EXECUTION COPY
PARTY CITY CORPORATION
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INVESTOR RIGHTS AGREEMENT
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Dated as of August 16, 1999
TABLE OF CONTENTS
Page
1. Certain Definitions......................................................1
2. Investor Representations.................................................1
3. Registration Rights......................................................1
3.1 Requested Registration................................................1
3.2 Company Registration..................................................1
3.3 Registration on Form S-3..............................................1
3.4 Limitations on Subsequent Registration Rights.........................1
3.5 Expenses of Registration..............................................1
3.6 Registration Procedures...............................................1
3.7 Indemnification.......................................................1
3.8 Information by Holder.................................................1
3.9 Rule 144 Reporting....................................................1
3.10 Transfer of Registration Rights.......................................1
3.11 Termination of Rights.................................................1
4. Governance...............................................................1
4.1 Resignation of Current Directors......................................1
4.2 Election of Directors; Company Actions................................1
4.3 Election of Directors; Stockholder Actions............................1
4.4 Committee of the Board; Annual Meeting................................1
4.5 Liability Insurance...................................................1
5. Investor Restrictions....................................................1
5.1 Restrictions..........................................................1
5.2 Lapse of Restrictions.................................................1
6. Rights to Co-Invest......................................................1
6.1 General...............................................................1
6.2 Qualified Offeree.....................................................1
6.3 Exemptions............................................................1
6.4 Termination of Co-Investment Rights...................................1
7. Miscellaneous............................................................1
7.1 Assignment............................................................1
7.2 Third Parties.........................................................1
7.3 Future Investors......................................................1
7.4 Governing Law.........................................................1
7.5 Counterparts..........................................................1
7.6 Notices...............................................................1
7.7 Severability..........................................................1
7.8 Amendment and Waiver..................................................1
7.9 Effect of Amendment or Waiver.........................................1
7.10 Rights of Holders.....................................................1
7.11 Delays or Omissions...................................................1
INVESTOR RIGHTS AGREEMENT
THIS INVESTOR RIGHTS AGREEMENT (the "Agreement") is made as of August
16, 1999 by and among Party City Corporation, a Delaware corporation (the
"Company"), the persons set forth on the Schedule of Investors attached hereto
as Annex I (the "Investors") and certain stockholders and/or optionholders of
the Company identified on the Schedule of Company Stockholders attached hereto
as Annex II (the "Company Stockholders").
RECITALS
The Company is issuing certain warrants (the "Warrants") to purchase
shares of its common stock, par value $.01 per share ("Common Stock"), and
certain notes of the Company to the Investors pursuant to one or more Securities
Purchase Agreements dated as of August 16, 1999 by and among the Company and the
Investors (each such agreement being of the same form and referred to herein as
the "Purchase Agreement"). This Agreement shall become effective from and after
the Closing (as such term is defined in the Purchase Agreement).
1. Certain Definitions. As used in this Agreement, the following
terms shall have the following respective meanings:
"Commission" shall mean the Securities and Exchange Commission
or any other federal agency at the time administering the Securities Act.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended, or any similar successor federal statute, and the rules and
regulations thereunder, all as the same shall be in effect from time to time.
"Fully-Diluted Common Stock" shall mean all of the issued and
outstanding Common Stock of the Company, assuming conversion, exercise or
exchange of all outstanding convertible, exercisable or exchangeable securities,
options, warrants and similar instruments into or for Common Stock (regardless
of whether such convertibles securities are at such time convertible,
exercisable or exchangeable). All such calculations shall be appropriately
adjusted for stock splits, stock dividends and other similar events.
"Holder" shall mean (a) any Investor holding Registrable
Securities and (b) any person holding Registrable Securities to whom the rights
under this Agreement have been transferred in accordance with Section 3.10
hereof.
"Initiating Holders" shall mean any Investors or transferees
of Investors under Section 3.10 hereof who in the aggregate are Holders of not
less than twenty percent (20%) of the Registrable Securities and who propose to
register securities, the aggregate offering price of which, net of underwriting
discounts and commissions, exceeds $2,500,000.
"Person" shall mean a corporation, an association, a
partnership, an organization, a business, an individual, a government or
political subdivision thereof or a governmental agency.
"Public Event" shall mean the earlier to occur of (a) the
first public offering of the Common Stock of the Company after the date hereof
to the general public which is effected pursuant to a registration statement
filed with, and declared effective by, the Commission under the Securities Act
or (b) the first listing (or relisting) of the Common Stock with the Nasdaq
National Market or any national securities exchange after the date hereof.
The terms "register," "registered" and "registration" refer to
a registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
"Registration Expenses" shall mean all expenses incurred by
the Company in complying with Sections 3.1, 3.2 and 3.3 hereof, including,
without limitation, all registration, qualification, listing and filing fees,
printing expenses, escrow fees, fees and disbursements of counsel for the and
the Holders, blue sky fees and expenses, and the expense of any special audits
incident to or required by any such registration.
"Registrable Securities" shall mean (a) the shares of Common
Stock issuable to any Investor upon exercise of the Warrants, (b) any other
shares of Common Stock held by any Investor from time to time after the date
hereof, and (c) any Common Stock of the Company issued or issuable in respect of
the shares of Common Stock described in clauses (a) and (b) above, or other
securities issued or issuable with respect to such shares of Common Stock upon
any stock split, stock dividend, recapitalization or similar event, provided,
however, that shares of Common Stock or other securities shall only be treated
as Registrable Securities if and so long as they have not been (i) sold to or
through a broker or dealer or underwriter in a public distribution or a public
securities transaction, (ii) sold in a transaction exempt from the registration
and prospectus delivery requirements of the Securities Act under Section 4(1)
thereof so that all transfer restrictions and restrictive legends with respect
thereto are removed upon the consummation of such sale, or (iii) transferred in
a transaction pursuant to which the registration rights are not also assigned in
accordance with Section 3.10 hereof. As used herein, the term "Registrable
Securities" shall also include the Warrants provided that only the shares of
Common Stock issuable upon exercise of the Warrants need be registered by the
Company pursuant to Section 3 hereof.
"Securities Act" shall mean the Securities Act of 1933, as
amended, and the rules and regulations promulgated thereunder or any similar
federal statute and the rules and regulations of the Commission thereunder, all
as the same shall be in effect at the time.
"Selling Expenses" shall mean all underwriting discounts,
selling commissions and stock transfer taxes applicable to the securities
registered by the Holders.
"Supermajority in Interest" shall mean (a) in the case of
Warrantholders, at least eight-one percent (81.0%) in aggregate amount of
Registrable Securities (as listed on Annex I hereto) and (b) in the case of
Investors, at least eighty-one percent (81.0%) in principal amount of the then
outstanding Notes (as such term is defined in the Purchase Agreement).
"Warrantholder" shall mean the holder of any Warrant.
2. Investor Representations. Each Investor hereby represents,
warrants, acknowledges and agrees as follows:
(a) .....the Securities (as such term is defined in the
Purchase Agreement) issued to such Investor pursuant to the Purchase Agreement
are being acquired for such Investor's own account for investment purposes only
and not with a view to any public resale, public distribution or public offering
thereof within the meaning of the Securities Act or any state securities or blue
sky laws, and such Securities will not be sold or otherwise disposed of except
in compliance with the Securities Act and state securities or blue sky laws or
in reliance upon an exemption therefrom; and
(b)......the Investor is an "accredited investor" within the
meaning of Rule 501 promulgated under the Securities Act.
3. Registration Rights.
3.1. Requested Registration.
(a) Request for Registration. If the Company
shall receive from Initiating Holders a written request that the Company effect
any registration, qualification or compliance, the Company will:
(i) promptly give written notice of the
proposed registration, qualification or compliance to all other Holders; and
(ii) promptly use its best efforts to
effect such registration, qualification or compliance (including, without
limitation, the execution of an undertaking to file post-effective amendments,
appropriate qualification under applicable blue sky or other state securities
laws and appropriate compliance with applicable regulations issued under the
Securities Act and any other governmental requirements or regulations) as may be
so requested and as would permit or facilitate the sale and distribution of all
or such portion of such Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any Holder or
Holders joining in such request as are specified in a written request received
by the Company within fifteen (15) days after receipt of such written notice
from the Company; provided, however, that the Company shall not be obligated to
take any action to effect any such registration, qualification or compliance
pursuant to this Section 3.1:
(1) In any particular juris-
diction in which the Company would be required to execute a general consent to
service of process in effecting such registration, qualification or compliance
unless the Company is already subject to service in such jurisdiction and
except as may be required by the Securities Act;
(2) Prior to the date which is
six (6) months following the effective date of the Public Event;
(3) After (A) the Company has
effected one (or more) registrations pursuant to this Section 3.1(a) which have
included the Registrable Securities of each and every Investor who holds or has
held at any time at least twenty-five percent (25%) of the aggregate number of
Registrable Securities subject to this Agreement as set forth on Annex I hereto,
(B) such registrations have been declared or ordered effective and (C) the
securities offered pursuant to such registrations have been sold; or
(4) If the Company shall
furnish to such Holders a certificate, signed by the President or Chief
Executive Officer of the Company, stating that in the good faith judgment of the
Board of Directors the filing of a registration statement in the near future
with respect to the proposed registration would have a material adverse effect
on the Company, then the Company's obligation to use its best efforts to
register, qualify or comply under this Section 3.1 shall be deferred for a
period not to exceed sixty (60) days from the date of receipt of written request
from the Initiating Holders; provided, however, that the Company may not utilize
this right more than once in any twelve (12) month period.
Subject to the foregoing clauses (1) through
(4), the Company shall file a registration statement covering the Registrable
Securities so requested to be registered as soon as practicable after receipt of
the request or requests of the Initiating Holders.
(b) Underwriting. The Initiating Holders shall
have the right to determine whether any registration under Section 3.1 shall be
underwritten or not, and shall so specify in their initial notice to the
Company. In the event that a registration pursuant to Section 3.1 is for a
registered public offering involving an underwriting, the Company shall so
advise the Holders as part of the notice given pursuant to Section 3.1(a)(i).
The right of any Holder to registration pursuant to Section 3.1 shall be
conditioned upon such Holder's participation in the underwriting arrangements
required by this Section 3.1 and the inclusion of such Holder's Registrable
Securities in the underwriting, to the extent requested, to the extent provided
herein.
The Company shall (together with all Holders
proposing to distribute their securities through such
underwriting) enter into and perform its obligations under an underwriting
agreement in customary form with the managing underwriter selected for such
underwriting selected by Supermajority in Interest of the Initiating Holders
(which managing underwriter shall be reasonably acceptable to the Company).
Notwithstanding any other provision of this Section 3.1, if the managing
underwriter advises the Initiating Holders in writing that marketing factors
require a limitation of the number of shares to be underwritten, then the
Company shall so advise all Holders of Registrable Securities and the number of
shares of Registrable Securities that may be included in the registration and
underwriting shall be allocated among all Holders thereof in proportion, as
nearly as practicable, to the respective amounts of Registrable Securities held
by such Holders at the time of filing the registration statement. No Registrable
Securities excluded from the underwriting by reason of the underwriter's
marketing limitation shall be included in such registration. To facilitate the
allocation of shares in accordance with the above provisions, the Company or the
underwriters may round the number of shares allocated to any Holder to the
nearest one hundred (100) shares.
3.2. Company Registration.
(a) Notice of Registration. If at any time or
from time to time the Company shall determine to register any of its equity
securities, either for its own account or the account of a security holder or
holders other than (i) a registration relating solely to employee benefit plans,
(ii) a registration relating solely to a Commission Rule 145 transaction, or
(iii) a registration on any registration form that does not permit secondary
sales, the Company will:
(i) promptly give to each Holder written
notice thereof; and
(ii) include in such registration (and
any related qualification under blue sky laws or other compliance), and in any
underwriting involved therein, all of the Registrable Securities specified in a
written request or requests made within fifteen (15) days after receipt of such
written notice from the Company by any Holder, but only to the extent that such
inclusion will not diminish the number of securities included by the Company or
by holders of the Company's securities who have demanded such registration.
(b) Underwriting. If the registration of which
the Company gives notice is for a registered public offering involving an
underwriting, the Company shall so advise the Holders as a part of the written
notice given pursuant to Section 3.2(a)(i). In such event, the right of any
Holder to registration pursuant to Section 3.2 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of Registrable
Securities in the underwriting to the extent provided herein. All Holders
proposing to distribute their securities through such underwriting shall
(together with the Company and the other holders distributing their securities
through such underwriting) enter into and perform their obligations under an
underwriting agreement in customary form with the managing underwriter selected
for such underwriting by the Company. Notwithstanding any other provision of
this Section 3.2, if the managing underwriter determines that marketing factors
require a limitation of the number of shares to be underwritten, the managing
underwriter may exclude all Registrable Securities from, or limit the number of
Registrable Securities to be included in the registration and underwriting, on a
pro rata basis based on the total number of securities (including, without
limitation, Registrable Securities) entitled to registration pursuant to
registration rights granted to the participating Holders by the Company. To
facilitate the allocation of shares in accordance with the above provisions, the
Company or the underwriters may round the number of shares allocated to any
Holder or other holder to the nearest one hundred (100) shares.
(c) Right to Terminate Registration. The
Company shall have the right to terminate or withdraw any registration initiated
by it under this Section 3.2 prior to the effectiveness of such registration,
whether or not any Holder has elected to include securities in such
registration.
3.3. Registration on Form S-3.
(a) The Company shall use its best efforts to
qualify for registration on Form S-3 or any comparable or successor form. To
that end the Company shall register (whether or not required by law to do so)
its Common Stock under the Exchange Act in accordance with the provisions of the
Exchange Act.
(b) If any Holder or Holders of not less than
twenty percent (20%) of the Registrable Securities then outstanding requests
that the Company file a registration statement on Form S-3 (or any successor
form to Form S-3) for a public offering of shares of the Registrable Securities,
the reasonably anticipated aggregate price to the public of which, net of
underwriting discounts and commissions, would exceed $2,500,000, and the Company
is a registrant entitled to use Form S-3 to register the Registrable Securities
for such an offering, the Company shall use its best efforts to cause such
Registrable Securities to be registered for the offering on such form. The
Company will (i) promptly give written notice of the proposed registration to
all other Holders, and (ii) promptly use its best efforts to effect such
registration (including, without limitation, the execution of an undertaking to
file post-effective amendments, appropriate qualification under applicable blue
sky or other state securities laws and appropriate compliance with applicable
regulations issued under the Securities Act and any other governmental
requirements or regulations) as may be so requested and as would permit or
facilitate the sale and distribution of all or such portion of such Registrable
Securities as are specified in such request, together with all or such portion
of the Registrable Securities of any Holder or Holders joining in such request
as are specified in a written request received by the Company within fifteen
(15) days after receipt of the written notice from the Company referred to in
the preceding clause (i). The substantive provisions of Section 3.1(b) shall be
applicable to each registration initiated under this Section 3.3.
(c) Notwithstanding the foregoing, the Company
shall not be obligated to take any action pursuant to this Section 3.3: (i) in
any particular jurisdiction in which the Company would be required to execute a
general consent to service of process in effecting such registration,
qualification or compliance unless the Company is already subject to service in
such jurisdiction and except as may be required by the Securities Act; or (ii)
if the Company shall furnish to such Holder a certificate signed by the
President or Chief Executive Officer of the Company stating that, in the good
faith judgment of the Board of Directors the filing of a registration statement
in the near future with respect to the proposed registration would have a
material adverse effect on the Company, then the Company's obligation to use its
best efforts to register, qualify or comply under this Section 3.3 shall be
deferred for a period not to exceed sixty (60) days from the receipt of the
request to file such registration by such Holder or Holders; provided, however,
that the Company may not utilize this right more than once in any twelve (12)
month period.
3.4. Limitations on Subsequent Registration Rights. From
and after the date hereof, the Company shall not enter into any agreement
granting any holder or prospective holder of any securities of the Company
registration rights with respect to such securities unless such new registration
rights, including standoff obligations, are subordinate to the registration
rights granted to the Holders hereunder.
3.5. Expenses of Registration. All Registration Expenses
incurred in connection with any registration pursuant to Sections 3.1, 3.2 or
3.3 shall be borne by the Company. Unless otherwise stated, all other Selling
Expenses relating to securities registered on behalf of the Holders shall be
borne by the Holders of the registered securities included in such registration
pro rata on the basis of the number of shares so registered.
3.6. Registration Procedures. In the case of each
registration, qualification or compliance effected by the Company pursuant to
this Section 3, the Company will keep each Holder advised in writing as to the
initiation of each registration, qualification and compliance and as to the
completion thereof and, at its expense, the Company will:
(a) Prepare and file with the Commission a
registration statement with respect to such securities and use its best efforts
to cause such registration statement to become and remain effective for at least
ninety (90) days or until the distribution described in the registration
statement has been completed; provided, however, that in the case of any
registration of Registrable Securities on Form S-3 which are intended to be
offered on a continuous or delayed basis, such period shall be extended, if
necessary, to keep the registration statement effective until all such
Registrable Securities are sold, provided that if Rule 415, or any successor
rule under the Securities Act, permits an offering on a continuous or delayed
basis, and provided further that if applicable rules under the Securities Act
governing the obligation to file a post-effective amendment permit, in lieu of
filing a post-effective amendment which (i) includes any prospectus required by
Section 10(a)(3) of the Securities Act or (ii) reflects facts or events
representing a material or fundamental change in the information set forth in
the registration statement, the incorporation by reference of information
required to be included in (i) and (ii) above shall be contained in periodic
reports filed pursuant to Section 13 or 15(d) of the Exchange Act in the
registration statement;
(b) Furnish to the Holders participating in such
registration and to the underwriters of the securities being registered such
number of copies of the registration statement, preliminary prospectus, final
prospectus and such other documents as such Holders and underwriters may
reasonably request in order to facilitate the public offering of such
securities;
(c) Prepare and file with the Commission such
amendments and supplements to such registration statement and the prospectus
used in connection with such registration statement as may be necessary to
comply with the provisions of the Securities Act with respect to the disposition
of all securities covered by such registration statement;
(d) Notify each seller of Registrable Securities
covered by such registration statement at any time when a prospectus relating
thereto is required to be delivered under the Securities Act of the happening of
any event as a result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein not misleading or incomplete in the light of the
circumstances then existing, and at the request of any such seller, prepare and
furnish to such seller a reasonable number of copies of a supplement to or an
amendment of such prospectus as may be necessary so that, as thereafter
delivered to the purchaser of such shares, such prospectus shall not include an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading or
incomplete in the light of the circumstances then existing;
(e) Use its best efforts to register and qualify
the securities covered by such registration statement under such other
securities or blue sky laws of such jurisdictions as shall be reasonably
requested by the Holders, provided that the Company shall not be required in
connection therewith or as a condition thereto to qualify to do business or to
file a general consent to service of process in any such states or
jurisdictions;
(f) Cause all such Registrable Securities to be
listed on each securities exchange on which similar securities issued by the
Company are then listed;
(g) Provide a transfer agent and registrar for
all Registrable Securities and a CUSIP number for all such Registrable
Securities, in each case not later than the effective date of such registration;
and
(h) Make available for inspection by any Holder
participating in such registration, any underwriter participating in any
disposition pursuant to such registration, and any attorney or accountant
retained by any such Holder or underwriter, all financial and other records,
pertinent corporate documents and properties of the Company, and cause the
Company's officers and directors to supply all information requested by any such
Holder, underwriter, attorney or accountant in connection with such registration
statement; provided, however, that such Holder, underwriter, attorney or
accountant shall agree to hold in confidence and trust all information so
provided.
3.7. Indemnification.
(a) The Company will indemnify each Holder, each
of its officers, principals, members, directors and partners, and each person
controlling such Holder within the meaning of Section 15 of the Securities Act,
with respect to which registration, qualification or compliance has been
effected pursuant to this Section 3, and each underwriter, if any, and each
person who controls any underwriter within the meaning of Section 15 of the
Securities Act, against all expenses, claims, losses, damages or liabilities (or
actions in respect thereof) arising out of or based on any untrue statement (or
alleged untrue statement) of a material fact contained in any registration
statement, prospectus, offering circular or other document, or any amendment or
supplement thereto, incident to any such registration, qualification or
compliance, or based on any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances in which they were made, not misleading,
or any violation by the Company of any rule or regulation promulgated under the
Securities Act applicable to the Company in connection with any such
registration, qualification or compliance, and the Company will reimburse each
such Holder, each of its officers and directors, and each person controlling
such Holder, each such underwriter and each person who controls any such
underwriter, for any legal and any other expenses reasonably incurred in
connection with investigating, preparing or defending any such claim, loss,
damage, liability or action, as such expenses are incurred, provided that the
Company will not be liable in any such case to the extent that any such claim,
loss, damage, liability or expense arises out of or is based on any untrue
statement or omission or alleged untrue statement or omission, made in reliance
upon and in conformity with written information furnished to the Company by an
instrument duly executed by such Holder, controlling person or underwriter and
stated to be specifically for use therein.
(b) Each Holder will, if Registrable Securities
held by such Holder are included in the securities as to which such
registration, qualification or compliance is being effected, indemnify the
Company, each of its directors and officers, each underwriter, if any, of the
Company's securities covered by such registration statement, each person who
controls the Company or such underwriter within the meaning of Section 15 of the
Securities Act, and each other such Holder, each of its officers and directors
and each person controlling such Holder within the meaning of Section 15 of the
Securities Act, against all claims, losses, damages and liabilities (or actions
in respect thereof) arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any such registration
statement, prospectus, offering circular or other document, or any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse
the Company, such Holders, such directors, officers, persons, underwriters or
control persons for any legal or any other expenses reasonably incurred in
connection with investigating or defending any such claim, loss, damage,
liability or action, as such expenses are incurred, in each case to the extent,
but only to the extent, that such untrue statement (or alleged untrue statement)
or omission (or alleged omission) is made in such registration statement,
prospectus, offering circular or other document in reliance upon and in
conformity with written information furnished to the Company by an instrument
duly executed by such Holder and stated to be specifically for use therein;
provided that in no event shall any indemnity under this Section 3.7(b) exceed
the net proceeds received by such Holder in such registration.
(c) Each party entitled to indemnification under
this Section 3.7 (the "Indemnified Party") shall give notice to the party
required to provide indemnification (the "Indemnifying Party") promptly after
such Indemnified Party has actual knowledge of any claim as to which indemnity
may be sought, and shall permit the Indemnifying Party to assume the defense of
any such claim or any litigation resulting therefrom, provided that counsel for
the Indemnifying Party, who shall conduct the defense of such claim or
litigation, shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's expense; provided, however, that an Indemnified Party
(together with all other Indemnified Parties which may be represented without
conflict by one counsel) shall have the right to retain one separate counsel,
with the fees and expenses to be paid by the Indemnifying Party, if
representation of such Indemnified Party by the counsel retained by the
Indemnifying Party would be inappropriate due to actual or potential differing
interests between such Indemnified Party and any other party represented by such
counsel in such proceeding. The failure of any Indemnified Party to give notice
as provided herein shall not relieve the Indemnifying Party of its obligations
under this Section 3 unless the failure to give such notice is materially
prejudicial to an Indemnifying Party's ability to defend such action. No
Indemnifying Party, in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, consent to entry of any
judgment or enter into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such Indemnified Party
of a release from all liability in respect to such claim or litigation.
(d) If the indemnification provided for in this
Section 3.7 is held by a court of competent jurisdiction to be unavailable to an
Indemnified Party with respect to any claim, loss, damage, liability or action
referred to therein, then the Indemnifying Party, in lieu of indemnifying such
Indemnified Party hereunder, shall contribute to the amount paid or payable by
such Indemnified Party as a result of such claim, loss, damage, liability or
action in such proportion as is appropriate to reflect the relative fault of the
Indemnifying Party on the one hand and the Indemnified Party on the other in
connection with the actions that resulted in such claim, loss, damage, liability
or action, as well as any other relevant equitable considerations. The relative
fault of the Indemnifying Party and of the Indemnified Party shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission to state a material fact related to
information supplied by the Indemnifying Party or by the Indemnified Party and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission. The Company and the Holders
agree that it would not be just and equitable if contribution pursuant to this
Section 3.7(d) were based solely upon the number of entities from whom
contribution was requested or by any other method of allocation which does not
take account of the equitable considerations referred to above in this Section
3.7(d).
(e) The amount paid or payable by an Indemnified
Party as a result of the losses, claims, damages and liabilities referred to
above in this Section 3.7 shall be deemed to include any legal or other expenses
reasonably incurred by such Indemnified Party in connection with investigating
or defending any such action or claim, subject to the provisions of Section 3.7
hereof. Notwithstanding the provisions of this Section 3.7, no Holder shall be
required to contribute any amount or make any other payments under this
Agreement which in the aggregate exceed the net proceeds (after selling
expenses) received by such Holder. No person guilty of fraudulent
misrepresentation (within the meaning of the Securities Act) shall be entitled
to contribution from any person who was not guilty of such fraudulent
misrepresentation.
3.8. Information by Holder. The Holder or Holders of
Registrable Securities included in any registration shall furnish to the Company
such information regarding such Holder or Holders, the Registrable Securities
held by them and the distribution proposed by such Holder or Holders as the
Company may reasonably request in writing and as shall be required in connection
with any registration, qualification or compliance referred to in this Section
3.
3.9. Rule 144 Reporting. With a view to making available
the benefits of certain rules and regulations of the Commission which may at any
time permit the sale of the Registrable Securities to the public without
registration, after such time as a public market exists for the Common Stock of
the Company, the Company agrees, promptly following the completion of the
Company's audit for the 18-month period ended July 3, 1999, to use its best
efforts to:
(a) Make and keep public information available,
as those terms are understood and defined in Rule 144 under the Securities Act,
at all times after the effective date that the Company becomes subject to the
reporting requirements of the Securities Act or the Exchange Act; and
(b) File with the Commission in a timely manner
all reports and other documents required of the Company under the Securities Act
and the Exchange Act (at any time after it has become subject to such reporting
requirements).
3.10. Transfer of Registration Rights. The rights to cause
the Company to register securities granted to any party hereto under Sections
3.1, 3.2 and 3.3 may be assigned to a transferee or assignee in connection with
any transfer or assignment of Registrable Securities by such party (together
with any affiliate); provided that (a) such transfer may otherwise be effected
in accordance with applicable securities laws and (b) notice of such assignment
is given to the Company.
3.11. Termination of Rights. The rights of any particular
Holder to cause the Company to register securities under Sections 3.1, 3.2 and
3.3 shall terminate with respect to such Holder on the date that is seven (7)
years after the date hereof or on the date on which all Registrable Securities
held by such Holder can be sold in any 90-day period under Rule 144 (without
regard to Rule 144(k)).
4. Governance.
4.1. Resignation of Current Directors. Immediately prior
to the Closing (as such term is defined in the Purchase Agreement), one (1)
member of the Company's Board of Directors shall resign from his position as
director.
4.2. Election of Directors; Company Actions.
(a) The Company agrees to take all actions
necessary to enable (i) ▇▇▇▇▇▇▇▇▇▇ & Co., LLC (or its transferree) to designate
one (1) director for election to the Company's Board of Directors and (ii)
TCO/Party City, LLC (or its transferee) to designate one (1) director for
election to the Company's Board of Directors concurrent with the Closing. The
Company further agrees to take all actions necessary to enable Supermajority in
Interest of the Investors to designate additional directors for election to the
Company's Board of Directors such that the number of directors nominated by the
Investors pursuant to this Section 4.2 shall represent not less than thirty
percent (30%) of the number of directors serving on the Company's Board of
Directors at any time.
(b) The Company shall exercise its best efforts
to cause the nominees of the Investors pursuant to this Section 4.2 (the
"Nominees") to be elected to the Board of Directors by the stockholders of the
Company or otherwise cause to be expanded the size of the Board of Directors and
cause to be appointed the Nominees as directors in accordance with the Company's
Bylaws. This right shall continue until later of (i) the payment in full of each
of the Notes (as such term is defined in the Purchase Agreement), (ii) the
exercise in full of each of the Warrants, and (iii) the date that the
Registrable Securities of the Holders represent less than ten percent (10.0%) of
the issued and outstanding Common Stock of the Company.
4.3. Election of Directors; Stockholder Actions. Each
Company Stockholder hereby agrees to vote all shares of capital stock of the
Company entitled to vote owned or held of record by such Company Stockholder at
any annual or special meeting in favor of, or take all action by written consent
in lieu of any such meeting, necessary to ensure that the Nominees are elected
as directors as contemplated in Section 4.2. In addition, each Company
Stockholder agrees to vote all shares of capital stock of the Company owned or
held of record by such Company Stockholder, or over which such Company
Stockholder has voting control, upon any other matter arising under this
Agreement submitted to a vote of the stockholders in a manner so as to implement
the terms of this Agreement.
4.4. Committee of the Board; Annual Meeting.
(a) The Company agrees to take all actions
necessary to cause the Nominating Committee of the Board of Directors to consist
of Messrs. ▇▇▇▇ ▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ and ▇▇▇▇▇▇ ▇▇▇▇▇▇▇.
(b) The Company will use its best efforts to
hold its 1999 Annual Meeting of stockholders and election of directors as soon
as possible and in no event later than November 15, 1999.
4.5. Liability Insurance. Unless the Nominees have
otherwise consented, for so long as the Nominees serve as directors of the
Company, the Company shall maintain in effect the current policies of directors'
and officers' liability insurance maintained by the Company and to the extent
any claims are made against such insurance, shall increase the coverage amounts
thereunder so as to maintain the same amount of insurance protection for the
Nominees as existed immediately prior to any such claims assuming such claims
are paid in full; provided that the Company may substitute therefor policies of
the same or higher standard of coverage and amounts containing terms and
conditions which are no less advantageous. In addition, from and after the
Closing, the Company shall keep in effect provisions in its charter and bylaws
providing for exculpation of director liability and indemnification of
directors, officers, employees and agents at the Company to the extent that such
persons are entitled thereto thereunder on the date hereof, which provisions
shall not be amended, repealed or otherwise modified for so long as the Nominees
serve as directors of the Company in any manner that would adversely affect the
rights thereunder of any such individuals unless such modification is required
by law.
5. Investor Restrictions.
5.1. Restrictions. Subject to Section 5.2, each Investor
agrees that such Investor will not, directly or indirectly, take any of the
following actions without the prior written consent of the Board of Directors of
the Company:
(a) Acquire or agree to acquire, publicly offer,
or make any public proposal with respect to the possible acquisition of (i)
beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act)
of any securities of the Company; (ii) any substantial part of the Company's
assets; or (iii) any rights or options to acquire any of the foregoing from any
Person;
(b) Make, or in any way participate, directly or
indirectly, in any "solicitation" of "proxies" (as such terms are defined in the
rules under the Exchange Act) to vote, or seek to advise or influence any Person
with respect to the voting of any voting securities of the Company;
(c) Make any public announcement with respect to
any transaction or proposed or contemplated transaction between the Company or
any of its security holders and the Investor, including, without limitation, any
tender or exchange offer, merger or other business combination or acquisition of
a material portion of the assets of the Company; or
(d) Publicly request the Company, directly or
indirectly, to amend or waive any of the foregoing provisions of this Section 5.
5.2. Lapse of Restrictions.
(a) The Investors shall be relieved of their
obligations under Section 5.1 above if (a) the Company's Consolidated EBITDA (as
such term is defined in the Purchase Agreement) for the year ended December 31,
1999 is less than $22,000,000 or (b) the Company's Consolidated EBITDA for the
year ended December 31, 2000 is less than $32,000,000. Notice of the Company's
Consolidated EBITDA shall be provided as set forth in Section 5.2(b) below.
(b) As soon as reasonably practicable following
the end of calendar years 1999 and 2000 (but not less than sixty (60) days
thereafter), the Company shall prepare and deliver to the Investors a reasonably
detailed calculation of Consolidated EBITDA for the applicable year. If the
Investors disagree with the calculation of Consolidated EBITDA, the Investors
shall give to the Company a notice (the "Dispute Notice") explaining in
reasonable detail the basis of such disagreement within fifteen (15) business
days after the Investor's receipt of the calculation of Consolidated EBITDA. The
Company and the Investors shall use their commercially reasonable efforts for a
period of fifteen (15) business days following a Dispute Notice to resolve any
disagreement. If the Company and the Investors have been unable to resolve the
disagreement by the end of such period, a mutually agreed upon independent
public accounting firm (the "Arbitrator") shall be retained to make a
determination on the matter in dispute. The determination of Consolidated EBITDA
by the Arbitrator shall be final, binding and conclusive on the parties. The
fees and expenses of the Arbitrator shall be borne equally by the Company, on
the one hand, and the Investors, on the other hand.
6. Rights to Co-Invest.
6.1. General. If at any time the Company proposes to
newly-issue for cash (a "proposed issuance") any of its equity securities (the
"Company Securities"), then the Company shall, no later than forty-five (45)
days prior to the consummation of such proposed issuance, give written notice to
each of the Qualified Offeree (as defined in Section 6.2 below) of the proposed
issuance. Such notice shall describe the proposed issuance and shall contain an
offer to each Qualified Offeree to sell to such Qualified Offeree its pro rata
portion of the Company Securities (which shall be a percentage equal to the
percentage of the Fully-Diluted Common Stock held by such Qualified Offeree). If
any such Qualified Offeree fails to accept such offer by written notice to the
Company within fifteen (15) days following the date the Company's notice is
received, the Company may proceed with such proposed issuance, free of any right
on the part of such Qualified Offeree under this Section 6.1 in respect
thereof.
6.2. Qualified Offeree. For purposes of this Section 6, a
"Qualified Offeree" shall include Warrantholders and the holders of Common Stock
issuable upon exercise of the Warrant who own beneficially (within the meaning
of Rule 13d-3 under the Exchange Act) at least two percent (2.0%) of the
outstanding Common Stock.
6.3. Exemptions. The purchase right granted by Section
6.1 shall not apply to: (1) any issuance of Company Securities in connection
with a merger, consolidation, transfer of assets or other business combination
involving the Company, or (ii) any issuance of Company Securities pursuant to an
employee benefit plan of the Company.
6.4. Termination of Co-Investment Rights. The co-
investment right provided under this Section 6 shall terminate on the date that
is seven (7) years after the date hereof or the date on which the Qualified
Offerees, in the aggregate, own beneficially (within the meaning of Rule 13d-3
under the Exchange Act less than two percent (2.0%) of the outstanding Common
Stock.
7. Miscellaneous
7.1. Assignment. Except as otherwise provided herein, the
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties hereto.
7.2. Third Parties. Nothing in this Agreement, express or
implied, is intended to confer upon any party, other than the parties hereto,
and their respective successors and assigns, any rights, remedies, obligations
or liabilities under or by reason of this Agreement, except as expressly
provided herein.
7.3. Future Investors. Subject to Section 3.10, any
person who acquires the Securities (as such term is defined in the Purchase
Agreement) may become a party to this Agreement by execution and delivery to the
Company of a counterpart of this Agreement. Upon delivery of such counterpart,
(a) the signature pages and Annex I hereto shall be amended to reflect the name
of such new party and (b) such new party shall thereafter be deemed an
"Investor" for purposes of this Agreement.
7.4. Governing Law. This Agreement shall be governed
by and construed under the laws of the State of New York without regard to
choice of laws or conflict of laws provisions thereof.
7.5. Counterparts. This Agreement may be executed in two
or more counterparts and signature pages may be delivered by facsimile, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
7.6. Notices. Any notice required or permitted by this
Agreement shall be in writing and shall be deemed to have been duly given if
delivered personally, or if mailed by certified mail, return receipt requested,
postage prepaid, or if sent by overnight courier, or if sent by written
telecommunication, addressed to the other party at (a) if to an Investor, at the
address set forth in Annex I hereto, or (b) if to the Company, at ▇▇▇ ▇▇▇▇▇▇▇
▇▇▇, ▇▇▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇, to the attention of Corporate Secretary. Any
notice so addressed and delivered by facsimile transmission, hand or courier
shall be deemed to be given when received, and any notice so addressed and
mailed by registered or certified mail shall be deemed to be given three
business days after being so mailed
7.7. Severability. If one or more provisions of this
Agreement are held to be unenforceable under applicable law, portions of such
provisions, or such provisions in their entirety, to the extent necessary, shall
be severed from this Agreement, and the balance of this Agreement shall be
enforceable in accordance with its terms.
7.8. Amendment and Waiver. Any provision of this
Agreement may be amended with the written consent of the Company, Supermajority
in Interest of the Investors and Supermajority in Interest of the
Warrantholders; provided that (a) no such amendment shall impose or increase any
liability or obligation on a Holder without the consent of such Holder and (b)
no such amendment having a disproportionately adverse effect on any Holder in
relation to the other Holders may be made without consent of such Holder. Any
amendment or waiver effected in accordance with this paragraph shall be binding
upon each Holder of Registrable Securities and the Company. In addition, the
Company may waive performance of any obligation owing to it, as to some or all
of the Holders of Registrable Securities, or agree to accept alternatives to
such performance, without obtaining the consent of any Holder of Registrable
Securities. In the event that an underwriting agreement is entered into between
the Company and any Holder, and such underwriting agreement contains terms
differing from this Agreement, as to any such Holder the terms of such
underwriting agreement shall govern.
7.9. Effect of Amendment or Waiver. The Investors and
their successors and assigns acknowledge that by the operation of Section 6.8
hereof Supermajority in Interest of the Investors and Supermajority in Interest
of the Warrantholders, acting in conjunction with the Company, will have the
right and power to diminish or eliminate any or all rights pursuant to this
Agreement.
7.10. Rights of Holders. Each party to this Agreement
shall have the absolute right to exercise or refrain from exercising any right
or rights that such party may have by reason of this Agreement, including,
without limitation, the right to consent to the waiver or modification of any
obligation under this Agreement, and such party shall not incur any liability to
any other party or other Holder of any securities of the Company as a result of
exercising or refraining from exercising any such right or rights.
7.11. Delays or Omissions. No delay or omission to
exercise any right, power or remedy accruing to any party to this Agreement,
upon any breach or default of the other party, shall impair any such right,
power or remedy of such non-breaching party nor shall it be construed to be a
waiver of any such breach or default, or an acquiescence therein, or of or in
any similar breach or default thereafter occurring; nor shall any waiver of any
single breach or default be deemed a waiver of any other breach or default
theretofore or thereafter occurring. Any waiver, permit, consent or approval of
any kind or character on the part of any party of any breach or default under
this Agreement, or any waiver on the part of any party of any provisions or
conditions of this Agreement, must be made in writing and shall be effective
only to the extent specifically set forth in such writing. All remedies, either
under this Agreement, or by law or otherwise afforded to any Holder, shall be
cumulative and not alternative.
[SIGNATURES APPEAR ON THE FOLLOWING PAGES]
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
PARTY CITY CORPORATION
By: /s/ ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
-----------------------------
Name: ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
Title: Chief Financial Officer
COUNTERPART SIGNATURE PAGE
TO
INVESTOR RIGHTS AGREEMENT
INVESTOR:
▇▇▇▇▇▇▇▇▇ & CO, LLC
By: /s/ ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇▇
-------------------------------
Name: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇▇
Its: Managing Member
COUNTERPART SIGNATURE PAGE
TO
INVESTOR RIGHTS AGREEMENT
INVESTOR:
TCO/PARTY CITY, LLC
By: ▇▇▇▇▇▇▇▇▇▇ & Co., LLC
Its: Managing Member
By: /s/ ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇
-------------------------------
Name: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇
Title: Managing Member
COUNTERPART SIGNATURE PAGE
TO
INVESTOR RIGHTS AGREEMENT
INVESTOR:
▇▇▇▇▇▇▇ ▇▇▇▇▇ CREDIT PARTNERS L.P.
By: /s/ ▇▇▇▇ ▇▇▇▇▇
---------------------------------
Name: ▇▇▇▇ ▇▇▇▇▇
Its: Authorized Signer
COUNTERPART SIGNATURE PAGE
TO
INVESTOR RIGHTS AGREEMENT
INVESTOR:
▇▇▇▇▇▇▇, SACHS & CO.
By: /s/ ▇▇▇▇ ▇▇▇▇▇
---------------------------------
Name: ▇▇▇▇ ▇▇▇▇▇
Its: Authorized Signer
COUNTERPART SIGNATURE PAGE
TO
INVESTOR RIGHTS AGREEMENT
INVESTOR:
ENHANCED RETAIL FUNDING, LLC
By: /s/ ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
---------------------------------
Name: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
Its: Vice President
COUNTERPART SIGNATURE PAGE
TO
INVESTOR RIGHTS AGREEMENT
INVESTOR:
RICHMOND ASSOCIATES, L.P.,
a New York limited partnership
By: MHM MANAGEMENT,INC.,
a New York corporation
Its: General Partner
By: /s/ ▇▇▇▇ ▇. ▇▇▇▇▇▇▇
-----------------------------------
Name: ▇▇▇▇ ▇. ▇▇▇▇▇▇▇
Title: Vice President
COUNTERPART SIGNATURE PAGE
TO
INVESTOR RIGHTS AGREEMENT
COMPANY STOCKHOLDER:
▇▇▇▇ ▇▇▇▇▇▇▇▇▇
/s/ ▇▇▇▇ ▇▇▇▇▇▇▇▇▇
-----------------------------
Signature
ANNEX I
SCHEDULE OF INVESTORS
--------------------------------------------- -------------------------------- -------------------------------------------------
Shares of Common Stock
Investor (subject to Warrants) Notes
--------------------------------------------- -------------------------------- -------------------------------------------------
--------------------------------------------- -------------------------------- -------------------------------------------------
▇▇▇▇▇▇▇▇▇▇ & 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
--------------------------------------------- -------------------------------- -------------------------------------------------
--------------------------------------------- -------------------------------- -------------------------------------------------
▇▇▇▇▇▇▇ Sachs & Co.......................... 2,867,000 none
--------------------------------------------- -------------------------------- -------------------------------------------------
--------------------------------------------- -------------------------------- -------------------------------------------------
▇▇▇▇▇▇▇ ▇▇▇▇▇ Credit Partners, L.P.......... C Note in the principal amount of $2,085,000
D Note in the principal amount of $4,165,000
--------------------------------------------- -------------------------------- -------------------------------------------------
--------------------------------------------- -------------------------------- -------------------------------------------------
Enhanced Retail Funding, LLC................ 688,000 C Note in the principal amount of $500,000
D Note in the principal amount of $1,000,000
--------------------------------------------- -------------------------------- -------------------------------------------------
--------------------------------------------- -------------------------------- -------------------------------------------------
Richmond Associates, L.P.................... 229,000 C Note in the principal amount of $165,000
D Note in the principal amount of $335,000
--------------------------------------------- -------------------------------- -------------------------------------------------
--------------------------------------------- -------------------------------- -------------------------------------------------
Total....................................... 6,888,000
--------------------------------------------- -------------------------------- -------------------------------------------------
ANNEX II
SCHEDULE OF COMPANY STOCKHOLDERS
------------------------------------- ------------------------------------------
Shares of Common Stock
Company Stockholder (Held Beneficially or of Record
and/or subject to Options)
------------------------------------- ------------------------------------------
------------------------------------- ------------------------------------------
▇▇▇▇ ▇▇▇▇▇▇▇▇▇
------------------------------------- ------------------------------------------
------------------------------------- ------------------------------------------
------------------------------------- ------------------------------------------
------------------------------------- ------------------------------------------
------------------------------------- ------------------------------------------
------------------------------------- ------------------------------------------
------------------------------------- ------------------------------------------
------------------------------------- ------------------------------------------
------------------------------------- ------------------------------------------
------------------------------------- ------------------------------------------
Total................................
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