<PAGE>
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
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(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)
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
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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
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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.
<PAGE>
[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
<PAGE>
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;
<PAGE>
(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.
<PAGE>
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
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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.
<PAGE>
(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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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:________________________
<PAGE>
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.
<PAGE>
[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
<PAGE>
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
<PAGE>
[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
<PAGE>
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
<PAGE>
[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
<PAGE>
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
<PAGE>
[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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
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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
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SCHEDULE 9.18 Schedule of Halloween Inventory
v
<PAGE>
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;
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<PAGE>
(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.
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<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
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(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
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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.
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(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).
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(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
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(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.
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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
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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
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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.
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(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.
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<PAGE>
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
<PAGE>
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
<PAGE>
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.
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<PAGE>
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:
<TABLE>
<CAPTION>
Quarter End Date Ratio
---------------- -----
<S> <C>
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.
</TABLE>
(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:
<TABLE>
<CAPTION>
Quarter End Date Ratio
---------------- -----
<S> <C>
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
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<PAGE>
June 30, 2003 1.80 to 1.0
and thereafter.
</TABLE>
(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:
<TABLE>
<CAPTION>
Quarter End Date Ratio
---------------- -----
<S> <C>
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.
</TABLE>
(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:
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<PAGE>
(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.,
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<PAGE>
(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
<PAGE>
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
<PAGE>
(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;
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(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
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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
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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
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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:
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(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
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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
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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.
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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
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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):
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(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,
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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
<PAGE>
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
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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
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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.
<TABLE>
<CAPTION>
Term Section
---- -------
<S> <C>
"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)
--------
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
EXECUTION COPY
PARTY CITY CORPORATION
------------------
INVESTOR RIGHTS AGREEMENT
------------------
Dated as of August 16, 1999
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
(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.
<PAGE>
(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
<PAGE>
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
<PAGE>
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;
<PAGE>
(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;
<PAGE>
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
<PAGE>
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
<PAGE>
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;
<PAGE>
(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.
<PAGE>
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
<PAGE>
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]
<PAGE>
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
<PAGE>
COUNTERPART SIGNATURE PAGE
TO
INVESTOR RIGHTS AGREEMENT
INVESTOR:
TENENBAUM & CO, LLC
By: /s/ Michael E. Tennenbaum
-------------------------------
Name: Michael E. Tennenbaum
Its: Managing Member
<PAGE>
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
<PAGE>
COUNTERPART SIGNATURE PAGE
TO
INVESTOR RIGHTS AGREEMENT
INVESTOR:
GOLDMAN SACHS CREDIT PARTNERS L.P.
By: /s/ John Urban
---------------------------------
Name: John Urban
Its: Authorized Signer
<PAGE>
COUNTERPART SIGNATURE PAGE
TO
INVESTOR RIGHTS AGREEMENT
INVESTOR:
GOLDMAN, SACHS & CO.
By: /s/ John Urban
---------------------------------
Name: John Urban
Its: Authorized Signer
<PAGE>
COUNTERPART SIGNATURE PAGE
TO
INVESTOR RIGHTS AGREEMENT
INVESTOR:
ENHANCED RETAIL FUNDING, LLC
By: /s/ Bradley W. Snyder
---------------------------------
Name: Bradley W. Snyder
Its: Vice President
<PAGE>
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
<PAGE>
COUNTERPART SIGNATURE PAGE
TO
INVESTOR RIGHTS AGREEMENT
COMPANY STOCKHOLDER:
JACK FUTTERMAN
/s/ Jack Futterman
-----------------------------
Signature
<PAGE>
<TABLE>
ANNEX I
SCHEDULE OF INVESTORS
<CAPTION>
- --------------------------------------------- -------------------------------- -------------------------------------------------
Shares of Common Stock
Investor (subject to Warrants) Notes
- --------------------------------------------- -------------------------------- -------------------------------------------------
- --------------------------------------------- -------------------------------- -------------------------------------------------
<S> <C> <C>
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
- --------------------------------------------- -------------------------------- -------------------------------------------------
</TABLE>
<PAGE>
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................................
- ------------------------------------- ------------------------------------------
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
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(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,
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<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
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<PAGE>
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.
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<PAGE>
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
<PAGE>
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.
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<PAGE>
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
<PAGE>
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
<PAGE>
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
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<PAGE>
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]
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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
<PAGE>
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
<PAGE>
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
<PAGE>
"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
<PAGE>
"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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:_____________________
<PAGE>
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.
<PAGE>
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
<PAGE>
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)
