EXHIBIT 10.8
EXECUTION COPY

SEPARATION AGREEMENT

      This SEPARATION AGREEMENT (the “Agreement”) is dated as of August 26,
2002, and is entered into between PARTY CITY CORPORATION (the “Company”), and
Thomas E. Larson (“Executive”).

      WHEREAS, Executive is currently employed by the Company as Senior Vice
President and Chief Financial Officer; and

      WHEREAS, Executive wishes to resign from his employment with the Company
and the Company wishes to accept Executive’s resignation; and

      WHEREAS, Executive and the Company desire to embody in this Agreement the
terms and conditions applicable to Executive’s resignation of employment with
the Company; and

      WHEREAS, this Agreement shall supersede all prior oral and written
agreements, arrangements and understandings relating to the terms and conditions
of Executive’s resignation.

      NOW, THEREFORE, the parties hereby agree:

      1.     Termination Date. Executive’s resignation from the Company will be
effective September 3, 2002 (the “Termination Date”).

      2.     Company Property. Executive shall return to the Company all
Company-owned property in his possession on or prior to the Termination Date,
unless otherwise set forth herein.

      3.     Termination Benefits. Commencing as of the Termination Date, the
Company shall continue to pay, in accordance with the Company’s prevailing
payroll practices, Executive’s current Salary of $285,749.92 annually
($21,562.49 monthly), for the period of six (6) months beginning on the
Termination Date and ending on March 3, 2003.

      4.     Benefit Plans. Except as otherwise specifically provided in this
Agreement or by law or by any employee benefit plan, Executive’s participation
in all employee benefit plans and executive compensation plans and practices of
the Company shall terminate on the Termination Date, and there shall be no other
payments or benefits payable to Executive by the Company, including, but not
limited to, any other salary, bonus, commissions, fees, benefits, or other
payments of any nature whatsoever.

      5.     Additional Consideration. Executive acknowledges that pursuant to
this Agreement he is receiving consideration in addition to any amounts to which
he would otherwise have been entitled but for this Agreement.

      6.     Taxes. The payments due to Executive under this Agreement shall be
subject to reduction to satisfy all applicable Federal, state and local
withholding tax obligations.

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      7.     Payment Upon Death. Executive’s rights and obligations under this
Agreement are not transferable. However, if Executive should die while any
amounts would still be payable to him hereunder, all such amounts shall be
payable to Executive’s estate, heirs, executors or beneficiaries in accordance
with the terms hereof.

      8.     Non-competition.

A.     Executive agrees for a period of one (1) year from the Termination Date
that he will not, as a principal, agent, employee, employer, consultant,
stockholder, investor, director or co-partner of any person, firm, corporation
or business entity other than the Company, or in any individual representative
capacity whatsoever, directly or indirectly, without the express prior written
consent of the Company:

      (a) engage or participate in any business whose products or services are
competitive with that of the Company, which business is exclusively the sale of
party goods, and which conducts or solicits business, or transacts with supplier
or customers located within the United States, Canada or Puerto Rico;

      (b) aid or counsel any other person, firm, corporation or business entity
to do any of the above;

      (c) become employed by a firm, corporation, partnership or joint venture
which competes with the business of the Company within the United States, Canada
or Puerto Rico;

      (d) approach, solicit business from, or otherwise do business or deal with
any customer of the Company in connection with any product or service
competitive to any provided by the Company.

B.     Executive agrees for a period of one year from the Termination Date that
he will not, as a principal, agent, employee, employer, consultant, stockholder,
investor, director or partner of any person, firm, corporation or business
entity other than the Company, or in any individual representative capacity
whatsoever, directly or indirectly, without the express prior written consent of
the Company approach, counsel or attempt to induce any person who is then in the
employ of the Company to leave the employ of the Company or employ or attempt to
employ any such person or persons who at the time during the preceding six
months was in the employ of the Company.

      Executive acknowledges (i) that his position with the Company required the
performance of services which were special, unique and extraordinary in
character and placed him in a position of confidence and trust with the
customers and employees of the Company, through which, among other things, he
obtained knowledge of the Company’s “technical information” and “know-how” and
became acquainted with its customers, in which matters the Company has
substantial proprietary interests, (ii) that the restrictive covenants set forth
above are necessary in order to protect and maintain such proprietary interests
and the other legitimate business

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interests of the Company, and (iii) that the Company would not have entered into
this Agreement unless the non-competition covenants of this Section 8 were
included herein.

      Executive also acknowledges that the business of the Company presently
extends throughout the United States, Puerto Rico and other certain European
countries, and that he personally supervised and engaged in such business on
behalf of Company, and accordingly, it is reasonable that the restrictive
covenants set forth above are not more limited as to geographic area then is set
forth herein. Executive also represents to the Company that the enforcement of
such covenants will not prevent Executive from earning a livelihood or impose an
undue hardship on the Executive.

      If any provisions of this Section 8, or any part thereof, is hereinafter
construed to be invalid or unenforceable, the same shall not affect the
remainder of such provision or provisions, which shall be given full effect,
without regard to the invalid portions. If any of the provisions of this Section
or any part thereof, is held to be unenforceable because of the duration of such
provision, the area covered thereby or the type of conduct restricted therein,
the parties agree that the court making such determination shall have the power
to modify the duration, geographic area and/or other terms or such provision
and, as so modified, said provisions shall then be enforceable. In the event
that the courts of any one or more jurisdictions shall not hold such provisions
wholly or partially unenforceable by reason of the scope thereof or otherwise,
it is the intention of the parties hereto that such determination not bar or in
any way affect the Company’s right to the relief provided for herein in the
courts of any other jurisdictions as to breaches or threatened breaches of such
provisions in such other jurisdictions, the above provisions as they relate to
each jurisdiction being, for this purpose, severable into diverse and
independent convents.

      The provision of this Section 8 shall be construed as an agreement on the
part of the Executive independent of any other part of this Agreement or any
other agreement, and the existence of any claim or cause of action of the
Executive against the Company, whether predicated on this Agreement or
otherwise, shall not constitute a defense to the enforcement by the Company of
the provisions of this Section 8.

      9.     Release and Waiver of Claims. Effective as of the Termination Date,
subject to Section 10 hereof, in consideration of the payments, benefits, and
other consideration provided to Executive under this Agreement, Executive, for
himself and his family, heirs, executors, administrators, legal representatives,
and their respective successors and assigns, hereby releases and forever
discharges the Company, and all of its subsidiaries, officers, directors,
employees, agents, stockholders, representatives, and their successors and
assigns (collectively, “Company Entities”), from all rights, claims or demands
Executive may have, arising at any time on or before the date hereof, based on
his employment with any Company Entity or the termination of that employment,
including without limitation any claims under the Employment Agreement, or based
on any services provided to any Company Entity by Executive other than pursuant
to an employment relationship with any Company Entity. This includes a release
of any and all rights, claims or demands Executive may have, whether known or
unknown, under the Age Discrimination in Employment Act, which prohibits age
discrimination in employment; Title VII of the Civil Rights Act of 1964, which
prohibits discrimination in employment based on race, color, national origin,
religion or sex; the Equal Pay Act, which

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prohibits paying men and women unequal pay for equal work; or under any other
federal, state or local laws or regulations regarding employment discrimination
or termination of employment. This also includes a release by Executive of any
claims for wrongful discharge under any statute, rule, regulation or under the
common law. Executive hereby agrees never individually or with any person to
file, or commence the filing of, any charges, lawsuits, complaints or
proceedings with any governmental agency, or against any Company Entity, with
respect to any of the matters released by Executive pursuant to this Section 9.

      10.     Rights Not Released or Waived. Section 9 hereof notwithstanding,
by signing this Agreement, Executive shall not have relinquished his right to
(i) benefits in accordance with the provisions of any Company retirement plans
subject to the Employee Retirement Income Security Act of 1974, as amended, or
(ii) enforce the provisions of this Agreement.

      11.     Release and Waiver of Claims Under the Age Discrimination in
Employment Act. Executive acknowledges that the Company has encouraged him to
consult with an attorney of his choosing and, through this Agreement, encourages
him to consult with his attorney with respect to any possible claims he may
have, including claims under the Age Discrimination in Employment Act (“ADEA”),
as well as under the other federal, state and local laws described in Section 9
hereof. Executive understands that by signing this Agreement he is in fact
waiving, releasing and forever giving up any claim under the ADEA, as well as
all other federal, state and local laws described in Section 9 hereof that may
have existed on or prior to the date hereof.

      12.     Waiting Period and Revocation Period. Executive hereby
acknowledges that the Company has informed him that he has up to twenty-one (21)
days to sign this Agreement and he may knowingly and voluntarily waive that
twenty-one (21) day period by signing this Agreement earlier. Executive also
understands that he shall have seven (7) days following the date on which he
signs this Agreement within which to revoke it by providing a written notice of
his revocation to the Company.

      13.     Remedies. Executive hereby acknowledges and understands that if he
revokes this Agreement within the seven (7)-day revocation period provided under
Section 12 above, the Company may, in addition to any other remedies it may
have, reclaim any amounts paid to Executive under this Agreement to which
Executive would not be otherwise entitled, and/or terminate any payments to
which Executive would not be otherwise entitled that are subsequently due
hereunder.

      14.     Non-Admission. Executive expressly acknowledges that this
Agreement does not constitute an admission by the Company of any violation of
any employment law, regulation, ordinance, or administrative procedure, or any
other federal, state, or local law, common law, regulation or ordinance,
liability for which is expressly denied.

      15.     Non-Disparagement. Executive shall not at any time after the date
hereof disparage the Company or any of its officers, directors, shareholders or
any of their respective affiliates. The obligations of Executive under this
Section 15 shall not apply to disclosures required by applicable law, regulation
or order of a court or governmental agency.

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      16.     Confidentiality. Executive and the Company hereby agree to keep
the terms of this Agreement confidential. The obligations of Executive and the
Company under this Section 16 shall not apply to disclosures required by
applicable law, regulation or order of a court or governmental agency.

      17.     Opportunity for Advice. By signing this Agreement, Executive
acknowledges that with the advice of the Company, he has had a reasonable
opportunity to consider advice from his legal counsel and that the Company had
encouraged him to seek such legal counsel. Fully understanding these terms,
Executive is entering into this Agreement knowingly and voluntarily.

      18.     Acceptance. To accept this Agreement, Executive shall execute and
date this Agreement on the spaces provided and return a copy to the Company at
any time during the twenty-one (21)-day period commencing on the date hereof.
This Agreement shall take effect on the eighth day following Executive’s
execution of this Agreement unless Executive’s written revocation is delivered
to the Company within seven (7) days after such execution.

      19.     Entire Agreement. This Agreement represents the entire agreement
of the parties with respect to the Executive’s employment and termination
thereof. Except as specifically provided herein, this Agreement shall supersede
any other agreements between the Executive and the Company in all respects
effective as of the Termination Date. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW JERSEY
APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE.

      20.     Relocation. The Company agrees to reimburse Executive for his
reasonable personal moving expenses incurred should Executive relocate from his
home in New Jersey to Texas at any time through March 3, 2003. Executive
understands that the reasonable personal moving expenses agreed to be reimbursed
by the Company pursuant to this Section 20 do not include any costs and expenses
which may be incurred by Executive in the sale of his home in New Jersey or any
bridge or refinance loans in connection therewith. Executive shall submit not
later than March 16, 2003 those costs and expenses to be reimbursed hereunder,
along with documentation reasonable to verify the payment of such costs and
expenses. The Company agrees to reimburse Executive within fifteen (15) days of
the Company’s receipt of such reimbursement request pursuant to the provisions
of this Section 20.

      21.     Executive Out Placement Service. The Company, at its expense, will
provide “Executive Out Placement” assistance through the services of Goodrich
and Sherwood (New York City or Parsippany, NJ) or a comparable “Executive Out
Placement” firm from the Termination Date through March 16, 2003.

      22.     Vested Stock Options. Notwithstanding any Company policies to the
contrary, the Company agrees that Executive shall have until March 3, 2003 to
exercise any stock options which had vested for Executive prior to the
Termination Date.

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      23.     Cell Phones. Executive shall be permitted to use the Company’s
cell phone until March 3, 2003, at which date Executive agrees to return such
cell phone to the Company.

      24.     Automobile Allowance. Executive shall continue to receive through
March 3, 2003 Executive’s automobile allowance of $675.00 per month.

      25.     SEC Filing. Executive and the Company agree to coordinate the
preparation and filing of any “Form 4” required to be filed as a result of an
acquisition/disposition of Company stock that occurs from the Termination Date
through March 3, 2003. Executive agrees to notify the Company not later than
three (3) business days prior to Executive’s contemplated
acquisition/disposition of Company stock to coordinate the timely filing of any
required “Form 4”. Executive and the Company further agree to coordinate the
filing of a “Form 5” or other documents as may be required pursuant to SEC
regulations resulting from Executive’s “Section 16” position while employed by
the Company. The costs for preparing and filing any of the Forms referenced in
this Section 25 shall be borne by the Company.

      IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date and year first above written.

  /s/ THOMAS E. LARSON  

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  Name: Thomas E. Larson       PARTY CITY CORPORATION       By: /s/ Melissa
Wallace      

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  Name: Melissa Wallace   Title: VP of Human Resources

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