Document:

Billy Martin's Western Wear, LA, Inc

Elite Artz, Inc.

           

(a Nevada Corporation)

Convertible Note

Elite Artz, Inc. a Nevada corporation ("Company") for value received (summarized more specifically in Exhibit I.) hereby promises to pay to Chris Kirch (the "Holder") or his assignee, the sum of twenty Thousand Dollars ($20,000.00) US, with no interest in consideration of the conversion right and payable in accordance with the terms and conditions set forth herein.

1)

Payment Terms:  Principal shall be all due and payable on December 31, 2006.

2)

Right to Convert by Holder:  The Holder of this Note shall have the option to convert the entire amount or any portion thereof, of the principal of this Note into shares of common stock of the Company at a conversion price as hereinafter provided in Paragraph 3 below.

3)

Conversion Price:  The principal of the Note shall be converted into common shares of the Company (the "Converted Shares") at a share price equal to the "bid" price of the Company's common stock on the date of the conversion, or in the event the Company has no bid price, the principal of this Note shall be converted into 400,000 shares as an equity position of the Company.

4)

Conversion Date:  The Conversion Date for the Holder of the Note shall be anytime after December 31, 2006 but  no later than December 31, 2007 (the Holder’s Conversion Period).

5)

Manner of Exercise of Conversion rights:  In order to exercise the conversion rights of this Note, the Holder must give notice to the Company at anytime during the Holder's Conversion Period of its intention to exercise

          

its conversion rights.  Absent such a notice to the Company, the Holder's conversion rights shall expire after the expiration of the Holder's Conversion Period.

6)

Prepayment:  The Company shall have the right to prepay all or any part of the principal of this Note without penalty.  However, in the event the Company elects to prepay the Note, the Holder shall have ten (10) days from the receipt of  written notice of this prepayment election to exercise its conversion rights as set forth above in Paragraph 2.

7)

Default:  In the event the Company fails to pay the principal of this Note when due, the Holder shall have the option, after providing thirty (30) days written notice to the Company, to (1) declare the unpaid principal balance all due and payable or (2) exercise their conversion rights for all of the unpaid principal as set forth above in Paragraph 2.

8)

Company to Reserve Shares:   The Company shall at all times during the term of this Note reserve and keep available out of its authorized but unissued shares, such amount of its duly authorized shares of common stock as shall be necessary to effect the conversion of this Note. 

9)

Notices:  All notices given pursuant to this Note must be in writing and may be given by (1) personal delivery, or (2) registered or certified mail, return receipt requested, or (3) via facsimile transmission.

10)Arbitration:  The parties hereby submit all controversies, claims and           

           matters of difference arising out of the Note to arbitration in Utah.  This

           submission and agreement to arbitrate shall be specifically enforceable. 

IN WITNESS WHEREOF, the Company has caused this Note to be executed by its duly authorized officer.

Elite Artz, Inc.

By: /s/ David Miles Oman

Dated: 9-23-06Exhibit 4.1

 

 

 

RAFAELLA APPAREL GROUP, INC.

STOCKHOLDERS’ AGREEMENT

Dated as of June 20, 2005

 

 

 

 

TABLE OF CONTENTS

 

	
   

  	
   

  	
  Page

  
	
   

  	
   

  	
   

  
	
  1.

  	
  DEFINITIONS

  	
  2

  
	
   

  	
  1.1.

  	
  Other
  Definitional Provisions

  	
  5

  
	
   

  	
   

  	
   

  	
   

  
	
  2.

  	
  RESTRICTIONS
  ON TRANSFERS APPLICABLE TO STOCKHOLDERS AND THE COMPANY

  	
  5

  
	
   

  	
  2.1.

  	
  General
  Restriction

  	
  5

  
	
   

  	
  2.2.

  	
  Restrictions
  on Transfer by Affiliates

  	
  6

  
	
   

  	
  2.3.

  	
  Transfers
  to Permitted Transferees

  	
  7

  
	
   

  	
  2.4.

  	
  Rafaella
  Tag-Along Rights

  	
  7

  
	
   

  	
  2.5.

  	
  Cerberus
  Stockholder Right of First Refusal; Tag-Along Rights

  	
  9

  
	
   

  	
  2.6.

  	
  Subscription
  Rights

  	
  12

  
	
   

  	
  2.7.

  	
  Drag
  Along Right

  	
  13

  
	
   

  	
   

  	
   

  	
   

  
	
  3.

  	
  BOOKS
  AND RECORDS; REPORTS TO STOCKHOLDERS

  	
  14

  
	
   

  	
  3.1.

  	
  Books
  and Records

  	
  14

  
	
   

  	
  3.2.

  	
  Financial
  Reporting; Annual Budget

  	
  15

  
	
   

  	
   

  	
   

  	
   

  
	
  4.

  	
  BOARD
  OF DIRECTORS AND OTHER MATTERS

  	
  15

  
	
   

  	
  4.1.

  	
  Board
  of Directors

  	
  15

  
	
   

  	
  4.2.

  	
  Transactions
  with Affiliates

  	
  16

  
	
   

  	
  4.3.

  	
  Expenses

  	
  17

  
	
   

  	
  4.4.

  	
  Non-Competition

  	
  17

  
	
   

  	
  4.5.

  	
  Incentive
  Plan

  	
  18

  
	
   

  	
   

  	
   

  	
   

  
	
  5.

  	
  GENERAL

  	
  18

  
	
   

  	
  5.1.

  	
  Amendments
  and Waivers

  	
  18

  
	
   

  	
  5.2.

  	
  Notices

  	
  18

  
	
   

  	
  5.3.

  	
  Successors
  and Assigns

  	
  20

  
	
   

  	
  5.4.

  	
  Descriptive
  Headings, Etc

  	
  20

  
	
   

  	
  5.5.

  	
  Severability

  	
  20

  
	
   

  	
  5.6.

  	
  Counterparts

  	
  20

  
	
   

  	
  5.7.

  	
  Confidentiality

  	
  20

  
	
   

  	
  5.8.

  	
  Complete
  Agreement

  	
  21

  
	
   

  	
  5.9.

  	
  No
  Third Party Beneficiary

  	
  21

  
	
   

  	
  5.10.

  	
  No
  Implied Waiver

  	
  21

  
	
   

  	
  5.11.

  	
  Governing
  Law

  	
  21

  
	
   

  	
  5.12.

  	
  Jurisdiction

  	
  21

  
	
   

  	
  5.13.

  	
  Waiver
  of Jury Trial

  	
  21

  

 

i

 

EXHIBITS AND SCHEDULES

 

Schedule
1 – Investors

 

Exhibit
A – Stockholder Joinder

 

ii

 

STOCKHOLDERS’ AGREEMENT

 

This
STOCKHOLDERS’ AGREEMENT (this “Agreement”) is made and entered into as
of June 20, 2005, by and among Rafaella Apparel Group, Inc., a Delaware
corporation (formerly known as Rafaella Corporation) (the “Company”), RA
Cerberus Acquisition, LLC (“Cerberus”) and Rafaella Sportswear, Inc. (“Rafaella”
and, together with Cerberus, the “Stockholders”) and each of the
principals of Rafaella named on Schedule 1 hereto (each, a “Principal”
and, collectively, the “Principals”).

 

W I  T
N  E  S  S  E  T  H:

 

WHEREAS,
the Company and Rafaella are parties to a Contribution Agreement, (the “Contribution
Agreement”), pursuant to which Rafaella has contributed to the capital of
the Company the Assets and the Company has assumed the Assumed Liabilities
(each as defined in the Contribution Agreement) in exchange for 100% of the
Common Stock of the Company (the “Contribution”);

 

WHEREAS,
the Company, the Stockholders, and certain affiliates of the Stockholders are
parties 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 Cerberus has
contributed to the capital of the Company $40 million in exchange for 100% of
the Series A Preferred Stock in the Company (the “Preferred Stock Issuance”);

 

WHEREAS,
Jefferies & Company Inc. has entered into a senior note purchase agreement
(the “Senior Note Purchase Agreement”), with the Company pursuant to
which the Company issued $172,000,000 aggregate principal amount at maturity of
second lien senior secured notes (the “Financing”);

 

WHEREAS,
pursuant to the redemption agreement, dated as of June
      , 2005 (the “Redemption Agreement”)
and upon the terms and conditions therein, a portion of the proceeds of the
Preferred Stock Issuance and the Financing shall be used to redeem 75% of the
Shares of Common Stock in the Company from Rafaella (the “Redemption”);
and

 

WHEREAS,
the individuals listed on Schedule I hereof (the “Principals”) desire to
make certain agreements to induce Cerberus to execute this Agreement and the
Purchase Agreement and the parties hereto wish to restrict the transfer of the
Capital Stock of the Company and to provide for certain other rights and
obligations as set forth herein.

 

NOW,
THEREFORE, in consideration of the mutual covenants and agreements herein
contained and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:

 

 

1.                                       DEFINITIONS. As used in this Agreement, the
following terms shall have the following meanings:

 

“Affiliate”
of a specified Person means any other Person who (a) directly or indirectly
controls, is controlled by, or is under common control with, such specified
Person; or (b) is an officer, director, member, manager or agent of such
specified Person, or (c) in the case of a natural person, any Family Member of
such natural person. For purposes of the preceding sentence, “control” of a
Person means possession, directly or indirectly (through one or more
intermediaries), of the power to direct or cause the direction of management
and policies of such Person through ownership of voting securities (or other
ownership interests), contract, voting trust or otherwise.

 

“Agreement”
shall have the meaning set forth in the preamble.

 

“Applicable
Law” shall mean, with respect to any Person, all provisions of laws,
statutes, ordinances, rules, regulations, permits or certificates of any
Governmental Authority applicable to such Person or any of its assets or
property, and all judgments, injunctions, orders and decrees of all courts,
arbitrators or Governmental Authorities in proceedings or actions in which such
Person is a party or by which any of its assets or properties are bound.

 

“Board”
shall mean the Company’s board of directors.

 

“Business”
means the business and substantially all of the assets of Rafaella, subject to
certain assumed liabilities.

 

“Capital
Stock” shall mean the Common Stock and the Preferred Stock of the Company.

 

“Cause”
means, with respect to conduct during the Director’s service on the Board of
the Company, (i) the commission of a felony by the Director; (ii) acts of
dishonesty committed by the Director resulting or intending to result in
personal gain or enrichment at the expense of the Company or its subsidiaries;
(iii) repeated failure by the Director to perform his duties as described in
this Agreement; or (iv) gross negligence or willful malfeasance in the
performance by the Director of his duties as a member of the Board (which, if
curable, is not cured within 15 days after notice thereof to the Director by
the Board).

 

“Cerberus
Holder” means any fund or account managed by, or Affiliate of, Cerberus
Capital Management L.P.

 

“Change
of Control” shall mean (i) the consolidation, merger or other business
combination of the Company with or into another Person (other than (A) a
consolidation, merger or other business combination in which holders of the
Company’s voting power immediately prior to the transaction continue after the
transaction to hold, directly or indirectly, the voting power of the surviving
entity or entities necessary to elect a majority of the members of the board of
directors (or their equivalent if other than a corporation) of such entity or
entities, or (B) pursuant to a migratory merger effected solely for the purpose
of changing the jurisdiction of incorporation of the Company), (ii) the sale or
transfer of all or substantially all of the assets of the Company and its
Subsidiaries taken as a whole, or (iii) the consummation of a purchase,

 

 

tender or exchange offer made to and accepted
by the holders of more than 50% of the aggregate voting power of the
fully-diluted outstanding shares of Common Stock (on an as-converted basis)
which results in a person or group unaffiliated with Cerberus owning in excess
of 50% of the aggregate voting power of the fully-diluted outstanding shares of
Common Stock.

 

“Common
Stock” shall mean common stock of the Company, par value $.01 per share.

 

“Exchange
Act”  means the Securities Exchange
Act of 1934, as amended.

 

“Fair
Market Value” means the amount for which any asset could be sold in an
arm’s length transaction by one who desires to sell, but is not under any
urgent requirement to sell, to a buyer who desires to buy, but is under no
urgent necessity to buy, when both have a reasonable knowledge of the facts,
all as determined by the Board; provided, however, that if any Stockholder
objects to such determination, the Fair Market Value shall be determined by two
independent appraisers (each, an “Appraiser”), one selected by Cerberus
and one selected by Rafaella, provided that if either Cerberus or Rafaella fail
to appoint an Appraiser within 10 days following the expiration of such 20 day
period, Fair Market Value shall be determined by the Appraiser selected by the
other selecting Stockholder. If two Appraisers are selected, each Appraiser
shall submit to the Stockholders their respective appraisals within 30 days
after their selection. If a discrepancy between the dollar value of the
appraisals exceeds 10% of the higher appraisal and the Stockholders do not
agree on a settlement of the discrepancy within 10 days after receipt of the
appraisals, then a third Appraiser mutually selected by the Stockholders (or if
they cannot so select, then selected by the first two Appraisers), shall be
afforded access to the first two appraisals. The third Appraiser shall select
one of the appraisals of the first two Appraisers, which selection shall
constitute a final determination of Fair Market Value of the property or asset
and shall be binding upon the Stockholders. If a discrepancy between the
appraisals of the first two Appraisers is less than 10% of the higher
appraisal, then the Fair Market Value of the property or assets shall be the
average of the two appraisals. Notwithstanding anything herein to the contrary,
securities which are listed or traded on a national securities exchange shall
be valued at the average last sales price during the immediately preceding 20
days on which such securities are traded on such exchange or, with respect to any
of such dates on which no sales occurred, at the mean between the high “bid”
and low “asked” prices at the close of business on such date.

 

“Family
Member” means, with respect to any specified natural person, (i) any
parent, child, descendant or sibling of such natural person (including
relationships resulting from adoption) or (ii) the spouse of such natural
person or of any person covered by clause (i).

 

“Fiscal
Year” means the fiscal year of the Company, as determined by the Board.

 

“Governmental
Authorities” means any federal, state, local or foreign government or court
of competent jurisdiction, administrative agency, commission, or other
governmental or regulatory authority or instrumentality.

 

“Independent”
shall have the meaning given to such term in Section 301 of the Sarbanes
Oxley Act of 2002.

 

 

“Lien”
means and includes any lien, security interest, pledge, charge, option, right
of first refusal, claim, mortgage, lease, easement or any other encumbrance
whatsoever.

 

“Permitted
Transferee” means:  (i) with respect
to the shares of Capital Stock being Transferred, the Company which is the
issuer of such shares of Capital Stock, (ii) with respect to any Stockholder
who is not a natural person, any Affiliate of such Stockholder that is
controlled by the same Persons (with identical percentage ownership), (iii)
with respect to any Stockholder who is a natural person, (x) upon the death of
such natural person, any Person in accordance with such natural person’s will
or the laws of intestacy; or (y) one or more trusts for the sole benefit of the
Family Members of such natural person provided that such natural person
shall not be released from his obligations under this Agreement as a
Stockholder; and (iv) in the event of the dissolution, liquidation or winding
up of any such Person that is a corporation, partnership or limited liability
company, the stockholders of a corporation that is such Person, the partners of
a partnership that is such Person, the members of a limited liability company
that is such Person or a successor corporation all of the stockholders of which
or a successor partnership all of the partners of which or a limited liability
company all of the members of which are the Persons who were the stockholders
of such corporation or the partners of such partnership or the members of such
limited liability company immediately prior to the dissolution, liquidation or
winding up of such Person; provided, however, that no such
Transfer under any one or more of the foregoing clauses (i) through (iv) to any
such Person shall be permitted where such Transfer (x) fails to comply in
any respect with any federal or state securities laws, including, without
limitation, the Investment Company Act of 1940, as amended, or (y) would result
in the Company becoming subject to the Exchange Act.

 

“Person”
means any individual, corporation, association, partnership (general or
limited), joint venture, trust, joint-stock company, estate, limited liability
company, unincorporated organization or other legal entity or organization.

 

“Preferred
Stock” shall mean Series A Preferred Stock and any other series of
preferred stock of the Company from time to time in existence.

 

“Proportionate
Percentage” shall mean, with respect to any group of Stockholders, the
ratio of the number of shares of Common Stock then owned by any Stockholder of
such group to the aggregate number of shares of Common Stock then owned by all
Stockholders of such group, determined on an as converted basis for all Capital
Stock then owned by any such Stockholder. When the term Proportionate
Percentage is used without reference to any specific group of Stockholders, all
of the Company’s Stockholders shall be considered part of the relevant group.

 

“Securities
Act” shall have the meaning set forth in Section 2.1(c).

 

“Series
A Preferred Stock” shall mean Series A Preferred Stock of the Company, par
value $.01 per share.

 

“Stockholder
Joinder” shall mean a joinder agreement, substantially in the form of Exhibit
A attached hereto, executed by a Person, other than a current Stockholder,
who has 

 

 

acquired shares from a current Stockholder or
Permitted Transferee, with the effect that the holder thereafter shall be
deemed to be a Stockholder for all purposes of this Agreement.

 

“Subsidiary”
or “Subsidiaries” of any Person, means any corporation, partnership,
limited liability company, joint venture or other legal entity of which such
Person (either alone or through or together with any other Subsidiary), owns,
directly or indirectly, 50% or
more of the stock or other equity interests the holders of which are generally
entitled to vote for the election of the board of directors or other governing
body of such corporation or other legal entity.

 

“Transfer”
means any transfer, sale, assignment, exchange, charge, pledge, gift,
hypothecation, conveyance, encumbrance, security interest or other disposition
(including any contract therefore), whether direct or indirect, voluntary or
involuntary, by operation of law or otherwise and with respect to the shares of
Capital Stock, the entering into any voting trust or other arrangement (other
than as contemplated herein) with respect to voting rights of such shares of
Capital Stock or the transfer of any other beneficial interest in the shares of
Capital Stock.

 

1.1.                              Other Definitional Provisions. (a) 
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

 

(b)                                 The terms “dollars” and “$” shall mean
United States dollars.

 

2.                                       RESTRICTIONS ON TRANSFERS APPLICABLE TO
STOCKHOLDERS AND THE COMPANY.

 

2.1.                              General Restriction.

 

(a)                                  Except as otherwise contemplated in this
Section 2, Rafaella and any transferee of Rafaella (other than a transferee
acquiring shares pursuant to Section 2.4 or 2.7 hereof) agrees, without the
prior written consent of Cerberus (which consent may be withheld for any reason
or for no reason), not to Transfer any or all of its Capital Stock (or any
interest therein). Any purported Transfer in violation of the foregoing, other
than in compliance with this Agreement, shall be null and void. Subject to the
provisions of Section 2.4 hereof, any holder of Preferred Stock (or any Capital
Stock issued upon conversion thereof) may Transfer any or all of its Capital
Stock of the Company (or any interest therein) to any Person at any time.

 

(b)                                 From and after the date hereof, all
certificates or other instruments representing Capital Stock held by any of the
Stockholders of the Company shall bear a legend which shall state as follows:

 

“The
shares represented by this certificate are subject to and have the benefit of a
Stockholders’ Agreement of the issuer, dated as of June
    , 2005, as the same may be amended from time to time. A
copy of such Stockholders’ Agreement has been filed in the principal executive
office of the Company where the same may be inspected daily during business
hours.”

 

 

(c)                                  In addition to the legend required by
Section 2.1(b) above, all certificates or other instruments, if any,
representing Capital Stock held by any of the Stockholders of the Company shall
bear a legend which shall state as follows:

 

“The
shares represented by this certificate have not been registered under the
Securities Act of 1933, as amended (the “Securities Act”), and such
shares may not be offered, sold, pledged or otherwise transferred except (1)
pursuant to an exemption from, or in a transaction not subject to, the
registration requirements under the Securities Act or (2) pursuant to an
effective registration statement under the Securities Act, in each case in
accordance with any applicable securities laws of any State of the United
States.”

 

(d)                                 The Company agrees that it will not cause
or permit any Transfer of any Capital Stock to be made on its books unless such
Transfer is permitted by this Agreement and has been made in accordance with
the terms hereof.

 

(e)                                  Each Stockholder agrees that it will not
effect any Transfer of any Capital Stock unless such Transfer is made (i) pursuant
to an effective registration statement under the Securities Act or pursuant to
an exemption from the registration requirements of the Securities Act and (ii)
in accordance with any other applicable “blue sky” laws of any state of the
United States.

 

(f)                                    Rafaella and any transferee of Rafaella
(other than a transferee acquiring shares pursuant to Section 2.4 or 2.7
hereof) agrees not to Transfer any or all of its shares of Capital Stock (or
any interest therein) unless the transferee of such Transfer agrees in writing
to comply with the provisions of Section 4.4 or such transfer is in accordance
with Section 2.4 or 2.7 hereof. Any purported Transfer in violation of the
provisions of this Section 2.1(f) shall be null and void.

 

2.2.                              Restrictions on Transfer by Affiliates.

 

(a)                                  Each Principal agrees to cause Rafaella
to comply with the restrictions on transfer of shares of Capital Stock
contained in this Article 2.

 

(b)                                 Each Principal agrees not to Transfer its
ownership interest in Rafaella, respectively, unless (x) (i) Stockholders
holding a majority of the voting power of the Common Stock of the Company
(voting on an as-converted basis) shall consent in writing to such Transfer or
(ii) such transfer is to a Permitted Transferee and (y) the transferee of such
Transfer agrees in writing to comply with the provisions of Section 4.4.

 

(c)                                  Rafaella agrees, and each Principal
agrees to cause Rafaella, not to issue any equity securities in Rafaella to any
Person (other than to a Permitted Transferee) prior to the occurrence of an
event of dissolution of the Company (or its successors).

 

(d)                                 Nothing in this Agreement or any other
Transaction Document (as defined in the Purchase Agreement) shall preclude a
Principal from causing Rafaella to be dissolved and the Common Stock of the
Company held by Rafaella to be 

 

 

distributed to the stockholders of Rafaella
as of the date hereof or any transferee who receives stock of Rafaella in
compliance with this Agreement, provided, that no such event of
dissolution of Rafaella shall occur prior to the full satisfaction of, or
reservation pursuant to and in accordance with Delaware law for, all claims
against and liabilities of Rafaella.

 

2.3.                              Transfers to Permitted Transferees. Notwithstanding any other provision of
this Agreement, upon written notice to each of the other Stockholders, each
holder of Common Stock may Transfer some or all of its shares (or any interest
thereon) to any Permitted Transferee. A Permitted Transferee shall have all the
rights and powers, and shall be subject to all of the restrictions and
liabilities (including, but not limited to, the non-competition obligations set
forth in Section 4.4 below) of the holders of Common Stock from whom the
transferred stock was acquired relative to such transferred stock. The transfer
to a Permitted Transferee, without more, shall not release the transferor
holders of Common Stock from any liability with respect to the transferred
Common Stock (or otherwise) that may have existed prior to the transfer.

 

2.4.                              Rafaella Tag-Along Rights.

 

(a)                                  If at any time Cerberus or any Person
that acquires Capital Stock from Cerberus or from such a transferee of Cerberus
(a “Cerberus Transferee”) (Cerberus or the Cerberus Transferee being
hereinafter referred to as the “Proposed Cerberus Seller”) wishes to
Transfer (other than an indirect Transfer) some or all of its Capital Stock to
a third party other than a Permitted Transferee (the “Proposed Cerberus
Buyer”), the Proposed Cerberus Seller shall first give written notice (a “Cerberus
Offer Notice”) thereof to the other Stockholders (the “Remaining
Stockholders”). Each Cerberus Offer Notice shall state, in reasonable
detail, (i) the Proposed Cerberus Buyer, (ii) the amount and series,
if any, of Capital Stock to be sold, (iii) the offering price (which shall
be payable in cash) per share (or portion thereof) and (iv) all other
significant terms and conditions of such offer including any representations or
warranties with respect to which the Remaining Stockholders may have an indemnification
or contribution obligation.

 

(b)                                 Not later than the ten (10) business days
following receipt by such Remaining Stockholders of a Cerberus Offer Notice,
such Remaining Stockholders shall give written notice (the “Cerberus
Response Notice”) to the Proposed Cerberus Seller indicating whether such
Remaining Stockholders elects to exercise their rights hereunder to require
that their Capital Stock be Transferred to the Proposed Cerberus Buyer on a pro
rata basis with the Transfer of the Proposed Cerberus Seller’s Capital Stock,
and on the same terms and conditions specified in the Cerberus Offer Notice
with respect to the Proposed Cerberus Seller’s Capital Stock, including the
same price per share of Common Stock (treating the Preferred Stock on an as-converted
basis) provided that the price per share of Series A Preferred Stock may be
appropriately adjusted to account for the redemption rights of the holder of
Series A Preferred Stock only in the event that the proposed sale price per
share of Series A Preferred Stock is not more than the amount that the
redemption price would be for such share of Series A Preferred Stock if
redeemed at the date of sale.

 

The
failure to deliver a Cerberus Response Notice within such ten (10) day period
shall be deemed to be a waiver of the Rafaella Option.

 

 

(c)                                  If such Remaining Stockholders elect to
exercise the Rafaella Option:

 

(i)                                     The Proposed Cerberus Seller shall promptly
seek to cause the Proposed Cerberus Buyer to purchase both its and such
Remaining Stockholder’s capital stock on a pro rata basis at the same price and
upon the same terms and conditions (appropriately adjusted to account for the
redemption rights of the holders of Series A Preferred Stock only in the event
that the proposed sale price per share of Series A Preferred Stock is not more
than the amount that the redemption price would be for such share of Series A
Preferred Stock if redeemed at the date of sale) as specified in the Cerberus
Offer Notice; provided, however, that such terms and conditions
shall not be deemed to include the making of any representations and
warranties, indemnities or other similar agreement to the Proposed Cerberus
Buyer, other than representations and warranties with respect to title to the
Capital Stock being sold and authority to sell such Capital Stock and
indemnities related thereto.

 

(ii)                                  If the Proposed Cerberus Buyer is not willing
to purchase the Capital Stock of such Remaining Stockholder on the same terms
and conditions (appropriately adjusted to account for the redemption rights of
the holders of Series A Preferred Stock only in the event that the proposed
sale price per share of Series A Preferred Stock is not more than the amount
that the redemption price would be for such share of Series A Preferred Stock
if redeemed at the date of sale) as specified in the Cerberus Offer Notice,
then the Proposed Cerberus Seller shall not be permitted to Transfer its
Capital Stock to the Proposed Cerberus Buyer.

 

(iii)                               At the closing of the purchase and sale of
the Capital Stock pursuant to this Section 2.4(c), each Stockholder selling its
respective Capital Stock shall deliver to the Proposed Cerberus Buyer stock
certificates or such other documentation as is reasonably satisfactory to the
Proposed Cerberus Buyer evidencing its ownership of such Capital Stock; and
(ii) the Proposed Cerberus Buyer shall pay the purchase price to the
Proposed Cerberus Seller and each selling Remaining Stockholder on a pro rata
basis in respect of their respective Capital Stock being sold.

 

(iv)                              In order to provide for just and equitable
contribution if the Proposed Cerberus Seller makes a payment to the Proposed
Cerberus Buyer with respect to an obligation or liability arising under an
indemnity by the Proposed Cerberus Seller covering representations and
warranties (excluding representations and warranties, if any, with respect to
post-acquisition events) made in any agreement by which Capital Stock is sold
pursuant to this Section 2.4(c), each Remaining Stockholder shall contribute to
the aggregate amount of such payments in the proportion that the amount
received by such Remaining Stockholder from the sale of its Capital Stock to
the Proposed Cerberus Buyer bears to the aggregate amount received by the
Proposed Cerberus Seller and all such Remaining Stockholders from the sale of
their respective Capital Stock to the Proposed Cerberus Buyer.

 

(d)                                 If the Remaining Stockholders do not
exercise the Rafaella Option, the Proposed Cerberus Seller may sell the shares
of Capital Stock that were the subject of the Cerberus Offer Notice to the
Proposed Cerberus Buyer named therein, on the same terms set forth in the
Cerberus Offer Notice, pursuant to a binding written agreement entered into 

 

 

within ninety (90) days following receipt by
the Proposed Cerberus Seller of the related Cerberus Response Notice or the
expiration of the period for giving such Cerberus Response Notice if no such
notice is received during such period. If a binding written agreement to sell
such Capital Stock is not entered into within such ninety (90) day period, and
if such shares of Capital Stock are not sold pursuant to such agreement within
a ninety (90) day period after entering into such agreement, then the
restrictions of this Section 2.4 shall again apply.

 

(e)                                  It shall be a condition to any sale of
Capital Stock by a Proposed Cerberus Seller or a Remaining Stockholder to a
Proposed Cerberus Buyer pursuant to this Section 2.4 that such shares of
Capital Stock be sold free and clear of all Liens other than such Liens in
connection with indebtedness of the Company.

 

(f)                                    If at any time any Cerberus Holder
holding interests of Cerberus or any Person that acquires interests in Cerberus
from any such Cerberus Holder or from any transferee of such Cerberus Holder
wishes to Transfer (other than indirect Transfers) its interests in Cerberus to
a third party other than a Permitted Transferee, prior to effecting any such
Transfer, such Cerberus Holder or Person shall, and Cerberus shall cause such
Cerberus Holder or Person to, provide the other Stockholders with the same
rights that such other Stockholder would have had if such Transfer had been a
direct Transfer of Capital Stock pursuant to Sections 2.4(a)-(e).

 

(g)                                 Any purported transfer in violation of
this Section 2.4 shall be null and void ab
initio.

 

2.5.                              Cerberus Stockholder Right of First
Refusal; Tag-Along Rights.

 

(a)                                  If at any time Rafaella or any Person
that acquires Capital Stock from Rafaella or from such a transferee of Rafaella
(a “Rafaella Transferee”, and together with the Cerberus Transferee, a “Transferee”)
(Rafaella or the Rafaella Transferee being hereinafter referred to as the “Proposed
Rafaella Seller”) wishes to Transfer (other than an indirect Transfer) some
or all of its Capital Stock to a third party other than a Permitted Transferee
(the “Proposed Rafaella Buyer”), the Proposed Rafaella Seller shall
first give written notice (a “Rafaella Offer Notice”) thereof to
Cerberus. Each Rafaella Offer Notice shall state, in reasonable detail,
(i) the Proposed Rafaella Buyer, (ii) the amount and series, if any,
of Capital Stock to be sold, (iii) the offering price (which shall be
payable in cash) per share (or portion thereof) and (iv) all other
significant terms and conditions of such offer.

 

(b)                                 Not later than the ten (10) business days
following receipt by Cerberus of a Rafaella Offer Notice, Cerberus shall give
written notice (the “Rafaella Response Notice”) to the Proposed Rafaella
Seller indicating whether Cerberus elects to exercise its rights hereunder (the
“Cerberus Options”), which consist of the following:

 

(i)                                     Cerberus may require that its Capital
Stock be Transferred to the Proposed Rafaella Buyer on a pro rata basis with
the Transfer of the Proposed Rafaella Seller’s Capital Stock, and on the same
terms and conditions specified in the Rafaella Offer Notice with respect to the
Proposed Rafaella Seller’s Capital Stock, including the same price per share of
Common Stock (treating the Preferred Stock on an 

 

 

as converted basis)
provided that the price per share of Series A Preferred Stock may be
appropriately adjusted to account for the redemption rights of the holder of
Series A Preferred Stock only in the event that the proposed sale price per
share of Series A Preferred Stock is not more than the amount that the redemption
price would be for such share of Series A Preferred Stock if redeemed on the
date of sale; or

 

(ii)                                  Cerberus may purchase the Capital Stock
offered by the Proposed Rafaella Seller on the same terms and conditions
specified in the Rafaella Offer Notice; or

 

(iii)                               Cerberus may neither sell its shares of
Capital Stock nor purchase the Capital Stock offered by the Proposed Rafaella
Seller.

 

The
failure to deliver a Rafaella Response Notice within such ten (10) day period
shall be deemed to be an election of Cerberus Option (iii) above.

 

(c)                                  If Cerberus elects to exercise Cerberus
Option (i) above:

 

(i)                                     The Proposed Rafaella Seller shall
promptly seek to cause the Proposed Rafaella Buyer to purchase both its and
Cerberus’ Capital Stock on a pro rata basis at the same price and upon the same
terms and conditions (appropriately adjusted to account for the redemption
rights of the holder of Series A Preferred Stock only in the event that the
proposed sale price per share of Series A Preferred Stock is not more than the
amount that the redemption price would be for such share of Series A Preferred
Stock if redeemed on the date of sale) as specified in the Rafaella Offer
Notice; provided, however, that such terms and conditions shall
not be deemed to include the making of any representations and warranties,
indemnities or other similar agreement to the Proposed Rafaella Buyer, other
than representations and warranties with respect to title to the Capital Stock
being sold and authority to sell such Capital Stock and indemnities related
thereto.

 

(ii)                                  If the Proposed Rafaella Buyer is not
willing to purchase Cerberus’ shares of Capital Stock on the same terms and
conditions as specified in the Rafaella Offer Notice, then the Proposed
Rafaella Seller shall not be permitted to Transfer its Capital Stock to the
Proposed Rafaella Buyer.

 

(iii)                               At the closing of the purchase and sale
of the Capital Stock pursuant to this Section 2.5(c), each Stockholder selling
its respective Capital Stock shall deliver to the Proposed Rafaella Buyer stock
certificates or such other documentation as is reasonably satisfactory to the
Proposed Rafaella Buyer evidencing its ownership of such Capital Stock; and
(ii) the Proposed Rafaella Buyer shall pay the purchase price to the
Proposed Rafaella Seller and Cerberus on a pro rata basis in respect of their
respective Capital Stock being sold.

 

(iv)                              In order to provide for just and
equitable contribution if the Proposed Rafaella Seller makes a payment to the
Proposed Rafaella Buyer with respect to an obligation or liability arising
under an indemnity by the Proposed Rafaella Seller covering representations and
warranties (excluding 

 

 

representations and
warranties, if any, with respect to post-acquisition events) made in any
agreement by which shares of Capital Stock are sold pursuant to this Section
2.5(c), Cerberus shall contribute to the aggregate amount of such payments in
the proportion that the amount received by Cerberus from the sale of its
Capital Stock to the Proposed Rafaella Buyer bears to the aggregate amount
received by the Proposed Rafaella Seller and Cerberus from the sale of their
respective Capital Stock to the Proposed Rafaella Buyer.

 

(d)                                 If Cerberus elects to exercise Cerberus
Option (ii) above, the Transfer to Cerberus shall take place at a mutually
agreeable time and place not more than 30 days after the Rafaella Response
Notice has been given, subject to compliance with any applicable statutory or
regulatory requirements, receipt of all necessary governmental consents, clearances
and approvals and deferral of the date for such Transfer until completion of
compliance with such requirements and the issuance of such approvals, but in no
event to a date more than sixty (60) days after the Rafaella Response Notice
has been given. Each such Transfer of Capital Stock shall be on the same terms
and conditions as those proposed by the Proposed Rafaella Buyer named in such
Rafaella Offer Notice.

 

(e)                                  If Cerberus does not exercise Rafaella
Option (i) or Rafaella Option (ii), the Proposed Rafaella Seller may sell the
shares of Capital Stock that were the subject of the Rafaella Offer Notice to
the Proposed Rafaella Buyer named therein, on the same terms set forth in the
Rafaella Offer Notice, pursuant to a binding written agreement entered into
within ninety (90) days following receipt by the Proposed Rafaella Seller of
the related Rafaella Response Notice or the expiration of the period for giving
such Rafaella Response Notice, if no such notice is received during such
period. If a binding written agreement to sell such shares of Capital Stock is
not entered into within such ninety (90) day period, and if such shares of
Capital Stock are not sold pursuant to such agreement within a ninety (90) day
period after entering into such agreement, then the restrictions of this
Section 2.5 shall again apply.

 

(f)                                    Neither Rafaella nor any Rafaella
Transferee shall pledge or encumber its Capital Stock in the Company and it
shall be a condition to any sale of Capital Stock by a Proposed Rafaella Seller
to Cerberus and to any sale by a Proposed Rafaella Seller or Cerberus to a
Proposed Rafaella Buyer pursuant to this Section 2.5 that such shares of
Capital Stock be sold free and clear of all Liens whatsoever, other than such
Liens in connection with indebtedness of the Company.

 

(g)                                 Rafaella and any Rafaella Transferee
shall not indirectly Transfer any of its shares of Capital Stock to a third
party other than a Permitted Transferee unless, in connection with such
indirect Transfer, Rafaella or such Rafaella Transferee provides Cerberus with
the same rights that Cerberus would have had pursuant to Sections 2.6(a)-(e) if
Rafaella or such Rafaella Transferee had engaged in a direct Transfer of its
Capital Stock. Any purported Transfer in violation of this Section 2.5(g) shall
be null and void ab initio.

 

 

2.6.                              Subscription Rights.

 

(a)                                  If at any time after the date hereof, the
Company proposes to issue equity securities of any kind (for purposes of this
Section 2.6, the term “equity securities” shall include any warrants,
options or other rights to acquire equity securities and debt securities
convertible into equity securities) of the Company other than (i) pursuant to
an incentive plan in compliance with the limits described in Section 4.5 or
(ii) pursuant to an investment in the Company by Cerberus of Escrow Funds (as
defined in the Escrow Agreement dated June     , 2005 by
and among Cerberus, the Company, Rafaella, Ronald Frankel and JP Morgan Chase
Bank, N.A., (the “Escrow Agreement”)) pursuant to that certain Letter
Agreement dated May 27, 2005 by and among Cerberus, the Company, Rafaella,
Ronald Frankel and Jefferies & Company, Inc. (the “Letter Agreement”)
then, as to each Stockholder, the Company shall:

 

(i)                                     give written notice setting forth in
reasonable detail (1) the designation and all of the terms and provisions of
the securities proposed to be issued (the “Proposed Securities”),
including, where applicable, the voting powers, preferences and relative
participating, optional or other special rights, and the qualification,
limitations or restrictions thereof and interest rate and maturity, (2) the
price and other terms of the proposed sale of such securities, (3) the amount
of such securities proposed to be issued, and (4) such other information as the
Stockholders may reasonably request in order to evaluate the proposed issuance;
and

 

(ii)                                  offer to issue to each such Stockholder a
portion of the Proposed Securities in proportion to such Stockholder’s
Proportionate Percentage.

 

(b)                                 Each such Stockholder must exercise its
purchase rights hereunder within ten (10) days after receipt of such notice
from the Company. If all of the Proposed Securities offered to such
Stockholders are not fully subscribed for by such Stockholders, the remaining
Proposed Securities will be reoffered to the Stockholders purchasing their full
allotment upon the terms set forth in this Section 2.6, until all such Proposed
Securities are fully subscribed for or until all such Stockholders have
subscribed for all such Proposed Securities which they desire to purchase,
except that such Stockholders must exercise their purchase rights within five
(5) days after receipt of all such reoffers. To the extent that the Company
offers two or more securities in units, such Stockholders must purchase such
units as a whole and will not be given the opportunity to purchase only one of
the securities making up such unit.

 

(c)                                  During the one hundred and twenty (120)
days following the expiration of the offering periods described above, the
Company will be free to sell any Proposed Securities that the Stockholders have
not elected to purchase on terms and conditions no more favorable to the
purchasers thereof than those offered to the Stockholders. Any Proposed
Securities offered or sold by the Company after such one hundred and twenty
(120)-day period must be reoffered to the Stockholders pursuant to this Section
2.6.

 

(d)                                 The election by any Stockholder not to
exercise its subscription rights under this Section 2.6 in any one instance
shall not affect its right (other than 

 

 

in respect of a reduction in its percentage
holdings) as to any subsequent proposed issuance. Any sale of such securities
by the Company without first giving the Stockholders the rights described in
this Section 2.6 shall be void and of no force and effect.

 

2.7.                              Drag Along Right.

 

(a)                                  If at any time and from time to time
after the date of this Agreement, Stockholders holding a majority of the Common
Stock on an as-converted basis (the “Majority Holders”) wish to (i)
Transfer in a bona fide arms’ length sale all of their Capital Stock to any
Person or Persons who are not Affiliates of the Company or the Majority Holders
for consideration consisting of at least 80% cash or cash equivalents or
readily marketable securities, (ii) approve any merger of the Company with or
into any other Person who is not an Affiliate of the Company or the Majority
Holders where each Stockholder receives its Proportionate Percentage of the
aggregate consideration paid in such merger (appropriately adjusted to account
for the redemption rights of the holder of Series A Preferred Stock only in the
event that the proposed sale price per share of Series A Preferred Stock is not
more than the amount that the redemption price would be for such share of Series
A Preferred Stock if redeemed on the date of sale), which consideration
consists of at least 80% cash or cash equivalents or readily marketable
securities, or (iii) approve any sale of all or substantially all of the
Company’s assets for consideration consisting of at least 80% cash or cash
equivalents or readily marketable securities to any Person or Persons who are
not Affiliates of the Company or the Majority Holders (for purposes of this
Section 2.7, such Person or Persons is referred to as the “Proposed
Transferee”), the Majority Holders shall have the right (for purposes of
Section 2.7, the “Drag-Along Right”) to (x) in the case of a Transfer of
the type referred to in clause (i), require each other Stockholder to sell to
the Proposed Transferee all of its Capital Stock (including any warrants or
options or other rights to acquire Capital Stock) for an amount equal to such
other Stockholder’s Proportionate Percentage of the total consideration
proposed to be received by all Stockholders (appropriately adjusted to account
for the redemption rights of the holder of Series A Preferred Stock only in the
event that the proposed sale price per share of Series A Preferred Stock is not
more than the amount that the redemption price would be for such share of Series
A Preferred Stock if redeemed on the date of sale); or (y) in the case of a
merger or sale of assets referred to in clauses (ii) or (iii), require each
other Stockholder to vote all Capital Stock then held by such other Stockholder
in favor of such transaction and to waive any dissenter or appraisal right such
Stockholder may have under Applicable Law. Each Stockholder agrees to take all
steps necessary to enable him or it to comply with the provisions of this
Section 2.7 to facilitate the Majority Holders’ exercise of a Drag-Along Right.

 

(b)                                 To exercise a Drag-Along Right, the
Majority Holders shall give each Stockholder a written notice (for purposes of
this Section 2.7, a “Drag-Along Notice”) containing (1) the name and
address of the Proposed Transferee and (2) the proposed purchase price, terms
of payment and other material terms and conditions of the Proposed Transferee’s
offer. Each Stockholder shall thereafter be obligated to sell or vote its
Capital Stock (including any warrants or options or other rights to purchase
Capital Stock held by such Stockholder), provided that the sale to the Proposed
Transferee is consummated within ninety (90) days of delivery of the Drag-Along
Notice. If the sale or merger is not consummated within such ninety (90)-day
period, then each Stockholder shall no longer be obligated to sell such
Stockholder’s 

 

 

Capital Stock pursuant to that specific
Drag-Along Right but shall remain subject to the provisions of this Section
2.7.

 

(c)                                  Each Stockholder shall execute and
deliver such instruments of conveyance and transfer and take such other action,
including executing any purchase agreement, merger agreement, indemnity
agreement, escrow agreement or related documents, as may be reasonably required
by the Majority Holders or the Company in order to carry out the terms and
provisions of this Section 2.7; provided, however that such
Stockholders shall not be required to make any representations and warranties
or provide indemnification to the Proposed Transferee other than
representations and warranties with respect to title to the Capital Stock being
voted or sold and authority to vote or sell such Capital Stock and indemnities
related to such representations and warranties. If the transaction is
structured as a merger or consolidation, each Stockholder shall waive any
dissenters’ rights, appraisal rights or similar rights in connection with the
proposed transaction. If any Stockholder fails or refuses to vote or sell his,
her or its shares of Capital Stock as required by, or votes his, her or its
shares of Capital Stock in contravention of, this Section 2.7, then such
Stockholder hereby grants to the Secretary of the Company an irrevocable proxy,
coupled with an interest, to vote such shares in accordance with the provisions
of this Section 2.7, and hereby appoints the Secretary of the Company his, her
or its attorney in fact, to sell such shares of Capital Stock in accordance
with the provisions of this Section 2.7.

 

(d)                                 Notwithstanding anything contained in
this Section 2.7, in the event that all or a portion of the purchase price
consists of securities, and the sale of such securities to the Stockholders
would require either a registration under the Securities Act or the preparation
of a disclosure document pursuant to Regulation D under the Securities Act (or
any successor regulation) or a similar provision of any state securities law,
then, at the option of the Majority Holders, all of the Stockholders requiring
delivery of such disclosure statement may receive, in lieu of such securities,
the Fair Market Value of such securities in cash.

 

3.                                       BOOKS AND RECORDS; REPORTS TO
STOCKHOLDERS.

 

3.1.                              Books and Records. The Board shall cause the Company to
keep at the Company’s principal office separate books of account, which shall
show a true, complete and accurate record of all assets and liabilities,
operations, transactions and financial condition of the Company. All financial
statements shall be accurate in all material respects, shall present fairly the
financial position and results of the Company, and shall be prepared in
accordance with the accrual method of accounting for GAAP, consistently
applied. Without limiting the generality of the foregoing, the Company shall
prepare such financial information and maintain such books and records as are:
(i) required by any law, rule or regulation applicable to the Company; or
(ii) reasonably requested by any Stockholder. Each Stockholder shall, at
its sole expense, have the right, at any time upon reasonable notice to the Board,
to examine, copy and audit the Company’s books and records during normal
business hours.

 

 

3.2.                              Financial Reporting; Annual Budget.

 

(a)                                  No later than two (2) business days after
each Sunday, the CEO, on behalf of the Company shall prepare and submit or
cause to be prepared or submitted to each Stockholder, a statement of cash
flows and cash balances for the preceding weekly period.

 

(b)                                 No later than ten (10) business days
after each month, the CEO, on behalf of the Company, shall prepare and submit
or cause to be prepared and submitted to each Stockholder, an accrual basis
balance sheet together with an accrual basis profit and loss statement for the
month next preceding with a cumulative Fiscal Year accrual basis profit and
loss statement to date and with such other financial statements and information
as may be reasonably requested by a Stockholder or any of its Affiliates,
including any such information required to enable a Stockholder or any of its
Affiliates to prepare quarterly reports to be filed pursuant to U.S. or foreign
securities or banking laws.

 

(c)                                  As soon as practicable after the end of
each Fiscal Year, a general accounting and audit shall be taken and made by the
Company’s independent certified public accountants, which shall be a “big four”
accounting firm designated by Cerberus, covering the assets, properties,
liabilities and net worth of the Company, and its dealings, transactions and
operations during such Fiscal Year, and all other matters and things
customarily included in such accounts and audits, and a full, detailed
certified statement shall be furnished to each Stockholder within ninety (90)
days after the end of such Fiscal Year. A full and complete report of the audit
scope and audit findings in the form of a management audit report shall also be
furnished to each Stockholder within ninety (90) days after the end of such
Fiscal Year. Such financial statements shall disclose and/or footnote, in
sufficient detail, all items of taxable income, gain, loss or accounts that
vary from the reporting of such items for financial accounting purposes. The
CEO, on behalf of the Company, shall distribute or cause to be distributed to
the Stockholders copies of all management letters prepared by the Accountants
in connection with their certification of the audited financial statements.

 

(d)                                 At least forty-five (45) days prior to
the beginning of each Fiscal Year, the CEO, on behalf of the Company, shall
prepare and submit or cause to be prepared and submitted for approval to the
Board and Cerberus, an annual budget (including a capital expenditure budget)
for such Fiscal Year (and as soon as available, any subsequent revisions
thereto).

 

4.                                       BOARD OF DIRECTORS AND OTHER MATTERS.

 

4.1.                              Board of Directors. From and after the date hereof and
until the provisions of this Section 4 cease to be effective, each Stockholder
shall vote all of the voting securities of the Company over which such Person
has voting control and shall take all other necessary or desirable actions
within his or its control (whether in his or its capacity as a stockholder,
director or officer of the Company or otherwise, and including, without
limitation, attendance at meetings in person or by proxy for purposes of
obtaining a quorum and execution of written consents in lieu of meetings), and
the Company shall take all necessary or desirable actions within its control
(including, without limitation, calling special board and stockholder
meetings), so that:

 

 

(a)                                  the authorized number of directors on the
Board shall consist of seven (7) members; and

 

(b)                                 the following persons shall be elected to
the Board at each election of directors during the term of this Agreement:

 

(i)                                     Four (4) representatives designated by
Cerberus (the “Cerberus Designees”) (two (2) of such Cerberus Designees
shall have experience related to the Business),

 

(ii)                                  Two (2) representatives designated by
Ronald Frankel (each a “Rafaella Designee”); and

 

(iii)                               One (1) representative designated jointly
by Cerberus and Rafaella, who shall be Independent (the “Joint Designee”);
and

 

(c)                                  The members of each of the audit
committee and the compensation committee shall consist of two (2) Cerberus
Designees and the Joint Designee.

 

(d)                                 There shall be no requirement that the
Cerberus Designees be affiliated with Cerberus or its Affiliates. Each member
of the Board shall hereinafter be referred to as a “Director”. A
majority of the Board shall designate the Chairman (the “Chairman”) of
the Board (who shall initially be Ronald Frankel), and the Chairman shall
preside at all meetings of the Board. The Cerberus Designees shall serve at the
pleasure of Cerberus, the Rafaella Designee shall serve at the pleasure of
Rafaella and the Joint Designee shall serve at the pleasure of both Cerberus
and Rafaella. The parties hereto agree to cause any Director to be removed from
the Board other than for Cause only at the request of the Stockholders or their
Affiliates that appointed him or her, in such Person’s sole discretion (other
than the Joint Designee, who the parties hereto agree to cause to be removed
only upon the mutual agreement of Cerberus and Rafaella) for any reason or for
no reason, by delivering written notice of such removal to the Company and the
other Stockholder(s).

 

4.2.                              Transactions with Affiliates.

 

(a)                                  The Company and the Stockholders agree
that the Company will not, nor will it permit any subsidiary to, sell, lease or
otherwise transfer any property or assets to, or purchase, lease or otherwise
acquire any property or assets from, or otherwise engage in any other
transactions with, any of its Affiliates, except (i) transactions that are at
prices and on terms and conditions not less favorable to the Company or such
subsidiary than could be obtained on an arms length basis from unrelated third
parties, (ii) transactions between or among the Company and the Company’s
wholly-owned subsidiaries not involving any other Affiliate, (iii) payment of
distributions or other amounts provided for pursuant to this Agreement, (iv)
payment or mandatory prepayment of indebtedness or interest or principal
payments when due for such indebtedness, (v) pursuant to employment agreements
or other compensation plans existing on the date hereof or approved by the
Board, including by the Joint Designee, (vi) customary fees paid to members of
the board of directors of the Company and its subsidiaries, (vii) the issuance
of equity securities pursuant to the provisions of Section 2.6; provided
that the issuance of such equity securities in compliance with such Section 2.6
shall 

 

 

not, in and of itself, be deemed sufficient
to satisfy the fiduciary obligations of the Board under Delaware law, (viii)
the issuance of preferred stock resulting from an investment by Cerberus of
Escrow Funds (as defined in the Escrow Agreement) pursuant to the terms of the
Letter Agreement and (ix) transactions or a series of related transactions
involving less than $1,000,000 that are approved by the Board, including by the
Joint Designee.

 

(b)                                 Cerberus and any of its Affiliates may
engage in or possess an interest in any other business venture of any kind,
nature or description, independently or with others, whether or not such
ventures are competitive with the Company, notwithstanding that Cerberus or any
of its Affiliates are serving as members of the Board of the Company. Nothing
in this Agreement shall be deemed to prohibit Cerberus or any of its Affiliates
from dealing, or otherwise engaging in business with Persons transacting
business with the Company. Neither the Company nor any Stockholder shall have
any rights or obligations by virtue of this Agreement, in or to any independent
venture of Cerberus or any of its Affiliates, or the income or profits or
losses or distributions derived therefrom, and such ventures shall not be
deemed wrongful or improper even if competitive with the business of the
Company.

 

(c)                                  In addition, without first obtaining the
approval (by vote or written consent, as permitted by law) of Rafaella or the
Principals holding a majority of the aggregate number of then outstanding
shares of Common Stock held by all of the Principals, the Stockholders will
not, and will not permit the Company to, approve any amendment to the Company’s
Certificate of Incorporation which would alter or change the powers,
preferences or special rights of any series of Preferred Stock so as to affect
the holders of Common Stock adversely, including without limitation, by
diluting such holders.

 

4.3.                              Expenses. The Company shall be responsible for paying, and the
Stockholders hereby authorize the Board to pay, directly out of Company funds,
all reasonable costs and expenses incurred in connection with the business of
the Company, including, without limitation, (i) any out-of-pocket expenses of
the Stockholders and each agent of each Stockholders (including the Directors
and the officers) incurred in connection with the Business, (ii) liability and
other insurance premiums, (iii) expenses incurred in the preparation of reports
to the Stockholders and (iv) legal, accounting and other professional fees and
expenses, if any.

 

4.4.                              Non-Competition.

 

(a)                                  None of Rafaella, its Affiliates, any
Principal nor any Person that acquires capital stock from Rafaella or such a
transferee of Rafaella (in each case, other than any holders of Series A
Preferred Stock or its Affiliates and any transferees acquiring capital stock
transferred in compliance with Section 2.4 or 2.7) (each a “Restricted Party”)
shall, in the case of the Restricted Parties other than Robert Newman and Asher
Haddad or their transferees prior to the occurrence of an event of dissolution
of the Company (or any successor of the Company and, in the case of Robert
Newman and his transferees or Asher Haddad and his transferees, prior to the
date that is two (2) years after the date of termination of his employment with
the Company for any reason, directly or indirectly;

 

(i)                                     engage in any managerial, administrative,
operational or sales activities in the Business anywhere in the Restricted
Area;

 

 

(ii)                                  organize, establish, operate, own,
manage, control or have a direct or indirect investment or ownership interest
in any corporation, partnership (limited or general), limited liability company
enterprise or other business entity that engages in the Business anywhere in
the Restricted Area, provided, however, that such Person may retain, purchase
or otherwise acquire (directly or indirectly) up to 2.5% of the outstanding
shares of capital stock of any corporation listed on a national securities
exchange or publicity traded in the over-the-counter market without violating
this restriction; or

 

(iii)                               solicit or actively recruit any employees
of the Company or any of its subsidiaries or solicit any employee of the
Company or any of its subsidiaries to leave the employment of the Company;

 

in
each case except for Rafaella’s and Principal’s ownership of the Company and
Principal’s performance of his obligations under his employment or consulting
agreement with the Company. In no event shall any Principal have any liability
under this Section 4.4 as a result of a breach of the provisions hereof by any
other Principal or such other Principal’s transferee or any other Person other
then such Principal and his transferees (other than any transferee acquiring
Shares in compliance with Section 2.4 or 2.7 hereof). In no event shall
Rafaella have any liability under this Section 4.4 as a result of a breach of
the provisions hereof by any Person other than Rafaella or Frankel or their
transferees (other than any transferee acquiring shares in compliance with
Section 2.4 or 2.7 hereof).

 

(b)                                 For purposes of this Section 4.4, “Restricted
Area” means North America, South America, Europe, Asia and Australia.

 

4.5.                              Incentive Plan. As soon as practicable after the date
hereof, the Board shall adopt a plan (the “Plan”) for Common Stock options,
Common Stock warrants or other Common Stock purchase rights in an aggregate
amount not greater than, unless Ronald Frankel and Cerberus otherwise agree,
10% of the total Common Stock initially outstanding (determined on an
as-converted basis) to be granted or allocated to employees, officers or
directors of, or consultants or advisors to, the Company in the manner and in
such amounts as determined by the Board. In no event shall Cerberus cause the
Board to grant, or adopt any plan in addition to the Plan granting, any equity
securities or rights to purchase equity securities other than pursuant to the
Plan to any employees, officers or directors of, or consultants or advisors to,
the Company without the prior consent of Ronald Frankel.

 

5.                                       GENERAL.

 

5.1.                              Amendments and Waivers. The provisions of this Agreement,
including the provisions of this sentence, 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 each of the
Stockholders 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:

 

(a)                                  if to Cerberus or the holders of Series A
Preferred Stock:

 

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

 

(b)                                 if to Rafaella or the Rafaella Transferees:

 

c/o
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

 

(c)                                  if to any Principal, at the address under
such Principal’s name on Schedule I attached hereto.

 

Any
Stockholder may designate a new address by notice to that effect given to the
Company. Unless otherwise specifically provided in this Agreement, a notice
shall be deemed to have been effectively given three days after deposit,
postage prepaid, for delivery by registered 

 

 

or certified mail to the proper address or
delivered in person or when sent by telecopier with receipt confirmed.

 

All
such notices, requests, consents and other communications shall be deemed to
have been delivered (a) in the case of personal delivery or delivery by
confirmed facsimile, on the date of such delivery, (b) in the case of
nationally-recognized overnight courier, on the next business day and (c) 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. Without limiting the restrictions on
Transfer contained in this Agreement, the Company and the Stockholders shall
cause any Person, other than a current Stockholder, who acquires shares of
Capital Stock from a Stockholder to become a Stockholder hereunder by executing
a Stockholder Joinder. This Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective heirs, successors and
permitted assigns.

 

5.4.                              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:  (a) words of any
gender shall be deemed to include each other gender; (b) words using the
singular or plural number shall also include the plural or singular number,
respectively; (c) Section and paragraph references are to the Sections and
paragraphs of this Agreement unless otherwise specified; (d) the word
“including” and words of similar import when used in this Agreement shall mean
“including, without limitation,” unless otherwise specified; (e) “or” is not
exclusive; and (f) provisions apply to successive events and transactions.

 

5.5.                              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.

 

5.6.                              Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original and all of which, when
taken together, shall constitute one and the same instrument, binding on the
Stockholders (and, in the case of Section 4.4, the Principals), and the
signature of any party to any counterpart shall be deemed a signature to, and
may be appended to, any other counterpart.

 

5.7.                              Confidentiality. Each Stockholder acknowledges that it
has acquired and will continue to acquire confidential and proprietary
information regarding the business and operations of the Company, each other
Stockholder and their respective affiliates. Accordingly, each Stockholder
agrees that, without the prior written consent of each other Stockholder, it
will neither (i) disclose any such information to any third party nor
(ii) use, or permit the use of, any such information in the other businesses
of such Stockholder and its Affiliates (other than the Company and its
subsidiaries). For purposes of this Agreement, 

 

 

information shall be considered confidential
and proprietary if it relates to the Business, was developed or acquired by any
Stockholder or any of its Affiliates and is not publicly available or otherwise
generally known.

 

5.8.                              Complete Agreement. This Agreement and the Transaction
Documents constitute the complete and exclusive statement of the agreement
between the Stockholders with respect to the matters to which such documents
relate. It supersedes all prior written and oral statements and no
representation, statement, condition or warranty not contained in this
Agreement shall be binding on the Stockholders or have any force or effect whatsoever.

 

5.9.                              No Third Party Beneficiary. Any agreement to pay any amount and any
assumption of liability herein contained, express or implied, shall be only for
the benefit of the Stockholders and their respective successors and permitted
assigns, and such agreements and assumption shall not inure to the benefit of
the obligees of any indebtedness or any other party whomsoever, it being the
intention of the Stockholders that no one shall be deemed to be a third party
beneficiary of this Agreement.

 

5.10.                        No Implied Waiver. The Stockholders and the Company shall
have the right at all times to enforce the provisions of this Agreement in
strict accordance with the terms hereof, and no waiver of any provision of this
Agreement shall constitute a waiver of any other provision, nor shall any
waiver constitute a continuing waiver unless otherwise provided in writing.

 

5.11.                        Governing Law. This Agreement shall be governed by,
and construed and enforced in accordance with and subject to, the laws of the
State of New York, without regard to principles of conflicts of Laws.

 

5.12.                        Jurisdiction. Each party to this Agreement hereby
irrevocably agrees that any legal action or proceeding arising out of or
relating to this Agreement or any agreements or transactions contemplated
hereby may be brought exclusively in the courts of the State of New York or of
the United States of America for the Southern District of New York and hereby
expressly submits to the personal jurisdiction and venue of such courts for the
purposes thereof and expressly waives any claim of improper venue and any claim
that such courts are an inconvenient forum. Each party hereby irrevocably
consents to the service of process of any of the aforementioned courts in any
such suit, action or proceeding by the mailing of copies thereof by registered
or certified mail, postage prepaid, to the address provided to the Company in
accordance with Section 5.2, such service to become effective 10 days after
such mailing.

 

5.13.                        Waiver of Jury Trial. EACH OF THE PARTIES HERETO HEREBY
WAIVE, 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 HEREBY 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.

 

 

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

 

 

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

 

	
   

  	
  COMPANY:

  
	
   

  	
   

  
	
   

  	
  RAFAELLA
  APPAREL GROUP, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Ronald Frankel

  	
   

  
	
   

  	
   

  	
  Name:
  Ronald Frankel

  Title: Authorized Person

  
	
   

  	
   

  	
   

  
	
   

  	
  STOCKHOLDERS:

  
	
   

  	
   

  
	
   

  	
  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: Chairman and President

  
	
   

  	
   

  
	
  Agreed
  and accepted, solely with respect to Section 2.2 and 4.4, as of the date
  first above written, 

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  PRINCIPALS:

  	
   

  
	
   

  	
   

  
	
  /s/
  Ronald Frankel

  	
   

  	
   

  
	
  Ronald
  Frankel

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  /s/
  Asher Haddad

  	
   

  	
   

  
	
  Asher
  Haddad

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  /s/
  Robert Newman

  	
   

  	
   

  
	
  Robert
  Newman

  	
   

  	
   

  
						

 

Stockholders’ Agreement

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