EXHIBIT 10.18

EXECUTION COPY

GUARANTY AND SECURITY AGREEMENT

     This GUARANTY AND SECURITY AGREEMENT (this “Agreement”) is made as of
January 9, 2003 by and between PARTY CITY MICHIGAN, INC., a Delaware corporation
(the “Guarantor”), and WELLS FARGO RETAIL FINANCE, LLC, as the arranger,
collateral agent and administrative agent for the Lender Group and any other
holder of Obligations under the Loan Agreement referred to below (in such
capacity, the “Agent or the “Secured Party”).

INTRODUCTION:

     Concurrently with the execution and delivery hereof, Party City
Corporation, a Delaware corporation (the “Borrower”), is entering into a Loan
and Security Agreement dated as of the date hereof (as amended, restated,
extended, supplemented or otherwise modified from time to time, the “Loan
Agreement”) with the Agent and the financial institutions from time to time
party thereto as lenders (the “Lenders”) pursuant to which the Agent and the
Lenders have agreed, subject to the terms and conditions set forth therein, to
make certain revolving credit loans and to provide other financial
accommodations to the Borrower (collectively, the “Loans”).

     The Borrower is the sole stockholder and owns all of the issued and
outstanding Stock of the Guarantor.

     The obligations of the Agent and the Lenders to enter into the Loan
Agreement, and the obligations of the Agent and the Lenders to make the Loans,
are subject to the condition, among others, that the Guarantor executes and
delivers this Agreement.

     As the wholly-owned subsidiary of the Borrower, the Guarantor will derive
substantial direct and indirect benefits from the revolving advances and other
financial accommodations provided to the Borrower under the Loan Agreement.

     NOW, THEREFORE, in consideration of the willingness of the Lenders to make
the Loans to the Borrower, and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged by the Guarantor, the
Guarantor hereby agrees as follows:

ARTICLE I
DEFINITIONS

     1.1.     Loan Agreement Definitions. Unless otherwise defined herein or the
context otherwise requires, capitalized terms used in this Agreement, including
its preamble and recitals, have the meanings provided in the Loan Agreement.

     1.2.     UCC Definitions. Unless otherwise defined herein or in the Loan
Agreement or the context otherwise requires, terms for which meanings are
provided in the UCC are used in this Agreement, including its preamble and
recitals, with such meanings, as such meanings may be amended from time to time.

 

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ARTICLE II
SECURITY INTEREST

     2.1.     Grant of Security Interest. The Guarantor hereby assigns, pledges,
hypothecates, charges, mortgages, delivers, and transfers to the Secured Party,
and hereby grant to the Secured Party, a continuing security interest in all of
the Guarantor’s right, title and interest in, to and under the personal
property, whether now or hereafter existing, owned or acquired by the Guarantor
(the “Collateral”), including:

  (a)   Accounts,     (b)   Books,     (c)   Chattel Paper,     (d)   DDAs,    
(e)   Documents,     (f)   General Intangibles (including, without limitation,
all of Guarantor’s rights under any contracts),     (g)   Goods (including,
without limitation, Inventory and Equipment),     (h)   Instruments,     (i)  
Investment Property,     (j)   Letter-of-Credit Rights,     (k)   Negotiable
Collateral,     (l)   Commercial Tort Claims,     (m)   money or other assets of
the Guarantor that now or hereafter come into the possession, custody, or
control of any member of the Lender Group, and     (n)   any and all proceeds
and products, whether tangible or intangible, of any of the foregoing, including
proceeds of insurance covering any or all of the foregoing, or other tangible or
intangible property resulting from the sale, exchange, collection, or other
disposition of any of the foregoing, or any portion thereof or interest therein,
and the proceeds thereof.

     2.2.     Security for Obligations. This Agreement and the Collateral in
which the Secured Party is granted a security interest in and to hereunder
secures the Borrower’s prompt, punctual and faithful repayment of the
Obligations in accordance with the terms and conditions of the Loan Agreement
and the other Loan Documents and the Borrower’s prompt performance of each of
its covenants and duties under the Loan Agreement and the other Loan Documents
(collectively, the “Guaranteed Obligations”).

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     2.3.     Guarantor Remains Liable. Anything herein to the contrary
notwithstanding,

               (a)     the Guarantor will remain liable under the contracts and
agreements included in the Collateral to the extent set forth therein and will
perform all of its duties and obligations under such contracts and agreements to
the same extent as if this Agreement had not been executed;

               (b)     the exercise by the Secured Party of any of its rights
hereunder will not release the Guarantor from any of its duties or obligations
under any such contracts or agreements included in the Collateral; and

               (c)     the Secured Party will not be obligated or liable under
any contracts or agreements included in the Collateral by reason of this
Agreement, nor will the Secured Party be obligated to perform any of the
obligations or duties of the Guarantor thereunder or to take any action to
collect or enforce any claim for payment assigned hereunder.

     2.4.     Continuing Security Interest. This Agreement shall create a
continuing security interest in the Collateral and shall:

               (a)     remain in full force and effect until the date on which
the Guaranteed Obligations shall have been finally, indefeasibly paid in full
(other than contingent indemnification obligations for which neither the Agent
nor the Lenders have made a claim) and the Lender Group’s obligation to make the
Loans under the Loan Agreement shall have been terminated (the “Maturity Date”);

               (b)     be binding upon the Guarantor, its successors,
transferees and assigns; and

               (c)     inure, together with the rights and remedies of the
Secured Party hereunder, to the benefit of the Secured Party.

ARTICLE III
GUARANTY PROVISIONS

     3.1.     Guaranty. The Guarantor hereby absolutely, unconditionally and
irrevocably:

               (a)     guarantees the full and punctual payment when due,
whether at stated maturity, by required prepayment, declaration, acceleration,
demand or otherwise, of all Guaranteed Obligations of the Borrower now or
hereafter existing, whether for principal, interest (including interest accruing
at the then applicable rate provided in the Loan Agreement after the occurrence
of any Default set forth in the Loan Agreement, whether or not a claim for
post-filing or post-petition interest is allowed under applicable law following
the institution of a proceeding under bankruptcy, insolvency or similar laws),
fees, expenses or otherwise (including all such amounts which would become due
but for the operation of the automatic stay under Section 362(a) of the United
States Bankruptcy Code, 11 U.S.C. §362(a), and the operation of Sections 502(b)
and 506(b) of the United States Bankruptcy Code, 11 U.S.C. §502(b) and §506(b));
and

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               (b)     indemnifies and holds harmless the Secured Party for any
and all costs and expenses (including reasonable attorneys’ fees and expenses)
incurred by the Secured Party in enforcing any rights under this Guaranty;

provided, however, that the Guarantor shall only be liable under this Agreement
for the maximum amount of such liability that can be hereby incurred without
rendering this Guaranty, as it relates to the Guarantor, voidable under
applicable law relating to fraudulent conveyance or fraudulent transfer, and not
for any greater amount. This Agreement constitutes a guaranty of payment when
due and not of collection, and the Guarantor specifically agrees that it shall
not be necessary or required that the Secured Party exercise any right, assert
any claim or demand or enforce any remedy whatsoever against any Loan Party or
any other Person before or as a condition to the obligations of the Guarantor
hereunder.

     3.2.     Reinstatement, etc. The Guarantor hereby agrees that this
Agreement shall continue to be effective or be reinstated, as the case may be,
if at any time any payment (in whole or in part) of any of the Guaranteed
Obligations is invalidated, declared to be fraudulent or preferential, set
aside, rescinded or must otherwise be restored by the Secured Party, including
upon the occurrence of any Default or Event of Default or otherwise, all as
though such payment had not been made.

     3.3.     Guaranty Absolute, etc. This Agreement shall in all respects be a
continuing, absolute, unconditional and irrevocable guaranty of payment, and
shall remain in full force and effect until the Maturity Date. The Guarantor
guarantees that the Guaranteed Obligations will be paid strictly in accordance
with the terms of each Loan Document under which they arise, regardless of any
law, regulation or order now or hereafter in effect in any jurisdiction
affecting any of such terms or the rights of the Secured Party with respect
thereto. The liability of the Guarantor under this Agreement shall be absolute,
unconditional and irrevocable irrespective of:

               (a)     any lack of validity, legality or enforceability of any
other Loan Document;

               (b)     the failure of the Secured Party to assert any claim or
demand or to enforce any right or remedy against any party to the Loan Agreement
or any other Person (including any other guarantor) under the provisions of any
Loan Document or otherwise, or to exercise any right or remedy against any other
guarantor (including the Guarantor) of, or collateral securing, any Guaranteed
Obligations;

               (c)     any change in the time, manner or place of payment of, or
in any other term of, all or any part of the Guaranteed Obligations, or any
other extension, compromise or renewal of any Guaranteed Obligation;

               (d)     any reduction, limitation, impairment or termination of
any Guaranteed Obligations for any reason, including any claim of waiver,
release, surrender, alteration or compromise, and shall not be subject to (and
the Guarantor hereby waives any right to or claim of) any defense (other than
payment) or setoff, counterclaim, recoupment or termination whatsoever by reason
of the invalidity, illegality, nongenuineness, irregularity, compromise,

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unenforceability of, any Guaranteed Obligations (other than the payment and
performance in full of the Guaranteed Obligations) or otherwise;

               (e)     any amendment to, rescission, waiver, or other
modification of, or any consent to or departure from, any of the terms of any
Loan Document;

               (f)     any addition, exchange or release of any collateral or of
the Guarantor of the Guaranteed Obligations, or any surrender or non-perfection
of any collateral, or any amendment to or waiver or release or addition to, or
consent to or departure from, any other guaranty held by the Secured Party
securing any of the Guaranteed Obligations; or

               (g)     any other circumstance (other than payment) which might
otherwise constitute a defense available to, or a legal or equitable discharge
of, any party to the Loan Agreement, any surety or any guarantor.

     3.4.     Setoff. The Guarantor hereby irrevocably authorizes the Secured
Party, without the requirement that any notice be given to the Guarantor (such
notice being expressly waived by the Guarantor), upon the occurrence and during
the continuance of any Event of Default to set-off and appropriate and apply to
the payment of the Guaranteed Obligations (whether or not then due, and whether
or not the Secured Party has made any demand for payment of the Guaranteed
Obligations), any and all balances, claims, credits, deposits (general or
special, time or demand, provisional or final), accounts or money of the
Guarantor then or thereafter maintained with the Secured Party and apply the
same pursuant to the Loan Agreement. The Secured Party agrees to notify the
Guarantor and the Secured Party after any such setoff and application made by
the Secured Party; provided, that the failure to give such notice shall not
affect the validity of such setoff and application. The rights of the Secured
Party under this Section are in addition to other rights and remedies (including
other rights of setoff under applicable law or otherwise) which the Secured
Party may have.

     3.5.     Waiver, etc. Except as otherwise set forth herein, Guarantor
hereby waives promptness, diligence, notice of acceptance and any other notice
with respect to any of the Guaranteed Obligations and this Guaranty and any
requirement that the Secured Party protect, secure, perfect or insure any Lien,
or any property subject thereto, or exhaust any right or take any action against
any party to the Loan Agreement or any other Person (including any other
guarantor) or entity or any collateral securing the Guaranteed Obligations, as
the case may be. Without limiting the generality of the foregoing, the Guarantor
waives (i) all rights and benefits of any applicable law purporting to reduce a
guarantor’s obligations in proportion to the obligation of the principal or
providing that the obligation of a surety or guarantor must neither be larger
nor in any other respects more burdensome than that of the principal; (ii) the
benefit of any statute of limitations affecting the Guaranteed Obligations or
the Guarantor’s liabilities hereunder or under any law now or hereafter
applicable hereto; (iii) any protection afforded pursuant to the antideficiency
or other laws of the State of California or any other state limiting or
discharging a Borrower’s indebtedness.

     3.6.     Subordination of Claims of Guarantor; Waiver of Subrogation and
Certain Other Rights. Any claims against the Borrowers to which the Guarantor
may be or become entitled (including, without limitation, claims by subrogation
or otherwise by reason of any payment or

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performance by the Guarantor in satisfaction and discharge, in whole or in part,
of his obligations under this Agreement) shall be and hereby are made subject
and subordinate to the prior payment in full in cash of the Guaranteed
Obligations (other than contingent indemnification obligations for which neither
the Agent nor the Lenders have made a claim). WITHOUT LIMITING THE FOREGOING,
THE GUARANTOR WAIVES ANY AND ALL RIGHTS OF SUBROGATION, INDEMNITY, CONTRIBUTION
OR REIMBURSEMENT, AND ANY AND ALL BENEFITS OF AND RIGHT TO ENFORCE ANY POWER,
RIGHT OR REMEDY THAT THE SECURED PARTY MAY NOW OR HEREAFTER HAVE IN RESPECT OF
THE GUARANTEED OBLIGATIONS AGAINST THE BORROWER, THE GUARANTOR OR ANY OTHER
OBLIGOR, ANY AND ALL BENEFITS OF AND RIGHTS TO PARTICIPATE IN ANY COLLATERAL,
NOW OR HEREAFTER HELD BY THE SECURED PARTY, AND ANY AND ALL OTHER RIGHTS AND
CLAIMS (AS DEFINED IN THE BANKRUPTCY CODE) THE GUARANTOR MAY HAVE AGAINST THE
SECURED PARTY OR THE BORROWER OR ANY OTHER OBLIGOR, UNDER APPLICABLE LAW OR
OTHERWISE, AT LAW OR IN EQUITY, BY REASON OF ANY PAYMENT HEREUNDER OR OTHERWISE,
UNLESS AND UNTIL THE GUARANTEED OBLIGATIONS SHALL HAVE BEEN PAID IN FULL IN
CASH. Without limitation, the Guarantor shall exercise no voting rights, shall
file no claim, shall waive any election pursuant to Section 1111(b) of the
Bankruptcy Code and shall not participate or appear in any bankruptcy or
insolvency case involving the Borrower with respect to the Guaranteed
Obligations unless and until all the Guaranteed Obligations shall have been paid
in full in cash. If, notwithstanding the foregoing, any amount shall be paid to
the Guarantor on account of any such rights at any time, such amount shall be
held in trust for the benefit of the Secured Party and shall forthwith be paid
to the Secured Party to be held as collateral for or credited and applied in
reduction of the Obligations (other than contingent indemnification obligations
for which neither the Agent nor the Lenders have made a claim) in accordance
with the terms of the Loan Agreement.

     3.7.     Payments; Application. The Guarantor hereby agrees with the
Secured Party that (a) all payments made hereunder shall be applied upon receipt
as set forth in Section 2.4(b) of the Loan Agreement and (b) all payments made
by the Guarantor hereunder will be made in Dollars to the Secured Party, without
set-off, counterclaim or other defense (other than payment) and in accordance
with the Loan Agreement, free and clear of and without deduction for any taxes
owed by the Guarantor, the Guarantor hereby agreeing to comply with and be bound
by the provisions of the Loan Agreement in respect of all payments made by it
hereunder and the provisions of which Sections are hereby incorporated into and
made a part of this Agreement by this reference as if set forth herein;
provided, that references to the “Borrower” in such Sections shall be deemed to
be references to the Guarantor, and references to “this Agreement” in such
Sections shall be deemed to be references to this Agreement.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES

     In order to induce the Secured Party to enter into the Loan Agreement and
make Loans thereunder, the Guarantor represents and warrants to the Secured
Party as set forth below.

     4.1.     Validity, etc. This Agreement creates a valid security interest in
the Collateral securing the payment of the Guaranteed Obligations. The Guarantor
acknowledges that the

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Secured Party intends to or have filed or caused to be filed all statements in
the appropriate offices therefor and has taken all of the actions necessary to
create perfected first-priority security interests in any Collateral in which a
security interest may be perfected by the filing of a financing statement. This
Agreement constitutes the legal, valid and binding obligations of Guarantor,
enforceable against Guarantor in accordance with its terms, except as may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the enforceability of creditors’ rights generally. The
representations and warranties made in this Section are made as of, and relate
solely to, the Closing Date.

     4.2.     Financial Statements. The financial statements that have
heretofore been submitted by the Guarantor (or by the Borrower on the
Guarantor’s behalf) to the Secured Party in connection herewith fairly present
the financial condition of the Guarantor for the dates and periods covered
thereby. Since the date of each such financial statement there has occurred no
event or condition which could reasonably be expected to have a “Material
Adverse Effect” on the Guarantor’s financial condition. As used herein, Material
Adverse Effect shall mean any event, matter or condition which could reasonably
be expected to have a material adverse effect on (x) the financial condition or
assets of the Guarantor or (y) the Guarantor’s ability to pay and perform its
obligations under this Agreement in accordance with the terms thereof. The
representations and warranties made in this Section are made as of, and relate
solely to, the Closing Date.

     4.3.     Litigation; Compliance with Laws. There are no actions or
proceedings pending by or against Guarantor before any court or administrative
agency and Guarantor does not have knowledge or belief of any threatened or
imminent litigation, governmental investigations, or claims, complaints,
actions, or prosecutions involving Guarantor. Guarantor is not in default under
any applicable law or any material contractual obligation to which Guarantor is
a party or by which its properties are bound. The Guarantor is in material
compliance with the requirements of all applicable laws, rules and regulations,
the non-compliance with any of which could reasonably be expected to materially
adversely affect the value of the Collateral. The representations and warranties
made in this Section are made as of, and relate solely to, the Closing Date.

     4.4.     Taxes. The Guarantor has filed all federal and state income tax
returns and all other tax returns required to be filed by it and has paid all
taxes shown to be due on the returns so filed as well as all other taxes,
assessments and governmental charges that have become due. The Guarantor does
not know of any proposed, asserted or assessed tax deficiency against it. The
representations and warranties made in this Section are made as of, and relate
solely to, the Closing Date.

     4.5.     Ownership, No Liens, etc. The Guarantor owns its Collateral free
and clear of any Lien. No effective financing statement or other filing similar
in effect covering any Collateral is on file in any recording office, except
those filed in favor of the Secured Party relating to this Agreement. The
Guarantor has good title to, or valid and subsisting leasehold interests in, all
of the property, whether real or personal, reflected in its financial
statements. The representations and warranties made in this Section are made as
of, and relate solely to, the Closing Date.

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     4.6.     Indebtedness. Except as set forth herein, the Guarantor has not
guaranteed any liabilities or Indebtedness of the Borrowers or of any other
Person, and covenants that it will not, after the date hereof, execute any such
guaranty. The representations and warranties made in this Section are made as
of, and relate solely to, the Closing Date.

     4.7.     Authorization, Approval, etc. Except as have been obtained or made
and are in full force and effect, no authorization, approval or other action by,
and no notice to or filing with, any governmental authority or regulatory body
(other than in connection with the perfection of the Liens hereof) is required
either

               (a)     for the grant by the Guarantor of the security interest
granted hereby, the pledge by the Guarantor of any Collateral pursuant hereto or
for the execution, delivery and performance of this Agreement by the Guarantor;
or

               (b)     for the exercise by the Secured Party of the voting or
other rights provided for in this Agreement.

The representations and warranties made in this Section are made as of, and
relate solely to, the Closing Date.

     4.8.     Best Interests. It is in the best interests of the Guarantor to
execute this Agreement inasmuch as the Guarantor will, as a result of having
100% of its Stock owned by Borrower, derive substantial direct and indirect
benefits from the Loans made from time to time to the Borrower by the Secured
Party. The Guarantor agrees that the Secured Party is relying on this
representation in agreeing to make Loans to the Borrower. The representations
and warranties made in this Section are made as of, and relate solely to, the
Closing Date.

     4.9.     Review of Loan Documents. The Guarantor hereby acknowledges that
it has reviewed and caused its counsel to review copies of, and is fully
familiar with, this Agreement, the Loan Agreement and each of the other Loan
Documents executed and delivered by the Borrower or the Guarantor. The Guarantor
warrants and agrees that each representation, warranty and waiver set forth in
this Guaranty is made with the Guarantor having full knowledge of its
significance and consequences and after having consulted with counsel of its own
choosing and that, under the circumstances, each such waiver is in the best
interest of the Guarantor in furtherance of its business plan and is reasonable.
The representations and warranties made in this Section are made as of, and
relate solely to, the Closing Date.

     4.10.     Loan Agreement Event of Default. The Guarantor acknowledges and
agrees that any material breach of any representation, warranty or covenant of
the Guarantor in this Agreement shall constitute an Event of Default under the
Loan Agreement and under each of the other Loan Documents.

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ARTICLE V
COVENANTS

     The Guarantor covenants and agrees that, from the date hereof until the
Maturity Date, the Guarantor will perform, comply with and be bound by the
obligations set forth below.

     5.1.     Further Assurances, etc. Guarantor, from time to time and at its
own expense, will promptly execute and deliver all further documents and
instruments, and take all further action, that may be necessary to protect,
preserve and perfect any security interest granted or purported to be granted
hereby. Without limiting the generality of the foregoing, Guarantor will:

               (a)     enter into control agreements, and otherwise cause the
Secured Party to obtain control over such items of Collateral as the Secured
Party may reasonably request in writing;

               (b)     furnish to the Secured Party, from time to time at the
Secured Party’s reasonable request, statements and schedules further identifying
and describing the Collateral and such other reports in connection with the
Collateral, all in reasonable detail.

     5.2.     Authorization to File. With respect to the foregoing and the grant
of the security interest hereunder, the Guarantor hereby authorizes the Secured
Party to file one or more financing or continuation statements, and amendments
thereto, relative to all or any part of the Collateral without the signature of
the Guarantor where permitted by law to perfect the Secured Party’s security
interest therein.

ARTICLE VI
THE SECURED PARTY

     6.1.     Secured Party Appointed Attorney-in-Fact. The Guarantor hereby
irrevocably appoints the Secured Party its attorney-in-fact, with full authority
in the place and stead of the Guarantor and in the name of the Guarantor or
otherwise, from time to time in the Secured Party’s discretion, following the
occurrence and during the continuance of an Event of Default, to take any action
and to execute any instrument which the Secured Party may deem necessary or
advisable to accomplish the purposes of this Agreement, including:

               (a)     to ask, demand, collect, sue for, recover, compromise,
receive and give acquittance and receipts for moneys due and to become due under
or in respect of any of the Collateral;

               (b)     to receive, endorse, and collect any drafts or other
instruments, documents and chattel paper, in connection with clause (a) above;

               (c)     to file any claims or take any action or institute any
proceedings which the Secured Party may deem necessary or desirable for the
collection of any of the Collateral or otherwise to enforce the rights of the
Secured Party with respect to any of the Collateral; and

               (d)     to perform the affirmative obligations of the Guarantor
hereunder.

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The Guarantor hereby acknowledges, consents and agrees that the power of
attorney granted pursuant to this Section is irrevocable and coupled with an
interest.

     6.2.     Secured Party May Perform. If the Guarantor fails to perform any
agreement contained herein, the Secured Party may themselves perform, or cause
performance of, such agreement, and the reasonable expenses of the Secured Party
incurred in connection therewith shall be payable by the Guarantor pursuant to
Section 7.4.

     6.3.     Secured Party Has No Duty. The powers conferred on the Secured
Party hereunder are solely to protect their interest in the Collateral and shall
not impose any duty on it to exercise any such powers. Except for reasonable
care of any Collateral in its possession and the accounting for moneys actually
received by it hereunder, the Secured Party shall have no duty as to any
Collateral. The Secured Party shall be deemed to have exercised reasonable care
in the custody and preservation of any of the Collateral, if it takes such
action for that purpose as it takes with their own similar property or as the
Guarantor reasonably requests in writing at times other than upon the occurrence
and during the continuance of any Event of Default, but failure of the Secured
Party to comply with any such request at any time shall not in itself be deemed
a failure to exercise reasonable care.

ARTICLE VII
REMEDIES

     7.1.     Certain Remedies. If any Event of Default shall have occurred and
be continuing:

               (a)     the Secured Party may exercise in respect of the
Collateral, in addition to other rights and remedies provided for herein or
otherwise available to it, all the rights and remedies of a Secured Party on
default under the UCC (whether or not the Code applies to the affected
Collateral) and also may require the Guarantor to, and the Guarantor hereby
agrees that it will, at its expense and upon the written request of the Secured
Party promptly, assemble all or part of the Collateral as directed by the
Secured Party and make it available to the Secured Party at a place to be
designated by the Secured Party which is reasonably convenient to both Party,
and without notice except as specified below, sell the Collateral or any part
thereof in one or more parcels at public or private sale, at any of the Secured
Party’s offices or elsewhere, for cash, on credit or for future delivery, and
upon such other terms as the Secured Party may deem commercially reasonable. The
Secured Party will give the Guarantor at least ten (10) days’ prior written
notice at the address of the Guarantor specified in Section 8.4 hereof of the
time and place of any public sale thereof or of the time after which any private
sale or any other intended disposition thereof is to be made. Any such notice
shall be deemed to meet any requirement hereunder or under any applicable law
(including the UCC) that reasonable notification be given of the time and place
of such sale or other disposition. All such sales shall be conducted in a
commercially reasonable manner and shall be at such commercially reasonable
price or prices as the Secured Party shall deem best and either for cash or on
credit or for future delivery (without assuming any responsibility for credit
risk). The Secured Party shall not be obligated to make any sale of Collateral
regardless of notice of sale having been given. The Secured Party may adjourn
any public or private sale from time to time by announcement at the time and
place fixed therefor, and such sale may, without further notice, be made at the
time and place to which it was so adjourned. All cash proceeds received by the
Secured Party in respect of any sale of,

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collection from, or other realization upon, all or any part of the Collateral
shall be applied by the Secured Party against all or any part of the Guaranteed
Obligations as set forth in Section 3.7.

               (b)     The Secured Party may transfer all or any part of the
Collateral into the name of the Secured Party or its nominee, with or without
disclosing that such Collateral is subject to the Lien hereunder, notify the
party obligated on any of the Collateral to make payment to the Secured Party of
any amount due or to become due thereunder, enforce collection of any of the
Collateral by suit or otherwise, and surrender, release or exchange all or any
part thereof, or compromise or extend or renew for any period (whether or not
longer than the original period) any obligations of any nature of any party with
respect thereto, endorse any checks, drafts, or other writings in the
Guarantor’s name to allow collection of the Collateral, take control of any
proceeds of the Collateral, and execute (in the name, place and stead of the
Guarantor) endorsements, assignments, stock powers and other instruments of
conveyance or transfer with respect to all or any of the Collateral.

     7.2.     Waiver. The Guarantor agrees, to the full extent that it may
lawfully so agree, that neither it nor anyone claiming through or under it will
set up, claim or seek to take advantage of any appraisement, valuation, stay,
extension or redemption law now or hereafter in force in any locality where any
property subject to the Lien hereof may be situated, in order to prevent, hinder
or delay the enforcement or foreclosure of this Agreement, or the absolute sale
of the Collateral or any part thereof, or the final and absolute putting into
possession thereof, immediately after such sale, of the purchaser thereof and
the Guarantor, for itself and all who may at any time claim through or under it,
hereby waives, to the full extent that it may be lawful so to do, the benefit of
all such laws, and any and all right to have any of the properties or assets
comprising the Collateral marshaled upon any such sale, and agrees that, subject
to the terms of this Agreement, the Secured Party, or any court having
jurisdiction to foreclose the Lien hereof, may sell the Collateral as an
entirety or in such parcels as it may determine.

     7.3.     Compliance with Restrictions. The Guarantor agrees that

               (a)     in any sale of any of the Collateral whenever an Event of
Default shall have occurred and be continuing, the Secured Party are hereby
authorized to comply with any limitation or restriction in connection with such
sale as it may be advised by counsel is necessary in order to avoid any
violation of applicable law (including compliance with such procedures as may
restrict the number of prospective bidders and purchasers, require that such
prospective bidders and purchasers have certain qualifications, and restrict
such prospective bidders and purchasers to Persons who will represent and agree
that they are purchasing for their own account for investment and not with a
view to the distribution or resale of such Collateral), or obtain any required
approval of the sale or of the purchaser by any Governmental Authority or
official, and

               (b)     such compliance shall not result in such sale being
considered or deemed not to have been made in a commercially reasonable manner,
nor shall the Secured Party be

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liable nor accountable to the Guarantor for any discount allowed by the reason
of the fact that such Collateral is sold in compliance with any such limitation
or restriction.

     7.4.     Protection of Collateral. The Secured Party may from time to time,
at its option, perform any act which the Guarantor fails to perform after being
requested in writing so to perform within the time period requested by the
Secured Party (it being understood that no such request need be given after the
occurrence and during the continuance of an Event of Default) and the Secured
Party may from time to time take any other action which the Secured Party
reasonably deems necessary for the maintenance, preservation or protection of
any of the Collateral or of its security interest therein.

ARTICLE VIII
MISCELLANEOUS PROVISIONS

     8.1.     Loan Document. This Agreement is a Loan Document executed pursuant
to the Loan Agreement and shall (unless otherwise expressly indicated herein) be
construed, administered and applied in accordance with the terms and provisions
thereof.

     8.2.     Binding on Successors, Transferees and Assigns; Assignment. This
Agreement shall remain in full force and effect until the Maturity Date has
occurred, shall be binding upon the Guarantor and its successors, transferees
and assigns and shall inure to the benefit of and be enforceable by the Secured
Party and their successors, transferees and assigns, in each case as permitted
by the Loan Agreement; provided, however, that the Guarantor may not assign any
of its obligations hereunder without the prior written consent of the Secured
Party.

     8.3.     Amendments, etc. No amendment to or waiver of any provision of
this Agreement, nor consent to any departure by the Guarantor from its
obligations under this Agreement, shall in any event be effective unless the
same shall be in writing and signed by the Secured Party and then such waiver or
consent shall be effective only in the specific instance and for the specific
purpose for which given.

     8.4.     Notices. All notices and other communications to the Guarantor or
to the Secured Party shall be in writing and shall be personally delivered or
mailed by telegraphic, telex or facsimile transmission, reputable overnight
courier or first class mail, postage prepaid, as follows:

      If to the Guarantor:   PARTY CITY MICHIGAN, INC.     400 Commons Way    
Rockaway, NJ 07866     Attn: Linda M. Siluk     Fax: [               ]      
With copies to:   LATHAM & WATKINS     885 Third Avenue     Suite 1000     New
York, NY 10022-4802     Attn: Steven Della Rocca     Fax No.: ( 212)751-4864

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      If to the     Secured Party:             WELLS FARGO RETAIL FINANCE, LLC  
  One Boston Place, 18th Floor     Boston, MA 02108     Attn: [Applicable
Account Officer]     Fax No. (617) 523-4029       with copies to:  
          CHOATE, HALL & STEWART     Exchange Place     53 State Street    
Boston, MA 02109     Attn: Peter M. Palladino, P.C.     Fax No. (617) 248-4000

     8.5.     Release of Liens. On the Maturity Date, the security interests
granted herein shall automatically terminate with respect to all Collateral. At
such time, the Secured Party will, at the Guarantor’s expense, deliver to the
Guarantor, without any representations, warranties or recourse of any kind
whatsoever, all Collateral held by the Secured Party hereunder, and execute and
deliver to the Guarantor such documents as the Guarantor shall reasonably
request to evidence such termination.

     8.6.     No Waiver; Remedies. No failure on the part of the Secured Party
to exercise, and no delay in exercising, any right hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any right hereunder
preclude any other or further exercise thereof or the exercise of any other
right. The remedies herein provided are cumulative and not exclusive of any
remedies provided by law.

     8.7.     Section Captions. Section captions used in this Agreement are for
convenience of reference only, and shall not affect the construction of this
Agreement.

     8.8.     Severability. Wherever possible each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be prohibited by or
invalid under such law, such provision shall be ineffective to the extent of
such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Agreement.

     8.9.     Governing Law, Entire Agreement, etc. THIS AGREEMENT WILL BE
DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE LAWS OF THE STATE OF NEW
YORK, EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY
INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR
COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF
NEW YORK. This Agreement and the other Loan Documents constitute the entire
understanding among the parties hereto with respect to the subject matter hereof
and thereof and supersede any prior agreements, written or oral, with respect
thereto.

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     8.10.     Counterparts. This Agreement may be executed by the parties
hereto in several counterparts, each of which shall be deemed to be an original
and all of which shall constitute together but one and the same agreement.

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     IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be duly executed and delivered by its officer thereunto duly authorized as a
document under seal as of the date first above written.

              PARTY CITY MICHIGAN, INC.               By:     /s/ Linda M. Siluk
       

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        Name: Linda M. Siluk         Title: Chief Financial Officer            
  WELLS FARGO RETAIL FINANCE, LLC,
as Agent               By:     /s/ David Molinario        

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        David Molinario         Vice President

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