change in the assets, liabilities or financial condition of the Company or any of its Subsidiaries, other than changes in the ordinary course of business which have not been, either in any case or in the aggregate, materially adverse to the Company or any of its Subsidiaries, (b) neither the business, operations or affairs nor any of the properties or assets of the Company or its Subsidiaries have been affected by any occurrence or development (whether or not insured against) which has been, either in any case or in the aggregate, materially adverse to the Company or any of its Subsidiaries and (c) the Company has not as of the date of this Agreement directly or indirectly declared, ordered, paid, made or set apart any sum or property for any Restricted Payment or agreed to do so. 7 5.6 Tax Returns and Payments. The Company and each of its Subsidiaries have filed all federal, state, local and foreign tax returns, reports and estimates which are required to be filed by it and all taxes (including penalties and interest, if any) shown on such returns, reports and estimates as being due and payable or which are otherwise due and payable have been fully paid (other than taxes contested in good faith by appropriate proceedings diligently pursued and as to which appropriate reserves have been established and maintained in conformity with GAAP). Such tax returns properly and correctly reflect, in all material respects, the income and taxes of the Company or such Subsidiary for the periods covered thereby. The federal tax identification number of the Company and each of its Subsidiaries is set forth on Schedule 5.6 attached hereto. 5.7 Debt. Schedule 5.7(a) correctly describes all secured and unsecured Debt of the Company and its Subsidiaries as of the date of this Agreement outstanding in a principal amount greater than $100,000, or for which the Company or any of its Subsidiaries has commitments, and identifies the collateral securing any secured Debt. Except as set forth on Schedule 5.7(a), the Company has outstanding not more than an aggregate of $1,000,000 of unsecured Debt in individual amounts less than $100,000. Schedule 5.7(b) correctly describes all such Debt that, on the Closing Date and after giving effect to the transactions contemplated by this Agreement, will remain outstanding. Other than as described on Schedule 5.7(c), neither the Company nor any of its Subsidiaries is in default with respect to any Debt or any instrument or agreement relating thereto. 5.8 Liens. There are no Liens on the Company's properties, assets or rights of any kind (whether tangible or intangible, real or personal), other than the Liens individually identified on Schedule 5.8 and Liens not described on said Schedule but which in the aggregate do not exceed the amount of $100,000. 5.9 Capital Stock and Related Matters. The authorized capital stock of the Company consists of 25,000,000 shares of Common Stock of which 12,455,538 shares of Common Stock are issued and outstanding. The shares of Common Stock issuable upon exercise of the Warrants have been duly authorized and validly reserved for issuance upon such exercise and, when so issued, will be validly issued, fully paid and non assessable. As of the Closing Date, the Company will not have outstanding securities convertible into or exchangeable for any shares of its capital stock, nor will it have outstanding any rights to subscribe for or to purchase, or any options for the purchase of, or any agreements providing for the issuance (contingent or otherwise) of, or any calls, commitments or claims of any character relating to, any shares of its capital stock or any securities convertible into or exchangeable for any shares of its capital stock, other than those listed on Schedule 5.9. 5.10 Title to Properties; Liens. Except as set forth on Schedule 5.10, each of the Company and its Subsidiaries has good and sufficient title to its properties and assets, including the properties and assets reflected in the financial statements referred to in Section 5.4 (except properties and assets disposed of since such date in the ordinary course of business and properties and assets held under Capital Leases referred to in Schedule 5.7(a)), and none of such properties or assets is subject to any Liens except such as are of the character permitted by Section 9.4, the Company and its Subsidiaries enjoy peaceful and undisturbed possession under all leases necessary in any material respect for the operation of their respective properties and assets, and all such leases are valid and subsisting and are in full force and effect. Except to perfect and protect security interests of the character permitted by Section 9.4 and except as set forth on Schedule 5.10, no presently effective financing statement under the Uniform Commercial Code which names the Company or any Subsidiary as debtor is on file in any jurisdiction and neither the Company nor any Subsidiary has signed any presently effective financing statement or any presently effective security agreement authorizing any secured party thereunder to file any such financing statement. 8 5.11 Insurance. The physical properties, assets and business of the Company and its Subsidiaries are insured to the extent disclosed on Schedule 5.11 hereto and all such insurance policies and arrangements are disclosed on said Schedule. Said insurance policies and arrangements are in full force and effect, all premiums with respect thereto are currently paid, and the Company and its Subsidiaries are in compliance in all material respects with the terms thereof. To the knowledge of the Company, said insurance is adequate and customary for the business engaged in by the Company and its Subsidiaries and is sufficient for compliance by the Company and its Subsidiaries with all requirements of law and all agreements and leases to which the Company or its Subsidiaries is a party. 5.12 Litigation. Except as set forth on Schedule 5.12 hereto or as would not have a Material Adverse Effect, as of the Closing Date there are no actions, proceedings or investigations pending or, to the knowledge of the Company, threatened against the Company or any of its Subsidiaries before or by any court or administrative agency (or any basis therefor known to the Company). 5.13 Compliance with Other Instruments, etc. Except as set forth on Schedule 5.13, neither the Company nor any of its Subsidiaries is in violation of any term of its certificate or articles of incorporation or by-laws, and neither the Company nor any of its Subsidiaries is in violation of any term of any agreement or instrument to which it is a party or by which it is bound or, to the best of the Company's knowledge, any term of any applicable law, ordinance, rule or regulation of any governmental authority or any term of any applicable order, judgment or decree of any court, arbitrator or governmental authority, the consequences of which violation would have a Material Adverse Effect. Except as set forth on Schedule 5.13, the execution, delivery and performance of this Agreement and the issuance of the Securities to you and the other Purchasers will not result in any violation of or be in conflict with or constitute a default under any term of any agreement or instrument to which it is a party or by which it is bound (including, without limitation, the Company's agreements with its vendors) or, to the best of the Company's knowledge, any term of any applicable law, ordinance, rule or regulation of any governmental authority or any term of any applicable order, judgment or decree of any court, arbitrator or governmental authority or result in the creation of (or impose any obligation on the Company or any of its Subsidiaries to create) any Lien upon any of the properties or assets of the Company or any of its Subsidiaries pursuant to any such term; and there is no such term which would have a Material Adverse Effect. The Company has not received any inquiries from the Securities and Exchange Commission including, without limitation, inquiries related to any failure to file the reports described on Schedule 5.13. 5.14 Governmental Consent. No consent, approval or authorization of, or declaration or filing with, any governmental authority on the part of the Company or any of its Subsidiaries is required for the valid execution and delivery of this Agreement or the valid offer, issue, sale and delivery of the Securities pursuant to this Agreement. 5.15 Patents, Trademarks, Authorizations, etc. (a) Except as described on Schedule 5.15, each of the Company and its Subsidiaries has ownership of, or license to use, all Proprietary Rights used or to be used in its business as presently conducted or contemplated by the Company. There are no claims or demands of any other person pertaining to any of such Proprietary Rights and no proceedings have been instituted, or are pending or, to the knowledge of the Company, threatened, which challenge the rights of the Company or its Subsidiaries in respect thereof. Each of the Company and its Subsidiaries has the right to use, free and clear of claims or rights of other persons, all customer lists, designs, manufacturing or other processes, computer software, systems, data compilations, research results and other information required for or incident to its products or its business as presently conducted or contemplated. 9 (b) All patents, patent applications, trademarks, trademark applications and registrations and registered copyrights which are owned by or licensed to the Company or used or to be used by the Company or its Subsidiaries in their business as presently conducted or contemplated by the Company, and all other Proprietary Rights which are material to the business or operations of the Company or its Subsidiaries, are listed on Schedule 5.15. Except as set forth on Schedule 5.15, all of such patents, patent applications, trademark registrations, trademark applications and registered copyrights have been duly registered in, filed in or issued by the United States Patent and Trademark Office, the United States Register of Copyrights, or the corresponding offices of other jurisdictions as identified on said Schedule, and have been properly maintained and renewed in accordance with all applicable provisions of law and administrative regulations of the United States and each such jurisdiction. (c) All licenses or other agreements under which the Company or its Subsidiaries are granted Proprietary Rights which are material to the business or operations of the Company or its Subsidiaries are listed on Schedule 5.15, other than generally commercially available third party software that has not been materially modified by the Company, for which the Company can freely assign its rights to a successor of the Company that is either: (i) only subject to a shrink wrap license agreement, or (ii) is immaterial to the Company's business. All said licenses or other agreements are in full force and effect, there is no material default by the Company or its Subsidiaries or, to the knowledge of the Company, any other party thereto. To the knowledge of the Company, the licensors under said licenses and other agreements have and had all requisite power and authority to grant the rights purported to be conferred thereby. True and complete copies of all such licenses or other agreements, and any amendments thereto, have been provided to you or your counsel. (d) All material licenses or other material agreements under which the Company or its Subsidiaries have granted to others Proprietary Rights owned or licensed by the Company or its Subsidiaries are listed on Schedule 5.15. All of said licenses or other agreements are in full force and effect, there is no material default by the Company or its Subsidiaries or, to the knowledge of the Company, any other party thereto. True and complete copies of all such licenses or other agreements, and any amendments thereto, have been provided to you or your counsel. (e) The Company and its Subsidiaries have taken all steps required in accordance with sound business practice to establish and preserve their ownership of all Proprietary Rights with respect to their products, services and technology except where failure to take such steps would not have a Material Adverse Effect. The Company has no knowledge of any infringement by others of any Proprietary Rights of the Company or its Subsidiaries. (f) To the knowledge of the Company, the business, activities and products of the Company and its Subsidiaries do not infringe any Proprietary Rights of any other person. To the knowledge of the Company, no proceeding charging the Company or its Subsidiaries with infringement of any adversely held Proprietary Rights has been filed or is threatened to be filed. To the knowledge of the Company, there exists no unexpired patent or patent application which includes claims that would be infringed by or otherwise adversely affect the activities or business of the Company or its Subsidiaries. To the knowledge of the Company, neither the Company nor any of its Subsidiaries is making unauthorized use of any confidential information or trade secrets of any person, including without limitation, any former employer of any past or present employee of the Company. Neither the Company, any of its Subsidiaries nor, to the knowledge of Company, any of their employees have any agreements or arrangements with any persons other than the Company or its Subsidiaries related to confidential information or trade secrets of such persons or restricting any such employee's ability to engage in business activities of any nature. The 10 activities of the employees of the Company and its Subsidiaries on behalf of the Company or its Subsidiaries do not violate any such agreements or arrangements known to the Company. 5.16 Principal Corporate Office. As of the date hereof the Company's and each of its Subsidiaries' principal place of business, chief executive office and location of its books and records is set forth on Schedule 5.16 attached hereto and neither the Company, any of its Subsidiaries nor any of their respective predecessors has had any other chief executive office or principal place of business except as set forth on Schedule 5.16 during the five (5) years immediately preceding the date hereof. 5.17 Corporate and Trade or Fictitious Names. As of the Closing Date, except as set forth on Schedule 5.17 hereof, during the five (5) years immediately preceding the date of this Agreement, neither the Company, any of its Subsidiaries, nor any of their respective predecessors has been known as or used any corporate, trade or fictitious name other than its current corporate or individual name as such name is set forth in this Agreement. 5.18 Environmental Matters. (a) Each of the Company and its Subsidiaries has complied and is in compliance with all Environmental Laws in all material respects. (b) Each of the Company and its Subsidiaries has obtained and complied in all material respects with, and is in compliance in all material respects with, all permits, licenses and other authorizations that are required pursuant to Environmental Laws for the occupation of its facilities and the operation of its business, without transfer, reissuance, or other governmental approval or action. (c) Neither the Company nor any of its Subsidiaries has received any written claim, complaint, citation, report or other written or oral notice regarding any liabilities or potential liabilities, including any investigatory, remedial or corrective obligations, arising under Environmental Laws. (d) No underground storage tanks or surface impoundments or asbestos-containing material in any form or condition exists at any property owned or occupied by the Company or any of its Subsidiaries. (e) Neither the Company nor any of its Subsidiaries has treated, stored, disposed of, arranged for or permitted the disposal of, transported, handled, or released any substance, including without limitation any hazardous substance, or owned or operated any facility or property, in a manner that would reasonably be expected to give rise to liabilities of the Company or any of its Subsidiaries for response costs, natural resource damages or attorneys' fees pursuant to CERCLA or other Environmental Laws. (f) No facts, events or conditions relating to the past or present facilities, properties or operations of the Company or its Subsidiaries will prevent, hinder or limit continued compliance with Environmental Laws, give rise to any investigatory, remedial or corrective obligations pursuant to Environmental Laws, or give rise to any other material liabilities pursuant to Environmental Laws, including without limitation any relating to onsite or offsite Releases (as defined in CERCLA) or threatened Releases of hazardous or otherwise regulated materials, substances or wastes, personal injury, property damage or natural resources damage. 11 (g) Neither the Company nor any of its Subsidiaries has, either expressly or by operation of law, assumed or undertaken any liability or corrective or remedial obligation of any other Person relating to Environmental Laws. 5.19 Status Under Certain Federal Statutes. The Company is not (a) an "investment company," or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended; (b) a "holding company" or a "subsidiary company" of a "holding company," or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company," as such terms are defined in the Public Utility Holding Company Act of 1935, as amended; (c) a "public utility" as such term is defined in the Federal Power Act, as amended; or (d) a "rail carrier or a person controlled by or affiliated with a rail carrier," within the meaning of Title 49, U.S.C., or a "carrier" to which 49 U.S.C. Section 11301(b)(1) is applicable. 5.20 Compliance with ERISA. (a) Neither the Company nor any of its Subsidiaries has breached the fiduciary rules of ERISA or engaged in any non-exempt prohibited transaction in connection with which the Company or any of its Subsidiaries could be subjected to (in the case of any such breach) a suit for damages or (in the case of any such prohibited transaction) either a civil penalty assessed under Section 502(i) of ERISA or a tax imposed by Section 4975 of the Code, which suit, penalty or tax, in any case, could have a Material Adverse Effect. (b) No Plan (other than a Multiemployer Plan) or any trust created under any such Plan has been terminated since September 2, 1974. Neither the Company nor any Related Person has within the past six (6) years contributed to a single employer plan which has at least two (2) contributing sponsors who are not Related Persons, or ceased operations at a facility in a manner which could result in liability under Section 4062(e) of ERISA. No liability to the PBGC has been or is expected by the Company to be incurred with respect to any Plan (other than a Multiemployer Plan) by the Company or any Subsidiary which could have a Material Adverse Effect. There has been no reportable event (within the meaning of Section 4043(c) of ERISA) or any other event or condition with respect to any Plan (other than a Multiemployer Plan) which presents a risk of termination of any such Plan by the PBGC under circumstances which in any case could result in liability which could have a Material Adverse Effect. (c) Full payment has been made of all amounts which the Company or any Related Person is required under the terms of each Plan to have paid as contributions to such Plan as of the last day of the most recent fiscal year of such Plan ended prior to the date hereof, and no accumulated funding deficiency (as defined in Section 302 of ERISA and Section 412 of the Code), whether or not waived, exists with respect to any Plan (other than a Multiemployer Plan). (d) The present value of all vested accrued benefits under all Plans (other than Multiemployer Plans), determined as of the end of the Company's most recently ended fiscal year on the basis of reasonable actuarial assumptions, did not exceed the current value of the assets of such Plans allocable to such vested accrued benefits. The terms "present value," "current value," and "accrued benefit" have the meanings specified in Section 3 of ERISA. (e) The Company is not and has never been obligated to contribute to any "multiemployer plan" (as such term is defined in Section 4001(a)(3) of ERISA). 12 (f) The execution and delivery of this Agreement and the issue and sale of the Securities hereunder will not involve any transaction which is subject to the prohibitions of Section 406 of ERISA or in connection with which a tax could be imposed pursuant to Section 4975 of the Code. The representation by the Company in the preceding sentence is made in reliance upon and subject to the accuracy of your representation in Section 6.3 of this Agreement as to the source of the funds used to pay the purchase price of the Securities purchased by you. The Company has delivered to you, if requested by you, a complete and correct list of all employee benefit plans with respect to which the Company is a party in interest and with respect to which its securities are employer securities. As used in this Section 5.18(f), the terms "employee benefit plans" and "party in interest" have the respective meanings specified in Section 3 of ERISA and the term "employer securities" has the meaning specified in Section 407(d)(1) of ERISA. 5.21 Employee Matters. As of the date hereof, there is no strike or work stoppage in existence or threatened against or by any employees of the Company or its Subsidiaries. As of each subsequent date, there is no strike or work stoppage in existence involving five percent (5.0%) or more of the total workforce of the Company and its Subsidiaries. Except as set forth on Schedule 5.21, the Company is not a party to any employment agreement. 5.22 Withholding and Other Taxes. The Company and its Subsidiaries have properly withheld and currently paid all applicable federal and state unemployment taxes and other federal and state taxes payable with respect to the income of their employees (including without limitation, all taxes and other amounts withheld pursuant to their employees' Internal Revenue Service form W-4, all social security, all Federal Insurance Contribution Act ("FICA") contributions and all Federal Unemployment Tax Act contributions), and have currently paid all workers compensation insurance, disability and insurance benefits properly payable with respect to their employees, other than immaterial amounts not paid through oversight and promptly corrected. 5.23 Certain Fees. Except as set forth on Schedule 5.23 and for the fees referred to in Sections 3.2 and 3.3, no broker's or finder's fee or commission has been paid or will be payable by the Company with respect to the offer, issue and sale of the Securities. 5.24 Year 2000 Compliance. Except as set forth on Schedule 5.24 or as would not have a Material Adverse Effect, the Company and its Subsidiaries have all systems and software solutions necessary or appropriate to address and accommodate Year 2000 computer systems issues, and their software programs, systems and applications used in the operation of its business have been tested and are fully capable of providing accurate results using data having date ranges spanning the twentieth and twenty-first centuries. Without limiting the generality of the foregoing, except as set forth on Schedule 5.24 or as would not have a Material Adverse Effect, all of the Company's software programs, systems and applications are able to: (a) Consistently handle date information before, during and after January 1, 2000, including but not limited to accepting date input, providing date output, and performing calculations on dates or portions of dates; (b) Function accurately and without interruption before, during and after January 1, 2000 (including leap year computations), without any change in operations associated with the advent of the new century; (c) Respond to two-digit date input in a way that resolves any ambiguity as to century in a disclosed defined and predetermined manner; and 13 (d) Store and provide output of date information in ways that are unambiguous as to century. Notwithstanding any remaining steps to be taken to address the Year 2000 issues identified on Schedule 5.24, the Company in good faith believes that its software programs, systems and applications will be capable of performing the tasks identified in clauses (a) through (d) above. 5.25 Payments Under Leases. Except as to the arrangements for deferrals of rent set forth on Schedule 5.25, the Company is not in material default under any lease of real property and has paid all rent due under leases to which the Company is a party (the "Company Leases"). 5.26 Disclosure. Neither this Agreement nor any other document, certificate or instrument delivered to you by or on behalf of the Company in connection with the transactions contemplated by this Agreement contains (in each case, as of its date) any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained in this Agreement and in such other documents, certificates or instruments not misleading. There is no fact (other than matters of a general economic or political nature which do not affect the Company uniquely) known to the Company which could result in a Material Adverse Effect (or in the future may result in a Material Adverse Effect) which has not been set forth in this Agreement or in the other documents, certificates and instruments delivered to you by or on behalf of the Company specifically for use in connection with the transactions contemplated by this Agreement. 6. Purchaser Representations. 6.1 Purchase Intent. You represent that you are purchasing the Securities hereunder for your own account, not with a view to the distribution thereof or with any present intention of distributing or selling any of such Securities except in compliance with the Securities Act and any applicable state securities laws, provided that the disposition of your property shall at all times be within your control. 6.2 Status of Purchaser. You represent that you are an "accredited investor" within the meaning of Rule 501 of the Securities Act, with such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of a prospective investment in the Securities and that you are capable of bearing the economic risks of such investment. You understand that no public market now exists for the Securities and there can be no assurance that a public market will ever exist for such securities. You represent that you have had an opportunity to discuss the Company's business, management and financial affairs with the Company's management and an opportunity to review the Company's facilities. 6.3 Source of Funds. You represent that all or a portion of the funds to be used by you to pay the purchase price of the Securities consists of funds which do not constitute assets of any employee benefit plan and the remaining portion, if any, of such funds consists of funds which may be deemed to constitute assets of one or more specific employee benefit plans, complete and accurate information as to the identity of each of which you have delivered to the Company. As used in this Section 6.3, the terms "employee benefit plan" and "government plan" shall have the respective meanings assigned to such terms in Section 3 of ERISA. 7. Prepayment and Defeasance of A Notes. 14 7.1 Optional Prepayments of A Notes and B Notes. (a) General. Unless an Event of Default shall have occurred and be continuing, the Company may, at its option, upon notice as provided in Section 7.1(c), prepay at any time, or from time to time, all or any part (in an amount of at least $1,000,000 in the aggregate or an integral multiple of $1,000 in excess thereof) of, the A Notes and/or the B Notes at the principal amount so prepaid. (b) Allocation of Partial Prepayments. In the case of each partial prepayment paid or to be prepaid pursuant to this Section 7.1, the principal amount of the tranche(s) of Notes selected to be prepaid shall be allocated pro rata among all of the Notes of such series at the time outstanding in proportion, as nearly as practicable, to the respective unpaid principal amounts thereof not theretofore called for prepayment, with adjustments, to the extent practicable, to compensate for any prior prepayments not made exactly in such proportion. (c) Notice. The Company will give each holder of any A Notes and/or B Notes, as applicable, written notice of each optional prepayment under this Section 7.1 not less than thirty (30) days and not more than sixty (60) days prior to the date fixed for such prepayment, in each case specifying such date, the aggregate principal amount of the Notes to be prepaid, the principal amount of each Note held by such holder to be prepaid. Such notice shall be accompanied by an Officers' Certificate certifying that the conditions of this Section 7 have been fulfilled and specifying the particulars of such fulfillment. (d) Maturity, Surrender, etc. In the case of each prepayment pursuant to this Section 7.1, the principal amount of each Note to be prepaid shall mature and become due and payable on the date fixed for such prepayment, together with interest on such principal amount accrued to such date and the applicable premium, if any. From and after such date, unless the Company shall fail to pay such principal amount when so due and payable, together with the interest and premium, if any, as aforesaid, interest on such principal amount shall cease to accrue. Any Note paid or prepaid in full shall be surrendered to the Company and canceled and shall not be reissued, and no Note shall be issued in lieu of any prepaid principal amount of any Note. 7.2 Defeasance of C Notes and D Notes (a) General. Unless an Event of Default shall have occurred and be continuing, the Company may, at its option, at any time, elect to have either Section 7.2(b) or 7.2(c) hereof be applied to all outstanding C Notes and/or D Notes upon compliance with the conditions set forth below in this Section 7.2. In the event the Company exercises its option under this Section 7.2, a majority in interest of the holders of the C Notes and/or D Notes (based upon the principal amount of the outstanding C Notes and/or D Notes, subject to Section 14.4), as applicable, shall select a trustee which is independent of the holders and the Company to administer the trust to be established for the benefit of the noteholders described below, which trustee shall be reasonably acceptable to the Company (the "Trustee"). In the event of a defeasance hereunder with respect to the C Notes and/or the D Notes, the Trustee shall maintain separate accounts for the funds deposited with respect to the two tranches of notes and the Trustee's other accounts and shall not commingle said funds. (b) Legal Defeasance and Discharge. Upon the Company's exercise under Section 7.2(a) hereof of the option applicable to this Section 7.2(b), the Company shall, subject to the satisfaction of the conditions set forth in Section 7.2(d) hereof, be deemed to have been discharged from its obligations with respect to all outstanding C Notes and/or D Notes on the date the conditions set forth below are satisfied ("Legal Defeasance"). For this purpose, Legal Defeasance means that the Company shall be 15 deemed to have paid and discharged the entire Debt represented by the outstanding C Notes and/or D Notes, as applicable, which shall thereafter be deemed to be "outstanding" only for the purposes of 7.2(e) hereof and the other Sections of this Indenture referred to in (i) and (ii) below, and to have satisfied all its other obligations under such Notes and this Agreement, except for the following provisions which shall survive until otherwise terminated or discharged hereunder: (i) the rights of holders of outstanding Notes to receive solely from the trust fund described in Section 7.2(d) hereof, and as more fully set forth in such Section, payments in respect of the principal of, premium, if any, and interest on such Notes when such payments are due, (ii) the Company's obligations with respect to such Notes under Section 14 hereof, and (iii) this Section 7.2. Subject to compliance with this Section 7.2, the Company may exercise its option under this Section 7.2(b) notwithstanding the prior exercise of its option under Section 7.2(c) hereof. (c) Covenant Defeasance. Upon the Company's exercise under Section 7.2(a) hereof of the option applicable to this Section 7.2(c), the Company shall, subject to the satisfaction of the conditions set forth in Section 7.2(d) hereof, be released from its obligations under the covenants contained in Section 7.3 and Section 9 (other than Sections 9.1 and the first sentence of Section 9.10) hereof with respect to the outstanding C Notes and/or D Notes being defeased on and after the date the conditions set forth in Section 7.2(d) are satisfied ("Covenant Defeasance"), and such Notes shall thereafter be deemed not "outstanding" for the purposes of any direction, waiver, consent or declaration or act of holders of the Notes (and the consequences of any thereof) in connection with such covenants, but shall continue to be deemed "outstanding" for all other purposes hereunder (it being understood that such Notes shall not be deemed outstanding for accounting purposes). For this purpose, Covenant Defeasance means that, with respect to the outstanding C Notes and/or D Notes being defeased, the Company may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such covenant, whether directly or indirectly, by reason of any reference elsewhere herein to any such covenant or by reason of any reference in any such covenant to any other provision herein or in any other document and such omission to comply shall not constitute an Event of Default under Section 10 hereof, but, except as specified above, this Agreement and the C Notes and/or D Notes being defeased shall be unaffected thereby. In addition, upon the Company's exercise under Section 7.2(a) hereof of the option applicable to this Section 7.2(c) hereof, subject to the satisfaction of the conditions set forth in Section 7.2(d) hereof, Sections 10(c) through (h) and Section 10(k) through (l) hereof shall not constitute Events of Default, and, promptly following the period ending on the 91st day after the date of the deposit in respect of the Covenant Defeasance you, and the Other Purchasers shall cause all Liens which secure the C Notes and/or D Notes, as applicable, to be released. (d) Conditions to Legal or Covenant Defeasance. The following shall be the conditions to the application of either Section 7.2(b) or 7.2(c) hereof to the outstanding C Notes and/or D Notes being defeased: In order to exercise either Legal Defeasance or Covenant Defeasance: (i) the Company must irrevocably deposit with the Trustee, in trust, for the benefit of the holders C Notes and/or D Notes being defeased, cash in United States dollars, non-callable 16 Government Securities, or a combination thereof, free and clear of any and all Liens, claims or interests, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of, premium, if any, and interest on the outstanding C Notes and/or D Notes being defeased on the stated date for payment thereof; (ii) in the case of an election under Section 7.2(b) hereof, the Company shall have delivered to the Trustee an opinion of counsel reasonably acceptable to the Trustee confirming that (i) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (ii) since the date of this Agreement, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such opinion of counsel shall confirm that, the holders of the outstanding C Notes and/or D Notes being defeased will not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred; (iii) in the case of an election under Section 7.2(c) hereof, the Company shall have delivered to the Trustee an opinion of counsel reasonably acceptable to the Trustee confirming that the holders of the outstanding C Notes and/or D Notes being defeased will not recognize income, gain or loss for federal income tax purposes as a result of such Covenant Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred; (iv) no Event of Default shall have occurred and be continuing on the date of such deposit after giving effect thereto (other than an Event of Default resulting from the incurrence of Debt all or a portion of the proceeds of which will be used to defease the C Notes and/or D Notes, as applicable, pursuant to this Section 7.2 concurrently with such incurrence) or in the case of a Legal Defeasance insofar as Sections 10(i) or (j) hereof is concerned, at any time in the period ending on the 91st day after the date of deposit; (v) such Legal Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under, any material agreement or instrument to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound; (vi) the Company shall have delivered to the Trustee an opinion of counsel (which may be subject to customary exceptions) and an Officers' Certificate to the effect that on the 91st day following the deposit, the trust funds will not be subject to recapture or avoidance of a preference under any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally; (vii) the Company shall have delivered to the Trustee an Officers' Certificate stating that the deposit was not made by the Company with the intent of preferring the holders of the C Notes and/or D Notes being defeased over any other creditors of the Company or with the intent of defeating, hindering, delaying or defrauding any other creditors of the Company; and (viii) the Company shall have delivered to the Trustee an Officers' Certificate and an opinion of counsel, each stating that all conditions precedent provided for or relating to the Legal Defeasance or the Covenant Defeasance have been complied with. 17 (e) Deposited Money and Government Securities to be Held in Trust; Other Miscellaneous Provisions. Subject to Section 7.2(f) hereof, all money and non-callable Government Securities (including the proceeds thereof) deposited with the Trustee pursuant to Section 7.2(d) hereof in respect of the outstanding C Notes and/or D Notes being defeased shall be held in trust and applied by the Trustee, in accordance with the provisions of such Notes and this Agreement, to the payment to the holders of such Notes of all sums due and to become due thereon in respect of principal, premium, if any, and interest, but such money need not be segregated from other funds except to the extent required by law. The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the cash or non-callable Government Securities deposited pursuant to Section 7.2(d) hereof or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the holders of the outstanding C Notes and/or D Notes being defeased. Anything in this Section 7.2 to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon the request of the Company any money or non-callable Government Securities held by it as provided in Section 7.2(d) hereof which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are in excess of the amount thereof that would then be required to be deposited to effect an equivalent Legal Defeasance or Covenant Defeasance. (f) Repayment to Company. Any money deposited with the Trustee in trust for the payment of the principal of, premium, if any, or interest on any Note and remaining unclaimed for two (2) years after such principal, and premium, if any, or interest has become due and payable shall be paid to the Company on its request or (if then held by the Company) shall be discharged from such trust; and the holder of such Note shall thereafter look only to the Company for payment thereof, and all liability of the Trustee with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee, before being required to make any such repayment, may at the expense of the Company cause to be published once, in the New York Times and The Wall Street Journal (national edition), notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than thirty (30) days from the date of such notification or publication, any unclaimed balance of such money then remaining will be repaid to the Company. (g) Reinstatement. If the Trustee is unable to apply any United States dollars or non-callable Government Securities in accordance with Sections 7.2(b) or 7.2(c) hereof, as the case may be, by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the Company's obligations under this Agreement and the C Notes and/or D Notes intended to be defeased shall be revived and reinstated as though no deposit had occurred pursuant to Sections 7.2(b) or 7.2(c) hereof until such time as the Trustee is permitted to apply all such money in accordance with Sections 7.2(b) or 7.2(c) hereof, as the case may be; provided, however, that, if the Company makes any payment of principal of, premium, if any, or interest on any C Note and/or D Note intended to be defeased following the reinstatement of its obligations, the Company shall be subrogated to the rights of the holders of such Notes to receive such payment from the money held by the Trustee. (h) Notice. The Company will give each holder of C Notes and/or D Notes, as applicable, written notice of each optional defeasance under this Section 7.2 not less than thirty (30) days and not more than sixty (60) days prior to the date fixed for such defeasance. 18 7.3 Contingent Prepayments Upon Change of Control. In the event of the occurrence of a Change of Control, the Company shall give prompt written notice thereof to each holder of the Notes, by facsimile transmission or registered mail (and shall confirm such notice by prompt telephonic advice to an investment officer of each such holder), which notice shall contain a written, irrevocable offer by the Company to prepay, on a date specified in such notice (which date shall be not less than thirty (30) days and not more than sixty (60) days after the date of such notice), the Notes held by such holder in full (and not in part). Upon the acceptance of such offer by such holder mailed to the Company at least ten (10) days prior to the date of prepayment specified in the Company's offer, such prepayment shall be made at the principal amount of the Notes so prepaid, plus a premium equal to 1.0% of the principal amount of the Notes so prepaid. Any offer by the Company to prepay the Notes pursuant to this Section 7.3 shall be accompanied by an Officers' Certificate certifying that the conditions of this Section 7.3 have been fulfilled and specifying the particulars of such fulfillment. If the holder of any Note shall accept such offer, the principal amount of such Note shall become due and payable on the date specified in such offer. In the event that there shall have been a prepayment of any Note under this Section 7.3, the Company shall promptly give notice to the holders of all of the Notes, accompanied by an Officers' Certificate setting forth the principal amount of each of the Notes that was prepaid. 7.4 Acquisition of Notes. The Company will not, and will not permit any Subsidiary or Affiliate to, purchase, redeem or otherwise acquire, directly or indirectly, any Note except upon the payment, prepayment or defeasance thereof in accordance with the terms of this Section 7 and such Note or pursuant to a purchase offer made pro rata to all of the holders of the Notes. 7.5 No Fraudulent Conveyance. The Company may not make any prepayment or defeasance under this Section 7 unless the Company's capital and financial resources shall be sufficient to effect such prepayment. The Company further agrees that any such prepayment or defeasance may not (a) diminish the Company's capital and financial resources to an unreasonable level, (b) hinder, delay or defraud creditors of the Company or (c) otherwise amount to a "fraudulent conveyance" as such term is defined in the Uniform Fraudulent Conveyance Act or similar statute or act. At the written request of any holder of any Note being prepaid or defeased, the Company agrees to provide an Officers' Certificate to such holder to the effect of the foregoing in this Section 7.5. 8. Inspection; Confidentiality 8.1 Inspection. The Company will permit any authorized representatives designated by you, so long as you or your nominee shall be the holder of any Securities, or by any other holder of at least $500,000 of the original principal amount of any tranche of the Notes, to visit and inspect any of the properties of the Company or any of its Subsidiaries, including its and their books of account, and to make copies and take extracts therefrom, and to discuss its and their affairs, finances and accounts with its and their officers and independent public accountants, all at such reasonable times and as often as may be reasonably requested. 8.2 Confidentiality. You agree that you will not disclose without the prior consent of the Company (other than to your employees, officers, directors, advisors, auditors or counsel or to another holder of the Securities) any information with respect to the Company or any Subsidiary which is furnished pursuant to this Section 8 or Section 9 and which is designated by the Company to you in writing as 19 confidential, provided that you may disclose any such information (a) as has become generally available to the public, (b) as may be required in any report, statement or testimony submitted to any municipal, state or federal regulatory body having or claiming to have jurisdiction over you or to the National Association of Insurance Commissioners or similar organizations or their successors, (c) as may be required in response to any summons or subpoena or in connection with any litigation, (d) in order to comply with any law, order, regulation or ruling applicable to you or (e) to any prospective transferee in connection with any contemplated transfer of any of the Notes by you who has, prior to your disclosure of information to such transferee, agreed to be bound by the terms of this Section 8.2 as if such transferee were a party to this Agreement. 9. Covenants. The Company covenants that from the date of this Agreement through the Closing and thereafter so long as any of the Notes are outstanding: 9.1 Reporting Requirements. The Company will maintain, and will cause each of its Subsidiaries to maintain, a system of accounting established and administered in accordance with GAAP, and will accrue, and will cause each of its Subsidiaries to accrue, all such liabilities as shall be required by GAAP. The Company will deliver (in duplicate) to you, so long as you or your nominee shall be the holder of any Securities, and to each other holder of any Securities: (a) Weekly Sales Reports. On each Monday, the Company shall provide unaudited reports of sales for the week ending on the immediately prior Saturday for the current year week, the prior year week and the percentage of comparable store sales in the current year week compared to the prior year week. (b) Monthly Financial Reports. As soon as practicable, and in any event within thirty (30) days after the end of each month (except that such period shall be forty (40) days following any fiscal quarter), interim unaudited consolidated and consolidating financial statements of the Company and its Subsidiaries, for the Company and its consolidated Subsidiaries, including a balance sheet, income statements and statements of cash flow, for the month- and year-to-date period then ended, prepared in accordance with GAAP (subject to the absence of footnotes and year end adjustments allowed by GAAP) and certified by the chief financial officer of the Company, together with a comparison of such financial statements to budget and the financial statements for the prior year, together with a narrative management discussion and analysis of such financial results; (c) Annual Financial Reports. As soon as available, and in any event within ninety (90) days after the end of each subsequent fiscal year, audited consolidated annual financial statements of the Company and its consolidated Subsidiaries, including consolidated balance sheets, consolidated income statements and consolidated statements of cash flow for the fiscal year then ended, prepared in accordance with GAAP, in comparative form and accompanied by the unqualified opinion of a nationally recognized firm of independent certified public accountants retained by the Company and its Subsidiaries; (d) Compliance Certificate. Together with each delivery of financial statements pursuant to subdivisions (b) and (c) of this Section 9.1, an Officers' Certificate (i) stating that the signers have reviewed the terms of this Agreement and have made, or caused to be made under their supervision, a review in reasonable detail of the transactions and condition of the Company and its Subsidiaries during the accounting period covered by such financial statements and that such review has not disclosed the existence during or at the end of such accounting period, and that the signers do not have knowledge of the existence as at the date of the Officers' Certificate, of any condition or event which constitutes an Event of Default or Potential Event of Default, or, if any such condition or event existed or exists, specifying the nature and 20 period of existence thereof and what action the Company has taken or is taking or proposes to take with respect thereto, and (ii) demonstrating in reasonable detail compliance during and at the end of such accounting period with the restrictions contained in Sections 9.2, 9.3 and 9.4; (e) SEC Reports. If applicable, simultaneously with the sending or filing thereof, as the case may be, copies of any definitive proxy statements, financial statements or reports which the Company sends to its shareholders and copies of any regular periodic and special reports or registration statements which the Company files with the Securities and Exchange Commission (or any Governmental Authority substituted therefor), including, but not limited to, all Form 10-K and Form 10-Q reports, if any, or any report or registration statement which the Company files with any national securities exchange; (f) Accountants' Reports. Promptly upon receipt thereof, copies of all final reports submitted to the Company by independent public accountants in connection with each annual, interim or special audit of the books of the Company or any Subsidiary made by such accountants, including, without limitation, the comment letter submitted by such accountants to management in connection with their annual audit; (g) Notice of Event of Default. Within two (2) business days following any principal officer of the Company or any other officer of the Company involved in its financial administration obtaining knowledge of any condition or event which constitutes an Event of Default or Potential Event of Default, or that the holder of any Note has given any notice or taken any other action with respect to a claimed Event of Default or Potential Event of Default under this Agreement or that any Person has given any notice to the Company or any Subsidiary or taken any other action with respect to a claimed default or event or condition of the type referred to in Section 10(f), an Officers' Certificate describing the same and the period of existence thereof and what action the Company has taken, is taking and proposes to take with respect thereto; (h) Other Notices. Within two (2) business days following any principal officer of the Company or any other officer of the Company involved in its financial administration obtaining knowledge of the occurrence of any (i) "reportable event," as such term is defined in Section 4043 of ERISA, or (ii) non-exempt "prohibited transaction," as such term is defined in Section 4975 of the Code, in connection with any Plan or any trust created thereunder, a written notice specifying the nature thereof, what action the Company has taken, is taking and proposes to take with respect thereto, and, when known, any action taken or threatened by the Internal Revenue Service or the PBGC with respect thereto, provided that, with respect to the occurrence of any "reportable event" as to which the PBGC has waived the thirty-day reporting requirement, such written notice need be given only at the time notice is given to the PBGC; and (i) Other Reports and Information. With reasonable promptness, such other financial reports and information and data with respect to the Company or any of its Subsidiaries as from time to time may be reasonably requested. 9.2 Debt. The Company will not, and will not permit any Subsidiary to, directly or indirectly, create, incur, assume, guarantee, or otherwise become or remain directly or indirectly liable with respect to, any Debt, except that the Company and any Subsidiary may become and remain liable with respect to Debt if, on the date the Company or such Subsidiary becomes liable with respect to such Debt and immediately after giving effect thereto and to the concurrent retirement of any other Debt, the Company would be in compliance with all of the terms of Section 9.3 as if compliance with the terms of Section 9.3 were determined as of such date. 21 For the purposes of this Section 9.2, any Person becoming a Subsidiary after the date of this Agreement shall be deemed to have incurred all of its then outstanding Debt at the time it becomes a Subsidiary, and any Person extending, renewing or refunding any Debt shall be deemed to have incurred such Debt at the time of such extension, renewal or refunding. 9.3 Financial Covenants. (a) Limitation on Net Debt. The Company will not have outstanding Net Debt in excess of (i) $47,000,000 for the time period commencing on the Closing Date through October 31, 1999, (ii) $35,000,000 for the time period commencing November 1, 1999 through December 31, 1999 or (iii) $20,000,000 at any time thereafter. (b) Limitation on Senior Secured Funded Debt. The Company will not permit the ratio of (i) Senior Secured Funded Debt as of each date listed in the table below, to (ii) Consolidated EBITDA for the period of four consecutive fiscal quarters of the Company ending on such date, to be greater than the ratio set forth opposite such date in the table below:
Quarter End Date Ratio ---------------- ----- September 30, 1999 10.0 to 1.0 December 31, 1999 1.80 to 1.0 March 31, 2000 1.80 to 1.0 June 30, 2000 1.80 to 1.0 September 30, 2000 2.80 to 1.0 December 31, 2000 1.80 to 1.0 March 31, 2001 1.80 to 1.0 June 30, 2001 1.80 to 1.0 September 30, 2001 2.80 to 1.0 December 31, 2001 1.80 to 1.0 March 31, 2002 1.80 to 1.0 and thereafter.
(c) Limitation on Funded Debt. The Company will not permit the ratio of (i) Funded Debt as of each date listed in the table below, to (ii) Consolidated EBITDA for the period of four consecutive fiscal quarters of the Company ending on such date, to be greater than the ratio set forth opposite such date in the table below:
Quarter End Date Ratio ---------------- ----- September 30, 1999 11.00 to 1.0 December 31, 1999 1.80 to 1.0 March 31, 2000 1.80 to 1.0 June 30, 2000 1.80 to 1.0 September 30, 2000 2.80 to 1.0 December 31, 2000 1.80 to 1.0 March 31, 2001 1.80 to 1.0 June 30, 2001 1.80 to 1.0 September 30, 2001 2.80 to 1.0 December 31, 2001 1.80 to 1.0 March 31, 2002 1.80 to 1.0 June 30, 2002 1.80 to 1.0 September 30, 2002 2.80 to 1.0 December 31, 2002 1.80 to 1.0 March 31, 2003 1.80 to 1.0 22 June 30, 2003 1.80 to 1.0 and thereafter.
(d) Minimum Interest Coverage. The Company will not permit the ratio of (i) Consolidated EBITDA for the period of four consecutive fiscal quarters of the Company ending on each date listed in the table below, to (ii) Interest Expense for such period, to be less than the ratio set forth opposite such date in the table below:
Quarter End Date Ratio ---------------- ----- September 30, 1999 1.70 to 1.0 December 31, 1999 2.75 to 1.0 March 31, 2000 3.00 to 1.0 June 30, 2000 3.50 to 1.0 September 30, 2000 3.50 to 1.0 December 31, 2000 3.50 to 1.0 March 31, 2001 3.50 to 1.0 June 30, 2001 3.50 to 1.0 September 30, 2001 3.50 to 1.0 and thereafter.
(e) Limitation on Capital Expenditures. The Company will not make or commit to make any Capital Expenditure if the amount thereof, taken together with all other Capital Expenditures made by the Company during the then fiscal year, would exceed $10,000,000 without obtaining the prior written consent of a Supermajority in Interest of the Notes, provided that: (i) for the remainder of the 1999 calendar year, the Company may not make Capital Expenditures in respect of any newly opened, acquired or relocated stores, provided that the Company may open one (1) store in Novato, California if it closes its existing store in Whiterock, Texas during calendar year 1999; (ii) in the 2000 calendar year, the Company may not make Capital Expenditures in respect of any newly opened, acquired or relocated stores in excess of $1,000,000; (iii) in the 2001 calendar year and thereafter, the Company may not, on an annual basis, make Capital Expenditures in respect of any newly opened, acquired or relocated stores in excess of (A) $1,000,000 plus (B) up to $3,000,000 in proceeds (after fees, expenses and capital gains taxes but excluding the book value of inventory sold) from the sale or disposition of existing stores of the Company during the applicable year. (f) Capital Leases. The Company's obligations under Capital Leases for any calendar year shall not exceed $1,000,000. (g) Minimum EBITDA. The Company's Consolidated EBITDA shall be no less than $21,500,000 in calendar year 1999 and $31,500,000 in calendar year 2000. 9.4 Liens, etc. The Company will not, and will not permit any Subsidiary to, directly or indirectly create, incur, assume or permit to exist any Lien on or with respect to any property or asset (including any document or instrument in respect of goods or accounts receivable) of the Company or any Subsidiary, whether now owned or held or hereafter acquired, or any income or profits therefrom, except: 23 (a) Liens for taxes, assessments or other governmental charges the payment of which is not at the time required by Section 9.11; (b) statutory Liens of landlords and Liens of carriers, warehousemen, mechanics and materialmen incurred in the ordinary course of business for sums not yet due or the payment of which is not at the time required by Section 9.11; (c) Liens (other than any Lien imposed by ERISA or the Code in connection with a Plan) incurred or deposits made (i) in connection with workers' compensation, unemployment insurance and other types of social security, or (ii) to secure (or to obtain letters of credit that secure) the performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, performance bonds, purchase, construction or sales contracts and other similar obligations, in each case not incurred or made in connection with the borrowing of money, the obtaining of advances or credit or the payment of the deferred purchase price of property; (d) any attachment or judgment Lien, unless the judgment it secures shall not, within sixty (60) days after the entry thereof, have been discharged or execution thereof stayed pending appeal, or shall not have been discharged within sixty (60) days after the expiration of any such stay; (e) leases or subleases granted to others, easements, rights-of-way, restrictions and other similar charges or encumbrances, in each case incidental to, and not interfering with, the ordinary conduct of the business of the Company or any Subsidiary; and (f) Liens incurred to secure the Debt (other than subordinated Debt) of the Company outstanding in compliance with Section 9.2. For the purposes of this Section 9.4, any Person becoming a Subsidiary after the date of this Agreement shall be deemed to have incurred all of its then outstanding Liens at the time it becomes a Subsidiary, and any Person extending, renewing or refunding any Debt secured by any Lien shall be deemed to have incurred such Lien at the time of such extension, renewal or refunding. 9.5 Investments, Guaranties, etc. The Company will not, and will not permit any Subsidiary to, directly or indirectly make or own any Investment in any Person, or create or become or be liable with respect to any Guaranty, except: (a) the Company and its Subsidiaries may make and own Investments in (i) marketable direct obligations issued or unconditionally guaranteed by the United States of America or issued by any agency thereof maturing within one year from the date of acquisition thereof, (ii) marketable direct obligations issued by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof maturing within one year from the date of acquisition thereof and having as at any date of determination the highest rating obtainable from either Standard & Poor's Corporation or Moody's Investors Service, Inc., 24 (iii) commercial paper maturing no more than 270 days from the date of creation thereof and having as at any date of determination the highest rating obtainable from either Standard & Poor's Corporation or Moody's Investors Service, Inc., (iv) certificates of deposit maturing within one year from the date of acquisition thereof issued by commercial banks incorporated under the laws of the United States of America or any state thereof or the District of Columbia, each having as at any date of determination combined capital and surplus of not less than $300,000,000 ("Permitted Banks") or a foreign branch thereof, (v) bankers' acceptances eligible for rediscount under requirements of The Board of Governors of the Federal Reserve System and accepted by Permitted Banks, (vi) obligations of the type described in clauses (i) through (iv) above purchased from a securities dealer designated as a "primary dealer" by the Federal Reserve Bank of New York or a Permitted Bank as counterparty pursuant to a repurchase agreement obligating such counterparty to repurchase such obligations not later than fourteen (14) days after the purchase thereof and which provides that the obligations which are the subject thereof are held for the benefit of the Company and its Subsidiaries by a custodian which is a Permitted Bank and which is not the counterparty to the repurchase agreement in question, and (vii) the securities of any investment company registered under the Investment Company Act of 1940 which is a "money market fund" within the meaning of regulations of the Securities and Exchange Commission, or an interest in a pooled fund maintained by a Permitted Bank having comparable investment restrictions; (b) the Company and its Wholly-Owned Subsidiaries may make and own Investments in any Wholly-Owned Subsidiary or any Person which simultaneously therewith becomes a Wholly-Owned Subsidiary, if such Wholly-Owned Subsidiary or such Person is a corporation organized under the laws of the United States or any state thereof or the District of Columbia or Canada or Mexico and substantially all of whose assets are located and substantially all of whose business is conducted within the United States; (c) the Company's Subsidiaries may become and remain liable with respect to Guaranties of the Notes set forth in the Guaranty Agreement; and (d) the Company's Subsidiaries may become and remain liable with respect to Guaranties of the obligations of the Company under the Credit Agreement. Notwithstanding the foregoing, no Guaranty (other than those guaranties described in clauses (c) and (d) above) shall be permitted by this Section 9.5 unless either the maximum dollar amount of the obligation being guaranteed is readily ascertainable by the terms of such obligation or the agreement or instrument evidencing such Guaranty specifically limits the dollar amount of the maximum exposure of the guarantor thereunder. 9.6 Restricted Payments. The Company will not, and will not permit any Subsidiary to, directly or indirectly declare, order, pay, make or set apart any sum or property for any Restricted Payment. 9.7 Transactions with Affiliates. The Company will not, and will not permit any Subsidiary to, directly or indirectly, engage in any transaction (or series of related transactions) material to the Company 25 or any of its Subsidiaries (including, without limitation, the purchase, sale or exchange of assets or the rendering of any service) with any Affiliate of the Company, except upon fair and reasonable terms that are no less favorable to the Company or such Subsidiary, as the case may be, than those which might be obtained, in the good faith judgment of the Company, in an arm's length transaction at the time from Persons which are not such an Affiliate. 9.8 Consolidation, Merger, Sale of Assets, etc. The Company will not, and will not permit any Subsidiary to, directly or indirectly, (a) acquire any Person or all or substantially all of the assets of any Person whether by purchase, consolidation, merger or otherwise, or consolidate with or merge into any other Person or permit any other Person to consolidate with or merge into the Company, except that if no Event of Default shall have occurred and be continuing: (i) any Subsidiary may consolidate with or merge into the Company or a Wholly-Owned Subsidiary if the Company or such Wholly-Owned Subsidiary, as the case may be, shall be the surviving corporation and if, immediately after giving effect to such transaction, no condition or event shall exist which constitutes an Event of Default or Potential Event of Default; (ii) any corporation (other than a Subsidiary) may consolidate with or merge into the Company if the Company shall be the surviving corporation and if, immediately after giving effect to such transaction, (x) no condition or event shall exist which constitutes an Event of Default or Potential Event of Default, (y) substantially all of the assets of the Company shall be located and substantially all of its business shall be conducted within the United States, and (z) the Company could incur at least $1.00 of additional Debt in compliance with Section 9.2; (iii) any corporation may consolidate with or merge into any Subsidiary, or any Subsidiary may consolidate with or merge into another corporation, if the surviving corporation shall be a Wholly-Owned Subsidiary following the consolidation or merger, and if, immediately after giving effect to the transaction, (x) no condition or event shall exist which constitutes an Event of Default or Potential Event of Default, (y) substantially all of the assets of such Wholly Owned Subsidiary shall be located and substantially all of its business shall be conducted within the United States, and (z) the Company could incur at least $1.00 of additional Debt in compliance with Section 9.2; and (iv) the Company may consolidate with or merge into any other corporation if (x) the surviving corporation is a corporation organized and existing under the laws of the United States of America or a state thereof, with substantially all of its assets located and substantially all of its business conducted within the United States, (y) such corporation expressly assumes, by an agreement satisfactory in substance and form to the holders of a Supermajority in Interest of the Notes (which agreement may require the delivery in connection with such assumption of such opinions of counsel as such holders may reasonably require), the obligations of the Company under this Agreement and under the Notes, (z) immediately after giving effect to such transaction (and such assumption) (A) such corporation shall not be liable with respect to any Debt or allow its property to be subject to any Lien which it could not become liable with respect to or allow its property to become subject to under this Agreement on the date of such transaction, (B) such corporation could incur at least $1.00 of additional Debt in compliance with Section 9.2 and (C) no condition or event shall exist which constitutes an Event of Default or a Potential Event of Default; and 26 (v) with the prior written consent of a Supermajority in Interest of the Notes, the Company or any Subsidiary of the Company may acquire any Person or all or substantially all of the assets of any Person whether by purchase, consolidation, merger or otherwise; or (b) sell, lease, abandon or otherwise dispose of all or substantially all its assets, except that: (i) any Subsidiary may sell, lease or otherwise dispose of all or substantially all its assets to the Company or a Wholly-Owned Subsidiary; (ii) the Company may sell, lease or otherwise dispose of all or substantially all its assets to any corporation into which the Company could be consolidated or merged in compliance with subdivision (a)(iv) of this Section 9.8, provided that (x) each of the conditions set forth in such subdivision (a)(iv) shall have been fulfilled, and (y) no such disposition shall relieve the Company from its obligations under this Agreement or the Notes; or (c) sell, lease, abandon or otherwise dispose of any of its assets (except in a transaction permitted by subdivision (b) or (d) of this Section 9.8), except that (i) the Company and its Subsidiaries may sell their inventory in the ordinary course of business, (ii) the Company and its Subsidiaries may dispose of obsolete equipment in the ordinary course of business and (iii) the Company may sell up to twenty (20) stores (including the seventeen (17) stores currently under contract or negotiation) as more particularly described on Schedule 9.8 hereto, and the holders of the Notes shall release without payment any Lien securing the Notes against such stores at the time of any such sale; or (d) enter into, or permit any of its Subsidiaries to enter into, any sale and leaseback transaction; provided that the Company may enter into a sale and leaseback transaction if (i) the Company could have (a) incurred Debt pursuant to Section 9.2 in an amount equal to the capitalized amount in respect of such transaction that would appear on the balance sheet of the Company in accordance with GAAP relating to such sale and leaseback transaction and (b) incurred a Lien to secure such Debt pursuant to the provisions of Section 9.4 hereof, and (ii) the gross cash proceeds of such sale and leaseback transaction are at least equal to the fair market value (as determined in good faith by the Board of Directors and set forth in an Officers' Certificate delivered to the holders of the Notes) of the property that is the subject of such sale and leaseback transaction. 9.9 Subsidiary Stock and Indebtedness. Except for the pledge of shares of stock of any Subsidiary of the Company pursuant to the Credit Agreement, the Company will not, and will not permit any Subsidiary to: (a) directly or indirectly sell, assign, pledge or otherwise dispose of any shares of stock of (or warrants, rights or options to acquire stock of) any Subsidiary except to a Wholly-Owned Subsidiary or a corporation that becomes a Wholly-Owned Subsidiary upon consummation of the transaction, or as directors' qualifying shares if required by applicable law; (b) permit any Subsidiary directly or indirectly to sell, assign, pledge or otherwise dispose of any shares of stock of (or warrants, rights or options to acquire stock of) any other Subsidiary, except to the Company or a Wholly-Owned Subsidiary or as directors' qualifying shares if required by applicable law; 27 (c) permit any Subsidiary to have outstanding any shares of Preferred Stock other than shares of Preferred Stock which are owned by the Company or a Wholly-Owned Subsidiary; or (d) permit any Subsidiary directly or indirectly to issue or sell (including, without limitation, in connection with a merger or consolidation of a Subsidiary otherwise permitted-by Section 9.8(a)) any shares of its stock (or warrants, rights or options to acquire its stock) except to the Company, a Wholly-Owned Subsidiary or a corporation that becomes a Wholly-Owned Subsidiary upon consummation of the transaction, or as directors' qualifying shares if required by applicable law. 9.10 Corporate Existence, Business and Franchise Relations. The Company will at all times preserve and keep in full force and effect its corporate existence, and rights and franchises deemed material to its business (including, without limitation, the operations of the Company's franchisees), and those of each of its Subsidiaries, except as otherwise specifically permitted by Section 9.8 and except that the corporate existence of any Subsidiary may be terminated if, in the good faith judgment of the Board, such termination is in the best interest of the Company and is not disadvantageous to the holders of the Notes. The Company will not, and will not permit any Subsidiary to, engage in any business other than the business of (a) selling party goods and supplies and rendering related services and (b) conducting its franchise operations for the purposes described in the foregoing clause (a). The Company shall use commercially reasonable efforts to maintain good business relationships with its franchisees. Without limiting the generality of the foregoing, the Company shall at all times conduct itself in a manner consistent with the terms of its franchise agreements. 9.11 Payment of Taxes and Claims. The Company will, and will cause each Subsidiary to, pay all material taxes, assessments and other governmental charges imposed upon it or any of its properties or assets or in respect of any of its franchises, business, income or profits before any penalty or interest accrues thereon, and all claims (including, without limitation, claims for labor, services, materials and supplies) for sums which have become due and payable and which by law have or might become a Lien upon any of its properties or assets, provided that no such charge or claim need be paid if being contested in good faith by appropriate proceedings promptly initiated and diligently conducted and if such reserves or other appropriate provision, if any, as shall be required by GAAP shall have been made therefor. 9.12 Compliance with ERISA. The Company will not, and will not permit any Subsidiary to, (a) engage in any transaction in connection with which the Company or any Subsidiary could be subject to either a civil penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed by Section 4975 of the Code, terminate or withdraw from any Plan (other than a Multiemployer Plan) in a manner, or take any other action with respect to any such Plan (including, without limitation, a substantial cessation of operations within the meaning of Section 4062(e) of ERISA), which could result in any liability of the Company or any Subsidiary to the PBGC or to a trustee appointed under Section 4042(b) or (c) of ERISA, incur any liability on account of a termination of a Plan under Section 4064 of ERISA, fail to make full payment when due of all amounts which, under the provisions of any Plan, the Company or any Subsidiary is required to pay as contributions thereto, or permit to exist any accumulated funding deficiency, whether or not waived, with respect to any Plan (other than a Multiemployer Plan), if, in any such case, such penalty or tax or such liability, or the failure to make such payment, or the existence of such deficiency, as the case may be, could have a Material Adverse Effect; (b) permit the present value of all vested accrued benefits under all Plans maintained at such time by the Company and any Subsidiary (other than Multiemployer Plans) guaranteed under Title IV 28 of ERISA to exceed the current value of the assets of such Plans allocable to such vested accrued benefits by more than $1,000,000; (c) permit the aggregate complete or partial withdrawal liability under Title IV of ERISA with respect to Multiemployer Plans incurred by the Company and its Subsidiaries to exceed $1,000,000; or (d) permit the sum of (i) the amount by which the current value of all vested accrued benefits referred to in subdivision (b) of this Section 9.12 exceeds the current value of the assets referred to in such subdivision (b) and (ii) the amount of the aggregate incurred withdrawal liability referred to in subdivision (c) of this Section 9.12 to exceed $1,000,000. For the purposes of subdivisions (c) and (d) of this Section 9.12, the amount of the withdrawal liability of the Company and its Subsidiaries at any date shall be the aggregate present value of the amount claimed to have been incurred less any portion thereof as to which the Company reasonably believes, after appropriate consideration of possible adjustments arising under Sections 4219 and 4221 of ERISA, it and its Subsidiaries will have no liability, provided that the Company shall obtain prompt written advice from independent actuarial consultants supporting such determination. 9.13 Maintenance of Properties; Insurance. The Company will maintain or cause to be maintained in good repair, working order and condition all properties used or useful in the business of the Company and its Subsidiaries and from time to time will make or cause to be made all appropriate repairs, renewals and replacements thereof, except where the failure to make any repairs, renewals, or replacements would not have a Material Adverse Effect. The Company will maintain or cause to be maintained, with financially sound and reputable insurers, insurance with respect to its properties and business and the properties and business of its Subsidiaries against loss or damage of the kinds customarily insured against by corporations of established reputation engaged in the same or similar business and similarly situated, of such types and in such amounts as are customarily carried under similar circumstances by such other corporations. Such insurance may be subject to co-insurance, deductibility or similar clauses which, in effect, result in self-insurance of certain losses, provided that such self-insurance is in accord with the approved practices of corporations similarly situated and adequate insurance reserves are maintained in connection with such self-insurance. 9.14 Additional Guaranties. The Company shall cause any Person that hereafter becomes a Subsidiary of the Company to execute and deliver to the holders of the Notes a Guaranty Agreement with respect to the obligations of the Company hereunder and under the Notes, substantially in the form of Exhibit K, with such changes to such form as may be appropriate to reflect the identity and circumstances of the guarantor. 9.15 Other Loan Agreements. The Company will not enter into any amendment or modification of the Credit Agreement that would: (a) accelerate the amount or the time of any prepayment or payment of the principal amount of Debt outstanding under the Credit Agreement, the Bank Standstill Agreement or the Vendor Standstill Agreement; or (b) provide for per annum interest rates payable on the Debt outstanding under the Credit Agreement at any time in excess of 1.0% over the per annum interest rates that would otherwise be payable 29 on such Debt at such time in accordance with the applicable provisions of the Credit Agreement as in effect on the Closing Date; or (c) reduce the commitment of the lenders under the Credit Agreement (other than the Bank Standstill Agreement) to provide revolving credit loans to the Company or it Subsidiaries (excluding a voluntary reduction by the Company of the revolving credit commitment pursuant to the terms of the Credit Agreement); without, in each case, obtaining the prior written consent to such amendment or change of a Supermajority in Interest of the Notes. 9.16 Restrictions Affecting Subsidiaries. The Company will not, and will not permit any Subsidiary to, create or otherwise permit to exist any restriction on the ability of any Subsidiary to pay dividends or make any other distributions on its capital stock or any other interest in its profits owned by the Company or any other Subsidiary, or pay any Debt owed to the Company or any other Subsidiary, other than restrictions contained in the Credit Agreement as in effect on the date of this Agreement. 9.17 Insurance. The Company will: (a) Keep all of its property insured by insurance companies having A.M. best ratings of not less than A- which are licensed to do business in all jurisdictions in which assets of the Company and its Subsidiaries are located against loss or damage by fire or other risk usually insured against under extended coverage endorsement and theft, burglary, and pilferage, together with such other hazards as a Supermajority in Interest of the Notes may reasonably from time to time request, in amounts satisfactory to a Supermajority in Interest of the Notes and naming the holders of the Notes as loss payee thereon pursuant to a loss payee clause satisfactory to the holders of the Notes; (b) Maintain at all times liability insurance coverage against such risks and in such amounts as are customarily maintained by others in similar businesses, such insurance to be carried by insurance companies having A.M. best ratings of not less than A- which are licensed to do business in the states in which the Company and its Subsidiaries conduct business, including without limitation statutory limits of worker's compensation insurance including employer's liability to the extent required by means all provisions of statutes, rules, regulations and orders of any the government of the United States of America, any other nation or any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government, applicable to the Company, and all orders and decrees of all courts and arbitrators in proceedings or actions in which the Company in question is a party; and (c) Deliver certificates of insurance for such policy or policies to the holders of the Notes, containing endorsements, in form satisfactory to such holders, providing that the insurance shall not be cancelable, except upon thirty (30) days' prior written notice to such holders. In the event of any termination or notice of nonpayment by any insurer with respect to any policy or any lapse in the coverage thereunder, the Company shall cause such insurer to give prompt written notice to the holders of the Notes of the occurrence of such termination, nonpayment or lapse. 9.18 Use of Proceeds. The Company will apply the proceeds of the sale of the Securities, promptly following the Closing, (a) to acquire seasonal inventory for "Halloween" in the aggregate amount of approximately $20,000,000 as set forth on Schedule 9.18, (b) to the repayment of outstanding debt under the Credit Agreement/Bank Standstill Agreement in the aggregate amount of approximately $4,000,000, (c) to the payment of fees and expenses incurred in connection with the offering and sale of the 30 Securities in the aggregate amount of approximately $450,000 and (d) the balance of approximately $5,550,000 to working capital needs. 9.19 Relocation; Use of Name. The Company will not relocate its executive offices, open new places of business or relocate existing places of business, maintain any of its assets or records with respect to its assets at any other locations than those locations presently kept or maintained, as set forth on Schedule 5.16 hereto, or use any corporate name (other than its own) or any fictitious name, except, in each case, upon thirty (30) days prior written notice to the holders of the Notes and after the delivery to the holders of financing statements in form satisfactory to a Supermajority in Interest of the Notes. 9.20 Seasonal Orders. The Company shall employ the manual oversight inventory ordering and inventory management processes for the "Halloween" season as the Company used in previous years, including, but not limited to, utilizing materially the same degree of participation by the Company's executive management. 9.21 Option Grants. The Company may not grant options to purchase more than 500,000 shares of Common Stock at an exercise price of less than $10.00 per share (subject to adjustment for stock splits, stock dividends and similar transactions). 9.22 Note Ratings. The Company shall use its best efforts to maintain credit ratings or "shadow ratings" from a nationally recognized rating service with respect to each tranche of the Notes and shall promptly advise the holders of the Notes of the initial ratings and any changes in such ratings. 9.23 Governance. The Company shall comply with its obligations in Section 4 of the Investor Rights Agreement. 9.24 Audited Financial Statements. The Company agrees to provide to you, not later than September 30, 1999, audited consolidated financial statements of the Company and its consolidated Subsidiaries for the fiscal period from January 1, 1998 to July 3, 1999, which statements shall be prepared in accordance with GAAP and fairly present, as of the date thereof and for the periods covered thereby the financial position and results of operations of the Company and its Subsidiaries. 9.25 Payments to Vendors. The Company shall not prior to January 15, 2000 make any payments to its vendors or trade creditors that are parties to the Vendor Standstill Agreement in respect of the remaining amounts due to such vendors or creditors as of the date hereof other than payments of the Trade Notes (as such term is defined in the Vendor Standstill Agreement) in accordance with their terms. 9.26 Perfection of Security Interest. Within five (5) Business Days of the Closing, the Company and Party City Michigan shall have taken all actions necessary to provide a perfected security interest in favor of you and the Other Purchasers in the Collateral (as such term is defined in the Security Agreement (Parent) and the Security Agreement (Subsidiary)), including, without limitation, the execution of UCC-1 Financing Statements for all facilities of the Company and Party City Michigan. 9.27 Year 2000 Compliance. The Company agrees to use its best efforts to implement the tests and other steps identified on Schedule 5.24 in a timely manner in order to comply with the requirements of clauses (a) through (d) of Section 5.24. 10. Events of Default; Acceleration. If any of the following conditions or events ("Events of Default") shall occur and be continuing: 31 (a) if the Company shall default in the payment of any principal of or premium, if any, on any Note when the same becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration or otherwise; or (b) if the Company shall default in the payment of any interest on any Note for more than five days after the same becomes due and payable; or (c) if the Company shall default in the performance of or compliance with any term contained in Sections 9.3, 9.6 and 9.8; or (d) if the Company shall default in the performance of or compliance with any term contained in this Agreement or the other Operative Agreements other than Sections 9.3, 9.6 and 9.8 and such default shall not have been remedied within thirty (30) days after such failure shall first have become known to any officer of the Company or written notice thereof shall have been received by the Company from any holder of any Note; or (e) if any representation or warranty made in writing by or on behalf of the Company in this Agreement or in any instrument furnished in compliance with this Agreement shall prove to have been false or incorrect in any material respect on the date as of which made; or (f) if the Company or any Subsidiary shall default (as principal or guarantor or other surety) in the payment of any principal of or premium or interest on any Debt which is outstanding in a principal amount of at least $500,000 (other than the Notes), or if any event shall occur or condition shall exist in respect of any such Debt which is outstanding in a principal amount of at least $500,000 or under any evidence of any such Debt or of any mortgage, indenture or other agreement relating thereto, and as a result of such default, event or condition the holder or holders of such Debt shall have caused the acceleration of the payment of such Debt before its regularly scheduled dates of payment; or (g) if any Guaranty Agreement shall be unenforceable or shall cease to be in full force and effect as to any Subsidiary; or (h) if a final judgment or judgments shall be rendered against the Company or any Subsidiary for the payment of money in excess of $500,000 (in excess of insurance coverage) in the aggregate and any one of such judgments shall not be discharged or execution thereon stayed pending appeal, within sixty (60) days after entry thereof, or, in the event of such a stay, such judgment shall not be discharged within sixty (60) days after such stay expires; or (i) if the Company or any Subsidiary shall (i) be generally not paying its debts as they become due, (ii) file, or consent by answer or otherwise to the filing against it of, a petition for relief or reorganization or arrangement or any other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction, (iii) make an assignment for the benefit of its creditors, (iv) consent to the appointment of a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, (v) be adjudicated insolvent or (vi) take corporate action for the purpose of any of the foregoing; or (j) if a court or governmental authority of competent jurisdiction shall enter an order appointing, without consent by the Company or any Subsidiary, a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, or if an order for relief shall be entered in any case or proceeding for liquidation or reorganization or otherwise to 32 take advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding-up or liquidation of the Company or any Subsidiary, or if any petition for any such relief shall be filed against the Company or a Subsidiary and such petition shall not be dismissed within sixty (60) days; or (k) if any default or "event of default" under the Credit Agreement, the Bank Standstill Agreement or, the Vendor Standstill Agreement shall have occurred and be continuing; (l) if any restatement is made of the Company's financial statements for periods prior to and including the 1997 fiscal year, including, without limitation, its previously reported earnings, for any time periods prior to the date thereof; and (m) any breach of the provisions of paragraphs 2, 3 or 4 of the Letter Agreement; then, (x) upon the occurrence of any Event of Default described in subdivision (i) or (j) of this Section 10 with respect to the Company (other than such an Event of Default described in clause (i) of subdivision (i) or described in clause (vi) of subdivision (i) by virtue of the reference in such clause (vi) to such clause (i)), the unpaid principal amount of and accrued interest on the Notes shall automatically become due and payable or (y) upon the occurrence of any other Event of Default, a Supermajority in Interest of the Notes may at any time (unless all defaults shall theretofore have been remedied) at its option, by written notice or notices to the Company, declare all the Notes to be due and payable, whereupon all of the Notes shall forthwith mature and become due and payable, together with interest accrued thereon, all without presentment, demand, protest or notice, which are hereby waived; provided that during the existence of an Event of Default described in subdivision (a), (b) or (c) of this Section 10, then, irrespective of whether a Supermajority in of the Notes shall have declared all the Notes to be due and payable pursuant to this Section 10, any holder of the Notes may, at its option, by notice in writing to the Company, declare the Notes then held by such holder to be due and payable, whereupon the Notes then held by such holder shall forthwith mature and become due and payable, together with interest accrued thereon, without presentment, demand, protest or notice, all of which are hereby waived. In the event the Notes become due and payable pursuant to the preceding paragraph (an "Acceleration Event"), all amounts paid by the Company to you and to the Other Purchasers on account of the Notes shall be allocated pro rata among all of the Notes at the time outstanding in proportion to the unpaid principal amounts thereof (the "Proportional Amount"). To the extent any holder of Notes receives amounts from the Company following an Acceleration Event in excess of such holder's Proportional Amount, such holder will hold in trust for the benefit of the other holders of Notes such excess amounts. Further, such holder may not dispose of such excess amounts other than to the other holders of Notes or the Company for the benefit of such other holders so as to provide for the pro rata distribution of all payments from the Company upon the Notes following the Acceleration Event. Following any Acceleration Event the holder of any Note may request an Officers' Certificate certifying that the Company has made payments in compliance with this paragraph of this Section 10. At any time after the principal of, and interest accrued on, any or all of the Notes are declared due and payable, a Supermajority in Interest of the Notes by written notice to the Company may rescind and annul any such declaration and its consequences if (x) the Company has paid all overdue interest on the Notes, the principal of and premium, if any, on any Notes which have become due otherwise than by reason of such declaration, and interest on such overdue principal and premium and (to the extent permitted by applicable law) any overdue interest in respect of the Notes at the rate of 450 basis points above the rate of interest on the face of the Notes (or, if less than such rate, the highest legal rate permitted 33 by applicable law), (y) all Events of Default, other than non-payment of amounts which have become due solely by reason of such declaration, and all conditions and events which constitute Events of Default or Potential Events of Default have been cured or waived pursuant to Section 18, and (z) no judgment or decree has been entered for the payment of any monies due pursuant to the Notes or this Agreement; but no such rescission and annulment shall extend to or affect any subsequent Event of Default or Potential Event of Default or impair any right consequent thereon. 11. Remedies on Default, etc. In case any one or more Events of Default or Potential Events of Default shall occur and be continuing, the holder of any Note at the time outstanding may proceed to protect and enforce the rights of such holder by an action at law, suit in equity or other appropriate proceeding, whether for the specific performance of any agreement contained herein or in such Note, or for an injunction against a violation of any of the terms hereof or thereof, or in aid of the exercise of any power granted hereby or thereby or by law or otherwise. The Company agrees to pay all reasonable costs and expenses (including, without limitation, (a) the reasonable fees and out-of-pocket expenses of, prior to an Event of Default, one (1) legal counsel for the agent for the holders of the Notes and one (1) additional legal counsel for the holder of the Notes and, following an Event of Default, one (1) legal counsel for the agent for the holders of the Notes and one (1) additional legal counsel for each of the holders of the Notes and (b) the fees and Administrative Expenses (as such term is defined in the Collateral Agency Agreement) of the Collateral Agent under the Collateral Agency Agreement and the other Operative Agreements)) incurred by the Collateral Agent or the holders of the Notes in connection with interpreting, administering, preserving, enforcing or exercising any rights or remedies under this Agreement, the Notes or any other Operative Agreement, whether or not legal action is instituted. Any fees, expenses or other charges which the Collateral Agent or the holders of the Notes are entitled to receive from the Company hereunder shall constitute an obligation of the Company pursuant to the Notes, and shall bear interest until paid at a rate per annum equal to the maximum rate in effect and permitted hereunder. In case of a default in the payment of any principal of or premium, if any, or interest on any Note, the Company will pay to the holder thereof such further amount as shall be sufficient to cover the cost and expenses of collection, including, without limitation, reasonable attorneys' fees, expenses and disbursements. No course of dealing and no delay on the part of any holder of any Note in exercising any right, power or remedy shall operate as a waiver thereof or otherwise prejudice such holder's rights, powers or remedies. No right, power or remedy conferred by this Agreement or by any Note upon any holder thereof shall be exclusive of any other right, power or remedy referred to herein or therein or now or hereafter available at law, in equity, by statute or otherwise. 12. Security Interest and Intercreditor Arrangements. 12.1 Security Agreement. The Notes and any obligation with respect to any Guaranty of the Notes shall be secured by liens in substantially all of the Company's assets as provided in the Security Agreement (Parent) and the Security Agreement (Subsidiary) and the other agreements listed in Section 4.5 and shall have the relative rights and priorities set forth in the Intercreditor Agreement. 12.2 Intercreditor Agreement. The Notes have the relative rights and priorities set forth in the Intercreditor Agreement. 34 13. Definitions. 13.1 Certain Definitions. As used herein the following terms have the following respective meanings (refer to Section 13.2 for location of other definitions): Affiliate: any Person directly or indirectly controlling or controlled by or under common control with the Company or any Subsidiary, including (without limitation) any Person beneficially owning or holding ten percent (10.0%) or more of any class of voting securities of the Company or any Subsidiary or any other corporation of which the Company or any Subsidiary owns or holds ten percent (10.0%) or more of any class of voting securities, provided that, for purposes of this definition, "control" (including, with correlative meanings,, the terms "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or by contract or otherwise, and provided, further, that neither you nor any other Person which is an institution shall be deemed to be an Affiliate of the Company or any of its Subsidiaries solely by reason of ownership of the Notes or other securities issued in exchange for the Notes or by reason of having the benefits of any agreements or covenants of the Company contained in this Agreement. Board: the Board of Directors of the Company or a committee of three or more directors lawfully exercising the relevant powers of the Board. Business Day: any day except a Saturday, a Sunday or other day on which commercial banks in Cleveland, Los Angeles, or New York City are required or authorized by law to be closed. Capital Expenditure: any amount paid or incurred in connection with the purchase of real estate, plant, machinery, equipment, computer hardware or software or other similar expenditure (including all renewals, improvements and replacements thereto, and all obligations under any lease of any of the foregoing) which would be required to be capitalized and shown on the consolidated balance sheet of the Company in accordance with GAAP. Capital Lease: as applied to any Person, any lease of any property (whether real, personal or mixed) by such Person as lessee which would, in accordance with GAAP, be required to be classified and accounted for as a capital lease on a balance sheet of such Person, other than, in the case of the Company or a Subsidiary, any such lease under which the Company or a Wholly-Owned Subsidiary is the lessor. Capital Lease Obligation: with respect to any Capital Lease, the amount of the obligation of the lessee thereunder which would, in accordance with GAAP, appear on a balance sheet of such lessee in respect of such Capital Lease. CERCLA: the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended from time to time. Change of Control: other than through the exercise of the Warrants by you or the Other Purchasers, (a) the sale, lease or transfer of all or substantially all of the Company's assets to any Person or "group" (within the meaning of Section 13(d) of the Exchange Act (hereinafter a "Group")) together with any Affiliates thereof, (b) the liquidation of the Company, (c) the acquisition by any Person or Group, together with any Affiliates thereof, of in excess of fifty percent (50%) of the Voting Stock of the 35 Company, or (d) the first day on which a majority of the members of the Board are not Continuing Directors. Code: the Internal Revenue Code of 1986, as amended from time to time. Collateral Agency Agreement: that certain Collateral Agency Agreement dated as of August 16, 1999 by and among you and the Other Purchasers. Collateral Agent: the "Collateral Agent" as defined in and serving from time to time under the Collateral Agency Agreement. Consolidated EBITDA: for any period, without duplication, (i) Consolidated Net Income, plus (ii) for such period, any Interest Expense deducted in the determination of Consolidated Net Income; plus (iii) any income, ad valorem, and franchise taxes paid in cash and deducted in the determination of Consolidated Net Income; plus (iv) amortization and depreciation and other non-cash charges deducted in the determination of Consolidated Net Income for such period; plus (v) immaterial extraordinary losses, losses on sales of assets (other than sales of inventory in the ordinary course of business) and unrealized gains from changes in currency; plus (vi) non-recurring non-cash charges of the Company or its Subsidiaries for Permitted Acquisitions; plus the additional reserves, if any, established by the Company pursuant to Section 2 of the Letter Agreement; plus (vii) restructuring costs including related professional fees in calendar year 1999 only (which amount shall not exceed $10.4 million); minus (viii) the sum for such period of interest income, extraordinary gains, gains from sales of assets (other than sales of inventory in the ordinary course of business) and unrealized losses from changes in currency; provided that, if the Company or any of its Subsidiaries completes a Permitted Acquisition during any Reference Period, EBITDA for such Reference Period shall be reasonably determined on a pro forma basis, as if such Permitted Acquisition was completed on the first day thereof. Consolidated Net Income: for any period, the aggregate of the net income (or net loss) of the Company and its Subsidiaries for such period, determined on a consolidated basis without duplication in accordance with GAAP. Continuing Director: as of any date of determination, any member of the Board who (i) was a member of the Board on the date hereof or (ii) was nominated for election or elected to the Board with the approval of a majority of the Continuing Directors who were members of such Board at the time of such nomination or election. Copyrights: registered copyrights, copyright applications and unregistered copyrights. Credit Agreement: that certain Credit Agreement, dated as of April 22, 1998, among the Company, PNC Bank, National Association, as Agent, and the lenders named therein, and all related notes, guaranties, security documents, instruments and agreements executed in connection therewith and all other Loan Documents thereunder, as such loan agreement and related documents and Loan Documents may be amended, restated, supplemented, extended, renewed, refinanced, refunded, replaced or otherwise modified from time to time (subject to the approval requirements of Section 9.15) whether or not with the same agent, trustee, representative, lenders or holders, and, so long as the aggregate principal amount of Debt at any time outstanding thereunder does not exceed the amount of the $54 million, irrespective of any changes in the terms and conditions thereof. Debt: as applied to any Person (without duplication): 36 (a) any indebtedness for borrowed money which such Person has directly or indirectly created, incurred or assumed; and (b) any indebtedness secured by any Lien in respect of property owned by such Person, whether or not such Person has assumed or become liable for the payment of such indebtedness; and (c) any indebtedness with respect to which such Person has become directly or indirectly liable and which represents or has been incurred to finance the purchase price (or a portion thereof) of any property or services or business acquired by such Person, whether by purchase, consolidation, merger or otherwise; and (d) any indebtedness of any other Person of the character referred to in subdivision (a), (b) or (c) of this definition with respect to which the Person whose Debt is being determined has become liable by way of a Guaranty. Environmental Laws: federal, state, provincial, local and foreign laws, rules and regulations relating to emissions, discharges, releases or threatened releases of pollutants, contaminants, chemicals or industrial, toxic or hazardous substances or wastes into the environment (including, without limitation, air, surface water, ground water or land), or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, chemicals or industrial, toxic or hazardous substances or wastes. ERISA: the Employee Retirement Income Security Act of 1974, as amended from time to time. Exchange Act: the Securities Exchange Act of 1934, as amended from time to time. Funded Debt: collectively, Senior Secured Funded Debt and all other Debt of the Company or a Subsidiary, in excess of $1,000,000, that is or should be, in accordance with GAAP, characterized as senior long-term Debt on a consolidated balance sheet of the Company and its Subsidiaries, including, without limitation, (a) Debt with a final maturity more than six (6) months after the creation of thereof, (b) any portion thereof included in current liabilities, (c) any Debt outstanding under the Notes, (d) any Debt outstanding under the Seasonal Trade Debt, (e) any Debt outstanding under the Trade Notes (as such term is defined in the Vendor Standstill Agreement), (f) any Debt outstanding under the Credit Agreement and (g) Debt outstanding under another revolving credit or similar agreement providing for borrowings (and renewals and extensions thereof) over a period of more than one year, notwithstanding that any such debt may be payable on demand or within one year after the creation thereof; but excluding contingent reimbursement obligations with respect to any letter of credit issued for the account of the Company or a Subsidiary (unless, and to the extent, such reimbursement obligations mature as a result of any payment by the issuer of such letter of credit). GAAP: means generally accepted accounting principles consistently applied and maintained throughout the period indicated Government Securities means direct obligations of, or obligations guaranteed by, the United States of America, and the payment for which the United States pledges its full faith and credit. Guaranty: as applied to any Person, any direct or indirect liability, contingent or otherwise, of such Person with respect to any indebtedness, lease, dividend or other obligation of another, 37 including, without limitation, any such obligation directly or indirectly guaranteed, endorsed (otherwise than for collection or deposit in the ordinary course of business) or discounted or sold with recourse by such Person, or in respect of which such Person is otherwise directly or indirectly liable, including, without limitation, any such obligation in effect guaranteed by such Person through any agreement (contingent or otherwise) to purchase, repurchase or otherwise acquire such obligation or any security therefor, or to provide funds for the payment or discharge of such obligation (whether in the form of loans, advances, stock purchases, capital contributions or otherwise), or to maintain the solvency or any balance sheet or other financial condition of the obligor of such obligation, or to make payment for any products, materials or supplies or for any transportation or services regardless of the non-delivery or nonfurnishing thereof, in any such case if the purpose or intent of such agreement is to provide assurance that such obligation will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such obligation will be protected against loss in respect thereof. The amount of any Guaranty shall be equal to the outstanding principal amount of the obligation guaranteed. Interest Expense: for any period, the total amount of all charges for the use of funds (whether characterized as interest, debt service or otherwise) payable during such period with respect to all Debt of the Company or a Subsidiary for such period, including the amortization of debt discount and the amortization of all fees payable in connection with the incurrence of such Debt, provided that for the quarter ended September 30, 1999 Interest Expense shall be the total of cash paid during such period. Investment: as applied to any Person, any direct or indirect purchase or other acquisition by such Person of stock or other securities of any other Person, or any direct or indirect loan, advance (other than advances to employees for moving and travel expenses, drawing accounts and similar expenditures in the ordinary course of business) or capital contribution by such Person to any other Person, including all Debt and accounts receivable from such other Person which are not current assets or did not arise from sales to such other Person in the ordinary course of business. In computing the amount involved in any Investment at the time outstanding, (a) undistributed earnings of, and interest accrued in respect of Debt owing by, such other Person accrued after the date of such Investment shall not be included, (b) there shall not be deducted from the amounts invested in such other Person any amounts received as earnings (in the form of dividends, interest or otherwise) on such Investment or as loans from such other Person, and (c) unrealized increases or decreases in value, or write-ups, write-downs or write-offs, of Investments in such other Person shall be disregarded. Letter Agreement: means that certain letter, dated the date hereof, from the Company to the Purchasers. Lien: as to any Person, any mortgage, lien, pledge, adverse claim, charge, security interest or other encumbrance in or on, or any interest or title of any vendor, lessor, lender or other secured party to or of such Person under any conditional sale or other title retention agreement or Capital Lease with respect to, any property or asset owned or held by such Person, or the signing or filing of a financing statement which names such Person as debtor, or the signing of any security agreement authorizing any other party as the secured party thereunder to file any financing statement. Loan Documents: means the Credit Agreement and the documents identified therein as the "Loan Documents" thereunder. Material Adverse Effect: shall mean any material adverse effect or change in the condition (financial or other), business, results of operations, prospects, assets, liabilities or operations of the Company and its Subsidiaries considered as a whole or on the ability of the Company to consummate the 38 transactions contemplated hereby, or any event or condition which would, with the passage of time, constitute a material adverse effect or material adverse change. Multiemployer Plan: any Plan which is a "multiemployer plan" (as such term is defined in Section 4001(a)(3) of ERISA). Net Debt: the principal outstanding from time to time under the Credit Agreement (including the Loan Documents) and the Seasonal Trade Debt, and any obligation with respect to any Guaranty of any such amounts, and net of cash balances of the Company. Officers' Certificate: a certificate executed on behalf of the Company by (a) the Chairman of the Board of Directors (if an officer) or its President or one of its Vice Presidents and (b) its Treasurer, one of its Assistant Treasurers or its Chief Financial Officer. Operative Agreements: the Notes, the Warrants, the Intercreditor Agreement, that certain Collateral Agency Agreement and the agreements listed in Section 4.5. PBGC: the Pension Benefit Guaranty Corporation or any governmental authority succeeding to any of its functions. Permitted Acquisition: acquisitions which are approved in advance in writing by a Supermajority in Interest of the Notes (including by way of merger, consolidation or amalgamation) by the Company or a Subsidiary of the Company of the capital stock or other ownership interest of, or all or substantially all of the assets of, any Person (or, in the case of an acquisition of assets, (a) substantially all of the assets within a reasonably identifiable business unit of such Person or (b) Proprietary Rights of such person), but only to the extent that (x) the Person whose capital stock has been acquired or (y) the assets acquired reasonably relate to or are synergistic with, the business of (or a business related to) selling party goods and supplies and rendering related services and conducting franchise operations for such purposes. Person: a corporation, an association, a partnership, an organization, a business, an individual, a government or political subdivision thereof or a governmental agency. Plan: an "employee pension benefit plan" (as defined in Section 3 of ERISA) which is or has been established or maintained, or to which contributions are or have been made, by the Company or any of its Related Persons, or an employee pension benefit plan as to which the Company or any of its Related Persons would be treated as a contributory sponsor under Section 4069 of ERISA if it were to be terminated. Potential Event of Default: any condition or event which, with notice or lapse of time or both, would become an Event of Default. Preferred Stock: as applied to any corporation, shares of such corporation which shall be entitled to preference or priority over any other shares of such corporation in respect of either the payment of dividends or the distribution of assets upon liquidation or both. Proprietary Rights: all of the Company's Copyrights, Trademarks, patents, technology rights and licenses, computer software (including without limitation any source or object codes therefor or documentation relating thereto), trade secrets, franchises, know-how, inventions, designs, specifications, plans, drawings and intellectual property rights. 39 Reference Period: with respect to any date of computation under Section 9.3, the period of four consecutive calendar quarters ending on such date. Related Person: any trade or business that, together with the Company as of any relevant measuring date under ERISA, was or is required to be treated as a single employer under Section 414 of the Code. Restricted Payment: (a) any declaration or payment of any dividend or other distribution, direct or indirect, on account of any shares of any class of capital stock of the Company, now or hereafter outstanding, except a dividend payable solely in shares of stock of the Company and (b) any redemption, retirement, purchase or other acquisition, direct or indirect, of any shares of any class of capital stock of the Company now or hereafter outstanding, or of any warrants, rights or options to acquire any such shares, except to the extent that the consideration therefor consists of shares of stock of the Company. Securities Act: the Securities Act of 1933, as amended from time to time. Senior Secured Funded Debt: Funded Debt of the Company which would, in accordance with GAAP, constitute long-term debt and have a security interest in any of the assets of the Company or any of its Subsidiaries, including, without limitation, (a) any Debt with a maturity more than one year after the creation of such Debt, (b) any portion thereof included in current liabilities, (c) any Debt outstanding under the Notes, (d) any Debt outstanding under the Seasonal Trade Debt, (e) any Debt outstanding under the Credit Agreement and (f) any Debt outstanding under another revolving credit or similar agreement providing for borrowings (and any renewals and extensions thereof) over a period of more than one year, notwithstanding that any such indebtedness may be payable on demand or within one year after the creation thereof, and excluding all Debt solely by and between two or more of the Company or its Subsidiaries. Subsidiary: any corporation at least fifty percent (50.0%) (by number of votes) of the Voting Stock of which is at the time owned by the Company or by one or more Subsidiaries or by the Company and one or more Subsidiaries. A Supermajority in Interest of the Notes: at least eighty-one (81.0%) in aggregate principal amount of the then outstanding Notes, considered together, subject to Section 14.4. Trademarks: registered trademarks, registered service marks, trademark and service mark applications and unregistered trademarks and service marks. Seasonal Trade Debt: the debt of the Company in an amount not to exceed $15,000,000 in favor of any of its vendors which is secured by that certain Seasonal Vendor Security Agreement dated as of August 16, 1999. Voting Stock: with reference to any corporation, stock of any class or classes (or equivalent interests), if the holders of the stock of such class or classes (or equivalent interests) are ordinarily, in the absence of contingencies, entitled to vote for the election of the directors (or Persons performing similar functions) of such corporation, even though the right so to vote has been suspended by the happening of such a contingency. Wholly-Owned: as applied to any Subsidiary, a Subsidiary all the outstanding shares (other than directors' qualifying shares, if required by law) of every class of stock of which are at the time 40 owned by the Company or by one or more Wholly-Owned Subsidiaries or by the Company and one or more Wholly-Owned Subsidiaries. 13.2 Table of Definitions. Certain terms are defined elsewhere in this Agreement as set forth below.
Term Section ---- ------- "A Notes" 1(a) ------- "B Notes" 1(b) ------- "Bank Standstill Agreement" 4.7(a) ------------------------- "C Notes" 1(c) ------- "Closing" 3.1 ------- "Closing Date" 3.1 ------------ "Common Stock" 1(e) ------------ "Company" Introduction ------- "Company Leases" 5.26 -------------- "Covenant Defeasance" 7.2(c) ------------------- "D Notes" 1(d) ------- "ERF" 2.4 --- "Events of Default" 10 ----------------- "FICA" 5.22 ---- "Guaranty Agreement" 4.8 ------------------ "Indemnified Party" 20 ----------------- "Intercreditor Agreement" 4.6 ----------------------- "Investor Rights Agreement" 4.4 ------------------------- "Legal Defeasance" 7.2(b) ---------------- "Notes" 1 ----- "Other Purchasers" 2.1 ---------------- "Party City Michigan" 4.5 ------------------- "Permitted Banks" 9.5(a) --------------- "Projections" 5.4(b) ----------- "Securities" 1 ---------- "Security Agreement (Parent)" 2.4 --------------------------- "Security Agreement (Subsidiary)" 4.5(b) ------------------------------- "Senior Debt Event of Default" 12.3(c) ---------------------------- "Senior Debt Event of Default Blockage Period" 12.3(c) -------------------------------------------- "Senior Debt Event of Default Notice" 12.3(c) ----------------------------------- "tranche" 1 ------- "Trustee" 7.2(a) ------- "Vendor Standstill Agreement" 4.7(b) --------------------------- "Warrants" 1(i) --------
14. Registration, Transfer and Substitution of Notes; Action by Noteholders. 14.1 Note Register; Ownership of Notes. The Company will keep at its principal office a register in which the Company will provide for the registration of Notes and the registration of transfers of Notes. The Company may treat the Person in whose name any Note is registered on such register as the owner thereof for the purpose of receiving payment of the principal of and the premium, if any, and interest on such Note and for all other purposes, whether or not such Note shall be overdue, and the Company shall 41 not be affected by any notice to the contrary. All references in this Agreement to a "holder" of any Note shall mean the Person in whose name such Note is at the time registered on such register. 14.2 Transfer and Exchange of Notes. Any transfer of any Note or interest therein may be effected only by the surrender of such Note to the Company at its principal office. Upon surrender of any Note for registration of transfer or for exchange to the Company at its principal office, the Company at its expense will execute and deliver in exchange therefor a new Note or Notes in denominations of at least $100,000 (except one Note may be issued in a lesser principal amount if the unpaid principal amount of the surrendered Note is not evenly divisible by, or is less than $100,000), as requested by the holder or transferee, which aggregate the unpaid principal amount of such surrendered Note, registered as such holder or transferee may request, dated so that there will be no loss of interest on such surrendered Note and otherwise of like tenor. The Company will not be required to register the transfer of any Note unless the transferee is an insurance company, bank, investment company, investment partnership or other vehicle, CLO, CBO or similar fund, or other type of financial institution, or a registered broker-dealer and transferee agrees to make representations which are substantially similar to those in Sections 6.1 and 6.2. 14.3 Replacement of Notes. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of any Note and, in the case of any such loss, theft or destruction of any Note, upon delivery of an indemnity bond in such reasonable amount as the Company may determine (or, in the case of any Note held by you or another institutional holder or your or its nominee, of an indemnity agreement from you or such other holder) or, in the case of any such mutilation, upon the surrender of such Note for cancellation to the Company at its principal office, the Company at its expense will execute and deliver, in lieu thereof, a new Note in the unpaid principal amount of such lost, stolen, destroyed or mutilated Note, dated so that there will be no loss of interest on such Note and otherwise of like tenor. Any Note in lieu of which any such new Note has been so executed and delivered by the Company shall not be deemed to be an outstanding Note for any purpose of this Agreement. 14.4 Notes held by Company Deemed Not Outstanding. For the purposes of determining whether the holders of the Notes of the requisite principal amount at the time outstanding have taken any action authorized by this Agreement with respect to the giving of consents or approvals or with respect to acceleration upon an Event of Default, any Notes directly or indirectly owned by the Company or any of its Subsidiaries or Affiliates shall be disregarded and deemed not to be outstanding. 15. Payments on Notes. The Company will pay all sums becoming due on any Note for principal, premium, if any, and interest by the method and at the address specified for such purpose in Annex I, or by such other method or at such other address as the holder of any such Note shall have from time to time specified to the Company in writing for such purpose, without the presentation or surrender of such Note or the making of any notation thereon, except that any Note paid or prepaid in full shall be surrendered to the Company at its principal office. Prior to any sale or other disposition of any Note held by you or your nominee you will, at your election, either endorse thereon the amount of principal paid thereon and the last date to which interest has been paid thereon or surrender such Note to the Company in exchange for a new Note or Notes pursuant to Section 15. The Company will afford the benefits of this Section 15.2 to any institutional investor which is the direct or indirect transferee of any Note purchased by you under this Agreement and which has made the same agreement relating to such Note as you have made in this Section 15. 16. Expenses, etc.. Whether or not the transactions contemplated by this Agreement shall be consummated, the Company will pay all expenses described in Section 3.2 hereof up to (a) a maximum of $200,000 should the Closing not occur or (b) a maximum of $400,000 should the Closing occur. In 42 addition to the foregoing and not subject to the limitations of the preceding sentence, the Company will (i) pay to you all reasonable legal and consultant fees and expenses incurred by you in connection with the amendment or enforcement of this Agreement or the Securities or in protecting your interests in any bankruptcy, receivership, reorganization, insolvency or liquidation proceeding by or affecting the Company and (ii) pay to the Collateral Agent its fees and Administrative Expenses (as such term is defined in the Collateral Agency Agreement) under the Collateral Agency Agreement and the other Operative Agreements. The Company also will pay, and will save you and each holder of any Notes harmless from, all claims in respect of the fees, if any, of brokers and finders and any and all liabilities with respect to any taxes (including interest and penalties) which may be payable in respect of the execution and delivery of this Agreement, the issue of the Securities and any amendment or waiver under or in respect of this Agreement or the Notes. The obligation of the Company under this Section 16 shall survive any disposition or payment of the Securities and the termination of this Agreement. 17. Survival of Representations and Warranties. All representations and warranties contained in this Agreement or made in writing by or on behalf of the Company in connection with the transactions contemplated by this Agreement shall survive the execution and delivery of this Agreement, any investigation at any time made by you or on your behalf, the purchase of the Securities by you under this Agreement and any disposition or payment of the Securities. All statements contained in any certificate or other instrument delivered by or on behalf of the Company pursuant to this Agreement or in connection with the transactions contemplated by this Agreement shall be deemed representations and warranties of the Company under this Agreement. 18. Amendments and Waivers. Any term of this Agreement or of the Securities may be amended and the observance of any term of this Agreement or of the Securities may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the Company and a Supermajority in Interest of the Notes, provided that, without the prior written consent of the holders of all the Notes at the time outstanding (subject to Section 14.4), no such amendment or waiver shall (a) change the maturity or the principal amount of, or reduce the rate or change the time of payment of interest on, or change the amount or the time of payment of any principal or premium payable on any prepayment of, any Note, or change the amount or the time of payment of any fee payable hereunder, (b) reduce the aforesaid percentages of the principal amount of the Notes the holders of which are required to consent to any such amendment or waiver, (c) change the percentage of the principal amount of the Notes the holders of which may declare the Notes to be due and payable as provided in Section 10, (d) modify the proviso to the first sentence of Section 10, or (e) decrease the percentage of the principal amount of the Notes the holders of which may rescind and annul any such declaration as provided in Section 10. Any amendment or waiver effected in accordance with this Section 18 shall be binding upon each holder of any Note at the time outstanding, each future holder of any Note and the Company. 19. Notices, etc. Except as otherwise provided in this Agreement, notices and other communications under this Agreement 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 you, at the address set forth in Annex I or at such other address as you shall have furnished to the Company in writing, except as otherwise provided in Section 15.2 with respect to payments on Notes held by you or your nominee, or (b) if to any other holder of any Note, 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 at the beginning of this 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 you and each such other holder in writing. Any notice so addressed and delivered by facsimile 43 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 (3) business days after being so mailed. 20. Indemnification. The Company will indemnify and hold harmless each of you and each person who controls you within the meaning of the Securities Act or the Exchange Act and each of your subsidiaries and each of your and their respective directors, officers, employees, principals, members, agents, advisors and partners (any and all of whom are referred to as the "Indemnified Party") from and against any and all losses, claims, damages and liabilities, whether joint or several (including all legal fees or other expenses reasonably incurred by one counsel for any Indemnified Party in connection with the preparation for or defense of any pending or threatened third party claim, action or proceeding, whether or not resulting in any liability), to which such Indemnified Party may become subject under any applicable federal or state law or otherwise, caused by or arising out of, or allegedly caused by or arising out of, this Agreement or any transaction contemplated hereby or thereby (including, without limitation, any failure to purchase the Securities by reason of Section 3.4), other than, with respect to any Indemnified Party, losses, claims, damages or liabilities that are the result of any representation made by such Indemnified Party in Section 6 or the result of the gross negligence or willful misconduct of such Indemnified Party. This section is not intended to provide to any Indemnified Party an additional means of enforcement against the Company of the Debt evidenced by the Notes. Promptly after receipt by an Indemnified Party of notice of any claim, action or proceeding with respect to which an Indemnified Party is entitled to indemnity hereunder, such Indemnified Party will notify the Company of such claim or the commencement of such action or proceeding, provided that the failure of an Indemnified Party to give notice as provided herein shall not relieve the Company of its obligations under this Section 20 with respect to such Indemnified Party, except to the extent that the Company is actually prejudiced by such failure. The Company will assume the defense of such claim, action or proceeding and will employ counsel satisfactory to the Indemnified Party and will pay the fees and expenses of such counsel. Notwithstanding the preceding sentence, the Indemnified Party will be entitled, at the expense of the Company, to employ counsel separate from counsel for the Company and for any other party in such action if the Indemnified Party reasonably determines upon advice of counsel that a conflict of interest or other reasonable basis exists which makes representation by counsel chosen by the Company not advisable, but the Company will not be obligated to pay the fees and expenses of more than one counsel for all Indemnified Parties. 21. Miscellaneous. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto, whether so expressed or not, and, in particular, shall inure to the benefit of and be enforceable by any holder or holders at the time of the Notes or any part thereof. Except as stated in Section 17, this Agreement embodies the entire agreement and understanding between you and the Company and supersedes all prior agreements and understandings relating to the subject matter hereof. This Agreement and the Notes shall be construed and enforced in accordance with and governed by the law of the State of New York. The headings in this Agreement are for purposes of reference only and shall not limit or otherwise affect the meaning hereof. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. [SIGNATURES APPEAR ON THE FOLLOWING PAGE] 44 EX-10.1 8 INVESTOR RIGHTS AGREEMENT EXECUTION COPY PARTY CITY CORPORATION ------------------ INVESTOR RIGHTS AGREEMENT ------------------ Dated as of August 16, 1999 TABLE OF CONTENTS Page 1. Certain Definitions......................................................1 2. Investor Representations.................................................1 3. Registration Rights......................................................1 3.1 Requested Registration................................................1 3.2 Company Registration..................................................1 3.3 Registration on Form S-3..............................................1 3.4 Limitations on Subsequent Registration Rights.........................1 3.5 Expenses of Registration..............................................1 3.6 Registration Procedures...............................................1 3.7 Indemnification.......................................................1 3.8 Information by Holder.................................................1 3.9 Rule 144 Reporting....................................................1 3.10 Transfer of Registration Rights.......................................1 3.11 Termination of Rights.................................................1 4. Governance...............................................................1 4.1 Resignation of Current Directors......................................1 4.2 Election of Directors; Company Actions................................1 4.3 Election of Directors; Stockholder Actions............................1 4.4 Committee of the Board; Annual Meeting................................1 4.5 Liability Insurance...................................................1 5. Investor Restrictions....................................................1 5.1 Restrictions..........................................................1 5.2 Lapse of Restrictions.................................................1 6. Rights to Co-Invest......................................................1 6.1 General...............................................................1 6.2 Qualified Offeree.....................................................1 6.3 Exemptions............................................................1 6.4 Termination of Co-Investment Rights...................................1 7. Miscellaneous............................................................1 7.1 Assignment............................................................1 7.2 Third Parties.........................................................1 7.3 Future Investors......................................................1 7.4 Governing Law.........................................................1 7.5 Counterparts..........................................................1 7.6 Notices...............................................................1 7.7 Severability..........................................................1 7.8 Amendment and Waiver..................................................1 7.9 Effect of Amendment or Waiver.........................................1 7.10 Rights of Holders.....................................................1 7.11 Delays or Omissions...................................................1 INVESTOR RIGHTS AGREEMENT THIS INVESTOR RIGHTS AGREEMENT (the "Agreement") is made as of August 16, 1999 by and among Party City Corporation, a Delaware corporation (the "Company"), the persons set forth on the Schedule of Investors attached hereto as Annex I (the "Investors") and certain stockholders and/or optionholders of the Company identified on the Schedule of Company Stockholders attached hereto as Annex II (the "Company Stockholders"). RECITALS The Company is issuing certain warrants (the "Warrants") to purchase shares of its common stock, par value $.01 per share ("Common Stock"), and certain notes of the Company to the Investors pursuant to one or more Securities Purchase Agreements dated as of August 16, 1999 by and among the Company and the Investors (each such agreement being of the same form and referred to herein as the "Purchase Agreement"). This Agreement shall become effective from and after the Closing (as such term is defined in the Purchase Agreement). 1. Certain Definitions. As used in this Agreement, the following terms shall have the following respective meanings: "Commission" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, or any similar successor federal statute, and the rules and regulations thereunder, all as the same shall be in effect from time to time. "Fully-Diluted Common Stock" shall mean all of the issued and outstanding Common Stock of the Company, assuming conversion, exercise or exchange of all outstanding convertible, exercisable or exchangeable securities, options, warrants and similar instruments into or for Common Stock (regardless of whether such convertibles securities are at such time convertible, exercisable or exchangeable). All such calculations shall be appropriately adjusted for stock splits, stock dividends and other similar events. "Holder" shall mean (a) any Investor holding Registrable Securities and (b) any person holding Registrable Securities to whom the rights under this Agreement have been transferred in accordance with Section 3.10 hereof. "Initiating Holders" shall mean any Investors or transferees of Investors under Section 3.10 hereof who in the aggregate are Holders of not less than twenty percent (20%) of the Registrable Securities and who propose to register securities, the aggregate offering price of which, net of underwriting discounts and commissions, exceeds $2,500,000. "Person" shall mean a corporation, an association, a partnership, an organization, a business, an individual, a government or political subdivision thereof or a governmental agency. "Public Event" shall mean the earlier to occur of (a) the first public offering of the Common Stock of the Company after the date hereof to the general public which is effected pursuant to a registration statement filed with, and declared effective by, the Commission under the Securities Act or (b) the first listing (or relisting) of the Common Stock with the Nasdaq National Market or any national securities exchange after the date hereof. The terms "register," "registered" and "registration" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of the effectiveness of such registration statement. "Registration Expenses" shall mean all expenses incurred by the Company in complying with Sections 3.1, 3.2 and 3.3 hereof, including, without limitation, all registration, qualification, listing and filing fees, printing expenses, escrow fees, fees and disbursements of counsel for the and the Holders, blue sky fees and expenses, and the expense of any special audits incident to or required by any such registration. "Registrable Securities" shall mean (a) the shares of Common Stock issuable to any Investor upon exercise of the Warrants, (b) any other shares of Common Stock held by any Investor from time to time after the date hereof, and (c) any Common Stock of the Company issued or issuable in respect of the shares of Common Stock described in clauses (a) and (b) above, or other securities issued or issuable with respect to such shares of Common Stock upon any stock split, stock dividend, recapitalization or similar event, provided, however, that shares of Common Stock or other securities shall only be treated as Registrable Securities if and so long as they have not been (i) sold to or through a broker or dealer or underwriter in a public distribution or a public securities transaction, (ii) sold in a transaction exempt from the registration and prospectus delivery requirements of the Securities Act under Section 4(1) thereof so that all transfer restrictions and restrictive legends with respect thereto are removed upon the consummation of such sale, or (iii) transferred in a transaction pursuant to which the registration rights are not also assigned in accordance with Section 3.10 hereof. As used herein, the term "Registrable Securities" shall also include the Warrants provided that only the shares of Common Stock issuable upon exercise of the Warrants need be registered by the Company pursuant to Section 3 hereof. "Securities Act" shall mean the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder or any similar federal statute and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "Selling Expenses" shall mean all underwriting discounts, selling commissions and stock transfer taxes applicable to the securities registered by the Holders. "Supermajority in Interest" shall mean (a) in the case of Warrantholders, at least eight-one percent (81.0%) in aggregate amount of Registrable Securities (as listed on Annex I hereto) and (b) in the case of Investors, at least eighty-one percent (81.0%) in principal amount of the then outstanding Notes (as such term is defined in the Purchase Agreement). "Warrantholder" shall mean the holder of any Warrant. 2. Investor Representations. Each Investor hereby represents, warrants, acknowledges and agrees as follows: (a) .....the Securities (as such term is defined in the Purchase Agreement) issued to such Investor pursuant to the Purchase Agreement are being acquired for such Investor's own account for investment purposes only and not with a view to any public resale, public distribution or public offering thereof within the meaning of the Securities Act or any state securities or blue sky laws, and such Securities will not be sold or otherwise disposed of except in compliance with the Securities Act and state securities or blue sky laws or in reliance upon an exemption therefrom; and (b)......the Investor is an "accredited investor" within the meaning of Rule 501 promulgated under the Securities Act. 3. Registration Rights. 3.1. Requested Registration. (a) Request for Registration. If the Company shall receive from Initiating Holders a written request that the Company effect any registration, qualification or compliance, the Company will: (i) promptly give written notice of the proposed registration, qualification or compliance to all other Holders; and (ii) promptly use its best efforts to effect such registration, qualification or compliance (including, without limitation, the execution of an undertaking to file post-effective amendments, appropriate qualification under applicable blue sky or other state securities laws and appropriate compliance with applicable regulations issued under the Securities Act and any other governmental requirements or regulations) as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any Holder or Holders joining in such request as are specified in a written request received by the Company within fifteen (15) days after receipt of such written notice from the Company; provided, however, that the Company shall not be obligated to take any action to effect any such registration, qualification or compliance pursuant to this Section 3.1: (1) In any particular juris- diction in which the Company would be required to execute a general consent to service of process in effecting such registration, qualification or compliance unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act; (2) Prior to the date which is six (6) months following the effective date of the Public Event; (3) After (A) the Company has effected one (or more) registrations pursuant to this Section 3.1(a) which have included the Registrable Securities of each and every Investor who holds or has held at any time at least twenty-five percent (25%) of the aggregate number of Registrable Securities subject to this Agreement as set forth on Annex I hereto, (B) such registrations have been declared or ordered effective and (C) the securities offered pursuant to such registrations have been sold; or (4) If the Company shall furnish to such Holders a certificate, signed by the President or Chief Executive Officer of the Company, stating that in the good faith judgment of the Board of Directors the filing of a registration statement in the near future with respect to the proposed registration would have a material adverse effect on the Company, then the Company's obligation to use its best efforts to register, qualify or comply under this Section 3.1 shall be deferred for a period not to exceed sixty (60) days from the date of receipt of written request from the Initiating Holders; provided, however, that the Company may not utilize this right more than once in any twelve (12) month period. Subject to the foregoing clauses (1) through (4), the Company shall file a registration statement covering the Registrable Securities so requested to be registered as soon as practicable after receipt of the request or requests of the Initiating Holders. (b) Underwriting. The Initiating Holders shall have the right to determine whether any registration under Section 3.1 shall be underwritten or not, and shall so specify in their initial notice to the Company. In the event that a registration pursuant to Section 3.1 is for a registered public offering involving an underwriting, the Company shall so advise the Holders as part of the notice given pursuant to Section 3.1(a)(i). The right of any Holder to registration pursuant to Section 3.1 shall be conditioned upon such Holder's participation in the underwriting arrangements required by this Section 3.1 and the inclusion of such Holder's Registrable Securities in the underwriting, to the extent requested, to the extent provided herein. The Company shall (together with all Holders proposing to distribute their securities through such underwriting) enter into and perform its obligations under an underwriting agreement in customary form with the managing underwriter selected for such underwriting selected by Supermajority in Interest of the Initiating Holders (which managing underwriter shall be reasonably acceptable to the Company). Notwithstanding any other provision of this Section 3.1, if the managing underwriter advises the Initiating Holders in writing that marketing factors require a limitation of the number of shares to be underwritten, then the Company shall so advise all Holders of Registrable Securities and the number of shares of Registrable Securities that may be included in the registration and underwriting shall be allocated among all Holders thereof in proportion, as nearly as practicable, to the respective amounts of Registrable Securities held by such Holders at the time of filing the registration statement. No Registrable Securities excluded from the underwriting by reason of the underwriter's marketing limitation shall be included in such registration. To facilitate the allocation of shares in accordance with the above provisions, the Company or the underwriters may round the number of shares allocated to any Holder to the nearest one hundred (100) shares. 3.2. Company Registration. (a) Notice of Registration. If at any time or from time to time the Company shall determine to register any of its equity securities, either for its own account or the account of a security holder or holders other than (i) a registration relating solely to employee benefit plans, (ii) a registration relating solely to a Commission Rule 145 transaction, or (iii) a registration on any registration form that does not permit secondary sales, the Company will: (i) promptly give to each Holder written notice thereof; and (ii) include in such registration (and any related qualification under blue sky laws or other compliance), and in any underwriting involved therein, all of the Registrable Securities specified in a written request or requests made within fifteen (15) days after receipt of such written notice from the Company by any Holder, but only to the extent that such inclusion will not diminish the number of securities included by the Company or by holders of the Company's securities who have demanded such registration. (b) Underwriting. If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to Section 3.2(a)(i). In such event, the right of any Holder to registration pursuant to Section 3.2 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company and the other holders distributing their securities through such underwriting) enter into and perform their obligations under an underwriting agreement in customary form with the managing underwriter selected for such underwriting by the Company. Notwithstanding any other provision of this Section 3.2, if the managing underwriter determines that marketing factors require a limitation of the number of shares to be underwritten, the managing underwriter may exclude all Registrable Securities from, or limit the number of Registrable Securities to be included in the registration and underwriting, on a pro rata basis based on the total number of securities (including, without limitation, Registrable Securities) entitled to registration pursuant to registration rights granted to the participating Holders by the Company. To facilitate the allocation of shares in accordance with the above provisions, the Company or the underwriters may round the number of shares allocated to any Holder or other holder to the nearest one hundred (100) shares. (c) Right to Terminate Registration. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section 3.2 prior to the effectiveness of such registration, whether or not any Holder has elected to include securities in such registration. 3.3. Registration on Form S-3. (a) The Company shall use its best efforts to qualify for registration on Form S-3 or any comparable or successor form. To that end the Company shall register (whether or not required by law to do so) its Common Stock under the Exchange Act in accordance with the provisions of the Exchange Act. (b) If any Holder or Holders of not less than twenty percent (20%) of the Registrable Securities then outstanding requests that the Company file a registration statement on Form S-3 (or any successor form to Form S-3) for a public offering of shares of the Registrable Securities, the reasonably anticipated aggregate price to the public of which, net of underwriting discounts and commissions, would exceed $2,500,000, and the Company is a registrant entitled to use Form S-3 to register the Registrable Securities for such an offering, the Company shall use its best efforts to cause such Registrable Securities to be registered for the offering on such form. The Company will (i) promptly give written notice of the proposed registration to all other Holders, and (ii) promptly use its best efforts to effect such registration (including, without limitation, the execution of an undertaking to file post-effective amendments, appropriate qualification under applicable blue sky or other state securities laws and appropriate compliance with applicable regulations issued under the Securities Act and any other governmental requirements or regulations) as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any Holder or Holders joining in such request as are specified in a written request received by the Company within fifteen (15) days after receipt of the written notice from the Company referred to in the preceding clause (i). The substantive provisions of Section 3.1(b) shall be applicable to each registration initiated under this Section 3.3. (c) Notwithstanding the foregoing, the Company shall not be obligated to take any action pursuant to this Section 3.3: (i) in any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, qualification or compliance unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act; or (ii) if the Company shall furnish to such Holder a certificate signed by the President or Chief Executive Officer of the Company stating that, in the good faith judgment of the Board of Directors the filing of a registration statement in the near future with respect to the proposed registration would have a material adverse effect on the Company, then the Company's obligation to use its best efforts to register, qualify or comply under this Section 3.3 shall be deferred for a period not to exceed sixty (60) days from the receipt of the request to file such registration by such Holder or Holders; provided, however, that the Company may not utilize this right more than once in any twelve (12) month period. 3.4. Limitations on Subsequent Registration Rights. From and after the date hereof, the Company shall not enter into any agreement granting any holder or prospective holder of any securities of the Company registration rights with respect to such securities unless such new registration rights, including standoff obligations, are subordinate to the registration rights granted to the Holders hereunder. 3.5. Expenses of Registration. All Registration Expenses incurred in connection with any registration pursuant to Sections 3.1, 3.2 or 3.3 shall be borne by the Company. Unless otherwise stated, all other Selling Expenses relating to securities registered on behalf of the Holders shall be borne by the Holders of the registered securities included in such registration pro rata on the basis of the number of shares so registered. 3.6. Registration Procedures. In the case of each registration, qualification or compliance effected by the Company pursuant to this Section 3, the Company will keep each Holder advised in writing as to the initiation of each registration, qualification and compliance and as to the completion thereof and, at its expense, the Company will: (a) Prepare and file with the Commission a registration statement with respect to such securities and use its best efforts to cause such registration statement to become and remain effective for at least ninety (90) days or until the distribution described in the registration statement has been completed; provided, however, that in the case of any registration of Registrable Securities on Form S-3 which are intended to be offered on a continuous or delayed basis, such period shall be extended, if necessary, to keep the registration statement effective until all such Registrable Securities are sold, provided that if Rule 415, or any successor rule under the Securities Act, permits an offering on a continuous or delayed basis, and provided further that if applicable rules under the Securities Act governing the obligation to file a post-effective amendment permit, in lieu of filing a post-effective amendment which (i) includes any prospectus required by Section 10(a)(3) of the Securities Act or (ii) reflects facts or events representing a material or fundamental change in the information set forth in the registration statement, the incorporation by reference of information required to be included in (i) and (ii) above shall be contained in periodic reports filed pursuant to Section 13 or 15(d) of the Exchange Act in the registration statement; (b) Furnish to the Holders participating in such registration and to the underwriters of the securities being registered such number of copies of the registration statement, preliminary prospectus, final prospectus and such other documents as such Holders and underwriters may reasonably request in order to facilitate the public offering of such securities; (c) Prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement; (d) Notify each seller of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading or incomplete in the light of the circumstances then existing, and at the request of any such seller, prepare and furnish to such seller a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchaser of such shares, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading or incomplete in the light of the circumstances then existing; (e) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions as shall be reasonably requested by the Holders, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions; (f) Cause all such Registrable Securities to be listed on each securities exchange on which similar securities issued by the Company are then listed; (g) Provide a transfer agent and registrar for all Registrable Securities and a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration; and (h) Make available for inspection by any Holder participating in such registration, any underwriter participating in any disposition pursuant to such registration, and any attorney or accountant retained by any such Holder or underwriter, all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers and directors to supply all information requested by any such Holder, underwriter, attorney or accountant in connection with such registration statement; provided, however, that such Holder, underwriter, attorney or accountant shall agree to hold in confidence and trust all information so provided. 3.7. Indemnification. (a) The Company will indemnify each Holder, each of its officers, principals, members, directors and partners, and each person controlling such Holder within the meaning of Section 15 of the Securities Act, with respect to which registration, qualification or compliance has been effected pursuant to this Section 3, and each underwriter, if any, and each person who controls any underwriter within the meaning of Section 15 of the Securities Act, against all expenses, claims, losses, damages or liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus, offering circular or other document, or any amendment or supplement thereto, incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, or any violation by the Company of any rule or regulation promulgated under the Securities Act applicable to the Company in connection with any such registration, qualification or compliance, and the Company will reimburse each such Holder, each of its officers and directors, and each person controlling such Holder, each such underwriter and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating, preparing or defending any such claim, loss, damage, liability or action, as such expenses are incurred, provided that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission or alleged untrue statement or omission, made in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such Holder, controlling person or underwriter and stated to be specifically for use therein. (b) Each Holder will, if Registrable Securities held by such Holder are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company, each of its directors and officers, each underwriter, if any, of the Company's securities covered by such registration statement, each person who controls the Company or such underwriter within the meaning of Section 15 of the Securities Act, and each other such Holder, each of its officers and directors and each person controlling such Holder within the meaning of Section 15 of the Securities Act, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company, such Holders, such directors, officers, persons, underwriters or control persons for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, as such expenses are incurred, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such Holder and stated to be specifically for use therein; provided that in no event shall any indemnity under this Section 3.7(b) exceed the net proceeds received by such Holder in such registration. (c) Each party entitled to indemnification under this Section 3.7 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld), and the Indemnified Party may participate in such defense at such party's expense; provided, however, that an Indemnified Party (together with all other Indemnified Parties which may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the fees and expenses to be paid by the Indemnifying Party, if representation of such Indemnified Party by the counsel retained by the Indemnifying Party would be inappropriate due to actual or potential differing interests between such Indemnified Party and any other party represented by such counsel in such proceeding. The failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 3 unless the failure to give such notice is materially prejudicial to an Indemnifying Party's ability to defend such action. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. (d) If the indemnification provided for in this Section 3.7 is held by a court of competent jurisdiction to be unavailable to an Indemnified Party with respect to any claim, loss, damage, liability or action referred to therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified Party hereunder, shall contribute to the amount paid or payable by such Indemnified Party as a result of such claim, loss, damage, liability or action in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party on the one hand and the Indemnified Party on the other in connection with the actions that resulted in such claim, loss, damage, liability or action, as well as any other relevant equitable considerations. The relative fault of the Indemnifying Party and of the Indemnified Party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact related to information supplied by the Indemnifying Party or by the Indemnified Party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Holders agree that it would not be just and equitable if contribution pursuant to this Section 3.7(d) were based solely upon the number of entities from whom contribution was requested or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 3.7(d). (e) The amount paid or payable by an Indemnified Party as a result of the losses, claims, damages and liabilities referred to above in this Section 3.7 shall be deemed to include any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any such action or claim, subject to the provisions of Section 3.7 hereof. Notwithstanding the provisions of this Section 3.7, no Holder shall be required to contribute any amount or make any other payments under this Agreement which in the aggregate exceed the net proceeds (after selling expenses) received by such Holder. No person guilty of fraudulent misrepresentation (within the meaning of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 3.8. Information by Holder. The Holder or Holders of Registrable Securities included in any registration shall furnish to the Company such information regarding such Holder or Holders, the Registrable Securities held by them and the distribution proposed by such Holder or Holders as the Company may reasonably request in writing and as shall be required in connection with any registration, qualification or compliance referred to in this Section 3. 3.9. Rule 144 Reporting. With a view to making available the benefits of certain rules and regulations of the Commission which may at any time permit the sale of the Registrable Securities to the public without registration, after such time as a public market exists for the Common Stock of the Company, the Company agrees, promptly following the completion of the Company's audit for the 18-month period ended July 3, 1999, to use its best efforts to: (a) Make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act, at all times after the effective date that the Company becomes subject to the reporting requirements of the Securities Act or the Exchange Act; and (b) File with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements). 3.10. Transfer of Registration Rights. The rights to cause the Company to register securities granted to any party hereto under Sections 3.1, 3.2 and 3.3 may be assigned to a transferee or assignee in connection with any transfer or assignment of Registrable Securities by such party (together with any affiliate); provided that (a) such transfer may otherwise be effected in accordance with applicable securities laws and (b) notice of such assignment is given to the Company. 3.11. Termination of Rights. The rights of any particular Holder to cause the Company to register securities under Sections 3.1, 3.2 and 3.3 shall terminate with respect to such Holder on the date that is seven (7) years after the date hereof or on the date on which all Registrable Securities held by such Holder can be sold in any 90-day period under Rule 144 (without regard to Rule 144(k)). 4. Governance. 4.1. Resignation of Current Directors. Immediately prior to the Closing (as such term is defined in the Purchase Agreement), one (1) member of the Company's Board of Directors shall resign from his position as director. 4.2. Election of Directors; Company Actions. (a) The Company agrees to take all actions necessary to enable (i) Tennenbaum & Co., LLC (or its transferree) to designate one (1) director for election to the Company's Board of Directors and (ii) TCO/Party City, LLC (or its transferee) to designate one (1) director for election to the Company's Board of Directors concurrent with the Closing. The Company further agrees to take all actions necessary to enable Supermajority in Interest of the Investors to designate additional directors for election to the Company's Board of Directors such that the number of directors nominated by the Investors pursuant to this Section 4.2 shall represent not less than thirty percent (30%) of the number of directors serving on the Company's Board of Directors at any time. (b) The Company shall exercise its best efforts to cause the nominees of the Investors pursuant to this Section 4.2 (the "Nominees") to be elected to the Board of Directors by the stockholders of the Company or otherwise cause to be expanded the size of the Board of Directors and cause to be appointed the Nominees as directors in accordance with the Company's Bylaws. This right shall continue until later of (i) the payment in full of each of the Notes (as such term is defined in the Purchase Agreement), (ii) the exercise in full of each of the Warrants, and (iii) the date that the Registrable Securities of the Holders represent less than ten percent (10.0%) of the issued and outstanding Common Stock of the Company. 4.3. Election of Directors; Stockholder Actions. Each Company Stockholder hereby agrees to vote all shares of capital stock of the Company entitled to vote owned or held of record by such Company Stockholder at any annual or special meeting in favor of, or take all action by written consent in lieu of any such meeting, necessary to ensure that the Nominees are elected as directors as contemplated in Section 4.2. In addition, each Company Stockholder agrees to vote all shares of capital stock of the Company owned or held of record by such Company Stockholder, or over which such Company Stockholder has voting control, upon any other matter arising under this Agreement submitted to a vote of the stockholders in a manner so as to implement the terms of this Agreement. 4.4. Committee of the Board; Annual Meeting. (a) The Company agrees to take all actions necessary to cause the Nominating Committee of the Board of Directors to consist of Messrs. Jack Futterman, Howard Levkowitz and Duayne Weinger. (b) The Company will use its best efforts to hold its 1999 Annual Meeting of stockholders and election of directors as soon as possible and in no event later than November 15, 1999. 4.5. Liability Insurance. Unless the Nominees have otherwise consented, for so long as the Nominees serve as directors of the Company, the Company shall maintain in effect the current policies of directors' and officers' liability insurance maintained by the Company and to the extent any claims are made against such insurance, shall increase the coverage amounts thereunder so as to maintain the same amount of insurance protection for the Nominees as existed immediately prior to any such claims assuming such claims are paid in full; provided that the Company may substitute therefor policies of the same or higher standard of coverage and amounts containing terms and conditions which are no less advantageous. In addition, from and after the Closing, the Company shall keep in effect provisions in its charter and bylaws providing for exculpation of director liability and indemnification of directors, officers, employees and agents at the Company to the extent that such persons are entitled thereto thereunder on the date hereof, which provisions shall not be amended, repealed or otherwise modified for so long as the Nominees serve as directors of the Company in any manner that would adversely affect the rights thereunder of any such individuals unless such modification is required by law. 5. Investor Restrictions. 5.1. Restrictions. Subject to Section 5.2, each Investor agrees that such Investor will not, directly or indirectly, take any of the following actions without the prior written consent of the Board of Directors of the Company: (a) Acquire or agree to acquire, publicly offer, or make any public proposal with respect to the possible acquisition of (i) beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act) of any securities of the Company; (ii) any substantial part of the Company's assets; or (iii) any rights or options to acquire any of the foregoing from any Person; (b) Make, or in any way participate, directly or indirectly, in any "solicitation" of "proxies" (as such terms are defined in the rules under 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; (c) Make any public announcement with respect to any transaction or proposed or contemplated transaction between the Company or any of its security holders and the Investor, including, without limitation, any tender or exchange offer, merger or other business combination or acquisition of a material portion of the assets of the Company; or (d) Publicly request the Company, directly or indirectly, to amend or waive any of the foregoing provisions of this Section 5. 5.2. Lapse of Restrictions. (a) The Investors shall be relieved of their obligations under Section 5.1 above if (a) the Company's Consolidated EBITDA (as such term is defined in the Purchase Agreement) for the year ended December 31, 1999 is less than $22,000,000 or (b) the Company's Consolidated EBITDA for the year ended December 31, 2000 is less than $32,000,000. Notice of the Company's Consolidated EBITDA shall be provided as set forth in Section 5.2(b) below. (b) As soon as reasonably practicable following the end of calendar years 1999 and 2000 (but not less than sixty (60) days thereafter), the Company shall prepare and deliver to the Investors a reasonably detailed calculation of Consolidated EBITDA for the applicable year. If the Investors disagree with the calculation of Consolidated EBITDA, the Investors shall give to the Company a notice (the "Dispute Notice") explaining in reasonable detail the basis of such disagreement within fifteen (15) business days after the Investor's receipt of the calculation of Consolidated EBITDA. The Company and the Investors shall use their commercially reasonable efforts for a period of fifteen (15) business days following a Dispute Notice to resolve any disagreement. If the Company and the Investors have been unable to resolve the disagreement by the end of such period, a mutually agreed upon independent public accounting firm (the "Arbitrator") shall be retained to make a determination on the matter in dispute. The determination of Consolidated EBITDA by the Arbitrator shall be final, binding and conclusive on the parties. The fees and expenses of the Arbitrator shall be borne equally by the Company, on the one hand, and the Investors, on the other hand. 6. Rights to Co-Invest. 6.1. General. If at any time the Company proposes to newly-issue for cash (a "proposed issuance") any of its equity securities (the "Company Securities"), then the Company shall, no later than forty-five (45) days prior to the consummation of such proposed issuance, give written notice to each of the Qualified Offeree (as defined in Section 6.2 below) of the proposed issuance. Such notice shall describe the proposed issuance and shall contain an offer to each Qualified Offeree to sell to such Qualified Offeree its pro rata portion of the Company Securities (which shall be a percentage equal to the percentage of the Fully-Diluted Common Stock held by such Qualified Offeree). If any such Qualified Offeree fails to accept such offer by written notice to the Company within fifteen (15) days following the date the Company's notice is received, the Company may proceed with such proposed issuance, free of any right on the part of such Qualified Offeree under this Section 6.1 in respect thereof. 6.2. Qualified Offeree. For purposes of this Section 6, a "Qualified Offeree" shall include Warrantholders and the holders of Common Stock issuable upon exercise of the Warrant who own beneficially (within the meaning of Rule 13d-3 under the Exchange Act) at least two percent (2.0%) of the outstanding Common Stock. 6.3. Exemptions. The purchase right granted by Section 6.1 shall not apply to: (1) any issuance of Company Securities in connection with a merger, consolidation, transfer of assets or other business combination involving the Company, or (ii) any issuance of Company Securities pursuant to an employee benefit plan of the Company. 6.4. Termination of Co-Investment Rights. The co- investment right provided under this Section 6 shall terminate on the date that is seven (7) years after the date hereof or the date on which the Qualified Offerees, in the aggregate, own beneficially (within the meaning of Rule 13d-3 under the Exchange Act less than two percent (2.0%) of the outstanding Common Stock. 7. Miscellaneous 7.1. Assignment. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties hereto. 7.2. Third Parties. Nothing in this Agreement, express or implied, is intended to confer upon any party, other than the parties hereto, and their respective successors and assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided herein. 7.3. Future Investors. Subject to Section 3.10, any person who acquires the Securities (as such term is defined in the Purchase Agreement) may become a party to this Agreement by execution and delivery to the Company of a counterpart of this Agreement. Upon delivery of such counterpart, (a) the signature pages and Annex I hereto shall be amended to reflect the name of such new party and (b) such new party shall thereafter be deemed an "Investor" for purposes of this Agreement. 7.4. Governing Law. This Agreement shall be governed by and construed under the laws of the State of New York without regard to choice of laws or conflict of laws provisions thereof. 7.5. Counterparts. This Agreement may be executed in two or more counterparts and signature pages may be delivered by facsimile, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 7.6. Notices. Any notice required or permitted by this Agreement shall be in writing and shall be deemed to have been duly given if delivered personally, or if mailed by certified mail, return receipt requested, postage prepaid, or if sent by overnight courier, or if sent by written telecommunication, addressed to the other party at (a) if to an Investor, at the address set forth in Annex I hereto, or (b) if to the Company, at 400 Commons Way, Rockaway, New Jersey 07866, to the attention of Corporate Secretary. 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 7.7. Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, portions of such provisions, or such provisions in their entirety, to the extent necessary, shall be severed from this Agreement, and the balance of this Agreement shall be enforceable in accordance with its terms. 7.8. Amendment and Waiver. Any provision of this Agreement may be amended with the written consent of the Company, Supermajority in Interest of the Investors and Supermajority in Interest of the Warrantholders; provided that (a) no such amendment shall impose or increase any liability or obligation on a Holder without the consent of such Holder and (b) no such amendment having a disproportionately adverse effect on any Holder in relation to the other Holders may be made without consent of such Holder. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each Holder of Registrable Securities and the Company. In addition, the Company may waive performance of any obligation owing to it, as to some or all of the Holders of Registrable Securities, or agree to accept alternatives to such performance, without obtaining the consent of any Holder of Registrable Securities. In the event that an underwriting agreement is entered into between the Company and any Holder, and such underwriting agreement contains terms differing from this Agreement, as to any such Holder the terms of such underwriting agreement shall govern. 7.9. Effect of Amendment or Waiver. The Investors and their successors and assigns acknowledge that by the operation of Section 6.8 hereof Supermajority in Interest of the Investors and Supermajority in Interest of the Warrantholders, acting in conjunction with the Company, will have the right and power to diminish or eliminate any or all rights pursuant to this Agreement. 7.10. Rights of Holders. Each party to this Agreement shall have the absolute right to exercise or refrain from exercising any right or rights that such party may have by reason of this Agreement, including, without limitation, the right to consent to the waiver or modification of any obligation under this Agreement, and such party shall not incur any liability to any other party or other Holder of any securities of the Company as a result of exercising or refraining from exercising any such right or rights. 7.11. Delays or Omissions. No delay or omission to exercise any right, power or remedy accruing to any party to this Agreement, upon any breach or default of the other party, shall impair any such right, power or remedy of such non-breaching party nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any party of any breach or default under this Agreement, or any waiver on the part of any party of any provisions or conditions of this Agreement, must be made in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement, or by law or otherwise afforded to any Holder, shall be cumulative and not alternative. [SIGNATURES APPEAR ON THE FOLLOWING PAGES] IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. PARTY CITY CORPORATION By: /s/ Thomas E. Larson ----------------------------- Name: Thomas E. Larson Title: Chief Financial Officer COUNTERPART SIGNATURE PAGE TO INVESTOR RIGHTS AGREEMENT INVESTOR: TENENBAUM & CO, LLC By: /s/ Michael E. Tennenbaum ------------------------------- Name: Michael E. Tennenbaum Its: Managing Member COUNTERPART SIGNATURE PAGE TO INVESTOR RIGHTS AGREEMENT INVESTOR: TCO/PARTY CITY, LLC By: Tennenbaum & Co., LLC Its: Managing Member By: /s/ Michael E. Tennebaum ------------------------------- Name: Michael E. Tennebaum Title: Managing Member COUNTERPART SIGNATURE PAGE TO INVESTOR RIGHTS AGREEMENT INVESTOR: GOLDMAN SACHS CREDIT PARTNERS L.P. By: /s/ John Urban --------------------------------- Name: John Urban Its: Authorized Signer COUNTERPART SIGNATURE PAGE TO INVESTOR RIGHTS AGREEMENT INVESTOR: GOLDMAN, SACHS & CO. By: /s/ John Urban --------------------------------- Name: John Urban Its: Authorized Signer COUNTERPART SIGNATURE PAGE TO INVESTOR RIGHTS AGREEMENT INVESTOR: ENHANCED RETAIL FUNDING, LLC By: /s/ Bradley W. Snyder --------------------------------- Name: Bradley W. Snyder Its: Vice President COUNTERPART SIGNATURE PAGE TO INVESTOR RIGHTS AGREEMENT INVESTOR: RICHMOND ASSOCIATES, L.P., a New York limited partnership By: MHM MANAGEMENT,INC., a New York corporation Its: General Partner By: /s/ John F. Clausen ----------------------------------- Name: John F. Clausen Title: Vice President COUNTERPART SIGNATURE PAGE TO INVESTOR RIGHTS AGREEMENT COMPANY STOCKHOLDER: JACK FUTTERMAN /s/ Jack Futterman ----------------------------- Signature ANNEX I SCHEDULE OF INVESTORS
- --------------------------------------------- -------------------------------- ------------------------------------------------- Shares of Common Stock Investor (subject to Warrants) Notes - --------------------------------------------- -------------------------------- ------------------------------------------------- - --------------------------------------------- -------------------------------- ------------------------------------------------- Tennenbaum & Co., LLC....................... 3,096,000 C Note in the principal amount of $2,250,000 D Note in the principal amount of $4,500,000 - --------------------------------------------- -------------------------------- ------------------------------------------------- - --------------------------------------------- -------------------------------- ------------------------------------------------- TCO/Party City, LLC......................... none A Note in the principal amount of $10,000,000 B Note in the principal amount of $5,000,000 - --------------------------------------------- -------------------------------- ------------------------------------------------- - --------------------------------------------- -------------------------------- ------------------------------------------------- Goldman Sachs & Co.......................... 2,867,000 none - --------------------------------------------- -------------------------------- ------------------------------------------------- - --------------------------------------------- -------------------------------- ------------------------------------------------- Goldman Sachs Credit Partners, L.P.......... C Note in the principal amount of $2,085,000 D Note in the principal amount of $4,165,000 - --------------------------------------------- -------------------------------- ------------------------------------------------- - --------------------------------------------- -------------------------------- ------------------------------------------------- Enhanced Retail Funding, LLC................ 688,000 C Note in the principal amount of $500,000 D Note in the principal amount of $1,000,000 - --------------------------------------------- -------------------------------- ------------------------------------------------- - --------------------------------------------- -------------------------------- ------------------------------------------------- Richmond Associates, L.P.................... 229,000 C Note in the principal amount of $165,000 D Note in the principal amount of $335,000 - --------------------------------------------- -------------------------------- ------------------------------------------------- - --------------------------------------------- -------------------------------- ------------------------------------------------- Total....................................... 6,888,000 - --------------------------------------------- -------------------------------- -------------------------------------------------
ANNEX II SCHEDULE OF COMPANY STOCKHOLDERS - ------------------------------------- ------------------------------------------ Shares of Common Stock Company Stockholder (Held Beneficially or of Record and/or subject to Options) - ------------------------------------- ------------------------------------------ - ------------------------------------- ------------------------------------------ Jack Futterman - ------------------------------------- ------------------------------------------ - ------------------------------------- ------------------------------------------ - ------------------------------------- ------------------------------------------ - ------------------------------------- ------------------------------------------ - ------------------------------------- ------------------------------------------ - ------------------------------------- ------------------------------------------ - ------------------------------------- ------------------------------------------ - ------------------------------------- ------------------------------------------ - ------------------------------------- ------------------------------------------ - ------------------------------------- ------------------------------------------ Total................................ - ------------------------------------- ------------------------------------------ EX-10.2 9 STANDSTILL AND FORBEARANCE AGREEMENT STANDSTILL AND FORBEARANCE AGREEMENT THIS STANDSTILL AND FORBEARANCE AGREEMENT (the "Standstill Agreement") is made as of the 1st day of July, 1999 by and among PNC BANK, NATIONAL ASSOCIATION, as agent for the Banks (the "Agent"), PARTY CITY CORPORATION, a corporation of the State of Delaware ("Borrower"), PARTY CITY MICHIGAN, INC., a corporation of the State of Delaware ("Guarantor") and PNC BANK, NATIONAL ASSOCIATION, ("PNC"), THE CHASE MANHATTAN BANK ("Chase"), NATIONAL CITY BANK OF PENNSYLVANIA ("National City"), FLEET BANK, N.A. ("Fleet") and LASALLE BANK, N.A. ("LaSalle") (collectively PNC, Chase, National City, Fleet and LaSalle, including their successors and assigns, the "Banks"). W I T N E S S E T H WHEREAS, the Banks, Agent, Borrower and Guarantor entered into a Credit Agreement dated April 24, 1998, as amended as of June 26, 1998 (the "Credit Agreement"), pursuant to which the Banks agreed to make advances to Borrower on a revolving basis up to Sixty Million ($60,000,000) Dollars under the terms and conditions set forth in the Credit Agreement (as hereinafter defined); and WHEREAS, the Borrower has granted a lien to the Agent for the benefit of the Banks in substantially all of its business assets as more particularly set forth in the Credit Agreement and that certain Security Agreement dated April 24, 1998; and WHEREAS, the Borrower, Banks, Agent and Guarantor entered into a Waiver and Consent Agreement dated March 29, 1999 as amended by the Amendment to Waiver and Consent Agreement dated as of April, 1999 (collectively the "Waiver Agreement"); and WHEREAS, in order to induce the Banks and the Agent to enter into the Credit Agreement with the Borrower, the Guarantor executed a Guaranty and Suretyship Agreement dated April 24, 1998 (the "Guaranty") and to secure the Guaranty, Guarantor executed a certain Security Agreement ("Subsidiary") dated April 24, 1998 (the "Guarantor Security Agreement") wherein the Guarantor has granted a lien to the Agent for the benefit of the Bank in substantially all of its business assets as more particularly set forth in the Guarantor Security Agreement; and WHEREAS, the Borrower is in default under the terms of the Credit Agreement and the Waiver Agreement has expired; and WHEREAS, the Borrower and Guarantor have represented to the Banks and the Agent that the Borrower is seeking to recapitalize itself through the sale of some its retail stores and/or the obtaining of additional equity through investors and thereby infuse approximately FORTY MILLION DOLLARS ($40,000,000) into the Borrower's operations, a portion of which shall be used to repay the obligations of Borrower to the Banks; and WHEREAS, Borrower and Guarantor have requested that the Banks and Agent agree to forbear from exercising their rights and remedies under the Credit Agreement from the date hereof until the earlier of (a) June 30, 2000 or (b) the occurrence of an Event of Default (as hereinafter defined); and WHEREAS, the Borrower is indebted to its Trade Vendors (as hereinafter defined) in the sum of approximately $47,000,000; and WHEREAS, the Trade Vendors have, contemporaneously herewith and as a condition to the Banks and the Agent entering into this Standstill Agreement, agreed to a Standstill and Forbearance Agreement with the Borrower and an Intercreditor Agreement with the Banks and the Agent; WHEREAS, the Banks and Agent, in reliance on the representations of the Borrower and Guarantor regarding the recapitalization of Borrower and repayment of the obligations owed to the Banks and other matters referred to herein, are willing to enter into this Standstill Agreement under the terms and conditions hereinafter set forth. NOW THEREFORE, for and in consideration of the mutual covenants and agreements herein contained and Ten Dollars and other good and valuable consideration the receipt of which is hereby acknowledged, it is agreed as follows: AGREEMENT 1. Definitions. ----------- a. The term "Agent" shall mean PNC Bank, National Association as agent for all of the Banks. b. The term "Asset Purchase Agreement" shall mean the agreement or agreements pursuant to which the Borrower enters into any Store Sale. c. The term "Banks" shall have the meaning set /forth in the preamble to this Standstill Agreement. d. The term "Borrower" shall have the meaning set forth in the preamble to this Standstill Agreement. e. The term "Commitments" shall have the meaning ascribed to it in the Credit Agreement. f. The term "Credit Agreement" shall mean the $60,000,000 Revolving Credit Facility Credit Agreement by and among Borrower, the Banks and the Agent dated as of April 24, 1998, the Security Agreement, the Revolving Credit Notes and all other related documents executed in furtherance thereof or related thereto, as same may have been heretofore or may hereafter be amended, modified, changed, supplemented or restated, including but not limited to the Waiver Agreement. g. The term "Eligible Inventory" shall mean and include Inventory as shown on the books of Borrower in accordance with generally accepted accounting principles 2 and valued at the lower of cost or market value, which is not, in the reasonable opinion of the Agent and the Required Banks, obsolete, slow moving or unmerchantable, based on such considerations as Agent or the Required Banks may from time to time deem appropriate including, without limitation, whether the Inventory is subject to a perfected, first priority security interest in favor of Agent and whether the Inventory conforms to all standards imposed by any governmental agency, division or department thereof which has regulatory authority over such goods or the use or sale thereof. For the purposes of this Standstill Agreement, Borrower's seasonal pack-away inventory (to the extent otherwise eligible as stated above) shall be Eligible Inventory. h. The term "Existing Trade Debt" shall mean the unsecured debt owedby the Borrower to its Trade Vendors as of July 15, 1999 in the approximate sum of $47,000,000, as listed on Schedule 1.h. annexed hereto and made a part hereof. i. The term "Event of Default" shall have the meaning as ascribed to it in paragraph 8 hereof. j. The term "Existing Defaults" shall mean those defaults presently existing under the terms of the Credit Agreement as set forth in Schedule 1.j. hereof. k. The term "Forbearance Period" shall mean that period during which the Agent and the Banks shall forbear in exercising their rights and remedies under the Credit Agreement and which shall be from the date hereof until the earlier of (a) June 30, 2000 or (b) the occurrence of an Event of Default. l. The term "Guarantor" shall mean Party City Michigan, Inc., a corporation of the State of Delaware. m. The term "Intercreditor Agreement" shall mean the agreement entered into by and among the Seasonal Trade Creditors, the Seasonal Trade Agent, the Investor Agent, the Investors, the Agent and the Banks contemporaneously herewith. n. The term "Inventory" shall have the meaning ascribed to it in the Security Agreement (Parent) dated April 24, 1998 between the Borrower and the Agent, which shall include but not be limited to all of Borrower's now owned or hereafteracquired goods, merchandise and other personal property, wherever located, to be furnished under any contract of service or held for sale or lease, all raw materials, work in process, finished goods and materials and supplies of any kind, nature or description which are or might be used or consumed in such Borrower's business or used in selling or furnishing such goods, merchandise and other personal property, and all documents of title or other documents representing them. o. The term "Investment" shall mean debt financing in the Borrower by the Investors in the sum of not less than $30,000,000. p. The term "Investment Obligations" shall mean all obligations of the Borrower under the documents delivered in connection with the Investment. 3 q. The term "Investor Agent" shall mean Enhanced Retail Funding, LLC. r. The term "Investors" shall mean, collectively, the purchasers of the Notes pursuant to the Securities Purchase Agreement with the Borrower dated as of August __, 1999. s. The term "Investor/Banks Shared Lien" shall mean the lien granted by Borrower to the Agent and the Investor Agent in the Borrower's Collateral other than Inventory which is to be shared pro-rata by the Agent and the Investor Agent in accordance with the terms of the Intercreditor Agreement. t. The term "Loan" or "Loans" shall mean the indebtedness of the Borrower and the Guarantor to the Banks pursuant to the Credit Agreement. u. The term "Maximum Commitment" shall mean the amount of Revolving Loans the Banks are committed to make under the Credit Agreement as modified by Section 5 hereof. v. The term "Net Proceeds" shall have the meaning set forth in paragraph 5.e. hereof. w. The term "Obligation" or "Obligations" shall have the meaning set forth in the Credit Agreement. x. The term "Seasonal Trade Agent" shall mean Zahn Associates, Inc. y. The term "Seasonal Trade Creditors" shall mean vendors which supply Borrower with primarily Halloween, Thanksgiving and/or Christmas/New Year's Inventory, as set forth on Schedule 1.y. annexed hereto and made a part hereof. z. The term "Shared Liens" shall mean the liens granted by Borrower to the Agent, the Investor and the Seasonal Trade Agent in the Borrower's Inventory which are to be shared pro-rata by the Agent, the Investor and the Seasonal Trade Agent in accordance with the terms of the Intercreditor Agreement, and each of such liens shall be referred to as a "Shared Lien". aa. The term "Standstill Agreement" shall mean this Standstill and Forbearance Agreement. bb. The term "Store Sale" or Store Sales" shall mean the sale of any retail store or the assets or substantially all of the assets of any retail store now or hereafter owned by Borrower. cc. The term "Termination Event" shall mean any event which causes the Forbearance Period to end. 4 dd. The term "Trade Agreement" shall mean the standstill agreement to be entered into by and among certain Trade Vendors, the Seasonal Trade Creditors and the Borrower containing terms and conditions in form and substance acceptable to the Agent and the Banks contemporaneously herewith. ee. The term "Trade Vendors" shall mean the Borrower's unsecured suppliers of Inventory, trade goods and services to the Borrower. ff. The term "Waiver Agreement" shall mean the Waiver and Consent Agreement dated March 29, 1999 as amended by the Amendment to Waiver and Consent Agreement dated as of April, 1999. 2. Incorporation of Recitals. The recitals set forth above are incorporated herein by reference, made a part hereof, and acknowledged by the Borrower and the Guarantor to be true and correct as of the date hereof. 3. Acknowledgment of Indebtedness. Borrower and Guarantor acknowledge that: (a) As of July 1, 1999, there is outstanding the principal amount of Fifty Eight Million Five Hundred Fifty Thousand Dollars ($58,550,000) together with accrued and to accrue interest, costs and expenses (including the Agent's and each Bank's in-house and outside legal fees). (b) Such sums are due to the Banks without any defense, offset, recoupment, or counterclaim whatsoever. 4. Obligations and Defaults Under Credit Agreement. The Borrower and Guarantor each represent, warrant and acknowledge to the Banks and the Agent the following with respect to the actions of the Banks and the Agent as a result of the defaults by the Borrower and the Guarantor: (a) The Banks and the Agent have fully and completely performed as required under the Credit Agreement and the Waiver Agreement and have satisfied all obligations they have or had to the Borrower and the Guarantor under the Credit Agreement, the Waiver Agreement or otherwise. The Borrower and Guarantor acknowledge and agree that except as provided for in the Standstill Agreement the Banks and the Agent have no obligation to advance any additional funds under the Credit Agreement or otherwise, to or at the request of the Borrower. (b) The Borrower and the Guarantor and each of them have absolutely no claim against nor right of setoff against the Banks or the Agent. (c) The Borrower and Guarantor acknowledge: (i) the Existing Defaults; (ii) that there is no defense to any of the Existing Defaults; (iii) that the Agent, on behalf of the Banks, today could rightfully exercise all rights, remedies and privileges of enforcement against each of the Borrower and the Guarantor by virtue of the Existing Defaults, all without defense or setoff of any kind; (iv) that by not exercising the rights, remedies and 5 privileges available to the Banks and the Agent the Banks and the Agent are not waiving and have not waived any of their rights to do so and (v) by entering into this Standstill Agreement the Banks and the Agent are not establishing a course of conduct nor a pattern of operation nor an implicit understanding they may or will ever further revise or modify any term or condition of the Credit Agreement or this Standstill Agreement. 5. Terms of Forbearance and Standstill. During the Forbearance Period and so long as no Event of Default or Termination Event occurs, the Banks and Agent agree to forbear from exercising any remedies available to them under the Credit Agreement or taking any legal or other action available to them, at law or in equity, as a result of the occurrence of the Existing Defaults; provided: a. The Commitments shall be permanently reduced as follows: (i) On or before July 15, 1999 to the sum of not more than $56,000,000; (ii) On or before July 31, 1999 to the sum of not more than $54,000,000; (iii) On or before closing of the Investment, but no later than August 17, 1999 to the sum of not more than $50,000,000; (iv) On or before September 30, 1999 to the sum of not more than $40,000,000; (v) On or before October 15, 1999 to the sum of not more than $35,000,000; and then (vi) On or before October 30, 1999, to the sum of not more than $15,000,000. Each of the foregoing reductions in the Commitments shall be accompanied or preceded by a permanent repayment of the Obligations down to an aggregate outstanding amount, as of the date of each such reduction, of not more than the Commitments as so reduced. Anything herein to the contrary notwithstanding, to the extent Borrower shall have Loans outstanding which in the aggregate on any day total less than the Maximum Commitment, Borrower may reborrow at any time up to the amount of the Maximum Commitment, except that the provisions of paragraphs 5.b.(ii), and 5.b.(iii) shall also apply to any such right to reborrow on such day. b. If each of the foregoing reductions, and corresponding repayment of Obligations, has occurred as and when provided above, and if no Event of Default or Termination Event has occurred on and after October 30, 1999, the Borrower shall be permitted to reborrow, repay and reborrow under the Credit Agreement from October 30, 1999 to June 30, 2000 under the following terms and conditions: 6 (i) The maximum aggregate amount available for borrowing on any day shall be limited as follows: (A) For the period from October 30, 1999 to December 15, 1999 to the lesser of (x) $15,000,000 or (y) an amount equal to Eligible Inventory minus the outstanding amount of the Shared Lien multiplied by 40% on such day; (B) For the period from December 16, 1999 to January 15, 2000, to the lesser of (x) $15,000,000 or (y) an amount equal of Eligible Inventory minus the outstanding amount of the Shared Lien multiplied by 40% on such day, provided, however, during two consecutive weeks (the "Clean-UpPeriod") occurring within the period from December 16, 1999 to January 15, 2000, the outstanding amount of the Obligations shall not exceed $5,000,000; and (C) During the Period from January 15, 2000 to June 30, 2000, to the lesser of (x) $15,000,000 or (y) an amount equal to Eligible Inventory minus the outstanding amount of the Shared Lien multiplied by 40% on such day. In addition, if at any time during any of the foregoing periods the aggregate amount of Obligations exceeds the borrowing limits set forth above, the Borrower shall immediately repay the Obligations in an amount equal to such excess. (ii) All of the conditions precedent to additional borrowing set forth herein or in the Credit Agreement shall continue to apply to each additional borrowing provided for hereunder except that, as an additional such condition precedent, no Event of Default (or event or condition which with notice, lapse of time or both, will become an Event of Default) or Termination Event shall have occurred at the time any such additional borrowing is requested or made (and so long as no such events have occurred, continued existence of the Existing Defaults shall be disregarded). (iii) In addition to the rights and remedies otherwise contained herein and in the Credit Agreement, if an Event of Default or a Termination Event shall occur, the Agent may, and shall upon the request of the Required Banks (as defined in the Credit Agreement), by written notice to the Borrower, 7 terminate the Borrower's ability to borrow pursuant to the above provisions. c. Borrower shall continue to pay interest to the Agent on the first day of each month as follows: (i) Until the Obligations due under the Credit Agreement are permanently reduced to Thirty Five Million Five Hundred Thousand Dollars ($35,500,000), interest on the outstanding principal balance of the Loan shall be calculated at the rate of the PNC Base Rate plus 200 basis points per annum; and then (ii) Until the permanent reduction of the Obligations due under the Credit Agreement to Fifteen Million Dollars ($15,000,000), interest on the outstanding principal balance of the Loan shall be calculated at the rate of the PNC Base Rate plus 150 basis points per annum; and then (iii) Upon the permanent reduction of the Obligations due under the Credit Agreement to less than Fifteen Million Dollars ($15,000,000), interest on the outstanding principal balance of the Loan shall be calculated at the rate of the PNC Base Rate plus 100 basis points per annum. d. Borrower shall diligently and in good faith continuously work toward bringing to closing between 12 and 20 Store Sales. All such Store Sales shall be conditioned upon the Borrower obtaining the prior written consent of the Agent for each such sale. e. One hundred percent (100%) of the Net Proceeds of each Store Sale shall be paid to the Agent notwithstanding the terms of the Intercreditor Agreement. To the extent that the application of the Net Proceeds to the Borrower's Obligations to the Banks results in the unpaid portion of the Obligations being less than the Maximum Commitments, then, in that event, the Borrower shall have the right to borrow, repay and reborrow up to the amount of the Maximum Commitments then available at the time of each such borrowing request in accordance with Section 5.b. hereof, provided however, twenty five (25%) percent of the Net Proceeds shall be retained by the Banks and shall not be available for reborrowing until after September 30, 1999, notwithstanding such reborrowing might otherwise be permitted under Section 5.b. above. For the purposes of this Standstill Agreement the term "Net Proceeds" shall mean: (i) the gross sales price of each Store Sale less (x) expenses directly attributable to such sale (including reasonable legal fees), (y) capital gains taxesattributable to each sale, if any; and (ii) the New Trade Credit (defined in the Intercreditor Agreement), incurred in the purchase of Inventory included in the Store Sale and repaid from the proceeds thereof. 8 f. Subject to Borrower's right to reborrow as herein provided, in addition to all other sums to be paid to the Agent, the Borrower shall pay the gross amount of all Franchise Fees and Royalties received from Franchisees of Borrower to the Agent. All such fees and royalties shall be shall be deposited to the lock box account referred to in Section 5.j. below hereof g. At all times during the term of this Standstill Agreement the ratio of the Banks' Pro-Rata Share multiplied by the amount of the Eligible Inventory (including Eligible Inventory ordered and for which payment has been made in full or to the extent necessary to obtain delivery) plus cash collateral to the aggregate outstanding amount of the Obligations, shall not at any time be less than 1. 11 to 1. For the purposes of the foregoing calculation, the term "Banks' Pro-Rata Share" shall mean at any time the percentage of which the aggregate outstanding amount of the Obligations at such time bears to the aggregate outstanding amount of all indebtedness, obligations or other liabilities (whether owing to the Banks, the Seasonal Trade Creditors, the Investors or otherwise) secured in whole or in part, by Inventory at such time. h. All Asset Purchase Agreements shall be in form and substance satisfactory to Agent and shall be assignable and shall be assigned to the Agent for the benefit of the Banks as further security for the Borrower's Obligations to the Banks. To this end Borrower hereby sells, assigns and transfers to Agent, for the benefit of the Banks, all of Borrower's right, title and interest in and to each of the Asset Purchase Agreements and the proceeds thereof, now or hereafter entered into by Borrower including but not limited to those set forth in Schedule 5.h. hereof. Anything herein to the contrary notwithstanding, neither the Agent nor any of the Banks shall, by acceptance of this assignment, undertake to fulfill on behalf of the Borrower, any of the obligations of Borrower imposed under the terms of any of the Asset Purchase Agreements. Borrower hereby irrevocably constitutes and appoints the Agent as Borrower's true and lawful attorney, with power of substitution, to ask, demand and receive, and to take all lawful means for the recovery of money due or to become due under the Asset Purchase Agreements and on payment, to acknowledge satisfaction or discharge of any obligation under the Asset Purchase Agreements. i. Borrower and not less than that number of Trade Vendors holding not less than $30,000,000 in Existing Trade Debt shall have executed the Trade Agreement, and not less than75% of the Seasonal Trade Creditors shall have executed and delivered both the Trade Agreement and the Intercreditor Agreement and at all times during the term of this Standstill Agreement, the Borrower, the Trade Vendors and the Seasonal Trade Creditors who executed the Trade Agreement and/or the Intercreditor Agreement (as applicable) shall continue to be in substantial compliance with the terms of the Trade Agreement and the Intercreditor Agreement. j. At all times during the term hereof Borrower shall maintain its concentration accounts at Agent and shall continue to deposit all sums into such accounts in the same manner as shall be consistent with the current practice of the parties. In addition, the Borrower shall cause to be opened and maintained, at all times there is any Obligation owed by the Borrower to the Banks, a lock box and a Blocked Account. All Franchise Fees and Royalties 9 due to the Borrower from its Franchisees shall be delivered to the lock box and shall thereafter be deposited into the Blocked Account for the benefit of the Banks or if any such Franchise Fee or Royalty is received by the Borrower, Borrower shall deliver same to Agent in kind. Agent shall collect the funds so deposited weekly and shall distribute same to the Banks in repayment of the principal of Borrower's Obligations in accordance with the terms of the Credit Agreement. k. Beginning November 10, 1999 and monthly thereafter the Borrower shall within 10 days of the end of the previous month deliver to the Agent cycle counts of its Inventory at not less than eight (8) of the stores owned by the Borrower conducted by an independent party acceptable to the Agent. The stores at which Inventory shall be counted each month shall be determined by the Agent. Agent shall notify the Borrower of the stores at which cycle counts are to be taken on or before the 15th day of the month prior to which the cycle counts are to be taken. l. Beginning September 15, until the Obligations have been Paid in Full, Borrower shall deliver to the Agent within 45 days after the end of each fiscal quarter and 15 days after the end of each month which is not the end of a fiscal quarter the following information as of the last day of the previous month: (i) all cash on hand including but not limited to cash in banks, cash in process and cash at store locations; (ii) a certificate of all Inventory by location and the value thereof determined at the lower of cost or market and specifically identifying that which is "pack-away" seasonal Inventory; (iii) sales by store for the prior month; (iv) cash receipts from all sources and disbursements; and (v) the status of the Inventory Coverage Ratio referred to in paragraph 5.g. above (and defined in the Intecreditor Agreement) and the basic of the calculation thereof in such detail and form as shall be satisfactory to the Agent. In addition to the above, within 45 days after the end of each fiscal quarter, Borrower shall deliver to the Agent Borrower's balance sheet as at the end of the prior month and its statements of cash flows for the period beginning on the first day of Borrower's fiscal year and ended on the date of such period and, on a cumulative basis, its income and surplus statement, all in reasonable detail, all prepared in accordance with generally accepted accounting principles as practiced in the United States of America and all certified as accurate by Borrower's Chief Financial Officer or other officer acceptable to the Agent. On or before September 30, 1999 the Borrower shall deliver to the Agent its financial statements for the period through July 3, 1999 including, but not limited to, statements of income and stockholders equity and cash flow from the date after the last audited financial statement of Borrower to July 3, 1999 and the balance sheet as at the end of such period, all prepared in accordance with generally accepted accounting principles in effect in the United States of America applied on a basis consistent with prior practices, and in reasonable 10 detail and reported upon without qualification, except on a going concern basis by an independent certified public accounting firm selected by Borrower and satisfactory to the Agent. The accounting firm of Deloitte and Touche is currently satisfactory to the Agent. Within 90 days after the end of each fiscal year of Borrower, Borrower shall furnish to the Agent its financial statements, including, but not limited to, statements of income and stockholders equity and cash flow from the beginning of the current fiscal year to the end of such fiscal year and the balance sheet as at the end of such fiscal year, all prepared in accordance with generally accepted accounting principles in effect in the United States of America applied on a basis consistent with prior practices, and in reasonable detail and reported upon without qualification by an independent certified public accounting firm selected by Borrower and satisfactory to the Agent m. Immediately upon execution of each Asset Purchase Agreement Borrower shall deliver same to the Agent, together with an assignment of same in form and substance satisfactory to the Agent. n. Borrower shall provide the Agent, from time to time, with such information as shall be requested concerning any potential investor or investment of equity into Borrower, including but not limited to the names of prospective investors, the amount to be invested, the form in which the investment is to be made, the terms of the investment and such other information concerning the potential investor or investment as the Agent shall reasonably request. o. This Standstill Agreement shall not constitute and shall not be construed or interpreted to constitute a waiver of any Existing Default or any default hereafter occurring under the Credit Agreement. All other rights of the Agent or the Banks contained in the Credit Agreement shall remain in full force and effect to the extent that there remains any Obligation of the Borrower owed to the Banks. Upon the occurrence of an Event of Default or a Termination Event, the Agent and the Banks shall be entitled to exercise all rights and remedies available to them under the Credit Agreement or at law or in equity or otherwise. All periods of limitation specified by statute and all defenses of laches or waiver as to any default existing on the date of this Standstill Agreement or arising during the Forbearance Period will be tolled and otherwise suspended. p. The Borrower shall pay to the Banks a Forbearance Fee in the sum of Five Hundred Eighty Thousand Dollars ($580,000) as follows: (i) 50% on execution of this Standstill Agreement; and (ii) 50% on November 15, 1999. q. In addition to all other security granted to the Agent as collateral for Party City's Obligations to the Banks, Party City, without limiting Agent's rights in any other collateral granted to the Agent and not in lieu thereof, hereby grants, assigns and pledges to Agent for the benefit of the Banks and to each Bank a continuing security interest in and to all deposit accounts and money of Party City whether now or hereafter existing at the Agent or any Bank and hereby recognizes the setoff rights of Agent or any Bank in any deposit accounts 11 or other money now in or coming into the Agent's or any Bank's possession with respect to the Obligations. It is the intention of the parties hereto that the Borrower shall, on and after November 16, 1999 maintain on hand no more than $10,000,000 of available cash for working capital. To this end, on and after November 16, 1999, on Wednesday of each week, Borrower shall pay over to the Agent all cash on hand in excess of such sum and/or the Agent shall sweep all accounts of Borrower at Agent for such purpose. All excess funds shall be applied on account of the Borrower's Obligations to the Banks subject to Borrower's right to reborrow same as provided for in Sections 5.a. and 5.b. hereof. 6. Permitted Liens. --------------- a. Upon the execution by not less than 75% the Seasonal Trade Creditors of the Intercreditor Agreement and the Trade Agreement, the Banks and the Agent hereby consent to Borrower granting a Shared Lien to the Seasonal Trade Agent for the benefit of the Seasonal Trade Creditors in an amount which shall not exceed a sum equal to the total of credit extended to Borrower by the Seasonal Trade Creditors from the Effective Date of the Trade Agreement (as defined therein) to January 15, 2000 less any payments of any kind, including but not limited to credits, set-offs, claims of recoupment, reclamation of goods or proceeds of Inventory, whether in cash or otherwise, made or taken by Seasonal Trade Creditors to whom a lien has been granted at any time in compliance with the Intercreditor Agreement. b. The Banks and Agent understand that the Borrower has negotiated with the Investor to obtain the Investment. Upon (i) delivery by the Investor of the sum of $30,000,000 to Borrower on terms and conditions which are satisfactory to the Banks and the Agent in their sole discretion and (ii) the execution by the Investor Agent, the Investors, the Seasonal Trade Agent, the Banks and the Agent of the Intercreditor Agreement, the Banks and the Agent hereby consent to Borrower granting (x) the Shared Lien and (y) the Investor/Banks Shared Lien, to the Investor Agent in an amount not to exceed the sum of $15,000,000 for the sole purpose of securing such portion of the Investment Obligations; provided, however, that distributions to the Investor Agent on account of the Shared Lien shall be made only as provided for under the terms of the Intercreditor Agreement. c. In addition to the Shared Lien and the Investor/Banks Shared Lien, upon (i) delivery by the Investors of the sum of $30,000,000 to Borrower on terms and conditions which are satisfactory to the Agent and the Banks in their sole discretion and (ii) the execution by the Investor Agent of Intercreditor Agreement in form and substance satisfactory to the Banks and the Agent, the Banks and the Agent on written notice of their acceptance of the terms and conditions of the Investment and the Intercreditor Agreement, consent to Borrower and Guarantor granting a lien upon the Collateral and the Guarantor's assets to the Investor Agent for the sole purpose of securing the Investment Obligations; provided, however, anything herein to the contrary notwithstanding the liens granted by the Borrower and Guarantor to the Investor Agent under this Section 6.c. shall be fully junior in priority and payment to the lien of the Banks and the Shared Liens at all times that there shall be any Obligations owed to the Banks or any New Trade Credit (as defined in the Intercreditor Agreement) owed to the Seasonal Trade Creditors. 12 7. Covenants, Representations and Warranties. Each of Borrower and Guarantor covenants, represents and warrants that: a. Borrower and Guarantor are each corporations, duly organized, validly existing and in good standing in their states of incorporation. b. Each of Borrower and Guarantor has the requisite power and authority to own its properties and assets and to carry on that business that is now being conducted. c. Each of Borrower and Guarantor are fully authorized and permitted to enter this Standstill Agreement and to perform the terms hereof, none of which conflicts with any provision of any law, rule or regulation applicable to Borrower or Guarantor. d. This Standstill Agreement is a valid and binding legal obligation of Borrower and Guarantor and is enforceable in accordance with its terms. e. The agreements of the Banks contained herein (i) do not in any respect relieve Borrower or Guarantor from their respective obligations to comply with each and every term, agreement and condition applicable to it under its agreements with the Banks and the Agent and (ii) shall not be construed in any respect to prohibit or limit the exercise of any remedies that are or may become available to the Banks or the Agent, otherwise than as expressly provided for herein; and f. The agreements of the Banks hereunder shall not in any respect prevent the Obligations of Borrower or Guarantor under the Credit Agreement, Guaranty or related documents from being and becoming due and payable in full to such extent as may be provided in any such agreement. g. Except as provided in the Trade Agreement, Borrower shall not pay any Existing Trade Debt prior to January 15, 2000; provided, however, Borrower shall be permitted to make up to $5,200,000 in aggregate payments to the Convenience Class Claimants (sometimes hereinafter, individually the "Claimant") upon the following terms and conditions: (i) No such payment to any Claimant shall exceed the lesser of (x) the amount of the Existing Trade Debt owed to such Claimant, or (y) $100,000; and (ii) Each such payment shall effect a full and final satisfaction of the Existing Trade Debt claim of such Claimant. For the purposes of this Standstill Agreement the term "Convenience Class Claimants" shall mean holders of Existing Trade Debt willing to settle their claims for not more than $100,000. 8. Events of Default. The occurrence or existence of any one or more of the following events or conditions, whatever the reason therefore and whether voluntary, involuntary or effected by operation of law, shall constitute an "Event of Default" under this Standstill Agreement: 13 a. The failure of the Borrower to make any payment (including, but not limited to, principal, interest, costs and expenses, including reasonable legal fees) to the Banks or the Agent when and as required by the Credit Agreement or this Standstill Agreement. b. Borrower or Guarantor are in default under or shall fail to perform, observe or comply with any covenant, agreement or term contained in the Credit Agreement or in this Standstill Agreement, or the occurrence of any other Event of Default, except the Existing Defaults. c. The occurrence of any event or condition which constitutes a breach, default or "event of default" under the Trade Agreement, or the Intercreditor Agreement (or any agreement entered into with the Investors in connection with their Investment), or a termination of the Trade Agreement or the Intercreditor Agreement (or the agreement with the Investors in connection with the Investment). d. Borrower or Guarantor shall commence a voluntary proceeding, or if an involuntary proceeding shall be commenced against them (or either of them) which is not discharged within sixty (60) days of filing, seeking liquidation, reorganization, or other relief with respect to either of them or their debts under any bankruptcy, insolvency, or other similar law now or hereafter in effect or seeking the appointment of a receiver, trustee, liquidator, custodian or other similar official of them or either of them or a substantial part of their property. e. Borrower (i) fails to timely pay and satisfy when due any and all valid claims of Trade Vendors expressly permitted by the Trade Agreement; or (ii) fails to timely pay and satisfy when due any and all valid taxes, levies or charges by a state, federal or municipal governmental agency or authority. f. Entry of final judgment, no longer subject to Judicial review, against Borrower or Guarantor in an amount in excess of $5,000,000 in the aggregate or the issuance of a levy or execution to realize upon any property of Borrower or Guarantor. g. Failure of Borrower to fully close and fund the Investment on or before August 16, 1999 on terms and conditions satisfactory to the Banks and the Agent. h. The payment to any Trade Vendor or Seasonal Trade Creditor on account of Existing Trade Debt which is not expressly permitted by this Agreement, the Trade Agreement or the Intercreditor Agreement or at any time when an Event of Default or a Termination Event shall exist. i. The prepayment or defeasance of any principal to any Investor or on account of the Investment at any time prior to the Obligations to the Banks being paid in full. 14 9. Notices. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given when received, if delivered in person, by facsimile with confirmation of receipt, or by registered or certified mail, postage prepaid, return receipt requested, or by overnight delivery to the respective parties as follows: If to the Agent: --------------- To the Banks, in care of the Bank Agent: PNC Bank, National Association, As Agent One PNC Plaza 249 5th Avenue, 21st Floor Pittsburgh, PA, 5222 Attn.: Thomas J. McCool, SVP (Fax): 412) 762-4157 And a copy to: Peter A. Forgosh, Esq. Pitney Hardin Kipp & Szuch P.O. Box 1945 (mail) Morristown, NJ 07962-1945 200 Campus Drive (delivery) Florham Park, NJ 07932 (Fax) (973) 966-1550 If to the Banks: PNC Bank, National Association One PNC Plaza 249 5th Avenue Pittsburgh, Pennsylvania 15222 Attn.: Thomas J. McCool, SVP (Fax): (412) 762-4157 The Chase Manhattan Bank 380 Madison Avenue, 9th fl New York, NY 10017 Attn: William T. Strout, VP (Fax): (212) 622-4834 15 National City Bank of Pennsylvania 20 Stanwix St. Pittsburgh, PA 15222-4802 Attn: William F. Nicholson, VP Special Assets Dept. (Fax): (412) 644-0966 Fleet Bank 777 Main St. CT MO H20A Hartford, CT 06115 Attn: Donald J. Sheehan, SVP (Fax): (860) 986-3162 LaSalle Bank 135 South LaSalle Street, Suite 218 Chicago, IL 60603 Attn: James Thompson, SVP (Fax): (312) 904-8169 If to Party City Corporation or Party City Michigan, Inc.: Party City Corporation 400 Commons Way Rockaway, NJ 07866 (Fax): (973) 983-1333 And a copy to: William Oberdorf, Esq. St. John & Wayne, L.L.C. Two Penn Plaza East Newark, NJ 07105-2249 (Fax): (973) 491-3555 or to such other address as any such person may have furnished to the others in writing in accordance herewith, except that notices of changes of address shall only be effective upon receipt. 10. Ratification; Release of Banks. For good and valuable consideration, the receipt of which is hereby acknowledged, including the agreements and accommodations of the Agent and the Banks set forth in this Standstill Agreement, Borrower and Guarantor, for themselves and their present and former officers, directors, partners, shareholders, affiliates, beneficiaries, agents and employees, personal representatives, successors, and assigns, do hereby unconditionally and irrevocably release, quit and forever discharge the Agent and the Banks and their predecessors in interest, their present and former officers, directors, partners, shareholders, affiliates, beneficiaries, asset managers, subasset managers, agents, attorneys and employees, personal representatives, successors, and assigns, of and from any and all liabilities, claims, 16 demands, actions, and causes of action (including without limitation any claim based upon usury), whether known or unknown, contingent or matured, and whether arising pursuant to statute, contract, tort, or equity, now existing or that may hereafter arise with respect to acts, omissions or events occurring prior to the date hereof, arising out of or in any way connected with, directly or indirectly, the Loan or the Credit Agreement. No matter released herein has been previously assigned or transferred to any other person or entity. 11. Costs, Fees and Expenses. Upon demand, Borrower shall pay or reimburse the Agent and the Banks for any fees and expenses that may be payable or incurred in connection with the existing Events of Default, the administration of the Credit Agreement and the Loan, this Standstill Agreement and/or which may be due under or pursuant to the Credit Agreement and all its reasonable and customary out-of-pocket costs and expenses incurred in connection with such defaults or the Credit Agreement and the preparation, negotiation and execution of this Standstill Agreement, including, without limitation, the reasonable fees and disbursements of their attorneys. This provision is in addition to and not in lieu or limitation of any obligations of the Borrower and Guarantor for payment of fees, costs and expenses contained in the Credit Agreement. 12. Counterparts and Facsimile. This Standstill Agreement may be executed in any number of counterparts each of which, when so executed and delivered, shall be an original, and all such counterparts shall together constitute one and the same instrument. This Standstill Agreement may be executed and transmitted by facsimile signature and shall be effective and binding upon execution and transmission of same. 13. Waiver of Jury Trial. ALL PARTIES TO THIS STANDSTILL AGREEMENT, UPON ADVICE OF THEIR RESPECTIVE ATTORNEYS OR ADVISORS, HEREBY KNOWINGLY, INTENTIONALLY, VOLUNTARILY, EXPRESSLY AND MUTUALLY WAIVE ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION, OR CAUSE OF ACTION (A) ARISING UNDER THIS STANDSTILL AGREEMENT OR THE CREDIT AGREEMENT EVIDENCING THE LOAN, OR (B) IN ANY WAY CONNECTED WITH OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO OR ANY OF THEM WITH RESPECT TO THIS STANDSTILL AGREEMENT OR THE CREDIT AGREEMENT, OR THE TRANSACTIONS RELATED HERETO OR THERETO, OR (C) IN ANY LITIGATION BETWEEN THE PARTIES IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING AND WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE, AND EACH PARTY HEREBY AGREES AND CONSENTS THAT EACH SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND ANY PARTY TO THIS STANDSTILL AGREEMENT MAY FILE THIS ORIGINAL STANDSTILL AGREEMENT OR A COPY THEREOF WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO A TRIAL BY JURY. 14. No Waiver. Neither this Standstill Agreement nor the forbearance and other agreements contained herein shall be deemed a waiver of any rights and remedies available to the Agent and the Banks pursuant to the terms of the Credit Agreement or any default or Event 17 of Default existing thereunder except as specifically set forth herein. For all other purposes the Credit Agreement remains in full force and effect as if this Standstill Agreement had not been executed. 15. Further Assurances. Each party hereto shall sign such other documents and do such other acts as necessary or desirable to carry out this Standstill Agreement before and after the Termination Date. 16. Amendments. This Standstill Agreement may not be amended, modified, altered, or changed except in a signed writing by the parties hereto. 17. Governing Law. This Standstill Agreement shall be governed by the laws of the State of New Jersey and the United States of America, without regard to their conflict of laws or principles. 18. Definitions. Any capitalized term not otherwise defined herein shall have the same meaning as ascribed to such term in the Credit Agreement unless the context clearly requires otherwise. 19. Severability. The provisions of this Standstill Agreement are severable. If any provision of the Standstill Agreement shall be held invalid or unenforceable in whole or in part in any jurisdiction, such invalidity or unenforceability shall not in any manner affect the validity or enforceability of such provision in any other jurisdiction or any other provision of the Standstill Agreement in any jurisdiction. 20. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of Borrower, Agent, each Bank, all future holders of the Obligations and their respective successors and assigns, except that Borrower may not assign, delegate or transfer any of its rights or obligations under this Standstill Agreement without the prior written consent of the Agent. [SIGNATURE PAGES FOLLOW] 18 IN WITNESS WHEREOF, the parties hereto have executed this Standstill Agreement on the date first indicated above and have set their hands and seals or caused these presents to be signed by their proper corporate officers and sealed with their seals. PNC BANK, NATIONAL ASSOCIATION As Agent By:/s/ Richard G. Depaul 8/16/99 ------------------------- -------------------------- Name: Richard G. Depaul Dated: Title: Senior Vice President PARTY CITY CORPORATION By:/s/ Jack H. Futterman 8/16/99 ------------------------ -------------------------- Name: Jack H. Futterman Dated: Title: PARTY CITY MICHIGAN, INC. By:/s/ Jack H. Futterman 8/16/99 ------------------------ -------------------------- Name: Jack H. Futterman Dated: Title: PNC BANK, NATIONAL ASSOCIATION By:/s/ Richard G. Depaul 8/16/99 ------------------------- -------------------------- Name: Richard G. Depaul Dated: Title: Senior Vice President THE CHASE MANHATTAN BANK By:/s/ Stephen W. Revis 8/13/99 ------------------------- -------------------------- Name: Stephen W. Revis Dated: Title: Vice President 19 NATIONAL CITY BANK OF PENNSYLVANIA By:/s/ William F. Nicholson 8/13/99 ------------------------- -------------------------- Name: William F. Nicholson Dated: Title: Vice President FLEET BANK, N.A. By:/s/ Donald R. Nicholson 8/13/99 ------------------------- -------------------------- Name: Donald R. Nicholson Dated: Title: Senior Vice President LASALLE BANK, N.A. By:/s/ James Thompson 8/16/99 ------------------------- -------------------------- Name: James Thompson Dated: Title: Group Senior Vice President 20 EX-10.3 10 VENDOR FORBEARANCE AND STANDSTILL AGREEMENT VENDOR FORBEARANCE AND STANDSTILL AGREEMENT ------------------------------------------- This Vendor Forbearance and Standstill Agreement (this "Agreement") is entered into as of this 16th day of August 1999, by and among, Party City Corporation (the "Company") and each vendor that has executed a signature page hereto that has been accepted by the Company in accordance with the terms set forth in Section 12(c) below (each, a "Vendor," and collectively, the "Vendors"). RECITALS -------- A. Prior to the Effective Date (as defined in Section 1(a) below), the Company purchased merchandise (the "Merchandise") from the Vendors on credit. B. The Company has failed to remit timely payment to the Vendors for Merchandise shipped to the Company (the "Existing Defaults"). C. The Company desires to obtain the agreement of each of the Vendors to forbear from taking collection actions or other enforcement remedies by reason of the Existing Defaults, and each of the Vendors is willing to agree to forbear, on the terms and conditions set forth in this Agreement. AGREEMENT --------- NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Company and each of the Vendors, intending to be bound, agree as follows: 1. Definitions. a. The following terms used in this Agreement shall have the following meanings: "Additional Amount" shall have the meaning given to it in Section 3(b) below. "Agreement" shall mean this Forbearance and Standstill Agreement, as it may be amended, supplemented or otherwise modified from time to time. "Bank Debt" shall mean all outstanding indebtedness owed by the Company to the Bank Group. "Bank Forbearance Agreement" shall have the meaning given to it in Section 4(a) below. "Bank Group" shall mean the collective reference to PNC Bank National Association, Fleet Bank, The Chase Manhattan Bank, National City Bank of Pennsylvania and LaSalle Bank. 1 "Capital Infusion" shall mean (a) any indebtedness on account of borrowed money incurred by the Company other than the Bank Debt and trade credit (including trade credit that is owed to the Seasonal Vendors), (b) any purchase of equity in the Company and/or (c) any other infusion of capital in the Company in an amount greater than $1,000,000, in each case obtained on or after August 1, 1999. "Company" shall have the meaning assigned to that term in the introduction to this Agreement. "Company Termination Event" shall have the meaning given to it in Section 11 below. "Enforcement Action" shall mean any right or remedy available to any of the Vendors on the Effective Date under contract or applicable law (including, without limitation, (i) suing to recover on its Vendor Claim, (ii) seeking to recover on its Vendor Claim by way of setoff or recoupment and (iii) initiating, joining or supporting any proceeding against the Company (A) seeking to adjudicate it a bankrupt or insolvent, or (B) seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or (C) seeking the entry of an order for relief or the appointment of a receiver, trustee, or similar official for it or for any substantial part of its property) on account of or relating to its Vendor Claim solely by reason of the existence and continuation of the Existing Defaults. "Effective Date" shall have the meaning given to it in Section 6 below. "Event of Default" shall have the meaning given to in Section 10 below. "Existing Defaults" shall have the meaning given to it in Recital B above. "Existing Trade Debt" shall mean the outstanding indebtedness as of the Effective Date that the Vendors claim is owed to them by the Company for the delivery of Merchandise. "Interest Payment" shall have the meaning given to it in Section 3(a) below. "Interest Payment Date" shall have the meaning given to it in Section 3(a) below. "Merchandise" shall have the meaning given to it in Recital A above. "Principal Payment Date" shall have the meaning given to it in Section 3(a) below. "Seasonal Vendor Security Agreement" shall mean that certain Vendor Security Agreement, dated as of the date hereof, by and between the Company, each of the Seasonal Vendors and the Vendor Trustee (as identified therein), as the same may be amended, supplemented or otherwise modified from time to time. "Seasonal Vendor" shall mean any Vendor that is a party to the Seasonal Vendor Security Agreement. 2 "Standstill Period" shall mean the period from the Effective Date to the Termination Date. "Termination Date" shall mean the earliest to occur of (a) January 15, 2000, (b) an Event of Default and (c) a Company Termination Event. "Trade Note" shall mean a promissory note, dated as of the Effective Date, by the Company in favor of a Vendor in an amount equal to thirty three percent (33%) of its Vendor Claim. "Vendors" shall have the meaning assigned to that term in the introduction to this Agreement. "Vendor Claim" shall mean, for each of the Vendors, the amount of Existing Trade Debt asserted by such Vendor as reflected on the signature page of such Vendor. "Vendor Group" means the informal group of Vendors listed on Exhibit B hereto. b. References to "Sections" and "subsections" shall be to Sections and subsections, respectively, of this Agreement unless otherwise specifically provided. Any of the terms defined in Section 1(a) may, unless the context otherwise requires, be used in the singular or the plural, depending on the reference. 2. Vendors' Agreement to Forbear, etc. a. From and after the Effective Date, and subject to the terms and conditions contained herein, each of the Vendors shall forbear from taking any Enforcement Action until the Termination Date. Upon the Termination Date, each Vendor's agreement to forbear from taking any Enforcement Action shall automatically expire and be of no further force or effect. b. Nothing contained in this Agreement shall be construed to be a waiver of the Existing Defaults. The Existing Defaults shall continue in existence subject only to each Vendor's written agreement, as set forth in this Agreement, not to take Enforcement Actions prior to the Termination Date. c. Nothing in this Agreement shall prejudice or limit any of the rights and remedies of any of the Vendors to take any Enforcement Action from and after the Termination Date. d. Each of the Vendors expressly reserves all of its rights and remedies under applicable law, except as expressly limited herein. Except as expressly set forth herein, from and after the Termination Date, each of the Vendors shall be entitled to take any Enforcement Action and pursue all rights and remedies available to it under any agreements, arrangements or understandings, including, without limitation, the Vendor Notes, if applicable, by reason of the occurrence of any defaults, including the Existing Defaults. 3 e. Except as expressly set forth herein, nothing contained herein shall affect any Seasonal Vendor's rights arising (i) under the Seasonal Vendor Security Agreement, or (ii) with respect to any extension of credit made after the Effective Date. f. Except as otherwise agreed between the Company and any Vendor, no Vendor shall have any obligation to sell the Company Merchandise after the Effective Date. To the extent that any Vendor agrees to sell the Company Merchandise after the Effective Date, such Vendor agrees that (i) it will apply any payment received from the Company prior to the Termination Date on account of such purchase only to such purchase and that it will not seek to setoff or recoup such payment against, or otherwise apply such payment to, its Vendor Claim and (ii) it will use commercially reasonable efforts to complete shipping of any Merchandise purchased by the Company within (5) business days after such Vendor's receipt of appropriate notice and (A) a payment equal to seventy percent (70%) of the purchase price for such Merchandise if it is purchased in connection with the Seasonal Vendor Security Agreement or (B) the payment previously agreed to by the Company and such Vendor for other Merchandise, provided that in either case such payment shall be in good funds. 3. Company's Agreements. a. Within five (5) business days after the Effective Date, the Company shall deliver to each Vendor a Trade Note. Subject to Section 3(d) below, each Trade Note shall bear interest at the rate of 10% per annum, from and after May 1, 1999 until the Principal Payment Date (as defined below), and, from and after an Event of Default hereunder, shall bear interest at the rate of 14% per annum until paid in full. The principal amount of each Trade Note shall be payable in cash on or before November 15, 1999 (the "Principal Payment Date") and interest on each Trade Note (the "Interest Payment") shall be payable in cash on the earlier to occur (the "Interest Payment Date") of (i) January 15, 2000 or (ii) the date on which any refinancing of the entire amount of the Bank Debt is consummated. Each Trade Note shall be substantially in the form of Exhibit A hereto. b. In addition to the amounts payable on account of each Trade Note as set forth in Section 3(a) above and subject to Section 3(d) below, on or before the Principal Payment Date, but only if there is no Event of Default under those certain Securities Purchase Agreements, dated as of the date hereof, by and among the Company and the purchasers named therein, the Company shall also pay to each Vendor in cash an amount (the "Additional Amount") based on the formula of: the amount of its Vendor Claim multiplied by .67 and further multiplied by a fraction, the numerator of which is equal to the number of stores of the Company that are sold or closed between June 1, 1999 and the Principal Payment Date and the denominator of which is 216. Any payment under this Section 3(b) shall be applied first to the principal balance of any Vendor Claim. c. All payments provided for in this Section 3 shall be made on a pro rata basis among the Vendors. 4 d. Notwithstanding the foregoing and provided that an Event of Default has not occurred, the Company shall not be obligated to make any Interest Payment or pay any Additional Amount to any Vendor that has breached any of its obligations hereunder, provided that such breach remains uncured for a period of five (5) days after the Company provides such Vendor with written notice of such breach. Notwithstanding the foregoing sentence, a breach by any Vendor of its obligations hereunder shall not affect the Interest Payment or Additional Amount payable to any other Vendor hereunder. 4. Conditions Precedent to Each Vendor's Obligations. The Effective Date shall not occur and this Agreement shall not become effective until satisfaction or express waiver of the following conditions: a. The Company and the Bank Group shall have entered into a forbearance and standstill agreement (the "Bank Forbearance Agreement") in form and substance acceptable to each of the Vendors (with such acceptance deemed to be given by delivery of its executed counterpart of this Agreement). b. The Company shall have obtained and closed (or shall close simultaneously with this Agreement) a Capital Infusion in an amount not less than $30,000,000 on terms and conditions satisfactory to the Vendor Group. c. After giving effect to the transactions contemplated by this Agreement, no Event of Default shall exist under this Agreement. d. The Company shall have accepted the signature page of each Vendor that is a member of the Vendor Group as set forth in Section 12(c). 5. Conditions Precedent to the Company's Obligations. The Effective Date shall not occur and this Agreement shall not become effective until satisfaction or express waiver of the following conditions: a. Each of the Vendors that is a member of the Vendor Group shall have executed and delivered an original counterpart of this Agreement to the Company. b. The Company and the Bank Group shall have entered into the Bank Forbearance Agreement in form and substance satisfactory to the Company. 5 6. The Effective Date. This Agreement shall become effective on the date (the "Effective Date") on which all of the conditions set forth in Sections 4 and 5 have been satisfied or waived by the party(ies) for whose benefit they are intended; provided that, if the Effective Date does not occur on or prior to August 20, 1999 (as such date may be extended by the mutual agreement of the parties hereto), this Agreement shall be deemed null and void and neither the Company nor any of the Vendors shall be deemed to be obligated hereunder. 7. Representations and Warranties of the Company. As a material inducement to the Vendors to enter into the transactions contemplated hereby, the Company represents and warrants to each of the Vendors as follows: a. This Agreement has been duly authorized, executed and delivered by the Company, is a legally valid and binding agreement and is enforceable against the Company in accordance with its terms, except to the extent that such enforcement may be limited by applicable bankruptcy, insolvency and other similar laws affecting creditors' rights generally. b. The execution, delivery and performance by the Company of this Agreement do not and will not (i) violate any provisions of any law or any governmental rule or regulation applicable to the Company, the Company's governing documents or any order, judgment or decree of any court or other agency of government binding on the Company, (ii) conflict with, result in a material breach of or constitute (with due notice or lapse of time or both) a default under any material agreement or contract of the Company, or (iii) result in or require the creation or imposition of any lien upon any of the properties or assets of the Company except as expressly contemplated hereby. 8. Representations and Warranties of the Vendors. As a material inducement to the Company to enter into the transactions contemplated hereby, each of the Vendors severally represents and warrants to the Company as follows: a. This Agreement has been duly authorized, executed and delivered by such Vendor, is a legally valid and binding agreement and is enforceable against such Vendor in accordance with its terms, except to the extent that such enforcement may be limited by applicable bankruptcy, insolvency and other similar laws affecting creditors' rights generally. b. The execution, delivery and performance by such Vendor of this Agreement do not and will not (i) violate any provisions of any law or any governmental rule or regulation applicable to such Vendor, such Vendor's governing documents or any order, judgment or decree of any court or other agency of government binding on such Vendor, or (ii) conflict with, result in a material breach of or constitute (with due notice or lapse of time or both) a default under any material agreement or contract of such Vendor. c. The amount of its Vendor Claim as set forth on its signature page is true and correct according to its books and records. 6 9. Covenants of the Company. The Company covenants and agrees as follows: a. The Company shall not make any unscheduled principal payment, redeem any equity or declare and distribute any cash dividend on account of or in connection with any Capital Infusion prior to the Termination Date. b. The Company shall simultaneously provide Latham & Watkins and Ernst & Young, the Vendor Group's advisors, with any and all written information that it provides to the Bank Group, including, without limitation, periodic reports on efforts to obtain a Capital Infusion. c. The Company shall provide Ernst & Young with access on a reasonable, confidential basis to information that the Company makes available to any prospective sources of a Capital Infusion. d. The Company shall pay the indebtedness evidenced by the Trade Notes and perform each and all of the conditions and covenants required to be performed by the Company thereunder. e. The Company shall provide notice to each Vendor of the occurrence of an Event of Default as to any Vendor or Vendors promptly after becoming aware thereof. 10. Events of Default. Any Vendor has the right to terminate this agreement as it applies to such Vendor upon the occurrence of any of the following events (each an "Event of Default"); provided, however, that only a Vendor party to the Seasonal Vendor Security Agreement may rely on Section 10(e): a. The Company shall breach any of its obligations under Section 3 of this Agreement including, without limitation, failing to pay any amounts under the Trade Notes on the dates when such amounts are due; b. Any of the Company's representations and warranties in Section 7 of this Agreement shall prove to have been materially incorrect when made and shall remain incorrect for a period of five (5) days after written notice thereof shall have been given to the Company by any Vendor; c. The Company shall fail to perform or observe any covenant contained in Section 9(a) of this Agreement; d. The Company (i) shall fail to perform or observe any covenant contained in Section 9(d) or (e) of this Agreement and such failure shall continue for a period of five (5) days after written notice thereof shall have been given to the Company by any Vendor or (ii) shall fail to perform or observe any covenant contained in Section 9(b) or (c) of this Agreement and such failure shall continue for a period of fifteen (15) days after written notice thereof shall have been given to the Company by any Vendor; 7 e. The Company shall fail to perform or observe any term, condition, covenant or agreement contained in the Seasonal Vendor Security Agreement and such failure shall continue after the applicable grace period, if any, specified therein; f. An Event of Default (as such term is defined in the Bank Forbearance Agreement) shall have occurred and be continuing under the Bank Forbearance Agreement; g. The Company shall fail to perform or observe any term, condition, covenant or agreement contained in any document governing, relating to or arising from the Capital Infusion and such failure shall continue after the applicable grace period, if any, specified therein, unless such failure is expressly waived by the party or parties providing such Capital Infusion (to the extent such waiver is permitted under such document); h. From and after the Effective Date, any proceeding shall be instituted by or against the Company seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, or other similar official for it or for any substantial part of its property and, in the case of any such proceeding instituted against it (but not instituted by it) that is being diligently contested by it in good faith, either such proceeding shall remain undismissed or unstayed for a period of sixty (60) days or any of the actions sought in such proceeding (including, without limitation, the entry of an order for relief against, or the appointment of a receiver, trustee, custodian or other similar official for, it or any substantial part of its property) shall occur, or the Company shall take any corporate action to authorize any of the actions set forth in this Section 10(h). Upon the occurrence of an Event of Default under Section 10(a) or (h) above, the Trade Notes shall immediately become due and payable and the Vendor shall no longer be deemed to have any obligation under Section 2(a) of this Agreement. Upon the occurrence of an Event of Default under Section 10(b), (c), (d), (e), (f) or (g), the Trade Note of any Vendor shall become immediately due and payable upon such Vendor's delivery of notice of such Event of Default to the Company pursuant to Section 12(i) hereof. Moreover, from and after an Event of Default as to any Vendor, the principal amount due under such Vendor's Trade Note shall accrue interest at the default interest rate set forth therein until the Notes are paid in full. 8 11. Company Termination Event. The Company shall have the right to terminate this Agreement (a "Company Termination Event") if (i) prior to August 31, 1999 this Agreement has not been executed and delivered to the Company by Vendors holding in the aggregate at least $38,000,000 of Existing Trade Debt, and representing at least 90% of anticipated purchases to be made pursuant to or in connection with the Seasonal Vendor Security Agreement and (ii) the Company provides written notice to all Vendors who have executed this Agreement as of such date no later than August 31, 1999 that it is nullifying this Agreement pursuant to this Section 11. If the Company does not provide such notice on or prior to August 31, 1999, no Company Termination Event shall be deemed to have occurred and this Agreement shall continue to be the binding obligation of each of the parties hereto. From and after a Company Termination Date, this Agreement and the Trade Notes shall be deemed to be null and void, and none of the parties hereto shall be deemed to have any obligation hereunder or thereunder. In furtherance of the foregoing and not in limitation thereof, from and after the occurrence of a Company Termination Event, none of the Vendors shall be deemed to have any obligation under Section 2 hereof and the Company shall not be deemed to have any obligation under Section 3 hereof. Notwithstanding the foregoing, however, a Company Termination Event shall not be deemed to relieve the Company from any of its obligations under the Seasonal Vendor Security Agreement or any instruments entered into in connection therewith. 12. Miscellaneous Provisions. a. The Company hereby authorizes and allows each of the Vendors to communicate freely, and share information with, any member of the Bank Group and their advisors. b. Whether or not the transactions contemplated by this Agreement shall be consummated, the Company agrees to pay on demand all costs and expenses (including all reasonable direct out-of-pocket expenses of each member of the Vendor Group and all reasonable fees and expenses of the Vendor Group's legal counsel and financial advisors) incurred by each member of the Vendor Group in connection with negotiating, documenting and implementing this Agreement prior to the Effective Date. The Company further agrees to pay on demand all reasonable fees and expenses of (i) Latham & Watkins, counsel to the Vendor Group, in an aggregate amount not to exceed $50,000 and (ii) Ernst & Young, financial advisor to the Vendor Group, in an aggregate amount not to exceed $150,000 plus reasonable out-of-pocket expenses, in either case from the Effective Date through the Termination Date. From and after the occurrence of an Event of Default, the Company agrees to reimburse on demand all costs and expenses (including all reasonable direct out-of-pocket expenses of each of the Vendors and the fees of Latham & Watkins and Ernst & Young, as advisors to the Vendor Group) incurred by any of the Vendors or the Vendor Group in enforcing its rights or in collecting any payment due from the Company under this Agreement or the Trade Notes. c. This Agreement shall not become binding as to any Vendor unless and until (i) such Vendor has completed, executed and delivered to the Company a signature page to this Agreement and (ii) the Company has manifested its acceptance of such signature page by executing in the space provided thereon and returning an original executed counterpart thereof to such Vendor. Simultaneously with returning an accepted 9 signature page to any Vendor, the Company shall forward a copy of such signature page to Ernst & Young and Latham & Watkins at the addresses set forth below. Upon request from any Vendor, the Company shall provide such Vendor with a list of all Vendors who are party hereto; provided, however, that the Company will keep confidential the amount of each individual Vendor Claim. d. By accepting the signature page of any Vendor as set forth in Section 12(c) above, the Company agrees to and acknowledges the amount of such Vendor's Vendor Claim as set forth on its signature page, except to the extent the Company expressly disputes the amount of such Vendor Claim in a writing sent to such Vendor within sixty (60) days after the Effective Date and expressly specifies in such writing the amount the Company believes is owed to such Vendor on account of its Existing Trade Debt. e. The Company hereby acknowledges that it has been represented by counsel of its choice in negotiating, executing and delivering this Agreement and the Trade Notes. The Vendors acknowledge that Latham & Watkins has acted as counsel and Ernst & Young has acted as financial advisor to the Vendor Group but neither Latham & Watkins nor Ernst & Young has represented any individual Vendor in connection with the negotiation, execution and delivery of this Agreement and the Trade Notes. Each Vendor acknowledges that it has had the opportunity to obtain independent legal advice from counsel of its choice. f. This Agreement may be executed in any number of counterparts with the same effect as if all parties hereto had signed the same document. All such counterparts shall be construed together and shall constitute one instrument, but in making proof hereof it shall only be necessary to produce one such counterpart. Delivery of an executed signature page of this Agreement by facsimile transmission shall be effective as delivery of a manually executed counterpart thereof. g. This Agreement shall be binding upon and inure to the benefit of the Company, each of Vendors and their respective successors and assigns, except that the Company may not assign or transfer any of its rights or obligations under this Agreement as to any Vendor, or the Trade Note of such Vendor without the prior written consent of such Vendor. h. The Company and each of the Vendors shall take further actions as are reasonably required and within its powers in order to carry out its obligations under this Agreement and the Trade Notes. i. All notices, requests and demands to or upon the respective parties hereto to be effective shall be in writing (including by telecopy) and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made when delivered, or three business days after being deposited in the mail, postage prepaid, or, in the case of telecopy notice, when received, addressed as follows in the case of the Company, and as set forth on the signature page for each Vendor, or to such other address as may be hereafter notified by the respective parties hereto: 10 Party City Corporation 400 Commons Way Rockaway, New Jersey 07818 Attn: Tom Larson Facsimile: (973) 983-1333 with a copy to: Willkie Farr & Gallagher 787 Seventh Avenue New York, New York 10019 Facsimile: (212) 728-8111 Attn: Alan J. Lipkin Copies of all notices delivered pursuant to this Section 12(i) should be sent to: Latham & Watkins Sears Tower, Suite 5800 233 South Wacker Drive Chicago, Illinois 60606 Attn: Douglas Bacon Facsimile: (312) 993-9767 Ernst & Young, LLP 787 Seventh Avenue, 7th Floor New York, New York 10019 Attn: Michael Eisenband Facsimile: (212) 773-5440 Zahn Associates, Inc. 2050 Center Avenue Fort Lee, New Jersey 07024 Attn: Arnold Zahn Facsimile: (201) 944-3553 j. The Company hereby waives any defenses or counterclaims it has to any of the Trade Notes or its obligations evidenced thereby except for the defense of a Vendor's breach of this Agreement. The Company agrees that it will not exercise any right of offset it may have against any amounts payable under any of the Trade Notes on account of any amounts owed to it by any Vendor whether prior to or after the Effective Date except to the extent that the amounts owed to the Company by such Vendor exceed any and all amounts (other than the amounts payable under such Vendor's Trade Note) payable to such Vendor by the Company. 11 k. Time is of the essence of this Agreement and all of the terms, provisions, covenants and conditions hereof. l. The Company shall not offer any trade creditor not a party to this Agreement with treatment on account of any obligation owed to such trade creditor as of the Effective Date that is more favorable than that provided to the Vendors herein without offering such treatment to each of the Vendors; provided, however, that notwithstanding the foregoing, the Company may in its discretion settle any obligation owed to a trade creditor not a party to this Agreement that is outstanding as of the Effective Date so long as the aggregate settlement payment to any single trade creditor prior to the Principal Payment Date is equal to or less than $100,000. m. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. [Signature pages to follow.] 12 IN WITNESS WHEREOF, the undersigned have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers. Date: _________, 1999 AMSCAN, INC. [Name of Vendor] By: /s/James M. Harrison -------------------- Name: James M. Harrison Title: President Vendor Claim Amount: $15,800,000 Notice Address: 80 Grasslands Ave. Elmsford, NY 10523 Attn: Jim Harrison Facsimile: (914) 345-2056 Agreed to and Accepted, Date: August 16, 1999 PARTY CITY CORPORATION By: /s/Thomas E. Larson ------------------- Name: Thomas E. Larson Title: Chief Financial Officer IN WITNESS WHEREOF, the undersigned have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers. Date: August 16, 1999 BUNZL DISTRIBUTION USA, INC. [Name of Vendor] By: /s/Daniel Lett -------------- Name: Daniel Lett Title: Secretary and General Counsel Vendor Claim Amount: $1,379,848.36 Notice Address: 701 Emerson Road, Suite 500 St. Louis, MO 63191 Attn: Daniel J. Lett, Esq. Facsimile: (314) 817-1548 Agreed to and Accepted, Date: August 16, 1999 PARTY CITY CORPORATION By: /s/Thomas E. Larson ------------------- Name: Thomas E. Larson Title: Chief Financial Officer IN WITNESS WHEREOF, the undersigned have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers. Date: August 12, 1999 CREATIVE EXPRESSIONS [Name of Vendor] By: /s/Jon M. McLain ---------------- Name: Jon M. McLain Title: VP and GM Vendor Claim Amount: $5,153,229.77 Notice Address: 7240 Shadeland Station *300 Indianapolis, IN 46256 Attn: Jon M. McLain Facsimile: (317) 841-2608 Agreed to and Accepted, Date: August 16, 1999 PARTY CITY CORPORATION By: /s/Thomas E. Larson ------------------- Name: Thomas E. Larson Title: Chief Financial Officer IN WITNESS WHEREOF, the undersigned have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers. Date: August 16, 1999 EASTER UNLIMITED, INC. AND FUN WORLD DIV. OF EASTER UNLIMITED, INC. [Name of Vendor] By: /s/Stanley Geller ----------------- Name: Stanley Geller Title: President Vendor Claim Amount: $259,741.27 Notice Address: Fun World 80 Voice Road Carle Place, NY 11514 Attn: Stanley Geller Facsimile: (516) 873-9005 Agreed to and Accepted, Date: August 16, 1999 PARTY CITY CORPORATION By: /s/Thomas E. Larson ------------------- Name: Thomas E. Larson Title: Chief Financial Officer IN WITNESS WHEREOF, the undersigned have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers. Date: August 14, 1999 GIBSON GREETINGS, INC. [Name of Vendor] By: /s/Harold L. Caldwell --------------------- Name: Harold L. Caldwell Title: Secretary Vendor Claim Amount: $2,585,473.29 Notice Address: Gibson Greetings, Inc. 2100 Section Road Cincinnati, OH 45234 Attn: Chief Financial Officer Facsimile: (513) 841-6647 Agreed to and Accepted, Date: August 16, 1999 PARTY CITY CORPORATION By: /s/Thomas E. Larson ------------------- Name: Thomas E. Larson Title: Chief Financial Officer IN WITNESS WHEREOF, the undersigned have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers. Date: August 12, 1999 MARYLAND PLASTICS, INC. [Name of Vendor] By: /s/John A. Sofer, Jr. --------------------- Name: John A. Sofer, Jr. Title: Controller Vendor Claim Amount: $409,192.00 Notice Address: 251 East Central Ave. Federalsburg, MD 21630 Attn: John Sofer Facsimile: (410) 754-8036 Agreed to and Accepted, Date: August 16, 1999 PARTY CITY CORPORATION By: /s/Thomas E. Larson ------------------- Name: Thomas E. Larson Title: Chief Financial Officer IN WITNESS WHEREOF, the undersigned have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers. Date: August 16, 1999 PLASTICS, INC. [Name of Vendor] By: /s/Frank Biller --------------- Name: Frank Biller Title: President - GM Vendor Claim Amount: $320,092 Notice Address: 900 Apollo Road Eagan, MN 55121 Attn: Controller Facsimile: (651) 229-5470 Agreed to and Accepted, Date: August 16, 1999 PARTY CITY CORPORATION By: /s/Thomas E. Larson ------------------- Name: Thomas E. Larson Title: Chief Financial Officer IN WITNESS WHEREOF, the undersigned have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers. Date: August 16, 1999 RUBIE'S COSTUME CO., INC. [Name of Vendor] By: /s/Marc P. Beige ---------------- Name: Marc P. Beige Title: President Vendor Claim Amount: $195,361.09 Notice Address: One Rubie Plaza Richmond Hill, NY 11418 Attn: Marc P. Beige Facsimile: (718) 441-1415 Agreed to and Accepted, Date: August 16, 1999 PARTY CITY CORPORATION By: /s/Thomas E. Larson ------------------- Name: Thomas E. Larson Title: Chief Financial Officer IN WITNESS WHEREOF, the undersigned have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers. Date: August 16, 1999 THE BEISTLE COMPANY [Name of Vendor] By: /s/Patricia D. Lacy ------------------- Name: Patricia D. Lacy Title: Vice President Vendor Claim Amount: $700,978.93 Notice Address: Patricia D. Lacy, VP 1 Beistle Plaza, PO Box 10 Shippensburg, PA 17257 Attn: ________________ Facsimile: (717) 552-7753 Agreed to and Accepted, Date: August 16, 1999 PARTY CITY CORPORATION By: /s/Thomas E. Larson ------------------- Name: Thomas E. Larson Title: Chief Financial Officer IN WITNESS WHEREOF, the undersigned have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers. Date: August 12, 1999 TURN UP THE MUSIC, INC. [Name of Vendor] By: /s/Sheldon J. Isaacs -------------------- Name: Sheldon J. Isaacs Title: Exec. VP-CEO Vendor Claim Amount: $317,182.49 Notice Address: 708 Colfax Ave. Kenilworth, NJ 07033 Attn: Sheldon J. Isaacs Facsimile: (408) 620-0934 Agreed to and Accepted, Date: August 16, 1999 PARTY CITY CORPORATION By: /s/Thomas E. Larson ------------------- Name: Thomas E. Larson Title: Chief Financial Officer IN WITNESS WHEREOF, the undersigned have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers. Date: August 13, 1999 U.S. BALLOON MFG. CO., INC. [Name of Vendor] By: /s/Michael Isaacs ----------------- Name: Michael Isaacs Title: President Vendor Claim Amount: $673,301.38 Notice Address: U.S. Balloon Mfg. Co., Inc. 140 58 St. Brooklyn, NY Attn: Michael Isaacs Facsimile: (718) 442-9566 Agreed to and Accepted, Date: August 16, 1999 PARTY CITY CORPORATION By: /s/Thomas E. Larson ------------------- Name: Thomas E. Larson Title: Chief Financial Officer IN WITNESS WHEREOF, the undersigned have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers. Date: August 12, 1999 UNIQUE INDUSTRIES, INC. [Name of Vendor] By: /s/Everett Novak ------------------ Name: Everett Novak Title: Chairman/CEO Vendor Claim Amount: $2,863,291.94 Notice Address: Unique Industries, Inc. 2400 S. Weccacoe Avenue Philadelphia, PA 19148 Attn: Everett Novak Facsimile: (215) 336-2006 Agreed to and Accepted, Date: August 16, 1999 PARTY CITY CORPORATION By: /s/Thomas E. Larson ------------------- Name: Thomas E. Larson Title: Chief Financial Officer EXHIBIT A - FORM OF TRADE NOTE U.S. $_______________ Dated: August __, 1999 FOR VALUE RECEIVED, the undersigned, PARTY CITY CORPORATION, a Delaware corporation (the "Company"), HEREBY PROMISES TO PAY to the order of ____________________ (the "Vendor") on November 15, 1999 (the "Payment Date") the principal sum of U.S. $_______________ pursuant to that certain Vendor Forbearance and Standstill Agreement, dated as of August ___, 1999 (as amended or modified from time to time, the "Vendor Agreement"; the terms defined therein being used herein as therein defined), by and among the Company and each of those certain vendors (including the Vendor) that has executed a signature page thereto that has been accepted by the Company in accordance with the terms set forth therein. The Company promises to pay interest at the rate of ten percent (10%) per annum on the unpaid principal amount of this Trade Note from May 1, 1999 until the Payment Date. Such interest shall be due and payable in cash on the earlier to occur (the "Interest Payment Date") of (i) January 15, 1999 or (ii) the date on which a refinancing of the entire amount of the Bank Debt is consummated. From and after an Event of Default, the Company agrees to pay default interest at the rate of fourteen percent (14%) on any and all unpaid principal until paid in full in cash. Both principal and interest are payable in lawful money of the United States of America to Vendor in same day funds. This Trade Note is one of the Trade notes referred to in, and is entitled to the benefits of, the Vendor Agreement. The Vendor Agreement, among other things, contains provisions for acceleration of the maturity hereof upon the happening of certain stated events. PARTY CITY CORPORATION By:________________________ Name:______________________ Title:_____________________ EXHIBIT B --------- Members of the Vendor Group Amscan Bunzl Distribution, Inc. Creative Expressions Fun World Gibson Greetings, Inc. Maryland Plastics, Inc. Plastics, Inc. Rubie's The Beistle Company Turn Up the Music, Inc. U.S. Balloon Company Unique Industries, Inc. EX-99.1 11 PRESS RELEASE FOR IMMEDIATE RELEASE PARTY CITY RAISES $30 MILLION AND ANNOUNCES COMPREHENSIVE RESTRUCTURING ROCKAWAY, N.J. August 17, 1999 -- Party City Corporation today announced that it has received $30 million in financing from a group of new investors led by Tennenbaum & Co., LLC, a Los Angeles-based investment firm, and that it has reached agreements with its existing bank group and trade vendors. Party City received an infusion of $30 million from the proceeds from the sale of senior secured notes and warrants. The notes bear interest at various rates between 12.5% and 14.0% and mature at various times between 2001 and 2004. The notes are secured by a shared first lien and a second lien on all of the company's assets As part of the note transaction, Party City issued warrants to certain of the noteholders to acquire 6,880,000 shares of its Common Stock at an exercise price of $3.00 per share. These shares represent 35% of the shares outstanding after giving effect to the exercise of the warrants. Party City's existing banks have agreed not to exercise rights and remedies based upon any existing defaults until June 30, 2000 unless an event of default occurs. Party City has agreed to reduce its outstanding borrowings from $54 million currently outstanding to $15 million by October 30, 1999, and to increase the interest rate on its bank debt. Party City's trade vendors representing approximately $30 million of trade debt, as well as various seasonal trade creditors, have also entered into an agreement with Party City. As part of the agreement, the trade vendors agreed to forbear from taking any action against Party City until January 15, 2000, unless an event of default occurs. The trade vendors will receive promissory notes from Party City representing one-third of their claims. These notes will bear interest at a rate of 10% and mature on November 15, 1999. Interest on the notes is due on January 15, 2000, unless the bank debt is refinanced before then. Certain seasonal trade vendors have agreed to extend certain credit to Party City for the Halloween and year-end holiday season. Vendors that have agreed to extend credit will receive a shared lien on the Company's inventory for the amount of the credit. Party City also announced that John Oberdorf has resigned as a director and that two representatives of the noteholders, Howard Levkowitz and Matthew R. Kahn, have joined the Board of Directors. Mr. Levkowitz, a principal of Tennenbaum & Co., LLC, was previously a transactional attorney with Dewey Ballantine LLP. Mr. Kahn, President of GB Equity Partners, LLC, was previously a Managing Director of Gordon Brothers Group, Chief Financial Officer of Joseph A. Bank Clothiers, Inc. and Senior Financial Officer of Nature Food Centres, Inc. Jack Futterman, Chairman of the Board and Chief Executive Officer of Party City, stated: "We are very pleased with the terms of this comprehensive restructuring. The restructuring has the support of our banks and our vendors and will enable us to purchase our Halloween and other seasonal inventory. We are also excited to have a significant new investment in Party City, and look forward to the contribution of Howard Levkowitz and Matthew Kahn as board members." Party City also indicated that its audit was expected to be completed by September 30, 1999. The audit will cover the 18-month period ended July 3, 1999. Party City is a specialty retailer of party supplies through its national network of discount super stores. This press release contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties, which may cause Party City's actual results in future periods to differ materially from forecasted results. Those risks include, among other things, the competitive environment in the party goods industry in general and in Party City's specific market areas, inflation, changes in costs of goods and services and economic conditions in general. Those and other risks are more fully described in Party City's filings with the Securities and Exchange Commission. Contact: Gordon Keil Chief Operating Officer (973-983-0888, ext. 244) -----END PRIVACY-ENHANCED MESSAGE-----