Document:

Exhibit 10.1

SUPPLY
AGREEMENT

This Supply Agreement
(the “Agreement”) is dated as of August 7,
2006, by and between Amscan Inc., a New York corporation (“Amscan”),
and iParty Corp. a Delaware corporation (“iParty”).  Amscan and iParty are sometimes referred to
herein collectively as the “parties”.

In consideration of the
mutual promises herein contained and for all valuable consideration, the
parties hereby agree to be legally bound as follows:

1.             Supply
Agreement.

A.                                   During the Term, and
subject to the terms and conditions set forth herein, iParty hereby appoints
Amscan as a supplier of Party Goods (as hereinafter defined) and Amscan shall
supply iParty with Party Goods as ordered by iParty on the terms set forth in
this Agreement.

B.                                     iParty agrees
that, during the Term, and subject to the terms and conditions set forth
herein, Amscan shall supply Party Goods for stores which iParty now or
hereafter owns or operates during the Term and iParty shall purchase Party
Goods from Amscan in the aggregate annual minimum amounts  set forth on Schedule “A” attached
hereto (the “Annual Purchase Commitment”).  Notwithstanding the foregoing, this Agreement
shall not prohibit iParty from: (i) obtaining any Party Goods from any Person
in excess of the Annual Purchase Commitment, (ii) obtaining Party Goods from
any other person to the extent that Amscan is unable to fill an order from
iParty for such Party Goods, or (iii) obtaining Party Goods from any other
Person if Amscan shall not be able to provide iParty with competitive
pricing.  Amscan shall be deemed “unable
to fill an order” for purposes of this Agreement if Amscan is unable to fill at
least eighty percent (80%) of Party Goods orders within ten (10) days of
submission of such orders by iParty for a period of at least sixty (60) days.

C.                                     “Party Goods”
means all kinds of party goods, including without limitation paper and plastic
tableware, accessories and novelties, distributed by Amscan or its affiliates,
including (i) all such goods currently stocked by iParty and (ii) any new goods
either developed or acquired by Amscan or its affiliates after the date
hereof.  Notwithstanding anything set
forth herein, “party goods” for the purposes of this Agreement shall not
include metallic balloons.

D.                                    This Agreement is
not a requirements contract and nothing herein shall be construed to obligate
iParty to purchase any particular product or products or type of product or
products exclusively from Amscan.

2.             Pricing
and Annual Purchase Commitment.

A.                                   During the Term, “Non-contract
Party Goods” sold by Amscan to iParty in accordance with the provisions of this
Agreement will be invoiced by Amscan in accordance with the pricing schedule
set forth on Schedule B, based on Amscan’s 

 

 

manufacturer’s suggested
retail price (“MSRP”), as reflected in Amscan’s catalog.  “Non-contract Party Goods,” as used herein,
shall mean all Party Goods contained in Amscan catalogs, except for those Party
Goods set forth on Schedule “B” hereto, as the same may be from time to
time amended.  In the event that Amscan’s
price to iParty for any particular Party Goods, calculated in accordance with Schedule
B, is not competitive with pricing available from a competitive supplier,
nothing herein shall require iParty to buy such Party Goods from Amscan,
however, iParty shall remain subject to the terms of this Agreement, including
the Annual Purchase Commitment.

B.                                     Non-contract Party
Goods purchased by iParty for its stores shall also initially be subject to an
additional discretionary territory development rebate (the “Base Rebate”) as set forth on Schedule C
hereto, calculated based on the invoiced price of products shipped in each
calendar quarter during the Term, before reduction for credits for damaged
goods, rebates and allowances (including any reduction on account of any Base
Rebates and Incentive Rebates under this Agreement or under any Term Sheet in
effect between the parties). 
Notwithstanding anything to the contrary set forth herein, the Base
Rebate is a discretionary rebate by Amscan and may be eliminated or reduced at
any time in Amscan’s sole discretion based upon iParty’s good faith continued
development of the territory; provided, however, that development
of the territory shall not be deemed to require the opening of any new stores
(as opposed to promoting stores already open). 
No Base Rebate previously applied to purchases by iParty is subject to
recapture by Amscan, except to the extent of returns for damaged or defective
goods.  The Base Rebate shall be paid or
credited in accordance with the provisions of Schedule B.

C.                                     Non-contract Party
Goods shall also be subject to an Incentive Rebate (as defined on Schedule “C”),
which shall commence on the date hereof. 
The Incentive Rebate shall be calculated, based on increased purchases,
in accordance with Schedule “C”. 
The Incentive Rebate is non-discretionary, irrespective of any reduction
in or elimination of the Base Rebate and irrespective of whether or not iParty
has achieved the Annual Purchase Commitment described in Section 2.F.  The Incentive Rebate shall be paid in
accordance with the provisions of Schedule B.

D.                                    During the Term, “Contract
Party Goods” (as hereinafter defined) shall be sold by Amscan to iParty in
accordance with the provisions of this Agreement, and shall be invoiced by Amscan
at the net prices set forth on Schedule “B”.  “Contract Party Goods” shall mean the Party
Goods set forth on Schedule “B” hereto, as the same may be amended from
time to time.

E.                                      Commencing on the
date of this Agreement, iParty shall commence to increase, in a commercially
reasonable manner, its purchases of Amscan Party Goods over the Base Purchase
Amount, as defined on Schedule “A”, to the “Annual Purchase Commitment,”
as defined on Schedule “A”.

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i.                                          During each
calendar year beginning on January 1, 2008, iParty shall purchase not less than
the Annual Purchase Commitment for such calendar year.

ii.                                       In the event
that iParty fails to purchase at least the Annual Purchase Commitment, as
determined at the end of any such calendar year, iParty may place an order to
fulfill its Annual Purchase Commitment for the immediately preceding calendar
year no later than the thirtieth (30th)
day following the end of such calendar year.

iii.                                    In the event that
iParty does not place an order sufficient to fulfill its Annual Purchase
Commitment for such calendar year within such thirty (30) day period, Amscan
shall bill iParty an amount equal to (i) the Annual Purchase Commitment for
such immediately preceding calendar year multiplied by the total number of
iParty Stores open during such calendar year, less (ii) the aggregate
total amount invoiced to iParty for Party Goods purchased from Amscan for all
iParty Stores during or in respect of such immediately preceding calendar year
(the “Penalty”).  The Penalty shall be due and payable on the
terms set forth on Schedule B attached hereto.

iv.                                   In calculating the
Penalty for iParty Stores open for only a portion of such calendar year (if
any), the calculation shall be made on a pro rata basis for such stores based
on the number of months during such year that each such store was open (such
number, with respect to each such store, rounded to the nearest whole number).

v.                                      In the event that
either (i) a Penalty is paid in respect of a preceding calendar year, or (ii)
iParty orders an amount of party goods within 30 days following the close of
any calendar year in order to avoid a shortfall in the Annual Purchase
Commitment for the previous calendar year, then neither the dollar amount of
such Penalty paid and/or the Party Goods ordered that represent a shortfall
from a prior calendar year shall be included in the calculation of total Party
Goods purchased for purposes of determining whether iParty has achieved its
Annual Purchase Commitment for the calendar year in which the Penalty was paid
or shortfall made up, as the case may be.

vi.                                   Notwithstanding
anything to the contrary set forth herein, if iParty fails to meet the Annual
Purchase Commitment for any relevant calendar year, as a result of (i) Amscan
being “unable to fill an order,” as defined in Paragraph 1.B, or (ii) the
return of damaged and/or defective products in excess of the customarily
anticipated rate of damaged or defective products occurring in the ordinary
course, then, the purchase price of the goods ordered, but not available, or
returned as damaged or defective shall be deducted from the Annual Purchase
Commitment solely for purposes of calculating whether a Penalty is due in
respect of such calendar year (and any subsequent calendar year for which such
calculation may be relevant). 

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The Annual
Purchase Commitment shall also be subject to adjustment as provided for in
Schedule B in the event that Amscan is unable to provide competitive pricing in
accordance with Schedule B.

F.                                      Notwithstanding
anything to the contrary, Amscan and iParty acknowledge that the Annual
Purchase Commitment is an aggregate commitment and nothing in this Agreement
shall be construed to mean or to imply that iParty shall be obligated to
purchase any specific amount of Party Goods with respect to any individual
store or group of stores, and any such failure in respect of any store or group
of stores will not result in a Penalty so long as iParty has purchased an
aggregate amount of Amscan Party Goods equal to or greater than the Annual
Purchase Commitment.

F.                                      Notwithstanding
anything to the contrary set forth herein, the parties acknowledge and agree
that Amscan’s MSRP prices for Non-contract Party Goods and/or prices for
Contract Party Goods may increase from time to time, subject to market conditions
and consistent with Amscan’s usual practices.

H.                                    In
addition to the Base Rebate and the Incentive Rebate provided for under this
Agreement, iParty shall be eligible for such other rebates, allowances,
credits, freight, seasonal dating, new store dating, and other similar
incentives contained in Term Sheets in effect from time to time between Amscan
and iParty, consistent with past practices, custom, and usage between the
Parties in this respect.

3.             Payment
Terms.

A.                                   Payment for all “everyday
Party Goods”, shipped by Amscan shall be made on the terms set forth on Schedule
B.

B.                                     Any and all taxes,
excises, assessments, levees, imports, duties, costs and penalties that may be
assessed or imposed by any governmental agency in connection with this
Agreement shall be paid by the party on which they are imposed and shall be the
sole obligation of such party.

C.                                   Existing
Amscan receivables owed by iParty to Amscan as of the date hereof, in the
approximate amount of $1,150,000.00 (the “Extended Receivables”), shall have
the payment date extended until October 31, 2006.  Commencing on October 2, 2006 until October
31, 2006, iParty, at its option, may elect to convert the remaining balance of
the Extended Receivables into a promissory note (the “Note”).  The Note, if issued, will bear interest at
the rate of 11.0% per annum, and shall be payable in thirty-six (36) equal
monthly installments of principal and interest commencing on November 1, 2006,
and on the first day of each month thereafter until October 1, 2009, when the
remaining principal balance and all accrued and unpaid interest shall be due
and payable.  The Note, if issued, shall
be in the form annexed hereto as Exhibit “1”, and subordinated to
certain “Senior Debt” of iParty, as provided in the Subordination Agreement in
the form of annexed hereto as  Exhibit
“2” (the “Subordination Agreement”), which Amscan will execute upon
issuance of the Note.  At the request of
iParty Amscan will also 

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execute a Subordination
Agreement, on terms materially consistent with and similar to the Subordination
Agreement, with any successor holder of Senior Indebtedness (as defined in the
Note), including specifically with any Senior Subordinated Lender (as defined
in the Note).

4.             Shipment
Terms.

A.                                   Shipment Terms are
as set forth on Schedule B.

B.                                     Amscan shall use
its commercially reasonable efforts to fulfill the orders for Party Goods
placed by iParty pursuant to the terms of this Agreement.

C.                                     Amscan agrees that
it will:

(i)                                     Continue
to handle and fulfill orders by iParty in a manner consistent with past
practice, and in the event of the occurrence of a force majuere event,
including any shortage, embargo, strike or other similar situation, it will
treat iParty consistently with its treatment of other customers in order fulfillment;

(ii)                                  Provide
products of comparable quality to the products being supplied to iParty and its
other customers at the time of the execution of this Agreement, free from
material defects in material, workmanship and design; and

(iii)                               Provide
products manufactured and labeled in compliance with all applicable laws and
regulations.

5.             Term of Agreement; Termination.

A.                                   This Agreement shall
be deemed effective from and after August 7, 2006 through and including
December 31, 2012 (the “Term”),
unless sooner terminated as follows:

i.                                          Either
party hereto may terminate this Agreement upon written notice to the other
party if the other party hereto becomes the subject of a voluntary or
involuntary petition in bankruptcy or any proceeding relating to insolvency,
receivership, liquidation, or composition for the benefit of creditors, which
petition or proceeding is not dismissed with prejudice within sixty (60) days
after filing.

ii.                                       Either
party hereto may terminate this Agreement upon written notice to the other
party if the other party breaches any express material term or condition of
this Agreement and fails to cure that breach within forty-five (45) days
after receiving written notice of the breach. 
In the event that iParty gives written notice to Amscan of any good
faith dispute with respect to any invoice(s) (which notice shall include
specific details regarding each disputed invoice(s)) within fifteen days after
receipt by iParty of written notice from Amscan of non-payment of such
invoice(s), 

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then the failure by iParty to pay such
disputed amount shall not be deemed to be a breach of this Agreement; provided
that either party may immediately submit the dispute to arbitration pursuant to
this Agreement.

B.                                     Except as set
forth herein, any termination or expiration of this Agreement shall be without
prejudice to any right which shall have accrued to the benefit of any Party and
shall not relieve any Party of any obligation which has accrued prior to the
effective date of such termination or expiration (including, without
limitation, any credits and/or allowances in accordance with the provisions of
this Agreement), which obligations shall remain in full force and effect for
the period provided therein or, if no period is provided therein, then such obligations
shall remain in full force and effect indefinitely (provided that to the extent
that a Party is entitled to a credit at a time when it does not owe any amounts
to the other Party pursuant to this Agreement, then such Party shall be
entitled to receive a payment from the other Party in an amount equal to the
credit).  Except as expressly stated
otherwise herein, the remedies hereunder are cumulative, and nothing in this
Agreement shall prevent any Party, in the case of a breach, from not
terminating this Agreement and seeking to enforce its rights hereunder.

C.                                     Upon any
termination or expiration of this Agreement in accordance with the provisions
hereof, the provisions in Sections 8 and 10 shall survive such termination or
expiration.

6.             Notices.

Any and all
notices required hereunder shall be in writing and shall be (a) sent by
certified, first-class mail, postage prepaid, (b) sent by national overnight
courier or (c) delivered by facsimile (with the original promptly sent by any
of the foregoing manners), to the addresses or facsimile numbers of the other
party as set forth below.  The effective
date of any notice hereunder shall be the date of receipt by the receiving
party:

	
  

  	
   If to Amscan:

  	
   

  	
   

  	
  Amscan Inc.

  
	
   

  	
   

  	
   

  	
   

  	
  80 Grasslands Road

  
	
   

  	
   

  	
   

  	
   

  	
  Elmsford, New
  York 10523

  
	
   

  	
   

  	
   

  	
   

  	
  Facsimile:
  (914)345-2056

  
	
   

  	
   

  	
   

  	
   

  	
  Attention: James
  M. Harrison, President

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  and

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Kurzman
  Eisenberg Corbin & Lever, LLP

  
	
   

  	
   

  	
   

  	
   

  	
  One North
  Broadway

  
	
   

  	
   

  	
   

  	
   

  	
  White Plains,
  New York 10601

  
	
   

  	
   

  	
   

  	
   

  	
  (914)285-9855

  
	
   

  	
   

  	
   

  	
   

  	
  Attention: Joel
  S. Lever, Esq.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   If to iParty:

  	
   

  	
   

  	
  iParty Corp.

  
	
   

  	
   

  	
   

  	
   

  	
  270 Bridge
  Street, Suite 301

  
	
   

  	
   

  	
   

  	
   

  	
  Dedham, MA 02026

  
	
   

  	
   

  	
   

  	
   

  	
  Attn: Sal
  Perisano, Chief Executive Officer

  
	
   

  	
   

  	
   

  	
   

  	
  Fax: (781)
  326-7143

  

 

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7.             Governing Law.

This Agreement and all
sales transactions pursuant hereto shall be governed by and construed in
accordance with the internal laws of the State of New York.

8.             Arbitration.

Except as expressly set
forth in this Agreement, all disagreements, disputes, controversies and claims
arising out of this Agreement, shall be submitted to and resolved by
arbitration in Westchester County, New York before a commercial panel of three
arbitrators in accordance with and pursuant to the Commercial Arbitration Rules
of the American Arbitration Association, as then in effect.  The arbitrators shall be selected by mutual
agreement of the Parties, or if no agreement can be reached, the arbitrators
shall be selected by the American Arbitration Association.  Each of the arbitrators shall be licensed
attorneys with at least fifteen (15) years experience in the negotiation and
performance of commercial contracts.  The
discovery period shall last no more than thirty (30) days after the arbitrators
shall declare the discovery period commenced, and each Party may conduct no
more than five (5) depositions.  The arbitrators shall issue a reasoned opinion
in support of their award.  The
determination of any such panel of arbitrators shall be final and binding on
the parties.  The service of any notice,
process, motion or other document in connection with an arbitration proceeding
or for the enforcement of any arbitration award may be made as set forth in
Section 6 (other than by telecopier). 
The provisions of this Section shall not be deemed to preclude any party
hereto from seeking preliminary injunctive or other equitable relief to protect
or enforce its rights hereunder pending arbitration, or to prohibit any court
from making preliminary findings of fact in connection with granting or denying
such preliminary injunctive relief pending arbitration, or to preclude any
party hereto from seeking permanent injunctive or other equitable relief after
and in accordance with the decision of the arbitrators.  Nothing herein shall be construed to mean
that any decision of the arbitrator is subject to judicial review or appeal,
and the parties hereto hereby waive any and all rights of judicial appeal or
review, on any ground whatsoever.  Each
party shall bear its own costs and expenses in the event of any dispute
hereunder.

9.             Press Releases.

No press release,
publicity or other form of public written disclosure related to this Agreement
shall be permitted by either party to be published or otherwise disclosed
unless the other party has indicated its consent to the form of the release in
writing, except for any disclosure as is deemed necessary or advisable, in the
reasonable judgment of the responsible party, to comply with national, federal
or state laws or regulations with respect to regulatory reporting or disclosure
obligations.

10.          Confidential Information.

A.                                   Confidential
Information Defined.  “Confidential
Information” shall mean each Party’s business, technical, engineering,
manufacturing, marketing, sales, customer, financial and other information
relating to such party or any of its 

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affiliates or their respective businesses that constitutes trade
secrets or know-how or is otherwise proprietary or not generally known to the
public or other information which the disclosing party otherwise informs the
receiving party is confidential whether by so indicating on such information or
otherwise, and shall include any such information received by a receiving party
prior to or following execution of this Agreement.  Confidential Information shall include
information in any form, whether written, graphic, electronic, physical or
other form and may include raw data, graphs, charts, drawings, models, samples,
hardware, photographs, software or electronic code.

B.                                     Loss of Status.  Confidential Information shall not include
information, data, knowledge and know-how that, as shown by written records,
(i) is known to the receiving party prior to disclosure to such party; (ii) is
in the public domain prior to disclosure to such party; (iii) enters the
public domain through no violation of this Agreement after disclosure to such
party; or (iv) the receiving party independently develops without reliance on
Confidential Information.

C.                                     Disclosures.  Each party shall keep the Confidential
Information communicated to it by the other party confidential and shall not
disclose such information or provisions to any third party without the prior
written approval of the other party, except that either party may disclose such
provisions to the extent required by law or other demand under lawful process;
provided the receiving party gives the disclosing party prompt notice prior to
any disclosure required by demand under lawful process to allow the disclosing
party to make a reasonable effort to obtain a protective order or otherwise
protect the confidentiality of such information.  Notwithstanding the foregoing, a receiving
party may disclose Confidential Information of the disclosing Party (i) to its
officers, directors, employees, contractors, affiliates and representatives and
to third parties to whom such disclosure is necessary in connection with
performance of this Agreement provided that such recipient is notified of the
confidential nature of such Confidential Information and agrees to abide by the
applicable terms of this Section 10 with respect to such Confidential
Information or (ii) as required to enforce or exercise the receiving party’s
rights under this Agreement.  Nothing
contained herein shall be deemed to grant either party, either expressed or
implied, a license or other right or interest in the Confidential Information
of the other or in any trademark or other similar property of the other, except
as expressly provided hereunder.

D.                                    Return of
Confidential Information.  A
receiving party shall not make or retain or permit to be made or retained any copies
of any of the disclosing party’s Confidential Information, except as may be
necessary in connection with the receiving party’s performance under this
Agreement.  A receiving party shall
return to the disclosing party all Confidential Information of the disclosing
party and all copies and other duplicates and reproductions thereof (i) within
ten (10) days following request by the disclosing party of the return thereof;
(ii) immediately, in the event that the receiving party’s use of the
Confidential 

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Information is no longer necessary in connection with this Agreement;
or (iii) upon expiration or termination of this Agreement.

E.                                      Remedies.  Each party acknowledges and agrees that a
breach by it of the applicable provisions of this Section 10 could result in
irreparable damages to the other Party, for which an adequate legal remedy may
not exist.  Accordingly, each party
agrees and acknowledges that in the event of a breach by it of any of the
applicable provisions of this Section 10, the other party shall be entitled to
specific performance, temporary and/or permanent injunctive relief or any other
equitable remedy (without the need to post a bond or surety in connection
therewith), in addition to any other remedy to which such party may be entitled
at law or in equity.

11.          Miscellaneous.

A.                                   Independent
Contractors.  Each party acknowledges
that the relationship between the parties pursuant to this Agreement is that of
independent contractors. No provision of this Agreement shall be construed to
(i) constitute the parties as partners, joint venturers or participants in a
joint undertaking, or (ii) give any party the power to direct and control the
day-to-day activities of the other. Further, no employees of any party shall be
deemed or treated as employees of another party, and each party shall be solely
responsible for any and all payroll, employment and related taxes, and
withholding applicable to its own employees.

B.                                     Waiver. Any
waiver of breach or default pursuant to this Agreement shall not be a waiver of
any other subsequent default. Failure or delay by either party to enforce any
term or condition of this Agreement shall not constitute a waiver of such term
or condition.

C.                                     Conflicts in
Provisions. In the event of any apparent conflicts or inconsistencies
between this Agreement and any Schedules hereto, to the extent possible such
provisions shall be interpreted so as to make them consistent, and if such is
not possible, the provisions of this Agreement shall prevail.

D.                                    Headings.
The Section headings herein are for reference and convenience only and shall
not enter into the interpretation hereof.

E.                                      Severability.
To the extent that any provision of this Agreement is found by a court of
competent jurisdiction to be invalid or unenforceable, that provision
notwithstanding, the remaining provisions of this Agreement shall remain in
full force and effect and such invalid or unenforceable provision shall be
deleted.

F.                                      Assignment.  This Agreement shall be binding upon the
successors and assigns of the Parties and the name of a party appearing herein
shall be deemed to include the names of its successors and assigns.  No party may assign, delegate or transfer all
or any of its respective rights or obligations under this Agreement without the
prior written consent of the other party which consent will not be unreasonably
withheld, delayed or conditioned. 
Notwithstanding the foregoing, either party 

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may assign, delegate or transfer this Agreement or any of its
respective rights or obligations to (a) its affiliate, so long as the assigning
party unconditionally guarantees the obligations of such affiliate or (b) any
successor of the assigning party’s business in the event of a merger,
acquisition or consolidation involving such party or its affiliates.

G.                                     Amendment.
No alternation, waiver, cancellation, or any other change or modification in
any term or condition of this Agreement, or any agreement contemplated to be
negotiated or reached pursuant to the terms of this Agreement, shall be valid
or binding on either party unless made in writing and signed by duly authorized
representatives of both parties.

H.                                    Approvals and
Similar Actions. Wherever agreement, approval, acceptance, consent or
similar action by either party hereto is required by any provision of this
Agreement, such action shall not be unreasonably delayed or withheld.

I.                                         Entire
Agreement. This Agreement, constitutes the entire agreement between the
Parties with respect to the subject matter hereof and supersedes any previous
agreements and understandings, whether oral or written, between the Parties
hereto with respect to the subject matter hereof, subject to such Term Sheets
relating to allowances, credits, discounts, and dating, as in effect from time
to time, in a manner consistent with past practice, custom and usage between
the Parties.

J.                                        No Joint
Venture.  Nothing herein shall be
deemed to create a relationship or partnership, joint venture, agency or
employment relationship between Amscan and iParty.  The nature of the relationship between Amscan
and iParty hereunder is that of independent contracting parties.  Neither Amscan nor iParty shall be a
fiduciary of the other.  This Agreement
is not for the benefit of any third party and shall not be deemed to give any
right or remedy to or against any such third party except as otherwise
expressly provided herein.  Neither party
is the agent or legal representative of the other for any purpose whatsoever
and has no right or authority to assume or create orally or in writing any
obligation of any kind, express or implied, on behalf of the other.

K.                                    Construction.
This Agreement is the result of negotiation between the parties and their
respective counsel. This Agreement will be interpreted fairly in accordance
with its terms and conditions and without any strict construction in favor of
either party. Any ambiguity shall not be interpreted against the drafting
party.

L.                                      Counterparts.
This Agreement may be executed in one or more counterparts, each of which will
be deemed an original, but all of which taken together will constitute one and
the same instrument.

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IN
WITNESS WHEREOF the parties have executed this Agreement
in the corporate name by their officers duly authorized as of the day and year
first above written.

	
  

  	
  iPARTY CORP.

  
	
   

  	
   

  	
   

  	
   

  
	
  

  	
  By:

  	
   

  	
  /s/ SAL PERISANO

  
	
   

  	
   

  	
   

  	
  Sal Perisano

  
	
   

  	
   

  	
   

  	
  Chief Executive Officer

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  AMSCAN INC.

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
  /s/ JAMES M. HARRISON

  
	
   

  	
   

  	
   

  	
  James M. Harrison

  
	
   

  	
   

  	
   

  	
  President

  

 

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Schedule
A

Annual
Purchase Commitment

As used in this
Agreement, the term “iParty Store” means any party goods retail store operated
under the name “iParty,” other than any store opened or acquired after the date
of this Agreement that has less than 8,000 square feet of retail space.

As used in this
Agreement, the term “Base Purchase Amount” means $112,500 multiplied by
the number of iParty Stores open as of June 30, 2006.

As used in this
Agreement, the term “Annual Purchase Commitment” with respect to each
calendar year, beginning with the calendar year commencing on January 1, 2008,
means the product obtained by multiplying (1) the total number of iParty Stores
open during such calendar year, by (2) $180,000. . In the event that any iParty
Stores are open for only a portion of such calendar year, the calculation shall
be made on a pro rata basis for such stores based on the number of months (such
number, with respect to each such store, rounded to the nearest whole number)
during such year that each such store was open.

The calculation of the
Annual Purchase Commitment shall be based on the invoiced price of products
shipped, before reduction for credits for damaged goods, rebates and allowances
(including any reduction on account of any Base Rebates and Incentive Rebates
under this Agreement or under any Term Sheet in effect between the parties),
and shall be subject to adjustment in accordance with the provisions of Schedule
B.

 

Exhibit “1”

SUBORDINATED PROMISSORY NOTE

	
  $[1,150,000.00]

  	
   

  	
      ,
  New York

  
	
   

  	
   

  	
  October
     , 2006

  

 

iPARTY CORP., a Delaware corporation (the “Company”), the principal office of which is located at 270
Bridge Street, Dedham, Massachusetts 
02026, for value received hereby promises to pay to AMSCAN INC., or its
assigns (the “Holder”), the sum of [ONE MILLION
ONE HUNDRED FIFTY THOUSAND AND 00/100 DOLLARS ($1,150,000.00)], plus interest
calculated at the rate of 11.0% per annum.

This Note shall be payable in thirty-six (36) equal
monthly installments of principal and interest of $  *   commencing
on November 1, 2006, and thereafter, on the first date of each month until
October 1, 2009, when the entire remaining principal balance and all accrued
interest shall be due and payable.  All
interest shall be computed on the basis of a 365 day year and shall be paid for
the actual number of days elapsed.

1.                                       SUBORDINATION.

This Note is subordinate to the Senior Indebtedness
(as hereinafter defined) of the Company. 
“Senior Indebtedness” shall mean any and all obligations and
liabilities of the Company to (i) Wells Fargo Retail Finance II, LLC, (“Wells Fargo”) as referenced by the certain Subordination
Agreement dated as of the date hereof by and between the Company, Wells Fargo
and Holder (the “Senior Subordination Agreement”)
and (ii) to any Senior Subordinated Lender, and including, without limitation,
principal and interest thereon, whether accrued before or after the filing of a
petition in bankruptcy or similar insolvency proceeding, and whether direct or
indirect, absolute or contingent, joint or several, secured or unsecured, due
or to become due, now existing or later arising and however evidenced, together
with all other sums due thereon and all costs of collecting the same
(including, without limitation, reasonable attorney fees) for which the Company
is liable, and any such indebtedness or any debentures, notes or other evidence
of indebtedness issued in exchange for or to refinance such Senior Indebtedness
(in whole or in part), or any indebtedness arising from the satisfaction of
such Senior Indebtedness by a guarantor. 
Wells Fargo, any such Senior Subordinated Lender and any successor
holders of Senior Indebtedness are collectively referred to as the “Senior
Lenders.”

“Senior Subordinated Lender” means any current or
future lender or lenders to the Company and/or its subsidiaries, which loan up
to $3,200,000 in the aggregate to the Company and/or its subsidiaries, and
which indebtedness is by its express terms senior hereto and junior to the
Senior Indebtedness to Wells Fargo or any successor to Wells Fargo.

*                    The amount
necessary to fully amortize the principal balance of this note in 36 equal
monthly payments of principal and interest at the rate set forth herein

 

 

The Holder agrees that the indebtedness
evidenced by this Note is, and until the Senior Indebtedness is indefeasibly
paid in full shall be, subject and subordinate and junior in right of repayment
to the Senior Indebtedness, subject to the terms of the respective
Subordination Agreements between the Holder and the respective Senior Lenders.

2.                                       EVENTS OF
DEFAULT.

If any of the events specified in this section shall
occur (herein individually referred to as an “Event of
Default”), the Holder of this Note may, so long as such condition
exists, and, subject to the provision of the Subordination Agreements, declare
the entire principal and unpaid accrued interest hereon immediately due and
payable, by notice in writing to the Company:

(i)            Default in the
payment of the principal, and unpaid accrued interest of this Note when due and
payable if such default is not cured by the Company within ten (10) days after
the Holder has given the Company written notice of such default; or

(ii)           The institution by
the Company of any Insolvency Case (as hereinafter defined) or the taking of
corporate action by the Company in furtherance of any such Insolvency Case; or

(iii)          If, within sixty
(60) days after the commencement of an action against the Company (and service
of process in connection therewith on the Company) of an Insolvency Case, such
Insolvency Case shall not have been resolved in favor of the Company or all
orders or proceedings thereunder affecting the operations or the business of
the Company stayed, or if the stay of any such order or proceeding shall
thereafter be set aside, or if, within sixty (60) days after the appointment
without the consent or acquiescence of the Company of any trustee, receiver or
liquidator of the Company or of all or any substantial part of the properties
of the Company, such appointment shall not have been vacated; or

(iv)          Any declared default
of the Company under any Senior Indebtedness that gives the holder thereof the
right to accelerate such Senior Indebtedness, and such Senior Indebtedness is
in fact accelerated by the holder.

 

 

 2
 

 

 

(v)           The
term “Insolvency Case” means (i) any insolvency, bankruptcy,
receivership, custodianship, liquidation, reorganization, readjustment,
composition or other similar proceeding relative to the Company or any of its
properties, whether under any bankruptcy, reorganization or insolvency law or
laws, federal or state, or any law, federal or state, relating to relief of
debtors, readjustment of indebtedness, reorganization, composition or
extension, (ii) proceeding for any liquidation, liquidating distribution,
dissolution or other winding up of the Company, voluntary or involuntary,
whether or not involving insolvency or bankruptcy proceedings, (iii) assignment
for the benefit of creditors of the Company or (iv) other marshalling of assets
of the Company.

3.                                   MISCELLANEOUS.

(a)           The rights and obligations of the Company and the Holder
shall be binding upon and benefit the permitted successors, assigns, and
transferees of the parties.

(b)          No provision of this Note may be amended, waived or
modified except upon the written consent of the Company, the Holder and the
holder of the Senior Indebtedness.

(c)           This
Note is governed by, and shall be construed and enforced in accordance with,
the laws of the State of New York.  Each
of the parties hereto expressly submits to the non-exclusive jurisdiction of
the Supreme Court, County of Westchester and the United States District Court
for the Southern District of New York in any action or proceeding relating to
any claim, dispute or other matter pertaining directly or indirectly to this
Note.

(d)           THE
PARTIES HERETO HEREBY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING ARISING
OUT OF OR IN CONNECTION WITH THIS NOTE AND FURTHER HEREBY WAIVE ANY RIGHT OF
OFFSET OR RIGHT TO INTERPOSE ANY COUNTERCLAIM IN ANY SUCH ACTION.

(e)           The
provisions of this Note shall be applicable both before and after the
commencement of any Insolvency Case by or against the Company and all converted
and succeeding cases in respect thereof. 
The relative rights, as provided for in this Note, shall continue after
the commencement of any such Insolvency Case on the same basis as prior to the
date of the commencement of any such Insolvency Case, as provided in this Note.

(f)            The
Company shall pay to the Holder, upon written demand, all costs of collection
and reasonable attorney’s fees and other costs and expenses paid or incurred by
the Holder in enforcing the obligations of the Company hereunder and/or in
exercising the 

 3
 

 

 

Holder’s rights and remedies hereunder (whether such
costs and expenses are incurred in any work-out, bankruptcy case or proceeding,
or otherwise).

[The remainder of this
page has been intentionally left blank]

 4
 

 

 

IN WITNESS WHEREOF, the Company has caused this Note
to be issued this    day of October,  2006, and the Holder, by signing this Note,
agrees to be bound by this Note.

	
  

  	
  iPARTY CORP.

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  

 

Name of Holder:            AMSCAN INC.

Address:                        80 Grasslands Road,
Elmsford, New York  10523

Agreed:

AMSCAN INC.

	
  By:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  	
   

  
	
   

  	
   

  	
  Title:

  	
   

  

 

 5Exhibit 10.2

ASSET PURCHASE AGREEMENT

By
and Among

PARTY
CITY CORPORATION,

iPARTY
CORP.

and

iPARTY
RETAIL STORES CORP.

Dated as of August 7,
2006

 

 

 

TABLE
OF CONTENTS

	
  1.

  	
   

  	
  DEFINITIONS; CERTAIN
  RULES OF CONSTRUCTION

  	
   

  	
  1

  	
   

  
	
  2.

  	
   

  	
  ACQUISITION OF ASSETS
  BY BUYER

  	
   

  	
  8

  	
   

  
	
   

  	
   

  	
  2.1.

  	
   

  	
  Purchase and Sale of
  Assets

  	
   

  	
  8

  	
   

  
	
   

  	
   

  	
  2.2.

  	
   

  	
  Excluded Assets

  	
   

  	
  9

  	
   

  
	
   

  	
   

  	
  2.3.

  	
   

  	
  Assumption of
  Liabilities

  	
   

  	
  9

  	
   

  
	
   

  	
   

  	
  2.4.

  	
   

  	
  Liabilities Not Assumed

  	
   

  	
  10

  	
   

  
	
   

  	
   

  	
  2.5.

  	
   

  	
  Purchase Price

  	
   

  	
  11

  	
   

  
	
   

  	
   

  	
  2.6.

  	
   

  	
  The Closing

  	
   

  	
  11

  	
   

  
	
   

  	
   

  	
  2.7.

  	
   

  	
  Deliveries by Seller
  and Buyer

  	
   

  	
  11

  	
   

  
	
   

  	
   

  	
  2.8.

  	
   

  	
  Allocation of Purchase
  Price

  	
   

  	
  12

  	
   

  
	
   

  	
   

  	
  2.9.

  	
   

  	
  Adjustment of Purchase
  Price

  	
   

  	
  12

  	
   

  
	
   

  	
   

  	
  2.10.

  	
   

  	
  Prorations

  	
   

  	
  13

  	
   

  
	
   

  	
   

  	
  2.11.

  	
   

  	
  Security Deposits and
  Cash

  	
   

  	
  13

  	
   

  
	
  3.

  	
   

  	
  REPRESENTATIONS AND
  WARRANTIES OF THE SELLER

  	
   

  	
  13

  	
   

  
	
   

  	
   

  	
  3.1.

  	
   

  	
  Organization and
  Qualification of the Seller

  	
   

  	
  13

  	
   

  
	
   

  	
   

  	
  3.2.

  	
   

  	
  Authorization of
  Transaction

  	
   

  	
  14

  	
   

  
	
   

  	
   

  	
  3.3.

  	
   

  	
  Noncontravention

  	
   

  	
  14

  	
   

  
	
   

  	
   

  	
  3.4.

  	
   

  	
  Brokers’ Fees

  	
   

  	
  14

  	
   

  
	
   

  	
   

  	
  3.5.

  	
   

  	
  Assets

  	
   

  	
  14

  	
   

  
	
   

  	
   

  	
  3.6.

  	
   

  	
  Legal and Other
  Compliance

  	
   

  	
  14

  	
   

  
	
   

  	
   

  	
  3.7.

  	
   

  	
  Consents

  	
   

  	
  14

  	
   

  
	
   

  	
   

  	
  3.8.

  	
   

  	
  Property, Plant and
  Equipment

  	
   

  	
  15

  	
   

  
	
   

  	
   

  	
  3.9.

  	
   

  	
  Litigation

  	
   

  	
  15

  	
   

  
	
   

  	
   

  	
  3.10.

  	
   

  	
  Environmental Matters

  	
   

  	
  15

  	
   

  
	
   

  	
   

  	
  3.11.

  	
   

  	
  Affiliated Transactions

  	
   

  	
  15

  	
   

  
	
   

  	
   

  	
  3.12.

  	
   

  	
  Absence of Certain
  Developments

  	
   

  	
  16

  	
   

  
	
   

  	
   

  	
  3.13.

  	
   

  	
  Employment

  	
   

  	
  16

  	
   

  
	
   

  	
   

  	
  3.14.

  	
   

  	
  Certain Financial
  Information

  	
   

  	
  16

  	
   

  
	
   

  	
   

  	
  3.15.

  	
   

  	
  Undisclosed Liabilities

  	
   

  	
  16

  	
   

  
	
   

  	
   

  	
  3.16.

  	
   

  	
  Disclaimer of other
  Representations and Warranties

  	
   

  	
  16

  	
   

  
	
  4.

  	
   

  	
  REPRESENTATIONS AND
  WARRANTIES OF THE BUYER AND BUYER PARENT

  	
   

  	
  17

  	
   

  
	
   

  	
   

  	
  4.1.

  	
   

  	
  Organization and
  Qualification of the Buyer and Buyer Parent

  	
   

  	
  17

  	
   

  
	
   

  	
   

  	
  4.2.

  	
   

  	
  Authorization of
  Transaction

  	
   

  	
  17

  	
   

  
	
   

  	
   

  	
  4.3.

  	
   

  	
  Noncontravention

  	
   

  	
  17

  	
   

  
	
   

  	
   

  	
  4.4.

  	
   

  	
  Brokers’ Fees

  	
   

  	
  17

  	
   

  
	
   

  	
   

  	
  4.5.

  	
   

  	
  Consents

  	
   

  	
  18

  	
   

  
	
   

  	
   

  	
  4.6.

  	
   

  	
  Litigation

  	
   

  	
  18

  	
   

  
	
   

  	
   

  	
  4.7.

  	
   

  	
  Financial Statements

  	
   

  	
  18

  	
   

  
	
  5.

  	
   

  	
  POST CLOSING COVENANTS

  	
   

  	
  18

  	
   

  
	
   

  	
   

  	
  5.1.

  	
   

  	
  Non-Competition

  	
   

  	
  18

  	
   

  
	
   

  	
   

  	
  5.2.

  	
   

  	
  Payment Received

  	
   

  	
  19

  	
   

  
	
   

  	
   

  	
  5.3.

  	
   

  	
  Employees

  	
   

  	
  19

  	
   

  
	
   

  	
   

  	
  5.4.

  	
   

  	
  Reimbursement for
  Returns and Gift Certificates

  	
   

  	
  20

  	
   

  
	
   

  	
   

  	
  5.5.

  	
   

  	
  Utilities and Telephone
  Service

  	
   

  	
  20

  	
   

  

 

 i
 

 

 

	
  

  	
   

  	
  5.6.

  	
   

  	
  Revocable License to
  use Transitional Assets

  	
   

  	
  21

  	
   

  
	
   

  	
   

  	
  5.7.

  	
   

  	
  Waiver of Corporate Tax
  Lien

  	
   

  	
  22

  	
   

  
	
   

  	
   

  	
  5.8.

  	
   

  	
  Future Assurances

  	
   

  	
  22

  	
   

  
	
  6.

  	
   

  	
  INDEMNIFICATION

  	
   

  	
  22

  	
   

  
	
   

  	
   

  	
  6.1.

  	
   

  	
  Buyer’s Indemnification

  	
   

  	
  22

  	
   

  
	
   

  	
   

  	
  6.2.

  	
   

  	
  Seller’s
  Indemnification

  	
   

  	
  22

  	
   

  
	
   

  	
   

  	
  6.3.

  	
   

  	
  Seller’s Additional
  Indemnification

  	
   

  	
  23

  	
   

  
	
   

  	
   

  	
  6.4.

  	
   

  	
  Time Limitations.

  	
   

  	
  23

  	
   

  
	
   

  	
   

  	
  6.5.

  	
   

  	
  Certain Other Indemnity
  Matters

  	
   

  	
  24

  	
   

  
	
   

  	
   

  	
  6.6.

  	
   

  	
  Third Party Claims

  	
   

  	
  24

  	
   

  
	
   

  	
   

  	
  6.7.

  	
   

  	
  Information

  	
   

  	
  25

  	
   

  
	
  7.

  	
   

  	
  MISCELLANEOUS

  	
   

  	
  25

  	
   

  
	
   

  	
   

  	
  7.1.

  	
   

  	
  Press Releases and
  Public Announcements

  	
   

  	
  25

  	
   

  
	
   

  	
   

  	
  7.2.

  	
   

  	
  Entire Agreement

  	
   

  	
  26

  	
   

  
	
   

  	
   

  	
  7.3.

  	
   

  	
  Succession and
  Assignment; No Third-Party Beneficiary

  	
   

  	
  26

  	
   

  
	
   

  	
   

  	
  7.4.

  	
   

  	
  Counterparts

  	
   

  	
  26

  	
   

  
	
   

  	
   

  	
  7.5.

  	
   

  	
  Headings

  	
   

  	
  26

  	
   

  
	
   

  	
   

  	
  7.6.

  	
   

  	
  Notices

  	
   

  	
  26

  	
   

  
	
   

  	
   

  	
  7.7.

  	
   

  	
  Governing Law

  	
   

  	
  27

  	
   

  
	
   

  	
   

  	
  7.8.

  	
   

  	
  Amendments and Waivers

  	
   

  	
  27

  	
   

  
	
   

  	
   

  	
  7.9.

  	
   

  	
  Severability

  	
   

  	
  28

  	
   

  
	
   

  	
   

  	
  7.10.

  	
   

  	
  Expenses

  	
   

  	
  28

  	
   

  
	
   

  	
   

  	
  7.11.

  	
   

  	
  Construction

  	
   

  	
  28

  	
   

  
	
   

  	
   

  	
  7.12.

  	
   

  	
  Incorporation of
  Schedules

  	
   

  	
  28

  	
   

  
	
   

  	
   

  	
  7.13.

  	
   

  	
  Jurisdiction

  	
   

  	
  28

  	
   

  
	
   

  	
   

  	
  7.14.

  	
   

  	
  Venue

  	
   

  	
  29

  	
   

  
	
   

  	
   

  	
  7.15.

  	
   

  	
  Service of Process

  	
   

  	
  29

  	
   

  
	
   

  	
   

  	
  7.16.

  	
   

  	
  Waiver of Jury Trial

  	
   

  	
  29

  	
   

  

 

 ii
 

 

 

Schedules

	
  Schedule 2.1(a)(i)

  	
  —

  	
  Fixed Asset Register

  
	
  Schedule 2.1(a)(ii)

  	
  —

  	
  Inventory

  
	
  Schedule 2.1(b)

  	
  —

  	
  Leases

  
	
  Schedule 2.1(d)

  	
  —

  	
  Telephone Numbers

  
	
  Schedule 2.3(c)

  	
  —

  	
  Open Purchase Orders and In Transit Inventory

  
	
  Schedule 2.4

  	
  —

  	
  Liabilities to Affiliates

  
	
  Schedule 2.8

  	
  —

  	
  Allocation of Purchase Price

  
	
  Schedule 2.9

  	
  —

  	
  Dispute Procedures

  
	
  Schedule 4.5

  	
  —

  	
  Material Consents (Buyer and Buyer Parent)

  
	
  Schedule 5.6

  	
  —

  	
  Transitional Assets

  

 

Disclosure Schedules

	
  Schedule 3.3

  	
  —

  	
  Noncontravention

  
	
  Schedule 3.5

  	
  —

  	
  Assets

  
	
  Schedule 3.7

  	
  —

  	
  Material Consents (Seller)

  
	
  Schedule 3.10

  	
  —

  	
  Environmental Matters

  
	
  Schedule 3.11

  	
  —

  	
  Affiliated Transactions

  
	
  Schedule 3.13

  	
  —

  	
  Employment

  
	
  Schedule 3.14

  	
  —

  	
  Profit and Loss Statements

  

 

Exhibits

	
  Exhibit A

  	
  —

  	
  Subordinated Promissory Note

  
	
  Exhibit B

  	
  —

  	
  Bill of Sale

  
	
  Exhibit C

  	
  —

  	
  Instrument of Assumption

  
	
  Exhibit D

  	
  —

  	
  Lease Assignment and Assumption

  

 

 iii

 

ASSET
PURCHASE AGREEMENT

This Asset Purchase Agreement (the “Agreement”) is
entered into on August 7, 2006, by and between iParty Retail Stores Corp., a
Delaware corporation (the “Buyer”), iParty Corp., a Delaware corporation (the “Buyer
Parent”), Party City Corporation, a Delaware corporation (the “Seller”), and,
with respect to certain sections hereof, certain other parties set forth on the
signature pages hereto.  The Buyer, Buyer
Parent, the Seller, and, where applicable, the other parties set forth on the
signature pages hereto are collectively referred to herein as the “Parties.”

Whereas, Seller has determined that it desires to sell
and transfer its retail store located in Peabody, Massachusetts;

Whereas, Buyer and Buyer Parent desire to purchase and
acquire such retail store from Seller;

Whereas, subject to the terms and conditions contained
in this Agreement, Seller hereby shall sell and transfer and Buyer hereby shall
purchase and acquire certain of the assets (and assume certain of the
liabilities associated with those assets) of the Seller’s Massachusetts retail
store located at 300
Andover Street, Peabody, MA 01960 (the “Acquired Location”) for
$2,450,000, as more fully specified below;

Whereas, to facilitate and further the transactions
contemplated by this Agreement, and subject to the terms and conditions
contained herein, or any other agreement named herein, Buyer and Buyer Parent
hereby agree to enter into, execute and deliver that certain Supply Agreement
(the “Supply Agreement”) of even date herewith with Amscan, Inc., pursuant to
which Buyer and Buyer Parent agree to increase their purchases of merchandise
from Amscan, Inc.; and

Whereas, except as provided for herein, Seller may
continue to engage in its businesses after the consummation of the transactions
contemplated hereby.

Now, therefore, in consideration of the premises and
the mutual promises herein made, and in consideration of the representations,
warranties, and covenants herein contained, the Parties agree as follows.

1.             DEFINITIONS;
CERTAIN RULES OF CONSTRUCTION.

As used herein, the following terms will have the
following meanings:

“Acquired Assets” has the meaning set forth in §2.1.

“Acquired Location” has the meaning set forth in the
recitals.

“Action” means any claim, action, cause of action or
suit (whether in contract or tort or otherwise), litigation (whether at law or
in equity and whether civil or criminal), controversy, assessment, arbitration,
investigation, hearing, charge, complaint, demand, notice or proceeding to, from,
by or before any Governmental Authority.

 

 

“Affiliate” means, as to any specified Person at any
time, each Person directly or indirectly controlling, controlled by or under
direct or indirect common control with such specified Person at such time.

“Agreement” has the meaning set forth in the preamble.

“Assumed Liabilities” has the meaning set forth in
§2.3.

“Bill of Sale” has the meaning set forth in §2.7.

“Business” means only those operations of the Seller
related to the retail sale and merchandising of party goods and related items
that are conducted solely and exclusively in the retail store operated by the
Seller at the Acquired Location as of the date hereof, but specifically does
not mean or include (i) any operations of the Seller, whether located at or in,
conducted at or in, or related to the Acquired Location or other locations,
that are also related to or conducted in retail stores operated by the Seller
at any locations other than the Acquired Location or (ii) any other operations
or businesses of the Seller.

“Business Day” means any weekday other than a weekday
on which banks in The Commonwealth of Massachusetts are authorized or required
to be closed.

“Buyer” has the meaning set forth in the preamble.

“Buyer Indemnitees” has the meaning set forth in §6.2.

“Buyer Parent” has the meaning set forth in the
preamble.

“Buyer’s Knowledge” means the actual (and not
constructive or imputed) knowledge of Sal Perisano and Patrick Farrell.

“Cash” means the cash contained in the cash registers
of the Acquired Location at the Closing, but specifically excluding any checks
or cash equivalents.

“Cash Purchase Price” has the meaning set forth in
§2.5.

“CERCLA” shall mean the federal Comprehensive
Environmental Response Compensation and Liability Act of 1980, as amended.

“Closing” has the meaning set forth in §2.6.

“Closing Date” has the meaning set forth in §2.6.

“Closing Documents” has the meaning set forth in §2.7.

“COBRA” shall mean Consolidated Omnibus Budget
Reconciliation Act.

“Contractual Obligation” means, with respect to any
Person, any written contract, agreement, deed, mortgage, lease, license,
commitment, undertaking, arrangement or understanding, or other document or
written instrument, including without limitation any

 2
 

 

 

document or written instrument evidencing or otherwise
relating to any Debt (but excluding the charter and by-laws of such Person), to
which or by which such Person is a party or otherwise subject or bound or to
which or by which any property or right of such Person is subject or bound.

 “Debt” of any
Person means all obligations of such Person (i) for borrowed money, (ii)
evidenced by notes, bonds, debentures or similar instruments, (iii) under
capital leases or (iv) in the nature of Guarantees of the obligations described
in clauses (i) through (iii) above of any other Person.

“Disclosure Schedule” has the meaning set forth in §3.

“Employees” has the meaning set forth in §5.3(a).

“Employee Plans” mean all compensation and benefit
plans, programs, arrangements, contracts, agreements, understandings,
commitments and policies sponsored, administered, maintained, or contributed
to, by or on behalf of the Seller relating to the Acquired Location for the
benefit of any former or current employees of the Seller who performs services
for the Seller in connection with the Acquired Location or their respective
dependents.

“Enforceable” means, with respect to any Contractual
Obligation stated to be Enforceable by or against any Person, that such
Contractual Obligation is a legal, valid and binding obligation of such Person
enforceable by or against such Person in accordance with its terms, except to
the extent that enforcement of the rights and remedies created thereby is
subject to bankruptcy, insolvency, reorganization, moratorium and other similar
laws of general application affecting the rights and remedies of creditors and
to general principles of equity (regardless of whether enforceability is
considered in a proceeding in equity or at law).

“Environmental Laws” shall mean all federal, state, local
and foreign statutes, rules, orders, directives, judgments, permits,
regulations, and ordinances or the common law concerning or relating to the
environment, occupational health and safety, pollution, or protection of public
health  including without limitation all
those relating to the generation, manufacture, processing, import, export,
labeling, recycling, registration, investigation, documentation, use, handling,
transportation, treatment, storage, remediation, disposal, release, or
threatened release of any Materials of Environmental Concern, as such
requirements are enacted and in effect on or prior to the Closing Date,
including, without limitation, any statute, regulation, administrative
decision, order, or release pertaining to: (i) air, water, and noise pollution,
(ii) groundwater and soil contamination, (iii) the release, threatened release,
or accidental release into the environment, the workplace or other areas of
Materials of Environmental Concern, including emissions, discharges, injections,
spills, escapes or dumping of Materials of Environmental Concern, (iv) transfer
of interests in or control of real property which may be contaminated, (v)
community or worker right-to-know disclosures with respect to Materials of
Environmental Concern, (vi) the protection of wild life, marine life and
wetlands, and endangered and threatened species, (vii) storage tanks, vessels,
containers, abandoned and discarded barrels and other closed or breached
receptacles, and (viii) health and safety of employees and other persons.  As used above, the term “release” shall have
the meaning set forth in CERCLA.

 3
 

 

 

“Excluded Assets” has the meaning set forth in §2.2.

“Final Closing Statement” has the meaning set forth in
§2.9.

“Financial Statements” has the meaning set forth in
§4.7.

“GAAP” means United States generally accepted
accounting principles.

“Governmental Authority” means any United States
federal, state or local or any foreign government, or political subdivision
thereof, or any multinational organization or authority or any authority,
agency or commission entitled to exercise any administrative, executive,
judicial, legislative, police, regulatory or taxing authority or power, any
court or tribunal (or any department, bureau or division thereof), or any arbitrator
or arbitral body.

“Guarantee” means (i) any guarantee, other than in the
Ordinary Course of Business, of the payment or performance of, or any
contingent obligation in respect of, any Debt or other obligation of any other
Person, (ii) any other arrangement, other than in the Ordinary Course of
Business, whereby credit is extended to one obligor on the basis of any promise
or undertaking of another Person (A) to pay the Debt or other obligation of
such obligor, (B) to purchase any obligation owed by such obligor, (C) to
purchase or lease assets (other than inventory in the Ordinary Course of
Business) under circumstances that would enable such obligor to discharge one
or more of its obligations or (D) to maintain the capital, working capital,
solvency or general financial condition of such obligor or (iii) any liability
as a general partner of a partnership or as a venturer in a joint venture in
respect of indebtedness or other obligations of such partnership or venture.

“Hired Employees” has the meaning set forth in
§5.3(c).

“Holdings” means AAH Holdings Corporation, a Delaware
corporation, but specifically does not mean (i) any direct or indirect
partners, stockholders, members, or managers of AAH Holdings Corporation or
(ii) any Affiliates of such partners, stockholders, members, or managers.

“In Transit Inventory” has the meaning set forth in
§2.3(c).

“Initial Closing Statement” has the meaning set forth
in §2.9.

“Instrument of Assignment and Assumption” has the
meaning set forth in §2.7.

“Intellectual Property” means the following types of
proprietary rights: patents, copyrights, Trademarks, mask works, software,
trade secrets and proprietary information (including without limitation
proprietary ideas, research and development, know-how, processes and
techniques, technical data, specifications, customer and supplier lists (other
than the customer mailing list used by the Acquired Location in connection with
the conduct of the Business), pricing and cost information, and business and
marketing plans and proposals), all applications for any of the foregoing, all
copies and tangible embodiments of any of the foregoing in Seller’s possession
or control, and any Contractual Obligations granting rights related to the
foregoing (i) subsisting in, covering, reading on, directly applicable to, used
in the

 4
 

 

 

production of or existing in the Technology used in
the Acquired Location or (ii) that are owned, licensed or controlled in whole
or in part by the Seller and relate to the Acquired Location.

“Leases” has the meaning set forth in §2.1(b).

“Lease Assignment and Assumption” has the meaning set
forth in §2.7.

“Legal Requirement” means any United States federal,
state, or local or any foreign law, statute, standard, ordinance, code, rule,
regulation, resolution or promulgation, or any order, judgment or decree of any
Governmental Authority, or any similar provision having the force and effect of
law.

“Liability” means any liability or obligation (whether
known or unknown, whether asserted or unasserted, whether absolute or
contingent, whether accrued or unaccrued, whether liquidated or unliquidated
and whether due or to become due).

“Lien” means any mortgage, pledge, lien, security
interest, charge, adverse or prior claim, encumbrance, restriction on transfer,
conditional sale or other title retention device or arrangement (including
without limitation a capital lease), transfer for the purpose of subjection to
the payment of any Debt or other obligation, or restriction on the creation of
any of the foregoing, whether relating to any property or right or the income
or profits therefrom; provided, however, that the term “Lien” shall not include (i)
statutory liens for Taxes, special assessments, or other governmental charges
to the extent that the payment thereof is not in arrears or otherwise due, (ii)
imperfections in title or encumbrances in the nature of zoning restrictions,
easements, rights or restrictions of record on the use of real property if the
same do not impair its use in the operations of the Acquired Location as
currently conducted, (iii) statutory or common law liens in favor of carriers,
warehousemen, mechanics and materialmen, statutory or common law liens to
secure claims for labor, materials or supplies and other like liens, which
secure obligations to the extent that payment thereof is not in arrears or
otherwise due, and (iv) as to any leased assets or properties (including
pursuant to financial or capital leases), rights of the lessors thereof.

“Loss” means any loss, Liability, claim, damage, expense
(including costs of investigation and defense, reasonable attorneys’ fees, and
any interest and penalties imposed or assessed by any Governmental Authority),
whether or not involving a third party claim, and reduced by the amount of any
insurance proceeds and any Tax Benefit applicable to the then current fiscal
year in respect of (i) such Loss or (ii) a correlative adjustment which makes
allowable to the Buyer, Buyer Parent, Seller, or any of their Affiliates any
deduction, amortization, exclusion from income, or other allowance.

“Material Adverse Effect” means any change in or
effect on the Acquired Assets or Assumed Liabilities that, when considered
either singly or in the aggregate, would result in a material adverse effect on
the condition (financial or otherwise) or operations (including under the Lease
relating to the real property) of the Acquired Assets and Assumed Liabilities
at the Acquired Location, other than any such changes or effects resulting from
(i) this Agreement, the transactions contemplated hereby or the announcement
thereof, (ii) to the extent that it does not have a substantially
disproportionate effect on the Acquired Location, changes in general

 5
 

 

 

economic or political conditions or the securities
markets in general, and (iii) changes in (a) in Legal Requirements or (b) GAAP
or its application.

“Materials of Environmental Concern” means (i) any
pollutants, contaminants, or hazardous substances (as such terms are defined
under CERCLA), pesticides, (as such term is defined under the Federal
Insecticide, Fungicide and Rodenticide Act), hazardous wastes (as such term is
defined under the Resource Conservation and Recovery Act), other hazardous,
radioactive or toxic materials, oil, petroleum and petroleum products (and
fractions thereof), or any other material listed or subject to regulation under
any law, statute, rule, regulation, permit, or directive due to its potential,
directly or indirectly, to harm the environment or the health of humans or
other living beings, including, without limitation, those substances defined or
regulated as hazardous or toxic under Environmental Laws.

“Non-Competition Period” has the meaning set forth in
§5.1.

“Non-Disclosure Agreement” means the Mutual
Non-Disclosure Agreement, dated March 16, 2006, by and among the Buyer and
Berkshire Partners, LLC and Weston Presidio IV, LP, acting on their own behalf
and on behalf of Holdings and its direct and indirect subsidiaries, including
without limitation the Seller.

“Note Principal Amount” has the meaning set forth in
§2.5.

“Ordinary Course of Business” means, with respect to
the Acquired Location, the ordinary course of business consistent with past
custom and practice of the Acquired Location (including with respect to
quantity and frequency) other than with respect to the quantity or frequency of
or expenditure on advertising for the Acquired Location.

“Parties” has the meaning set forth in the preamble
above.

“Party” means any of the Parties individually.

“Person” means an individual, a partnership, a
corporation, an association, a joint stock company, a limited liability
company, a trust, a joint stock or venture, an unincorporated organization, a
Governmental Authority, an estate or other entity or organization.

“Personal Property” has the meaning set forth in
§2.1(a).

“Purchase Price” has the meaning set forth in §2.5.

“Restricted Parties” means, collectively, the (i) Seller, Seller Parent, and Holdings,
and their subsidiaries, assigns, and successors, and (ii) franchisees and licensees of the Seller,
Seller Parent, and Holdings, and their subsidiaries, assigns, and successors
(including, without limitation, any licensee of the Seller’s trade name), but
specifically does not mean Affiliates of such parties (other than Affiliates
that are also subsidiaries of any such parties).

“Restricted Party” means any of the Restricted Parties
individually.

“Restricted Region” has the meaning set forth in §5.1.

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“Retained Liabilities” has the meaning set forth in
§2.4.

“Seller” has the meaning set forth in the preamble.

“Seller Indemnitees” has the meaning set forth in
§6.1.

“Seller’s Knowledge” means the actual (and not
constructive or imputed) knowledge of Jim Harrison, Gregg Melnick, or Lisa
Laube after due inquiry of the store manager for the Acquired Location employed
by the Seller immediately prior to the Closing.

“Seller Parent” means Amscan Holdings, Inc.

“Subordinated Promissory Note” has the meaning set
forth in §2.5.

“Supply Agreement” has the meaning set forth in the
recitals.

“Tax” or “Taxes” means any United States federal,
state, or local or any foreign income, gross receipts, license, payroll,
employment, excise, severance, stamp, occupation, premium, windfall profits,
customs duties, capital stock, franchise, profits, withholding, social security
(or similar, including FICA), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or
add-on minimum, estimated, or other tax, including any interest, penalty, or
addition thereto.

“Tax Benefit” shall mean any refund or reduction in
Tax realized by any Person (or any Affiliate of a Person) attributable, as the
context may require, to any specified matter or event, which Tax Benefit shall
be determined after first taking into account all other items of income, gain,
loss, deduction or credit of such Person or Affiliate.

“Tax Return” means any return, declaration, report,
claim for refund, or information return or statement relating to Taxes,
including any schedule or attachment thereto, and including any amendment
thereof.

“Technology” means all inventions, copyrightable
works, discoveries, innovations, know-how, information (including ideas,
research and development, know-how, formulas, compositions, processes and
techniques, technical data, designs, drawings, specifications), and all other
forms of technology, including improvements, modifications, derivatives or
changes, whether or not protectible or protected by patent, copyright, mask
work right, trade secret law or otherwise.

“Trademarks” means any trademarks, service marks,
trade dress, and logos, together with all translations, adaptations,
derivations, and combinations thereof and including all goodwill associated
therewith.

“Transfer Taxes” has the meaning set forth in §7.10.

“Transitional Assets” has the meaning set forth in
§5.6.

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2.             ACQUISITION
OF ASSETS BY BUYER.

2.1.             Purchase and Sale
of Assets.  The Seller agrees to sell and
transfer to the Buyer, and the Buyer agrees to purchase and acquire from the
Seller at the Closing, subject to the exclusions contained in §2.2 and subject
to and upon the other terms and conditions contained herein, all of Seller’s
right, title and interest in and to the assets of the Seller which are used in
the conduct of the Business on the date hereof as set forth below
(collectively, the “Acquired Assets”), and no other properties, assets, or
rights of the Seller:

(a)           (i) the tangible personal property
and leasehold improvements, including machinery, equipment (including, without
limitation, POS equipment), alarm systems, tools, furniture, fixtures,
furnishings, shelving, owned by the Seller as of the date hereof and used in
the conduct of the Business, each as set forth on the fixed asset register
attached hereto as Schedule 2.1(a)(i), and (ii) the inventories (including In
Transit Inventory and inventories located at off-site storage facilities used
in connection with conduct of the Business) and supplies owned by the Seller as
of the date hereof for use in connection with the conduct of the Business, each
as set forth on Schedule 2.1(a)(ii) (collectively with the items set forth on
Schedule 2.1(a)(i), “Personal Property”); provided, however, that Buyer shall have the right, but not the
obligation, within thirty (30) calendar days after the Closing to return to
Seller by notifying Seller in writing within such period of, and making
available to, Seller for thirty (30) calendar days following such written
notification at the Acquired Location any Personal Property that the Buyer does
not elect to acquire from the Seller pursuant to this §2.1(a), but Seller shall
not be required to accept such Personal Property so made available and any such
return by the Buyer that is accepted by the Seller shall be irrevocable and
shall neither require the payment of any consideration by the Seller nor shall
adjust in any manner the Purchase Price set forth in §2.5 below;

(b)           all rights of the Seller (i) as
tenant under the lease relating to the real property at the Acquired Location
and (ii) under the leases relating to such personal property as is used in the
Business, each as set forth on Schedule 2.1(b) (collectively, the “Leases”);

(c)           all Cash (subject to the Buyer’s
compliance with §2.11);

(d)           all rights of the Seller to the
telephone numbers of the Acquired Location, each as set forth on Schedule
2.1(d); provided, however,
that under no circumstances shall such transfer of rights with respect to such
telephone numbers be construed or interpreted as selling, transferring, or
licensing to the Buyer or Buyer Parent (and the Seller shall retain all of the
Seller’s right, title and interest in and to) any Intellectual Property of the
Seller relating to, associated with, or used in connection with such telephone
numbers, goodwill associated therewith, licenses and sublicenses granted in respect
thereto and rights thereunder, remedies against infringements thereof and
rights to protection of interest therein; and

 8
 

 

 

(e)           the customer mailing list used by the
Acquired Location in connection with the conduct of the Business.

2.2.             Excluded Assets.  There shall be excluded from the Acquired
Assets to be sold and transferred to Buyer hereunder, and, to the extent in
existence on the Closing Date, the Seller shall retain all of the Seller’s
right, title and interest in and to the following assets, properties and rights
of the Seller (collectively, the “Excluded Assets”):

(a)           the consideration delivered to Seller
by Buyer pursuant to this Agreement and all checks received by the Seller as of
the Closing which have not yet cleared or been deposited or cashed;

(b)           any assets of the Seller not used in
the conduct of the Business;

(c)           all rights of the Seller under its
leases or subleases of real or personal property other than the Leases;

(d)           all claims, deposits, prepayments,
refunds, entitlements, causes of action, choses in action, rights of recovery,
rights of set off and rights of recoupment, including without limitation with
respect to Taxes, which Seller may hereafter receive or be responsible for by
reason of its ownership of the Acquired Assets prior to the Closing or which
have arisen in connection with the operation of the Acquired Location by the
Seller prior to the Closing (unless otherwise allocated pursuant to §2.10 or
§2.11);

(e)           all rights in and with respect to the
assets associated with (whether in trust, reserve, or otherwise) all employee
benefit plans of the Seller including, without limitation, each Employee Plan;

(f)            all rights in and with respect to
insurance policies of the Seller;

(g)           all corporate, financial (including,
without limitation, Tax), computer, litigation, 
and human resource books, records and systems of the Seller, including
without limitation those used in connection with the Acquired Location;

(h)           all Personal Property made available
to Seller by Buyer and accepted by Seller pursuant to §2.1(a) above;

(i)            all Intellectual Property used in
connection with the operations of the Acquired Location, goodwill associated
therewith, licenses and sublicenses granted in respect thereto and rights
thereunder, remedies against infringements thereof and rights to protection of
interest therein; and

(j)            all rights in and with respect to
the Transitional Assets.

2.3.             Assumption of
Liabilities.  At the Closing, Buyer will
deliver to Seller an instrument of assumption whereby on the terms and subject
to the conditions set forth herein and except as excluded by §2.4 hereof, Buyer
will undertake, assume, agree to

 9
 

 

 

satisfy or
perform when due and hold Seller harmless from and indemnify Seller against the
following Liabilities of the Seller (the “Assumed Liabilities”):

(a)           all Liabilities of the Seller under
the Leases included in the Acquired Assets (other than those Liabilities that
arose or accrued solely based on any act, event, or omission that occurred
prior to the Closing, which shall in all cases be retained by Seller
irrespective of whether they are known at Closing or become known only after the
Closing, except to the extent adjusted pursuant to §2.10 or §2.11 hereof);

(b)           all Liabilities for services rendered
by the Buyer with respect to the Acquired Location after the Closing;

(c)           the open purchase orders relating to
the Acquired Location for any inventory and supplies ordered by such location,
but not yet received, as of the Closing Date and identified on Schedule 2.3(c)
(the “In Transit Inventory”), but in each case only to the extent and as to the
amounts specifically set forth thereon;

(d)           all Liabilities for Taxes relating to
the Acquired Location that are incurred subsequent to the Closing (unless
otherwise allocated pursuant to §2.10 or §2.11) and all Liabilities for
Transfer Taxes arising out of the transactions contemplated by this Agreement
(as described in §7.10);

(e)           all other Liabilities relating to the
operations of the Acquired Location or the ownership of the Acquired Assets,
but in each such case only to the extent they arise or accrue after the
Closing; and

(f)            all Liabilities relating to or
arising from the Buyer’s use of (i) the Transitional Assets or (ii) the
utilities and telephone accounts of the Seller pursuant to §5.5.

2.4.             Liabilities Not
Assumed.  Except as expressly set forth
in this Agreement, the Buyer will not assume or perform any Liabilities not
specifically covered in §2.3 hereof including, but not limited to, the
following Liabilities (the “Retained Liabilities”), which shall be retained by
the Seller:

(a)           any Liability of the Seller for Taxes
(i) not relating to the Acquired Location or (ii) incurred prior to the Closing
(unless otherwise allocated pursuant to §2.10 or §2.11);

(b)           any Liability of the Seller for costs
and expenses incurred in connection with this Agreement, the making or
performance of this Agreement and the transactions contemplated hereby;

(c)           any Liability of the Seller to
indemnify any Person, except to the extent arising under the Leases for acts, events, or
omissions that may take place or transpire after the Closing (unless otherwise
allocated pursuant to §2.10 or §2.11);

(d)           any Liability associated with any
Employee Plan;

 10
 

 

 

(e)           any Liability of the Seller arising
under this Agreement except as set forth in the indemnification provisions of
§6 hereof, solely to the extent set forth therein;

(f)            any Liability arising out of or relating to
the Excluded Assets;

(g)           except as disclosed on Schedule 2.4, any
Liability to Affiliates of Seller;

(h)           any Liability
relating to former employees of Seller no longer employed by Seller as of the
close of business on the Closing Date, except to the extent, if any, that Buyer
has specifically assumed or agreed to assume responsibility for such obligations
in this Agreement; and

(i)            any Liability under
any Leases that accrued or arose based solely on any act, event, or omission
that occurred prior to or through and including the Closing Date (unless
otherwise allocated pursuant to §2.10 or §2.11).

2.5.             Purchase
Price.  The Buyer agrees to assume the
Assumed Liabilities and purchase the Acquired Assets for Two Million Four
Hundred Fifty Thousand Dollars ($2,450,000) (the “Purchase Price”), subject to
any adjustment pursuant to §§ 2.9, 2.10, and 2.11 below, of which the Buyer
hereby agrees to (i) pay to the Seller at the Closing an amount in cash equal
to One Million Eight Hundred Fifty Thousand Dollars ($1,850,000) (the “Cash Purchase
Price”), subject to any adjustment pursuant to §§ 2.9, 2.10, and 2.11 below,
payable by wire transfer of immediately available funds in accordance with
written instructions of the Seller given to the Buyer not less than two
Business Days prior to the Closing Date, and (ii) issue to the Seller a
subordinated promissory note executed by Buyer and Buyer Parent, in the form
attached hereto as Exhibit A (the “Subordinated Promissory Note”), with
a principal amount of Six Hundred Thousand Dollars ($600,000) (the “Note
Principal Amount”).

2.6.             The Closing.  The effective time of the closing of the
transactions contemplated by this Agreement (the “Closing”) shall be the close
of business at the Acquired Location on August 7, 2006 (the “Closing Date”).

2.7.             Deliveries by
Seller and Buyer.  Seller has delivered
to the Buyer (i) a bill of sale in the form attached hereto as Exhibit B
(the “Bill of Sale”) and (ii) such other instruments of sale, transfer,
conveyance and assignment as the Buyer and its counsel have reasonably
requested.  Buyer has delivered to the
Seller (i) an instrument of assignment and assumption  in the form attached hereto as Exhibit C
(the “Instrument of Assignment and Assumption”), (ii) the Cash Purchase Price,
(iii) the Subordinated Promissory Note, (iv) the Supply Agreement, and (v) such
other instruments of sale, transfer, conveyance, assignment, and assumption of
liabilities as the Seller and its counsel have reasonably requested.  Seller and Buyer have also entered into an
Assignment and Assumption of Lease in the form attached hereto as Exhibit D
(the “Lease Assignment and Assumption”) with respect to the lease relating to
the real property at the Acquired Location. 
Such Lease Assignment and Assumption shall be governed by and construed
in accordance with the terms of this Agreement and, in the event that any provision
of such Lease Assignment and Assumption is construed to conflict with a
provision in this Agreement, the provision in

 11
 

 

 

this Agreement
shall be deemed to be controlling. As used in this Agreement, the term “Closing
Documents” shall mean the Subordinated Promissory Note, the Bill of Sale, the
Instrument of Assignment and Assumption, the Lease Assignment and Assumption,
and any other instruments of sale, transfer, conveyance, assignment, and
assumption of liabilities executed and delivered by the Parties pursuant to
this §2.7 or §5.8 (Further Assurances).

2.8.             Allocation of
Purchase Price.  The Buyer and the Seller
agree that the Purchase Price shall be allocated in accordance with Schedule
2.8, which will be prepared by the Parties within one hundred twenty (120)
calendar days following the Closing Date, or as soon as practicable thereafter,
in accordance with Section 1060 of the United States Internal Revenue Code of
1986, as amended, and will be revised to reflect any adjustments necessary as a
result of any Purchase Price adjustment pursuant to §§ 2.9, 2.10, and 2.11
below.  The Buyer, Buyer Parent, and the
Seller shall use such allocation in all relevant Tax Returns.

2.9.             Adjustment of
Purchase Price.  Seller has delivered to
Buyer a preliminary statement (the “Initial Closing Statement”) of the Purchase
Price showing the prorations, deposit, and cash amounts pursuant to §§ 2.10 and
2.11, which shall constitute the initial adjustments to the Purchase Price at
Closing.  In the event that (i) the Purchase
Price is increased pursuant to the Initial Closing Statement, then at the
Closing the Cash Purchase Price paid by the Buyer shall be increased by the
same amount of such increase to the Purchase Price and (ii) the Purchase Price
is decreased pursuant to the Initial Closing Statement, then at the Closing the
Cash Purchase Price paid by the Buyer shall be decreased by the same amount of
such decrease to the Purchase Price. 
Within sixty (60) calendar days following the Closing Date, Seller will
deliver to Buyer a final statement (the “Final Closing Statement”) of the prorations,
deposit, and cash amounts pursuant to §§ 2.10 and 2.11, which shall constitute
the final adjustments to the Purchase Price. 
The Buyer shall have the right to object to any items or computations
appearing in the Final Closing Statement by notifying the Seller in writing of
such objection (and the details thereof) within ten (10) Business Days after
delivery of the Final Closing Statement by the Seller to the Buyer.  If the Buyer does not make any such written
objection prior to the expiration of such ten (10) Business Day period, the
prorations, deposit, and cash amounts appearing in the Final Closing Statement
(together with all components thereof) shall be determinative for the purposes
of §§ 2.9, 2.10, and 2.11 hereof and shall be final and binding on all
Parties.  Any disputes relating to the
Final Closing Statement shall be resolved by a mutually acceptable independent
accountant in accordance with the procedures set forth on Schedule 2.9 and
shall be final and binding on the Parties for purposes of this section.  In the event that there is a difference in
the adjustments to the Purchase Price set forth in the Final Closing Statement
(as finally determined) in comparison to those set forth in the Initial Closing
Statement, then (i) if such difference results in an increase to the Purchase
Price (as adjusted pursuant to the Initial Closing Statement), the Buyer shall
pay the Seller the amount of such increase in the Purchase Price in cash by
wire transfer of immediately available funds within five (5) Business Days
after the final determination of the Final Closing Statement and (ii) if such
difference results in a decrease to the Purchase Price (as adjusted pursuant to
the Initial Closing Statement), the Seller shall pay the Buyer the amount of
such decrease in the Purchase

 12
 

 

 

Price in cash
by wire transfer of immediately available funds within five (5) Business Days
after the final determination of the Final Closing Statement.

2.10.           Prorations.  The following items shall be prorated between
Buyer and Seller as of and through the Closing Date and shall constitute an
adjustment to the Purchase Price:

(a)           All ad valorem, real
and personal property Taxes (including without limitation any such Taxes paid
indirectly through the lessors or sublessors under or relating to the Leases),
general and special assessments (solely with respect to installments due in the
current Tax year), and any other property Taxes relating to the Acquired Assets
for the current tax year; however, if the amount of such Tax for the
current Tax year is not determinable, (i) it shall be prorated on the basis of
the Tax for the immediately preceding Tax year and (ii) after the amount of Tax
for the current Tax year becomes determinable, (A) either Party, at its option,
may give the other Party written notice of the correct amount of Tax
(accompanied by documentation substantiating such amount) and any necessary
adjustment to the prorations and (B) the Party from whom additional payment is
required will pay the applicable amount within ten Business Days after such
notice;

(b)           All payments to the
lessors or sublessors under or relating to the Leases, including unpaid or
prepaid rent and common area maintenance charges (unless otherwise allocated
pursuant to §2.11); and

(c)           Any prepaid expenses
associated with the operation of the Acquired Location which were paid by
Seller in the Ordinary Course of Business, including without limitation
telephone expenses and utility charges, but excluding advertising expenses.

Seller shall
bear the cost and expense of all prorated items set forth in this §2.10
applicable to periods prior to and including the Closing Date and shall receive
the benefits thereof, Buyer shall bear the cost and expense of payment of all
prorated items set forth in this §2.10 applicable to periods from and after the
Closing Date and shall receive the benefits thereof, and the Purchase Price
shall be adjusted as set forth in §2.9, if necessary, to account for such
division of the costs and expenses of prorated items.

2.11.           Security Deposits
and Cash.  Buyer agrees to reimburse
Seller for the amount, as of the Closing, of (i) all security deposits, if any,
paid by the Seller under the Leases and (ii) any Cash, and the Purchase Price
shall be adjusted as set forth in §2.9, if necessary, to account for such
reimbursement.

3.             REPRESENTATIONS
AND WARRANTIES OF THE SELLER.  The Seller
represents and warrants to the Buyer and Buyer Parent that, except as set forth
in the disclosure schedule attached to this Agreement (the “Disclosure Schedule”):

3.1.             Organization and
Qualification of the Seller.  The Seller
is a corporation that is duly organized, validly existing, and in good standing
under the laws of the State of Delaware and is qualified to do business in The
Commonwealth of Massachusetts.

 13

 

 

3.2.             Authorization of
Transaction. Prior to the date hereof, the Board of Directors of the Seller, by
written consent in lieu of a special meeting of the Board of Directors, adopted
and approved this Agreement and the transactions contemplated hereby. No vote
of the holders of any class of capital stock of the Seller is necessary to
adopt and approve this Agreement or the transactions contemplated hereby. The
Seller has the power and authority (including full corporate power and
authority) to execute and deliver this Agreement and has taken all actions
necessary to authorize the consummation of the transactions contemplated hereby
and the performance of its obligations hereunder. This Agreement has been duly
executed and delivered by the Seller and is Enforceable against the Seller.

3.3.             Noncontravention.
Except as disclosed on §3.3 of the Disclosure Schedule and except with regard
to Mass. Gen. Laws
ch. 62C, Section 51, neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby
(including the assignments and assumptions referred to in §2 above), will (i)
violate any material Legal Requirement to which the Seller is subject, (ii)
result in a material breach or violation of, or default under, any material
Contractual Obligation of the Seller, (iii) require any action by (including
any authorization, consent or approval), or in respect of (including notice
to), any Person under any material Contractual Obligation of the Seller, or
(iv) result in a breach or violation of, or default under, the Seller’s charter
or bylaws.

3.4.             Brokers’ Fees. The
Seller does not have any Liability or obligation to pay any fees or commissions
to any broker, finder, or agent with respect to the transactions contemplated
by this Agreement for which the Buyer could become liable or obligated.

3.5.             Assets. The
Seller has good title to (or, in the case of the Leases, a valid and subsisting
leasehold interest in or right to use), and the power to sell or transfer to
the Buyer, all of the Acquired Assets free and clear of any Liens except as
described in §3.5 of the Disclosure Schedule or resulting from Mass. Gen. Laws
ch. 62C, Section 51 in connection with the execution and the delivery of this
Agreement and the consummation of the transactions contemplated hereby.

3.6.             Legal and Other
Compliance. The Seller is in compliance with all applicable Legal Requirements
relating to the conduct of the Business, the violation of which could have a
Material Adverse Effect, and no Action has been filed or commenced or, to the
Seller’s Knowledge, threatened against it alleging any failure so to comply. Without limiting the generality of the
foregoing, the Seller acknowledges that the bulk transfer laws in The
Commonwealth of Massachusetts are no longer in effect.

3.7.             Consents. Except
for notices, consents, approvals, and waivers required and Liens as may be
imposed by Mass.
Gen. Laws ch. 62C, Section 51, the Seller has given all of the material
third party notices and procured the material third party consents, approvals,
and waivers necessary to permit the consummation by the Seller of the
transactions contemplated hereby as set forth on §3.7 of the Disclosure
Schedule, including obtaining a release of the Liens described in §3.5 of the
Disclosure Schedule.

 14
 

 

 

3.8.             Property, Plant
and Equipment. The Personal Property and other tangible assets included in the
Acquired Assets that are material to the operation of the Acquired Location as
conducted on the Closing Date are in good operating condition and repair
(subject to normal wear and tear, scheduled maintenance, and retirement). The
Seller has obtained an estoppel from the lessor under the Lease in respect of
real property relating to the Acquired Location.

3.9.             Litigation. There
are no Actions to which the Seller is a party (either as plaintiff or
defendant) or to which the Acquired Assets are subject pending or, to the
Seller’s Knowledge, threatened that, individually or collectively, would be
reasonably likely to result in a Material Adverse Effect, or that question the
validity of this Agreement or of any action taken or to be taken pursuant to or
in connection with the provisions of this Agreement. There are no outstanding
judgments, orders, decrees, citations, fines or penalties or written notices of
violation against the Seller affecting the Acquired Assets or the Assumed
Liabilities under any Legal Requirement.

3.10.           Environmental
Matters. Seller has complied with all applicable Environmental Laws relating to
the Acquired Location, except for violation of Environmental Laws that have not
had and would not reasonably be expected to have a Material Adverse Effect. There
is no pending or, to Seller’s Knowledge, threatened in writing civil or
criminal litigation, notice of violation, formal administrative proceeding, or
investigation, inquiry or information request by any governmental or
administrative entity relating to any Environmental Law relating to the
Acquired Location. To the Seller’s Knowledge, with respect to the Acquired
Location, no individual or entity has any material liabilities or material
obligations arising from the release or threatened release of Materials of
Environmental Concern into the environment. Neither
Seller nor to Seller’s Knowledge any other individual or entity is a party or
bound by any court order, administrative order, consent order, or other written
agreement or release with any governmental entity entered into in connection
with any legal obligation or liability arising under any Environmental Law with
respect to the Acquired Location. To the Seller’s Knowledge, the Seller does
not possess any documents (whether in hard copy or electronic form) that
contain any material environmental reports, investigations, or audits relating
to the Acquired Location. Except as described in §3.10 of the Disclosure
Schedule or as has not had or would not reasonably be expected to have a
Material Adverse Effect: (i) the Seller has all material permits, licenses and
other authorizations required to operate the Acquired Location under any
applicable Environmental Laws and (ii) neither the execution of this Agreement
nor the consummation of the transactions contemplated hereby will require any
investigation, remediation or other action with respect to Materials of
Environmental Concern, or any notice to or consent of any Governmental
Authority, pursuant to any applicable Environmental Laws.

3.11.           Affiliated
Transactions. Except as set forth on §3.11 of the Disclosure Schedule, no
Affiliate of the Seller owns or otherwise has any rights to or interests in any
Acquired Asset or Assumed Liability, or has engaged in business dealings with
the Seller related to the Acquired Location other than on arms-length terms
which are no less favorable to the Seller than those which could be obtained
with a third party which is not an Affiliate of the Seller.

 15
 

 

 

3.12.           Absence of Certain
Developments. Since March 31, 2006 (a) there has not been any material adverse
change in or material adverse effect on the Acquired Assets and no event has
occurred or circumstance exists that would be reasonably likely to result in
such a change or effect and (b) the Acquired Location has only been operated in
the Ordinary Course of Business.

3.13.           Employment. Except
as set forth on §3.13 of the Disclosure Schedule, (a) the Seller is not a party
to any labor collective bargaining union or similar agreement, (b) the
employment by Seller of each Hired Employee is terminable at will, (c) the
Seller is and has been in compliance in all material respects with any
obligations arising under a collective bargaining agreement or any obligations
arising under employee benefit plans in each case with respect to the Acquired
Location, and (d) the Seller has paid or will pay in full to all Hired
Employees all amounts currently due and payable for wages, salaries,
commissions, bonuses, benefits and other compensation accrued as of the Closing
Date.

3.14.           Certain Financial
Information. The profit and loss statements attached to §3.14 of the Disclosure
Schedule were prepared in accordance with the past custom and practice of the
Seller and fairly present the results of operations of the Acquired Location
set forth therein as of the respective dates thereof and for the periods
referred to therein.

3.15.           Undisclosed
Liabilities. To
the Seller’s Knowledge, except for Liabilities (i) arising in the Ordinary
Course of Business since December 31, 2005, (ii) under the Leases included in
the Acquired Assets, (iii) for accounts payable of the Acquired Location, and
(iv) arising or resulting from Mass. Gen. Laws ch. 62C, Section 51 in
connection with the execution and the delivery of this Agreement and the
consummation of the transactions contemplated hereby, the Acquired Location has no material Liabilities that would be
required to be disclosed in financial statements prepared in accordance with
GAAP.

3.16.           Disclaimer of
other Representations and Warranties. Notwithstanding anything contained herein
to the contrary, Buyer and Buyer Parent have made such examination of the
Acquired Assets and all other matters affecting or relating to the transactions
contemplated under the Agreement as Buyer and Buyer Parent have deemed
necessary. Except as expressly set forth in this §3, Seller (including, without
limitation, any agent, employee, or other representative of Seller or any
broker or any other person representing or purporting to represent Seller)
makes no written or oral representation, warranty, or statement, express or
implied, at law or in equity, in respect of any of its assets (including,
without limitation, the Acquired Assets), liabilities, operations (including,
without limitation, the Acquired Location), or any other matter affecting or
relating to the transactions contemplated by the Agreement, including, without
limitation, with respect to condition or merchantability or fitness of such
assets for any particular purpose, and any such other representations,
warranties, or statements are hereby expressly disclaimed and Buyer and Buyer
Parent hereby acknowledge and agree that they have not been induced by and have
not relied upon any such representations, warranties, or statements. Specifically,
Buyer and Buyer Parent agree that the Acquired Assets are being acquired,
conveyed to, and accepted by Buyer WITHOUT ANY WRITTEN OR VERBAL
REPRESENTATIONS, WARRANTIES, OR STATEMENTS WHATSOEVER, other 

 16
 

 

 

than
representations, warranties, and statements of Seller expressly set forth in
this §3. Without limiting the generality of the foregoing, Seller makes no
statement, representation, or warranty regarding any assets other than the
Acquired Assets or any liabilities other than the Assumed Liabilities, and none
shall be implied at law or in equity.

4.             REPRESENTATIONS
AND WARRANTIES OF THE BUYER AND BUYER PARENT. The Buyer and Buyer Parent
jointly and severally represent and warrant to the Seller that:

4.1.             Organization and
Qualification of the Buyer and Buyer Parent. The Buyer and Buyer Parent are
each a corporation that is duly organized, validly existing, and in good
standing under the laws of the State of Delaware and are each qualified to do
business in The Commonwealth of Massachusetts.

4.2.             Authorization of
Transaction. Prior to the date hereof, the Board of Directors of the Buyer and
Buyer Parent, respectively, at a meeting duly called and held, or by written
consent in lieu of a special meeting of the Board of Directors, adopted and
approved this Agreement (including, without limitation, the issuance and
delivery of the Subordinated Promissory Note) and the transactions contemplated
hereby. No vote of the holders of any class of capital stock of the Buyer or
Buyer Parent is necessary to adopt and approve this Agreement or the
transactions contemplated hereby (including, without limitation, the issuance
and delivery of the Subordinated Promissory Note). The Buyer and Buyer Parent
each have the power and authority (including full corporate power and
authority) to execute and deliver this Agreement and issue the Subordinated
Promissory Note and have taken all actions necessary to authorize the
consummation of the transactions contemplated hereby and thereby and the
performance of its obligations hereunder and thereunder. This Agreement has
been, and the Subordinated Promissory Note when delivered pursuant to this
Agreement will be, duly executed and delivered by each of the Buyer and Buyer
Parent and is or will be, as applicable, Enforceable against each of the Buyer
and Buyer Parent.

4.3.             Noncontravention.
Neither the execution and the delivery of this Agreement, nor the consummation
of the transactions contemplated hereby (including, without limitation, the
assignments and assumptions referred to in §2 above and the execution,
delivery, and issuance of the Subordinated Promissory Note), will (i) violate
any material Legal Requirement to which the Buyer or Buyer Parent is subject,
(ii) result in a material breach or violation of, or default under, any
material Contractual Obligation of the Buyer or Buyer Parent, (iii) require any
action by (including any authorization, consent or approval), or in respect of
(including notice to), any Person under any material Contractual Obligation of
the Buyer or Buyer Parent, or (iv) result in a breach or violation of, or
default under, the Buyer’s or Buyer Parent’s charter or bylaws.

4.4.             Brokers’ Fees. The
Buyer and Buyer Parent do not have any Liability or obligation to pay any fees
or commissions to any broker, finder, or agent with respect to the transactions
contemplated by this Agreement (including, without limitation, the issuance and
delivery of the Subordinated Promissory Note) for which the Seller could become
liable or obligated.

 17
 

 

 

4.5.             Consents. The
Buyer and Buyer Parent have given all of the material third party notices and
procured the material third party consents, approvals, and waivers necessary to
permit the consummation by the Buyer and Buyer Parent of the transactions
contemplated hereby as set forth on Schedule 4.5.

4.6.             Litigation. There
are no Actions to which either the Buyer or Buyer Parent is a party (either as
plaintiff or defendant) or to which either of its assets are subject pending
or, to the Buyer’s Knowledge, threatened that question the validity of this
Agreement or of any action taken or to be taken pursuant to or in connection
with the provisions of this Agreement (including, without limitation, the issuance
and delivery of the Subordinated Promissory Note). No Action is pending or
threatened wherein an unfavorable injunction would be reasonably likely to have
a material adverse effect on or materially affect adversely the right of the Seller to have an Enforceable interest in
and right under the Subordinated Promissory Note (and no such injunction is in
effect).

4.7.             Financial
Statements. All financial statements of the Buyer Parent (including the notes
to such financial statements) included in Buyer Parent’s Annual Report on Form
10-K for the fiscal year ended December 31, 2005 (the “Financial Statements”)
(i) are in accordance with the books and records of the Buyer Parent in
all material respects, (ii) present fairly in all material respects the
financial position, results of operations, changes in stockholders’ equity and
cash flow (as applicable) of the Buyer Parent as of the respective dates and
for the respective periods indicated, and (iii) have been prepared in
conformity with GAAP applied in all material respects on a consistent basis
through all the periods involved. Neither the Buyer nor the Buyer Parent has
any material Liabilities other than (i) those disclosed in the Financial
Statements, (ii) those arising in the ordinary course of business since
December 31, 2005, or (iii) that were incurred under this Agreement or in
compliance with the transactions contemplated hereby.

5.             POST
CLOSING COVENANTS.

5.1.             Non-Competition. The Seller agrees that, in
consideration of the transactions contemplated by this Agreement, the Seller,
Seller Parent, and Holdings, and their subsidiaries, assigns, and successors,
shall not, and the Seller shall use commercially reasonable efforts to cause
franchisees and licensees of the Seller, Seller Parent, and Holdings, and their
subsidiaries, assigns, and successors (including, without limitation, any
licensee of the Seller’s trade name), not to, on or prior to the fifth
anniversary of the Closing Date (the “Non-Competition Period”), directly or
indirectly, open, operate, control, or invest in, in each case, any new retail
party goods store (including, without limitation, any retail party goods stores
that are opened and operated temporarily for Halloween or any other holiday or
season) in Massachusetts, Rhode Island, New Hampshire, Vermont, Maine, or
Windham and New London counties in Connecticut (the “Restricted Region”); provided, however,
that the Restricted Parties shall not be deemed to be in violation of this §5.1 solely by virtue of any of the following:

(a)           a Restricted Party or its Affiliate,
directly or indirectly, operating, controlling, or investing in any retail
party goods store in the Restricted Region that was opened 

 18
 

 

 

for business
and operated, controlled, or invested in by any Restricted Party or its Affiliate
prior to (i) the Closing Date or (ii) solely with respect to any assigns or
successors of the Seller,
Seller Parent, or Holdings, or of their subsidiaries, franchisees, or
licensees, the date when such assigns or successors become subject to the terms
of this Agreement;

(b)           a Restricted Party or its Affiliate,
directly or indirectly, acquiring any retail party goods stores in the
Restricted Region after the Closing Date, provided that, unless such
acquisition is of retail party goods stores located in Rhode Island that are,
directly or indirectly, operated, controlled, or invested in by a franchisee of
the Seller as of the Closing Date, no more than twenty percent (20%) of the
total number of retail party goods stores owned by the seller of such stores
and its franchisees, licensees, and Affiliates immediately prior to such
acquisition are located in the Restricted Region;

(c)           a Restricted Party or its Affiliate,
directly or indirectly, owning less than five percent (5%) of the outstanding
stock of any publicly traded corporation; or

(d)           any action by an Affiliate of a
Restricted Party not a direct or indirect subsidiary thereof.

Seller acknowledges and agrees that (i) the
provisions of this §5.1 will not impose an undue hardship on it and (ii) breach
of the provisions of this §5.1will cause irreparable injury and damage to
Buyer, the exact amount of which will be difficult to ascertain and that
remedies at law for any such breach would be inadequate and that therefore, in
the event of such a breach, Buyer shall be entitled, in addition to all
remedies available at law, to equitable relief without posting any bond or
other undertaking.

5.2.             Payment Received.
In the event that a Party receives any payment or other amount owing to such
Party but allocated to another Party pursuant to this Agreement, the receiving
Party agrees to forward such payments in good faith as promptly as practicable
to the applicable Party.

5.3.             Employees.

(a)           Contemporaneously with the Closing,
Seller shall terminate all employees who work exclusively at the Acquired
Location (the “Employees”). Seller shall be solely responsible for all
termination payments and obligations to such Employees, including, without
limitation, any severance and other costs and expenses incurred in connection
with such termination. Through the Closing Date, Seller shall comply with its
COBRA obligations, if any.

(b)           Upon the occurrence of the Closing,
Buyer and/or Buyer Parent may, but are not obligated to, offer to those
Employees it selects employment by Buyer and/or Buyer Parent; provided, however, that
Buyer and Buyer Parent agree that any such employment offer made to an Employee
shall offer a position with the Buyer and/or the Buyer Parent’s that provides
such Employee with (i) the same base pay as such Employee received in the
position he or she held immediately prior to the Closing and (ii) bonuses,
benefits, and incentive compensation that are not less favorable to such
Employee than 

 19
 

 

 

the bonuses,
benefits, and incentive compensation provided by the Buyer and/or Buyer Parent
to its employees in positions comparable to the position offered by the Buyer
and/or Buyer Parent to such Employee. Subject the other provisions of this
§5.3, with respect to any “employee benefit plan”, as defined in Section 3(3)
of ERISA, maintained by Buyer and/or Buyer Parent (including any severance
plan), for all purposes, including determining eligibility to participate and
vesting, service with the Seller or any subsidiary or predecessor of the Seller
shall be treated as service with Buyer, Buyer Parent, or any of their
subsidiaries; provided, however,
that such service need not be recognized to the extent that such recognition
would result in any duplication of benefits.

(c)           Employees who accept offers of
employment made by Buyer and/or Buyer Parent pursuant to §5.3(b) shall be
referred to hereinafter as “Hired Employees.” For all periods following the
Closing Date the Buyer and/or Buyer Parent hereby (i) acknowledge and agree
that the Seller shall not be responsible for paying any salary, wages, pension,
retirement, savings, health, welfare and other benefits (whether arising by
contract, plan, statute or otherwise) with respect to such Hired Employees in
connection with their employment by the Buyer and/or Buyer Parent and (ii)
agree to comply with their COBRA obligations, if any, in the event that,
subsequent to their hire by the Buyer and/or Buyer Parent, the employment of
such Hired Employees is terminated by the Buyer and/or Buyer Parent.

5.4.             Reimbursement for
Returns and Gift Certificates. In the event that, within sixty (60) calendar
days following the Closing Date, the Buyer accepts either of the following:

(a)           the return of a retail product sold
by the Seller in connection with the Acquired Location prior to the Closing
Date and refunds no more than the retail cost of such product and any
associated sales tax to the purchaser of such product; or

(b)           a gift certificate for a retail
product sold by the Buyer that was issued by the Seller in connection with the
Acquired Location prior to the Closing Date and such acceptance is for no more
than the original face amount of such gift certificate;

then the Seller agrees to reimburse the Buyer
for the amount of such refund or the face amount of such gift certificate that
is paid or accepted, as applicable, by the Buyer within such sixty (60)
calendar day period; provided that promptly following the conclusion of such
sixty (60) calendar day period, the Buyer provides written notice to the Seller
of all such returns and gift certificates accepted and the aggregate amount due
to the Buyer pursuant to this §5.4 along with any supporting documentation
reasonably requested by the Seller. Any such reimbursement from the Seller to
the Buyer shall occur by wire transfer of immediately available funds within
five (5) Business Days after the receipt by the Seller of the Buyer’s written
notice and accompanying documentation pursuant to the preceding sentence.

5.5.             Utilities and
Telephone Service. Subject to the provisions of §§ 2.1(d) and 2.10(c) above,
Seller shall cancel its utilities and telephone accounts at the Acquired 

 20
 

 

 

Location on
the date that is five (5) Business Days after the Closing Date and Buyer will
be responsible for opening and arranging its own utility and telephone accounts
thereafter.

5.6.             Revocable License
to use Transitional Assets. Subject to the terms and conditions of this §5.6,
the Seller hereby grants to the Buyer, effective as of the Closing Date, a
limited, royalty-free license to use certain existing signs of the Seller
located at the Acquired Location as set forth on Schedule 5.6 (the “Transitional
Assets”), solely for purposes of the temporary signage and other physical
attributes of the Acquired Location in order to temporarily assist in the
transition of the Business to Buyer (and not for purposes of acquiring,
developing or marketing the Transitional Assets, including without limitation
any Intellectual Property therein), for a period of thirty (30) calendar days
following the Closing Date. Such license may be revoked by the Seller
immediately upon written notice to the Buyer upon failure of the Buyer or Buyer
Parent to satisfy the conditions of this §5.6. The Buyer and Buyer Parent may
not use the Transitional Assets, including without limitation any Intellectual
Property therein, in any manner or for any purpose different from the use by
Seller in the Business prior to the Closing Date. The Buyer and Buyer Parent
acknowledge, subject to the above limited license, the Seller has and retains
exclusive right, title and interest in and to the Transitional Assets,
including without limitation any Intellectual Property therein, and agree that
they will not at any time do, or cause to be done, any act or thing contesting
or in any way impairing or intending to impair the validity and value of and/or
the Seller’s exclusive right, title and interest in and to the Transitional
Assets, including without limitation any Intellectual Property therein. Neither
the Buyer nor the Buyer Parent will in any manner represent that it owns the
Transitional Assets, including without limitation any Intellectual Property
therein. All use of the Transitional Assets, including without limitation any
Intellectual Property therein, by the Buyer or the Buyer Parent shall inure to
the benefit of the Seller. Buyer and Buyer parent hereby assign, and agree to
assign, to Seller all goodwill associated with such use. The Buyer and Buyer
Parent may not assign, sublicense or transfer in any manner the license granted
by this §5.6. Upon the conclusion of such thirty (30) calendar day period
following the Closing Date or the earlier termination of the license granted
pursuant to this §5.6 by the Seller, the Buyer (i) shall make the Transitional
Assets available for thirty (30) calendar days at the Acquired Location for
removal by the Seller, at the Seller’s sole cost and expense, and (ii) will
cease using any Intellectual Property therein. Except as expressly set forth in
this paragraph, under no circumstances shall the license granted by this §5.6 be
construed or interpreted as selling, transferring, or licensing to the Buyer or
Buyer Parent (and the Seller shall retain all of the Seller’s right, title and
interest in and to) any Intellectual Property used in connection with the
operations at the Acquired Location, goodwill associated therewith, licenses
and sublicenses granted in respect thereto and rights thereunder, remedies
against infringements thereof and rights to protection of interest therein. BUYER
AND BUYER PARENT ACKNOWLEDGE AND AGREE THAT THE TRANSITIONAL ASSETS, INCLUDING WITHOUT LIMITATION ANY INTELLECTUAL
PROPERTY THEREIN, ARE PROVIDED ON AN “AS IS” BASIS AND THAT SELLER DOES
NOT MAKE ANY REPRESENTATIONS OR WARRANTIES WHATSOEVER, EXPRESS, IMPLIED OR
STATUTORY, WITH RESPECT THERETO, INCLUDING ANY REPRESENTATIONS OR WARRANTIES OF
TITLE, VALIDITY, ENFORCEABILITY OR NON-INFRINGEMENT. Buyer and Buyer Parent
further acknowledge and agree that breach of the provisions of this §5.6 will 

 21
 

 

 

cause
irreparable injury and damage to the Seller, the exact amount of which will be
difficult to ascertain and that remedies at law for any such breach would be
inadequate and that therefore, in the event of such a breach, the Seller shall
be entitled, in addition to all remedies available at law, to equitable relief
without posting any bond or other undertaking.

5.7.             Waiver of
Corporate Tax Lien. The Seller shall use commercially reasonable efforts to
obtain a Waiver of Corporate Tax Lien under Mass. Gen. Laws ch. 62C, Section 51 (as in
effect on the Closing Date) as soon as reasonably practicable following
the Closing and in any event within any applicable time period under such
section for obtaining such waiver following a sale or transfer of assets.

5.8.             Future
Assurances. At any time and from time to time after the Closing, at the request
of a Party and without further consideration, each other Party will execute and
deliver such other instruments of sale, transfer, conveyance, assignment and
confirmation and take such action as the requesting Party may reasonably
determine is necessary to effectuate the provisions and purposes of this
Agreement.

6.             INDEMNIFICATION.

6.1.             Buyer’s
Indemnification. Subject to the limitations set forth in this §6, the Buyer and
Buyer Parent shall jointly and severally indemnify and hold harmless, to the
fullest extent permitted by law, Seller, Seller Parent, Holdings, and their
direct and indirect partners, stockholders, members, managers, officers,
directors, employees, agents and Affiliates (collectively, the “Seller
Indemnitees”) from, against and in respect of Losses arising from or related to
any of the following:

(a)           any breach or default in performance
by the Buyer or Buyer Parent of any covenant or agreement of the Buyer or Buyer
Parent contained in this Agreement or any Closing Document;

(b)           any breach of, or inaccuracy in, any
representation or warranty made by the Buyer or Buyer Parent in (i) §4.1, §4.2,
§4.3, or §4.4 of this Agreement, (ii) any Closing Document, or (iii) any
certificate or other document delivered by the Buyer or Buyer Parent pursuant
hereto or thereto (in each case, as such representation or warranty would read
if all qualifications as to materiality were deleted therefrom);

(c)           any use of (i) the Transitional
Assets by the Buyer or Buyer Parent pursuant to §5.6 or (ii) the Seller’s
utilities and telephone accounts by the Buyer or Buyer Parent pursuant to §5.5;
or

(d)           any Assumed Liabilities.

6.2.             Seller’s
Indemnification. Subject to the limitations set forth in this §6, the Seller
shall indemnify and hold harmless, to the fullest extent permitted by law, the
Buyer, Buyer Parent, and their direct and indirect partners, stockholders,
members, managers, officers, directors, employees, agents and Affiliates
(collectively, the “Buyer 

 22
 

 

 

Indemnitees”)
from, against and in respect of Losses arising from or related to any of the
following:

(a)           any breach or default in performance
by the Seller of any covenant or agreement of the Seller contained in this
Agreement or any Closing Document;

(b)           any breach of, or inaccuracy in, any
representation or warranty made by the Seller in (i) §3.1, §3.2, §3.3, §3.4, or
§3.5 of this Agreement, (ii) any Closing Document, or (iii) any certificate or
other document delivered by the Seller pursuant hereto or thereto (in each
case, as such representation or warranty would read if all qualifications as to
materiality, including each reference to the defined term “Material Adverse
Effect” were deleted therefrom); or

(c)           any Retained Liabilities.

6.3.             Seller’s
Additional Indemnification. Subject to the limitations set forth in this §6,
the Seller shall indemnify and hold harmless, to the fullest extent permitted
by law, the Buyer Indemnitees from, against and in respect of Losses arising
from or related to the “Store Sales” set forth in the profit and loss
statements attached to §3.14 of the Disclosure Schedule having been overstated
by the Seller in such statements by an amount greater than ten percent (10%) of
the actual such “Store Sales”; provided,
however, that the aggregate
liability of the Seller to indemnify the Buyer Indemnitees for Losses under
this §6.3 (including, without limitation, any Losses arising from or related to
loss of profits or punitive, special, consequential or incidental damages)
shall in no event exceed $1,000,000. Notwithstanding any provision of this
Agreement (including, without limitation, §6.4(c) and §6.5 hereof), no claims
may be made or suits instituted with respect to this §6.3 or the profit and
loss statements attached to §3.14 of the Disclosure Schedule unless the “Store
Sales” set forth in such statements have been overstated by the Seller in such
statements by an amount greater than ten percent (10%) of the actual such “Store
Sales”.

6.4.             Time Limitations.

(a)           Regardless of any investigation made
at any time by or on behalf of any Party hereto or of any information any Party
may have in respect thereof, except as set forth in paragraphs (b) and (c) of
this §6.4, all of the representations and warranties made by the Buyer, Buyer
Parent, and Seller herein and all known, unknown or unasserted claims and
causes of action with respect thereto will terminate upon the Closing Date and
no claim may be made or suit instituted with respect to such representations
and warranties pursuant to this §6 thereafter.

(b)           No claim may be made or suit
instituted under §6.1(b), §6.2(b), or §6.3 after the close of business on the
date that is twelve (12) months after the Closing Date.

(c)           Claims may be made or suits
instituted at any time if such claims or suits are based upon fraud or
intentional misrepresentation or
are under §6.1(a), §6.1(c), §6.1(d), §6.2(a), or §6.2(c) (subject to any
applicable statutes of limitation).

 23
 

 

 

(d)           For purposes of this §6, any claim
for indemnification shall be duly made by delivering written notice of such
claim describing with reasonable specificity (in light of the facts then known)
the amount and basis of such claim to the Buyer, Buyer Parent, or the Seller,
as applicable, prior to the applicable limitation date specified in this §6.4.

(e)           Notwithstanding the limitation dates
set forth in this §6.4 above, obligations to indemnify shall not terminate with
respect to any claim as to which the Indemnified Party shall have, before the
expiration of the applicable time limitation, made a bona fide claim by
delivering notice in accordance with §6.4(d) above.

6.5.             Certain Other
Indemnity Matters. Except with respect to §§ 2.9, 5.1, and 5.6 and except with
respect to claims relating to fraud or intentional misrepresentation, the sole
and exclusive remedies of each Seller Indemnitee and each Buyer Indemnitee as
against any Person from and after the Closing with respect to any and all
claims of any kind whatsoever relating to the subject matter of this Agreement
shall be pursuant to the indemnification provisions set forth in this §6. In
furtherance of and subject to the foregoing, the Seller, Buyer, and Buyer
Parent hereby waive, to the fullest extent permitted under applicable law, and
agree not to assert and to cause each of the other Seller Indemnitees and Buyer
Indemnitees not to assert in any Action or proceeding of any kind, any and all
rights, claims and causes of action it may now or hereafter have against any
Party and any of their respective Affiliates and their respective members,
partners, stockholders, officers, directors, employees, agents and
representatives and their respective Affiliates relating to the subject matter
of this Agreement, other than claims for indemnification asserted as permitted
by and in accordance with the provisions set forth in this §6 (including any
such rights, claims or causes of action arising under or based upon common law
or other Legal Requirements). Upon making any payment to an Indemnified Party
for any indemnification claim pursuant to this §6, the Indemnifying Party shall
be subrogated, to the extent of such payment, to any rights which the
Indemnified Party may have against other Persons with respect to the subject
matter underlying such indemnification claim. The Parties shall take all
reasonable steps to mitigate all such Losses upon and after becoming aware of
any event which could reasonably be expected to give rise to any Losses with
respect to which indemnification may be requested hereunder. Any insurance
proceeds and Tax Benefits actually received or realized by an Indemnified Party
(or an Affiliate of an Indemnified Party) after indemnification shall have been
made to such Indemnified Party hereunder that were not given effect, pursuant
to the definition of “Loss”, in determining the amount of such Loss, up to the
amount of such Loss, shall be refunded to the Indemnifying Party by the
Indemnified Party. To the extent permitted under applicable Legal Requirements,
any and all payments or offsets pursuant to this §6 shall be deemed for Tax
purposes to be adjustments to the Purchase Price.

6.6.             Third Party
Claims. Promptly after the receipt by any Person entitled to indemnification
pursuant to this §6 (the “Indemnified Party”) of notice of the commencement of
any Action against such Indemnified Party by a third party, such Indemnified
Party shall, if a claim with respect thereto is to be made against any party
obligated to provide indemnification pursuant to this §6 (the “Indemnifying
Party”), give such Indemnifying Party written notice thereof in reasonable detail
in light of the 

 24
 

 

 

circumstances
then known to such Indemnified Party. The failure to give such notice shall not
relieve any Indemnifying Party from any obligation hereunder except where, and
then solely to the extent that, such failure actually and materially prejudices
the rights of such Indemnifying Party. Such Indemnifying Party shall have the
right to defend such claim, at such Indemnifying Party’s expense and with
counsel of its choice reasonably satisfactory to the Indemnified Party,
provided that the Indemnifying Party conducts the defense of such claim
actively and diligently. If the Indemnifying Party assumes the defense of such
claim, the Indemnified Party agrees to reasonably cooperate in such defense so
long as the Indemnified Party is not materially prejudiced thereby. So long as
the Indemnifying Party is conducting the defense of such claim actively and
diligently, the Indemnified Party may retain separate co-counsel at its sole
cost and expense and may participate in the defense of such claim, and neither
any Indemnifying Party nor any Indemnified Party will consent to the entry of
any judgment or enter into any settlement with respect to such claim without
the prior written consent of the other, which consent will not be unreasonably
withheld (provided that such consent shall be granted in connection with any
settlement (i) containing a full release of the party from whom such consent is
so requested and (ii) in the case of a consent from an Indemnified Party,
involving only monetary damages). In the event the Indemnifying Party does not
or ceases to conduct the defense of such claim actively and diligently, (x) the
Indemnified Party may defend against, and, with the prior written consent of
the Indemnifying Party (which consent shall not be unreasonably withheld),
consent to the entry of any judgment or enter into any settlement with respect
to, such claim, (y) the Indemnifying Party will reimburse the Indemnified Party
promptly and periodically for the costs of defending against such claim,
including reasonable attorneys’ fees and expenses and (z) the Indemnifying
Party will remain responsible for any Losses the Indemnified Party may suffer
as a result of such claim to the full extent provided in this §6.

6.7.             Information. Each
Party hereby agrees to provide to the other Parties on request all information
and documentation reasonably necessary to support and verify any Losses which
give rise to a claim for indemnification pursuant to this §6 and to provide
reasonable access to all books, records and personnel in their possession or
under their control which would have a bearing on such claim.

7.             MISCELLANEOUS.

7.1.             Press Releases
and Public Announcements. No public announcement, press release, or other
publicity regarding this Agreement or the transactions contemplated hereby
shall be made prior to or after the date of this Agreement without the prior
written approval of the other Parties following an opportunity to review such
proposed announcement or release. Notwithstanding the foregoing, nothing in
this Agreement shall preclude or prevent any Party from making any public
announcement or filing that the disclosing Party believes in good faith is
required for it to comply with by applicable law (in which case the disclosing
Party will provide the other Parties with the opportunity to review in advance
the disclosure), including applicable federal or state securities laws or any
rules of a stock exchange upon which any shares of such Party are listed for
trading.

 25

 

 

7.2.             Entire
Agreement.  This Agreement, together with
the Non-Disclosure Agreement, the Supply Agreement and any side letters or
instruments related thereto, and Closing Documents, constitutes the entire
agreement among the parties hereto with respect to the subject matter hereof
and supersedes any and all prior discussions, negotiations, proposals,
undertakings, understandings and agreements, whether written or oral, with
respect thereto.

7.3.             Succession and
Assignment; No Third-Party Beneficiary. 
Subject to the immediately following sentence, this Agreement will be
binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, each of which such successors and
permitted assigns will be deemed to be a party hereto for all purposes
hereof.  No Party may assign, delegate or
otherwise transfer either this Agreement or any of its rights, interests, or
obligations hereunder without the prior written approval of the other Parties
(except with respect to any successor to all or substantially all of a Party’s
business that becomes a party to this Agreement and subject to the terms and
conditions of this Agreement to the same extent, and in the same capacity, as
the Party which is so succeeded, in which case no prior written consent shall
be necessary hereunder).  Except as
expressly provided herein, this Agreement is for the sole benefit of the
Parties and their permitted successors and assignees and nothing herein
expressed or implied will give or be construed to give any Person, other than
the Parties and such successors and assignees, any legal or equitable rights
hereunder.

7.4.             Counterparts.  This Agreement may be executed in any number
of counterparts, each of which will be deemed an original, but all of which
together will constitute but one and the same instrument.  This Agreement will become effective when
duly executed by each Party hereto.

7.5.             Headings.  The headings contained in this Agreement are
for convenience purposes only and will not in any way affect the meaning or
interpretation hereof.

7.6.             Notices.  All notices, requests, demands, claims and
other communications required or permitted to be delivered, given or otherwise
provided under this Agreement must be in writing and must be delivered, given
or otherwise provided:

(a)           by hand (in which case, it will be
effective upon delivery);

(b)           by facsimile (in which case, it will
be effective upon receipt of confirmation of good transmission); or

(c)           by overnight delivery by a nationally
recognized courier service (in which case, it will be effective on the Business
Day after being deposited with such courier service);

in each case, to the
address (or facsimile number) listed below:

 26
 

 

 

If to the Seller:

Party City Corporation

	
   

  	
  25 Green Pond Road

  	
   

  	
   

  
	
   

  	
  Suite #1

  	
   

  	
   

  
	
   

  	
  Rockaway, NJ
  07866

  	
   

  	
   

  
	
   

  	
  Phone: (973)
  983-0888

  	
   

  	
   

  
	
   

  	
  Fax: (973)
  983-4776

  	
   

  	
   

  
	
   

  	
  Attention:

  	
  Gregg A.
  Melnick, Chief Financial Officer

  	
   

  	
   

  
	
   

  	
   

  	
  Joseph J. Zepf,
  Esq., General Counsel

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  With a copy to:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Ropes & Gray
  LLP

  	
   

  	
   

  
	
   

  	
  One
  International Place

  	
   

  	
   

  
	
   

  	
  Boston, MA 02110

  	
   

  	
   

  
	
   

  	
  Phone: (617)
  951-7861

  	
   

  	
   

  
	
   

  	
  Fax: (617)
  951-7050

  	
   

  	
   

  
	
   

  	
  Attention:

  	
  Shari H. Wolkon,
  Esq.

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  If to the Buyer
  or Buyer Parent:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  iParty Corp.

  	
   

  	
   

  
	
   

  	
  270 Bridge
  Street

  	
   

  	
   

  
	
   

  	
  Dedham, MA 02026

  	
   

  	
   

  
	
   

  	
  Phone: (781) 329-3952

  	
   

  	
   

  
	
   

  	
  Fax: (781)
  326-7143

  	
   

  	
   

  
	
   

  	
  Attention:

  	
  Sal Perisano,
  Chairman & Chief Executive Officer

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  With a copy to:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Posternak
  Blankstein & Lund LLP

  	
   

  	
   

  
	
   

  	
  Prudential Tower

  	
   

  	
   

  
	
   

  	
  800 Boylston
  Street

  	
   

  	
   

  
	
   

  	
  Boston, MA 02199

  	
   

  	
   

  
	
   

  	
  Phone: (617)
  973-6147

  	
   

  	
   

  
	
   

  	
  Fax: (617)
  722-4954

  	
   

  	
   

  
	
   

  	
  Attention:

  	
  Donald H.
  Siegel, P.C.

  	
   

  	
   

  
							

 

Any Party may change the
address to which notices, requests, demands, claims, and other communications
hereunder are to be delivered by giving the other Parties notice in the manner
herein set forth.

7.7.             Governing
Law.  This Agreement, the rights of the
parties and all Actions arising in whole or in part under or in connection
herewith, will be governed by and construed in accordance with the domestic
substantive laws of The Commonwealth of Massachusetts, without giving effect to
any choice or conflict of law provision or rule that would cause the
application of the laws of any other jurisdiction.

7.8.             Amendments and
Waivers.  No amendment or waiver of any
provision of this Agreement will be valid and binding unless it is in writing
and signed, in the case of 

 27
 

 

 

an amendment,
by Buyer, Buyer Parent, and Seller, or in the case of a waiver, by the Party
against whom the waiver is to be effective, and if the amendment or waiver is
applicable to any other party set forth on the signatures pages hereto, such
party.  No waiver by any Party of any
breach or violation of, default under or inaccuracy in any representation,
warranty or covenant hereunder, whether intentional or not, will be deemed to
extend to any prior or subsequent breach, violation, default of, or inaccuracy
in, any such representation, warranty or covenant hereunder or affect in any
way any rights arising by virtue of any prior or subsequent such occurrence.  No delay or omission on the part of any Party
in exercising any right, power or remedy under this Agreement will operate as a
waiver thereof.

7.9.             Severability.  Any term or provision of this Agreement or of
any Section hereof that is invalid or unenforceable in any situation in any jurisdiction,
including without limitation Section 5.1 hereof, will not affect the validity
or enforceability of the remaining terms and provisions hereof or the validity
or enforceability of the offending term or provision in any other situation or
in any other jurisdiction.  In the event
that any provision hereof would, under applicable law, be invalid or
unenforceable in any respect, each Party hereto intends that such provision
will be construed by modifying or limiting it so as to be valid and enforceable
to the maximum extent compatible with, and possible under, applicable law.

7.10.           Expenses.  Each of the Buyer, Buyer Parent, and the
Seller will bear its own costs and expenses (including legal and accounting
fees and expenses) incurred in connection with this Agreement and the
transactions contemplated hereby.  Buyer
shall pay any sales, use, excise, transfer or other similar Tax (collectively, “Transfer
Taxes”) imposed with respect to the transactions contemplated by this
Agreement.

7.11.           Construction.  The Parties have participated jointly in the
negotiation and drafting of this Agreement. 
In the event an ambiguity or question of intent or interpretation
arises, this Agreement will be construed as if drafted jointly by the Parties
and no presumption or burden of proof will arise favoring or disfavoring any
Party by virtue of the authorship of any of the provisions of this
Agreement.  The Parties intend that each
representation, warranty and covenant contained herein will have independent
significance.

7.12.           Incorporation of
Schedules.  The Schedules identified in
this Agreement are incorporated herein by reference and made a part hereof.

7.13.           Jurisdiction.  Each Party to this Agreement, by its
execution hereof, (a) hereby irrevocably submits to the exclusive jurisdiction
of the federal or state courts within The Commonwealth of Massachusetts for the
purpose of any Action between the Parties arising in whole or in part under or
in connection with this Agreement, (b) hereby waives to the extent not prohibited
by applicable law, and agrees not to assert, by way of motion, as a defense or
otherwise, in any such Action, any claim that it is not subject personally to
the jurisdiction of the above-named courts, that its property is exempt or
immune from attachment or execution, that any such Action brought in one of the
above-named courts should be dismissed on grounds of forum non conveniens,
should be transferred or 

 28
 

 

 

removed to any
court other than one of the above- named courts, or should be stayed by reason
of the pendency of some other proceeding in any other court other than one of
the above-named courts, or that this Agreement or the subject matter hereof may
not be enforced in or by such court and (c) hereby agrees not to commence any
such Action other than before one of the above-named courts.  Notwithstanding the previous sentence a Party
may commence any Action in a court other than the above-named courts solely for
the purpose of enforcing an order or judgment issued by one of the above-named
courts.

7.14.           Venue.  Each Party agrees that for any Action between
the Parties arising in whole or in part under or in connection with this
Agreement, such Party bring Actions only in The Commonwealth of Massachusetts.  Each Party further waives any claim and will
not assert that venue should properly lie in any other location within the
selected jurisdiction.

7.15.           Service of
Process.  Each Party hereby (a) consents
to service of process in any Action between the Parties arising in whole or in
part under or in connection with this Agreement in any manner permitted by
Massachusetts law, (b) agrees that service of process made in accordance with
clause (a) or made by registered or certified mail, return receipt requested,
at its address specified pursuant to §7.6, will constitute good and valid
service of process in any such Action and (c) waives and agrees not to assert
(by way of motion, as a defense, or otherwise) in any such Action any claim
that service of process made in accordance with clause (a) or (b) does not
constitute good and valid service of process.

7.16.           Waiver of Jury
Trial.  TO
THE EXTENT NOT PROHIBITED BY APPLICABLE LAW THAT CANNOT BE WAIVED, THE PARTIES
HEREBY WAIVE, AND COVENANT THAT THEY WILL NOT ASSERT (WHETHER AS PLAINTIFF,
DEFENDANT OR OTHERWISE), ANY RIGHT TO TRIAL BY JURY IN ANY ACTION ARISING IN
WHOLE OR IN PART UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE
CONTEMPLATED TRANSACTIONS, WHETHER NOW EXISTING OR HEREAFTER ARISING, AND
WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE.  THE PARTIES AGREE THAT ANY OF THEM MAY FILE A
COPY OF THIS PARAGRAPH WITH ANY COURT AS WRITTEN EVIDENCE OF THE KNOWING,
VOLUNTARY AND BARGAINED-FOR AGREEMENT AMONG THE PARTIES IRREVOCABLY TO WAIVE
ITS RIGHT TO TRIAL BY JURY IN ANY PROCEEDING WHATSOEVER BETWEEN THEM RELATING
TO THIS AGREEMENT OR ANY OF THE CONTEMPLATED TRANSACTIONS WILL INSTEAD BE TRIED
IN A COURT OF COMPETENT JURISDICTION BY A JUDGE SITTING WITHOUT A JURY.

[The
remainder of this page is intentionally left blank.]

 29

 

 

Asset
Purchase Agreement

IN WITNESS WHEREOF, each of the undersigned has
executed this Agreement as an agreement under seal as of the date first above
written.

	
  THE BUYER:

  	
  iPARTY RETAIL STORES CORP.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ SAL PERISANO

  
	
   

  	
  Name:

  	
  Sal Perisano

  
	
   

  	
  Title:

  	
  Chief Executive Officer

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  THE BUYER
  PARENT:

  	
  iPARTY CORP.

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ SAL PERISANO

  
	
   

  	
  Name:

  	
  Sal Perisano

  
	
   

  	
  Title:

  	
  Chief Executive Officer

  
				

 

 

 

	
  THE SELLER:

  	
  PARTY CITY CORPORATION

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ GREGG A. MELNICK

  
	
   

  	
  Name:

  	
  Gregg A. Melnick

  
	
   

  	
  Title:

  	
  Chief Financial Officer

  
				

 

 

	
  Solely with respect to §5.1
  hereof:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  HOLDINGS:

  	
  AAH HOLDINGS CORPORATION

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ JAMES M. HARRISON

  
	
   

  	
  Name: 

  	
  James M. Harrison

  
	
   

  	
  Title:

  	
  President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  SELLER PARENT:

  	
  AMSCAN HOLDINGS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ JAMES M. HARRISON

  
	
   

  	
  Name:

  	
  James M. Harrison

  
	
   

  	
  Title:

  	
  President

  
						

 

 

THIS NOTE WAS
ISSUED IN A PRIVATE PLACEMENT, WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE “ACT”), AND MAY NOT BE SOLD, ASSIGNED, PLEDGED OR
OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE ACT COVERING THE TRANSFER OR AN OPINION OF COUNSEL ACCEPTABLE TO THE
ISSUER THAT SUCH REGISTRATION UNDER THE ACT IS NOT REQUIRED.

THIS
NOTE IS SUBJECT TO THAT CERTAIN SUBORDINATION AGREEMENT DATED AS OF AUGUST 7,
2006 BY AND AMONG PARTY CITY CORPORATION, 
WELLS FARGO RETAIL FINANCE II, LLC, iPARTY CORP., AND iPARTY RETAIL
STORES CORP., AS SUCH SUBORDINATION AGREEMENT IS AMENDED FROM TIME TO TIME, AND
TO FURTHER SUBORDINATION TO SENIOR SUBORDINATED INDEBTEDNESS.

iPARTY
RETAIL STORES CORP.

Subordinated
Promissory Note Due August 7, 2010

	
  $600,000

  	
  August 7, 2006

  

 

FOR VALUE RECEIVED, the undersigned, iParty Retail
Stores Corp., a Delaware corporation (the “Company”), hereby promises to
pay to the order of Party City Corporation or its assigns (such original payee
or any assignee from time to time, the “Noteholder”), at the address
specified in Section 6.1 hereof, or at such other place as the Noteholder
shall from time to time have designated to the Company in writing, on August 7,
2010 (the “Maturity Date”), Six Hundred Thousand and No/100ths Dollars
($600,000.00), and to pay
interest thereon as provided in Section 2 hereof.

1.             THE NOTE.  This
Note (the “Note”) is issued pursuant to and in accordance with
Section 2.5 of the Asset Purchase Agreement, dated as of August 7,
2006, by and among the Company, iParty Corp. (the “Parent”), and the
Noteholder (as amended and in effect from time to time, the “Purchase
Agreement”).  Certain terms are used
in this Note as specifically defined herein and these definitions are set forth
or referred to in Section 5 hereof.

2.             INTEREST PROVISIONS. 
Subject to the provisions of Section 4.3 hereof, this Note shall
bear daily interest (computed on the basis of a 365-day year) from the
date hereof, on the principal amount hereof from time to time unpaid, to and
including the maturity hereof and repayment of all sums due hereunder, at a
rate equal to 12.25% per annum.  Interest shall be payable in cash quarterly in
arrears on the last day of each of September, December, March, and June (each,
a “Payment Date”) and on the Maturity Date, commencing on September 30, 2006.

 

 

3.             PAYMENT PROVISIONS. 
The Company covenants that so long as this Note is outstanding:

3.1           Payment at Maturity of the Note.  On the Maturity Date, a Change of Control, or
any accelerated maturity of this Note permitted hereby, the Company will pay
the entire principal amount of this Note then outstanding, together with all
accrued and unpaid interest thereon.

3.2           Voluntary Prepayments.  The Company may at any time and from time to
time prepay all or part of the principal amount of this Note then outstanding
without penalty or premium.

3.3           Notice of Prepayments.  Notice of each voluntary prepayment of this
Note pursuant to Section 3.2 hereof shall be given to the Noteholder in
accordance with Section 6.1 hereof not fewer than three days before the
prepayment date, in each case by delivering to the Noteholder a notice of
intention to prepay specifying the date of prepayment, the aggregate amount of
this Note to be prepaid on such date, and the accrued interest applicable to
such prepayment.

3.4           Payment and Interest Cut-Off.  Upon each prepayment of this Note, in whole
or in part, the Company will pay to the Noteholder the amount of this Note to
be prepaid, as set forth in the notice delivered pursuant to Section 3.3
hereof, together with unpaid interest in respect thereof accrued to and
including the prepayment date.  From and
after the date such prepayment is actually made, interest on the amount of the
Note so prepaid shall cease to accrue.

3.5           Noteholder Expenses.  The Company shall pay to the Noteholder, upon
written demand, all costs of collection and reasonable attorneys’ fees and
other costs and expenses paid or incurred by the Noteholder in enforcing the
obligations of the Company hereunder and/or in exercising the Noteholder’s
rights and remedies hereunder (whether such costs and expenses are incurred in
any work-out, bankruptcy case or proceeding, or otherwise).

3.6           Application of Payments.  All cash payments made by the Company
hereunder shall be applied:  (a) first,
to the payment of any costs and expenses for which the Company is responsible
under Section 3.5 hereto; (b) second, to the payment in full of accrued unpaid
interest; and (c) finally, to the reduction of the unpaid principal balance
hereof.

3.7           Payments Subject to Subordination.  Notwithstanding the foregoing provisions of
this Section 3, no cash payment of interest or principal or any other amounts
payable under this Section 3 shall be made at any time when the payment thereof
is prohibited by (i) the provisions of that certain Subordination Agreement,
dated as of August 7, 2006, by and between the Parent, Company, Wells Fargo
Retail Finance II, LLC, and the Noteholder (the “Subordination Agreement”) or
(ii) the provisions of any Subordination Agreement with any holder of Senior
Subordinated Indebtedness (a “Subordinated Subordination Agreement”) or any
Subordination Agreement with any successor holder of Senior Debt (as defined in
the Subordination Agreement) (a “Successor Subordination Agreement”), each of
which the Noteholder shall execute and deliver upon the request of the Company
or Parent, provided that the terms of such Subordinated Subordination Agreement
or Successor Subordination Agreement, as applicable, are materially consistent
with and similar to terms of the Subordination Agreement.

 2
 

 

 

3.8           Default Notices.  In the event that the Company receives a
notice of a default, that has not been waived or otherwise cured, in respect of
the Senior Indebtedness or any Senior Subordinated Indebtedness, the Company
shall promptly give notice thereof to the Noteholder.

4.             DEFAULTS.

4.1           Event of Default.  An “Event of Default” shall exist if any of
the following conditions or events shall occur and be continuing:

4.1.1        The Company
shall fail to make any payment in respect of interest on this Note as the same
shall become due, whether at maturity, by acceleration or otherwise, and such
default is not remedied within 3 days after the same becomes due or the Company
shall fail to make any payment in respect of principal of this Note as the same
shall become due, whether at maturity, by acceleration or otherwise; or

4.1.2        The Company or Parent shall fail to
perform any covenant or agreement required to be performed by the Company or
Parent, as applicable, under this Note, the Purchase Agreement, or the Supply
Agreement, which failure is not cured within 30 days after the Company or
Parent, as applicable, has received written notice of such failure from the
Noteholder or Amscan, Inc., as applicable;
or

4.1.3        The Company shall: (i) commence a
voluntary case concerning itself under Title 11 of the United States Code
entitled “Bankruptcy” as now or hereafter in effect, or any successor thereto
(the “Bankruptcy Code”); (ii) have commenced against it an
involuntary case under said Bankruptcy Code and the petition is not dismissed
within 60 days of the commencement of the case; (iii) have appointed for
it a custodian (as defined in the Bankruptcy Code) to take charge of all
or substantially all of its property; (iv) file or have filed against it
any proceeding under any reorganization, arrangement, adjustment of debt,
relief of debtors, dissolution, insolvency or liquidation or similar law of any
jurisdiction whether now or hereafter in effect, which such proceeding remains
undismissed for a period of 60 days, or shall suffer the appointment of any
receiver or custodian or the like for it or a substantial part of its property
which continues undischarged or unstayed for a period of 60 days;
(v) make a general assignment for the benefit of its creditors; or
(vi) take any corporate action for the purpose of effecting any case
referred to in the foregoing clauses (i) or (v); or

4.1.4        A Change of Control shall occur; or

4.1.5        All or any part of any Senior
Indebtedness or any Senior Subordinated Indebtedness shall be accelerated or
shall become due or payable prior to its stated maturity pursuant to the
default provisions related thereto.

4.2           Acceleration.  Upon the occurrence and during the
continuance of any Event of Default, after first providing 10 days’ written
notice to the Company (except in the case of an

 3
 

 

 

Event of Default under Section 4.1.3, in which
event no such notice to the Company is required), but subject to the provisions of the
Subordination Agreement, any Successor Subordination Agreement, or any
Subordinated Subordination Agreement, the Noteholder may proceed to protect and
enforce its rights by suit in equity, action at law and/or other appropriate
proceeding, and/or may by notice to the Company
declare all or any part of the unpaid principal amount of this Note then
outstanding to be forthwith due and payable (each, an “Acceleration”),
and thereupon such unpaid principal amount or part thereof, together with
interest accrued thereon and all other sums, if any, payable under this Note,
shall become so due and payable without presentation, presentment, protest or
further demand or notice of any kind, all of which are hereby expressly waived,
and such holder or holders may proceed to enforce payment of such amount or
part thereof in such manner as it or they may elect; provided, however, notwithstanding the foregoing, in the case
of an Event of Default under Section 4.1.3, Acceleration shall be deemed
automatic without notice to the Company.

4.3           Default Interest.  Upon the occurrence and during the
continuance of any Event of Default, whether arising as a result of any
restrictions on payments in accordance with the provisions of the Subordination
Agreement, any Successor Subordination Agreement, any Subordinated
Subordination Agreement or otherwise, this Note shall bear interest (the
“Default Interest”) at a rate equal to 14.25% per annum (the “Default Rate”),
payable by the Company in cash upon written demand of the Noteholder; provided,
that if such Default Interest is not paid in cash on account of the provisions
of the Subordination Agreement, any Successor Subordination Agreement or any
Subordinated Subordination Agreement, such unpaid interest shall compound on
each Payment Date until paid.

4.4           Annulment of Defaults.  An Event of Default shall not be deemed to be
in existence for any purpose of this Agreement if the Noteholder shall have
waived such event in writing or stated in writing that the same has been cured
to the Noteholder’s reasonable satisfaction. 
No waiver or statement of satisfactory cure pursuant to this Section 4.4
shall extend to or affect any subsequent or other Event of Default not specifically
identified in such waiver or statement of satisfactory cure or impair any of
the rights of any holder of this Note upon the occurrence thereof.

5.             DEFINED TERMS.

5.1           Cross Reference Table.  The following terms defined elsewhere in this
Note in the Sections set forth below shall have the respective meanings therein
defined

	
  Term

  	
  Definition

  
	
  “Acceleration”

  	
  Section 4.2

  
	
  “Bankruptcy Code”

  	
  Section 4.1.3

  
	
  “Company”

  	
  Preamble

  
	
  “Default Interest”

  	
  Section 4.3

  
	
  “Default Rate”

  	
  Section 4.3

  
	
  “Event of Default”

  	
  Section 4.1

  

 

 4
 

 

 

	
  “Maturity Date”

  	
  Preamble

  
	
  “Note”

  	
  Section 1

  
	
  “Noteholder”

  	
  Preamble

  
	
  “Parent”

  	
  Section 1

  
	
  “Payment Date”

  	
  Section 2

  
	
  “Purchase Agreement”

  	
  Section 1

  
	
  “Subordinated Subordination Agreement”

  	
  Section 3.7

  
	
  “Subordination Agreement”

  	
  Section 3.7

  
	
  “Successor Subordination Agreement”

  	
  Section 3.7

  

 

5.2           Other Defined Terms.  As used in this Note, the following terms
will have the following meanings:

“Business Day” means a day other than a
Saturday, Sunday or other day on which commercial banks are authorized to
close, or are in fact closed, in The Commonwealth of Massachusetts or in the
State of Delaware.

“Capital Stock” means any and all shares,
interests, participations or other equivalents 
(however designated) of capital stock of a corporation, any and all
equivalent ownership interests in a Person (other than a corporation),
including, without limitation, partnership interests and membership interests,
and any and all warrants, rights or options to purchase or other arrangements
or rights to acquire any of the foregoing.

“Change of
Control” means, at any time, (i) any Person or “group” (within the meaning
of Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934,
as amended from time to time, and any successor statute) shall have after the
date hereof (a) acquired beneficial ownership and control of 35% or more of the
combined voting power of all of the Capital Stock of Parent or (b) obtained the
power (whether or not exercised) to elect a majority of the members of the
board of directors (or similar governing body) of Parent; (ii) the majority of
the seats (other than vacant seats) on the board of directors (or similar
governing body) of Parent cease to be occupied by Persons who either (a) were
members of the board of directors of Parent on the date hereof or (b) were
nominated for election by a majority of the board of directors of Parent, who
were either (I) directors on the date hereof or (II) whose election or
nomination for election was previously approved by a majority of such
directors; (iii) Parent shall cease to own 100% of the Capital Stock of
Company; (iv) any “change of control” or similar event under the Senior Loan
Documents or under any documents evidencing any Senior Subordinated
Indebtedness shall occur; (v) any sale or other disposition of all or
substantially all of the assets of the Company or Parent (including without
limitation by way of a merger or consolidation or through the sale of all or
substantially all of the stock of its subsidiaries or sale of all or
substantially all of the assets of the Company or Parent, as applicable, and
its subsidiaries, taken as a whole) to another Person; or (vi) the initiation
of any action by the Company or Parent to dissolve, liquidate or otherwise
terminate its existence.

“Person” means any individual or corporation,
partnership, association, limited liability company, joint venture, trust,
governmental authority or other entity of any kind.

 5
 

 

 

“Senior Indebtedness” means the Senior Liabilities
under the Senior Loan Documents.

“Senior Liabilities” has the meaning set forth
in the Subordination Agreement.

“Senior Loan Documents” has the meaning set
forth in the Subordination Agreement.

“Senior Subordinated Indebtedness” shall mean
any and all obligations and liabilities of the Company or the Parent to any
lender or lenders, and their respective successors or assigns, of up to
$3,200,000 in the aggregate to the Company and/or the Parent, which
indebtedness is by its express terms senior hereto and junior to the Senior
Indebtedness, together with all interest thereon, whether accrued before or
after the filing of a petition in bankruptcy or similar insolvency proceeding,
and whether direct or indirect, absolute or contingent, joint or several,
secured or unsecured, due or to become due, now existing or later arising and
however evidenced, together with all other sums due thereon and all costs of
collecting the same (including, without limitation, reasonable attorney fees)
for which the Company is liable, and any such indebtedness or any debentures,
notes or other evidence of indebtedness issued in exchange for or to refinance
such Senior Subordinated  Indebtedness
(in whole or in part), or any indebtedness arising from the satisfaction of
such Senior Subordinated Indebtedness by a guarantor.

“Supply Agreement” means the Supply Agreement,
dated as of August 7, 2006, by and between the Parent
and Amscan, Inc.

6.             MISCELLANEOUS.

6.1           Notices.  Any notice or other communication to the
Company, Parent, or the Noteholder in connection with this Note must be in
writing and must be delivered: (a) by hand (in which case it will be effective
upon delivery), (b) by facsimile (in which case it will be effective upon
receipt of confirmation of good transmission), or (c) by overnight delivery by
a nationally recognized courier service (in which case it will be effective on
the business day after being deposited with such courier service), and in each
case, to the address (or facsimile number) listed below:

If to the Company or
Parent, to it at:

c/o iParty Corp.

270 Bridge Street

Dedham, MA 02026

Phone: (781) 329-3952

Fax: (781) 326-7143

Attention: Sal Perisano, Chairman & Chief Executive Officer

 6
 

 

with a copy to:

Posternak
Blankstein & Lund LLP

Prudential Tower

800 Boylston Street

Boston, MA 02199

Phone: (617) 973-6147

Fax: (617) 722-4954

Attention: Donald H. Siegel, P.C.

If to the Noteholder, to
it at :

Party City Corporation

25 Green Pond Road

Suite #1

Rockaway, NJ 07866

Phone: (973) 983-0888

Fax: (973) 983-4776

Attention: Gregg A. Melnick, Chief Financial Officer

Joseph J. Zepf, Esq.,
General Counsel

 

with a copy to:

Ropes & Gray
LLP

One International Place

Boston, MA 02110

Phone: (617) 951-7861

Fax: (617) 951-7050

Attention: Shari H. Wolkon, Esq.

6.2           Waiver of Jury Trial; No Set-Off.  TO THE EXTENT NOT PROHIBITED BY APPLICABLE
LAW WHICH CANNOT BE WAIVED, THE COMPANY (BY ITS EXECUTION HEREOF) AND THE
NOTEHOLDER (BY ITS ACCEPTANCE OF THIS NOTE) WAIVES AND COVENANTS THAT IT WILL
NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT OR OTHERWISE) ANY RIGHT TO TRIAL BY
JURY IN ANY FORUM IN RESPECT OF ANY ISSUE OR ACTION ARISING OUT OF OR BASED
UPON OR RELATING TO THIS NOTE OR IN ANY WAY CONNECTED WITH OR RELATED OR
INCIDENTAL TO THE TRANSACTIONS CONTEMPLATED HEREBY, IN EACH CASE WHETHER NOW
EXISTING OR HEREAFTER ARISING.  ALL
PAYMENTS HEREUNDER SHALL BE MADE WITHOUT ANY DEDUCTIONS WHATSOEVER, INCLUDING
DEDUCTION FOR SET-OFF, COUNTERCLAIM, OR RECOUPMENT.

6.3           Assignability; Governing Law.  This Note shall bind and inure to the benefit
of the Company and Noteholder and their respective successors and assigns;
provided, however, that the obligations of the Company hereunder may not be
transferred or assigned except with the prior written consent of the
Noteholder.  This Note shall be governed
by, construed under, and enforced in accordance with the laws of The
Commonwealth of Massachusetts.

6.4           Amendment and Waiver.  No amendment or waiver hereof will be valid
and binding unless it is in writing and signed, in the case of an amendment, by
the Company and the

 7
 

 

 

Noteholder,
or in the case of a waiver, by the party against whom the waiver is to be
effective.  Any waiver or consent shall
be effective only in the specific instance and for the specific purpose for
which it was given.  No notice to or
demand on the Company or Parent in any case shall entitle the Company or
Parent, as applicable, to any further notice or demand in similar or other
circumstances.

6.5           No Implied
Waiver; Remedies Cumulative.  No
failure or delay on the part of the Noteholder in the exercise of any power,
right or privilege hereunder shall impair such power, right or privilege or be
construed to be a waiver of any default or acquiescence therein, nor shall any
single or partial exercise of any such power, right or privilege preclude other
or further exercise thereof or of any other right, power or privilege.  All rights and remedies existing hereunder
are cumulative to and not exclusive of, any rights or remedies otherwise available.

6.6           Obligations on
Business Days.  All payments,
disbursements and other obligations hereunder which are or would be required or
otherwise due on a day which is not a Business Day will be required or due on
the next succeeding Business Day.

[The
rest of this page intentionally left blank.]

 8

 

 

Subordinated Note

$600,000

IN
WITNESS WHEREOF, the undersigned has caused this Note to be executed by a duly
authorized officer as of the date first written above.

	
  COMPANY:

  	
  iPARTY RETAIL STORES CORP.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ SAL PERISANO

  
	
   

  	
  Name:

  	
  Sal Perisano

  
	
   

  	
  Title:

  	
  Chief Executive Officer

  
	
   

  	
   

  	
   

  
	
  ACCEPTED AND AGREED:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  NOTEHOLDER:

  	
  PARTY CITY CORPORATION

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ GREGG A. MELNICK

  
	
   

  	
  Name:

  	
  Gregg A. Melnick

  
	
   

  	
  Title:

  	
  Chief Financial Officer

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