Document:

Exhibit 10.1

 

STOCK PURCHASE AGREEMENT

 

STOCK PURCHASE AGREEMENT (together with the
Schedules and Appendices hereto, the “Agreement”), dated as of July 19,
2005 (the “Closing Date”), by and among Lerner New York, Inc., a
Delaware corporation (the “Purchaser”) and Luciano Manganella, a
Massachusetts resident (the “Shareholder”).

 

W I T N E S S E T H:

 

WHEREAS, Jasmine Company, Inc., a
Massachusetts corporation (the “Company”) is engaged in the retail sale
of clothes, footwear and related accessories under the “Jasmine Sola” and “Luisa
Luisa” names (the “Business”);

 

WHEREAS, the Shareholder is the record and
beneficial owner of 100,300 shares of common stock, no par value per share of
the Company (the “Company Shares”) representing all of the issued and
outstanding capital stock of the Company;

 

WHEREAS, the Shareholder desires to sell to
the Purchaser, and the Purchaser desires to purchase from the Shareholder, the
Company Shares, the Business, and all the goodwill associated therewith; all
for the consideration and on the terms set forth in this Agreement;

 

NOW, THEREFORE, in consideration of the
mutual covenants hereinafter set forth, and for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties hereto agree as follows:

 

ARTICLE I.

 

Purchase and Sale

 

Section 1.1  Sale of Shares.  Subject to the terms and conditions of this
Agreement, the Shareholder does hereby sell, transfer, convey, assign and set
over (“Transfer”) to the Purchaser, and the Purchaser does hereby
purchase and acquire from Shareholder, all of Shareholder’s right, title and
interest in and to the Company Shares, free and clear of all Liens.

 

Section 1.2  Purchase Price.  As consideration for the Transfer of the
Company Shares to the Purchaser, and for the other representations, warranties
and covenants of Shareholder hereunder, the Purchaser:

 

(A)          is
at the Closing, (1) paying Shareholder $15,500,000 in cash by wire
transfer of immediately available funds receipt
of which payment the Shareholder hereby acknowledges, (2) paying
$7,000,000 into escrow pursuant to Section 1.4 (the foregoing two payments
in aggregate amount of $22,500,000, the “Cash Closing Payments”); and (3) causing
its Affiliate New York & Company, Inc. (the “Issuer”) to issue to
the

 

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Shareholder
350,000 shares of the Issuer’s common stock (such shares, the “Closing
Shares”); and

 

(B)           following
the Closing, cause the Issuer to issue to the Shareholder up to 200,000 shares
of the Issuer’s common stock (with such number of shares to be adjusted for
stock splits, recapitalizations, and the like between the Closing and issuance)
(the “Post-Closing Shares”) pursuant to and in accordance with Schedule 1.2(B).

 

The foregoing consideration payable or issuable by the Purchaser is
referred to herein as the “Purchase Price.”  The Purchase Price is subject to adjustment,
following the Closing, pursuant to Section 1.5.

 

Section 1.3  Closing Obligations.

 

A.            Shareholder
Deliveries.  At the Closing, the
Shareholder is delivering:

 

(i)            duly
executed forms of transfer in respect of, and share certificates for, the
Company Shares, accompanied by duly executed stock transfer powers in blank;

 

(ii)           the
employment agreements between the Company and the Shareholder and Stacey
Manganella, respectively, in the forms attached to Schedule 1.3(A) (the
“Employment Agreements”) and executed by the Shareholder and Stacey
Manganella, respectively;

 

(iii)          the
Registration Rights Agreement between the Issuer and the Shareholder, in the
form attached to Schedule 1.3(A) (the “Registration Rights
Agreement”) and executed by the Shareholder;

 

(iv)          The
Escrow Agreement (as defined in Section 1.4), executed by the Shareholder;

 

(v)           the
additional agreements, documents, certificates and materials listed on Schedule 1.3(A);
and

 

(vi)          a
certificate of non-foreign status in the form attached to Schedule 1.3(A) dated
as of the day immediately preceding the Closing Date, sworn under penalty of
perjury.

 

B.            Purchaser
Deliveries.  At the Closing, the
Purchaser is delivering:

 

(i)            the
Cash Closing Payments, by wire
transfer of immediately available funds, ;
and

 

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(ii)           the Closing Shares;

 

(iii)          the Employment Agreements, executed by the
Company;

 

(iv)          the Registration Rights Agreement, executed by
the Issuer;

 

(v)           the Escrow Agreement, executed by the Purchaser;
and

 

(v)           the
additional agreements, documents, certificates and materials listed on Schedule 1.3(B).

 

The stock certificates, stock powers and
transfer documents described in Section 1.3(A)(i), along with the
other documents listed in Schedule 1.3(A) and Schedule 1.3(B) are
referred to collectively as the “Additional Transaction Documents.”

 

Section 1.4  Escrow. Simultaneously with the
Closing, the Purchaser is depositing $7,000,000 into escrow pursuant to that
Escrow Agreement between the Purchaser, the Shareholder and Goulston &
Storrs, P.C., as escrow agent (the “Escrow Agreement”), with such
deposit being made as security with respect to the Shareholder’s obligations to
pay liquidated damages of $7,000,000 in the event of a Major Employment Breach
pursuant to Section 6.16.   The
parties agree that the foregoing Escrow Agreement, with Goulston &
Storrs, P.C. as escrow agent, is intended to be a temporary arrangement and
that they will use commercially reasonable efforts to enter into escrow
arrangements with a third party escrow agent on terms substantially similar to
such initial Escrow Agreement, as quickly as reasonably practicable (and in
such event, the escrow agreement entered into in connection with such new
arrangements shall thereupon constitute the “Escrow Agreement” for all purposes
hereunder).

 

Section 1.5.  Purchase Price Adjustment.

 

A.            Adjustments.  The Purchase Price shall be adjusted: (1) upward
or downward to the extent that the Closing Working Capital Level is greater or
less than $1,936,000, respectively; and (2) upward or downward to the
extent that Closing Long Term Indebtedness is less than or greater than
$195,091, respectively; and (3) downward in an amount equal to any Closing
Transaction Expenses; and (4) downward in an amount equal to any
Undisclosed Special Liabilities; all as determined pursuant to this Section 1.5.   Any adjustment to the Purchase Price shall
take into account, and be the net result of, all of the adjustments described
in the preceding clauses (1), (2), (3) and (4), and is referred to herein
as the “Net Adjustment.”

 

B.            Certain
Definitions.  As used herein: (1) the
term “Closing Working Capital Level” means Working Capital Levels of the
Closing Date; (2) the term “Working Capital Level” means the
Company’s current assets (i.e., cash; merchandise inventory; prepaid expenses;
loans receivable; and prepaid corporate taxes) minus the Company’s current
liabilities (i.e., note payable under line of credit; current portion of
long-term debt; accounts payable, trade; accounts payable, other; sales taxes
payable; and accrued payroll and expenses), (3) the term “Closing Long
Term Indebtedness” means the Company’s long-term debt (net of current
portion) as of the Closing Date; (4) the term “Transaction Expenses”
means the fees and expenses incurred on or

 

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before the Closing Date
(whether or not invoiced) and payable by the Company to third parties related
to or arising out of the transactions contemplated by this Agreement, or any
transaction involving the sale of all or substantially all of the Company’s
assets or capital stock, since January 1, 2005, that the Company and/or
the Shareholder have considered (including any “auction process” conducted on
the Company’s or the Shareholder’s behalf prior to the date hereof), including
travel, legal, accounting, investment banking and other professional fees and
expenses relating thereto, and 50% of the Company’s outstanding fees payable to
Schulte Roth & Zabel LLP (totalling $90,000), and Transfer Taxes for
which the Shareholder is liable pursuant to Section 5.2(F), in each
case that are not paid as of the Closing Date; and (5) the term “Undisclosed
Special Liabilities” means (1) any indebtedness of the Company
pursuant to deferred compensation obligations; (2) any “change in control”
payments required of the Company as a result of the Closing; (3) any indebtedness
pursuant to a guarantee by the Company of the obligations of another Person, (4) any
obligations (including breakage costs) payable by the Company under interest
rate protection agreements (including interest rate swaps, caps, floors and
collars) and in respect of any hedging agreements; and (5) any obligations
under capital leases; provided however that none of the foregoing shall
constitute Undisclosed Special Liabilities if they have otherwise been
disclosed either (I) under Schedules 3.1(D), 3.1(E), or 3.1(F) (or arise
pursuant to Commitments or other arrangements disclosed under said schedules,
including without limitation the leases of the Leased Realty) or (II) expressly
identified within the Financial Statements (including the notes thereto).  In the case of any guarantee described in the
foregoing clause (3), the Purchaser agrees that the Shareholder shall be given
reasonable opportunity (not to exceed 30 days) after notice from the Purchaser
in order to terminate, at his own cost and expense, such guarantee prior to
such guarantee being considered as an Undisclosed Special Liability
hereunder.   Notwithstanding anything
herein to the contrary, Working Capital Levels, Closing Long Term Indebtedness
(and “debt” and “indebtedness”) will be determined in accordance with GAAP,
consistently applied and consistent with the Financial Statements.  By way of example, as of April 30, 2005,
the Working Capital Level was $1,711,432 (current assets of $5,970,539 minus
current liabilities of $4,259,107) and the long term debt (net of current
portion) was $195,091.

 

C.            Within
sixty (60) days following the Closing, the Shareholder shall prepare or cause
to be prepared, and deliver to Purchaser his calculation of (1) Assumed
Closing Working Capital Level, (2) Closing Long Term Indebtedness, (3) Transaction
Expenses, (4) Undisclosed Special Liabilities; and (5) the Net
Adjustment (the “Shareholder Calculations”).

 

D.            Within
thirty (30) days after its receipt of the Shareholder Calculations, the
Purchaser shall cause its accountants to review the same.  If Purchaser has any objection to any such
calculations, or to any of the figures shown on the Shareholder Calculations,
the Purchaser shall, within such thirty (30) day period, inform the Shareholder
in writing thereof (the “Purchaser’s Objection”), setting forth in
reasonable detail the basis for its objection and the adjustments to the Net
Adjustment shown in the Shareholder Calculations which the Purchaser believes
should be made.  The Shareholder shall then
have thirty (30) days after his receipt of a Purchaser’s Objection to review
and respond to the Purchaser’s Objection (“Shareholder’s Review Period”).  If the Purchaser and the Shareholder are
unable to resolve all of their disagreements with respect to the determination
of the Net Adjustment within ten (10) days after the end of the
Shareholder’s Review Period, they shall refer their remaining disagreements to
a

 

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nationally known accounting
firm reasonably acceptable to the Purchaser and the Shareholder (the “Accounting
Firm”), who shall determine, on the basis of the standards, principles and
methods set forth herein, and only with respect to the remaining disagreements
submitted to them (and only, with respect to such disputed items, within the
parameters of the respective calculations thereof as have been previously
provided by the Purchaser and/or the Seller, respectively), whether and to what
extent the Net Adjustment shown on the Shareholder Calculations requires
adjustment.  The Purchaser and the
Shareholder shall direct the Accounting Firm to deliver its report and
determination of such adjustments as quickly as reasonably possible.  The Accounting Firm’s determination shall be
final, conclusive and binding upon the Purchaser and the Shareholder.  The fees and disbursements of the Accounting
Firm shall be paid by the party whose calculation of the Net Adjustment was
furthest from the Accounting Firm’s determination.  The Purchaser and the Shareholder shall make
readily available to the Accounting Firm all relevant books and records and any
work papers (including those of the parties’ respective accountants) relating
to the Financial Statements and the Shareholder Calculations and all other
items reasonably requested by the Accounting Firm.  The “Final Adjustment” shall be (i) the
Net Adjustment set forth in the Shareholder Calculations in the event that (x)
no Purchaser’s Objection is delivered to the Shareholder during the thirty (30)
day period specified above, or (y) the Shareholder and the Purchaser so agree, (ii) the
Net Adjustment, adjusted in accordance with the Purchaser’s Objection in the
event that the Shareholder does not respond to Purchaser’s Objection within the
Shareholder’s Review Period, or (iii) the Net Adjustment, as adjusted by
either (x) the agreement of the Shareholder and the Purchaser or (y) the
Accounting Firm.

 

E.             The
Purchaser shall provide the Shareholder and his accountants full access to the
books and records of the Business, to any other information, including work
papers of its accountants (to the extent available to the Purchaser), and to
any employees to the extent necessary for the Shareholder to prepare the
Shareholder Calculations.  The Purchaser
and its accountants shall have full access to all information used by the
Shareholder in preparing the Shareholder Calculations, including the work
papers of their accountants (to the extent available to the Shareholder).

 

F.             Within
ten (10) days following issuance of the Final Adjustment, the adjustment
payments payable pursuant to this Section 1.5 shall be paid by wire
transfer of immediately available funds to a bank account designated by
Purchaser or Shareholder, as the case may be.; plus, in either case, interest
thereon from the Closing Date through the date of payment at the rate of
interest publicly announced by Citibank, N.A. or any successor thereto in New
York, New York from time to time as its “base rate” (the “Interest Rate”)

 

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ARTICLE II.

 

Closing

 

Section 2.1  Closing Date.  The closing of the transactions contemplated
hereby (the “Closing”) is
occurring at the offices of Goulston & Storrs, P.C., Boston, MA, USA
on the Closing Date (i.e., the date of this Agreement).  The Closing shall be deemed effective as of
12:01 a.m. Eastern Time on the Closing Date.

 

Section 2.2  Effect of Closing.  All matters at the Closing shall be
considered to take place simultaneously, and no delivery of any document or
instrument shall be deemed complete until all transactions and deliveries of
documents and instruments and payments contemplated by this Agreement are
completed or have been waived by the party to whom delivery or payment was due
hereunder.

 

ARTICLE III.

 

Representations and Warranties
by the Shareholder

 

Section 3.1  Representations and Warranties.  The Shareholder hereby represents and
warrants to the Purchaser that:

 

A.            Corporate
Existence and Qualification of the Company and the Shareholder; Authority, Due
Execution, Ownership of Shares, Etc.

 

(i)            The
Company is a corporation duly organized, validly existing and in good standing
under the Laws of the Commonwealth of Massachusetts and is duly qualified to do
business, and is in good standing, in each jurisdiction in which the failure to
be so qualified would reasonably be
expected to have a Material Adverse Effect, which such jurisdictions are set
forth on Schedule 3.1(A).

 

(ii)           The
Company has the requisite corporate power and authority to own, lease or
otherwise hold its Assets and to conduct the Business as now conducted and
presently proposed to be conducted.  The
Company has no Subsidiaries.  Assuming
the due execution of this Agreement by the Purchaser, this Agreement
constitutes the valid and binding obligation of the Shareholder enforceable
against such Shareholder in accordance with its terms, subject only to
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
Laws relating to creditors’ rights generally and to general principles of
equity (regardless of whether such enforcement is considered in a proceeding at
law or in equity).

 

(iii)          As
of immediately prior to the Closing, the authorized capital stock of the
Company consists of 275,000 shares of common stock.  The Company Shares constitute all of the
issued and outstanding capital stock of the Company, and the Company Shares are
owned beneficially and of record by the Shareholder, free and clear of all
Liens.  The Company Shares and are duly
authorized, validly issued and are fully paid and non-assessable.

 

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(iv)          The
Company does not have outstanding (1) any stock or securities convertible
into or exchangeable for any shares of its capital stock or containing any
profit participation features, nor any options, warrants, agreements,
arrangements, preemptive rights, or other rights of any Person to acquire, or
any other Liens on, any capital stock of the Company or (2) any stock or
securities convertible into or exchangeable for any stock appreciation rights
or phantom stock or similar plans or rights. 
The Company is not subject to any obligation (contingent or otherwise)
to repurchase or otherwise acquire or retire any shares of its capital stock or
any warrants, options or other rights to acquire its capital stock.  There are no outstanding stock appreciation,
phantom stock, profit participation, or similar rights with respect to the
Company.  There are no voting trusts,
proxies, or other agreements or understandings with respect to the voting of any
capital stock of the Company.

 

B.            No
Violation.

 

(i)            Neither
the execution, delivery and performance by the Shareholder of this Agreement or
the Additional Transaction Documents to which such Person is party, nor the
consummation of the Contemplated Transactions by the Shareholder, will (A) violate
any order, ruling, writ, judgment, injunction or decree of any Governmental
Entity (an “Order”)
applicable to the Shareholder or the Company; (B) conflict with, result in
a breach of, constitute a default under, or violate the Charter Documents of
the Company; or (C) result in the imposition of any Lien on the Company
Shares.

 

(ii)           Neither
the execution, delivery and performance by the Shareholder of this Agreement or
the Additional Transaction Documents to which he is party, nor the consummation
of the Contemplated Transactions by the Shareholder, will violate any Law, or
give others any rights of termination, amendment, acceleration or cancellation
of, any Commitment (other than as disclosed on Schedule 3.1(B) or
Schedule 3.1(E)) applicable to the Shareholder or the Company or by
which any of the Company’s properties is bound or affected, excluding, for
purposes of this Section 3.1(B)(ii), any Commitment which is for goods or
services which are readily replaceable on comparable economic terms and
conditions and without material incremental cost, and the termination of which
would not materially impair the normal operations of the Business.

 

(iii)          Except
as set forth on Schedule 3.1(B) or Schedule 3.1(E)),
no consent, authorization, or approval from, or registration or filing with,
any Governmental Entity or other third party (not obtained or made as of the
date hereof), is required to be obtained or made by the Shareholder in
connection with the execution, delivery or performance of this Agreement or the
Additional Transaction Documents, or the consummation by the Shareholder of the
Contemplated Transactions, except for such consents, authorizations, or
approvals under any Commitment which is for goods or services which are readily
replaceable on comparable economic terms and conditions and without material
incremental cost, and the termination of which would not materially impair the
normal operations of the Business..

 

C.            Financial
Information.  Set forth on Schedule 3.1(C) are
copies of unaudited balance sheets and related statements of income of the
Company for the year ended December 31, 2004, and for the four months
ended April 30, 2005, respectively (collectively, the “Financial

 

7

 

Statements”).  The Financial Statements were prepared in
accordance with GAAP applied on a consistent basis throughout the periods
presented (except as required to comply with changes to GAAP), except that the
Financial Statements do not contain footnotes and, with respect to the
Financial Statements for the four months ended April 30, 2005, are subject
to year end adjustments, none of which would either singly or in the aggregate
be material.  Subject to the foregoing,
the Financial Statements present fairly in all material respects the financial
condition and results of operations of the Company as of the dates or for the
periods presented.  The aforementioned
balance sheet as of April 30, 2005, is sometimes referred to herein as the
“April 30, 2005
Balance Sheet.”

 

D.            Absence
of Certain Changes or Events.  Except
as set forth on Schedule 3.1(D), since December 31, 2004, the
Company has conducted the Business only in the Ordinary Course of Business,
there have not been any changes in the business, operations, assets, financial
condition or cash flow of the Company which in the aggregate has had, or is
reasonably likely to have, a Material Adverse Effect, and the Company has not
since such date:

 

(i)            changed
its authorized or issued capital stock; issued any notes, bonds or other debt
or equity securities convertible into capital stock; or granted any
registration rights with respect to any securities;

 

(ii)           amended
its Charter Documents;

 

(iii)          paid,
granted or increased any bonuses, salaries or other compensation by the Company
to any of its directors, officers, or employees except for bonus awards and
increases in salaries in the Ordinary Course of Business, as required by
applicable Laws or pursuant to any Commitment listed or referred to on Schedule 3.1(E);

 

(iv)          mortgaged,
pledged, imposed any security interest upon or subjected to any Lien any of its
properties or Assets, tangible or intangible, other than Permitted Liens and
for those Liens securing indebtedness expressly identified in the balance sheet
within, or notes to, the Financial Statements at December 31, 2004 or
expressly identified in the balance sheet within the Financial Statements at April 30,
2005;

 

(v)           sold,
assigned, licensed, transferred, leased or otherwise disposed of any Asset,
tangible or intangible (including Intellectual Property), except in the
Ordinary Course of Business;

 

(vi)          cancelled
or waived any material claims or material rights against third Persons;

 

(vii)         changed
its accounting methods or principles (including without limitation accounting
methods and principles used for tax purposes), except for any such changes
required by GAAP;

 

(viii)        entered
into, accelerated, modified or terminated or received notice of termination of
any Commitment material to the operation of the Business;

 

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(ix)           suffered
any damage to or destruction or loss of any Asset of the Company in excess of
$25,000;

 

(x)            adopted,
amended, modified or terminated or increased any payments to or benefits under
any Company Plans in any material respect;

 

(xi)           incurred
any Company Indebtedness, other than in the Ordinary Course of Business or as
expressly identified in the balance sheet within, or notes to, the Financial
Statements at December 31, 2004 or as expressly identified in the balance
sheet within the Financial Statements at April 30, 2005;

 

(xii)          made
capital expenditures or commitments therefor that aggregate in excess of
$75,000, other than capital expenditures in connection with store build-outs or
renovation consistent with the Company’s 2005 budget (with total budgeted
amount therein of $1,272,000);

 

(xiii)         made
any loans or advances to, guarantees for the benefit of, or any investments in,
any Persons or formed any Subsidiary;

 

(xiv)        directly
or indirectly engaged in any transaction with any officer, director, partner,
shareholder, employee or other Affiliate of the Company or the Shareholder, to
the extent any of the foregoing creates any Liability of the Company following
the Closing;

 

(xv)         taken any
action or otherwise omitted to take any action that could reasonably be
expected to result in the loss, lapse, abandonment, invalidity or
unenforceability of any material Business Intellectual Property (as defined
below);

 

(xvi)        granted
any license or sublicense of any rights under or with respect to any
Intellectual Property Rights; or

 

(xi)           agreed,
orally or in writing, to do any of the foregoing (to the extent such agreement
is currently binding upon the Company or could result in Liability to the
Company following the Closing).

 

As used herein, the “Ordinary Course of
Business” means the ordinary course of the Business, as operated by the
Company consistent with past practices.

 

E.             Contracts.

 

(i)            Schedule 3.1(E) lists
or references all contracts, agreements, or obligations, whether written or
oral, including all amendments thereto (collectively, “Commitments”) to
which the Company is currently a party or otherwise bound of the following
types:

 

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(a)           Any
such Commitment relating to the employment of any current employee of the
Company, or any severance or change in control payment to any employee, or any
labor contract or collective bargaining agreement, or any Commitment providing for
payments to any Person as a result of termination of employment or based upon
sales, purchases or profits other than direct payment for goods and which
require minimum payments of at least $50,000 per year;

 

(b)           Any
such Commitment or series of related Commitments for capital expenditures or
the acquisition or construction of fixed assets which requires or require
aggregate future payments or expenditures in excess of $75,000 in total;

 

(c)           Any
such Commitment granting to any Person a first-refusal, first-offer or other
right to purchase, acquire or use  (1) any
of the Assets of the Company (other than purchase or sales orders, which
pursuant to the terms thereof requires aggregate annual payments to or by the
Company in excess of $50,000, or (2) the Company Shares;

 

(d)           Any
such Commitment with respect to a joint venture or partnership arrangement,
under which the Company is or has agreed to become a joint venturer or partner
or otherwise has agreed to share profits, losses, costs or liabilities with any
other Person;

 

(e)           Any
such Commitment pursuant to which the Company is a lessee of any Leased Realty
requiring annual payments by the Company in excess of $150,000;

 

(f)            Any
powers of attorney to which the Company is a party;

 

(g)           Any
such Commitment that contains any provision that in any material way prohibits
the Company from engaging in any line of business or competing with another
Person within the geographic territory in which the Company sells goods, or restricts the use of any Business Intellectual Property
or prohibits the use of any Intellectual Property (including settlement and
coexistence agreements);

 

(h)           Any
other such Commitment which is not cancelable on 60 days or less notice and
which pursuant to the terms thereof requires annual payments by the Company in
excess of $50,000 (any such Commitment under this sub-clause (h), a “Material
Commitment”);

 

(i)            Any
agreement or indenture relating to Company Indebtedness or the mortgaging,
pledging or otherwise placing a Lien on any material asset or material group of
assets of the Company;

 

(j)            Any
such Commitment pursuant to which the Company grants or obtains any license or
other rights to any Intellectual Property (other than licenses of “off the
shelf” software which are readily available on a commercial or retail basis
with a replacement cost and/or annual license fee of less than $10,000).

 

10

 

(ii)           Except as set forth on Schedule 3.1(E) or
Schedule 3.1(B), (a) all Commitments listed on Schedule 3.1(E) are
now and will be, immediately following the Transfer of the Company Shares at
the Closing, in full force and effect, and represent the valid and binding
obligation of the Company, and, to the knowledge of the Shareholder, each of
the other parties thereto; (b) the Company has performed all obligations
required to be performed by it and is not in default under or in breach of nor
in receipt of any claim of default or breach under any Material Commitment; (c) no
event has occurred which with the passage of time or the giving of notice or
both would reasonably be expected to result in a default, breach or event of
noncompliance by the Company under any Material Commitment; and (d) the
execution, delivery and performance of the Commitments listed on Schedule 3.1(E) by
the Company are not in violation of the Charter Documents of the Company,
except to the extent that such any of the foregoing would not reasonably be
expected to have a Material Adverse Effect.

 

(iii)          Except
as set forth on Schedule 3.1(H): (a) the Company holds all
permits, licenses, approvals, consents and authorizations issued by any
Governmental Entity or other Person and which are required by applicable Laws
and material to its operation of the Business (collectively, “Licenses”).  Neither the Company nor the Shareholder has
received notice of any Legal Proceeding and, to the knowledge of the
Shareholder, no such Legal Proceeding has been threatened, which would, if
successful on the merits, lead to a revocation, suspension, or limitation of
the rights of any such Licenses, and the Company is in material compliance with
each of its such Licenses, and (b) to the knowledge of the Shareholder,
all applications required to have been filed for renewal of any such Licenses
have been duly filed on a timely basis with all appropriate Governmental
Entities or other Persons and all other filings required to have been made with
respect to such Licenses have been made on a timely basis with all appropriate
Governmental Entities or other Persons,

 

F.             Title
to and Condition of Properties.

 

(i)            Schedule 3.1(F)(i) lists
all real estate owned, leased or otherwise occupied by the Company.  The Company has valid leasehold or
subleasehold interests in any property identified as “Leased Realty” on said schedule (the
“Leased Realty”) and the Company owns its other Assets; in each case
free and clear of Liens other than Permitted Liens.

 

As used herein, the term “Lien” means
any charge, claim, option, lien, mortgage, encumbrance, or restriction of any
kind, including any restriction on use, voting, transfer, receipt of income or
exercise of any other attribute of ownership, and the term “Permitted Liens” means any Liens
which (1) are listed on Schedule 3.1(F); (2) are for
Taxes or other charges or assessments of any Governmental Entity which are not
yet due and owing or are subject to a good faith dispute, are not material in
amount and are being pursued diligently by appropriate Legal Proceedings; (3) constitute
Liens of carriers, warehousemen, mechanics and materialmen, or similar Liens,
incurred in the Ordinary Course of Business and for which adequate reserves
have been established in accordance with GAAP; (4) constitute statutory
Liens in favor of landlords with respect to real property leased, or protective
UCC filings in favor of lessors of personal property leased, to the Company; or
(5) with respect to real property only, are minor imperfections in title,
and do not materially detract from the value or interfere with the current use
of the property subject to such Liens; (6) are restrictions on transfer or
change in control

 

11

 

provisions which are disclosed
in Schedule 3.1(B) or Schedule 3.1(E); (7) are
restrictions or limitations arising under Laws (including zoning and land use
restrictions and restrictions relating to the transfer of securities); or (8) restrictions
created by or arising under any of the Commitments disclosed in Schedule 3.1(E).

 

(ii)           Neither
the Company nor the Shareholder has received notice of any condemnation
proceedings and, to the knowledge of the Shareholder, no condemnation
proceedings have been threatened, in each case with respect to any of the
Leased Realty, and no such property has been condemned.  Neither the Company nor the Shareholder has
received notice of any Legal Proceedings, and, to the knowledge of the
Shareholder, no Legal Proceedings have been threatened, that could, with the
passage of time or otherwise, give rise to a Lien (excluding a Permitted Lien)
against the Company’s leasehold interests in the Leased Realty.

 

(iii)          Except
as set forth in Schedule 3.1(F)(ii) or Schedule 3.1(B),
with respect to each of the Leases: (i) such Lease is legal, valid,
binding, enforceable and in full force and effect; (ii) the consummation
of the transaction contemplated by this Agreement does not require the consent
of any other party to such Lease, will not result in a breach of or default
under such Lease, or otherwise cause such Lease to cease to be legal, valid,
binding, enforceable and in full force and effect on identical terms following
the Closing; and (iii) neither the Company nor to the Shareholder’s
knowledge any other party to the Lease is in breach or default under such
Lease, and no event has occurred or circumstance exists which, with the
delivery of notice, the passage of time or both, would reasonably be expected
to result in a breach or default (excluding defaults which would not reasonably
be expected to result in any material Liability to the Company) or permit the
termination, modification or acceleration of rent under such Lease.

 

(iv)          To the
knowledge of the Shareholder, the landlord under the Company’s Brattle Street
Leases does not intend to terminate such lease as a result of the Contemplated
Transactions, or to refuse to renew the expired leases relating to the Brattle
Street store on commercially reasonable terms. 
As used herein the term “Contemplated Transactions” means the
transactions contemplated by this Agreement and the Additional Transaction
Documents.

 

G.            Intellectual
Property Assets.

 

(i)            Set
forth on Schedule 3.1(G) is a list of all patents and patent
applications, registered Marks (as defined below) and applications for the
registration of Marks, registered copyrights and copyright applications, and
similar material intellectual property rights which are owned by or licensed to
the Company or used in the Business as currently conducted or proposed to be
conducted; excluding in any case “off the shelf” software or similar property
which is readily available on a commercial or retail basis with a replacement
cost and/or annual license fee of less than $10,000.  Except as set forth on Schedule 3.1(G),
(1) to the knowledge of the Shareholder, the use of the Business
Intellectual Property, as currently used or proposed to be used by the Company,
does not conflict with, misappropriate or infringe upon any Intellectual
Property rights of others; (2) to the knowledge of the Shareholder, no
other Person is conflicting with, infringing on, or misappropriating (or has in
the past conflicted with, infringed on, or misappropriated) the rights of the
Company in such Business Intellectual Property; and (3) no

 

12

 

claims (including office
actions by Governmental Entities) with respect to the Business Intellectual
Property have been made or, to the knowledge of Shareholder threatened,
contesting the validity, use, ownership, enforceability or registrability of
any of the Business Intellectual Property, 
nor, to the knowledge of the Shareholder, is there any reasonable basis
for any such claim.

 

(ii)           The
Company owns all right, title, and interest in and to, free and clear of all
Liens (other than Permitted Liens) or has a valid and enforceable right to use
without payment to a third party (except for payments due under Material
Commitments or other Commitments listed on Schedule 3.1(E)) all
Intellectual Property which is necessary or used in the operation of the
Business  (together with the Intellectual
Property owned by the Company, collectively the “Business
Intellectual Property”).  Any such
usage rights do not require payment to a third party on account of such
Business Intellectual Property (except for payments due under Material
Commitments or other Commitments listed on Schedule 3.1(E)).  The transactions contemplated by this
Agreement shall not adversely affect the right, title or interest of the
Company in or to the Business Intellectual Property, and all of the Business
Intellectual Property shall be owned or available for use by the Company
immediately after the Closing on terms and conditions identical to those under
which the Company owned or used the Business Intellectual Property immediately
prior to the Closing.   The Company is
listed as the record owner of each registration or application for registration
of Business Intellectual Property.   No
past or present employee or consultant of the Company has or, together with the
Shareholder, will have as a result of the consummation of the transactions
contemplated by this Agreement, any ownership interest, license, permission or
other right in or to any Business Intellectual Property.

 

H.            Compliance
With Laws. Except as set forth on Schedule 3.1(H), the Company
has complied and is in compliance with all Laws (including the provisions of
the Occupational Safety and Health Act (29 U.S.C.A. § 651 et seq.)
(“OSHA”) except to the extent that (a) any prior (and not current)
noncompliance of such laws would not reasonably be expected to result in a
Material Adverse Effect, and (b) any current noncompliance is not material
to the operations of the Business.  The
Company has not received any notices from Governmental Entities alleging any
noncompliance with laws, excluding notices which have been withdrawn or which
relate to matters which have been resolved and settled in full by the Company
prior to Closing.   This Section 3.1(H) is
not intended to cover Laws relating to the issuance of Licenses, which are
addressed in Section 3.1(E)(iii), Environmental Laws, which are addressed
in Section 3.1(J), ERISA and other employee benefit Laws (including Laws
relating to pension matters), which are addressed in Section 3.1(K), or
Tax Laws, which are addressed in Section 3.1(N).

 

I.              Litigation.
Except as set forth on Schedule 3.1(I), there are no Legal
Proceedings pending or, to the knowledge of the Shareholder, threatened against
the Company or the Shareholder that seek to enjoin or obtain damages in respect
of the consummation of the transactions contemplated by this Agreement, or that
otherwise relate to the Business.

 

J.             Compliance
With Environmental Laws.  To the
Shareholder’s knowledge, except as set forth on Schedule 3.1(J):  (a) the Company is in compliance with
all Environmental Laws applicable to the operation of the Business; and (b) within the past two (2) years
neither the Company nor the Shareholder has received any written notice from
any Governmental Entity

 

13

 

asserting a violation of any
Environmental Law in connection with the operation of the Business by the
Company.  As used herein the term “Environmental Law” means: (1) the
Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.
§9601 et seq.; (2) the Toxic Substances Control Act, 15 U.S.C. §2101 et
seq.; (3) the Hazardous Materials Transportation Act, 49 U.S.C. §5101 et
seq.; (4) the Federal Water Pollution Control Act, 32 U.S.C. §1251 et
seq.; (5) the Federal Solid Waste Disposal Act, 42 U.S.C. §6901 et seq.; (6) the
Federal Clean Air Act, 42 U.S.C. §1857 et seq. and (7) OSHA (but only to
the extent such law in this clause (7) applies to the use, storage,
transportation, discharge, or release of Hazardous Materials by such company),
each as amended to date.  Notwithstanding
anything herein to the contrary, all matters relating to Laws applicable to the
protection of the environment generally, or of land, water or air specifically,
or to discharges, releases, creation, storage or transportation of Hazardous
Materials, including any Liabilities arising thereunder, shall be governed
exclusively by this Section 3.1(J).

 

K.            Employees
and Employee Benefit Programs.

 

(1)           Employees.  Schedule 3.1(K)(1) contains
a complete and accurate list of the
employees of the Company as of the date hereof and the rate of all current
compensation payable by the Company to each such employee, including any bonus,
contingent or deferred compensation.

 

(2)           Employee
Benefit Programs.  Set forth on Schedule 3.1(K)(2) is
a complete and correct list of each “employee benefit plan” (within the meaning
of Section 3(3) of the Employee Retirement Income Security Act of
1974, as amended (“ERISA”)) and each
other benefit plan, program or arrangement maintained, sponsored or contributed
or required to be contributed to by the Company or with respect to which the
Company has any current or potential liability. 
All such plans, programs or arrangements are collectively
referred to as the “Company Plans.” 
With respect to each Company Plan, the Company has heretofore delivered
or made available to the Purchaser, as applicable:  (i) complete and correct copies of the
Company Plan and any amendments thereto (or if the Company Plan is not a
written agreement, a description thereof); (ii) summary plan descriptions;
(iii) all related insurance contracts, other funding arrangements and
administrative services agreements; and (iv)  all other documents pursuant
to which such Company Plan is maintained, funded and administered.  Each Company Plan has been maintained, funded
and administered in accordance with its terms and in material compliance with
the applicable provisions of ERISA, the Internal Revenue Code of 1986, as
amended (the “Code”) and other applicable Laws. 
Except as required by COBRA (as defined below), the Company does not
have any obligation with respect to any Company Plan, no actions,
investigations, hearings, proceedings, audits, examinations, suits or claims
(other than routine claims for benefits in the Ordinary Course of Business) are
pending, or, to the Shareholder’s knowledge, threatened.  The Company does not have any obligation with
respect to any post-retirement or post-termination medical or life insurance or
other similar benefits.

 

(3)           General
Compliance Matters.  Neither the
Company nor any ERISA Affiliate has ever maintained, had an obligation to
contribute to, contributed to, or incurred any liability with respect to (1) any
“employee pension benefit plan” within the meaning of ERISA Section 3(2);
or (2) any pension plan that is or was subject to Title IV of ERISA or Section 401(a)

 

14

 

of the Code.  Neither the Company nor any ERISA Affiliate
has engaged in a prohibited transaction, as such term is defined under Code Section 4975
or ERISA Section 406, which would subject to the Company to any taxes,
penalties or other liabilities under Section 4975 of the Code or ERISA
Sections 409 or 502(i).  Neither the
Company nor any ERISA Affiliate has ever contributed to or been required to
contribute to any multiemployer plan (as defined in Section 3(37) of
ERISA).  Neither the Company nor any
ERISA Affiliate has any current or potential liability (including withdrawal
liability as defined in ERISA Section 4201) under any multiemployer plan
(as defined in Section 3(37) of ERISA). 
As used above, the term “ERISA Affiliate” means any Person that is or
was at any time treated as a single employer under IRC Section 414 with
the Company.

 

(4)           COBRA
Compliance.  Except as set forth on Schedule 3.1(K)(2),
the Company and each ERISA Affiliate have complied and are in compliance with
the requirements of Part 6 of Subtitle B of Title I of ERISA, Section 4980B
of the Code, and any similar state Laws (“COBRA”).

 

L.             Labor
Relations.  Except as set forth on Schedule 3.1(L),
the Company is not party to any collective bargaining agreement or other
similar labor Commitment.  Except as set
forth on Schedule 3.1(L): (i) there are, and since January 1,
2000 have been, no strikes, work slowdowns or stoppages, widespread picketing,
or formal employee grievance processes pending or, to the knowledge of the
Shareholder, threatened against the Company, and (ii) the Company is not
currently a party to, or, to the knowledge of the Shareholder, currently
threatened with, any Legal Proceeding by any employee or former employee  or
Governmental Entity relating to any alleged violation of Law pertaining to
labor relations or employment matters, including any Laws relating to wages and
hours, worker’s compensation or immigration.

 

M.           Insurance.  All policies of insurance relating to the
Business with respect to any periods which include the Closing Date are valid
and enforceable and in full force and effect and will continue to be in full
force and effect following the Closing. 
A summary of the Company’s current insurance coverages is set forth on Schedule 3.1(M).  All premiums,
including any current or retrospective premiums or other like arrangement with
respect to such policies of insurance which are currently maintained, have been
paid when due with respect to all periods prior to the date hereof.  No notice of cancellation or termination has
been received by the Company or Shareholder with respect to any such policy of
insurance, and except as set forth on Schedule 3.1(M) no claim
relating to the Business is currently reserved or, to the knowledge of the
Shareholder, should be reserved, under any such policy of insurance involving
an amount in excess of $150,000 (excluding provisional notices of prospective
non-renewal for insurance policies which are routinely sent, not in response to
any specific casualty event or loss history, by insurance companies within a
certain period before such policy would normally expire).

 

N.            Taxes.
The Company has timely filed all Tax Returns and reports required to be filed
by or with respect to it pursuant to applicable Law, and such Tax Returns are
accurate, complete and correct in all material respects.  The Company has paid all Taxes due and
payable by it (whether or not shown on such Tax Returns), and there are no
other Taxes payable on account of the Company except for Taxes which are not
yet due and for which the Company has made adequate reserves, accruals and
charges in its books and records of account in accordance

 

15

 

with GAAP.  The Shareholder has delivered or made
available to the Purchaser complete and correct copies of all federal and state
income Tax Returns, examination reports, and statement of deficiencies assessed
against, or agreed to by the Company for all taxable periods ended on or after December 31,
1998.  Schedule 3.1(N) lists
the dates since January 1, 1998 as of and for which the federal and state
corporate income/franchise, sales/use and other Tax Returns of the Company were
audited and closed and lists the jurisdictions in which the Company files any
such Tax Return.  Except as separately
set forth and identified on Schedule 3.1(N), there is no Tax audit
or examination or any judicial or administrative proceedings now being
conducted, pending or, to the Shareholder’s knowledge, threatened with respect
to the Company.  Except as set forth on Schedule 3.1(N),
since January 1, 1998, no correspondence or claim has been received by the
Company or the Shareholder from any taxing authority of any jurisdiction in
which the Company does not file Tax Returns that the Company is or may be
subject to taxation by such jurisdiction. 
There are no Liens on any of the assets of the Company that arose in
connection with any failure (or alleged failure) to pay any Tax.  All Taxes which the Company was or is
required by Law to withhold or collect have been and are being withheld or
collected by it and have been timely paid over to the proper Governmental
Entities or, if not yet due, are being held by the Company for such payment.  Except as set forth on Schedule 3.1(N),
neither the Shareholder nor the Company has waived, extended or agreed to
extend any applicable statute of limitations relating to any Tax assessment or
deficiency of the Company or agreed to any extension of time for filing any Tax
Return of the Company which has not been filed. 
There is no dispute with or asserted claim by any taxing authority
concerning any Tax liability of the Company. 
To the Shareholder’s knowledge no taxing authority intends to assess any
additional Taxes for any period for which Tax Returns of the Company have been
filed.  The Company has never been a
member of an Affiliated Group or filed or been included in a combined,
consolidated or unitary income Tax Return, and the Company is not a party to
and is not bound by any Tax allocation or Tax sharing agreement.  The Company has not distributed stock of
another Person, nor has it had its stock distributed by another Person, in a
transaction that was purported or intended to be governed in whole or in part
by Sections 355 or 361 of the Code.  The
Company has not engaged in any reportable transaction within the meaning of Section 6111
and 6112 of the Code.  Neither the
Company nor the Shareholder has requested or received a ruling from any taxing
authority or signed any binding agreement with any taxing authority that might
impact any tax attribute of or the amount of Tax due from the Company on or
after the Closing Date.  All of the
Company’s nonqualified deferred compensation plans (within the meaning of Section 409A
of the Code), if any, are in compliance with Section 409A of the
Code.  The Shareholder is not a “foreign
person” within the meaning of Section 1445(f)(3) of the Code.  The Company is not liable for the Taxes of
another Person (i) under Treasury Regulation § 1.1502-6 (or
comparable provisions of state, local or foreign Law), (ii) as a
transferee or successor, (iii) by contract or indemnity or (iv) otherwise;
and will not be required to include any item of income in, or exclude any item
of deduction from, taxable income for any taxable period (or portion thereof)
ending after the Closing Date as a result of any (A) change in method of
accounting for a taxable period ending on or prior to the Closing Date, (B) “closing
agreement” as described in Section 7121 of the Code (or any corresponding
or similar provision of state, local or foreign income Tax Law) executed on or
prior to the Closing Date, (C) intercompany transactions or any excess
loss account described in Treasury Regulations under Section 1502 of the
Code (or any corresponding or similar provision of state, local or foreign
income Tax Law), (D) installment sale or open transaction disposition made
on or prior to the Closing Date, or (E)

 

16

 

prepaid amount received on or
prior to the Closing Date.  The Company
(and any predecessor of the Company) has been a validly electing S corporation
within the meaning of Code Sections 1361 and 1362 at all times since July 1,
1988.   The Company has not, during its
last ten taxable years, acquired any assets to which Section 1374(d)(8) of
the Code would be applicable. The Company has consistently used the accrual
method of accounting, and has not used the cash receipts and disbursements
method of accounting, for federal state and local income tax purposes.  Notwithstanding anything herein to the
contrary, each representation and warranty within this Section 3.1(N)
shall be deemed to be preceded by the clause “except as set forth on Schedule 3.1(N).”

 

O.            Brokers’
Fees.  Neither the Company nor the
Shareholder has entered into any Commitment which will cause the Purchaser or
the Company (following the Closing) to become obligated for any broker’s,
finder’s or other similar fee or commission in connection with this Agreement
or the consummation of any of the transactions contemplated hereby, except for
Tri-Artisan Partners LLC, whose fees and expenses in respect of such
transactions shall be paid by the Shareholder.

 

P.             Vendor
Matters.  Schedule 3.1(P)
lists the top 25 vendors of the Company for the period therein described.  Except as set forth on Schedule 3.1(P):
(1) the relationship of the Company with each such vendor of the Company
is a good commercial working relationship, and there are no material unresolved
disputes between the Company and any such vendors;  (2) the Company has no chargebacks or
other liabilities to vendors which are required (or which will be required) to
be accrued or recorded under GAAP in excess or $100,000 and which are not so
accrued or recorded on the Company’s financial records; (3) no such vendor
within the last twelve (12) months has canceled or otherwise terminated, or
threatened to cancel, or to the knowledge of the Shareholder, intends to cancel
or terminate, its relationship with the Company, and (4) during the last
twelve (12) months there has been no material interruption in the Company’s
supply arrangements with such vendors.

 

Q.            Affiliated
Transactions. Except as set forth on the attached Schedule 3.1(C),
Schedule 3.1(D) or Schedule 3.1(E) (and
excluding employment, the Shareholder’s ownership of the Shares, and the prior
payment of personal expenses of any Key Employee which have been reimbursed in
full), no officer, Key Employee, director, shareholder or Affiliate of the
Company or the Shareholder, or any individual related by blood, marriage or
adoption to any such individual, or any entity in which any such Person or
individual owns any beneficial interest (excluding passive interests of less
than 5% of the equity of any such entity), is a party to any agreement,
contract, commitment or transaction with the Company (to the extent currently
binding on the Company) or has any material interest in any material property
used by the Company.  As used above, the
term “Key Employee” means the Shareholder, Stacey Manganella, and Percy Pava.

 

R.            Accredited
Investor.  Shareholder is an
accredited investor as such term is defined in Regulation D promulgated
pursuant to Section 4(2) of the Securities Act of 1933, as amended
(the “Securities Act”). 
Shareholder acknowledges and agrees that the Closing Shares are being
issued and sold in reliance on the exemption from registration contained in Section 4(2) of
the

 

17

 

Securities Act and
exemptions contained in applicable state securities laws, and that the Closing
Shares cannot and will not be transferred except in a transaction that is
exempt under the Securities Act and those state acts or pursuant to an
effective registration statement under the Securities Act and those state acts
or in a transaction that is otherwise in compliance with the Securities Act and
those state acts.  Shareholder
understands that he has no contractual right for the registration under the
Securities Act of the Closing Shares for public sale other than pursuant to the
Registration Rights Agreement and that, unless the Closing Shares are
registered or an exemption from registration is available, the Closing Shares
may be required to be held indefinitely. 
The Closing Shares to be acquired by Shareholder pursuant to this
Agreement shall be acquired for Shareholder’s own account and not with a view
to, or intention of, distribution thereof in violation of the Securities Act,
or any applicable state securities laws, and the Closing Shares shall not be
disposed of in contravention of the Securities Act or any applicable state
securities laws.  Shareholder is
sophisticated in financial matters and is able to evaluate the risks and
benefits of the investment in the Closing Shares.  Shareholder is able to bear the economic risk
of his investment in the Shareholder Stock for an indefinite period of time
because the Closing Shares have not been registered under the Securities Act
and, therefore, cannot be sold unless subsequently registered under the
Securities Act or an exemption from such registration is available.

 

Section 3.2.  No Implied Representations.  Notwithstanding
anything to the contrary herein: (1) it is the explicit intent and
acknowledgement of each party hereto that the Shareholder has not made and is
not making any representation or warranty whatsoever, express or implied, other
than those expressly given in Section 3.1 of this Agreement, and the
Purchaser is not relying on any other statement, representation or warranty, oral
or written, express or implied, made by the Shareholder or the Company or their
respective Affiliates, representatives or agents, including any such statement,
representation or warranty contained in any offering memorandum or any
information, document or material made available to the Purchaser or its
Affiliates, representatives or agents in any “data rooms,” management
presentations or any other form in expectation of the transactions contemplated
by this Agreement and the Additional Transaction Documents; and (2) the
Purchaser has undertaken its own analyses and methodologies to value the
Company and the Business, and in no event shall the Shareholder be charged with
knowledge of, or have responsibility for, such analyses or methodologies or the
valuation resulting therefrom.  EXCEPT AS
OTHERWISE SPECIFICALLY SET FORTH IN SECTION 3.1 OF THIS AGREEMENT, THE
SHAREHOLDER EXPRESSLY DISCLAIMS ANY IMPLIED WARRANTY OR REPRESENTATION.

 

ARTICLE IV.

 

Representations and Warranties
of the Purchaser

 

Section 4.1             Representations
and Warranties.  The Purchaser
represents and warrants to the Shareholder that:

 

A.            Corporate
Existence and Qualification; Due Execution, Etc.  The Purchaser is a corporation duly organized
and validly existing under the Laws of the State of Delaware and has the
requisite corporate power and authority to execute, deliver and perform

 

18

 

this Agreement and to
consummate the transactions contemplated hereby.  The execution and delivery of this Agreement
by the Purchaser and the consummation by the Purchaser of the transactions
contemplated hereby have been duly authorized by all requisite corporate action
and, assuming the due execution of this Agreement by the Shareholder, this
Agreement constitutes the valid and binding obligations of the Purchaser
enforceable against the Purchaser in accordance with its terms, subject only to
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
Laws relating to creditors’ rights generally and to general principles of
equity (regardless of whether such enforcement is considered in a proceeding at
law or in equity).

 

B.            No
Violation.

 

(i)            Neither
the execution, delivery and performance by the Purchaser of this Agreement or
the Additional Transaction Documents, nor the consummation of the Contemplated
Transactions by the Purchaser, will (A) violate any Order applicable to
the Purchaser or (B) result in a breach of or default under, the Charter
Documents of the Purchaser; except for such violations which would not
reasonably be expected to have a material adverse effect on the Purchaser’s
ability to perform its obligations under this Agreement or the Additional
Transaction Documents, or to consummate the Contemplated Transactions.

 

(ii)           Neither
the execution, delivery and performance by the Purchaser of this Agreement or
the Additional Transaction Documents, nor the consummation of the Contemplated
Transactions by the Purchaser, will violate any agreement or Law applicable to
the Purchaser; except for such violations which would not reasonably be
expected to have a material adverse effect on the Purchaser’s ability to
perform its obligations under this Agreement or the Additional Transaction
Documents, or to consummate the Contemplated Transactions.

 

(iii)          No
consent, authorization, or approval from, or registration or filing with, any
Governmental Entity or other third party (not obtained or made as of the date
hereof) is required to be obtained or made by or with respect to the Purchaser
in connection with the execution and delivery of this Agreement or the
consummation by the Purchaser of the transactions contemplated hereby; except
for such violations which would not reasonably be expected to have a material
adverse effect on the Purchaser’s ability to perform its obligations under this
Agreement or the Additional Transaction Documents, or to consummate the
Contemplated Transactions.

 

C.            Litigation.  There are no Legal Proceedings pending or, to
the knowledge of the Purchaser, threatened against the Purchaser that seek to
enjoin or obtain damages in respect of the consummation of the transactions
contemplated by this Agreement.

 

D.            Financial
Ability to Perform. The Purchaser has available cash funds sufficient to
consummate the transactions contemplated by this Agreement.

 

E.             Purchase
for Investment.  The Purchaser is
acquiring the Company Shares for investment and not with a view toward any
resale or distribution thereof except in compliance with applicable Laws,
including the Securities Act.

 

19

 

F.             Brokers’
Fees.  The Purchaser has not made any
agreement, which will cause the Company, or the Shareholder to become obligated
for any broker’s or other similar fee or commission as a result of any of the
transactions contemplated by this Agreement.

 

ARTICLE V

 

Covenants and Agreements

 

Section 5.1             Section 338(h)(10) Election

 

A.            At
the Purchaser’s option, the Shareholder and the Purchaser shall join in making
a timely election under Code Section 338(h)(10) (and any
corresponding elections under state, local, or foreign tax law) (collectively,
the “Section 338(h)(10) Election”) with respect to the
purchase and sale of the stock of the Company. 
The parties agree that the Purchase Price and the liabilities of the
Company (plus other relevant items) will be allocated to the assets of the
Company for all purposes as set forth in a schedule to be provided by the
Purchaser to the Shareholder (and subject to the Shareholder’s reasonable
approval) within 120 days after the Closing Date. In the event that the Purchaser
and the Shareholder cannot agree on such allocation within a reasonable period
of time prior to the due date for filing the Section 338(h)(10) Election,
then such allocation shall be finally determined by a nationally recognized
accounting firm reasonably acceptable to the Purchaser and the
Shareholder.  The Purchaser, the
Shareholder, and the Company shall file all Tax Returns (including amended
returns and claims for refund) and information reports in a manner consistent
with such allocation.

 

B.            For
purposes of this Agreement, “Extra Tax Cost” means the amount, if any,
of all incremental federal, state, and local Taxes imposed on the Shareholder
or the Company as a result of the Section 338(h)(10) Election
(assuming, solely for purposes of this calculation, that all of the Shareholder’s
representations and warranties set forth in Section 3.1(N) are true and
correct), compared to the federal, state, and local Taxes that would have been
imposed on the Shareholder or the Company in the absence of the Section 338(h)(10) Election
(including, without limitation, a gross-up for any Taxes imposed on the
Shareholder as a result of the payment of the Extra Tax Cost).  The Extra Tax Cost shall be calculated using
the highest marginal federal, state, and local Tax rates (taking into account
the federal Tax benefit of any state and local Taxes) applicable to individuals
living in the state of Massachusetts on income of the relevant character.

 

C.            Notwithstanding
anything herein to the contrary, the Shareholder and the Purchaser agree that
as between the Shareholder and the Purchaser, the Purchaser shall be
responsible for any and all Extra Tax Costs, and in furtherance thereof: (i) the Purchaser shall cause the Company to promptly
pay when due any Extra Tax Cost imposed on the Company; and (ii) the
Purchaser shall pay the amount of any Extra Tax Cost imposed on the Shareholder
concurrently with the payment of any such Extra Tax Cost by the Shareholder
(with payments pursuant to this clause (ii) to be made within 10 days
after delivery to the Purchaser of evidence showing payment by the Shareholder
of an Extra Tax Cost imposed on him). 
The Purchaser shall include with the allocation schedule to be
provided pursuant to clause (a) above its

 

20

 

calculation
of the Extra Tax Cost.  The amount of
Extra Tax Cost paid to the Shareholder shall be treated as an increase to the
Purchase Price.

 

Section 5.2             Tax
Matters.

 

A.            Tax
Periods Ending on or before the Closing Date.  The Shareholder shall prepare and file or
cause to be prepared and filed all Tax Returns for the Company and the Business
for all periods ending on or prior to the Closing Date which are filed after
the Closing Date. Each such Tax Return described in the preceding sentence
shall be subject to review and approval by the Purchaser (which approval shall
not be unreasonably withheld) prior to filing; provided, however, that with
respect to any dispute involving the calculation any Tax liability under Section 1374
of the Code with respect to assets acquired from Flirt, Inc., the
Accounting Firm shall determine such calculation consistent with the dispute
resolution provisions of Section 1.5. 
The Shareholder shall pay and
be liable for all Taxes of the Company with respect to such periods or which
arise in respect of any event, action, or transaction which occurred during
such periods, excluding, however, Extra Tax Costs.

 

B.            Tax
Periods Beginning on or after the Closing Date.  The Purchaser shall prepare and file or cause
to be prepared and filed when due all Tax Returns for the Company for all
periods beginning on or after the Closing Date. 
The Purchaser shall pay and
be liable for all Taxes of the Company with respect to such periods or which
arise in respect of any event, action, or transaction which occurred during
such periods.

 

C.            Tax Periods Beginning Before and Ending After the Closing Date.  The Purchaser shall prepare and file or cause to
be prepared and filed when due any Tax Returns of the Company for Tax periods
which begin before the Closing Date and end after the Closing Date.  The Purchaser shall permit the Shareholder to
review and comment on each such Tax Return described in the preceding sentence
prior to filing.  Subject to Section 5.2(G),
the Shareholder shall deliver to the Purchaser, at least three (3) business
days prior to the date on which such Taxes are required to be paid, that
portion of the Taxes which relates to the portion of such taxable period ending
on the day immediately preceding the Closing Date (the “Pre-Closing  Straddle
Period Taxes”), excluding, however, Extra Tax Costs.  For
purposes of this Section 5.2(C), in the case of any Taxes (other than
Extra Tax Costs) that are imposed on a periodic basis and are payable for a
taxable period that includes (but does not end on) the day immediately
preceding the Closing Date, the portion of such Tax which relates to the
portion of such taxable period ending on the day immediately preceding the
Closing Date shall (i) in the case of any Taxes
other than Taxes based upon or related to income or receipts, be deemed to be
the amount of such Tax for the entire taxable period multiplied by a fraction
the numerator of which is the number of days in the taxable period ending on
the day immediately preceding the Closing Date and the denominator of which is
the number of days in the entire taxable period, and (ii) in the case of
any Tax based upon or related to income or receipts be deemed equal to the
amount which would be payable if the relevant taxable period ended on the day
immediately preceding the Closing Date. 
Subject to the proration provisions of the
preceding sentence, any credits or refunds relating to a taxable period that
begins before and ends after the Closing Date shall be taken into account as
though the relevant taxable period ended on the day immediately

 

21

 

preceding the Closing Date.  All
determinations necessary to give effect to the foregoing allocations shall be
made in a manner consistent with prior practice of the Company.

 

D.            Contest
Proceedings. With respect to any Tax Returns for any Tax periods, the party
hereto responsible for the preparation and filing of such Tax Return shall
control the defense of any audits thereof or other Legal Proceedings relating
thereto, provided that the costs of any such
defense shall be shared by the parties hereto, pro rata based on their
responsibility for Taxes due under any such Tax Return, and provided further that no such audits or other Legal
Proceedings shall be settled in a manner which would adversely affect the other
party hereto without the prior written consent of such other party, which
consent shall not be unreasonably withheld.

 

E.             No
Withholding.  Payment by the
Purchaser to the Shareholder of the Purchase Price shall be made in full
without any deduction or withholding, whether in respect of set-off,
counterclaim, or Taxes (other than any Taxes imposed on the Shareholder that
are based on net income or profits or any Taxes required by law to be withheld
by the Purchaser).

 

F.             Transfer
Taxes.  All sales, use, transfer,
stamp, conveyance, value added or other similar Taxes, duties, excises or
governmental charges imposed by any taxing jurisdiction, domestic or foreign,
and all recording or filing fees, notarial fees and
other similar costs with respect to the Transfer of the Company Shares will be
split equally between the Purchaser and the Shareholder.  The Purchaser will file all necessary Tax
Returns and other documentation in connection with the Taxes and charges
encompassed in this Section 5.2(F), and the costs and expenses of filing
such Tax Returns and other documentation shall be split equally between the
Purchaser and the Shareholder.

 

G.            Cooperation
on Tax Matters.  The Purchaser, the
Company and the Shareholder shall cooperate (and cause their respective
Affiliates to cooperate) fully, as and to the extent reasonably requested by
the other parties, in connection with the preparation and filing of Tax Returns
pursuant to this Section 5.2 and any Tax audit, litigation or other
proceeding with respect to Taxes and payments in respect thereof.  Such cooperation shall include the retention
and (upon the other parties’ request) the provision of records and information
which are reasonably relevant to any such Tax audit, litigation or other
proceeding and making employees available on a mutually convenient basis to
provide additional information and explanation of any material provided
hereunder.  The Company and the
Shareholder agree to retain all books and records with respect to Tax matters
pertinent to the Company relating to any taxable period beginning before the
Closing Date until the expiration of the statute of limitations (and, to the
extent notified by the Purchaser, any extensions thereof) of the respective
taxable periods, and to abide by all record retention agreements entered into
with any taxing authority.  The parties
shall provide timely notice to the other in writing of any pending or proposed
Tax audits or assessments with respect to Taxes for which the other may have an
indemnification obligation under this Agreement.  The Purchaser and the Shareholder further
agree, upon the reasonable request of the other party, to cooperate with each
other to obtain any certificate or other document from any Governmental Entity
or otherwise to mitigate, reduce or eliminate any Tax that might otherwise be
imposed on either party or the Company in the absence of such certificate or
other documentation (including without limitation as a result of the
transactions

 

22

 

contemplated
hereby). Any failure to timely notify the other party of any Tax audits or
assessments shall not relieve such party from any obligation hereunder unless
(and then only to the extent) such party is actually prejudiced thereby.  The parties shall furnish the other with
copies of all relevant correspondence received from any taxing authority in
connection with any Tax audit or information request with respect to any Taxes
for which the other may have an indemnification obligation under this
Agreement.  The Purchaser and the
Shareholder further agree, upon request, to provide the other party with all
information that either party may be required to report pursuant to Sections
6043 and 6043A of the Code and all Treasury Regulations promulgated thereunder. The parties agree to cooperate in pursuing a
process where they would request the IRS to grant relief to Flirt, Inc. to
allow Flirt, Inc. to become an S corporation for its year ended December 31,
2004, provided that any additional costs and expenses of such process (on a net
basis, taking into account all of the consequences of such an S election),
including the tax costs of Flirt becoming an S corporation for such year, would
be borne by the Purchaser.

 

I.              Purchase
Price Adjustment.  All
indemnification payments under this Section 5.2 and Section 6.15
shall be deemed adjustments to the Purchase Price.

 

J.             Certain
Definitions.  For purposes of this
Agreement: (i) “Tax” or “Taxes” means all federal, state,
provincial, territorial, local, foreign and other taxes, assessments, or
governmental charges in each case in the nature of a tax, including income,
capital, franchise, capital stock, excise, property, sales, use, service,
service use, leasing, leasing use, license, goods and services, gross receipts,
value added, single business, alternative or add-on minimum, occupation, real
and personal property, stamp, ad valorem, workers’
compensation, severance, profits, windfall profits, customs, duties,
disability, registration, estimated, environmental (including Taxes under Code Section 59A),
transfer, payroll, wage or other withholding, employment, unemployment, social
security (or similar) taxes or premiums, or other assessments, charges and
taxes of the same or similar nature, together with any interest, penalties or
additions thereon and estimated payments thereof, whether disputed or not; and (ii) “Tax
Return” or “Tax Returns” includes all returns, reports, information
returns, forms, declarations, claims for refund, statements and other documents
(including any amendments thereto and including any schedule or attachment
thereto) in connection with Taxes that are required to be filed with a
Governmental Entity or other tax authority, or sent or provided to another
party under applicable Law (including any schedule or attachment thereto
and including any amendment thereof), and all citations of the Code or to the
Treasury Regulations promulgated thereunder will
include any amendments or successor provisions thereto.

 

Section 5.3             Books
and Records.  Until the earlier of (i) the expiration of the applicable statute of
limitations (including periods of waiver) or (ii) seven (7) years
after the Closing Date (or such longer period as may be required by any Law or
any ongoing Legal Proceeding), (1) the Purchaser shall cause the Company
to maintain all books and records of the Company material to the Business; and (2) the
Shareholder shall maintain those books and records which are material to the
Business and are not provided to Purchaser at or in connection with the
Closing; in each case with respect to the period up to and including the
Closing; and (3) the Purchaser and the Shareholder, respectively, shall
permit the Shareholder and the Purchaser, respectively, to have reasonable
access to such books, records and data for inspection and copying by the
Shareholder

 

23

 

or Purchaser, respectively, or
their respective duly authorized representatives (at the Shareholder’s or
Purchaser’s respective expense) upon reasonable prior written notice, in
connection with the preparation of financial reports, Tax Returns, Tax audits,
the defense or prosecution of litigation, or any other reasonable need of the
Shareholder or Purchaser, respectively, to consult such records and data.

 

Section 5.4             Discharge
of Liabilities.   The Purchaser acknowledges that any and all
Liabilities of the Company at Closing shall continue
to be Liabilities of the Company unaffected by the Closing and the Transfer of
the Company Shares hereunder.

 

Section 5.6             Indemnification
of Directors and Officers. 
Following the Closing, the Purchaser shall cause the Company to honor
its obligations, if any, to indemnify and advance defense costs to each present
and former officer or director of the Company pursuant to its Charter Documents
and shall not permit the Charter Documents of the Company to be amended for a
period of six years in a manner which materially adversely affects the indemnification
rights, if any, of present and former directors and officers of the Company.

 

Section 5.7             Further
Assurances.  At any time and from
time to time, the Shareholder on the one hand, and the Purchaser, on the other
hand, shall promptly execute, acknowledge and deliver any other assurances or
documents reasonably requested by the other, as the case may be, and necessary
for it, as the case may be, to satisfy its respective obligations hereunder or
obtain the benefits contemplated hereby.

 

Section 5.8             Confidentiality.  In consideration of the mutual covenants
contained herein, Shareholder agrees that, for all times after the Closing,
except as required by law or court order, or in order to assert a claim or
defense under this Agreement or the Additional Transaction Documents, he shall
not, directly or indirectly, disclose to any unauthorized Person or use for his
own account (other than pursuant to his employment duties under the Employment
Agreement) any Confidential Information.

 

Section 5.9 
Non-Competition; Non-Solicitation.

 

(i)            Shareholder
acknowledges that during his employment relationship with, and through his
involvement as a stockholder of, the Company, Shareholder has become familiar
with trade secrets and other Confidential Information concerning the Company,
and with investment opportunities relating to their respective businesses.  Therefore, Shareholder agrees that for a
period of five years following the date hereof (the “NonCompete
Period”), he will not singly, jointly, or as a partner, member or
stockholder directly, indirectly or beneficially own, manage, control,
participate in the ownership, management, operation or control of, or render
services for (as a consultant or advisor), or provide financial assistance to a
Competitive Business.  Nothing in this Section will
prohibit Shareholder from: (a) being employed by the Company or its
Affiliates; or (b) being a passive owner of less than 5% of the
outstanding stock of any company listed on a national securities exchange or
actively traded in the over-the-counter market, so long as Shareholder has no
direct or indirect participation in the management of such company.

 

24

 

(ii)           During
the NonCompete Period, Shareholder shall not (i) directly or indirectly, either for himself or for
any other person, business, partnership, association, firm, company or
corporation, hire from the Company, or attempt to hire, divert or take away
from the Company, any of the officers or employees of the Company in existence
from time to time during his employment with the Company, (ii) interfere
with or attempt to interfere with, the relationship of the Company or its
Affiliates, with any employee, customer or supplier of the Company or its
Affiliates, or (iii) knowingly make any public statement or other public
communication (or repeated and widespread private statements or communications)
that is or are reasonably likely to materially damage the goodwill of the
Company or its Affiliates, or knowingly take any action, directly or
indirectly, to interfere with any contractual or customer or supplier
relationships of the Company or its Affiliates.

 

(iii)          Shareholder
agrees and acknowledges that:  (a) the
covenants set forth in this Section 5.9 are reasonably limited in time and
in all other respects, (b) the covenants set forth in this Section 5.9
are reasonably necessary for the protection of the Company, (c) the
Purchaser would not have entered into this Agreement but for the covenants of
the Shareholder contained herein, and (d) the covenants contained herein
have been made in order to induce the Purchaser to enter into this Agreement.

 

(iv)          If,
at the time of enforcement of this Section 5.9, a court shall hold that
the duration, scope or area restrictions stated herein are unreasonable under
the circumstances then existing, the parties agree that the maximum duration,
scope or area reasonable under such circumstances shall be substituted for the
stated duration, scope or area and that the court shall be allowed to revise
the restrictions contained herein to cover the maximum period, scope and area
permitted by law.

 

(v)           The
Shareholder recognizes and affirms that in the event of his breach of any
provision of this Section 5.9, money damages would be inadequate and the
Purchaser and the Company would have no adequate remedy at law.  Accordingly, the Shareholder agrees that in
the event of a breach or a threatened breach by the Shareholder of any of the
provisions of this Section 5.9, the Purchaser and the Company, in addition
and supplementary to other rights and remedies existing in their favor, may
apply to any court of law or equity of competent jurisdiction for specific
performance and/or injunctive or other relief in order to enforce or prevent
any violations of the provisions hereof (without posting a bond or other
security).

 

Section 5.10  Guarantees.  To the extent that the Shareholder or Stacey Manganella has personally guaranteed any obligations of the
Company under any Commitment, then from and after the Closing (1) at the
Shareholder’s request the Purchaser will use reasonable efforts to have the
Shareholder and/or Stacey Manganella removed from
such guarantee; (2) the Purchaser shall not allow the Company to amend,
extend or renew such Commitment without removing the Shareholder and Stacey Manganella from such guarantee; and (3) the Purchaser
shall indemnify the Shareholder and Stacey Manganella
from any and all Shareholder’s Losses (as defined in Section 6.15(B))
incurred or suffered by the Shareholder and/or Stacey Manganella
on account of such guarantee.

 

25

 

ARTICLE VI

 

Miscellaneous

 

Section 6.1             Entire
Agreement.  This Agreement
(including the Disclosure Schedule and the Additional Transaction
Documents) supersedes any other agreement, whether written or oral, that may
have been made or entered into by any party or any of their respective
Affiliates (or by any director, officer or representative thereof) with respect
to the subject matter hereof.  This
Agreement (including the Disclosure Schedule and the Additional
Transaction Documents) constitutes the entire agreement of the parties hereto
with respect to the matters provided for herein, and there are no agreements or
commitments by or among such parties or their Affiliates with respect to the
subject matter hereof except as expressly set forth in this Agreement, the
Disclosure Schedule and the Additional Transaction Documents.

 

Section 6.2             Amendments.  No amendment, modification or alteration of
the terms or provisions of this Agreement shall be binding unless the same
shall be in writing and duly executed by the Purchaser and the Shareholder.

 

Section 6.3             Successors
and Assigns.  This Agreement shall
inure to the benefit of and be binding upon the
parties hereto and their respective successors and permitted assigns.  This Agreement may not be assigned by any
party without the prior written consent of the other parties; provided,
however, that Purchaser may assign any or all of its rights and obligations
under this Agreement or the Additional Transaction Documents to any direct or
indirect wholly owned subsidiary, limited partnership, limited liability
company or similar business entity without the consent of the Shareholder, or
to any Person in connection with the sale or transfer to such Person of all or
substantially all of the Purchaser’s assets, or as a collateral assignment by
the Purchaser to its lenders; but such assignment shall not relieve the
Purchaser of any of its obligations hereunder.

 

Section 6.4             Counterparts.  This Agreement may be executed and delivered
in counterparts, each of which when executed and delivered shall be deemed to
be an original for all purposes and all of which together shall constitute one
and the same agreement.

 

Section 6.5             Headings
and Section References.  The
headings of the sections and paragraphs of this Agreement are for reference
purposes only and are not intended to be a part of, or to affect the meaning or
interpretation of, this Agreement.  All Article and
Section references herein, unless otherwise clearly indicated, are to
Articles and sections within this Agreement.

 

Section 6.6             Waiver.  No failure or delay by either the Purchaser
or the Shareholder in exercising any right, power or privilege hereunder shall
operate as a waiver thereof; nor shall any single or partial exercise thereof
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege.  The rights
and remedies herein provided are cumulative and not exclusive of any rights or
remedies otherwise provided by law.

 

Section 6.7             Expenses.  Except as otherwise specifically provided for
in this Agreement or in any Additional Transaction Document, the Shareholder
and the Purchaser shall

 

26

 

each pay all costs and expenses
incurred by such party or on such party’s behalf in connection with this
Agreement and the Contemplated Transactions, including fees and expenses of
such party’s own financial consultants, accountants and counsel.

 

Section 6.8             Notices.  Any notice, request, instruction or other
document or communication to be given under this Agreement by any party hereto
to any other party shall be in writing and delivered personally or sent by an
internationally recognized overnight courier service or by registered or
certified mail, postage prepaid:

 

If to the Shareholder to the following
address:

 

c/o
Jasmine Company, Inc

329 Newbury Street

Boston MA 02115

Attn: Luciano  Manganella

 

with a copy to:

 

Goulston &
Storrs, P.C.

400 Atlantic
Avenue

Boston,
MA  02110-3333

Attn:       Matthew
E. Epstein, Esq.

 

If to the Purchaser, or to the Company
following the Closing, to:

 

New York &
Company, Inc.

450 West 33rd
Street

New York,
NY  10001

Attn:       Ronald
W. Ristau

 

with a copy to:

 

Kirkland &
Ellis LLP

Citigroup
Center

153 East 53rd
Street

New York,
NY  10022-464611

Attn:       Michael
T Edsall

Heidi C. Matterfis

 

or at such other
address for a party or as shall be specified by like notice.  Any notice that is delivered personally in
the manner provided herein shall be deemed to have been duly given to the
Person to which it is directed upon actual receipt by such party (or its agent
for notices hereunder).  Any notice that
is addressed as provided herein and mailed by registered or certified mail shall
be conclusively presumed to have been duly given to the Person to which it is
addressed at the close of business, local time of such party, on the fifth
calendar day after the day it is so placed in the mail.  Any notice that is addressed as provided herein
and sent by an

 

27

 

internationally
recognized overnight courier service shall be conclusively presumed to have
been duly given to the Person to which it is addressed at the close of
business, local time of such Person, on the next business day following its
deposit with such courier service for next day delivery.

 

Section 6.9             Governing
Law.  This Agreement and the legal
relations among the parties hereto shall be governed and construed in
accordance with the substantive Laws of the State of New York without giving
effect to the principles of conflict of laws thereof.

 

Section 6.10           Severability.  If any provisions hereof shall be held by any
court of competent jurisdiction to be prohibited by, illegal or unenforceable,
such provisions shall be of no force and effect to the extent of such
prohibition, illegality or unenforceability, but the prohibition, illegality or
unenforceability shall have no effect upon, and shall not impair the
enforceability of, any other provision of this Agreement.

 

Section 6.11           Knowledge.
Whenever “to its knowledge,” “known,” “aware,” “awareness,” or a similar phrase
is used with respect to the Shareholder to qualify a representation or warranty
of the Shareholder the “knowledge” or “awareness” so referred to shall be
deemed to be the actual and conscious (and not constructive) knowledge of the
Shareholder and Stacey Manganella, along with the
knowledge that the Shareholder would reasonably be expected to have as the
result of such person’s position as chief executive officer and sole
stockholder, and Key Employee, respectively of the Company.

 

Section 6.12           Rights
of Third Parties.  Nothing expressed
or implied in this Agreement is intended or will be construed to confer upon or
give any Person other than the parties hereto and their respective successors
and permitted assigns any rights, benefits or remedies under or by reason of
this Agreement or any transaction contemplated hereby except for the Parties
entitled to indemnification under Section 6.15.

 

Section 6.13           Consent
to Jurisdiction and Service of Process.  The Purchaser and each of the Shareholder
hereby irrevocably consents that any legal action or proceeding against it
under, arising out of, or in any manner relating to this Agreement or any other
agreement, document or instrument arising out of or executed in connection with
this Agreement shall be brought only in a state or federal court of competent
jurisdiction located within the State of New York and in all appellate courts
associated therewith.  Each party by the
execution and delivery of this Agreement expressly and irrevocably consents and
submits to the personal jurisdiction of any of such courts in any such action
or proceeding.  Each party hereby
expressly and irrevocably waives any claim or defense in any action or
proceeding based on any alleged lack of personal jurisdiction, improper venue,
forum non conveniens, or any similar basis.  Notwithstanding the foregoing, the Purchaser
may elect, in its sole discretion, to initiate the arbitration procedures set
forth on Schedule 6.13 to assert a claim that a Major Employment
Breach has occurred and to enforce its rights with respect to the same pursuant
to Section 6.16.  In such election,
the parties shall cooperate in good faith to implement such arbitration in
accordance with Schedule 6.13, and, without limiting the foregoing, the parties shall direct the arbitrators in such
event to issue their determinations on an expedited basis.

 

28

 

Section 6.14 
Waiver of Right to Jury Trial.  The Company, the Purchaser and the
Shareholder 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, any other Agreement contemplated hereby or
thereby or the validity, protection, interpretation, collection or enforcement
thereof.

 

Section 6.15           Indemnification;
Survival of Representations and Warranties.

 

A.            Indemnification
by Shareholder.  The Shareholder
shall indemnify, defend and hold harmless the Purchaser and its Affiliates and
their respective employees, agents, officers, directors, stockholders,
partners, representatives, successors and permitted assigns and the Company (a “Purchaser
Indemnified Person”) from and against any losses, taxes, penalties,
assessments, Liabilities, claims, damages, costs and expenses (including
reasonable attorneys’ fees and disbursements) incurred by such indemnified
party as the result of or arising from any misrepresentation in, breach of or
failure to comply with, any of the representations, warranties, covenants or
agreements of the Shareholder contained in this Agreement or any Additional
Transaction Document (including without limitation the covenants with respect
to Taxes under Section 5.2 hereof); and all such losses, assessments,
Liabilities, claims, damages, costs and expenses are referred to hereinafter as
the “Purchaser’s Losses.”

 

B.            Indemnification
by the Purchaser.  The Purchaser shall
indemnify, defend and hold harmless the Shareholder and its Affiliates and
their respective employees, officers, directors, stockholders, partners,
agents, representatives, successors and permitted assigns (a “Shareholder
Indemnified Party”) from and against any losses, taxes, penalties,
assessments, Liabilities, claims, damages, costs and expenses (including
reasonable attorneys’ fees and disbursements) incurred by such indemnified
party as the result of or arising from any misrepresentation in, breach of or
failure to comply with, any of the representations, warranties, covenants or
agreements of the Purchaser contained in this Agreement or any Additional
Transaction Document (including without limitation the covenants with respect
to Taxes under Section 5.2 hereof); and all such losses, assessments,
Liabilities, claims, damages, costs and expenses are referred to hereinafter as
the “Shareholder’s Losses.”

 

C.            Survival;
Limitations.  Notwithstanding
anything else in this Agreement or any Additional Transaction Document to the
contrary:

 

(i)            The
representations and warranties of the Shareholder and the Purchaser,
respectively, under this Agreement and any Additional Transaction Document, and
any indemnification obligations arising therefrom,
shall survive the Closing and shall expire and terminate on the date which is
12 months following the Closing Date; provided, however,
that the Shareholder’s representations and warranties in Section 3.1(A)(iii),
Section 3.1(A)(iv), Section 3.1(K)(3), Section 3.1(N), and Section 3.1(O),
and Section 3.1(S) shall not so expire and terminate upon such date but
rather shall expire and terminate 60 days following the expiration of the
respective statutes of limitations applicable to the matters giving rise to a
claim for breach of such sections (such applicable date, the “Survival Date”).  The covenants of the parties under this
Agreement and under any Additional Transaction Document, and any
indemnification obligations arising therefrom, shall
survive the Closing and shall expire in accordance with their

 

29

 

terms.  Any claim for indemnification made by a
Purchaser Indemnified Party or a Shareholder Indemnified Party under this Section 6.15
must be raised in a writing delivered to the Shareholder or the Purchaser, as applicable, by no later than the Survival Date and, if
raised by such date, such claim shall survive the Survival Date until final
resolution thereof.

 

(ii)           The
Shareholder shall not have any indemnification obligations under Section 6.15(A),
and the Purchaser shall not have any indemnification obligations under Section 6.15(B):  (a) except to the extent that the
Purchaser’s Losses, or the Shareholder’s Losses, respectively, with respect to
all such Material Claims in the aggregate exceed $300,000 (the “Indemnification
Threshold”), in which event such indemnification shall be required only to
the full extent of the Purchaser’s Losses or the Shareholder’s Losses,
respectively, in excess of the Indemnification Threshold (subject also to the
succeeding clause (b) of this Section 6.15(C)(ii)); and (b) to
the extent that the Purchaser’s Losses in the aggregate, or the Shareholder’s
Losses in the aggregate, respectively, exceed $4,500,000 (the “Cap”), in
which event such indemnification shall be required only to the extent of the
Purchaser’s Losses or the Shareholder’s Losses, respectively, below the Cap
(subject also to the preceding clauses (a) and (b) of this Section 6.15(C)(ii)),
provided that this Section 6.15(C)(ii) shall
not apply to the covenants of the parties and the indemnification obligations
relating thereto or to the Seller’s representations and warranties set forth in
Section 3.1(A)(iii), Section 3.1(A)(iv), Section 3.1(K)(3), Section 3.1(N),
and Section 3.1(O), and Section 3.1(S), provided
further however that in no event shall the foregoing proviso result
in the Shareholder’s maximum liability under this Agreement or the Additional
Transaction Documents being more than the Purchase Price.

 

(iii)          With
respect to any matter for which indemnification has been provided hereunder,
the Indemnitee (as defined below) hereby covenants and agrees to use all
commercially reasonable efforts to collect amounts payable to the Indemnitee under any applicable insurance policy of
the Indemnitee, and
any such amounts so paid to the Indemnitee
shall reduce the indemnification obligations of the Indemnitor
(as defined below) with respect to such matters; provided that this provision
shall not limit Indemnitee’s right to pursue indemnification
hereunder.

 

(iv)          In
no event shall Shareholder’s Losses or Purchaser’s Losses, as the case may be,
include amounts arising from special, exemplary, or punitive damages.

 

(v)           The
Shareholder shall have no liability under this Agreement (including under Section 3.1(N),
Section 5.2 and Section 6.15(A)) in relation to any Liability or
matter to the extent that the amount of such matter or Liability was included
in the determination of the Final Adjustment.

 

(v)           In
no event shall an Indemnitee have, with respect to
Purchaser’s Losses, any recourse to the Escrow Assets or the Escrow Account,
and the Purchaser hereby waives, for itself and on behalf of each Indemnitee having claims with respect to Purchaser’s
Losses, any recourse to, or claims or rights with respect to, the Escrow Assets
and the Escrow Account, provided, however, that such waiver shall not apply to
such Purchaser’s Losses to the extent arising from a Major Employment Breach by
the Shareholder, and provided further that such waiver shall expire, and be of
no further force or effect, from and after July 31, 2006; and

 

30

 

provided
further that such waiver shall not apply to any other assets, rights or
properties of the Shareholder. As used above, the term “Escrow Assets” means
any and all cash, stock, property and assets held in escrow pursuant to the
Escrow Agreement (or any replacement escrow agreement) pursuant to Section 1.4,
and the term Escrow Account means the account or accounts maintained by the
escrow agent and containing the Escrow Assets.

 

(vi)          The
parties acknowledge that the limitations set forth in the preceding clauses (i), (ii), (iii), (iv), (v) and (vi) of this Section 6.15(C) are
not mutually exclusive, but rather are separate and independent limitations,
and that each and all such limitations may, alone or together, apply to a party’s
indemnification obligations in accordance with their respective terms.

 

D.            Sole Remedy.  Notwithstanding anything herein
to the contrary, each party’s sole and exclusive remedy against any other party
for any breach of a representation, warranty, covenant or other obligation made
in or imposed by this Agreement or any Additional Transaction Document or the
other transactions contemplated hereunder or under the Additional Transaction
Documents shall be a claim for indemnification under this Section 6.15,
subject to all of the limitations of this Section 6.15, including under Section 6.15(C),
except in the case of claims in the event of a Major Employment Breach under Section 6.16,
or claims in the event of a Major Lease Termination under Section 7.17, or
claims for fraud or for equitable remedies, provided that
any breach of any representation, warranty, covenant or agreement by a party
hereunder shall not, in and of itself, constitute “fraud” by such party.

 

E.             Procedures.

 

(i)            In the event that any Legal Proceeding shall be
instituted with respect to which indemnification may be sought by one party
hereto from another party under the provisions of this Section 6.15, the
party seeking indemnification (“Indemnitee”)
shall, promptly after acquiring knowledge of such Legal Proceeding, cause
written notice in reasonable detail of such Legal Proceeding which is covered
by this indemnification to be forwarded to the other party from which
indemnification is being sought (“Indemnitor”),
provided, however, the failure to notify the Indemnitor
will not relieve the Indemnitor of any liability it
may have to indemnify the Indemnitee except to the
extent that the Indemnitor’s defense of such action,
or any of the Indemnitor’s rights with respect to the
same, including any rights under insurance or against any third parties, is
actually prejudiced or impaired by the Indemnitee’s
failure to give such notice.

 

(ii)           In the event of the initiation of any such Legal Proceeding against an Indemnitee, the Indemnitor, after
the receipt of the notice described in Section 6.15(E)(i),
at its option and at its own expense, to be represented by counsel of its
choice, and reasonably acceptable to Indemnitee, and
(subject to Section 6.15(E)(iii) and the second provision of this
subsection) to defend against, negotiate, settle or otherwise deal with any
Legal Proceeding or demand that relates to any Purchaser’s Losses or
Shareholder’s Losses, as the case may be, indemnified against hereunder, and,
in such event, the Indemnitee will reasonably
cooperate with the Indemnitor and its representatives
in connection with such defense, negotiation, settlement or dealings; provided, however, that the Indemnitee
may directly participate in any such Legal Proceeding so defended with counsel
of its choice at its own expense; provided further
that the

 

31

 

Indemnitor
shall not be entitled to assume control of such defense and shall pay the fees
and expenses of counsel retained by the Indemnitee
(reasonably acceptable to Indemnitor) if (1) the
claim for indemnification relates to or arises in connection with any criminal
proceeding, action, indictment, allegation or investigation; (2 the claim seeks
an injunction or equitable relief against the Indemnitee;
(3) a conflict of interest exists between the Indemnitor
and the Indemnitee; or (4) the Indemnitor failed or is failing to vigorously prosecute or
defend such claim).  Additionally, if the
claim for Indemnification relates to Taxes, the Indemnitor’s
rights to control the defense of such matter shall extend only to the specific
issue for which indemnification is claimed (and not the entire return or taxable
period).

 

(iii)          If the Indemnitor shall
control the defense of such claim, the Indemnitor
shall obtain the prior written consent of the Indemnitee
before entering into any settlement of any third party claim which would lead
to Liability or create any financial or other obligation on the part of the Indemnitee which is not paid or reimbursed in full by the Indemnitor on account of its indemnification obligation
hereunder; and Indemnitee may refuse to consent to a
settlement which imposes continuing obligations on Indemnitee
or involves any non-monetary relief, does not result in a complete release of Indemnitee from any and all liability (excluding any
liability with respect to which the Indemnitor
acknowledges its indemnification obligations) or involves a finding or
admission of any violation of Legal Requirements or any violation of the rights
of any Person by Indemnitee.  If a firm offer is made to settle a third
party claim without leading to Liability or the creation of a financial or
other obligation on the part of the Indemnitee for
which the Indemnitee is not entitled to
indemnification hereunder and the Indemnitor desires
to accept and agree to such offer, the Indemnitor
will give written notice to the Indemnitee to that
effect.  If the Indemnitee
notifies the Indemnitor that it does not consent to
such firm offer within ten (10) Business Days after its receipt of such
notice from the Indemnitor, the Indemnitee
may continue to contest or defend such third party claim and, in such event,
the maximum Liability of the Indemnitor as to such
third party claim will not exceed the amount of such settlement offer, plus the
Purchaser’s Losses or Shareholder’s Losses, as the case may be, reasonably paid
or incurred by the Indemnitee through the end of such
10-Business Day period.

 

(iv)          After any final judgment or award shall have been rendered by a
Governmental Entity of competent jurisdiction, and the time in which to appeal therefrom has expired, or a settlement shall have been
consummated, or the Indemnitee and the Indemnitor shall have arrived at a mutually binding
agreement with respect to each separate matter alleged to be indemnified
against by the Indemnitor hereunder, the Indemnitee shall forward to the Indemnitor
notice of any sums due and owing with respect to such matter, and the Indemnitor shall pay all of the sums so owing to the Indemnitee by wire transfer or certified or bank cashier’s
check within thirty (30) days after the date of such notice.  Any indemnification obligations of the
(A) Shareholder shall be shall be paid by wire transfer of immediately
available funds to an account designated in writing by the applicable Purchaser
Indemnified Party within 10 days after the determination thereof (B) Purchaser
shall be paid by wire transfer of immediately available funds to an account
designated in writing by the applicable Shareholder Indemnified Party within 10
days after the determination thereof.

 

32

 

Section 6.16           Major
Employment Breach.

 

A.            In
the event that a Major Employment Breach occurs, Shareholder shall pay to
Purchaser an amount of cash equal to $7,000,000 (plus interest, calculated at
the Interest Rate) (the “Shareholder Payment”).  The parties agree that the $7,000,000 is
being deposited into escrow under Section 1.4 as security for Shareholder’s
obligation to make such Shareholder Payment. 
The parties recognize that in the event of a Major Employment Breach,
the actual damages to the Purchaser would be extremely difficult or impossible
to determine, and that the amount of $7,000,000 represents the parties’
reasonable estimate of such damages, and that such amount shall constitute
liquidated damages payable to the Purchaser. Shareholder shall pay such amount
to Purchaser out of the Escrow Amount; provided that if the Escrow Amount has
been distributed to Shareholder or its designee pursuant to the terms of the
Escrow Agreement or if the Escrow Amount is less than the Shareholder Payment,
the Shareholder shall pay the full amount or such remaining portion of the
Shareholder Payment, as applicable, to Purchaser by wire transfer of
immediately available funds to an account designated in writing by Purchaser
within 10 days after the determination thereof. 
The Shareholder Payment shall constitute a full and complete release and
discharge of Shareholder’s liability with respect to such Major Employment
Breach.

 

B.            In the
event of a dispute as to whether a Major Employment Breach has occurred,
Shareholder and Purchaser shall cooperate in good faith to resolve such
dispute. If an arbitration proceeding is commenced, Purchase and Shareholder
shall comply with the arbitration procedures set forth on Schedule 6.13
and shall instruct the Arbitration Panel to render a final determination with
respect to such dispute within 30 days following the selection of the
Arbitration Panel.

 

C.            Notwithstanding
anything to the contrary set forth herein, in the event of a dispute as to
whether there has been a Major Employment Breach, Purchaser may elect to
commence an action in any court of competent jurisdiction to resolve such
dispute and may pursue any equitable relief, including but not limited to,
obtaining an injunction or temporary restraining order prohibiting the
distribution of the Escrow Amount. 

 

D.            Any Shareholder
Payment made hereunder shall constitute an adjustment to the Purchase Price.

 

E.             As used
above, the term “Major Employment Breach” means the breach by the
Shareholder of his Employment Agreement, provided such breach arises from
either (I) the voluntary resignation by the Shareholder of employment with the
Company; (II) the willful refusal of the Shareholder to comply with any
significant, lawful and proper policy, directive or decision of the Company’s
Board of Directors or the Chief Executive Officer of the Issuer in furtherance
of a legitimate business purpose or willful refusal to perform the duties
reasonably assigned to the Shareholder by the Company’s Board of Directors or
the Chief Executive Officer of the Issuer and, in each case, only if not
remedied within thirty days after receipt of written notice from the Company;
or (III) the Shareholder’s commission or conviction of, or a plea of guilty or
no contest or similar plea with respect to, a felony, an act of fraud or
embezzlement in each case against the Company; provided that in no event shall
any breach be considered a Major Employment Breach to the extent arising from
the death or disability of the Shareholder, and provided further that in no
event shall a voluntary resignation by the Shareholder be considered a Major
Employment Breach if such resignation is in response to: (1) a material
breach by the

 

33

 

Company of the Employment Agreement only if not
remedied within thirty days after receipt of written notice from the
Shareholder, or (2) the request by the Company to engage in (or refrain
from reporting to the appropriate authorities) any conduct or activities which
are not lawful only if not remedied within thirty days after receipt of written
notice from the Shareholder.

 

Section 6.17           Major
Lease Termination.  In the
event that a Major Lease Termination occurs, Shareholder shall pay to Purchaser
the Major Lease Termination Payment.  The
parties recognize that in the event of a Major Lease Termination, the actual
damages to the Purchaser would be extremely difficult or impossible to
determine, and that the amount of the Major Lease Termination Payment
represents the parties’ reasonable estimate of such damages, and that such
amount shall constitute liquidated damages payable to the Purchaser.  In the event of a Major Lease Termination,
Shareholder shall pay the full amount of the Major Lease Termination Payment by
wire transfer of immediately available funds to an account designated in writing
by Purchaser within 10 days after the Purchaser’s demand thereof.  The Major Lease Termination Payment shall
constitute a full and complete release and discharge of Shareholder’s liability
with respect to such Major Lease Termination.  
As used above, the term “Major Lease Termination” means the Company has
lost effective use of its Brattle Street store as the result of eviction or
other legal proceedings brought by the landlord under the leases of such store
(the “Brattle Street Leases”) solely on account of the failure of the Company
to get such landlord’s consent with respect to the Contemplated Transactions,
provided such loss of use has occurred within one year of the Closing Date, and
provided the Shareholder has the opportunity, during such one year period only,
to control the defense, at his sole cost and expense, of any such eviction or
other legal proceeding; and the term “Major Lease Termination Payment” means
$2,000,000.  In connection with the
foregoing, the parties shall work together in good faith to obtain any such
consent post-Closing, provided that in no event shall the Purchaser be
obligated to make any payments to the landlord under such Brattle Street Leases
in order to obtain such consent.  Any
Major Lease Termination Payment made hereunder shall constitute an adjustment
to the Purchase Price.

 

Section 6.18.          Certain
Definitions and Interpretative Matters

 

A.            Definitions.  As used herein, the following terms have the
meanings set forth as follows:

 

(i)            “Adjustment
Time” means 12:01 a.m., New York time, on the date of the Closing.

 

(ii)           “Affiliate” means, with respect to any
Person, any other Person controlling, controlled by, or under common control
with, such first Person or any individual related by blood, marriage or
adoption to any such Person.

 

(iii)          “Affiliated Group”
means an affiliated group as defined in Section 1504 of the Code (or any
analogous combined, consolidated or unitary group defined under state, local or
foreign income Tax law) of which the Company is or has been a member.

 

34

 

(iv)          “Assets” means the properties and assets
of the Company which are used in the Business.

 

(v)           “Business
Day” means any day other than a Saturday, Sunday or other day on which
commercial banks in the City of New York are authorized by law to close.

 

(vi)          “Charter Documents” means in the case of
the Company and the Purchaser, the current articles of organization or
certificate of incorporation, as the case may be, and the bylaws of such
entity.

 

(vii)         “Company
Indebtedness” means, without duplication, (A) all indebtedness of the
Company for borrowed money (including all principal, interest, premiums,
penalties, and breakage fees), (B) all obligations of the Company
evidenced by notes, bonds, debentures or similar instruments or pursuant to any
guaranty of indebtedness (excluding, in any event, the amounts covered in
clause (A) and trade payables), and (C) obligations under capital
leases or for deferred purchase price of property or services.

 

(viii)        “Confidential
Information” means the information, observations and data of the Company
concerning the business or affairs of the Company (including the Company’s
technology, computer programs, know-how, designs, inventions, methods of doing
business and supplier and customer information): (i) which
is proprietary to the Company, (ii) the disclosure of which could
reasonably be expected to be detrimental or adverse to the Company, or (iii) is
the property of the Company and that the continued success of the Company
depends in large part on keeping this information from becoming known to
competitors of the Company; provided, however, that Confidential Information
shall not include, in any event, any of the foregoing to the extent (A) generally
known to the public other than through disclosure by the Shareholder, (B) received
by the Shareholder from a third party where the Shareholder had no reasonable
reason to conclude that such disclosure was in violation of a duty of
confidentiality owed by such third party to the Purchaser; or (C) developed
independently of and without reliance on Confidential Information.

 

(ix)           “Disclosure
Schedule” means the Disclosure Schedule attached hereto, which
Disclosure Schedule is incorporated herein and made a part hereof, fully
as if the same were herein set forth in its entirety.

 

(x)            “GAAP” means United States generally accepted
accounting principles consistently applied with prior periods.

 

(xi)           “Governmental
Entity” means any domestic, foreign, or multinational court, government,
governmental agency, arbitrator, authority, entity or instrumentality.

 

(xii)          “Intellectual
Property” means (1) all inventions (whether patentable or unpatentable and whether or not reduced to practice), all
improvements thereto, and all patents, patent applications, and patent
disclosures, together with all reissuances,
continuations, continuations-in-part, revisions, extensions, and reexaminations
thereof; (2) all trademarks, service marks, trade dress, logos, slogans,
designs, trade names, and Internet domain names,

 

35

 

together with all translations,
adaptations, derivations, and combinations of any of the foregoing, all
applications, registrations, and renewals in connection therewith, and including
all goodwill associated with any of the foregoing (collectively, “Marks”);
(3) all copyrights and works of authorship, and all applications,
registrations, and renewals in connection therewith; (4) all trade secrets
and confidential business information (including ideas, know-how, drawings,
specifications, customer and supplier lists, pricing and cost information, and
business and marketing plans and proposals); (5) all computer software
(including source code, executable code, data, databases, and related
documentation); (6) all other proprietary and intellectual property
rights, and (7) all copies and tangible embodiments of any of the
foregoing (in whatever form or medium).

 

(xiii)         “Laws” means any foreign or
domestic, federal, state, provincial, territorial, county or local
constitution, statute, law, principle of common law, ordinance, rule,
regulation, treaty or court or administrative order, decree, judgment or
ruling.

 

(xiv)        “Leases”
means all leases, subleases, licenses, concessions and other agreements
(written or oral), including all amendments or modifications thereto, pursuant
to which the Company occupies any Leased Realty.

 

(xv)         “Legal Proceeding” means any claim, action, suit,
proceeding or investigation before any Governmental Entity, whether brought,
initiated, asserted or maintained by a Governmental Entity or any other Person.

 

(xvi)        “Liabilities”
means all liabilities, claims, obligations, expenses or damages, whether known
or unknown, fixed or contingent.

 

(xvii)       “Material Adverse Effect” means a material adverse
effect on the business, assets, operations, financial condition or cashflow of the Company or the Business, taken as whole,
excluding any such effect resulting from the Contemplated Transactions or
relating to general economic conditions.

 

(xxi)         “Person”
means any individual, person, corporation, trust, partnership, limited liability company, unincorporated association, joint
venture, Governmental Entity or other entity of any kind.

 

(xviii)      “Subsidiary”
when used with respect to the Company, means any corporation or other Person
(other than a natural person) of which securities or other interests having the
power to elect a majority of that corporation’s or other Person’s board of
directors or similar governing body, or otherwise having the power to direct
the business and policies of that corporation or other Person (other than
securities or other interests having such power only upon the happening of a
contingency that has not occurred) are held by the Company or one or more of its
Subsidiaries.

 

B.            Certain
Interpretive Matters.  Unless the
context otherwise requires, (i) each accounting
term not otherwise defined in this Agreement has the meaning assigned to it in
accordance with GAAP, (ii) “or” is disjunctive
but not necessarily exclusive, (iii) all words used

 

36

 

in this Agreement will be
construed to be of such gender or number as the circumstances require, (iv) unless
otherwise expressly provided, the word “including” does not limit the preceding
words or terms and shall mean “including without limitation,” (v) the
words “herein,” “hereunder” and words of similar import shall refer to this
Agreement, (vi) all references to $ or dollar amounts mean lawful currency
of the United States of America.  No
provision of this Agreement will be interpreted in favor of, or against, any of
the parties hereto by reason of the extent to which any such party or its
counsel participated in the drafting thereof or by reason of the extent to
which any such provision is inconsistent with any prior draft hereof or
thereof.

 

C.            Disclosure Schedules.  
The disclosure of any matter in any Disclosure Schedule shall also
qualify the representations and warranties contained in Sections of this
Agreement other than the Section to which such Schedule specifically
relates only to the extent that the language of the disclosure should
reasonably apply as the disclosure in such other Section or there is a
cross-reference to such other Section (or to the Schedule specifically
relating to such other Section).  The
disclosure of any matter in any schedule shall expressly not be deemed to
constitute an admission by the Shareholder, or to otherwise imply, that any
such matter is material for the purposes of this Agreement or that any other schedule (or
set of schedules) is incomplete by virtue of the omission of such disclosure.

 

[Signatures
Begin on Next Page]

 

37

 

IN WITNESS WHEREOF, the parties hereto have
executed this Agreement as of the date and year first written above.

 

 

	
   

  	
  PURCHASER:

  
	
   

  	
   

  
	
   

  	
  LERNER
  NEW YORK, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
    /s/ RONALD W. RISTAU

  	
   

  
	
   

  	
  By:

  	
  Ronald W. Ristau

  
	
   

  	
  Its:

  	
  Chief Operating Officer,

  
	
   

  	
   

  	
  Chief Financial Officer and Secretary

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  SHAREHOLDER:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
    /s/LUCIANO
  MANGANELLA

  	
   

  
	
   

  	
  Luciano  Manganella

  
					

 

38Exhibit 10.2

 

REGISTRATION RIGHTS
AGREEMENT

 

This Registration Rights Agreement (this “Agreement”)
is made and entered into as of this 19th day of July, 2005, by and
between New York & Company, Inc., a Delaware corporation (the “Company”)
and Luciano Manganella (“Manganella”).

 

RECITALS

 

A.            WHEREAS,
Manganella and Lerner New York, Inc., a subsidiary of the Company, are
parties to that certain Stock Purchase Agreement, dated the date hereof (the “Purchase
Agreement”);

 

B.            WHEREAS,
pursuant to the terms of the Purchase Agreement, the Company has issued to
Manganella, and has agreed, subject to certain conditions, to issue to
Manganella in the future, shares of common stock, par value $0.01 per share, of
the Company (“Common Stock”); and

 

C.            WHEREAS,
pursuant to the Purchase Agreement, the Company hereby grants Manganella
certain registration rights with respect to the Registrable Securities.

 

NOW, THEREFORE, in consideration of the mutual
representations, covenants and agreements contained herein, the parties hereto
agree as follows:

 

SECTION 1.                                                        DEFINITIONS.

 

For purposes of this Agreement, the following
definitions shall apply:

 

(a)           “Business
Day” shall mean any day on which commercial banks are not authorized or
required to close in the United States.

 

(b)           “Holder”
means Manganella.

 

(c)           The terms “Register,”
and “Registration” refer to registration under the Securities Act of
1933, as amended (the “Act”), effected by preparing and filing a
registration statement in compliance with the Act, and the declaration or
ordering of effectiveness of such registration statement or amendment thereto.

 

(d)           “Permitted
Transfer” means a transfer by Manganella to a member of Manganella’s
immediate family and any transfer to a trust, family limited partnership or
similar entity for estate planning purposes.

 

(e)           “Registrable
Securities” means (i) the 350,000 shares of Common Stock issued to
Manganella pursuant to Section 1.2(A)(3) of
the Purchase Agreement, (ii) shares of Common Stock issued to Manganella
pursuant to Section 1.2(B) of the Purchase Agreement, and (iii) any
shares of Common Stock issued in respect of the Common Stock described in
clause (i) or (ii) above by way of stock split, stock dividend or
other similar transaction. As to any such shares of Common Stock, they shall
cease to be Registrable Securities when (A) they have been acquired by the
Company or any of its subsidiaries, (B) they have been Transferred to any
Person (other than in a Permitted Transfer), or (C) the occurrence of the
Restriction Termination Date therefor.

 

 

(f)            “Restriction
Termination Date” means as to any Registrable Securities, the first date
after such Registrable Securities are issued to a Holder when all of them may
lawfully be sold in a Rule 144 Sale in a single transaction.

 

(g)           “Rule 144
Sale” means a sale of Common Stock to the public through a broker, dealer
or market-maker pursuant to Rule 144 under the Act (or any successor rule or
regulation).

 

(h)           “Transfer”
means any direct or indirect sale, transfer, assignment, pledge, encumbrance or
other disposition (whether with or without consideration and whether
voluntarily or involuntarily or by operation of law) including any derivative
transaction that has the effect of changing materially the economic benefits
and risks of ownership.

 

SECTION 2.                                                        REGISTRATION RIGHTS.

 

(a)           At any
time and from time to time after the date hereof and, with respect to any
particular Registrable Securities, prior to the related Restriction Termination
Date, so long as the Company then is eligible to register securities on Form S-3,
or any successor form prescribed by the United States Securities and Exchange
Commission (the “SEC”), the Holder may request that the Company effect a
registration of all (but not less than all) of the Holder’s Registrable Securities.  Upon such request, the Company shall file
with the SEC a registration statement under the Act on Form S-3 pursuant
to Rule 415 under the Act (a “Required Registration”)with respect
to the resale by the Holder of such Registrable Securities and shall use
commercially reasonable efforts to cause such registration statement to become
effective under the Act as expeditiously as reasonably possible; provided, however, that the Holder may
permit the Company to withdraw any registration statement at any time prior to
the effective date of such registration statement.

 

(b)           Notwithstanding
anything contained herein, (i) upon the occurrence or existence of any
pending corporate development or the occurrence of any event or the existence
of any fact that would cause the registration statement (the “Registration
Statement”) to contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading, or cause the prospectus to contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading, or (ii) if
the sale of Registrable Securities would cause a violation of applicable law,
that, in each case, in the sole judgment of the Company, makes it appropriate
to suspend the availability of the Registration Statement and the prospectus,
the Company shall give notice (without notice of the nature or details of such
events) to the Holder that the availability of the Registration Statement and
the prospectus is suspended (a “Deferral Notice”) and, upon receipt of
any Deferral Notice, the Holder agrees not to offer or sell any Registrable
Securities pursuant to the Registration Statement until the Holder is advised
in writing by the Company that the prospectus may be used.  The period(s) during which the availability
of the Registration Statement and any prospectus is suspended (each, a “No-Sale
Period”) shall not exceed ninety (90) days in the aggregate in any twelve
(12) consecutive month period.

 

(c)           Whenever
required under this Section 2 to effect the
registration of any Registrable Securities, the Company shall, as expeditiously
as reasonably possible:

 

(i)            Prepare
and file with the SEC a Registration Statement with respect to such Registrable
Securities and use its commercially reasonable efforts to cause such
registration to become effective as provided in Section 2(a) above,
and keep such Registration Statement effective until the earliest of (A) all
such Registrable Securities have been disposed of pursuant to an effective
registration statement, (B) all such Registrable Securities have been sold
in a transaction exempt from the registration

 

2

 

and prospectus delivery requirements of the Act so that all transfer
restriction and restrictive legends with respect thereto are removed upon the
consummation of such sale, or (C) the Registrable Securities have been
distributed to the public pursuant to a Rule 144 Sale or (D) the
occurrence of the Restriction Termination Date with respect to the Registrable
Securities covered thereby.

 

(ii)           Subject to
Section 2(b) hereof, prepare and file with the SEC such amendments
and supplements to such Registration Statement and the prospectus used in
connection with such Registration Statement as may be necessary to comply with
the provisions of the Act with respect to the disposition of all securities
covered by such Registration Statement and notify the Holder of the filing and
effectiveness of such Registration Statement and any amendments or supplements.

 

(iii)          Furnish
to the Holder such number of copies of a current prospectus conforming with the
requirements of the Act, copies of the Registration Statement, any amendment or
supplement thereto and any documents incorporated by reference therein and such
other documents as the Holder may reasonably require in order to facilitate the
disposition of Registrable Securities owned by the Holder.

 

(iv)          Use
commercially reasonable efforts to register and qualify the securities covered
by such Registration Statement under such securities or “Blue Sky” laws of such
jurisdictions in the United States as shall be reasonably requested by the
Holder and keep such registration or qualification effective as long as
required to permit sale of Registrable Securities thereunder; provided that the Company shall not be
required in connection therewith or as a condition thereto to qualify to do
business or to file a general consent to service of process in any such states
or jurisdictions.

 

(v)           Notify the
Holder immediately of the happening of any event as a result of which the
prospectus included in such Registration Statement, as then in effect, includes
an untrue statement of material fact or omits to state a material fact required
to be stated therein or necessary to make the statements therein not misleading
in light of the circumstances then existing, and, subject to Section 2(b),
use commercially reasonable efforts to promptly update or correct such
prospectus.

 

(vi)          List
the Registrable Securities covered by such Registration Statement on any
securities exchange or national market in the United States on which the
Registrable Securities are then listed.

 

SECTION 3.                                                        SALE OR DISTRIBUTION OF SECURITIES.

 

The sale of the Registrable Securities must be
conducted by the Holder through a securities broker (the “Broker”) and effected over The New York Stock Exchange, if the Common
Stock is then listed on The New York Stock Exchange.  Notwithstanding anything contained herein,
the aggregate number of shares of Company Stock that may be sold by the Holder
shall not exceed an aggregate of 1% of the then issued and outstanding shares
of Common Stock during any ninety (90) day period.

 

SECTION 4.                                                        INFORMATION.

 

The Holder will furnish to the Company in connection
with any registration under this Agreement such information regarding the
Holder, the number of shares of Registrable Securities owned by the Holder and
the number of shares to be registered, the number of shares or amount of other
securities of the Company held by the Holder, and the intended method of
disposition of such Registrable Securities as shall be reasonably required to
effect the registration of the Registrable Securities held by such holder of
Registrable Securities.

 

3

 

SECTION 5.                                                        INDEMNIFICATION

 

(a)           The
Company shall indemnify, defend and hold harmless the Holder (for the purposes
of this Section 5(a), the “indemnified party”) from and against,
and shall reimburse such indemnified party with respect to, any and all claims,
suits, demands, causes of action, losses, damages, liabilities, costs or
expenses (“Liabilities”) to which such indemnified party may become
subject under the Act or otherwise, arising from or relating to (i) any
untrue statement or alleged untrue statement of any material fact contained in
such Registration Statement, any prospectus contained therein or any amendment
or supplement thereto, or (ii) the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading; provided, first, that the Company shall not be
liable in any such case to the extent that any such Liability arises out of or
is based upon an untrue statement or omission so made in conformity with
information furnished by such indemnified party in writing specifically for use
in the Registration Statement; provided,
second, that the Company shall not be liable in any such case to the
extent that any Liability arises out of or results from any offer or sale of
Registrable Securities during the No-Sale Period if the Holder has received a
Deferral Notice from the Company as to such No-Sale Period; and provided, third, that the Company shall
not be liable in any such case to the extent that any Liability arises out of
or is based upon an untrue statement or alleged untrue statement or omission or
alleged omission in the prospectus, if such untrue statement or alleged untrue
statement, omission or alleged omission is corrected in an amendment or
supplement to the prospectus and such amendment or supplement is filed with the
SEC pursuant to Rule 424(b) of the Act prior to or concurrently with
the sale of Registrable Securities to the person asserting such Liability who
purchased such Registrable Securities which are the subject thereof from the
Holder.

 

(b)           The Holder
shall indemnify, defend and hold harmless the Company, and its officers,
directors, employees, agents, partners, or controlling persons (within the
meaning of the Act) (for purposes of this Section 5(b), each, an “indemnified
party”) from and against, and shall reimburse such indemnified party with
respect to, any and all Liabilities to which such indemnified party may become
subject under the Act or otherwise, arising from or relating to (i) any
untrue statement or alleged untrue statement of any material fact contained in
such Registration Statement, any prospectus contained therein or any amendment
or supplement thereto, or (ii) the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading; provided, that the
Holder will be liable in any such case to the extent, and only to the extent,
that any such Liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in such
Registration Statement, prospectus or amendment or supplement thereto (A) for
any offer or sale made during the No-Sale Period as to which the Holder has
received a Deferral Notice from the Company, or (B) in reliance upon
information furnished by the Holder to the Company in writing specifically for
use in the Registration Statement.

 

(c)           Promptly
after receipt by any indemnified party of notice of the commencement of any
action, such indemnified party shall, if a claim in respect thereof is to be
made against another party (for purposes of this Section 5(c) the “Indemnifying
Party”) hereunder, notify such party in writing thereof, but the omission so
to notify shall not relieve the indemnifying party from any Liability which it
may have to the indemnified party other than under this section and shall
only relieve it from any Liability which it may have to the indemnified party
under this section if and to the extent it is actually prejudiced by such
omission. In case any such action shall be brought against any indemnified
party and such indemnified party shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
in and, to the extent it shall wish, to assume and undertake the defense
thereof with counsel reasonably satisfactory to such indemnified party, and,
after notice from the indemnifying party to the indemnified party of its
election so to assume and undertake the defense

 

4

 

thereof, the indemnifying party shall not be liable to the indemnified
party under this section for any legal expenses subsequently incurred by
the indemnified party in connection with the defense thereof other than
reasonable costs of investigation and of liaison with counsel so selected; provided, that if the defendants in any
such action include both the indemnifying party and such indemnified party and
the indemnified party shall have reasonably concluded based upon a written
opinion of counsel that there may be reasonable defenses available to it which
are different from those available to the indemnifying party or if the
interests of the indemnified party reasonably may be deemed to conflict with
the interests of the indemnifying party, the indemnified party shall have the
right to select a separate counsel and to assume such legal defenses and
otherwise to participate in the defense of such action, with (subject to the
following sentence) the reasonable expenses and fees of such separate counsel
and other reasonable expenses related to such participation to be reimbursed by
the indemnifying party as incurred. If the Company is the indemnifying party it
shall pay the reasonable expenses and fees of only one separate counsel whose
selection is approved by the largest group of similarly situated indemnified
parties as measured by the aggregate value of securities registered by such
group. Any indemnified party who chooses not to be represented by the foregoing
separate counsel shall be entitled, at its own expense, to be represented by
counsel of its own selection.

 

SECTION 6.                                                        REGISTRATION EXPENSES.

 

All fees and expenses incident to the performance of
or compliance with this Agreement by the Company shall be borne by the Company,
whether or not any Registration Statement is filed or becomes effective,
including all registration and filing fees, and fees and expenses of compliance
with state securities or “blue sky” laws, printing expenses, messenger,
telephone and delivery expenses, fees and disbursements of custodians, fees and
expenses of counsel and accountants for the Company, Securities Act liability
insurance, if the Company so desires such insurance, internal expenses of the
Company, the expense of any annual audit or interim review, the fees and
expenses incurred in connection with the listing of the securities to be
registered on any securities exchange, and the fees and expenses of any Person,
including special experts, retained by the Company.  The Holder of the Registrable Securities
being registered in such registration shall be responsible for its own expenses
in connection with such Required Registration, including for the reasonable
fees and expenses of any counsel retained by Holder in connection with such
registration, and all discounts, commissions and fees of the Broker.

 

SECTION 7.                                                        MISCELLANEOUS.

 

(a)           Notices.

 

(i)            All
notices, requests, demands, or other communications required or permitted
hereunder shall be in writing and shall be deemed to have been duly given upon
actual receipt, or upon the expiration of four days after the date of mailing,
fully pre-paid, certified, return receipt requested, to the parties at the
following addresses:

 

	
  If to the Company:

  
	
   

  
	
  NY &
  Co. Group, Inc.

  
	
  450 West 33rd
  Street

  
	
  New York, New
  York 10001

  
	
  Attention: Chief
  Executive Officer

  
	
  Tel.:

  	
   

  	
  (212) 884-2010

  
	
  Fax:

  	
   

  	
  (212) 884-2399

  
	
   

  	
   

  	
   

  
	
  With copies,
  which shall not constitute notice, to:

  

 

5

 

	
  Kirkland &
  Ellis LLP

  
	
  153 East 53rd
  Street

  
	
  Citigroup Center

  
	
  New York, NY
  10022

  
	
  Attention:

  	
  Michael T.
  Edsall

  
	
   

  	
  Christian O.
  Nagler

  
	
  Tel.:

  	
   

  	
  (212) 446-4800

  
	
  Fax:

  	
   

  	
  (212) 446-4900

  
				

 

If to
Manganella:

 

 

With a copy, which shall not constitute notice, to:

 

 

(ii)           Any party
may change the address to which notices, requests, demands or other
communications to such party shall be delivered or mailed by giving notice
thereof to the other parties hereto in the manner provided herein.

 

(b)           Counterparts.
This Agreement may be executed in any number of counterparts, each of which
shall be deemed an original, and all of which shall constitute one and the same
instrument.

 

(c)           Entire
Agreement. This Agreement supersedes all prior discussions and agreements between
the parties with respect to the subject matter hereof, and this Agreement
contains the sole and entire agreement among the parties with respect to the
matters covered hereby.

 

(d)           Amendment.  This Agreement shall not be altered or
amended except by an instrument in writing signed by or on behalf of the
Company and the Holder.

 

(e)           Interpretation.  No ambiguity in any provision hereof shall be
construed against a party by reason of the fact it was drafted by such party or
its counsel. For purposes of this Agreement: “herein”, “hereby”, “hereunder”, “herewith”
and “hereinafter” refer to this Agreement in its entirety, and not to any
particular subsection or paragraph. References to “including” means
including without limiting the generality of any description preceding
such term. Nothing expressed or implied in this Agreement is intended, or shall
be construed, to confer upon or give any person other than the parties hereto
any rights or remedies under or by reason of this Agreement.

 

(f)            Governing
Law; Jurisdiction. The corporate law of the State of Delaware shall govern
all issues and questions concerning the relative rights of the Company and its
stockholders.  All other issues and
questions concerning the construction, validity, interpretation and enforceability
of this Agreement and the exhibits and schedules hereto shall be governed by,
and construed in accordance with, the laws of the State of New York, without
giving effect to any choice of law or conflict of law rules or provisions
(whether of the State of New York or any other jurisdiction) that would cause
the application of the laws of any jurisdiction other than the State of New
York.  The parties hereto hereby
irrevocably and unconditionally submit to the exclusive jurisdiction of any
State or Federal court sitting in New York, New York over any suit, action or
proceeding arising out of or relating to this Agreement.  The parties hereby agree that service of any
process, summons, notice or document by U.S. registered mail addressed to any
such party shall be effective service of process for any action, suit or
proceeding brought against a

 

6

 

party in any such court.  The parties hereto hereby irrevocably and
unconditionally waive any objection to the laying of venue of any such suit,
action or proceeding brought in any such court and any claim that any such
suit, action or proceeding brought in any such court has been brought in an
inconvenient forum.  The parties hereto
agree that a final judgment in any such suit, action or proceeding brought in
any such court shall be conclusive and binding upon any party and may be
enforced in any other courts to whose jurisdiction any party is or may be
subject, by suit upon such judgment.

 

(g)           Waiver
of Jury Trial.  EACH OF THE PARTIES
HERETO WAIVES ANY RIGHT IT MAY HAVE TO TRIAL BY JURY IN RESPECT OF ANY
LITIGATION BASED ON, ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT
OR ANY COURSE OF CONDUCT, COURSE OF DEALING, VERBAL OR WRITTEN STATEMENT OR ACTION
OF ANY PARTY HERETO.

 

(h)           Successors
and Assigns; Assignment. This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective heirs,
executors, legal representatives, and successors; provided, however, that no party may assign this Agreement
or any rights hereunder, in whole or in part, without the consent of the other
party.

 

(i)            Partial
Invalidity and Severability. All rights and restrictions contained herein
may be exercised and shall be applicable and binding only to the extent that
they do not violate any applicable laws and are intended to be limited to the
extent necessary to render this Agreement legal, valid and enforceable. If any
terms of this Agreement not essential to the commercial purpose of this
Agreement shall be held to be illegal, invalid or unenforceable by a court of
competent jurisdiction, it is the intention of the parties that the remaining
terms hereof shall constitute their agreement with respect to the subject
matter hereof and all such remaining terms shall remain in full force and
effect. To the extent legally permissible, any illegal, invalid or
unenforceable provision of this Agreement shall be replaced by a valid
provision which will implement the commercial purpose of the illegal, invalid
or unenforceable provision.

 

(j)            Waiver.
Any term or condition of this Agreement may be waived at any time by the party
which is entitled to the benefit thereof, but only if such waiver is evidenced
by a writing signed by such party. No failure on the
part of a party hereto to exercise, and no delay in exercising, any right,
power or remedy created hereunder, shall operate as a waiver thereof, nor shall
any single or partial exercise of any right, power or remedy by any such party
preclude any other future exercise thereof or the exercise of any other right,
power or remedy. No waiver by any party hereto to any breach of or default in
any term or condition of this Agreement shall constitute a waiver of or assent
to any succeeding breach of or default in the same or any other term or
condition hereof.

 

(k)           Headings.
The headings as to contents of particular paragraphs of this Agreement are
inserted for convenience only and shall not be construed as a part of this
Agreement or as a limitation on the scope of any terms or provisions of this
Agreement.

 

(l)            Expenses.
Except as otherwise expressly provided herein, all legal and
other costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the parties as each party
incurs such expenses.

 

(m)          Gender.
Where the context requires, the use of the singular form herein shall include
the plural, the use of the plural shall include the singular, and the use of
any gender shall include any and all genders.

 

[SIGNATURE
PAGE FOLLOWS]

 

7

 

IN WITNESS WHEREOF, the parties have executed this
Agreement or caused this Agreement to be duly executed by their duly authorized
officers as of the day and year first above written.

 

	
   

  	
  NEW
  YORK & COMPANY, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ RONALD
  W. RISTAU

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Ronald
  W. Ristau

  
	
   

  	
   

  	
  Title:

  	
  Chief Operating Officer and

  
	
   

  	
   

  	
   

  	
  Chief Financial Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
  /s/LUCIANO
  MANGANELLA

  	
   

  
	
   

  	
   

  	
  Luciano
  Manganella

  
						

 

8

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