Document:

Exhibit 10.2

 

ESCROW AGREEMENT

 

THIS ESCROW AGREEMENT, dated as of June 20,
2005 (the “Escrow Agreement”), is by and among RA Cerberus Acquisition,
LLC, a Delaware limited liability company (the “Purchaser”), Rafaella
Apparel Group, Inc. a Delaware corporation (formerly known as Rafaella
Corporation) (“Corporation”), Rafaella Sportswear, Inc., a Delaware
corporation (“Rafaella”), Ronald Frankel (“Frankel”) and JPMorgan
Chase Bank, N.A., as Escrow Agent and securities intermediary hereunder (the “Escrow
Agent”).

 

RECITALS

 

WHEREAS, Purchaser, Rafaella, Frankel and
Corporation are parties to that certain Securities Purchase Agreement, dated as
of April 15, 2005, as amended by Amendment No. 1 to the Securities
Purchase Agreement, dated May 27, 2005 (the “Purchase Agreement”)
pursuant to which Purchaser is contributing $40 million to the capital of the
Corporation in exchange for the issuance of 100% of the preferred stock of the
Corporation;

 

WHEREAS, pursuant to the Redemption Agreement,
Rafaella has agreed to deposit $20,000,000 in a segregated escrow account which
shall constitute a “securities account” as defined in Section 8-501 of the
Uniform Commercial Code (the “First Escrow Account”) and the
Corporation has agreed to deposit $10,000,000 into a segregated escrow account
which shall constitute a “securities account” as defined in Section 8-501
of the Uniform Commercial Code (the “Second Escrow Account,” and,
such $30,000,000 amount in the First Escrow Account and Second Escrow Account
in the aggregate, the “Escrow Amount”) to be held by JPMorgan Chase
Bank, as escrow agent (the “Escrow Agent”) pursuant to the terms of this
Escrow Agreement; and

 

WHEREAS, the Escrow Funds in the Second Escrow
Account secure the obligation of Corporation to make payments under Section 1.1(b)(2) of
the Redemption Agreement and the Escrow Amount will also support the
indemnification obligations of Rafaella and Frankel under the Purchase
Agreement.

 

WHEREAS, in order to establish the escrow of funds
and to effect the provisions of the Transaction Documents, the parties hereto
have entered into this Escrow Agreement.

 

NOW THEREFORE, for good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties
hereto, for themselves, their successors and assigns, hereby agree as follows:

 

1.                                       Definitions. Capitalized terms used herein and not
otherwise defined shall have the meanings ascribed to such terms in the
Purchase Agreement. The following terms have the following meanings when used
herein:

 

“Claim(s)” means a Claim (as such term is
defined in Section 8.02 of the Purchase Agreement) with respect to which a
Person is entitled to be indemnified in accordance with Section 8.02 of
the Purchase Agreement.

 

 

“Claim Notice” means a written notification,
signed by Purchaser, which shall describe (a) the obligation,
representation, warranty or agreement in a Transaction Document with respect to
which a Claim subject to indemnification in accordance with Section 8.02
of the Purchase Agreement is being made, (b) the amount claimed to be due
to Purchaser under Section 8.02 of the Purchase Agreement (the “Estimated
Claim Amount”), (c) the alleged facts giving rise to and basis for
such Claim and (d) the date of such notice. Each Claim Notice also shall
include a certification by Purchaser that payment of the Claim is being made
pursuant to Section 8.02 of the Purchase Agreement and Section 4(a) of
the Escrow Agreement.

 

“Claim Response” means a written
notification, signed by the Representative, which shall set forth the
Representative’s good faith dispute on any matter with respect to a Claim
Notice or the Claim described therein and such amount, if any, in dispute by
the Representative.

 

“Code” means the Internal Revenue Code of
1986, as amended from time to time.

 

“Escrow Funds” means the sum of Thirty
Million Dollars ($30,000,000) deposited by Rafaella and Corporation with the
Escrow Agent pursuant to this Escrow Agreement, less any disbursements pursuant
to Sections 3, 4 and 5, plus any and all interest earned thereon, as from time
to time invested and reinvested as herein provided.

 

“Joint Written Direction” means a written
direction executed by Purchaser and the Representative and directing the Escrow
Agent to disburse all or a portion of the Escrow Funds or to take or refrain
from taking an action pursuant to this Escrow Agreement.

 

“Person” means any individual, firm,
partnership, corporation (including, without limitation, a business trust),
limited liability company, joint stock company, trust, unincorporated
association, joint venture or other entity, and shall include any successor (by
merger or otherwise) of any such entity.

 

“Resolved Claim” means a final non-appealable
order, decree or judgment issued or rendered by a court of competent
jurisdiction presented by the Purchaser or the Representative and directing the
Escrow Agent to disburse all or a portion of the Escrow Funds or to take or
refrain from taking an action pursuant to this Escrow Agreement.

 

“Representative” means Ronald Frankel or any
other person designated in a writing signed by Rafaella and delivered to the
Escrow Agent and Purchaser in accordance with the notice provisions of this
Escrow Agreement, to act as representative of Rafaella and Frankel under this
Escrow Agreement.

 

2.                                       Appointment of and Acceptance by the
Escrow Agent.
Purchaser, Corporation, Rafaella and Frankel hereby appoint the Escrow Agent to
serve as the escrow agent hereunder. The Escrow Agent hereby accepts such
appointment and agrees to hold, invest and disburse the Escrow Funds
transferred to it in accordance with this Escrow Agreement.

 

2

 

3.                                       Disbursements of Escrow Funds. The Escrow Agent shall disburse Escrow
Funds, at any time and from time to time, only in accordance with a Joint
Written Direction or a Resolved Claim or as otherwise specifically provided
pursuant to this Escrow Agreement.

 

4.                                       Indemnity Claim.

 

(a)                                  In the event that Purchaser shall become
aware of facts or events that may reasonably be expected to give rise to a
Claim, Purchaser shall deliver a Claim Notice, together with proof of delivery
of a copy of such Claim Notice to the Representative (“Proof of Delivery”),
to the Escrow Agent, such delivery to be in accordance with the notice
provisions of this Escrow Agreement.

 

(b)                                 Upon receipt of any Claim Notice and
Proof of Delivery, the Escrow Agent shall promptly (x) make entries or
notations in the account records relating to the Escrow Funds, (i) indicating
that funds equal to the Estimated Claim Amount are reserved to satisfy such
Claim, and (ii) identifying the date and number of such Claim Notice and
(y) deliver notice of receipt of such Claim Notice to the Representative. If
requested by the Representative, the Escrow Agent will promptly deliver a copy
of such Claim Notice to the Representative.

 

(c)                                  If on or prior to the expiration of the
thirty (30) day period immediately following the delivery by Purchaser of any
Claim Notice and the associated Proof of Delivery to the Escrow Agent, the
Escrow Agent receives a Claim Response from the Representative, a copy of which
shall be delivered contemporaneously by the Representative to Purchaser, the
Escrow Agent (i) shall disburse to Purchaser the amount stated in such
Claim Response not to be in dispute and (ii) shall not disburse the amount
so stated to be in dispute (the “Disputed Amount”) until it receives a
Joint Written Direction or a Resolved Claim directing an amount of the Escrow
Funds be so disbursed, and then only in such amount.

 

(d)                                 If after expiration of such thirty (30)
day period the Escrow Agent has not received a Claim Response, the Escrow Agent
shall disburse the Estimated Claim Amount to Purchaser at the direction of
Purchaser.

 

(e)                                  Any payment to or at the direction of
Purchaser, including payment for Claims, shall be made from the Second Escrow
Account to the extent funds are available in such account, and, to the extent
all of the funds in the Second Escrow Account have been disbursed, from the
First Escrow Account.

 

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5.                                       Monthly Release of Escrow. On each one month anniversary of the
date hereof, the Escrow Agent shall distribute to Rafaella an amount equal to
the lesser of (i) Two Million Five Hundred Thousand Dollars ($2,500,000)
and (ii) an amount equal to (x) the Escrow Funds less (y) such Escrow
Funds sufficient to pay in full all Disputed Amounts, if any, that have not
been resolved at such time and (z) the Estimated Claim Amounts specified in
Claim Notices, if any, for which Representative has not yet delivered a Claim
Response to Escrow Agent and Purchaser and the time period for delivery of such
Claim Response has not expired. Such payments shall be made from the First
Escrow Account to the extent funds are available in such account and, to the
extent all of the funds in the First Escrow Account have been disbursed, from
the Second Escrow Account.

 

6.                                       Investment of Funds; Distributions.

 

(a)                                  The Escrow Agent is herein directed and
instructed to initially invest and reinvest the Escrow Funds as set forth on Schedule II.
Corporation may provide instructions changing the investment of the Escrow
Funds and the Escrow Agent shall invest and reinvest the Escrow Funds in the
name of the Escrow Agent as Corporation shall direct (subject to applicable
minimum investments) by the furnishing of written instructions to the Escrow
Agent; provided, however, that no investment or reinvestment may be
made except in the following:

 

(i)                                     JP Morgan Chase Bank Money Market
Account;

 

(ii)                                  A trust account with JP Morgan Chase
Bank; or

 

(iii)                               A money market mutual fund, including
without limitation, the JP Morgan Fund or any other mutual fund for which the
Escrow Agent or any affiliate of the Escrow Agent serves as investment manager,
administrator, shareholder servicing agent and/or custodian or subcustodian,
notwithstanding that (i) the Escrow Agent or an affiliate of the Escrow
Agent receives fees from such funds for services rendered, (ii) the Escrow
Agent charges and collects fees for services rendered pursuant to this Escrow
Agreement, which fees are separate from the fees received from such funds, and (iii) services
performed for such funds and pursuant to this Escrow Agreement may at
times duplicate those provided to such funds by the Escrow Agent or its
affiliates. (Must specify name of particular fund).

 

(b)                                 Within fifteen (15) days of December 31
of each calendar year during the term of this Escrow Agreement, the Escrow
Agent shall deliver to Corporation, Purchaser and the Representative a
statement (an “Annual Statement”) setting forth the amount of the Escrow
Funds as at such date; and the amount of income of the Escrow Funds during the
period covered by such Annual Statement (the “Annual Income”).

 

(c)                                  If the Escrow Agent has not received
written instruction from the Representative at any time that an investment
decision must be made, the Escrow Agent shall invest the Escrow Funds, or such
portion of the Escrow Funds as to which no written instruction from the
Representative has been received, in investments described on Schedule II.

 

4

 

(d)                                 Notwithstanding anything to the contrary
contained herein, the Escrow Agent may, without notice to Corporation, the
Representative and Purchaser, sell or liquidate any of the foregoing
investments at any time if the proceeds thereof are required for any release of
funds permitted or required hereunder, and the Escrow Agent shall not be liable
or responsible for any loss, cost or penalty resulting from any such sale or
liquidation.

 

(e)                                  With respect to any funds received by the
Escrow Agent for deposit into the Escrow Funds or any direction received by the
Escrow Agent with respect to investment of any funds in the Escrow Funds after
10:00 a.m., eastern time, the Escrow Agent shall not be required to invest
such funds or to effect such investment instruction until the next day upon
which banks in New York are open for business.

 

(f)                                    Unless the Escrow Agent receives other
fund transfer instructions, distributions to Purchaser shall be made to
Purchaser using the wire instructions specified for Purchaser on the Call-Back Schedule and
distributions to Rafaella shall be made to Rafaella using the wire instructions
specified for Representative on the Call-Back Schedule.

 

7.                                       Concerning the Escrow Agent.

 

(a)                                  Purchaser, Corporation, Rafaella and
Frankel agree to indemnify, jointly and severally, the Escrow Agent, and its
officers, directors, employees and agents, for, and to hold it and each of them
harmless against, any loss, liability or expense arising out of or in
connection with this Escrow Agreement and carrying out its duties hereunder,
including the cost and expenses of defending itself against any claim of
liability; provided, however, that none of Purchaser, Corporation,
Rafaella and Frankel will be liable for indemnification or otherwise for any
loss, liability or expense to the extent arising out of the gross negligence,
willful misconduct or bad faith of the Escrow Agent.

 

(b)                                 The Escrow Agent shall exercise the same
degree of care toward the Escrow Funds as it exercises toward its own similar
property and shall not be held to any higher standard of care under this Escrow
Agreement, nor be deemed to owe any fiduciary duty to the Representative.

 

(c)                                  The Escrow Agent may act upon any
instrument or other writing believed by it in good faith to be genuine and to
have been signed or presented by the proper person, and shall not be liable to
any party hereto in connection with the performance of its duties hereunder,
except for its own negligence, willful misconduct or bad faith. The duties of
the Escrow Agent shall be determined only with reference to this Escrow
Agreement and applicable laws and the Escrow Agent is not charged with any
knowledge of, or any duties or responsibilities in connection with, any other
document or agreement. If in doubt as to its duties and responsibilities
hereunder, the Escrow Agent may consult with counsel and shall be
protected in any action taken or omitted in good faith in reliance on the advice
or opinion of such counsel.

 

5

 

(d)                                 The Escrow Agent may execute any of
its powers or responsibilities hereunder and exercise any rights hereunder
either directly or by or through its agents or attorneys.

 

(e)                                  Nothing in this Escrow Agreement shall be
deemed to impose upon the Escrow Agent any duty to qualify to do business or to
act as agent or otherwise in any jurisdiction other than the State of New York.

 

(f)                                    The Escrow Agent shall not be responsible
for and shall not be under a duty to examine into or pass upon the validity,
binding effect, execution or sufficiency of this Escrow Agreement, any
agreement amendatory or supplemental hereto or of any certificates delivered to
it hereunder.

 

(g)                                 The Escrow Agent makes no representation
as to the validity, value, genuineness or collectability of any security or
other document or instrument held by or delivered to it.

 

(h)                                 The Escrow Agent shall not be called upon
to advise any party as to selling or retaining, or taking or refraining from
taking any action with respect to, any securities or other property deposited
hereunder.

 

(i)                                     The Escrow Agent shall have the right at
any time to resign hereunder by giving written notice of its resignation to
Purchaser and the Representative at the address set forth herein or at such
other address as Purchaser and the Representative shall provide, at least 30
days prior to the date specified for such resignation to take effect. Upon the
effective date of such resignation, all cash and other payments and all other
property then held by the Escrow Agent hereunder shall be delivered by it to a
successor escrow agent selected by the Representative and Purchaser. Such
successor escrow agent shall be a bank or trust company in good standing
organized and doing business under the laws of the United States or any state
thereof, subject to examination by state or federal authorities, and having
combined capital and surplus of not less than $500,000,000 which is authorized
under the laws of its jurisdiction of incorporation to exercise corporate trust
powers. If no successor escrow agent is appointed, the Escrow Agent may apply
to a court of competent jurisdiction for such appointment.

 

(j)                                     If the Escrow Agent should at any time be
confronted with inconsistent claims or demands to the Escrow Funds, the Escrow
Agent shall be entitled to refrain from taking any action and its sole
obligation shall be to keep safely all property held in escrow until it shall
be directed otherwise in a Joint Written Direction or by a final order or
judgment of a court of competent jurisdiction and the Escrow Agent shall have
the right, but not the duty, to interplead the parties in any state or federal
court sitting in the City of New York, Borough of Manhattan, in the State of
New York and request that such court determine the respective rights of the
parties with respect to the Escrow Funds. In the event the Escrow Agent no
longer holds any Escrow Funds, it shall be released from any obligation or
liability as a consequence of any such claims or demands.

 

(k)                                  In the event fund transfer instructions
are given (other than in writing at the time of the execution of this Escrow
Agreement), whether in writing, by telecopier 

 

6

 

or
otherwise, the Escrow Agent is authorized to seek confirmation of such
instructions by telephone call-back to the person or persons designated on the
call-back schedule attached hereto (the “Call-Back Schedule”), and
the Escrow Agent may rely upon the confirmations of anyone purporting to
be the person or persons so designated. The persons and telephone numbers for
call-backs may be changed only in writing actually received and
acknowledged by the Escrow Agent. If the Escrow Agent is unable to contact any
of the authorized representatives identified in the Call-Back Schedule, the
Escrow Agent is hereby authorized to seek confirmation of such instructions by
telephone call-back to any one or more of a party’s executive officers, (“Executive
Officers”), which shall include the titles of Chief Executive Officer,
Executive Vice President, General Counsel and Secretary, as the Escrow Agent may select.
Such “Executive Officer” shall deliver to the Escrow Agent a fully executed
Incumbency Certificate, and the Escrow Agent may rely upon the
confirmation of anyone purporting to be any such officer. The Escrow Agent and
the beneficiary’s bank in any funds transfer may rely solely upon any
account numbers or similar identifying numbers provided by Purchaser or the
Representative to identify (i) the beneficiary, (ii) the beneficiary’s
bank, or (iii) an intermediary bank. The Escrow Agent may apply any
of escrowed funds for any payment order it executes using any such identifying
number, even when its use may result in a person other than the
beneficiary being paid, or the transfer of funds to a bank other than the
beneficiary’s bank or an intermediary bank designated. The parties to this
Escrow Agreement acknowledge that such security procedure is commercially
reasonable.

 

(l)                                     Any corporation into which the Escrow
Agent in its individual capacity may be merged or converted or with which
it may be consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Escrow Agent in its individual
capacity shall be a party, or any corporation to which substantially all the
corporate trust business of the Escrow Agent in its individual capacity may be
transferred, shall be the Escrow Agent under this Escrow Agreement without
further act.

 

(m)                               Anything in this Escrow Agreement to the
contrary notwithstanding, in no event shall the Escrow Agent be liable for
special, indirect or consequential damage of any kind whatsoever (including but
not limited to lost profits), even if the Escrow Agent has been advised of the
likelihood for such loss or damage and regardless of the form of action.
The parties hereto acknowledge that the foregoing indemnities shall survive the
resignation or removal of the Escrow Agent or the termination of this Escrow
Agreement.

 

(n)                                 All trust investment orders involving
Treasuries, commercial paper and other direct investments will be executed
through J.P. Morgan Fleming Asset Management (“JPFAM”), in the
investment management division of J.P. Morgan Chase. Subject to the principles
of best execution, transactions are effected on behalf of the account through
broker-dealers selected by JPFAM. In this regard, JPFAM seeks to attain the
best overall result for the account, taking into consideration quality of
service and reliability. An agency fee will be assessed in connection with each
transaction.

 

8.                                       Fees. The fee of the Escrow Agent hereunder is as set
forth on Schedule I attached hereto, which fee shall be
nonrefundable and paid in advance one-half by Rafaella and one-half by
Purchaser. Rafaella and Purchaser also agree to pay on demand one-half each of
the 

 

7

 

costs
and expenses of the Escrow Agent, including the reasonable fees and expenses of
counsel selected by the Escrow Agent incurred in connection with its duties
hereunder.

 

9.                                       Tax Reporting Information and
Certification of Tax Identification Numbers.

 

(a)                                  The parties hereto agree that, for tax
reporting purposes, all taxable interest on or other income, if any,
attributable to the Escrow Funds or any other amount held in escrow by the
Escrow Agent pursuant to the Agreement shall be allocable to Corporation.

 

(b)                                 Corporation agrees to provide the Escrow
Agent with its tax identification number by furnishing an appropriate form W-9
and any other forms and documents for Corporation that the Escrow Agent may reasonably
request (collectively, “Tax Reporting Documentation”) to the Escrow
Agent. The parties hereto understand that, if such Tax Reporting Documentation
is not so provided to the Escrow Agent, the Escrow Agent shall be required by
the Code to withhold and promptly remit to the Internal Revenue Service a
portion of any interest or other income earned on the investment of monies or
other property held by the Escrow Agent pursuant to this Escrow Agreement.

 

(c)                                  Rafaella and Frankel shall assume jointly
and severally all obligations imposed now or hereafter by any applicable tax
law with respect to any payment or distribution of the Escrow Funds to Rafaella
and Frankel.

 

(d)                                 Purchaser shall assume all obligations
imposed now or hereafter by any applicable tax law with respect to any payment
or distribution of the Escrow Funds to Purchaser.

 

10.                                 Covenant of Frankel. Frankel covenants and agrees, for the
benefit of Purchaser, that from the date hereof until the first anniversary of
the Closing Date he shall maintain a minimum Net Worth of $40,000,000. For
purposes of this Section 10, “Net Worth” means the sum of (a) the
amount of Escrow Funds and (b) the gross fair market value of Frankel’s
total assets (excluding intangibles and without duplication) less total
liabilities, including but not limited to estimated taxes on asset appreciation
and any offsets against assets.

 

11.                                 Notice. All notices and other communications given or made
pursuant hereto shall be in writing and shall be deemed to have been duly given
or made as of the date delivered, mailed or transmitted, and shall be effective
upon receipt, if delivered personally, mailed by registered or certified mail (postage
prepaid, return receipt requested) or sent by fax (with immediate confirmation)
or nationally recognized overnight courier service, as follows:

 

(a)                                  if to the Representative:

 

Rafaella Sportswear, Inc.

1411 Broadway

New York, New York 10018

Attention: 
President

 

8

 

Telephone: 
(212) 403-0300

Telecopier: 
(212) 764-9275

 

with a copy to:

 

Kronish Lieb Weiner & Hellman LLP

1114 Avenue of the Americas

New York, New York 10036

Attention: 
Steven K. Weinberg, Esq.

Telephone: 
(212) 479-6240

Telecopier: 
(212) 479-6275

 

(b)                                 if to Purchaser:

 

RA Cerberus Acquisition, LLC

c/o Cerberus Capital Management, L.P.

299 Park Avenue

New York, New York 
10171

Attention: 
Mark Neporent, Kurt Larsen

and George Kollitides

Telephone: 
(212) 891-2100

Telecopier: 
(212) 891-1540

 

with a copy to:

 

Schulte Roth & Zabel LLP

919 Third Avenue

New York, New York 
10022

Attention: 
David E. Rosewater, Esq.

 

Telephone: 
(212) 756-2208

Telecopier: 
(212) 593-5955

 

(c)                                  if to Corporation:

 

Rafaella Apparel Group, Inc.

1411 Broadway

New York, New York 
10018

Attention: 
Chief Executive Officer

Telephone: 
(212) 403-0300

Telecopier: 
(212) 764-9275

 

with a copy to:

 

Schulte Roth & Zabel LLP

919 Third Avenue

New York, New York 
10022

Attention: 
David E. Rosewater, Esq.

 

Telephone: 
(212) 756-2208

 

9

 

Telecopier: 
(212) 593-5955

 

(d)                                 if to the Escrow Agent:

 

JPMorgan Chase Bank, N.A.

4 New York Plaza, 21st Floor 

New York, NY  10004

Attention:  Audrey Mohan

 

Telephone: 
(212) 623-5087

Telecopier: 
(212) 623-6168

 

or to such other address as each party may designate
for itself by like notice.

 

12.                                 Amendment or Waiver. This Escrow Agreement may be
changed, waived, discharged or terminated only by a writing signed by the
Representative, Corporation, Purchaser and the Escrow Agent. No delay or
omission by any party in exercising any right with respect hereto shall operate
as a waiver. A waiver on any one occasion shall not be construed as a bar to, or
waiver of, any right or remedy on any future occasion.

 

13.                                 Severability. To the extent any provision of this
Escrow Agreement is prohibited by or invalid under applicable law, such
provision shall be ineffective to the extent of such prohibition or invalidity,
without invalidating the remainder of such provision or the remaining
provisions of this Escrow Agreement.

 

14.                                 Governing Law. This Escrow Agreement shall be
construed and interpreted in accordance with the internal laws of the State of
New York without giving effect to the conflict of laws principles thereof.

 

15.                                 Entire Agreement. This Escrow Agreement constitutes the
entire agreement between the parties relating to the holding, investment and
disbursement of the Escrow Funds and sets forth in their entirety the
obligations and duties of the Escrow Agent with respect to the Escrow Funds.

 

16.                                 No Assignment. Except as provided in Section 7(l),
this Escrow Agreement is not assignable (by operation of law or otherwise)
without the prior written consent of the other parties, provided,
however, Purchaser may assign this Escrow Agreement to its financing
sources as collateral in connection with the Financing or to any of its
Affiliates so long as Purchaser remains an obligor under this Agreement,
without the prior written consent of the other parties.

 

17.                                 Successors and Assigns. This Escrow Agreement shall inure to
the benefit of and be binding upon the parties hereto and their respective
heirs, successors and assigns. For purposes of this Escrow Agreement, “successor”
for any entity other than a natural person shall mean a successor to such
entity as a result of such entity’s merger, consolidation, sale of
substantially all of its assets or similar transaction.

 

10

 

18.                                 Execution in Counterparts. This Escrow Agreement and any Joint
Written Direction may be executed in two or more counterparts and be
delivered via facsimile, which when so executed shall constitute one and the
same agreement or direction.

 

19.                                 Grant of Security Interest. To secure the obligations of
Corporation to make the payments under Section 1.1(b)(2) of the
Redemption Agreement, Corporation hereby grants Rafaella a security interest
and lien in the Second Escrow Account and on all of the funds from time to time
on deposit therein and grants to Rafaella the authority to file a UCC-1
financing statement with respect to such collateral.

 

20.                                 Termination. Upon the disbursement of all amounts in
the Escrow Funds pursuant to the terms of this Escrow Agreement, this Escrow
Agreement shall terminate and the Escrow Agent shall have no further obligation
or liability whatsoever with respect to this Escrow Agreement or the Escrow
Funds.

 

21.                                 Account Opening Information. IMPORTANT INFORMATION ABOUT PROCEDURES
FOR OPENING A NEW ACCOUNT For Accounts opened in the U.S.:  To help the government fight the funding of
terrorism and money laundering activities, Federal law requires all financial
institutions to obtain, verify, and record information that identifies each
person who opens an account. When an account is opened, we will ask for
information that will allow us to identify relevant parties.

 

22.                                 Waiver of Jury Trial. EACH OF THE PARTIES HEREBY IRREVOCABLY
WAIVES TRIAL BY JURY IN ANY ACTION, SUIT OR PROCEEDING, WHETHER AT LAW OR
EQUITY, BROUGHT BY ANY OF THEM IN CONNECTION WITH THIS ESCROW AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY.

 

*                                         *                                         *

 

11

 

	
   

  	
  RA CERBERUS ACQUISITION, LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ George Kollitides

  	
   

  
	
   

  	
   

  	
  Name: George Kollitides

  
	
   

  	
   

  	
  Title: Authorized Person

  	 

	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  RAFAELLA SPORTSWEAR, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Ronald Frankel

  	
   

  
	
   

  	
   

  	
  Name: Ronald Frankel

  
	
   

  	
   

  	
  Title: Chief Executive Officer

  	 

	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ Ronald Frankel

  	
   

  
	
   

  	
  Ronald Frankel

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  RAFAELLA APPAREL GROUP, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Glenn Palmer

  	
   

  
	
   

  	
   

  	
  Name: Glenn Palmer

  
	
   

  	
   

  	
  Title: Chief Executive Officer

  	 

	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  JPMORGAN CHASE BANK, N.A.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Debra A. DeMarco

  	
   

  
	
   

  	
   

  	
  Name: Debra A. DeMarco

  
	
   

  	
   

  	
  Title:  Vice President

  	 

						

 

A-1Exhibit 10.3

REDEMPTION AGREEMENT

This Redemption Agreement,
dated as of June 20, 2005 (this “Agreement”), is by and among Rafaella
Sportswear, Inc., a Delaware corporation (the “Seller”), Rafaella
Apparel Group, Inc., a Delaware corporation (formerly known as Rafaella
Corporation) (the “Company”) and RA Cerberus Acquisition, LLC, a
Delaware limited liability company (the “Purchaser”).  Capitalized terms not defined herein shall
have the meaning as set forth in the Purchase Agreement (as defined below).

WHEREAS, the Company is a
corporation formed pursuant to a certificate of incorporation filed with the
Secretary of State of Delaware on April 4, 2005;

WHEREAS, the Seller and the Company are parties to a
Contribution Agreement, (the “Contribution Agreement”), pursuant to
which the Seller will contribute, immediately prior to the consummation of the
transactions contemplated by this Agreement, to the capital of the Company all
of the Assets subject to the Assumed Liabilities (each as defined in the
Contribution Agreement) in exchange for 100% of the common stock in the Company
(the “Common Stock”);

WHEREAS, the Company, the Seller and certain
affiliates of the Seller and Purchaser are party to a Securities Purchase
Agreement, dated as of April 15, 2005, as amended by Amendment No. 1 to the
Securities Purchase Agreement dated May 27, 2005 (the “Purchase Agreement”), pursuant
to which Purchaser is contributing $40 million to the capital of the Company in
exchange for the issuance of 100% of the preferred stock of the Company;

WHEREAS, Purchaser and
Seller have entered into that certain Stockholders’ Agreement, dated June     ,
2005;

WHEREAS, the Company has
filed the Amended and Restated Certificate of Incorporation of the Company (the
“Charter”) with the Secretary of State of the State of Delaware and has
adopted the Amended and Restated By-Laws of the Company (the “By-Laws”),
each in the form attached to the Purchase Agreement as Exhibit I, and such
Charter and By-Laws are in full force and effect;

WHEREAS, Jefferies & Company Inc. and the
Company are party to a senior note purchase agreement (the “Senior Note
Purchase Agreement”), dated as of June     , 2005 pursuant to which
the Company is issuing $172,000,000 aggregate principal amount at maturity of second lien senior secured notes (the “Financing”);

WHEREAS, the Company desires
to redeem a portion of the Common Stock from the Seller in connection with the
consummation of the transactions contemplated by the Purchase Agreement and the
other Transaction Documents (the “Redemption”);

WHEREAS,
Seller has agreed to deposit $20,000,000 in a segregated escrow account (the “First
Escrow Account”) and the Company has agreed to deposit $10,000,000 into a
segregated escrow account (the “Second Escrow Account,” and, together
with the First Escrow Account, the “Escrow Accounts,” and such
$30,000,000 amount in the Escrow Accounts in the

 

 

aggregate, the “Escrow Amount”)) to be held
by JPMorgan Chase Bank, as escrow agent (the “Escrow Agent”) pursuant to
the terms of an escrow agreement (the “Escrow Agreement”); and

WHEREAS,
the Company’s contribution to the Second Escrow Account will secure the Company’s
obligation to make payments under Section 1.1(b)(2) hereof and the entire
Escrow Amount will also support the indemnification obligations of Rafaella and
Frankel under the Purchase Agreement.

NOW, THEREFORE, in
consideration of the mutual covenants herein set forth, the parties hereby
agree as follows:

1.             Repurchase of Common Stock; Closing.

1.1.          Sale and Transfer of Common Stock.

(a)           Upon the terms and subject to the conditions set forth in
this Agreement, on the Closing Date (as defined below) the Seller hereby agrees
to sell to the Company, and the Company hereby agrees to repurchase from the
Seller (and Purchaser shall cause the Company to purchase from Seller), such
portion of Seller’s Common Stock such that immediately after giving effect to
the redemption the Common Stock in the Company held by Seller will represent
25% of the fully diluted equity of the Company (the “Redemption Stock”)
for a purchase price of One Hundred Seventy Five Million Dollars ($175,000,000)
plus the Accrued Interest Amount (the “Purchase Price”).

(b)           The Purchase Price shall be paid as follows:

(1)           On the Closing Date, the Company shall pay the Seller One
Hundred Sixty Five Million Dollars ($165,000,000) (the “Closing Payment”)
by wire transfer of immediately available funds to an account designated by
Seller at least two Business Days prior to the Closing Date with respect to
$145,000,000 of such Closing Payment, and to the First Escrow Account with
respect to $20,000,000 of such Closing Payment;

(2)           Until such time as the Purchase Price has been paid in
full, beginning on the nine-month anniversary of the Closing Date or such
earlier date as may be necessary to satisfy the obligations to release funds
from the Second Escrow Account in accordance with the terms of the Escrow
Agreement, on each one month anniversary of the Closing Date, the Company shall
pay Seller an amount equal to the lesser of (x) Two Million Five Hundred
Thousand Dollars ($2,500,000) and (y) the remaining unpaid Purchase Price, such
amounts to be paid from the funds in the Second Escrow Account in accordance
with and subject to the terms and conditions in the Escrow Agreement.

(c)           In addition to the Closing Payment, on the Closing Date,
the Company shall deposit its portion of the Escrow Amount by wire transfer of
immediately available funds into the Second Escrow Account to secure its
obligation to make payments under Section 1.1(b)(2) hereof and, together with
the funds in the First Escrow Account, to support the indemnification
obligations of Rafaella and Frankel under the Purchase Agreement.

 

2

 

(d)           As used herein “Accrued Interest Amount” means an amount
equal to the actual earnings of the accountholder with respect to the amounts
on deposit in the Escrow Accounts that are distributed to Seller pursuant to
the terms and conditions of the Escrow Agreement.

1.2.          Closing Date. 
Upon the terms and subject to the conditions set forth in this
Agreement, the closing of the sale and purchase of the Redemption Stock (the “Closing”)
shall take place at the offices of Schulte Roth & Zabel LLP, 919 Third
Avenue, New York, New York immediately following the satisfaction or waiver of
all conditions set forth in Sections 3 and 4 hereof (the “Closing Date”).

1.3.          Allocations. 
As soon as practicable after the Closing, Purchaser shall deliver to
Seller and the Company a proposed schedule allocating the Purchase Price among
the Acquired Assets (the “Allocation Statement”) which allocation shall be made
in a manner consistent with Sections 755 and 1060 of the Code, as applicable,
and the Treasury Regulations thereunder. 
The parties will use their best efforts to agree on the Allocation
Statement.  If the parties do agree on an
allocation, the parties shall file all required Tax Returns in accordance with
the Allocation Statement and Sections 755 and 1060 of the Code, as
applicable.  Purchaser, Seller and the
Company shall provide promptly the other with any information required to
complete the Allocation Statement.  For
all tax purposes, Purchaser, Seller and the Company agree to report the
transactions contemplated hereby (including the filing of any Tax Returns and
refund claims) in a manner consistent with any agreed to Allocation Statement.

2.             Representations
and Warranties of the Company.  The
Company hereby represents and warrants to the Seller as follows:

(a)           The Company has the requisite power and authority to
execute and deliver this Agreement and the Escrow Agreement, to perform its
obligations hereunder and thereunder and to consummate the Redemption.  The execution and delivery of this Agreement
and the Escrow Agreement by the Company and the consummation by the Company of
the Redemption has been duly authorized by all requisite corporate action on
the part of the Company and no other proceedings on the part of the Company are
necessary to authorize this Agreement or to consummate the Redemption.

(b)           This Agreement and the Escrow Agreement have been duly
executed and delivered by the Company and constitute the legal, valid and
binding obligations of the Company, except that the enforcement hereof and
thereof may be limited by (a) bankruptcy, insolvency, reorganization,
moratorium or other similar Laws now or hereafter in effect relating to
creditors’ rights generally and (b) general principles of equity (regardless of
whether enforceability is considered in a proceeding at law or in equity).

3.             Conditions to
Obligations of the Company.  The
obligation of the Company hereto to effect the Redemption and to consummate the
transactions contemplated hereby shall be subject to the fulfillment or waiver
at or prior to the Closing Date of the following conditions:

 

3

 

(a)           Transactions Closed.  The closing of the transactions contemplated
by the Contribution Agreement and the issuance of the preferred stock pursuant
to the Purchase Agreement shall have occurred and all of the conditions to the
consummation of the Financing or of a replacement debt financing transaction or
transactions, shall have been satisfied or waived and such Financing or
replacement financing shall be on terms, when viewed in the aggregate, no less
favorable to the Company than those set forth on Exhibit VIII to the Purchase
Agreement.

(b)           Escrow Agreement. 
The Escrow Agreement shall be duly executed and delivered to the Company
by all the parties thereto (other than the Company).

(c)           Solvency Letter. 
The Company shall have received a solvency letter, in form and substance
reasonably satisfactory to the Company and the Purchaser, from Houlihan Lokey
Howard & Zukin, with respect to the solvency of the Seller after giving
effect to the transactions contemplated by Section 3(a) above, the Financing
and the Redemption.

4.             Conditions to
Obligations of the Seller.  The
obligation of the Seller hereto to effect the Redemption and to consummate the
transactions contemplated hereby shall be subject to the fulfillment or waiver
at or prior to the Closing Date of the following conditions:

(a)           Purchase Price. 
The Seller shall have received the Closing Payment and the Escrow Amount
shall have been deposited in the Escrow Account.

(b)           Escrow Agreement. The Escrow Agreement shall be
duly executed and delivered to the Seller by all parties thereto (other than
the Seller).

(c)           Transactions Closed.  The closing of the transactions contemplated
by the Contribution Agreement and the issuance of the preferred interests
pursuant to the Purchase Agreement shall have occurred and all of the
conditions to the consummation of the Financing or of a replacement debt
financing transaction or transactions, shall have been satisfied or waived and
such Financing or replacement financing shall be on terms, when viewed in the
aggregate, no less favorable to the Company than those set forth on Exhibit
VIII to the Purchase Agreement.

5.             General.

5.1.          Amendments and Waivers.  The provisions of this Agreement may not be
amended, modified, supplemented or terminated, and waivers or consents to
departures from the provisions hereof may not be given, without the written
consent of Seller and the Company.

5.2.          Notices.  All
notices and other communications provided for or permitted hereunder to any
party shall be deemed to be sufficient if contained in a written instrument and
shall be deemed to have been duly given when delivered in person, by facsimile,
by nationally-recognized overnight courier, or by first class registered or certified
mail, postage prepaid, addressed to such party at the address set forth below
or such other address as may hereafter be designated in writing by the
addressee as follows:

 

4

 

If to the Seller, to:

Rafaella Sportswear, Inc.

1411 Broadway

New York, New York  10018

Attention:  Ronald Frankel

Telephone:            (212) 403-0300

Telecopier:            (212) 764-9275

 

with a copy to:

 

Kronish Lieb Weiner & Hellman LLP

1114 Avenue of the Americas

New York, New York  10036

Attention:
Steven K. Weinberg, Esq.

Telephone:
(212) 479-6240

Telecopier:
(212) 479-6275

If to the Company, to:

Rafaella Apparel Group, Inc.

1411
Broadway

New
York, New York  10018

Attention:
Chief Executive Officer

Telephone:
212-403-0300

Telecopier: 212-764-9275

 

With a copy to:

Schulte Roth & Zabel LLP

919 Third Avenue

New York, New York  10022

Attn:  David E. Rosewater, Esq. 

Telephone:  (212) 756-2208

Telecopier: 
(212) 593-5955

If to RA Cerberus Acquisition, LLC, to:

c/o Cerberus Capital Management, L.P.

299
Park Avenue

New
York, New York  10171

Attention:    Mark Neporent, Kurt Larsen and George
Kollitides

Telephone:  (212) 891-2100

Telecopier: 
(212) 891-1540

 

With a copy to:

 

 

5

 

Schulte Roth & Zabel LLP

919 Third Avenue

New York, New York  10022

Attn:  David E. Rosewater, Esq. 

Telephone:  (212) 756-2208

Telecopier: 
(212) 593-5955

All such notices, requests,
consents and other communications shall be deemed to have been delivered (i) in
the case of personal delivery or delivery by confirmed facsimile, on the date
of such delivery, (ii) in the case of nationally-recognized overnight courier,
on the next business day and (iii) in the case of mailing, on the third
business day following such mailing if sent by certified mail, return receipt
requested.

5.3.          Successors and Assigns.  This Agreement shall inure to the benefit of
and be binding upon the parties hereto and their respective heirs, successors
and assigns.

5.4.          No Assignment. 
This Agreement is not assignable by the Company (by operation of law or
otherwise) without the prior written consent of the other parties, provided,
however that Purchaser may assign this Agreement to its financing sources as
collateral in connection with the Financing or to any of its Affiliates so long
as Purchaser remains an obligor under this Agreement, without the prior written
consent of the other parties.

5.5.          Counterparts. 
This Agreement may be executed in two or more counterparts, each of
which, when so executed and delivered, shall be deemed to be an original, but
all of which counterparts, taken together, shall constitute one and the same
instrument.

5.6.          Descriptive Headings, Etc.  The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning of terms contained herein. 
Unless the context of this Agreement otherwise requires: (i) words of
any gender shall be deemed to include each other gender; (ii) words using the
singular or plural number shall also include the plural or singular number,
respectively; (iii) the words “hereof”, “herein” and “hereunder” and words of
similar import when used in this Agreement shall refer to this Agreement as a
whole and not to any particular provision of this Agreement, and Section and
paragraph references are to the Sections and paragraphs of this Agreement
unless otherwise specified; (iv) the word “including” and words of similar
import when used in this Agreement shall mean “including, without limitation,”
unless otherwise specified; (v) “or” is not exclusive; and (vi) provisions
apply to successive events and transactions.

5.7.          Severability. 
In the event that any one or more of the provisions, paragraphs, words,
clauses, phrases or sentences contained herein, or the application thereof in
any circumstances, is held invalid, illegal or unenforceable in any respect for
any reason, the validity, legality and enforceability of any such provision,
paragraph, word, clause, phrase or sentence in every other respect and of the
other remaining provisions, paragraphs, words, clauses, phrases or sentences
hereof shall not be in any way impaired, it being intended that all rights,
powers and privileges of the parties hereto shall be enforceable to the fullest
extent permitted by law.

 

6

 

5.8.          Governing Law.  This
Agreement shall be governed by and construed in accordance with the internal
laws of the State of New York (without reference to its choice of law rules).

5.9.          Consent to Jurisdiction.  Each of the parties hereto hereby irrevocably
and unconditionally agrees that any action, suit or proceeding, at law or
equity, arising out of or relating to this Agreement or any agreements or
transactions contemplated hereby shall only be brought in any federal court of
the Southern District of New York or any state court located in New York
County, State of New York, and hereby irrevocably and unconditionally expressly
submits to the personal jurisdiction and venue of such courts for the purposes
thereof and hereby irrevocably and unconditionally waives (by way of motion, as
a defense or otherwise) any and all jurisdictional, venue and convenience
objections or defenses that such party may have in such action, suit or
proceeding.  Each party hereby irrevocably
and unconditionally consents to the service of process of any of the
aforementioned courts.  Nothing herein
contained shall be deemed to affect the right of any party to serve process in
any manner permitted by law or commence legal proceedings or otherwise proceed
against any other party in any other jurisdiction to enforce judgments obtained
in any action, suit or proceeding brought pursuant to this Section 5.9.

5.10.        Survival.  The
representations and warranties given or made in this Agreement shall survive
until sixty (60) days after the expiration of the applicable statute of
limitations and shall thereafter terminate and be of no further force or
effect, except any representation or warranty as to which a claim for
indemnification shall have been asserted during the survival period shall
continue in effect with respect to such claim until such claim shall have been
finally resolved or settled.

5.11.        Waiver of Jury Trial. 
EACH PARTY HERETO HEREBY WAIVES, TO THE EXTENT PERMITTED BY APPLICABLE
LAW, TRIAL BY JURY IN ANY LITIGATION IN ANY COURT WITH RESPECT TO, IN
CONNECTION WITH, OR ARISING OUT OF THIS AGREEMENT OR THE VALIDITY,
INTERPRETATION OR ENFORCEMENT HEREOF. 
EACH PARTY HERETO AGREES THAT THIS SECTION IS A SPECIFIC AND MATERIAL
ASPECT OF THIS AGREEMENT AND THAT IT WOULD NOT ENTER INTO THIS AGREEMENT IF
THIS SECTION WERE NOT PART OF THIS AGREEMENT.

5.12.        Entire Agreement. 
This Agreement together with the Purchase Agreement and the other
Transaction Documents are intended by the parties as a final expression of
their agreement and are intended to be a complete and exclusive statement of
the agreement and understanding of the parties hereto in respect of the subject
matter contained herein.  There are no
restrictions, promises, representations, warranties, covenants or undertakings
relating to such subject matter, other than those set forth or referred to
herein and therein.  This Agreement
supersedes all prior agreements and understandings between the parties with
respect to such subject matter.

5.13.        Further Assurances. 
Each party hereto shall do and perform or cause to be done and performed
all such further acts and things and shall execute and deliver all such other
agreements, certificates, instruments and documents as any other party hereto
reasonably may

 

7

 

request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.

5.14.        Construction. 
Each party hereto acknowledges that it has had the benefit of legal
counsel of its own choice and has been afforded an opportunity to review this
Agreement with its legal counsel and that this Agreement shall be construed as
if jointly drafted by all of the parties.

[Remainder
of page intentionally left blank. 
Signature page follows.]

 

 

8

 

IN WITNESS WHEREOF, the
parties hereto have caused this Agreement to be duly executed as of the date
first above written.

 

	
   

  	
  SELLER

  
	
   

  	
   

  
	
   

  	
  RAFAELLA SPORTSWEAR, INC.

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Ronald Frankel

  
	
   

  	
   

  	
  Name:

  	
   

  
	
   

  	
   

  	
  Title:

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  COMPANY 

  
	
   

  	
   

  
	
   

  	
  RAFAELLA APPAREL GROUP, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Glenn S. Palmer

  
	
   

  	
   

  	
  Name:

  	
   

  
	
   

  	
   

  	
  Title:

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  RA CERBERUS ACQUISITION, LLC

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ George Kollitides

  
	
   

  	
   

  	
  Name: George Kollitides

  
	
   

  	
   

  	
  Title: Authorized Person

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