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As of July 31, 2013

 

IM Brands, LLC
475 Tenth Avenue
New York, New York 10018

 

Ladies and Gentlemen:

 

We are pleased to advise that Bank Hapoalim B.M. (the “Bank”) has agreed,
subject to the conditions set forth below, to extend a term loan (the “Term
Loan”) to IM Brands, LLC, a Delaware limited liability company (the “Borrower”),
in the maximum principal amount of THIRTEEN MILLION AND 00/100 DOLLARS
($13,000,000.00) (the “Term Loan”).

 

The Term Loan (1) shall be evidenced by a Promissory Note dated as of the date
hereof executed by Borrower in favor of the Bank in the amount of $13,000,000.00
(the Promissory Note, together with any riders referred to in paragraph 3
thereto, as each may be amended, restated, supplemented or otherwise modified
from time to time, shall collectively be referred to as the “Promissory Note”),
(2) shall mature on July 1, 2018, and (3) shall be repaid by Borrower in
accordance with the terms and conditions of the Promissory Note.

 

1177 Avenue of the Americas, New York, New York 10036-2790

www.bhiusa.com

 

 

 

  

1.          Conditions Precedent

 

The effectiveness of the Term Loan is subject to the satisfaction, in the Bank’s
sole discretion, of the following conditions: (a) the Bank’s receipt of such
documentation as it may request, including without limitation, the following,
each in form and substance satisfactory to the Bank in all respects: (i) this
Letter Agreement duly executed by the Borrower; (ii) the Promissory Note; (iii)
(A) a Security Agreement executed by Borrower in favor of the Bank (as amended,
restated, supplemented or otherwise modified from time to time, the “Asset
Security Agreement”) and (B) an Intellectual Property Security Agreement
executed by Borrower in favor of the Bank (as amended, restated, supplemented or
otherwise modified from time to time, the “IP Security Agreement”; the Security
Agreement and the IP Security Agreement shall be collectively referred to herein
as the “Security Agreement”); (iv) a guaranty to perform the obligations of
Borrower to the Bank executed on behalf of Xcel Brands, Inc. (“Guarantor”); (v)
a Pledge Agreement executed by Guarantor (as amended, restated, supplemented or
otherwise modified from time to time, the “Pledge Agreement”); (vi) an opinion
of the Borrower’s and Guarantor’s legal counsel, covering such issues as the
Bank may reasonably request; (vii)a resolution by Borrower’s Manager approving
and authorizing the execution, delivery and performance of the Loan Documents
(as defined below) and any transaction contemplated thereby as well as the
incumbency and signatures of those authorized to sign and act with respect to
the Loan Documents; (viii) a letter of direction from Borrower to the Bank with
respect to the disbursements of the proceeds of the Term Loan; (ix) a
subordination agreement in favor of the Bank with respect to the indebtedness
and obligations of Borrower and Guarantor to IM Ready-Made, LLC; and (x) any
other documents as the Bank may reasonably require; (b) the Borrower’s entering
into such various collateral, security and/or control documents designed to
create and perfect the Bank’s security interest in certain assets of Borrower
and any other documents or instruments related thereto as required by the Bank
and its counsel; (c) certified copies of UCC, intellectual property, tax lien
and judgment searches or other evidence satisfactory to Lender, listing all
effective financing statements which name Borrower(under present name, any
previous name or any trade or doing business name) as debtor and covering all
jurisdictions requested by the Bank, together with copies of such other
financing statements and recordations; (d) the Bank’s receipt of a current
appraisal of the Borrower’s Trademarks (as such term is defined in the IP
Security Agreement) conducted at the Borrower’s expense (except as respects
$5,000 of such expense which will be paid by the Bank), in form and substance
acceptable to the Bank and performed by a firm acceptable to the Bank; (e) the
Bank shall have received a fully executed payoff letter satisfactory to Lender
confirming (i) the amount of all obligations owing by Borrower and Guarantor to
Midmarket Capital Partners LLC, Great American Life Insurance Company and Great
American Insurance Company will be repaid in full from the proceeds of the Term
Loan, (ii) that all liens and security interests upon any property of Borrower
and Guarantor shall be terminated immediately upon receipt of such payment by
such parties; (f) the Bank’s receipt of a field examination with respect to the
business and assets of Borrower performed by a field examiner acceptable to the
Bank with results satisfactory to the Bank; (g) the Bank’s receipt of a copy of
a life insurance policy insuring the life of Isaac Mizrahi for an amount at
least equal to $15,000,000 naming Borrower as the beneficiary thereof together
with a collateral assignment of the proceeds of such life insurance policy in
the favor of the Bank; (h) Borrower shall have furnished the Bank (i) a summary
of all of the Borrower’s existing insurance coverage and (ii) evidence
acceptable to the Bank that the insurance policies required by Section 4(s)
hereof have been obtained and are in full force and effect (and, if requested by
the Bank, copies of such policies); (i) the Bank shall have received (i)
satisfactory evidence that Borrower and Guarantor have obtained all required
consents and approvals of all persons and entities including all requisite
governmental authorities, to the execution, delivery and performance of this
Agreement and the other Loan Documents or (ii) an officer’s certificate in form
and substance reasonably satisfactory to the Bank affirming that no such
consents or approvals are required; (j) the Bank shall have completed its
business and legal due diligence, including agreements relating to the Trademark
Licenses with results satisfactory to the Bank; (k) payment to the Bank of a
commitment fee in the amount of $60,000.00 less up to a $35,000 credit against
fees paid to HSBC, such payment to be made from the proceeds of the Term Loan;
and (l) the Liabilities shall not exceed forty percent (40%) of the current fair
market value of the Borrower’s Trademarks or sixty percent (60%) of the current
orderly liquidation value of the Borrower’s Trademarks, as such values are set
forth in the most recent appraisal acceptable to the Bank of the Borrower’s
Trademarks, as prepared by an independent appraisal firm acceptable to the Bank.

 

This Letter Agreement, the Promissory Note, the Security Agreement, the
Guaranty, the Pledge Agreement, any Rate Contract between Borrower and Bank or
an affiliate of Bank and any documents or instruments entered into in connection
with any of the foregoing shall be referred to herein as the “Loan Documents”.

 

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2.          Representations and Warranties

 

In order to induce the Bank to enter into this Letter Agreement and to make
available the Term Loan provided for herein, Borrower makes the following
representations and warranties to the Bank, all of which shall survive the
execution and delivery of the Loan Documents: (a) Organization, Good Standing
and Due Qualification. Borrower is a limited liability company duly organized
and existing under the laws of the State of Delaware and has the full power,
authority and legal right to own its assets and conduct its business as it is
now being conducted. (b) Company Power and Authority. Borrower has the requisite
power and authority to execute, deliver and carry out the terms of the Loan
Documents and has taken all necessary limited liability company action to
authorize the execution, delivery and performance of the Loan Documents. Each of
the Loan Documents constitutes its legal, valid and binding obligation
enforceable in accordance with its terms, except to the extent that
enforceability of any such Loan Document may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditors’ rights generally or limiting the right
of specific performance. The execution and delivery of, the performance of its
obligations under, and compliance with the provisions of the Loan Documents by
Borrower will not: (i) contravene any existing applicable law, statute, rule or
regulation or any judgment decree or permit to which Borrower is subject, the
contravention of which would have a material adverse effect on the Borrower’s
operations; (ii) conflict with, or result in any breach of any of the terms of,
or constitute a default under, any material agreement or other instrument to
which Borrower is a party or is subject or by which it or any of its property is
bound; (iii) contravene or conflict with any provisions of the Borrower’s
Certificate of Formation and Limited Liability Company Agreement; or (iv) result
in the creation or imposition of, or oblige Borrower to create, any lien or
encumbrance on the Borrower’s assets, rights or revenues, except as provided for
in the Loan Documents. (c) Litigation. No litigation, arbitration or
administrative proceeding is pending or, to the knowledge of Borrower and its
respective officers, threatened against Borrower or any other person or entity
affiliated with Borrower, which could have a material adverse effect on the
Borrower’s Trademarks or the business, assets or financial condition of Borrower
or any other person or entity affiliated with Borrower, except as specifically
set forth on Schedule I hereto. (d) Disputes. There is not in existence nor to
the Borrower’s knowledge is there likely to occur any dispute with any
governmental or other authority or any other dispute of any kind which in any
such case may materially adversely affect it or its business or assets. (e)
Undisclosed Obligations. Except as set forth in on Schedule II hereto, there are
no liabilities of any person of any kind, whether accrued, contingent, absolute,
determined, determinable or otherwise, which could reasonably be expected to
result in a material adverse effect, and there is no existing condition,
situation or set of circumstances which could reasonably be expected to result
in such a liability, other than liabilities under the Loan Documents. (f)
Immunity. To the knowledge of the Borrower, neither Borrower nor any of its
assets is entitled to immunity on the grounds of sovereignty or otherwise from
any legal action or proceeding (which shall include, without limitation, suit,
attachment prior to judgment, execution or other enforcement). (g) Consents,
Approvals. Every consent, authorization, license or approval of, or registration
with or declaration to, governmental or public bodies or authorities or courts
required by Borrower to authorize, or required by Borrower in connection with
the execution, delivery, validity, enforceability or admissibility in evidence
of the Loan Documents or the performance by Borrower of its obligations under
the Loan Documents has been obtained or made and is in full force and effect and
there has been no default in the observance of the conditions or restrictions
(if any) imposed in, or in connection with, any of the same. (h) Investment
Company. Borrower is not an “investment company” or a company controlled by an
“investment company”, within the meaning of the Investment Company Act of 1940,
as amended. Borrower is not subject to regulation under any federal or state
statute or regulations that limit its ability to incur any indebtedness. (i)
Margin Stock. Borrower is not engaged principally in the business of extending
credit for the purpose of purchasing or carrying any “Margin Stock” as defined
in Regulation U, and no part of the proceeds of any Extension of Credit will be
used in a manner that would result in the Extensions of Credit being deemed to
be a “purpose credit” under Regulation U of the Federal Reserve Board, as the
same may at any time be amended or modified and in effect. (j) No Default.
Borrower is not, nor would it be with the giving of notice or lapse of time, in
breach of or in default under any agreement relating to indebtedness to which it
is a party or by which it may be bound or under any material agreement binding
upon it which could reasonably be expected to have a material adverse effect on
the Borrower’s business assets or financial condition. (k) Security Documents.
The Security Agreement is effective to create in favor of the Bank a legal,
valid and enforceable security interest in the collateral as defined and
qualified therein. (l) Subsidiaries. Set forth on Schedule III is a true and
complete list of all of the Subsidiaries of the Borrower, together with, for
each such Subsidiary, (i) the jurisdiction of organization of such Subsidiary,
(ii) each Person holding ownership interests in such Subsidiary and (iii) the
nature of the ownership interests held by each such Person and the percentage of
ownership of such Subsidiary represented by such ownership interests. (m)
Financial Statements. The audited consolidated financial statement of Guarantor
and its Subsidiaries for the fiscal year ending December 31, 2012 and the most
recent annual balance sheets of Guarantor and its Subsidiaries, together (in
each case) with the related statements of income and the related notes and
supplemental information delivered to the Bank, have been prepared in accordance
with GAAP in effect as of such date consistently applied, except as otherwise
indicated in the notes to such financial statements. All of such financial
statements fairly present the financial position or the results of operations of
Guarantor and its Subsidiaries at the dates or for the periods indicated, and
reflect all known liabilities, contingent or otherwise, that GAAP requires, as
of such dates, to be shown or reserved against. (n) Intellectual Property.
Schedules A and B to the IP Security Agreement contain a true, correct and
complete list of all of the Borrower’s registered Copyrights, registered
Trademarks and Revenue Licenses. (o) License Agreements. Borrower has provided
to the Bank true, correct and complete copies of each Revenue License, including
all material amendments, schedules, exhibits and other attachments thereto, all
conditions to the effectiveness of each Revenue License have been satisfied on
or prior to the date hereof, and to the knowledge of Borrower no material
defaults exist with respect to any of the Revenue Licenses except as disclosed
to the Bank on Schedule IV hereto.

 

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3.          Financial Reporting Requirements

 

(a)          Borrower and Guarantor each hereby agrees that, so long as the Term
Loan remains in effect and any amount is due and owing to Bank thereunder, it
shall submit to the following reporting requirements:

 

(i)          Annual Financial Statements.  Furnish to Bank within one hundred
and twenty (120) days after the close of each fiscal year of Guarantor, a copy
of the audited financial statement of Guarantor on a Consolidated Basis and, to
the extent Guarantor has any Subsidiary other than the Borrower, consolidating
balance sheets as at the end of such fiscal year and statements of income and of
cash flows for such fiscal year, prepared by CohnReznick LLP or other
independent certified public accountants of nationally recognized standing
reasonably acceptable to the Bank.

 

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(ii)         Quarterly Financial Statements.  As soon as available and in any
event within forty five (45) days after the end of each of the first three
quarterly periods of each fiscal year of Guarantor, a copy of internally
prepared financial statement of Guarantor on a Consolidated Basis and, to the
extent Guarantor has any Subsidiary other than Borrower, consolidating balance
sheets as of the end of such quarter and the related statements of income and of
cash flows for such quarter and the portion of the fiscal year through the end
of such quarter, setting forth in each case in comparative form the figures as
of the end of and for the corresponding period in the previous year (subject to
normal year-end audit adjustments).

 

(iii)        Covenant Compliance Certificate. Simultaneously with the delivery
of each set of financial statements referred to in clause (a)(i) and (a)(ii) of
this Section 3, provide a covenant compliance certificate of an authorized
officer or Manager of Borrower substantially in the form of Exhibit A hereto and
otherwise in form and substance satisfactory to the Bank in all respects.

 

(iv)        Royalty Collections Reports. Borrower shall furnish to the Bank
within forty-five (45) days after the close of each calendar quarter a copy of
its Quarterly Royalty Collections Report showing actual royalties billed and
collected in the period covered thereby and setting forth the GMR for such
period. For purposes of this Letter Agreement, the term “Quarterly Royalty
Collections Report” shall mean a report substantially in the form of Exhibit B
hereto and “GMR” shall mean guaranteed minimum royalties.

 

(b)          Borrower further agrees that, so long as the Term Loan remains in
effect and any amount is due and owing to Bank thereunder:

 

(i)          Complete Statements. All financial statements required pursuant to
paragraphs (a)(i) and (a)(ii) of this Section 3 shall be complete and correct in
all material respects and shall be prepared in reasonable detail and in
accordance with GAAP applied consistently throughout the periods reflected
therein except with respect to interim financial statements the absence of
footnotes and subject to year-end adjustments.

 

(ii)         Fiscal Year. The fiscal year of Guarantor and Borrower shall
conclude on December 31st of each year.

 

4.          Financial and Other Covenants

 

Borrower and Guarantor hereby agree that, so long as the Term Loan remains in
effect and any amount is due and owing to Bank thereunder, Borrower and
Guarantor shall submit to the following requirements:

 

(a)          Minimum Net Worth. Net Worth shall not be less than $22,500,000.00
at the end of any fiscal quarter.

 

(b)          Minimum Liquid Assets. Liquid Assets shall be at least $2,000,000
at all times.

 

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(c)          Fixed Charge Coverage Ratio. The Fixed Charge Ratio at the end of
each fiscal quarter for the twelve fiscal month period ending on such fiscal
quarter shall not be less than 1.20 to 1.00.

 

(d)          Capital Expenditures. Capital Expenditures in any fiscal year shall
not exceed the greater of (i) $1,000,000 or (ii) $1,000,000 plus an amount equal
to (A) the Royalty Revenues Amount minus $15,000,000 times (B) ten percent
(10%).

 

(e)          Financial Information. Borrower and Guarantor shall (i) provide the
Bank with such financial and other information concerning Guarantor, Borrower
and their affairs, as the Bank may from time to time reasonably request, (ii)
promptly inform the Bank of any occurrence of which it becomes aware which might
adversely affect its ability to perform its obligations under the Loan Documents
and of any default under the Loan Documents forthwith upon becoming aware
thereof, and (iii) promptly inform the Bank of any threatened litigation or
administrative or arbitration proceedings before or of any court, tribunal,
arbitrator of other relevant authority that may be Material to Borrower or
affect a Material part of the Borrower’s assets.

 

(f)          Consents; Taxes. Borrower and Guarantor shall (i) obtain or cause
to be obtained, maintain in full force and effect and comply in all material
respects with the conditions and restrictions (if any) imposed in, or in
connection with, every material consent, authorization, material license or
approval of governmental or public bodies or authorities or courts and do, or
cause to be done, all other acts and things, which may from time to time be
necessary or desirable under applicable law for the continued due performance of
all its obligations under the Loan Documents; (ii) comply in all material
respects with all applicable laws, rules, regulations and orders of any
governmental agency having jurisdiction over Borrower or Guarantor; (iii) pay to
the appropriate governmental authorities when due, all Federal, state, local and
other Taxes required to be paid or deposited by Borrower or Guarantor, except
that Borrower or Guarantor may defer any such payment while Borrower or
Guarantor is diligently contesting the respective Taxes in good faith by
appropriate proceedings, but any such deferment shall not extend beyond the time
when such unpaid Taxes would become a lien upon any of Borrower’s or Guarantor’s
assets. Borrower will furnish the Bank promptly at the Bank’s request with
evidence satisfactory to the Bank establishing payment of such Taxes,
assessments and contributions. In the Bank’s discretion, the Bank shall have the
right (but shall not be obligated) to pay any such Tax, assessment or
contribution (including any interest or penalties thereon) for Borrower’s or
Guarantor’s benefit in the event Borrower or Guarantor shall fail timely to do
so and provided the non-payment of such Tax will result in a lien or security
interest encumbering the assets which will be prior to the lien and security
interest held by the Bank; any such payment shall be deemed an advance hereunder
bearing interest at the Loan Rate (as such term is defined in the Promissory
Note) and payable in the manner specified therein. Borrower shall, promptly on
demand, reimburse the Bank for any such payment and any costs and expenses
(including reasonable attorneys’ fees) which the Bank may incur in connection
therewith. Notwithstanding anything in any of the Loan Documents to the
contrary, Borrower and Guarantor shall furnish to the Bank within twenty (20)
days of when filed copies of its annual tax returns as filed with the applicable
taxing authority, and to the extent that Borrower or Guarantor fails to file its
annual Federal tax return with the United States Internal Revenue Service by the
March 15th deadline, Borrower and Guarantor shall furnish to the Bank no later
than three (3) Business Days after such deadline a copy of Borrower’s and
Guarantor’s properly filed extension request.

 

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(g)          Company Existence. Borrower will maintain its existence as a
limited liability company and carry on its business in substantially the same
manner and in substantially the same fields as such business is now carried on
and maintained. Guarantor will maintain its existence as a corporation and carry
on its business in substantially the same manner and in substantially the same
fields as such business is now carried on and maintained.

 

(h)          Encumbrances. Borrower shall not create, effect or permit to exist
any Encumbrance over all or any part of its assets except for (i) liens for
taxes not yet due or that are being contested in good faith by appropriate
proceedings, provided that adequate reserves with respect thereto are maintained
on the books of Borrower or Guarantor in conformity with GAAP; (ii) carriers’,
warehousemen’s, mechanics’, materialmen’s, repairmen’s or other like liens
arising in the ordinary course of business; (iii) pledges or deposits in
connection with workers’ compensation, unemployment insurance and other social
security legislation; (iv) deposits to secure the performance of bids, trade
contracts (other than for borrowed money), leases, statutory obligations, surety
and appeal bonds, performance bonds and other obligations of a like nature
incurred in the ordinary course of business; (v) easements, rights-of-way,
restrictions and other similar encumbrances incurred in the ordinary course of
business that do not materially interfere with the ordinary conduct of the
business of Borrower or Guarantor; (vi) liens in existence on the date hereof
listed on Schedule IV hereto, provided that no such lien is spread to cover any
additional property after the date hereof and that the amount of indebtedness
secured thereby is not increased; (vii) liens securing indebtedness of Borrower
or Guarantor incurred to finance the acquisition of fixed or capital assets,
provided that (x) such liens shall be created substantially simultaneously with
the acquisition of such fixed or capital assets, (y) such liens do not at any
time encumber any property other than the property financed by such indebtedness
and (z) the amount of indebtedness secured thereby is not increased; (viii)
liens created pursuant to the Security Agreement and the Pledge Agreement; (ix)
any interest or title of a lessor under any lease entered into by Guarantor,
Borrower or any other Subsidiary in the ordinary course of its business and
covering only the assets so leased; and (x) the interests of non-exclusive
licensees under license agreements entered into in the ordinary course of
business. Guarantor shall not create, effect or permit to exist any Encumbrance
over all or any part of any of its assets pledged as collateral security for the
Liabilities.

 

(i)          Indebtedness. Neither Borrower nor Guarantor shall incur, create,
assume, become or be liable in any manner with respect to, or permit to exist,
any indebtedness for borrowed money, reimbursement or payment obligations or any
obligation evidenced by notes, bonds, debentures or similar instruments other
than (a) pursuant to the Loan Documents; (b) indebtedness to Guarantor or any of
its Subsidiaries; provided that any such indebtedness to Guarantor or any of its
Subsidiaries shall be subordinated to the Liabilities on terms and conditions
reasonably satisfactory to the Bank; (c) indebtedness (including, without
limitation, capital lease obligations) secured by liens permitted by clause
(vii) of Section 4(h) in an aggregate principal amount not to exceed $750,000 at
any one time outstanding; (d) indebtedness outstanding on the date hereof and
listed on Schedule II hereto and any refinancings, refundings, renewals or
extensions thereof (without any increase in the principal amount thereof and any
shortening of the maturity of any principal amount thereof) except that Borrower
and Guarantor may amend the indebtedness listed on Schedule II to (i) modify the
manner, calculations or mechanics by which amounts thereunder are payable in
capital stock of Guarantor and (ii) extend the maturity of all or any portion of
the indebtedness evidenced thereby; (e) guarantee obligations with respect to
the obligations of Guarantor under the Agreement of Lease with Adler Holding
III, LLC; (f) unsecured indebtedness not to exceed $500,000 in the aggregate at
any time outstanding; (g) indebtedness under Rate Contracts entered in the
ordinary course of business in order to mitigate interest rate, currency or
similar risks and not for speculative purposes with respect to the Term Loan;
and (h) guarantee obligations of Guarantor with respect to the obligations of
any Subsidiary of Guarantor.

 

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(j)          No Merger. Neither Borrower nor Guarantor shall merge or
consolidate with any other Person, acquire all or substantially all of the
assets or Stock of any Person except (a) any Subsidiary of Borrower may be
merged or consolidated with or into Borrower provided Borrower shall be the
continuing or surviving entity; (b) any Subsidiary of Borrower may dispose of
any or all of its assets (upon voluntary liquidation or otherwise) to Borrower;
(c) any Subsidiary of Guarantor (other than Borrower) may be merged or
consolidated with or into Guarantor provided Guarantor shall be the continuing
or surviving entity; (d) any Subsidiary of Guarantor (other than Borrower) may
dispose of any or all of its assets (upon voluntary liquidation or otherwise) to
Guarantor; (e) as otherwise expressly permitted pursuant to the terms of the
Promissory Note; and (f) Guarantor may acquire the assets or stock of any Person
provided that such acquisition is not financed in whole or in part from any
distributions, loans or other assets of Borrower or any Subsidiary of Borrower.

 

(k)          Dispositions. Borrower shall not sell, transfer, lend or otherwise
dispose of or cease to exercise direct control over any part of its assets,
undertakings or revenues which, in the commercially reasonably opinion of the
Bank, is material, other than (a) dispositions of obsolete, worn out or damaged
equipment not used in the Borrower’s business; (b) as permitted pursuant to the
terms of the IP Security Agreement; (c) the sale of inventory in the ordinary
course of business; (d) dispositions permitted by clause (b) of Section 4(j);
(e) the disposition of any or all of the assets of Borrower to any of its
Subsidiaries; (f) the disposition of other assets having a fair market value not
to exceed $750,000 in the aggregate for any of the Borrower’s fiscal years; (g)
any settlement of or payment in respect of any property or casualty insurance
claim or any condemnation proceeding relating to any property of Borrower,
Guarantor or any of their respective Subsidiaries if such property is Collateral
(as defined in the Security Agreement or the Pledge Agreement); and (h)
non-exclusive licenses of intellectual property in the ordinary course of
business. Guarantor shall not sell, transfer or otherwise dispose of any of its
ownership interest in Borrower.

 

(l)          Affiliate Transactions. None of Borrower, Guarantor nor any of
their respective subsidiaries shall enter into any transaction with any of its
affiliates, unless such transaction is on terms not materially less favorable
than if the transaction had been negotiated in good faith on an arm’s length
basis with a non-affiliate, provided, however, that Borrower may enter into and
perform its obligations under the Management Agreement dated as of September 29,
2011 between Borrower and Guarantor.

 

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(m)          Distributions. Borrower shall not declare or pay any dividends on
or make any other distribution with respect to any equity interests, except
that: (i) any Subsidiary of Borrower may make such payments to Borrower; (ii)
Borrower may make such payments to Guarantor in order to permit Guarantor to
make Capital Expenditures and pay overhead, employment cost and expenses and
similar expenses to the extent incurred in connection with the operation of the
business of Borrower and the Borrower’s Subsidiaries; provided, however, that
(x) such expenses shall not include interest expense of Guarantor, scheduled
payments of principal on funded debt of Guarantor or capital expenditures of
Guarantor and (y) to the extent Guarantor has any Subsidiary other than
Borrower, any such expenses which do not relate exclusively to the business and
operations of Borrower and the Borrower’s Subsidiaries or any such other
Subsidiary shall be allocated ratably among Borrower and each such other
Subsidiary and Borrower shall only make such payments to Guarantor in an amount
equal to its ratable share of such expenses and any such expenses which relate
directly to the operations of such other Subsidiary shall be paid directly or
indirectly by such other Subsidiary (such distributions, the “Expense
Distributions”); (iii) Borrower may make such payments to Guarantor in an amount
equal to the estimated federal, state and local tax liability of Guarantor
resulting from any taxable income (net of all losses, including for prior years
to the extent permitted to be deducted) of the Borrower, which such distribution
may be made on a quarterly basis not more than five (5) business days prior to
the date on which any quarterly estimated tax payment is payable by Guarantor;
provided, however, that, upon determination of the actual tax liability of
Guarantor with respect to the taxable income of Borrower for any tax year, the
next quarterly estimated payment shall be increased or reduced by the difference
between the estimated payments made during such tax year and such actual tax
liability (such distributions, the “Tax Distributions”); and (iv) subject to
compliance with Section 4(n), Borrower may make distributions on or after
January 1, 2015, in an amount not to exceed eighty percent (80%) of Excess Cash
Flow.

 

(n)          Cash Flow Recapture. On and after January 1, 2015, prior to
Borrower making any distribution as permitted hereunder other than Expense
Distributions and Tax Distributions, Borrower shall prepay the outstanding
amount of the Term Loan from Excess Cash Flow for the prior fiscal year in an
amount equal to twenty percent (20%) of such Excess Cash Flow (the “Cash Flow
Recapture Requirement”). Such payments received by the Bank in accordance with
this provision shall be applied by the Bank to the principal amount of the Term
Loan in the reverse order of maturity.

 

(o)          Bank Accounts. Within sixty (60) days of the date hereof Borrower
shall have established its primary operating bank accounts at the Bank, and
thereafter Borrower shall, during the term hereof, maintain its primary deposit
accounts and operating accounts at the Bank in accordance with the standard
account documents of the Bank.

 

(p)          Subsidiaries. Borrower shall not permit or suffer to exist the
formation of additional Subsidiaries except for Retail Stores unless the Bank
consents to such new Subsidiary in writing.

 

(q)          Trademarks and License Agreements. Borrower shall provide (i)
written notice to the Bank immediately upon any occurrence described in
paragraph D(6) of the Promissory Note and (ii) within forty-five (45) days after
the close of each calendar quarter a written report summarizing all material
changes to and material Defaults under any Revenue License.

 

9

 

  

(r)          Use of Proceeds. Borrower shall use the proceeds of the Term Loan
(i) to refinance the indebtedness of Borrower to Midmarket Capital Partners,
LLC, Great American Life Insurance Company and Great American Insurance Company,
(ii) to pay transaction fees and expenses incurred in connection with the
transactions contemplated by this Letter Agreement and the other Loan Documents
and (iii) and for general working capital purposes.

 

(s)          Inspections and Appraisals. At all times during normal business
hours upon reasonable advance notice to Borrower (provided that no notice shall
be required is an Event of Default has occurred and is continuing), the Bank
and/or any agent of the Bank shall have the right to (i) have access to, visit,
inspect, review, evaluate and make physical verification and appraisals of
Borrower’s properties and the collateral securing the Term Loan, (ii) inspect,
audit, photograph and copy and make extracts from Borrower’s and Guarantor’s
Books and Records, including management letters prepared by independent
accountants, and (iii) discuss with Borrower’s and Guarantor’s principal
officers and independent accountants Borrower’s and Guarantor’s business,
assets, liabilities, financial condition, results of operations and business
prospects. The Bank’s inspection rights under this clause (s) shall be at the
sole cost and expense of the Bank and, except upon the occurrence and during the
continuance of an Event of Default, be limited to no more than twice in any
calendar year. Borrower and Guarantor each will deliver to the Bank any
instrument necessary for the Bank to obtain records from any service bureau
maintaining records for Borrower or Guarantor.

 

(t)          Exchange Controls. To the extent that Borrower or Guarantor trades
or purchased foreign currency, Borrower and Guarantor each shall obtain any
Exchange Control Permit deemed by the Bank to be necessary or appropriate; and
obtain the renewal of any such Exchange Control Permit at least thirty (30) days
prior to its expiration.

 

(u)          Insurance. Borrower Guarantor shall each (i) keep its assets which
are of an insurable character insured (to the extent and for the time periods
consistent with or greater than normal industry standards) by financially sound
and reputable insurers against loss or damage by fire, explosion, theft,
terrorism or other hazards which are included under extended coverage in amounts
not less than the replacement value of the property insured, and Borrower shall
maintain with financially sound and reputable insurers, insurance against other
hazards and risks and liability to Persons and property (including officers and
directors liability coverage) to the extent and in the manner consistent or
greater than normal industry standards, (ii) within thirty (30) days of the date
hereof, provide to the Bank copies of its insurance policies evidencing to the
reasonable satisfaction of the Bank that endorsements have been made to such
policies adding the Bank as additional insured and/or lender’s loss payee, as
applicable, and (iii) within ten (10) business days of the date hereof, provide
to the Bank certificates of insurance reasonably satisfactory to the Bank with
respect to all existing insurance coverage, which certificates shall name the
Bank as additional insured and/or lender’s loss payee, as applicable (including,
without limitation, naming the Bank as additional insured under any umbrella
policy), and shall evidence the Borrower’s compliance with this Section 4(u)
with respect to all insurance coverage existing as of the date hereof. Borrower
shall maintain at all times life insurance insuring the life of Isaac Mizrahi in
an amount at least equal to $15,000,000 issued by MetLife, John Hancock or
another insurer otherwise acceptable to the Bank and the proceeds of such policy
shall have been assigned to the Bank.

 

5.          Miscellaneous

 

Capitalized terms not defined in this Letter Agreement shall have the meaning
ascribed thereto in the Promissory Note.

 

10

 

  

As used herein, the following terms shall have the following meanings: “Books
and Records” shall mean all books, records, board minutes, contracts, licenses,
insurance policies, environmental audits, business plans, files, computer files,
computer discs and other data and software storage and media devices, accounting
books and records, financial statements (actual and pro forma), filings with
Governmental Authorities and any and all records and instruments relating to the
collateral securing the Term Loan or otherwise necessary or helpful in the
collection thereof or the realization thereupon. “Capital Expenditures” shall
mean, as respects Guarantor on a Consolidated Basis, all payments or accruals
(including obligations under capital leases) for any fixed assets or
improvements or for replacements, substitutions or additions thereto, that have
a useful life of more than one year and that are required to be capitalized
under GAAP. “Cash Flow From Operations” shall mean as respects Guarantor on a
Consolidated Basis, cash flow from operations as determined in accordance with
GAAP. “EBITDA” shall mean, for any period for Guarantor on a Consolidated Basis
(without duplication), an amount equal to (a) Net Income (Loss) for such period,
minus, (b) to the extent included in calculating Net Income (Loss), the sum of,
without duplication, (i) interest income (whether cash or non-cash) for such
period, (ii) income tax credits for such period, (iii) gain from extraordinary
or non-recurring items for such period (including, without limitation, non-cash
items related to purchase accounting) and (iv) deferred compensation payments
(regardless of when accrued), plus (c) the following to the extent deducted in
calculating such Net Income (Loss), (i)  interest charges for such period,
(ii) the provision for all federal, state, local and foreign taxes payable for
such period and the amount of permitted payments in Section 4 (m)(iii) deducted
in calculating Net Income (Loss), (iii) the amount of depreciation and
amortization expense for such period, (iv) the transaction fees, costs and
expenses incurred in connection with the negotiation and execution of this
Letter Agreement and the other Loan Documents, (v) all other extraordinary or
non-recurring non-cash charges (including, without limitation, non-cash items
related to purchase accounting), (vi) deferred management salaries (accrued but
not paid) and (vii) all non-cash compensation (including without limitation,
stock or equity compensation) in such period. To the extent that permitted
payments in Section 4 (m)(ii) for any period are made to Guarantor in respect of
expenses of the type referred to in clauses (iii), (iv), (v), (vi) or (vii)
above, the portion of such permitted payments made in respect of such expenses
shall be included for purposes of the determination of EBITDA as if such
expenses had been incurred by Guarantor and its Subsidiaries. “Encumbrance”
shall mean any mortgage, pledge, hypothecation, assignment, deposit arrangement,
encumbrance, lien (statutory or other), charge or other security interest or any
preference, priority or other security agreement or preferential arrangement of
any kind or nature whatsoever (including without limitation, any conditional
sale or other title retention agreement and any financing lease having
substantially the same economic effect as any of the foregoing) or any options
or rights of first refusal with respect to securities, or any shareholders or
stockholders agreement or arrangement of any kind or nature whatsoever. “Excess
Cash Flow” shall mean (without duplication), for any fiscal period, Cash Flow
from Operations for such period less (a) Capital Expenditures not made through
the incurrence of indebtedness less (b) all cash interest and principal
(including indebtedness owed to the Bank) paid or payable during such period
less (c) all Tax Distributions made during such period. “Exchange Control
Permit” shall mean any permit or license issued by a Governmental Authority
outside the United States under which any Party is permitted (a) to incur and
pay any of the Liabilities in the United States in any currency(ies) in which
denominated or (b) to enter into, incur and/or perform any other obligation or
Loan Document. “Expense Distributions” shall have the meaning given to such term
in Section 4(m). “Fixed Charge Coverage Ratio” shall mean for any period, the
ratio of (a) EBITDA of Guarantor on a Consolidated Basis for such period plus
Liquid Assets in excess of $6,000,000 minus Capital Expenditures of Guarantor on
a Consolidated Basis to (b) the Fixed Charges for such period. “Fixed Charges”
shall mean for any period, the sum of (a) the cash interest expense of Guarantor
on a Consolidated Basis for such period, (b) the principal amount of total debt
of Guarantor on a Consolidated Basis having a scheduled due date during such
period, (c) all Tax Distributions and (d) all other cash distributions or
dividends made by Guarantor on a consolidated basis. “GAAP” shall mean generally
accepted accounting principles in the United States of America in effect from
time to time consistently applied (except for accounting changes in response to
FASB releases or other authoritative pronouncements). “Guarantor on a
Consolidated Basis” shall mean the accounts of Guarantor and its Subsidiaries in
accordance with GAAP. “Letter Agreement” shall mean this letter agreement, as
may be amended, restated, supplemented or otherwise modified from time to time.
“Licenses” shall have the meaning assigned to such term in the IP Security
Agreement. “Liquid Assets” shall mean (a) assets (which are unencumbered except
as permitted pursuant to the terms of the Loan Documents) in the form of cash
and cash equivalents consisting of certificates of deposit and money market
funds issued by a commercial bank having net assets of not less than $500
million less (b) the amount of any Encumbrances thereon and any unsatisfied
judgment, writ, order of attachment, levy or garnishment entered or issued
against the Borrower, Guarantor or any of its Subsidiaries. “Net Income (Loss)”
shall mean with respect to Guarantor on a Consolidated Basis and for any period,
the aggregate net income (or loss) after taxes for such period, determined in
accordance with GAAP but excluding for all purposes (a) net income of
minority-owned Subsidiaries (except to the extent of net income distributed or
representing a management fee or other similar fee), (b) the net income of any
Subsidiary to the extent that the declaration of dividends or similar
distributions of such income is not permitted by the organizational documents of
such Subsidiary or by operation of law, (c) unrealized gains or losses due
solely to fluctuations in currency values, (d) earnings (or losses) resulting
from my revaluation or write-up or write-down of assets and (d) unrealized gains
or losses under all interest rate or currency forwards, options, swaps, caps or
collar agreements, foreign exchange agreements, commodity contracts or similar
arrangements entered into by Guarantor or its Subsidiaries providing for
protection against fluctuations in interest rates, currency exchange rates,
commodity prices, or the exchange of nominal interest obligations, either
generally or under specific contingencies. “Net Worth” shall mean, as at any
date of determination an amount equal to (a) all of the assets of Guarantor on a
Consolidated Basis that, in accordance with GAAP, are properly classified as
assets on such date, minus (b) all liabilities of Guarantor on a Consolidated
Basis that, in accordance with GAAP, are properly classified as liabilities at
such date. “Rate Contracts” shall mean swap agreements and any other agreements
or arrangements designed to provide protection against fluctuations in interest
or currency exchange rates. “Retail Stores” shall mean up to 22 retail store
locations which are a wholly-owned Subsidiary of Borrower or a wholly-owned
Subsidiary of Guarantor (other than Borrower). “Revenue License” shall mean each
License pursuant to which Borrower is entitled to receive revenue from the
licensee party thereto. “Royalty Revenue Amount” shall mean an amount equal to
the gross royalty revenue of Borrower for the immediately preceding fiscal year.
“Stock” shall mean all certificated and uncertificated shares, options,
warrants, membership interests, general or limited partnership interests,
participation or other equivalents (regardless of how designated) of or in a
corporation, partnership, limited liability company or equivalent entity whether
voting or nonvoting, including common stock, preferred stock, or any other
“equity security” (as such term is defined in Rule 3a11-1 of the General Rules
and Regulations promulgated by the Securities and Exchange Commission under the
Securities Exchange Act of 1934, as amended). “Subsidiary” shall mean, with
respect to Guarantor and the Borrower, a corporation, exempted company,
partnership, exempted limited partnership, joint venture, limited liability
company or other business entity of which a majority of the shares of securities
or other interests having ordinary voting power for the election of directors or
other governing body are at the time beneficially owned by Guarantor or the
Borrower, as the case may be. “Tax Distributions” shall have the meaning given
to such term in Section 4(m). “Taxes” shall mean any and all present or future
taxes, levies, imposts, duties, deductions, withholdings, assessments, fees or
other charges imposed by any Governmental Authority, including interest,
additions to tax and penalties applicable thereto. “Trademark Licenses” shall
have the meaning assigned to such term in the IP Security Agreement.

 

11

 

  

Until the maturity of the Term Loan and the payment in full of all obligations
thereunder and all of Borrower’s obligations under the Loan Documents, the Bank
shall retain the security interests in the collateral granted under the Security
Agreement and the Pledge Agreement and the ability to exercise any and all
rights and remedies available to it pursuant to the Loan Documents and
applicable law.

 

No delay on the part of the Bank in exercising any of its options, powers or
rights, or partial or single exercise thereof, shall constitute a waiver
thereof. The options, powers and rights of the Bank specified in the Loan
Documents are in addition to those otherwise created by law or under any other
agreement between Borrower and the Bank. No amendment, modification or waiver of
any provision of the Loan Documents, nor consent to any departure by Borrower
therefrom shall be effective, unless the same shall be in writing and signed by
the Bank. Any such waiver or consent shall be effective only in the specific
instance and for the purpose for which given. No consent to or demand on
Borrower in any case shall, of itself, entitle it to any other or further notice
or demand in similar or other circumstances. This Letter Agreement and the other
Loan Documents embody the entire agreement and understanding between the Bank
and Borrower with respect to the Term Loan and supersedes all prior agreements
and understandings relating to the subject matter hereof. In the event of any
conflict between this Letter Agreement and any other Loan Document, this Letter
Agreement shall control and govern. Borrower agrees to pay all reasonable costs
and expenses incurred or payable by the Bank in connection with the
documentation, administration and interpretation of the Loan Documents,
including reasonable attorneys’ fees and disbursements. Borrower agrees to pay
all costs and expenses incurred or payable by the Bank in connection with the
enforcement or collection of the Loan Documents, including court costs and
reasonable attorneys’ fees and disbursements. This Letter Agreement shall be
binding on Borrower and its successors and assigns, provided that Borrower shall
not have the right to assign its rights hereunder or thereunder or any interest
herein or therein without the Bank’s prior written consent. This Letter
Agreement shall be governed by, and for all purposes shall be construed in
accordance with, the laws of the State of New York. For purposes of any action,
suit or proceeding in connection with this Letter Agreement or any other credit
document, Borrower and the Bank hereby irrevocably submit to the jurisdiction of
the courts of the State of New York and of the United States District Court for
the Southern District of New York and irrevocably agrees that any such action,
suit or proceeding may be brought by any party in any such New York or federal
court and that a service of process may be made upon any party by mailing a copy
of the summons to it, by registered or certified mail, at its address set forth
in the Note. Nothing herein shall affect the Bank’s right to commence legal
proceedings or otherwise proceed against Borrower in any other jurisdiction or
to serve process in any other manner permitted by applicable law. IN ANY SUCH
ACTION, SUIT OR PROCEEDING THE PARTIES HERETO MUTUALLY WAIVE TRIAL BY JURY.

 

12

 

  

Section headings used herein or in any other Loan Document are for convenience
only and are not to affect the construction of or be taken into consideration in
interpreting this Letter Agreement or any other Loan Document.

 

This Letter Agreement may be executed in any number of counterparts, all of
which shall constitute one and the same instrument, and any party hereto may
execute this Letter Agreement by signing and delivering one or more
counterparts. Any signature delivered by a party by facsimile or electronic
transmission (including email transmission of a PDF image) shall be deemed an
original signature page hereto.

 

[remainder of page intentionally left blank]

 

13

 

  

Please indicate your acknowledgment of and agreement to the foregoing by signing
and returning the enclosed copy of this letter to the attention of the Bank.

  

    Very truly yours,           BANK HAPOALIM B.M.

 

    By: /s/ Mitchell Barnett       Name:  Mitchell Barnett       Title:  Senior
Vice President

 

    By: /s/ Lavea Eisenberg       Name:  Lavea Eisenberg Barnett      
Title:  First Vice President

 

Acknowledged and Agreed to:

 

IM BRANDS, LLC

 

  XCEL BRANDS, INC.,       Its Manager    

  

By: /s/ James F. Haran       Name: James F. Haran       Title: Chief Financial
Officer    

 

XCEL BRANDS, INC.

 

By: /s/ James F. Haran       Name: James F. Haran       Title: Chief Financial
Officer    

 

SIGNATURE PAGE TO
LETTER AGREEMENT

 

 

 

  

Schedule I

 

to Letter Agreement between Bank Hapoalim B.M. and IM Brands, LLC

 

LITIGATION

 

None

 

 

 

  

Schedule II

 

to Letter Agreement between Bank Hapoalim B.M. and IM Brands, LLC

 

INDEBTEDNESS

 

Borrower may incur unsecured indebtedness for trade payables in the ordinary
course of business and payable on normal trade terms.

 

Promissory Note in the original principal amount of $7,377,432 dated September
29, 2011 issued by Borrower and Guarantor in favor of IM Ready-Made, LLC.

 

[Earn-Out]

 

 

 

  

Schedule III

 

to Letter Agreement between Bank Hapoalim B.M. and IM Brands, LLC

 

SUBSIDIARIES

 

None

 

 

 

  

Schedule IV

 

to Letter Agreement between Bank Hapoalim B.M. and IM Brands, LLC

 

ENCUMBRANCES

 

None

 

 

 

  

Exhibit A

 

to letter agreement between Bank Hapoalim B.M. and IM Brands, LLC

 

FORM OF COMPLIANCE CERTIFICATE

 

This Certificate is delivered pursuant to Section 3(a)(iii) of the Letter
Agreement dated as of July 31, 2013 among Bank Hapoalim B.M., Xcel Brands, Inc.
and IM Brands, LLC (as amended, restated, supplemented or otherwise modified
from time to time, the “Letter Agreement”). All capitalized terms used but not
defined herein shall have the respective meanings ascribed to such terms in the
Letter Agreement and/or the Promissory Note.

 

I, the undersigned, an authorized officer or Manager of Xcel Brands, Inc. and IM
Brands, LLC, do hereby certify pursuant to Section 3(a)(iii) of the Letter
Agreement that:

 

1.      As of the date hereof, no Event of Default or event which with the
giving of notice or lapse of time, or both, would constitute an Event of Default
has occurred and is continuing.

 

2.      Since _____________ there has been no material adverse change in the
business, condition (financial or otherwise) or operations of Xcel Brands, Inc.
or IM Brands, LLC, and no event or condition has occurred that might have had a
material adverse effect on the legality, validity or enforceability of any of
the Loan Documents or the ability of Xcel Brands, Inc. or IM Brands, LLC to
perform its obligations thereunder.

 

3.      Xcel Brands, Inc. and IM Brands, LLC are in compliance with the
financial covenants set forth in Section 4 of the Letter Agreement. Attached to
this Certificate as Annex A is a covenant compliance worksheet reflecting the
computation of such financial covenants as of the date and for the period
covered by the financial statements enclosed herewith. The information contained
herein and in the attached financial information is true, correct and complete
as of the last day of the period and for the period covered by the financial
statements enclosed herewith.

 

 

 

  

IN WITNESS WHEREOF I have affixed my signature as of ___ day of _________ 20__.

 

  IM BRANDS, LLC     By: Xcel Brands, Inc.,     Manager         By:       Name:
    Title:       XCEL BRANDS, INC.         By:       Name:     Title:

 

 

 

  

ANNEX A

 

to Compliance Certificate

 

1.          Net Worth as of ____________, 201__ is $_________________.

 

2.          Liquid Assets as of __________, 201__ are $_________________.

 

3.          Fixed Charge Coverage Ratio as of ____________, 201__ is ___ to
1.00.

 

4.          Capital Expenditures for the fiscal year ending _____________, 201__
are $___________.

 

 

 

  

Exhibit B

 

to letter agreement between Bank Hapoalim B.M. and IM Brands, LLC

 

FORM OF QUARTERLY ROYALTY COLLECTIONS REPORT

 

IM Brands, LLC   SAMPLE
REPORT Quarterly Royalty Payment Reporting Report
Date:   Guaranteed, Earned, and Overages Royalties Quarter
End Date:  

 

   Guaranteed Royalties   Earned Royalties and Overages         Bill   Due  
Amount   Paid   Amount   Paid   Subsequent   Bill   Due   Amount   Paid  
Amount   Paid   Subsequent  Licensee  Date   Date   Billed   Date   Paid  
Aging   Payment   Date   Date   Billed   Date   Paid   Aging   Payment        
                                                   Licensee A          $      
$                                                                           
                                  Licensee B            $        $            
          $        $                                                           
                        Licensee C            $        $                      
                                                                            
                   Licensee D            $        $                       $  
     $                                                                          
         Licensee X                                                             
                                                                                
Total            $        $                       $        $