**Exhibit 10.26**     THIS SECOND AMENDMENT AGREEMENT (this “Amendment”) is entered into as of June 23, 2005 by andamong, on the one hand, the financial institutions from time to time party to the Loan Agreementreferred to below as Lenders (the “Lenders”), Wells Fargo Retail Finance, LLC, as the arranger,collateral and administrative agent for the Lender Group and any other holder of Obligations (insuch capacity, “Agent”), and, on the other hand, Party City Corporation, a Delaware corporation(the “Borrower”).     *Introduction*     Borrower, the Lenders and the Agent have entered into a Loan and Security Agreement dated asof January 9, 2003, as previously amended by the First Amendment Agreement dated as of February 10,2005 (as so amended and otherwise amended to the date hereof, as amended hereby and as amended,restated, supplemented or otherwise modified from time to time hereafter, the “Loan Agreement”)pursuant to which the Lenders and the Agent have agreed to make revolving credit loans and toprovide other financial accommodations to Borrower.     Borrower desires to enter into a factoring arrangement with The CIT Group/ CommercialServices, Inc. (“CIT”) pursuant to which Borrower will sell to CIT certain Accounts owing toBorrower by certain of its franchisees in respect of Inventory sold by Borrower to such franchiseesin accordance with the term of the CIT Factoring Documents referred to below. Borrower hasrequested that the Loan Agreement be amended to permit and provide for such factoring arrangement,and the Agent and the Lenders have agreed to so amend the Loan Agreement on the terms andconditions set forth in this Amendment.     NOW, THEREFORE, in consideration of the foregoing and the mutual covenants herein contained,and for other good and valuable consideration, the receipt and sufficiency of which are herebyacknowledged, the parties signatory hereto agree as follows.     1. Definitions. Capitalized terms not otherwise defined herein shall have the respectivemeanings given such terms in the Loan Agreement.     2. Amendments to Loan Agreement.     (a) Section 1.1 of the Loan Agreement is hereby amended by inserting the following newdefinitions in the appropriate alphabetical order:     “Cash Management Activation Event” means the occurrence of either (a) a Default or Event ofDefault or (b) the Borrower’s failure to maintain Excess Availability of at least $5,000,000 at anytime.     “CIT” means The CIT Group/ Commercial Services, Inc.     “CIT Credit Decision Report” means the “Credit Decision Report” delivered by CIT to theBorrower.     “CITCredit Line Agreement” means the letter agreement dated as ofJune 20, 2005 by and betweenBorrower and CIT regarding “credit line customers”.     “CIT Factoring Documents” means, collectively, the CIT Credit Line Agreement, the CITFactoring Agreement, the CIT Intercreditor Agreement and all other material agreements anddocuments between Borrower and CIT executed in connection therewith.     “CITFactoring Agreement” means the Factoring Agreement dated as ofJune 20, 2005 by andbetween Borrower.     “CIT Factoring Receivables” means, at any date of determination, solely those amounts payableto Borrower by CIT under the CIT Factoring Agreement in respect of “Factor Risk Accounts” under,and as defined in, the CIT Factoring Agreement. For purposes of clarity, the term “CIT FactoringReceivables” excludes amounts in respect of Factored Accounts that are designated as “Client RiskAccounts” under, and as defined in, the CIT Factoring Agreement, including Accounts (or portionsthereof) as to which Credit Risk (as defined in the CIT Credit Line Agreement) is borne by Borrower pursuant to the terms of numbered paragraph 1 of the
 

 
CIT Credit Line Agreement. For purposes of determining the Borrowing Base and for all other purposesof this Agreement, as of any date of determination, the amount of CIT Factoring Receivables shallbe the amount of those Factored Accounts set forth on the most recent CIT Credit Decision Reportreceived by the Agent as being Factored Accounts for which CIT has assumed the Credit Risk (asdefined in the CIT Credit Line Agreement).     “CIT Intercreditor Agreement” means the letter agreement dated as of the date hereof by andamong CIT, Borrower and Agent with respect to intercreditor issues, such letter agreement in formand substance satisfactory to Agent.     “Factored Accounts” means Accounts owing to Borrower by its franchisees in respect ofInventory sold that are factored with CIT under the CIT Factoring Agreement. Factored Accounts donot include Accounts and other obligations owing to Borrower by its franchisees in respect ofroyalties, advertising funds or any other amounts under any franchise agreement between afranchisee and Borrower.     “Factoring Proceeds Account” means account number 4121132500 maintained by Borrower with WellsFargo.     “SecondAmendment Date” means June 20, 2005.     (b) Section 2.1(a) of the Loan Agreement is hereby amended by deleting such Section 2.1(a) inits entirety and inserting in lieu thereof the following new Section 2.1(a):     “(a) Subject to the terms and conditions of this Agreement, and during the term of thisAgreement, each Lender with a Revolver Commitment agrees (severally, not jointly or jointly andseverally) to make advances (“Advances”) to Borrower in an amount at any one time outstanding notto exceed such Lender’s Pro Rata Share of an amount equal to the lesser of (i) the Maximum RevolverAmount less the Availability Block less the Letter of Credit Usage, or (ii) the Borrowing Base lessthe Letter of Credit Usage and the aggregate amount of the Availability Reserves. For purposes ofthis Agreement, “Borrowing Base”, as of any date of determination, shall mean an amount equal tothe result of:     (A) the lesser of (i) 85% of the amount of Eligible Accounts less the amount, if any, of theDilution Reserve and (ii) $8,000,000,     plus     (B) the lesser of (i) up to 85% of the amount of CIT Factoring Receivables and (ii)$5,000,000; provided, however, that the amount set forth in this clause shall be $0 any time (x)after the occurrence and during the continuance of a default under the Factoring Agreement or (y)after Borrower delivers to, or receives from, CIT notice of termination of the Factoring Agreement,     plus     (C) (i) from August 1st through and including November 1st of each year, 90% of the Net RetailLiquidation Value of Eligible Inventory plus the lesser of (1) 90% of the Net Retail LiquidationValue of Eligible In-Transit Inventory and (2) $5,000,000, and     (ii) at all other times, 85% of the Net Retail Liquidation Value of the Eligible Inventoryplus the lesser of (1) 85% of the Net Retail Liquidation Value of Eligible In-Transit Inventory and(2) $5,000,000,     minus     (D) the Availability Block,     minus     (E) the aggregate amount of Reserves, if any, established by Agent under Section 2.1(b).”     (c) Section 2.5 of the Loan Agreement is hereby amended by deleting such Section 2.5 in itsentirety and inserting in lieu thereof the following new Section 2.5:
 

 
     “2.5. Overadvances.     (a) If, at any time or for any reason, the amount of Obligations (other than Bank ProductObligations) owed by Borrower to the Lender Group pursuant to Sections 2.1 and 2.12 is greater thaneither the Dollar or percentage limitations set forth in Sections 2.1 or 2.12, (an “Overadvance”),Borrower immediately shall pay to Agent, in cash, the amount of such excess, which amount shall beused by Agent to reduce the Obligations in accordance with the priorities set forth in Section2.4(b).     (b) If, at any time or for any reason, the amount of Advances made to Borrower by the LenderGroupin respect of Factoring Receivables is greater than either the Dollar or percentage limitationset forth in Section 2.1(a)(B) (a “Receivables Overadvance”), Borrower immediately shall pay toAgent, in cash, the amount of such excess, which amount shall be used by Agent to reduce theObligations in accordance with the priorities set forth in Section 2.4(b).     (c) In addition, Borrower hereby promises to pay the Obligations (including principal,interest, fees, costs, and expenses) in Dollars in full to the Lender Group as and when due andpayable under the terms of this Agreement and the other Loan Documents.”     (d) Section 2.7 of the Loan Agreement is hereby amended by adding the following new clause (f)at the end thereof:     “(f) Borrower shall cause all proceeds in respect of the Factored Accounts received from CITto be deposited directly into the Factoring Proceeds Account. Until the occurrence of a CashManagement Activation Event, the Borrower may transfer or disburse amounts in the FactoringProceeds Account directly to the Designated Account. From and after the occurrence of a CashManagement Activation Event, at the Agent’s election, all amounts on deposit in the FactoringProceeds Account in excess of any minimum balance required to be maintained therein, shall betransferred on a daily basis to the Agent’s Account. Borrower shall enter into a Cash ManagementAgreement with Wells Fargo and the Agent pursuant to which, among other things, the provisions ofthis Section 2.7(f) shall be effected.”     (e) Schedule 6.2 of the Loan Agreement is hereby amended to provide the following newreporting requirements:     (i) weekly and simultaneously with the Borrower’s delivery of the Borrowing Base Certificate,a copy of the CIT Credit Decision Report dated as of the immediately preceding Friday;     (ii) copies of all other reports, statements and other account information received byBorrower from CIT (whether in electronic or paper format) promptly upon Borrower’s receipt thereof;and     (iii) no later than the 15th day of each calendar month, a listing of any additionalfranchisees whose Accounts Borrower has begun factoring under the CIT Factoring Agreement duringthe preceding calendar month.     (f) Section 7.1 of the Loan Agreement is hereby amended by deleting such Section 7.1 in itsentirety and inserting in lieu thereof the following new Section 7.1:     “7.1. Indebtedness. Create, incur, assume, permit, guarantee, or otherwise become or remain,directly or indirectly, liable with respect to any Indebtedness, except:     (a) Indebtedness evidenced by this Agreement and the other Loan Documents, together withIndebtedness owed to Underlying Issuers with respect to Underlying Letters of Credit;     (b) Indebtedness set forth on Schedule 5.20 which schedule indicates whether such Indebtednessis secured;     (c) Permitted Purchase Money Indebtedness;     (d) refinancings, renewals, or extensions of Indebtedness permitted under clauses (b) and (c)of this Section 7.1 (and continuance or renewal of any Permitted Liens associated therewith) solong as: (i) the terms and conditions of such refinancings,
 

 
renewals, or extensions do not, inAgent’s reasonable judgment, materially impair the prospects of repayment of the Obligations byBorrower or materially impair Borrower’s creditworthiness, (ii) such refinancings, renewals, orextensions do not result in an increase in the principal amount of the Indebtedness so refinanced,renewed, or extended or add one or more of the Borrower as liable with respect thereto if suchadditional Borrower were not liable with respect to the original Indebtedness, (iii) suchrefinancings, renewals, or extensions do not result in a shortening of the average weightedmaturity of the Indebtedness so refinanced, renewed, or extended, nor are they on terms orconditions, that, taken as a whole, are materially more burdensome or restrictive to the Borrower,and (iv) if the Indebtedness that is refinanced, renewed, or extended was subordinated in right ofpayment to the Obligations, then the terms and conditions of the refinancing, renewal, or extensionIndebtedness must be include subordination terms and conditions that are at least as favorable tothe Lender Group as those that were applicable to the refinanced, renewed, or extendedIndebtedness;     (e) Indebtedness composing Permitted Investments;     (f) Indebtedness arising in connection with Permitted Acquisitions in an amount not to exceed$10,000,000 in any fiscal year;     (g) Indebtedness to CIT arising under the CIT Factoring Agreement;     (h) Unsecured Indebtedness on account of Hedge Agreements; and     (i) Unsecured Indebtedness not otherwise permitted in this Section not to exceed $15,000,000in the aggregate at any one time outstanding.”     (g) Section 7.2 of the Loan Agreement is hereby amended by deleting such Section 7.2 in itsentirety and inserting in lieu thereof the following new Section 7.2:     “7.2 Liens. Create, incur, assume, or permit to exist, directly or indirectly, any Lien on orwith respect to any of its assets, of any kind, whether now owned or hereafter acquired, or anyincome or profits therefrom, except for (a) Permitted Liens (including Liens that are replacementsof Permitted Liens to the extent that the original Indebtedness is refinanced, renewed, or extendedunder Section 7.1(d) and so long as the replacement Liens only encumber those assets that securedthe refinanced, renewed, or extended Indebtedness), (b) Liens referenced in Section 3.2(b) hereofwhose existence in the amounts set forth in such Section (plus accrued interest) will not be anEvent of Default under this section unless and until the Borrower fails to satisfy the conditionsset forth therein, and (c) the Liens of CIT on the Factored Accounts (and the proceeds andsupporting obligations thereof) as more fully described in Section 11 of the CIT FactoringAgreement.”     (h) Section 7.4 of the Loan Agreement is hereby amended by deleting such Section 7.4 in itsentirety and inserting in lieu thereof the following new Section 7.4:     “7.4 Disposal of Assets. Other than (a) Permitted Dispositions, (b) dispositions of FactoredAccounts made in accordance with the provisions of this Agreement and (c) store closingsconsummated in accordance with Section 7.15 hereof, convey, sell, lease, license, assign, transfer,or otherwise dispose of any of the assets of the Borrower.”     (i) Article 7 of the Loan Agreement is hereby amended by adding the following new Section 7.22thereto:     “7.22 Factored Accounts.     (a) Sell, assign, factor or otherwise transfer any Accounts other than those that are owing byBorrower’s franchisees listed on Schedule A to the CIT Factoring Agreement as in effect on theSecond Amendment Date and that have been designated as “Factor Risk Accounts” under the CITFactoring Agreement; provided, however, that Borrower may factor additional Accounts with CIT underthe CIT Factoring Agreement so long as no later than the 15th day of each calendar month, Borrower provides the Agent with a listing of any additional franchiseeswhose Accounts Borrower has begun factoring under the CIT Factoring Agreement during the precedingcalendar month. In no event may Borrower sell, assign, factor or otherwise transfer any Accountsowing from a franchisee that is not designated as a “Credit Line Customer” under the CIT FactoringAgreement.     (b) Amend or otherwise modify (i) the CIT Credit Line Agreement to change numbered paragraph 1thereof or (ii) the CIT Factoring Agreement to change (A) the definitions of “Account”, “ClientRisk Account”, “Credit Risk”, “Factor Risk Account”
 

 
or “Purchase Price” or (B) the provisions ofsection 1 (Sale of Accounts), section 3 (Invoicing), section 4 (Representations and Warranties),sections 8.2 and 8.3 (Charge Backs), section 11 (Grant of Security Interest), section 12(Obligations Secured), section 14 (Interest) and section 15 (Factoring Fees and Other Charges), ineach case in a manner that is adverse to the interests of the Lender Group, as determined by theAgent in its Permitted Discretion.”     (j) Exhibit B-1 (Borrowing Base Certificate) of the Loan Agreement is hereby amended bydeleting such Exhibit B-1 in its entirety and substituting therefor the Exhibit B-1 attached tothis Amendment.     3. Conditions Precedent to Amendment. The satisfaction of each of the following, unlesswaived or deferred by the Agent in its Permitted Discretion, shall constitute conditions precedentto the effectiveness of this Amendment.     (a) The Agent shall have received:     (i) this Amendment executed by Borrower, the Agent and all of the Lenders and in full forceand effect; and     (ii) copies of all of the fully executed CIT Factoring Documents, such copies to be attachedhereto as Exhibit A.     (b) The representations and warranties in the Loan Agreement and the other Loan Documentsshall be true and correct in all material respects on and as of the date hereof, as though made onsuch date (except to the extent that such representations and warranties relate solely to anearlier date).     (c) No Default or Event of Default shall have occurred and be continuing on the date hereof,nor shall any Default or Event of Default result from the consummation of the transactionscontemplated herein.     (d) No injunction, writ, restraining order, or other order of any nature prohibiting, directlyor indirectly, the consummation of the transactions contemplated herein or by the Loan Documentsshall have been issued and remain in force by any Governmental Authority against Borrower, theAgent or any Lender.     4. Conditions Subsequent. Within 30 days after the date of this Amendment, Agent shall havereceived a Cash Management Agreement with respect to the Factoring Proceeds Account in form andsubstance satisfactory to Agent, such Cash Management Agreement to be fully executed by all partiesthereto and in full force and effect. Borrower’s failure to comply with this Section 4 shallconstitute an Event of Default.     5. Representations and Warranties. Borrower hereby represents and warrants to the Agent that:     (a) the execution, delivery, and performance of this Amendment, the Loan Agreement and theother Loan Documents are within Borrower’s corporate powers, have been duly authorized by allnecessary corporate action, and are not in contravention of any law, rule, or regulation, or anyorder, judgment, decree, writ or injunction, or award of any arbitrator, court, or GovernmentalAuthority, or of the terms of its charter, bylaws or other operative or formative documents, or ofany contract or undertaking to which it is a party or by which any of its properties may be boundor affected;     (b) this Amendment has been duly executed and delivered by Borrower;     (c) this Amendment, the Loan Agreement and the other Loan Documents constitute Borrower’slegal, valid, and binding obligation, enforceable against Borrower in accordance with theirrespective terms;     (d) Borrower is in compliance with all of the terms and provisions set forth in the LoanAgreement and each of the other Loan Documents, each as previously amended and as amended hereby,on its part to be observed or performed on or prior to the date hereof;     (e) Attached hereto as Exhibit A are true, correct and complete copies of all of the CITFactoring Documents, and such CIT Factoring Documents set forth the complete agreement (whetheroral or written, including all side letters and agreements) between CIT and Borrower;     (f) no Default or Event of Default has occurred and is continuing; and
 

 
     (g) since December 31, 2004, no Material Adverse Change has occurred.     6. Choice of Law. The validity of this Amendment, its construction, interpretation andenforcement, and the rights of the parties hereunder, shall be determined under, governed by, andconstrued in accordance with the laws of the State of New York.     7. Counterparts; Telefacsimile Execution. This Amendment may be executed in any number ofcounterparts and by different parties in separate counterparts, each of which when so executed anddelivered, shall be deemed an original, and all of which, when taken together, shall constitute oneand the same instrument. Delivery of an executed counterpart of a signature page to this Amendmentby telefacsimile shall be as effective as delivery of a manually executed counterpart of thisAmendment. Any party delivering an executed counterpart of this Amendment by telefacsimile alsoshall deliver a manually executed counterpart of this Amendment but the failure to deliver amanually executed counterpart shall not affect the validity, enforceability, and binding effect ofthis Amendment.     8. Reaffirmation. Borrower further reaffirms all of its obligations under the Loan Agreementand the other Loan Documents.     9. Effect on Loan Agreement. The execution, delivery, and performance of this Amendment shallnot operate as a waiver of or, except as expressly provided herein, as an amendment of, any right,power, or remedy of the Agent or any Lender under the Loan Agreement. Except to the extentexpressly amended hereby, the Loan Agreement and all other Loan Documents shall be unaffectedhereby, shall continue in full force and effect, are hereby in all respects ratified and confirmed,and shall constitute the legal, valid, binding and enforceable obligations of Borrower to theLenders and the Agent.     10. Further Assurances. Borrower shall execute and deliver all agreements, documents, andinstruments, in form and substance satisfactory to Agent, and take all actions as Agent mayreasonably request from time to time, to perfect and maintain the perfection and priority of thesecurity interest in the Collateral held by Agent and to fully consummate the transactionscontemplated under this Amendment and the Loan Agreement.     11. Miscellaneous. Upon and after the effectiveness of this Amendment, each reference in theLoan Agreement to “this Agreement”, “hereunder”, “herein”, “hereof” or words of like importreferring to the Loan Agreement, and each reference in the other Loan Documents to “the LoanAgreement”, “thereunder”, “therein”, “thereof”, or words of like import referring to the LoanAgreement, shall mean and be a reference to the Loan Agreement as amended hereby.     [The remainder of this page is intentionally left blank.]
 

 
     IN WITNESS WHEREOF, the parties have entered into this Amendment as of the date first abovewritten.           PARTY CITY CORPORATION           By:/s/ GREGG A. MELNICK                                                                            Gregg Melnick     Chief Financial Officer           WELLS FARGO RETAIL FINANCE, LLC,     as Agent and as a Lender           By:/s/ LYNN S. WHITMORE                                                                            Lynn S. Whitmore     Vice President           FLEET RETAIL FINANCE, INC.,     as a Lender           By:/s/ CHRISTINE HUTCHINSON                                                                            Christine HutchinsonVice President