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As filed with the Securities and Exchange Commission on April 19, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
LearningExpress.com Holdings LLC
(Exact Name of Registrant as Specified in Its Charter)
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Delaware 5945c 04-3511125
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(State or Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
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29 Buena Vista Street
Ayer, Massachusetts 01432
(978) 889-1000
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(Address, Including Zip Code, and Telephone Number, Including Area Code of
Registrant's Principal Executive Offices)
Steven P. Manfredi
Chief Executive Officer
LearningExpress.com Holdings LLC
29 Buena Vista Street
Ayer, Massachusetts 01432
(978) 889-1000
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(Name, Address, Including Zip Code, and Telephone Number, Including Area Code of
Agent For Service)
Copies to:
Timothy B. Bancroft, Esq.
Goulston & Storrs, P.C.
400 Atlantic Ave.
Boston, MA 02110-3333
Approximate date of commencement of proposed sale to the public: AS
SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If any of the Securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. / / ________________________
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / ______________________________
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the securities
Act registration statement number of the earlier effective registration
statement for the same offering. / / ________________________________
If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / / ________________________________
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box. / /
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CALCULATION OF REGISTRATION FEE
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PROPOSED
TITLE OF EACH CLASS MAXIMUM OFFERING
OF SECURITIES AMOUNT TO BE PRICE PROPOSED MAXIMUM AMOUNT OF
TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE REGISTRATION FEE
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Common Shares 2,607,750 $ .30(1) $ 782,325(1) $207.00
Series A Convertible 1,550,000 $1.75 $2,712,500 $716.00
Preferred Shares
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(1) Estimated solely for the purpose of calculating the registration
fee. The Common Shares offered hereby are not being sold for cash
consideration.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE
REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES
THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN
ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE
COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN
OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
Subject to completion dated April 19, 2000
LEARNINGEXPRESS.COM HOLDINGS LLC
2,607,750 COMMON SHARES
1,550,000 SERIES A CONVERTIBLE PREFERRED SHARES
COMMON SHARES
We are offering an aggregate of 2,607,750 Common Shares of LearningExpress.com
Holdings LLC to franchisees and "regional owners" of The Learning Express, Inc.
Each party which is a franchisee under a current franchise agreement with The
Learning Express, Inc. as of April 10, 2000, remains a franchisee under a
franchise agreement with The Learning Express, Inc. as of the effective date of
the registration statement relating to this prospectus and executes and delivers
to LearningExpress.com an amendment to its franchise agreement in the form of
Annex A to this prospectus will receive 14,250 Common Shares of
LearningExpress.com Holdings LLC for each The Learning Express, Inc. franchise
store that it owns. Similarly, each party which is a regional owner under a
regional franchise license agreement with The Learning Express, Inc. as of April
10, 2000, remains a regional owner under a regional franchise license agreement
with The Learning Express, Inc. as of the effective date of the registration
statement relating to this prospectus and executes and delivers to
LearningExpress.com an amendment to its regional franchise license agreement in
the form of Annex B to this prospectus will receive 14,250 Common Shares of
LearningExpress.com Holdings LLC for each The Learning Express, Inc. region for
which it is responsible. In this offering we are offering Common Shares of
LearningExpress.com Holdings LLC only to franchisees and regional owners of The
Learning Express, Inc. as described in this paragraph.
SERIES A CONVERTIBLE PREFERRED SHARES
We also are offering to franchisees and regional owners of The Learning Express,
Inc., and to certain other selected prospective investors, an aggregate of
1,550,000 Series A Convertible Preferred Shares of LearningExpress.com Holdings
LLC for a purchase price of $1.75 per share, in cash.
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PRICE BROKER FEES PROCEEDS TO LEARNINGEXPRESS.COM HOLDINGS
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Per Series A Convertible
Preferred Share $ 1.75 $ $
Total $ 1.75 $ $
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LearningExpress.com Holdings LLC holds a 70.5% equity interest in
LearningExpress.com LLC, an operating company that was formed to serve as the
e-commerce distribution channel of The Learning Express, Inc., a retail toy
franchise with approximately 160 stores throughout the United States.
LearningExpress.com Holdings LLC holds a 100% residual share in
LearningExpress.com Incentive Plan LLC, which is the equity incentive vehicle of
LearningExpress.com, LLC. LearningExpress.com Incentive Plan LLC holds a 29.5%
interest in LearningExpress.com LLC.
THERE IS NO ESTABLISHED PUBLIC OR OTHER TRADING MARKET FOR THE SECURITIES
OFFERED HEREBY AND WE DO NOT EXPECT ANY MARKET TO DEVELOP. ACCORDINGLY,
INVESTORS MAY HAVE TO HOLD THE COMMON SHARES AND SERIES A CONVERTIBLE PREFERRED
SHARES INDEFINITELY. FURTHER, THE COMMON SHARES ARE SUBJECT TO CONTRACTUAL
RESTRICTIONS ON TRANSFER AND ARE SUBJECT TO FORFEITURE IF THE HOLDER'S FRANCHISE
AGREEMENT OR REGIONAL FRANCHISE LICENSE AGREEMENT IS TERMINATED. SEE "SUMMARY OF
OPERATING AGREEMENT/DESCRIPTION OF SECURITIES."
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 7.
THE SECURITIES OFFERED HEREBY ARE NOT BEING OFFERED TO FRANCHISEES AND REGIONAL
OWNERS IN CALIFORNIA UNTIL THE APPROVAL PROCESS PURSUANT TO THE CALIFORNIA
FRANCHISE INVESTMENT LAW RELATING TO THE FRANCHISE AND REGIONAL OWNER AMENDMENTS
HAS BEEN COMPLETED.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is , 2000.
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TABLE OF CONTENTS
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PROSPECTUS SUMMARY ................................................................................ 3
THE COMPANY .................................................................................... 3
THE OFFERING ................................................................................... 3
RISK FACTORS ...................................................................................... 7
PLAN OF DISTRIBUTION .............................................................................. 18
USE OF PROCEEDS ................................................................................... 19
DISTRIBUTION POLICY ............................................................................... 20
DETERMINATION OF OFFERING PRICE ................................................................... 20
CAPITALIZATION .................................................................................... 20
SELECTED CONSOLIDATED FINANCIAL DATA .............................................................. 21
MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ............ 21
BUSINESS .......................................................................................... 22
MANAGERS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES ............................................ 34
EXECUTIVE COMPENSATION ............................................................................ 36
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SECURITY HOLDERS ..................................... 37
INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS ......................................... 38
SUMMARY OF OPERATING AGREEMENT/DESCRIPTION OF SECURITIES .......................................... 39
FEDERAL TAX CONSEQUENCES .......................................................................... 42
LEGAL PROCEEDINGS ................................................................................. 45
LEGAL MATTERS ..................................................................................... 45
EXPERTS ........................................................................................... 45
INDEMNIFICATION OF OFFICERS AND DIRECTORS ......................................................... 45
WHERE YOU CAN FIND ADDITIONAL INFORMATION ......................................................... 45
FINANCIAL STATEMENTS .............................................................................. F-1
ANNEX 1 - AMENDMENT TO FRANCHISE AGREEMENT/LOCAL FRANCHISE LICENSE AGREEMENT ...................... A-1
ANNEX 2 - AMENDMENT TO REGIONAL FRANCHISE LICENSE AGREEMENT ....................................... B-1
ANNEX 3 - LEARNINGEXPRESS.COM HOLDINGS LLC FIRST AMENDED AND RESTATED LIMITED LIABILITY COMPANY
OPERATING AGREEMENT ............................................................................. C-1
EXHIBITS .......................................................................................... 49
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PROSPECTUS SUMMARY
Investors should read the following summary together with the more detailed
information and financial statements and notes thereto appearing elsewhere in
this prospectus before making an investment decision.
This prospectus contains forward-looking statements regarding
LearningExpress.com's performance, strategy, plans, objectives, expectations,
beliefs and intentions. The actual outcome of the events described in these
forward-looking statements could differ materially. Therefore, this prospectus,
and especially the sections entitled "Risk Factors" and "Business," contains a
discussion of some of the factors and risks that could contribute to those
differences.
The issuer of the shares we are offering by means of this prospectus is
LearningExpress.com Holdings LLC and references in this prospectus to the
"issuer" refer to that entity. In general in this prospectus, references to
"LearningExpress.com," "we," "us," and "our" refer to LearningExpress.com
Holdings LLC, LearningExpress.com LLC and LearningExpress.com Incentive Plan
LLC, taken as a whole, unless otherwise required by the context. References to
"Learning Express" refer to The Learning Express, Inc., the Learning Express
franchise stores or the Learning Express brand, depending on the context.
THE COMPANY
LearningExpress.com was organized as a Delaware limited liability company to
serve as the e-commerce distribution channel of The Learning Express, Inc., a
retail toy franchise with approximately 160 stores throughout the United States.
We plan to provide products and services similar to those provided by The
Learning Express, Inc. franchise stores, but to operate through the
LearningExpress.com World Wide Web site. Our business operations will be
integrated with those of participating franchise stores in an effort to minimize
the sales channel conflict between the stores and the Web site and to maximize
the options for customers seeking to buy our products. We believe that by
offering multiple distribution channels for our customers and by integrating the
business practices of LearningExpress.com, The Learning Express, Inc. and the
Learning Express franchise stores, the value of the Learning Express brand will
thrive and that LearningExpress.com, The Learning Express, Inc. and the Learning
Express franchise stores will benefit.
Our objectives in operating the LearningExpress.com Web site include:
- providing our customers with a unique online shopping experience
by offering carefully selected, high quality specialty toys and
other children's products, a high level of customer service and
important information to help parents raise happy and healthy
children;
- promoting a strong sense of community involvement similar to that
of the Learning Express stores;
- increasing the value of the Learning Express brand; and
- operating our business to achieve maximum shareholder value.
THE OFFERING
The following is a summary of the offering of Common Shares and Series A
Convertible Preferred Shares which we are making by means of this prospectus:
Common Shares We are offering an aggregate of 2,607,750 Common
Shares of LearningExpress.com Holdings LLC to
franchisees and "regional owners" of The Learning
Express, Inc. Each party which is a franchisee under
a current franchise agreement with The Learning
Express,
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Inc. as of April 10, 2000 and which remains a
franchisee under a franchise agreement with The
Learning Express, Inc. as of the date when the
registration statement relating to the prospectus
is declared effective by the Securities and Exchange
Commission and executes and delivers to
LearningExpress.com an amendment to its franchise
agreement in the form of Annex A to this prospectus
will receive 14,250 Common Shares of
LearningExpress.com Holdings LLC for each The
Learning Express, Inc. franchise store that it owns.
Similarly, each party which is a regional owner under
a current regional franchise license agreement with
The Learning Express, Inc. as of April 10, 2000 and
which remains a regional owner under a regional
franchise license agreement with The Learning
Express, Inc. as of the effective date of this
prospectus and executes and delivers to
LearningExpress.com an amendment to its regional
franchise license agreement in the form of Annex B to
this prospectus will receive 14,250 Common Shares of
LearningExpress.com Holdings LLC for each The
Learning Express, Inc. region for which it is
responsible. Common Shares are not being offered to
franchisees and regional owners in California until
the approval process pursuant to the California
Franchise Investment Law relating to the franchise
and regional owner amendments has been completed.
The key terms of the franchise agreement amendments
are, in addition to the issuance of 14,250 Common
Shares of LearningExpress.com Holdings LLC as
described above:
(1) a provision stating that the franchisee will not
have any rights under the franchise agreement against
The Learning Express, Inc. or any other party with
respect to LearningExpress.com's operation of its
online store, other than as set forth in the
franchise amendment;
(2) The Learning Express, Inc.'s agreement to pay to
the franchisee, for the first two years after
LearningExpress.com's launch of its online store, a
monthly commission of 5% of net sales resulting from
the online store's sales to "bill-to" addresses
within the franchisee's "protected territory" under
the franchise agreement, and after those first two
years, a commission not less than 2.5% of such net
sales as determined by the Board of Managers of
LearningExpress.com LLC taking into account sales and
cash flow information. Without limitation of the
foregoing, the Board of Managers of
LearningExpress.com LLC intends to maintain the
commission at the 5% level.
(3) the franchisee's agreement that The Learning
Express, Inc. operations manual will be amended to
provide for the franchisee's cooperation and
assistance in various aspects of
LearningExpress.com's online store.
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Please refer to Annex A to this prospectus for the
complete text of the franchise agreement amendment
that franchisees will need to execute in order to
receive Common Shares as described above.
The key terms of the regional franchise license
agreement amendments are, in addition to the issuance
of 14,250 Common Shares of LearningExpress.com
Holdings LLC as described above:
(1) a provision stating that the regional owner will
not have any rights under regional franchise license
agreement against The Learning Express, Inc. or any
other party with respect to LearningExpress.com's
operation of its online store, other than as set
forth in the regional franchise license amendment;
and
(2) The Learning Express, Inc.'s agreement to pay to
the regional owner, commencing January 1, 2002, a
monthly fee equal to the greater of one-half of the
royalty paid to The Learning Express, Inc. from
LearningExpress.com with respect to net sales by
LearningExpress.com's online store to "bill-to"
addresses within the regional owner's territory under
the regional franchise license agreement, or 1-1/2%
of net sales resulting from the online store's sales
to such addresses.
Please refer to Annex B to this prospectus for the
complete text of the regional franchise license
agreement amendment that regional owners will need
to execute in order to receive Common Shares as
described above.
Series A Convertible We also are offering to franchisees and regional
Preferred Shares owners of The Learning Express, Inc., and to certain
other selected prospective investors, an aggregate of
1,550,000 Series A Convertible Preferred Shares of
LearningExpress.com Holdings LLC for a purchase price
of $1.75 per share, in cash. Series A Preferred
Shares are not being offered to franchisees and
regional owners in California until the approval
process pursuant to the California Franchise
Investment Law relating to the franchise and regional
owner amendments has been completed.
Minimum Investment in Investors in the Series A Convertible Preferred
Series A Convertible Shares must subscribe for a minimum of 5,700
Preferred Shares Series A Convertible Preferred Shares. We may,
in our discretion, accept subscriptions for less
than 5,700 Series A Convertible Preferred Shares.
Maximum Investment in Investors in the Series A Convertible Preferred
Series A Convertible Shares may subscribe for a maximum of 142,857 Series
Preferred Shares A Convertible Preferred Shares. We may, in our
discretion, accept subscriptions for more than
142,857 Series A Convertible Preferred Shares.
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Use of Proceeds There will be no cash proceeds to the issuer from the
issuance of the Common Shares offered by this
prospectus. Assuming the issuance and sale of all of
the 1,550,000 Series A Convertible Preferred Shares
offered hereby, we estimate net proceeds to the
issuer of approximately $2,525,000 after deduction of
the expenses of the offering. Of the estimated net
proceeds from the offering of the Series A
Convertible Preferred Shares, we intend to use
approximately $500,000 for the development and launch
of our online store, approximately $1,000,000 for
marketing and advertising and approximately
$1,025,000 for other general company purposes,
including working capital and capital expenditures.
Conference Calls with We have scheduled the following conference calls to
Franchisees and answer questions from franchisees and regional
Regional Owners owners about this offering (all times are Eastern
time):
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FRANCHISEES AND REGIONAL OWNERS
DATE TIME RESIDING IN FOLLOWING STATES
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April 25, 2000 10:00 a.m. MA, NH and VT
April 25, 2000 3:00 p.m. IL, IN, KS, KY, MO, MI, NE and OH
April 26, 2000 10:00 a.m. NJ, NY and CT
April 26, 2000 3:00 p.m. TX, AL, CO and LA
April 27, 2000 10:00 a.m. FL and PA
April 27, 2000 3:00 p.m. AZ, UT, NV, SD, WI, IA and MN
April 28, 2000 10:00 a.m. MD, VA, NC, SC and GA
April 28, 2000 3:00 p.m. ID and OR
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We will schedule a conference call for California
franchisees and regional owners after we have
completed the approval process pursuant to the
California Franchise Investment Law.
Procedure for Amendment For a description of the procedure for amending
of Franchise Agreements your franchise agreement or regional franchise
and Regional Franchise license agreement and receiving Common Shares,
License Agreements and please see "Plan of Distribution" beginning on
Receipt of Common page 18 of this prospectus.
Shares
Procedure for Subscribing For a description of the procedure for subscribing
for Series A Convertible for Series A Convertible Preferred Shares, please see
Preferred Shares "Plan of Distribution" beginning on page 18 of this
prospectus.
Amendment of Offering; We reserve the right to amend or terminate this
Rejection of offering at any time prior to its completion, and to
Subscriptions reject any subscription for Common Shares or Series A
Convertible Preferred Shares, in whole or in part.
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RISK FACTORS
The value of an investment in LearningExpress.com will be subject to the
significant risks inherent in our business. You should consider carefully the
risks and uncertainties described below and the other information in this
prospectus before deciding whether to invest. If any of the events described
below actually occur, our business, financial condition or operating results
could be adversely affected in a material way. In such case, you may lose part
or all of your investment.
RISKS RELATED TO OUR BUSINESS
WE HAVE A LIMITED OPERATING HISTORY WHICH MAKES IT DIFFICULT TO PREDICT OUR
FUTURE PERFORMANCE.
We were organized in November 1999 and expect to launch our online store in the
late Spring or early Summer of 2000. As a result of our lack of an online
operating history, it is difficult to accurately forecast our Internet sales. In
addition, we have limited historical financial data upon which to base planned
operating expenses. We base our current and future expense levels on our
operating plans and estimates of future net sales, which are difficult to
forecast because they generally depend on the volume and timing of the orders we
receive. As a result, we may be unable to adjust our spending in a timely manner
to compensate for any unexpected order shortfall. This inability could cause our
operating losses in a particular period or in a series of periods to be greater
than expected.
THERE IS NO ESTABLISHED TRADING MARKET FOR OUR COMMON SHARES AND SERIES A
CONVERTIBLE PREFERRED SHARES.
There is no established public or other trading market for our Common Shares and
Series A Convertible Preferred Shares nor is one likely to develop. Accordingly,
holders of our Common Shares and Series A Convertible Preferred Shares may have
to hold their shares indefinitely. Further, the Common Shares are subject to
contractual restrictions on transfer and are subject to forfeiture if the
holder's franchise agreement or regional franchise license agreement is
terminated. See "Summary of Operating Agreement/Description of Securities."
WE ANTICIPATE FUTURE LOSSES AND NEGATIVE CASH FLOW.
We have incurred operating losses and negative cash flow since our inception and
we expect operating losses and negative cash flow to continue for the
foreseeable future. We incurred a net loss of $0.2 million for the period from
our inception in November 1999 through December 31, 1999. We anticipate our
operating losses will increase because we expect to incur substantial expenses
related to:
- marketing and advertising activities;
- the expansion of our product offerings and editorial content in
our online store;
- the continued development of our online store and technology, as
well as the systems that we use to process customers' orders and
payments;
- the expansion of our inventory management and distribution
operations; and
- the hiring of additional staff to support our growth.
Our ability to become profitable depends on our ability to generate and sustain
substantially higher net sales while maintaining reasonable expense levels. In
addition, our operating results may fluctuate significantly in the future due to
a variety of factors, many of which are outside of our control. Factors that may
harm our business or cause our operating results to fluctuate include the
following:
- our inability to manage and control the distribution of our
products;
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- the amount and timing of operating costs and capital expenditures
relating to the expansion of our operations;
- technical difficulties, system downtime or Internet brownouts;
- the ability of our competitors to offer new or enhanced online
stores, services or products;
- fluctuations in the amount of consumer spending on educational
toys and other products for children;
- our inability to attract and retain customers at a reasonable
cost;
- decreases in the number of visitors to our planned online store
or our inability to convert a sufficiently high percentage of
visitors to our planned online store into customers;
- the lack of acceptance by customers of our mix of products;
- increases in the level of our product returns;
- increases in the cost of online or offline advertising;
- the failure to develop strategic marketing alliances;
- increases in shipping and delivery costs;
- price competition;
- the inability to hire and retain qualified management personnel
and employees;
- conditions or trends in the Internet and the online commerce
industries;
- government regulations related to use of the Internet for
commerce;
- our inability to launch and maintain, upgrade and develop our
online store, the systems that we use to process customers'
orders and payments or our computer network;
- increased seasonality;
- our inability to manage and control inventory levels or control
inventory theft; and
- general economic conditions.
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY AGAINST CURRENT AND FUTURE
COMPETITORS.
The online market for educational toys and other products for children is
developing and evolving rapidly and intensely competitive. Several of our
competitors have launched online stores within the past two years. We expect
competition to intensify in the future because new competitors can enter our
market with little difficulty and can launch online stores at a relatively low
cost. Increased competition could result in price reductions and reduced gross
margins, which could have a material adverse effect on our business, financial
condition, results of operations and prospects.
We will compete with a variety of companies, including:
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- traditional store-based retailers of children's products, such as
Toys "R" Us, KB Kids, Babies "R" Us, FAO Schwarz, Zany Brainy,
Noodle Kidoodle, BabyGap, Gymboree, Imaginarium, The Right Start
and local toy stores;
- various online retailers of children's products, such as
Amazon.com, eToys.com, RightStart.com, Kbkids.com,
Smarterkids.com and Toysmart.com;
- major discount retailers of products for children, such as
Target, Wal-Mart and K-Mart;
- online efforts of traditional retailers, including the online
stores operated by Toys "R" Us, FAO Schwarz, Zany Brainy, Noodle
Kidoodle, and Wal-Mart;
- Internet portals and online service providers that feature
shopping services, such as AOL, Yahoo!, Excite@Home and Lycos;
and
- catalog retailers of toys and other products for children.
Several of our competitors have longer operating histories, larger customer
bases and significantly greater financial, marketing and other resources than we
do, and many of them sell a much broader range of products. Many of these
competitors can devote substantially more resources to online commerce than we
can. Our competitors may also be able to secure products from vendors on more
favorable terms, fulfill customer orders more efficiently and adopt more
aggressive pricing or inventory availability policies than we can.
IF WE ENTER NEW BUSINESS CATEGORIES THAT DO NOT ACHIEVE MARKET ACCEPTANCE, OUR
BUSINESS MAY SUFFER.
We plan to develop new departments and product categories, expand the breadth
and depth of products and services we offer and expand our market presence
through relationships with third parties. This planned expansion will require
significant additional expenses and may strain our management, financial and
operational resources. This type of expansion will also subject us to increased
inventory risk. Any such expansion of our business that is not favorably
received by consumers could require us to take significant inventory markdowns
which could cause our results of operations to fall below expectations.
WE ARE SUBSTANTIALLY DEPENDENT ON OUR RELATIONSHIP WITH THE LEARNING EXPRESS,
INC. AND ITS FRANCHISEES.
We have entered into a license agreement with The Learning Express, Inc.
pursuant to which The Learning Express, Inc. has granted us an exclusive,
world-wide, non-transferable, limited license to use the name "Learning
Express," as well as all trademarks, service marks, trade dress, trade names,
domain names and other source designations owned or used by The Learning
Express, Inc., in connection with our online business. The license agreement may
be terminated by The Learning Express, Inc. upon a continuing default by us or
upon a bankruptcy or liquidation event of The Learning Express, Inc. or us.
We have also entered into a management services agreement with The Learning
Express, Inc. pursuant to which we receive various services from The Learning
Express, Inc., including assistance with Web site design and content,
merchandise selection and procurement and advertising, marketing and design
services. Our cost for these services might increase if the management services
agreement is terminated. The Learning Express, Inc. may terminate the management
services agreement on continuing default by us, or a bankruptcy or liquidation
event of The Learning Express, Inc. or us. If the management services agreement
is terminated we might not be able to find comparable suppliers capable of
providing products and services on terms satisfactory to us or on terms as
favorable to us as provided in the management services agreement. To the extent
that The Learning Express, Inc. is unable to satisfy our requirements on a
timely basis, our business, financial condition, results of operations and
prospects could be affected adversely.
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Because we entered into the license agreement and the management services
agreement with The Learning Express, Inc. at the time that we were commonly
owned, we believe that the terms of these agreements are more favorable to us
than terms we could have obtained in the absence of such relationship. The
termination of either of these agreements could have a material adverse effect
on our business, financial condition, results of operations and prospects.
We are offering the Common Shares to franchisees and regional owners of The
Learning Express, Inc. who agree to amend their franchise/regional franchise
license agreements with The Learning Express, Inc. and to agree to participate
in and support the promotion of our Internet sales program. If the franchisees
and/or regional owners do not amend their agreements and support our Internet
sales program, our business, financial condition, results of operations and
prospects may be adversely affected.
WE ARE SUBSTANTIALLY DEPENDENT ON OUR ARRANGEMENTS WITH OUR TECHNOLOGY PARTNER.
In lieu of developing our own in-house technology group, we have engaged a
third-party technology firm to develop, maintain and enhance our Web site.
Although we own or lease the computer hardware and own or license the software
necessary to operate our Web site, our technology partner currently operates and
maintains our Web site on a day-to-day basis. Our partner will also provide
technological assistance to our third-party fulfillment facility and in-house
logistics team, including the monitoring of credit card verification services,
order shipment and inventory levels (to ensure that, to the extent practical,
only in-stock products are displayed on our Web site). Our partner also helps us
develop the online architecture for our new customer services, such as our
planned personal shopper service, children's wish list, gift registry and events
calendar. If we were to lose the services of our technology partner for any
reason, we might not be able to locate and retain an adequate replacement on
commercially reasonable terms in a timely manner, if at all. Accordingly, the
failure of our technology partner to provide us with ongoing technology services
could have a material adverse effect on our business, financial condition,
results of operations and prospects.
Our ability to improve the functionality of our Web site and support increased
traffic depends on our ability to cost-effectively ramp up our Web site
operations. Currently we are principally responsible for determining the
hardware and software required to maintain and expand the functionality of our
Web site. Because we believe our success will depend in large part on a high
level of customer service, a failure by us or our third-party vendors to
successfully anticipate the technology needs associated with our growth or a
failure by us or our third-party vendors to implement appropriate upgrades to
our Web site operations on a timely basis could have a material adverse effect
on our business, financial condition, results of operations and prospects.
The competition for qualified technology personnel is intense, particularly in
the Internet sector. We may be negatively impacted if we or our technology
vendors are unable to hire qualified individuals or fail to successfully
integrate and retain such individuals in our operation. We expect to move our
Web site operations from their present location to another location operated by
a third-party vendor. The move of our Web site operations could initially result
in impaired response times to hardware or software problems as they arise,
leading to potential Web site down-time over the transition period.
WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS.
Since our inception, we have experienced negative cash flow and expect to
experience significant negative cash flow from operations for the foreseeable
future. In addition, our expenses have continued to increase, and we expect to
increase our expenses significantly in future periods as we seek to build our
business. As a result, we do not expect to be able to fund our operations from
internally generated funds for the foreseeable future. Unanticipated expenses,
poor financial results or unanticipated opportunities that require financial
commitments could increase our need for additional capital. If we raise
additional funds through the issuance of equity or debt securities, such
securities may have rights, preferences or privileges senior to those of the
rights of our Common Shares and Series A Convertible Preferred Shares and
holders of Common Shares and Series A Convertible Preferred Shares may
experience additional dilution. Additional financing may not be available on
terms favorable to us, or at all. If adequate funds are not available or are
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not available on acceptable terms, our ability to fund our expansion, take
advantage of business opportunities, continue to develop our online store or
otherwise respond to competitive pressures would be significantly limited.
THE LOSS OF THE SERVICES OF ONE OR MORE OF OUR KEY PERSONNEL, OR OUR FAILURE TO
ATTRACT, ASSIMILATE AND RETAIN OTHER HIGHLY QUALIFIED PERSONNEL IN THE FUTURE,
COULD DISRUPT OUR BUSINESS.
The loss of the services of one or more of our key personnel could adversely
affect our business. We depend on the continued services and performance of our
senior management and other key personnel. The majority of our senior management
has joined us since October 1, 1999, including our Chief Executive Officer, our
Chief Operating Officer, our Chief Financial Officer and our Vice President,
Marketing and Business Development. Our future success depends on these officers
effectively working together. We do not have "key person" life insurance
policies or employment agreements covering any of our employees.
IF WE OR OUR SUPPLIERS ARE UNABLE TO OBTAIN SUFFICIENT QUANTITIES OF PRODUCTS
FROM OUR VENDORS IN A TIMELY MANNER, OUR NET SALES WILL DECREASE.
We do not own or operate any manufacturing facilities. Instead, we depend on
manufacturers and suppliers to provide us sufficient quantities of products at
competitive prices. We currently anticipate buying our products from
approximately 350 vendors. We do not have long-term or exclusive arrangements
with any vendor or distributor that guarantee the availability of products to
us. If we do not receive shipments in a timely manner, we may miss delivery
deadlines, and our customers may subsequently cancel orders, refuse to accept
deliveries or demand discounts. Additionally, certain vendors have limited or
prohibited online sales of their products. Any of these circumstances could have
a material adverse effect on our business, financial condition, results of
operations and prospects.
IF WE EXPERIENCE PROBLEMS IN DISTRIBUTION AND FULFILLMENT, WE COULD LOSE
CUSTOMERS.
We will rely on third-party service and product fulfillment providers for
product shipments, including shipments to and from our distribution facility, as
well as fulfillment and inventory services. We are therefore subject to risks,
including employee strikes and inclement weather, associated with such shipment
carriers' ability to provide delivery services to meet our shipping needs, and
such product fulfillment providers' ability to pick and pack orders. In
addition, if our primary shipment carriers or fulfillment providers fail to
devote a sufficient number of employees or amount of space to us, our ability to
deliver products in a timely manner could also be impaired. Our shipment
carriers and product fulfillment providers may also depend upon temporary
employees to fulfill our needs during peak periods, and sufficient temporary
employees may not be available to ensure timely deliveries. Failure to deliver
products to our customers in a timely manner could damage our reputation and
brand name.
WE ARE DEPENDENT ON OUR MARKETING AND PARTNERING ARRANGEMENTS TO DRIVE TRAFFIC
TO OUR ONLINE STORE TO GENERATE SALES.
We plan to rely on strategic alliances to attract users to our online store and
promote our brand name. We expect to enter into alliances with a variety of
companies, including a majority of Learning Express franchisees. We believe that
such alliances will result in increased traffic to our online store. Our ability
to generate net sales from our online store may depend on the increased traffic
and brand name promotion that we expect to receive through these alliances.
These alliances may not be maintained beyond their initial terms, and additional
alliances may not be available to us on acceptable commercial terms, if at all.
The inability to enter into new, or to maintain any one or more of our existing,
significant strategic alliances could have a material adverse effect on our
business, financial condition, results of operations and prospects.
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IF WE DO NOT SUCCESSFULLY LAUNCH AND SUBSEQUENTLY EXPAND OUR ONLINE STORE AND
THE SYSTEMS THAT PROCESS CUSTOMER ORDERS, WE COULD LOSE CUSTOMERS, AND OUR NET
SALES COULD BE REDUCED.
Our success also will depend on our ability to launch our online store on a
timely basis and rapidly expand our operations in order to accommodate expected
increases in customer orders and traffic to our online store. If we fail to
upgrade our Web site in a timely manner in order to accommodate increased
traffic, we may lose customers, which would reduce our online sales.
Furthermore, if we fail to expand the computer systems that we use to process
and ship customer orders and process payments, we may not be able to
successfully distribute customer orders.
OUR AFFILIATION WITH THE LEARNING EXPRESS, INC. AND ITS FRANCHISEES MAY CAUSE
POTENTIAL CONFLICTS OF INTEREST.
LearningExpress.com Holdings LLC's limited liability company operating agreement
as it will be in effect upon completion of this offering provides for a
seven-member Board of Managers. Upon completion of this offering, the Board of
Managers will consist of five members, including the Chief Executive Officer of
LearningExpress.com, a representative appointed by The Learning Express, Inc.
and three members who currently own Learning Express franchises. Although we
have entered into binding agreements with The Learning Express, Inc. governing
many aspects of our relationship with The Learning Express, Inc. and its
franchisees, the ownership of The Learning Express, Inc. by one of our Managers
and the ownership of franchises by one or more of our Managers could create
conflicts of interest when those Managers are faced with decisions that could
have different implications for us, The Learning Express, Inc. and Learning
Express's franchisees, including potential acquisitions or dispositions of
businesses, the issuance of securities, the election of new or additional
Managers, the payment of distributions, commissions or royalties and other
matters.
OUR BUSINESS RELIES ON FOREIGN PRODUCT SOURCES. WE MAY EXPAND OUR BUSINESS
INTERNATIONALLY AND BECOME SUBJECT TO CURRENCY, POLITICAL, TAX AND OTHER
UNCERTAINTIES.
A significant number of products we plan to purchase from domestic suppliers are
manufactured abroad. In the future, we intend to explore international markets.
As a result, we will be subject to risks associated with the purchase of
products manufactured abroad and the conduct of business abroad, such as:
- fluctuations in currency exchange rates that might affect the
prices we pay for our products;
- economic and political instability in foreign countries that
might limit supply;
- transportation delays;
- actions by foreign governments that restrict the number or
increase the cost of exports;
- the laws and policies of the United States affecting importation
of goods, including duties, quotas and taxes;
- foreign trade and tax laws;
- foreign labor practices that may increase prices or limit supply;
- reduced protections for intellectual property rights in some
countries;
- opening and managing distribution centers abroad; and
- developing customer lists and marketing channels.
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Our operating results will depend in part on our ability to manage such risks
while still offering an attractive product mix at profitable prices. The
realization of one or more of the risks listed above may interrupt or delay
imports, substantially increase the cost of our imports or materially adversely
affect our planned international business. If for any reason it becomes
necessary to locate alternative product sources, the products available through
those sources may be of lesser quality or more expensive than the products we
otherwise would buy. Furthermore, expansion into international markets may
present competitive and merchandising challenges different from those we will
face in domestic markets. In addition, we may not expand internationally, and
any such expansion may not result in profitable operations.
OUR INTERNET SALES COULD BE LIMITED IF OUR ONLINE SECURITY MEASURES FAIL.
Our relationships with customers would be adversely affected if the security
measures that we plan to use to protect their personal information, such as
credit card numbers, are ineffective. We plan to rely on security and
authentication technology that we license from third parties. With this
technology, we plan to perform real-time credit card authorization and
verification with our credit card processor. We cannot predict whether the
technology we use to protect a customer's personal information will fail. Under
current credit card practices, we will be liable for fraudulent credit card
transactions because we will not obtain credit cardholders' signatures.
Furthermore, our servers may be vulnerable to computer viruses, physical or
electronic break-ins and similar disruptions. We may need to expend significant
additional capital and other resources to protect against a security breach or
to alleviate problems caused by any breaches. We may not be able to prevent all
security breaches. To the extent that we or our third-party contractors store
and transmit proprietary information, such as credit card numbers, security
breaches could expose us to a risk of loss or litigation and possible liability.
OUR ONLINE STORE WILL BE DEPENDENT ON THIRD-PARTY SOFTWARE AND SERVICES.
We have entered into a number of service agreements with third parties that
supply software to operate, maintain and provide other services for our planned
online store. We generally do not have long-term relationships with and have
limited control over the companies that provide these third-party services.
Although we believe that our service providers are reputable and dependable,
such parties may not continue to perform such services, and it may not be
possible to replace them on commercially acceptable terms, if at all.
The operation of our online store will be dependent on third parties for the
following services:
- Internet and telecommunications systems (hosting);
- delivery services;
- inventory storage and handling;
- credit card processing;
- software services; and
- shopping cart and other Internet services.
OUR FACILITIES AND SYSTEMS ARE VULNERABLE TO NATURAL DISASTERS AND OTHER
UNEXPECTED PROBLEMS. THE OCCURRENCE OF A NATURAL DISASTER OR OTHER UNEXPECTED
PROBLEM COULD DAMAGE OUR REPUTATION AND BRAND NAME AND REDUCE OUR SALES.
Our business and net sales will depend upon third-party telecommunications,
computer systems operated by our third-party vendors and our own computer
systems, to receive and fulfill customer orders. Our facilities and systems may
be damaged or interrupted due to fire, flood, power loss, telecommunications
failure, security breaches, earthquakes and similar events. A natural disaster
or other unanticipated problem
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could cause interruptions or delays in our business or cause us to lose data or
render us unable to accept or fulfill customer orders. If any of these events
occurs, our business and property insurance may not adequately compensate us for
our resulting losses. In addition, our business, financial condition, operating
results and prospects could be adversely affected.
Although we, along with our third-party service providers, are developing a
disaster recovery plan for our online store, we currently do not have a formal
disaster recovery plan to prevent delays arising from the failure of our
information systems.
OUR INTELLECTUAL PROPERTY MAY NOT BE SAFEGUARDED, OR WE MAY BE SUBJECT TO
INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS.
The steps we take to protect our proprietary rights may be inadequate or
insufficient to provide full protection. Our owned and licensed copyrights,
service marks, trademarks, trade dress, trade secrets and other forms of
intellectual property will be critical to our success. We will rely on trademark
and copyright law, trade secret protection and confidentiality or license
agreements with our employees, business partners and others to protect our
proprietary rights. However, a third party could copy or otherwise obtain our
intellectual property without authorization. For example, employees, our
business partners or consultants could breach their confidentiality agreements.
In such a situation, we may not have adequate remedies for breach. Our inability
to protect our proprietary rights may materially adversely affect our business,
financial condition, results of operations and prospects.
We cannot predict whether third parties will assert infringement claims against
us, or whether any future assertions or prosecutions will harm our business. If
we are forced to defend against any such claims, even if they are without merit,
we may face costly litigation, diversion of technical and management personnel
or product shipment delays. As a result of any such a dispute, we may have to
develop non-infringing technology or enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on terms
acceptable to us, or at all. If there is a successful claim of intellectual
property infringement against us and we are unable to develop non-infringing
technology or license the infringed or similar technology on a timely basis, our
business, financial condition, results of operations and prospects could be
adversely impacted.
The United States Patent and Trademark Office has issued a federal trademark
registration to The Learning Express, Inc. for "Learning Express." The Learning
Express, Inc. has licensed to us the right to use the marks it owns and uses,
including the trademark "Learning Express" and the related trade name for our
online store. The Learning Express, Inc.'s trademarks are not registered in
every country in which we plan to sell or may sell products. We may be unable to
obtain trademark, service mark and copyright registration, or otherwise obtain
effective protection for trademarks, service marks, copyrights and trade secrets
in every country in which we plan to sell or may sell products and render
services online either because the mark is unavailable or because the protective
regimes are inadequate. Therefore, our efforts to protect our online proprietary
rights may not be adequate, and our online business may be adversely affected.
Also, it may be difficult or impossible to obtain registration for The Learning
Express, Inc.'s marks for certain classes of goods and services if there has
been prior use and registration of the marks by another party. While it may be
possible in some instances to obtain registration through consent and license
agreements, these may restrict the nature and extent of our business in certain
countries. For example, in the United Kingdom, we are aware that it may be
difficult to achieve registration for The Learning Express, Inc.'s "right start"
mark for certain clothing items because of the prior use and registration of a
"right start" mark for shoes.
IF WE ARE UNABLE TO ACQUIRE OR MAINTAIN OWNERSHIP OF NECESSARY INTERNET DOMAIN
NAMES, OUR BRAND NAME AND REPUTATION COULD BE DAMAGED, AND WE COULD LOSE
CUSTOMERS.
We have obtained a license to use the Web domain name www.learningexpress.com
from The Learning Express, Inc. Governmental agencies and their designees
regulate the acquisition and maintenance of domain names. Changes may occur in
the regulation of domain names in the United States and in foreign countries in
the near future. In the United States, such changes may include a transition
from the current
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system to a system which is controlled by one or more non-profit corporations.
Governing bodies may establish additional top-level domains, appoint additional
domain name registrars or modify the requirements for holding domain names. As a
result, we may not be able to acquire or maintain relevant domain names in all
jurisdictions in which we wish to conduct business. Furthermore, the
relationship between regulations governing domain names and laws protecting
trademarks and similar proprietary rights is unclear. Therefore, we may not be
able to prevent third parties from using similar domain names that decrease the
value of our owned and licensed trademarks and other property rights and take
customers away from our online site.
RISKS RELATED TO OUR INDUSTRY
OUR SUCCESS IN SELLING PRODUCTS ONLINE WILL DEPEND ON THE VIABILITY OF THE
INTERNET.
Our success will depend on the acceptance of the Internet for commercial use. A
number of issues concerning the commercial use of the Internet remain
unresolved, including:
- transaction and data security;
- reliability;
- cost;
- ease of access;
- quality of service; and
- bandwidth availability.
Our business will be adversely affected if the Internet develops more slowly
than expected as a commercial medium. In addition, companies that control access
to Internet transactions through Internet connectivity, portal services or Web
browsers could promote our competitors over us or charge us a substantial fee
for providing traffic to our online store.
Because the Internet is still in a relatively early stage of development, there
is no guarantee that consumers will use the Internet extensively for retail
purchases. Consumer concerns about privacy and security may hinder the growth of
Internet retailing and use of our online store.
The success of our online store also will depend on the development of an
infrastructure for providing Internet access and services. The Internet could
become an impracticable commercial medium due to delays in the development or
adoption of new methods to handle greater Internet activity or due to greater
governmental regulation. We are not certain that the infrastructure necessary to
make the Internet a viable, long-term commercial marketplace will be developed.
Even if such an infrastructure develops, we are not certain that the Internet
will become a viable marketing and sales channel for our products.
The recent growth in the use of the Internet has caused frequent periods of
impaired performance. As a result, routers and switches, telecommunications
links and other components of the infrastructure of Internet service providers
will need to be upgraded as use of the Internet continues to expand. Our ability
to provide products to customers quickly and increase the scope of our service
will depend on the speed and reliability of the networks operated by third
parties. Consequently, the growth of the market for the products offered in our
online store will depend upon improvements being made to the Internet to
alleviate congestion. If the Internet does not continue as a viable, long-term
commercial marketplace, our business, financial condition, results of operations
and prospects will be materially adversely affected.
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The rapid technological change and the emergence of new industry standards and
practices related to the Internet could render our planned online store and
related technology obsolete. Our performance will depend, in part, on our
ability to do the following:
- both license and internally develop leading technologies useful
in our business;
- enhance our existing services;
- enhance and improve the functionality of our online store;
- develop new services and technologies to keep up with the
increasingly sophisticated and varied needs of prospective
customers; and
- respond to technological advances and emerging industry standards
and practices in a cost effective and timely manner.
Developing our online store involves significant technical and business risks.
We may not succeed in using new technologies effectively and may not succeed in
adapting our planned online store, our systems that process customers' orders
and payments and our computer networks to customer requirements or emerging
industry standards. If for technical, legal, financial or other reasons we
cannot adapt in a timely manner to the changing market conditions or customer
requirements, or if our online store does not achieve market acceptance, our
business, financial condition, results of operations and prospects would be
materially adversely affected.
WE ARE SUSCEPTIBLE TO CHANGING ECONOMIC CONDITIONS.
Our business will depend substantially on middle- to upper-income individuals
whose income may be adversely affected by changes in economic conditions. A
prolonged economic downturn throughout the United States may decrease sales of
our products and have a material adverse effect on our business, financial
condition, results of operations and prospects.
WE ARE LIABLE FOR THE CONTENT AND PRODUCTS IN OUR ONLINE STORE.
We believe that our future success partially depends on our ability to deliver
original and compelling descriptions and images about our products on the
Internet as well as other information relevant to parents and childcare
providers. As a publisher of online content, we may face liability for
defamation, negligence, copyright, patent or trademark infringement, or other
similar claims. We may also face liability for product liability claims on the
merchandise we sell. Although we carry general liability insurance, our
insurance may not cover these types of claims or may not be adequate to
indemnify us for all our liability. If we are subject to liability that is not
covered by insurance or that exceeds our insurance coverage, our results of
operations will be materially adversely affected. In addition, our reputation
and brand name may also suffer if we are faced with liability for the content
on, or products in, our online store, even if such liability is covered by
insurance.
WE ARE SUBJECT TO GOVERNMENT REGULATION.
Our products are subject to provisions of the Consumer Product Safety Act and
the regulations issued thereunder. These laws authorize the Consumer Product
Safety Commission (the "CPSC") to protect the public from products which present
a substantial risk of injury. The CPSC can require the manufacturer of defective
products to repurchase or recall such products. The CPSC may also impose fines
or penalties on the manufacturer or retailer. Similar laws exist in some states,
cities and other countries in which we market or plan to market our products. A
recall of any of our products may materially adversely affect our business,
financial condition, results of operations and prospects.
Laws and regulations directly applicable to Internet communications and commerce
are becoming more prevalent. The United States Congress recently enacted
Internet laws on children's privacy, copyrights and
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taxation. The European Union recently enacted its own privacy regulations. Laws
governing the Internet, however, remain largely unsettled. It may take years to
determine whether and how existing laws, such as those governing intellectual
property, privacy, libel and taxation, apply to the Internet. The growth of the
market for Internet commerce may result in more stringent consumer protection
laws, both in the United States and abroad, that place additional burdens on
companies conducting business over the Internet. The adoption of more laws may
decrease the growth of the Internet. Such a slowdown may decrease our net sales,
increase our cost of doing business or otherwise materially adversely affect our
business, financial condition, results of operations and prospects.
In order to comply with new or existing laws regulating Internet commerce, we
may need to modify the manner in which we do business, which may result in
additional expenses. We may need to hire additional personnel to monitor our
compliance with applicable laws. We may also need to modify our software to
further protect our customers' personal information.
Our products and services will be available over the Internet in multiple
jurisdictions. We may be required to qualify to do business as a foreign
corporation in these jurisdictions because we sell products to numerous
customers who reside there or because a Learning Express store may be located
there. We may be subject to taxes and penalties if we fail to qualify as a
foreign corporation in a jurisdiction where we are required to qualify. The
future application of laws and regulations of jurisdictions whose laws do not
currently apply to our business may have a material adverse effect on our
business, financial condition, results of operations and prospects.
OUR SALES COULD DECREASE IF WE BECOME SUBJECT TO SALES AND OTHER SIMILAR TAXES.
If one or more states or any foreign country successfully asserts that we should
collect sales or other similar taxes on the sale of our products for which we
have not already collected such taxes, our results of operations could be
materially adversely affected. We plan to collect sales and other similar taxes
for physical shipments of goods into each state where a Learning Express store
is located. Sales in other jurisdictions, however, may subject our shipments in
such jurisdictions to sales taxes under current or future laws. If we become
obligated to collect additional sales taxes, we will need to update our system
that processes customers' orders to calculate the appropriate sales tax for each
customer order and to remit the collected sales taxes to the appropriate
authorities. Any such upgrades will increase our operating expenses. In
addition, our customers may be discouraged from purchasing products from us if
they have to pay sales taxes, potentially causing our net sales to be lower than
if we did not collect such taxes. We believe that many of our competitors do not
collect sales tax on as widespread a basis as we plan to do. As a result, we may
need to offer our products at lower prices to offer the same total cost to our
customers, which may decrease our margins and reduce our prospects for
profitability in order to retain our market share.
A SUBSTANTIAL PORTION OF THE NET PROCEEDS OF THIS OFFERING WILL BE ALLOCATED FOR
GENERAL WORKING CAPITAL.
A substantial portion of the net proceeds to us from the sale of the Series A
Convertible Preferred Shares offered in this offering has been allocated to
working capital and other general company purposes. This amount may increase
substantially as other anticipated uses of net proceeds are reduced. The net
proceeds may be utilized at the discretion of our Board of Managers. As a
result, investors will not know in advance how such net proceeds will be
utilized by us.
THE ISSUANCE OF ADDITIONAL PREFERRED SHARES WITH TERMS SET AT THE DISCRETION OF
OUR BOARD OF MANAGERS COULD DILUTE THE INTERESTS OF EXISTING EQUITY HOLDERS.
Following this offering, our Board of Managers will have the authority to issue
additional preferred shares, without any vote by LearningExpress.com Holdings
LLC's then existing equity holders, and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of such
shares. Since any such additional preferred shares could be issued with voting,
liquidation, distribution and other rights superior to those of our Common
Shares and Series A Convertible Preferred Shares, the rights of the holders of
our Common Shares and Series A Convertible Preferred Shares will be subject to,
and may be adversely affected by, the rights of the holders of any such
preferred shares.
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PLAN OF DISTRIBUTION
PROCEDURE FOR AMENDMENT OF FRANCHISE AGREEMENTS AND REGIONAL FRANCHISE LICENSE
AGREEMENTS AND RECEIPT OF COMMON SHARES
Each franchisee and regional owner which wishes to receive the Common Shares
offered by this prospectus should execute a "LearningExpress.com Holdings LLC
First Amended and Restated Operating Agreement" on the page indicating "Common
Members" and either an "Amendment to Franchise Agreement" or an "Amendment to
Regional Franchise License Agreement," each in the form enclosed with this
preliminary prospectus, and return them to us at:
LearningExpress.com Holdings LLC
Devens Business Community
29 Buena Vista Street
Ayer, MA 01432
Attn: Chief Executive Officer
We are not permitted by the Securities Act of 1933 and the rules of the
Securities and Exchange Commission thereunder to issue the Common Shares to
franchisees and regional owners until the registration statement relating to
this prospectus has been declared effective by the Securities and Exchange
Commission. Accordingly, until the registration statement relating to this
prospectus has been declared effective and a final prospectus, together with the
operating agreement and the franchise agreement amendment or regional franchise
license agreement amendment, as the case may be, bearing your signature and also
executed by The Learning Express, Inc., in the case of the amendments, and
LearningExpress.com Holdings LLC, in the case of the operating agreement, have
been delivered to you, the amendments and the operating agreement will not be
binding upon you. Prior to such effective date, execution and delivery, you may
withdraw your executed amendment and operating agreement at any time by
indicating to us in a written notice received by us at the above address or sent
to us by fax at (978) 889-1010 that you do not wish to continue with the
amendments and receive the shares. If you do not so withdraw, the amendments and
operating agreement, if executed and delivered by you to LearningExpress.com
Holdings LLC, will become binding agreements after the registration statement
relating to this prospectus has been declared effective and the final prospectus
and executed amendment and operating agreement are sent or delivered to you. The
operating agreement executed by LearningExpress.com Holdings LLC will evidence
your ownership of Common Shares. Common Shares are not being offered to
franchisees and regional owners in California until the approval process
pursuant to the California Franchise Investment Law relating to the franchise
and regional owner amendments has been completed.
PROCEDURE FOR SUBSCRIPTION FOR SERIES A CONVERTIBLE PREFERRED SHARES
Franchisees, regional owners and others who wish to purchase Series A
Convertible Preferred Shares should execute a "LearningExpress.com Holdings LLC
First Amended and Restated Operating Agreement" on the page indicating "Series A
Members" and a "Subscription Agreement for Series A Convertible Preferred
Shares," each in the form to be enclosed with the final prospectus that we will
send to you after the registration statement relating to this prospectus is
declared effective by the Securities and Exchange Commission, and return them to
us at:
LearningExpress.com Holdings LLC
Devens Business Community
29 Buena Vista Street
Ayer, MA 01432
Attn: Chief Executive Officer
We are not permitted by the Securities Act of 1933 and the rules of the
Securities and Exchange Commission thereunder to issue and sell the Series A
Convertible Preferred Shares until the registration
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statement relating to this prospectus has been declared effective by the
Securities and Exchange Commission. We are permitted to accept indications of
interest before such effective date. Until the registration statement relating
to this prospectus has been declared effective, a final prospectus has been
delivered to you and you have executed the subscription agreement and the
operating agreement, any indications of interest that you communicate to us will
not be binding upon you. Accordingly, prior to such effective date, execution
and delivery, you may withdraw your indication of interest by indicating to us
in a written notice received by us at the above address or sent to us by fax at
(978) 889-1010 that you do not wish to purchase the shares. After the
registration statement relating to this prospectus is declared effective and you
have executed a subscription agreement and operating agreement and mailed them
to us, the amount of your subscription will then be due to LearningExpress.com
Holdings LLC and will be payable by certified check or wire transfer. Upon
receipt of your payment, we will deliver to you the operating agreement executed
by LearningExpress.com Holdings LLC, which will evidence your ownership of the
Series A Convertible Preferred Shares you purchased. The Series A Convertible
Preferred Shares are not being offered to franchisees and regional owners in
California until the approval process pursuant to the California Franchise
Investment Law relating to the franchise and regional owner amendments has been
completed.
The Common Shares and Series A Convertible Preferred Shares are being offered
and sold primarily through the efforts of LearningExpress.com Holdings LLC.
We are using __________________ as a selling agent in the following states:
- Alabama
- Arizona
- Connecticut
- Illinois
- Indiana
- Iowa
- Massachusetts
- Minnesota
- Montana
- New Hampshire
- New Jersey
- Oregon
- Pennsylvania
- South Dakota
We will pay _________________ a fee of $_____________ for its services as
selling agent. The amount of the fee is not dependent upon any minimum amount of
our securities being sold in this offering.
We reserve the right to amend or terminate this offering at any time prior to
its completion and to reject any subscription for Common Shares or Series A
Convertible Preferred Shares, in whole or in part.
USE OF PROCEEDS
There will be no cash proceeds from the issuance of the Common Shares to
franchisees and regional owners of The Learning Express, Inc.
We estimate that the proceeds to LearningExpress.com Holdings LLC from the sale
of the Series A Convertible Preferred Shares, assuming the sale of all of the
Series A Convertible Preferred Shares and after deduction of the estimated
expenses of the offering, will be $2,525,000. Of the estimated net proceeds from
the sale of the Series A Convertible Preferred Shares, we intend to use
approximately $500,000 for the development and launch of our online store,
approximately $1,000,000 for marketing and advertising and approximately
$1,025,000 for other general company purposes, including working capital and
capital
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<PAGE> 22
expenditures. This allocation is only an estimate, and we may adjust it as
necessary to address our operational needs in the future. Pending such uses, we
intend to invest the net proceeds of the sale of the Series A Convertible
Preferred Shares in short-term, interest-bearing, investment-grade securities.
DISTRIBUTION POLICY
Holders of Common Shares and Series A Convertible Preferred Shares may be
entitled to receive a cash distribution, to the extent of available cash, to
cover their estimated tax liability resulting from any taxable income of the
issuer allocated to the holders. Any such distributions will be treated as
advances against any distributions they might otherwise receive. With the
exception of any such tax distributions, the issuer does not expect to make
distributions in the foreseeable future.
DETERMINATION OF OFFERING PRICE
The offering price of the Series A Convertible Shares has been arbitrarily
determined by us and bears no relationship to our assets or our book value or to
any other recognized criteria or value.
CAPITALIZATION
The following table sets forth the capitalization of LearningExpress.com
Holdings LLC as of December 31, 1999. The "actual" column reflects our
capitalization as of December 31, 1999, without any adjustments to reflect
subsequent events or anticipated events. The "pro forma" column reflects our
actual capitalization as of December 31, 1999 with adjustments for the receipt
of net proceeds of $732,150 from our sale of 428,572 Series A Convertible
Preferred Shares subsequent to December 31, 1999 and estimated net proceeds of
$2,525,000 from our sale in this offering of an additional 1,550,000 Series A
Convertible Preferred Shares. The information presented in the table below is
qualified by, and should be read in conjunction with, our financial statements
and the related notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
ACTUAL PRO FORMA
<S> <C> <C>
Current Portion of Long-Term Debt $ 60,793 $ 60,793
Long-Term Debt 689,207 689,207
Members' Equity (Deficiency):
Series A Convertible Preferred Shares, -0- shares issued and
outstanding, actual; 2,150,000 shares issued and outstanding, pro forma -- 3,550,000
Common Shares, -0- shares issued and outstanding, actual; 2,626,000
shares issued and outstanding, pro forma -- --
Members' Contributions 195,987 --
Net Income (loss) (220,584) (220,584)
----------- -----------
Total Members' Equity (24,597) 3,329,416
----------- -----------
Total Capitalization $ 725,403 $ 4,079,416
=========== ===========
</TABLE>
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<PAGE> 23
SELECTED CONSOLIDATED FINANCIAL DATA
LearningExpress.com LLC was organized in November 1999 as a Delaware limited
liability company to serve as the e-commerce distribution channel of The
Learning Express, Inc., a retail toy franchise with approximately 160 stores
throughout the United States. LearningExpress.com Holdings LLC, the issuer in
this offering, was organized in April 2000 as a Delaware limited liability
company to hold 70.5% of the shares of LearningExpress.com LLC and the entire
residual interest of Learning Express.com Incentive Plan LLC, which in turn
holds 29.5% of LearningExpress.com LLC. Presented below is selected financial
data for LearningExpress.com LLC as of December 31, 1999 and for the period then
ended. The selected financial data should be read in conjunction with our
"Management's Discussion and Analysis of Financial Condition and Results of
Operations: and financial statements and related notes included elsewhere in
this prospectus. The statement of operations data for the period ended December
31, 1999 and the balance sheet data at December 31, 1999 are derived from our
audited financial statements appearing elsewhere in this prospectus. Historical
results are not indicative of the results to be expected in the future.
<TABLE>
<CAPTION>
Period From November 5, 1999
(Date of Inception) to
December 31, 1999
<S> <C>
Statement of Operations Data:
Net sales $ ---
Income (loss) from continuing operations ( 220,584)
December 31, 1999
Balance Sheet Data:
Total assets $927,854
Total long-term debt, net of current portion 689,207
Total redeemable stock ---
Total members' equity (deficiency) (24,597)
</TABLE>
MANAGEMENT'S DISCUSSIONS AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LearningExpress.com LLC was organized in November 1999 as a Delaware limited
liability company to serve as the e-commerce distribution channel of The
Learning Express, Inc., a retail toy franchise with approximately 160 stores
throughout the United States. LearningExpress.com Holdings LLC, the issuer in
this offering, was organized in April 2000 as a Delaware limited liability
company and holds 70.5% of the shares of LearningExpress.com LLC and the entire
residual interest of Learning Express.com Incentive Plan LLC, which in turn
holds 29.5% of LearningExpress.com LLC.
We have not had any revenues to date and we expect that our expenses will exceed
any revenues we may have for at least the next twelve months. We estimate that
the proceeds from this offering of our Series A Convertible Preferred Shares
together with our revenues, if any, from our online store will allow us to
continue operations for approximately five months. Therefore, it will be
necessary for us to raise additional capital in the future. Any additional
equity financings may be dilutive to our stockholders and the necessary funds
may not be available to us on acceptable terms, if at all. Should we be unable
to raise additional capital on acceptable terms, there is substantial doubt that
we will be able to continue as a going concern.
In December 1999, we entered into a loan agreement with USTrust whereby USTrust
loaned us $750,000. The loan has an annual interest rate of 9% and a term of 5
years. To date, we have been using the proceeds of the loan to cover our
expenditures for the initial organization of the issuer and its subsidiaries,
for the establishment of relationships with our business partners and for
preparation for the launch of our Web site, planned for the Spring or Summer of
2000. Until the completion of this offering, we plan to fund our
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<PAGE> 24
operations with the net proceeds of a private placement of 600,000 of our Series
A Convertible Preferred Shares completed on April 13, 2000, consisting of
approximately $1,025,000.
BUSINESS
Company Overview
LearningExpress.com was established to serve as the e-commerce distribution
channel of The Learning Express, Inc., a franchisor of approximately 160
neighborhood toy stores located throughout the United States. We plan to launch
our online store in Spring 2000 as part of our company Web site,
www.learningexpress.com. Our carefully selected assortment of high-quality
specialty toys and other children's products are intended to meet the standards
of parents who prefer that toys, games and other products be fun, educational,
stimulating and non-violent. We are dedicated to providing our customers with a
unique online shopping experience by offering a carefully selected assortment of
products and providing a high level of customer service and important
information which we believe helps parents raise happy, healthy children.
We have entered into a license agreement and a management services agreement
with The Learning Express, Inc. We believe our relationship with The Learning
Express, Inc. and its franchisees combined with our planned online store
provides us with a meaningful multi-channel marketing advantage relative to
online-only retailers in our market. The Learning Express, Inc. was founded in
1987 by Sharon DiMinico and is the nation's largest franchisor of specialty toy
stores with approximately 160 stores in 35 states. The Learning Express, Inc.
has franchised approximately 125 toy stores in the last three years and expects
to franchise approximately 25 to 35 new stores in 2000. The Learning Express,
Inc. also designs and produces a holiday catalog and five bi-monthly mini
catalogs featuring carefully selected products. The Learning Express, Inc. and
its store owners expect to distribute approximately 5.5 million regular catalogs
and 3.75 million mini catalogs promoting LearningExpress.com's e-commerce site
during 2000. In addition, through our relationship with The Learning Express,
Inc. and its store owners, LearningExpress.com will have access to proprietary
customer lists containing approximately 750,000 customer names.
We believe our advantages include brand name recognition, established
relationships with Learning Express Inc.'s customers and vendors,
cross-marketing opportunities, customer convenience, preferred partnering
arrangements, customer care and merchandising expertise. We plan to provide a
number of customer services aimed at bringing the specialty retail experience of
Learning Express retail stores to our online customers, including gift wrapping,
same-day shipping and in-stock availability of products featured in our online
store, a VIP customer program, 24-hour customer service and live online help,
product returns to Learning Express retail stores and editorial content,
including parenting articles.
We believe we will be able to develop parental trust through our relationship
with The Learning Express, Inc. and by offering a pre-selected assortment of
high-quality specialty toys and other products for children. In adhering to our
"best of breed" approach, we carefully select products, to ensure that each of
the products we offer meets our standards for quality, safety and developmental
value. Our product offerings will include an assortment of children's
developmental and educational toys and other products. We plan to offer products
selected from well-known brands such as Alex(R), Brio(R), Meade(R),
Playmobil(R), Rokenbok(R), Tiny Love(R) and Lamaze(R). We carefully select these
products from a highly fragmented group of approximately 350 vendors. Under the
terms of the management services agreement with The Learning Express, Inc., we
will have access to sales and product information aggregated from Learning
Express stores. Because our select product line of high-quality developmental
and educational products for children excludes most mass-market toys, we believe
we achieve higher gross margins relative to online-only retailers in our market.
We believe that the net proceeds from the sale of the Series A Convertible
Preferred Shares offered in this offering will allow us to complete the
development and launch of our online store. We anticipate it will be necessary
for us to raise additional funds after we launch our online store in order to
market and promote our Web site prior to and during the 2000 holiday season.
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<PAGE> 25
Industry Overview
The Market for Developmental and Educational Products for Children
The market for developmental and educational products for children encompasses a
wide selection of product categories. This market includes a full assortment of
children's developmental and educational toys, books, software, music, videos,
sports equipment, nursery and kids' room accessories and travel accessories.
Within each category, we sell only those products that are consistent with our
mission to provide high-quality developmental, educational and other products
for children. Our focus has been on products in the birth-to-twelve age
category.
Current Retail Channel for Developmental and Educational Toys and Other
Products for Children
We believe that the current retailers of developmental and educational toys and
other products for children can be categorized as follows:
- traditional store-based children's product retailers;
- various online retailers of children's products;
- major discount retailers of children's products;
- online efforts of traditional store-based retailers of
children's products;
- Internet portals and online service providers that feature
shopping services; and
- catalog retailers of products for children.
We believe that we will distinguish ourselves from traditional store-based
retailers and online retailers of products for children by offering a focused
assortment of children's developmental and educational toys and other products
carefully selected with regard to quality, safety and developmental value. As a
specialty retailer, we will focus on providing high levels of customer service.
In addition, we believe our relationship with The Learning Express, Inc.
provides us with meaningful advantages relative to online-only retailers in our
market in terms of brand name recognition, relationships with customers,
cross-marketing opportunities, vendor relationships, customer convenience,
preferred partnering arrangements, customer care and merchandising expertise.
The LearningExpress.com Advantage
We believe our relationship with The Learning Express, Inc., its approximately
160 franchised specialty toy stores located throughout the United States and its
widely distributed catalog, which has been in existence since 1995, provide us
with a meaningful multi-channel marketing advantage relative to other online
retailers in our market. We believe our advantages include:
- Superior Brand Name Recognition. Through Learning Express
Inc.'s network of 160 franchised retail stores and its widely
distributed catalog, the "Learning Express" brand name has
been associated with high-quality developmental and
educational toys for children and high levels of customer
service for nearly 13 years. We believe The Learning Express,
Inc. has built a level of trust with parents and that the
strength of the "Learning Express" brand name is a significant
motivating factor in attracting customers, especially those
who may be making their first online purchases. We intend to
leverage this existing brand name presence in marketing our
online store. We expect that the costs associated with
attracting customers will be lower than other online retailers
due in part to our superior brand name recognition.
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<PAGE> 26
- Established Relationships with Our Target Customers. Over the
last 13 years, The Learning Express, Inc. and its store owners
have built a high level of trust and brand awareness among
parents. The Learning Express, Inc.'s retail stores focus
primarily on the infant to twelve-year-old age category. We
believe that our focus on parents of infants and young
children will allow us to capture our target customers at an
early stage in their child's development. We believe this
opportunity to establish first contact with consumers will
allow us to develop a strong customer relationship with
parents before many of our competitors and continue to serve
our customers as their children grow. Through our relationship
with The Learning Express, Inc. and its store owners, we will
be able to leverage information collected by The Learning
Express, Inc. retail stores to identify potential new
LearningExpress.com customers. We expect to have access to the
stores' proprietary customer lists containing approximately
750,000 customer names representing Learning Express's core
group of repeat customers.
- Cross-Marketing Opportunities. The Learning Express, Inc.'s
existing network of 160 franchised specialty toy stores, its
plans to franchise between 25 and 35 additional stores in 2000
and its widely distributed catalog provide us with substantial
multi-channel marketing opportunities. Learning Express store
owners will be encouraged to support all three distribution
channels, including our online store and the Learning Express
catalog. Visitors to Learning Express retail stores will be
greeted with in-store signage advertising LearningExpress.com.
In addition, customers will receive copies of the Learning
Express catalog and bi-monthly newsletters featuring the URL
for LearningExpress.com as well as discount coupons and other
incentives designed to encourage customers to shop online at
LearningExpress.com. Due to physical space limitations, the
average Learning Express store offers customers approximately
3,500 stock keeping units ("SKU's"). Through kiosks located in
participating Learning Express stores, customers will have
access to many additional products carried by
LearningExpress.com but not available in the local store. In
addition, LearningExpress.com will be featured on
approximately 5.5 million catalogs and 3.75 million bi-monthly
mini catalogs to be distributed by Learning Express store
owners in calendar year 2000.
- Vendor Relationships. We expect to obtain products from a
highly fragmented group of manufacturers and suppliers. The
Learning Express, Inc. has nearly 13 years of experience in
our market and has developed a network of approximately 350
vendors. We expect to be able to leverage this existing
product procurement infrastructure, knowledge and experience
through our relationship with The Learning Express, Inc. Our
combined purchasing requirements should provide us access to
vendor promotions and discounts that would not otherwise be
available. We believe our vendor relationships give us a
significant advantage in competition with online-only
retailers in our target market.
- Customer Convenience. Customers who purchase our products
online will be able to return them at any of the Learning
Express retail stores whose owners have executed franchise
agreement amendments, a convenience not offered by catalog
only or online-only retailers. Additionally, our customers
will be able to visit Learning Express's retail stores to
experience the touch and feel of a selection of our products
that they may purchase online at LearningExpress.com through a
kiosk in participating Learning Express stores or from home.
- Preferred Partnering Arrangements. We believe
LearningExpress.com and The Learning Express, Inc., together
with the Learning Express franchised retail stores, will be
one of the largest integrated retailers in the specialty
market for developmental and educational toys and other
products for children. We believe our relationship with The
Learning Express, Inc. gives us substantial advantages in
developing marketing arrangements with preferred partners. In
addition to exposure on our online store, our relationship
with The Learning Express, Inc. will allow us to offer to our
partners retail store presence, access to The Learning
Express, Inc.'s customer list and possible inclusion in The
Learning Express, Inc.'s direct mail advertising. Our online
competitors who lack these offline relationships cannot offer
this type of extensive cross-promotion.
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<PAGE> 27
- Outstanding Customer Care. Key members of our management team
have extensive experience with Learning Express and other
specialty retailers. As a result, we understand the high level
of customer service that specialty retail customers expect.
Our target customers are middle- to upper-income purchasers of
children's products who have high expectations about the
quality of their shopping experiences. It is our long-term
business strategy to offer customers shopping in our online
store a similar level of prices, promotions and services
offered in offline Learning Express stores. This consistent
pricing approach, together with the other services we plan to
offer, is intended to increase the rate at which we convert
visitors to our online store into LearningExpress.com
customers. At LearningExpress.com, we plan to provide a number
of services aimed at bringing the specialty retail experience
to our online customers, including:
- gift wrapping and gift cards;
- frequent buyer program;
- gift registry service;
- gift reminder service;
- kid's wish list;
- kids' club house games and activities;
- same-day shipment on orders placed before 2 p.m.,
Eastern time;
- in-stock availability of products featured in our
online store;
- knowledgeable customer service available 24 hours a
day, seven days a week via email and our toll-free
phone number;
- live online help for personalized service available
24 hours a day, seven days a week;
- online order tracking and email confirmation;
- product returns through the mail or through any
participating Learning Express retail store;
- product selection services such as our Toy Wizard;
and
- editorial content, including toy reviews, safety
recall notices and parenting articles from respected
parenting periodicals.
- Merchandising Expertise and Focused Product Selection. We
believe that The Learning Express, Inc. has developed parental
trust by offering a pre-selected assortment of high-quality
developmental, educational and other products for children and
that LearningExpress.com will enjoy similar parental trust. In
adhering to The Learning Express, Inc.'s "best of breed"
approach, we will carefully select products from over
approximately 350 vendors to ensure that each of the products
we offer will meet our standards for quality, safety and
developmental value. As a result, we will offer an assortment
of products not offered by mass-market retailers. Our product
offerings will include an assortment of children's
developmental and educational toys, books, software, music,
videos, sports equipment, kids' room accessories and travel
accessories. As a result of our relationship with
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<PAGE> 28
The Learning Express, Inc. and its franchisees, we have access
to sales, product and other information. During 1999, The
Learning Express, Inc. designed and implemented an intranet to
facilitate the exchange of sales, product and other
information by its store owners. The Learning Express, Inc.
store owners are continually searching for unique,
high-quality products to add to their merchandise assortment.
Their search results are shared with other store owners via
the intranet.
Our Growth Strategy
We have created a multi-faceted growth strategy that is designed to
leverage our brand name and increase sales from existing The Learning Express,
Inc. as well as new customers. Key components of our strategy include:
- Expand Product Offerings in Existing Departments Within Our
Online Store. We are dedicated to providing our customers with
a full assortment of high-quality developmental and
educational toys and other products for children. In addition
to selecting new items from existing suppliers, we also intend
to offer products from additional, high-quality suppliers. We
will continue to adhere to The Learning Express, Inc.'s
standards for quality, safety and developmental value as we
select new products.
- Launch New Departments Within Our Online Store. We believe
there is a significant opportunity to leverage the "Learning
Express" brand name and our customer base beyond products for
children through age twelve years old. We have designed our
online store so that we can continue to grow as our customers'
children grow by adding new departments and categories within
our online store. Additionally, we intend to form alliances
with third parties to develop online boutiques accessible from
our online store that will offer products in specialized
categories such as top-line juvenile furniture, bicycles and
outdoor play equipment.
- Enhance Customer Care. We are committed to providing high
levels of service to our customers in order to enhance and
personalize their shopping experiences. In addition to the
numerous services we plan to offer at the launch our online
store, including gift wrapping, guaranteed same-day shipping
and in-stock availability of products featured in our online
store, 24-hour customer service and live online help, product
return to Learning Express stores and editorial content
including parenting articles, we intend to add features to our
online store such as a personal shopper service, a children's
wish list and a gift registry. We also plan to offer
additional services aimed at promoting repeat visits to our
online store, including an events calendar, a gift reminder
service and a frequent buyer program. We believe that by
enhancing the online experience, we will increase the rate at
which we convert visitors to our online store into customers.
- Establish Additional Strategic Alliances. We believe there is
a significant opportunity to gain new online customers and
enrich our product offerings by forming strategic alliances
with companies that share a similar customer base, especially
companies that focus on providing goods or services to women
with young children. We believe that strategic alliances
provide us with a cost-effective method for reaching new
customers and generating additional sales. We are currently
exploring strategic alliances with companies in the following
sectors: online greeting cards, Internet portals, financial
service providers, personal health services, education,
travel, children's furniture, outdoor play equipment and
online music. We are also exploring opportunities to create
boutiques within our online store that would carry such items
as furniture, outdoor play equipment and other high-quality
children's items.
- Expand into Select International Markets. We intend to explore
additional international markets where we believe demand for
our products will be strong. We believe that there are
significant opportunities for expansion due to the vast size,
highly fragmented nature and early development stage of many
international retail markets for our products. We believe our
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advanced merchandising, marketing and fulfillment capabilities
would give us a competitive advantage as these international
Internet markets begin to develop.
Our Online Store
Our online store will provide our customers with an easy to use, convenient and
informative way to shop for developmental and educational toys and other
products for children. In addition to ordering products, a customer will be able
to browse the different departments within our online store, conduct targeted
searches, view recommended products, read parenting and child-related articles,
visit our gift registry, participate in promotions and check order status. Our
online store will include:
- Our Departments. Our online store will be organized into
departments based on product categories. Within each
department, we will organize products into different
subcategories. In addition, our online store will feature
advanced search technologies which make it easy for customers
to locate products based on selected criteria. For example, a
customer will be able to search by any combination of age,
category, brand name or keyword.
- Customer Services. We plan to offer our customers a number of
services that we believe are not available through many other
online retailers. For example:
- We plan to provide gift wrapping and gift cards for
online purchases, other than oversized items.
Customers will be able to select from a variety of
gift wraps and personalize their own gift cards for
each of their purchases.
- We plan to provide personalization services on many
products for a reasonable cost.
- We plan to ship customer orders within 24 hours of
order placement, and we plan to guarantee that
product orders placed before 2 p.m., Eastern time,
will be shipped from our distribution facility the
same day that we receive the order.
- We will guarantee in-stock availability of products
featured in our online store. We believe there is a
significant competitive advantage in being able to
consistently fulfill our customers' order requests on
a timely basis.
- We plan to have knowledgeable customer service
representatives that will be available 24 hours a
day, seven days a week via email and our toll-free
phone number. In addition, the customer service area
of our online store will provide extensive
information about using the Web site and will provide
answers to our customers' most frequently asked
questions.
- We expect to have a live online customer support
service available 24 hours a day, seven days a week.
- We plan to provide online order tracking and] product
returns directly through the mail and through
Learning Express retail stores. We also will have a
store locator feature within our online store that
will allow customers to easily find the store nearest
to them.
- We will provide product selection services to assist
customers in making purchases. We will highlight
best-selling products. Product pictures will be large
and colorful, making them easy to view. We will
provide customers with a product's skill rating,
awards, recommended accessories and related items.
- Editorial Content. Our online store will feature select
editorial content designed to provide useful and fun
information that will complement our products and assist
visitors to our online store with purchase decisions.
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We believe the customer presentation on our Web site is unique, with a less
aggressive commercial look. We plan to use more graphics, colors and animation
than many of our competitors. We believe our user friendly presentation will be
valued by our customers and it will give us a competitive advantage.
Products and Merchandising
We believe that our "best of breed" approach and extensive merchandising
expertise will result in a unique product selection unmatched by other online or
traditional store-based retailers. Our goal is to develop parental trust by
providing a pre-selected assortment of high-quality developmental, educational
and other products for children, including developmental and educational toys,
books, software, music, videos, sports equipment, nursery and kids' room
accessories and travel accessories. We have carefully select products to ensure
that each of the products we offer meets our standards for quality, safety and
developmental value. As a result, we will offer an assortment of products not
offered by mass-market retailers. We plan to offer products selected from
well-known brands such as Alex(R), Brio(R), Meade(R), Playmobil(R), Rokenbok(R),
Tiny Love(R) and Lamaze(R). We will obtain these products from a highly
fragmented group of approximately 350 vendors. We believe that our ability to
leverage the existing strong, long-term vendor relationships of The Learning
Express, Inc. will provide us with a competitive advantage.
Our product offerings will continue to expand as we add new high-quality
products to serve our customers. We plan to expand our product offerings by
introducing additional product categories for children through age twelve years
old such as bicycles, children's furniture and outdoor play equipment. Our
product line will also be available to customers through kiosks to be located in
Learning Express's retail stores.
Our merchandising team will continue to work closely with The Learning Express,
Inc.'s merchandising staff and store owners to locate, evaluate and market new
products. We believe that, due to our strong brand presence and our established
relationships with our vendors, we will often obtain information about new
products ahead of our competitors and we will be able to regularly introduce new
products and product lines to our customers. In addition, we will regularly
update our online store and catalogs in order to encourage repeat shopping,
respond to customer demands and promote top-selling products.
Marketing and Promotion
We have designed our marketing and promotional strategy to increase consumer
traffic to our online store, promote repeat purchases and develop strong
customer loyalty. We believe that our use of the established Learning Express
brand name will allow us to engage in highly targeted marketing and promotional
activities directed at purchasers of high-quality developmental and educational
toys and other products for children and will minimize our need to devote
resources to general branding efforts. Our marketing and promotional program
includes strategic partnering relationships, affiliate relationships, direct
marketing, offline and online advertising and cross-promotional activities with
The Learning Express, Inc. and its store owners.
- Direct Marketing. We plan to engage in several forms of direct
marketing, allowing us to individually target potential
customers and leverage our direct marketing expertise. Our
direct marketing initiatives will include mailings to our
customers and targeted non-customers, as well as mailings to
customers of Learning Express retail stores. In addition, we
plan to engage in focused online direct marketing, including
sending periodic emails to all the customers on our mailing
list and selectively emailing targeted non-customers. We also
plan to conduct cross-promotional marketing activities with
consumer products companies, financial services companies,
entertainment companies and others. Our Web site will also be
promoted through approximately 5.5 million catalogs and 3.75
million mini catalogs that The Learning Express, Inc. and its
store owners expect to distribute in calendar year 2000.
- Offline Advertising. We are considering numerous forms of
offline advertising that target our customer base, including
broadcast and print media.
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- Online Advertising. We intend to enter into marketing
relationships that provide targeted online advertising.
- Strategic Partner Program. We are currently exploring
strategic alliances with several companies and have targeted
the following sectors: entertainment, children's shoes,
travel, children's clothes, online greeting cards, Internet
portals, financial service providers, personal health
services, education, consumer products, magazines, charities
and non-profit organizations. Our strategic partners will be
provided with access to our customers through online links,
direct marketing mailings, joint programs with Learning
Express retail stores and the placement of promotional
materials in product shipments. In exchange, we typically will
receive online and offline promotional exposure from our
strategic partners. We believe that our strategic partner
relationships will provide us with a cost-effective way to
promote our online store.
- Promotion Through Learning Express Retail Stores and Catalog.
We plan to leverage our affiliation with The Learning Express,
Inc.'s franchised retail stores and catalog to market and
promote our online store. For example, we expect that
LearningExpress.com will be featured prominently in Learning
Express's retail stores and in Learning Express catalogs and
mini catalogs. In addition, inserts promoting
LearningExpress.com will be provided to Learning Express
stores for placement in customers' shopping bags.
Key Contracts
- Fulfillment and Call Center Operations
We plan to guarantee that any order we receive by 2 p.m., Eastern time, will be
delivered to a shipment carrier the same day. We have reached an agreement in
principle with a third party fulfillment and call center partner to provide
fulfillment and call center services for us 24 hours a day, seven days a week.
Orders will be automatically transmitted from our online store over a secure
connection to our partner's fulfillment center where our partner's warehouse
management system will optimize the pick, pack and ship process. Our online
store will also transmit to our fulfillment partner the customer's gift wrap
choices, gift messages and delivery information. We plan to offer three levels
of shipping service: next-day delivery, two-day delivery and ground delivery. We
expect to provide service to all 50 states and United States territories through
United Parcel Service and the United States Postal Service. In addition, we plan
to offer an order tracking service for our customers on our online store. Each
day, we will receive data back from our fulfillment partner regarding the
receipt of new inventory, shipping, inventory quantities and inventory location,
which will enable us to confirm the availability of the products on our online
store. Product returns will be processed by our fulfillment partner and by the
Learning Express stores.
Our fulfillment partner will also provide call center services for customer
support for our online store and assist with product returns. Customer support
will initially be provided by e-mail, a toll-free telephone number and by mail.
In the future, we plan to provide live online help to our customers through a
third party service provider.
We expect to reach a final agreement with our fulfillment and call center
partner in early May, 2000. If, however, we are unable to reach an agreement, we
believe alternative distribution, fulfillment and call center providers are
available to provide us with the necessary services we need. There can be no
assurance, however, that our inability to reach an agreement with the
fulfillment and call center partner we have chosen would not impair our ability
to ship products and manage our inventory levels.
- Operations and Technology
We have engaged an experienced Internet consulting firm, Miller Systems, Inc.,
to develop the underlying technology and systems of our Web site. Miller Systems
has extensive experience in building data driven, dynamic, Web-based,
self-administered business applications. Through our ongoing relationship with
Miller Systems, we have implemented and will continue to implement a broad array
of scalable site
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<PAGE> 32
management, search, customer interaction and distribution services, as well as
systems used to process customers' orders and payments. These services and
systems use a combination of our own technologies, Miller Systems' proprietary
technologies (for which we have obtained a perpetual non-exclusive license) and
commercially available, licensed technologies. We are in the process of
integrating the systems that we will use to process customers' orders and
payments with our fulfillment partner's systems and with our accounting and
financial systems. By working with Miller Systems, our goal is to have a highly
configurable, self-administered, customized Web site which can be tailored by
non-system professionals using back-end administration tools. This approach
should allow us to modify the look of our Web site without needing assistance
from programmers. Our agreement with Miller Systems can only be terminated by
either party if the other party materially breaches their obligations under the
agreement and such breach is not cured within a specified amount of time.
Our systems have been developed based on industry standard architectures and are
designed to reduce downtime. We plan for our online store to be generally
available 24 hours a day, seven days a week. Our system hardware will be hosted
at a third-party facility operated by GTE Internetworking, Inc. in Chantilly,
Virginia, which provides redundant communications lines and emergency power
backup. We have implemented load balancing systems and our own redundant servers
managed by GTE Interworking to provide for additional fault tolerance.
We have incurred significant Web site development expenses to date and
anticipate that we will continue to devote significant resources to Web site
development in the future.
- License Agreement with The Learning Express, Inc.
LearningExpress.com LLC and The Learning Express, Inc. are parties to a license
agreement pursuant to which The Learning Express, Inc. licenses the Learning
Express name, image, methods, manuals, procedures and "look and feel" components
to LearningExpress.com LLC for use in operation and promotion of the online
store. The license agreement provides that the license will be the only license
granted by The Learning Express, Inc. for Internet-based use of the Learning
Express system. In consideration of the license, commencing January 1, 2002,
LearningExpress.com LLC will pay The Learning Express, Inc. a royalty equal to
three percent (3%) of the gross revenues of the online store, less costs and
charges in connection with returned products and related shipping and handling.
The license term will continue unless terminated by one party on account of an
uncured material breach by the other party. The license agreement includes
mutual non-competition covenants applicable during the term and also provides
that LearningExpress.com LLC will not compete with The Learning Express, Inc.
(other than through Internet based sales through the online store) for a period
of two years following any termination of the license agreement.
- Management Services Agreement between LearningExpress Holdings
LLC, LearningExpress.com LLC and The Learning Express, Inc.
LearningExpress Holdings LLC, The Learning Express, Inc. and LearningExpress.com
LLC are parties to a management services agreement that has a term coextensive
with that of the license agreement between LearningExpress.com LLC and The
Learning Express, Inc. described above. Under the management services agreement,
The Learning Express, Inc. agreed to use its best efforts to have franchisees
execute a franchise agreement amendment in the form attached to this prospectus
as Annex A and to ensure that future franchise agreements include terms
consistent with those of the amendments. The Learning Express, Inc. also has
agreed to
- share with LearningExpress.com relevant business information
for operation of the online store, including with respect to
The Learning Express, Inc.'s sales, buying programs, marketing
programs, customers, vendors and services and
- promote LearningExpress.com and the online store in all
marketing, advertising and promotion campaigns relating to the
Learning Express stores.
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<PAGE> 33
Under the agreement LearningExpress.com LLC is required to pay to The Learning
Express, Inc. a monthly commission equal to 5% of net sales resulting from the
online store's sales, and after the first two years, a commission not less than
2.5% of such net sales as determined by the Board of Managers of Learning
Express.com LLC taking into account sales and cash flow information.
LearningExpress.com LLC also agreed to
- share with The Learning Express, Inc. business information
regarding the operation of the online store;
- coordinate and cooperate with The Learning Express, Inc. in
sales and marketing campaigns that promote both the online
store and retail stores operated by franchisees who
participate in the online store program;
- cooperate with participating franchisees in product returns
and product coupon programs.
In the management services agreement LearningExpress.com Holdings LLC agreed to
issue Common Shares of LearningExpress.com Holdings LLC to franchisees who
execute amendments to their franchise agreements and regional owners who execute
amendments to their regional franchise license agreements.
Competition
The online market for developmental and educational toys and other products for
children is developing and evolving rapidly. We expect competition to intensify
in the future because new competitors can enter our market with little
difficulty and can launch online stores at a relatively low cost. We principally
will compete with online and traditional store-based retailers and catalog
retailers that sell products for children, including specialty stores,
mass-market retailers, discount chains, department stores and a growing number
of mail-order catalogs.
We believe that competition in the online retail business is based on brand name
recognition, product selection, price, convenience, customer service and the
speed and reliability of fulfillment. We believe that we will be able to
distinguish ourselves from traditional store-based retailers and other online
retailers by offering a full assortment of children's developmental and
educational toys and other products carefully selected with regard to quality,
safety and developmental value. As a specialty retailer, we also will focus on
providing the highest levels of customer service. In addition, we believe our
relationship with The Learning Express, Inc. and its approximately 160
franchised retail stores located throughout the United States, provides us with
advantages relative to online-only retailers in our market, including
cross-marketing opportunities, vendor relationships, distribution capabilities
and enhanced customer convenience.
Many of our online competitors have longer operating histories, larger customer
bases, greater brand name recognition and significantly greater financial,
marketing and other resources than we do. Many of these competitors can devote
substantially more resources to Web site development than we can. Our
competitors also may be able to secure products from vendors on more favorable
terms, fulfill customer orders more efficiently and adopt more aggressive
pricing or inventory availability policies than we can. Some of our competitors
have significant experience in selling children's products online. Finally, new
technologies and the expansion of existing technologies, such as price
comparison programs, may increase competition.
Government Regulation
We are not currently subject to direct federal, state or local regulation other
than the Consumer Product Safety Act, the regulations issued thereunder and
regulations applicable to businesses generally or directly applicable to
electronic commerce. It is possible, however, that as the popularity of the
Internet grows, a number of laws and regulations may be adopted with respect to
the Internet. These laws may cover issues such as user privacy, freedom of
expression, pricing, content and quality of products and services, taxation,
advertising, intellectual property rights and information security. Furthermore,
the growth of electronic commerce may prompt calls for more stringent consumer
protection laws. Several states have proposed legislation to limit the uses of
personal user information gathered online or require online services to
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<PAGE> 34
establish privacy policies. The Federal Trade Commission has also initiated
action against at least one online service regarding the manner in which
personal information is collected from users and provided to third parties.
While we may contact our customers on behalf of our strategic partners, we will
not provide personal information regarding our users to any third parties
without our users' consent. The adoption of such Internet laws and the
increasing regulation of electronic commerce could make our business more costly
or reduce our ability to leverage information we gain from our customers to
increase sales.
We are not certain how our business may be affected by the application of
existing laws governing issues such as property ownership, copyrights,
encryption and other intellectual property issues, taxation, libel and export or
import matters. The vast majority of such laws were adopted prior to the advent
of the Internet. As a result, they may not fully contemplate or address the
unique issues of the Internet and related technologies. Changes in laws intended
to address such issues could increase the cost of doing business as a result of
litigation costs or increased service delivery costs.
In addition, because our products and services are available over the Internet
in multiple states and foreign countries and because our products may be
returned to Learning Express retail stores, multiple jurisdictions may claim
that we are required to qualify to do business there, be subject to litigation
in their courts and comply with their laws. We are qualified to do business only
in Massachusetts. Our failure to qualify in a jurisdiction where we are required
to do so could subject us to taxes and penalties. It could also hamper our
ability to enforce contracts or our intellectual property rights in such
jurisdictions. The application of laws or regulations from jurisdictions whose
laws do not currently apply to our business could have a material adverse effect
on our business, financial condition, results of operations and prospects.
We plan to collect sales and other similar taxes for physical shipments of goods
into each state in which there is a Learning Express retail store because our
online products may be returned to Learning Express retail stores. Sales in
other states, however, may subject our shipments in such states to state sales
taxes under current or future laws. If we become obligated to collect additional
sales taxes, we will need to update our system that processes customers' orders
to calculate the appropriate sales tax for each customer order and to remit the
collected sales taxes to the appropriate authorities. Any such upgrades will
increase our operating expenses. In addition, our customers in these states may
be discouraged from purchasing products from us if they have to pay sales tax,
potentially causing our net sales to be lower than if we did not collect such
taxes. Many of our competitors do not collect sales tax on as widespread a basis
as we plan to. As a result, in order to retain our market share, we may need to
offer our products at lower prices to offer the same total cost to our
customers, which may decrease our margins and reduce our profitability.
Intellectual Property
We regard the protection of our owned and licensed intellectual property as
critical to our future success and rely on various intellectual property laws
and contractual restrictions to protect our proprietary rights. These include
confidentiality and nondisclosure agreements with our employees, contractors,
suppliers and strategic partners. Despite these precautions, it may be possible
for a third party to copy or otherwise obtain and use our intellectual property
without our authorization. In addition, through our agreement with The Learning
Express, Inc. and independently, we have sought or will seek registration of our
owned and licensed trademarks, service marks and domain names in the United
States and internationally and have applied for federal registration of
"Learning Express" as it is used for online sales of child-related products.
However, effective intellectual property protection may not be available in
every country in which our products are made available online.
We also will rely on technologies that we license from third parties. These
licenses may not continue to be available to us on commercially reasonable terms
or at all. As a result, we may be required to obtain substitute technology of
lower quality or at greater cost, which may materially adversely affect our
business, financial condition, results of operations and prospects.
To date, we have not been notified that our technologies infringe the
proprietary rights of third parties. However, third parties may claim
infringement by us with respect to our current or future technologies. We expect
that participants in our markets will be increasingly subject to infringement
claims as the number of
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<PAGE> 35
services and competitors in our industry segment grows. Any such claim, with or
without merit, may be time-consuming, result in costly litigation, cause service
upgrade delays or require us to enter into royalty or licensing agreements. Such
royalty or licensing agreements might not be available on terms acceptable to us
or at all. As a result, any such claim of infringement against us may have a
material adverse effect upon our business, financial condition, results of
operations and prospects.
Employees
As of March 31, 2000, we had 9 full-time employees. In order to maintain
flexibility, we expect to employ a strategy of outsourcing functions essential
to our business. We have outsourced our technology department, our warehousing
and logistics operations, our Web site development and maintenance function,
certain of our customer service functions and certain of our administrative
functions. As a result, we have engaged our employees primarily in managerial
roles. None of our employees is represented by labor unions and we consider our
employee relations to be good.
Property
Our company offices are located in approximately 1,500 square feet of space in
Learning Express Inc.'s corporate offices in Ayer, Massachusetts. We currently
do not pay rent. We use third-party distribution and fulfillment providers and
therefore do not directly lease or own any space for our inventory. Our Web
site's servers will be located in GTE Internetworking, Inc.'s hosting facilities
in Chantilly, Virginia.
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<PAGE> 36
MANAGERS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
LearningExpress.com Holdings LLC is a limited liability company organized under
the laws of the State of Delaware. Management of LearningExpress.com Holdings
LLC is vested in a Board of Managers and executive officers who report to the
Board.
Our limited liability company operating agreement as it will be in effect upon
the completion of this offering contemplates a Board of Managers consisting of
seven members, although we expect that initially there will be only five
Managers. Until there are seven Managers, Sharon DiMinico and Steven P. Manfredi
each will have two votes to cast on the Board of Managers, and the other
Managers each will have one vote to cast. After there are seven Managers, each
Manager, including Ms. DiMinico and Mr. Manfredi, will have one vote. So long as
the license agreement between the issuer and Learning Express, Inc. described
elsewhere in this prospectus remains in effect, one Manager will be designated
by Learning Express, Inc., one Manager, who will also serve as the Chairman of
the Board of Managers, will be the Chief Executive Officer of the issuer, three
Managers, who will be franchisees of Learning Express, Inc., will be selected by
the unanimous vote of the Manager designated by Learning Express, Inc. and the
Manager who is the Chief Executive Officer of the issuer from a list of nominees
presented by Learning Express, Inc.'s Franchisee Advisory Board, and the
remaining two Managers will be selected by the unanimous vote of the initial
five members. Additional Managers may be added to the Board of Managers by vote
of a majority of the Managers, provided the then current designee of Learning
Express, Inc. and the then current Chief Executive Officer of the issuer both
vote in favor of such additional Managers. Holders of Common Shares and holders
of Series A Convertible Preferred Shares will not have the right to vote for the
election of Managers.
Upon completion of this offering we expect that the Board of Managers will
consist of Ms. DiMinico, who is the initial designee of Learning Express, Inc.,
Mr. Manfredi, who is our Chief Executive Officer, and W. Edmund Hobson, Kenneth
Levinsohn and Ira Marks, who were selected by Ms. DiMinico and Mr. Manfredi from
a list submitted by Learning Express, Inc.'s Franchisee Advisory Board and own
Learning Express franchises. After completion of this offering, we expect to
commence a search to fill the two expected vacancies on the Board of Managers.
Each Manager is elected and serves until his or her successor is duly elected
and qualified. The following table sets forth certain information regarding our
current and proposed Managers and executive officers.
<TABLE>
<CAPTION>
NAME AGE DESCRIPTION
---- --- -----------
<S> <C> <C>
Sharon DiMinico 54 Ms. DiMinico has served as a Manager of
LearningExpress.com Holdings LLC since our
inception in November 1999. Ms. DiMinico has
also served as Chief Executive Officer and a
director of The Learning Express, Inc. since
1987.
W. Edmund Hobson 50 Mr. Hobson has been nominated to become a
Manager of LearningExpress.com Holdings LLC upon
completion of this offering. Mr. Hobson has
owned and operated the Learning Express store in
Wilmington, North Carolina since 1995. Prior to
1995, Mr. Hobson was Senior Vice President ,
Treasurer and Chief Financial Officer of
Massachusetts Financial, a subsidiary of
Travelers Corp.
Kenneth Levinsohn 35 Mr. Levinsohn has been nominated to become a
Manager of LearningExpress.com Holdings LLC upon
completion of this offering. Mr. Levinsohn has
owned and operated the Learning Express store in
Scarsdale, New York since August 1998. From
August 1997 to August 1998, Mr.
</TABLE>
34
<PAGE> 37
<TABLE>
<CAPTION>
<S> <C> <C>
Levinsohn was self-employed as a securities trader.
From March 1995 to August 1997, Mr. Levinsohn held
various sales and marketing positions with several
luxury automobile companies.
Steven P. Manfredi 49 Mr. Manfredi has served as Chief Executive
Officer and a Manager of LearningExpress.com
Holdings LLC since our inception. Mr. Manfredi
became Vice President and Chief Operating
Officer of The Learning Express, Inc. in April
1996. From January 1998 to March 2000, he
served as President and Chief Operating
Officer. From 1991 to 1994, Mr. Manfredi owned
the Learning Express franchise in Salem, New
Hampshire. Mr. Manfredi will become Chairman of
the Board of Managers upon completion of this
offering.
Ira Marks 49 Mr. Marks has been nominated to become a Manager
of LearningExpress.com upon completion of this
offering. Mr. Marks has owned the Learning
Express store in San Diego, California since
March 1998. From May 1995 to March 2000, Mr.
Marks has been President and a member of the
board of directors of RaiChem, a division of
Hemagen Diagnostics Corp.
Robert E. Cunningham 53 Mr. Cunningham has served as Vice President,
Marketing and Business Development of
LearningExpress.com since December 1999. From
February 1999 to August 1999, Mr. Cunningham was
President (Acting) and Vice President, Marketing
for PersonalSource.com, an online provider of
personal shopping services. From March 1986 to
December 1998, Mr. Cunningham was Vice
President, Marketing and a partner of
StrategyBase, Inc., a strategic marketing firm.
Glenn E. Davis 45 Mr. Davis has served as Vice President, Finance,
Treasurer and Chief Financial Officer of
LearningExpress.com since our inception. From
March 1999 until November 1999, Mr. Davis
provided financial and accounting advisory
services to BCC Capital LLC, an investment firm
with interests in several internet businesses.
From February 1996 to March 1999, Mr. Davis was
Vice President, Finance, Treasurer and Chief
Financial Officer of CML Group, Inc, a
multi-channel specialty retailing company. Mr.
Davis was Vice President and Controller of CML
Group from 1990 to February 1996. CML Group
filed for protection under Chapter 11 of the
U.S. Bankruptcy Code in December 1998.
Michael J. Sanders 39 Mr. Sanders has served as Chief Operating
Officer of LearningExpress.com since our
inception. From 1998 to 1999, Mr. Sanders
served as Vice President of Worldwide Support
and Knowledge Management for EXE
</TABLE>
35
<PAGE> 38
<TABLE>
<CAPTION>
<S> <C> <C>
Technologies, Inc., a provider of multi-channel
distribution software. From 1988 to 1998, Mr. Sanders
served in several capacities with Oracle Corporation,
most recently as a Senior Practice Director.
</TABLE>
EXECUTIVE COMPENSATION
The following table sets forth the aggregate annual compensation of our chief
executive officer and each of the three highest paid officers of
LearningExpress.com from the period from our inception to the end of our fiscal
year on December 31, 1999.
<TABLE>
<CAPTION>
AGGREGATE
NAME POSITION COMPENSATION(1)
---- -------- ---------------
<S> <C> <C>
Steven P. Manfredi Chief Executive Officer $0(2)
Michael J. Sanders Chief Operating Officer $44,038
Glenn E. Davis Vice President, Finance and Chief $30,918
Financial Officer
Robert E. Cunningham Vice President, Marketing and Business $12,748
Development
</TABLE>
(1) Includes salary and incentive bonuses earned by the named individuals during
the period from inception, November 5, 1999, to December 31, 1999. Each of the
officers named in the preceding table participates in an incentive bonus
arrangement. Messrs. Sanders, Davis and Cunningham are eligible to receive
bonuses of up to 50%, 30% and 21%, respectively, of their base salary. Up to
one-half of each individual's total incentive bonus is payable annually based
upon the attainment of annual performance objectives and up to 12.5% of each
individual's total bonus is payable each quarter based upon the attainment of
quarterly objectives. (2) Mr. Manfredi has served as our Chief Executive Officer
since our inception. Mr. Manfredi did not receive any compensation from our
inception through December 31, 1999.
For a discussion of shares of LearningExpress.com Incentive Plan LLC which have
been promised, but not yet issued, to the management of the issuer, see
footnotes to "Security Ownership of Management and Certain Security Holders."
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<PAGE> 39
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SECURITY HOLDERS
The following table sets forth certain information as of March 31, 2000
regarding the record ownership of our securities by each member who owns more
than 10% of any class of our voting securities, the three highest paid officers
and managers of LearningExpress.com Holdings LLC and all officers and managers
as a group. Amount and percentage after the offering assumes the issuance of all
of the shares offered in this offering. For purposes of calculating amounts
owned and percentages owned before and after this offering, this table includes
Common Shares and Series A Preferred Shares together as a single class, because
each Series A Convertible Preferred Share is convertible into one Common Share.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT OWNED PERCENTAGE AMOUNT OWNED PERCENTAGE
TITLE OF CLASS OF OWNER BEFORE THIS BEFORE THIS AFTER THIS AFTER THIS
OFFERING OFFERING OFFERING OFFERING
-------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Common Shares and Sharon DiMinico
Series A Louis DiMinico 185,678(1) 30.2% 185,678(2) 3.9%
Convertible c/o Learning Express.com
Preferred Shares 29 Buena Vista Street
Ayer, MA 01432
Common Shares Michael J. Sanders
c/o Learning Express.com 0 0% 14,250(3) 0.3%
29 Buena Vista Street
Ayer, MA 01432
Series A Steven P. Manfredi
Convertible c/o LearningExpress.com 114,286 18.6% 114,286(4) 2.4%
Preferred Shares 29 Buena Vista Street
Ayer, MA 01432
Common Shares and Glenn E. Davis
Series A c/o Learning Express.com 0 0% 0(5) 0%
Convertible 29 Buena Vista Street
Preferred Shares Ayer, MA 01432
</TABLE>
- --------
(1) Includes 14,250 Common Shares and 85,714 Series A Convertible Preferred
Shares held by Ms. DiMinico and 85,714 Series A Convertible Preferred Shares
held by Louis DiMinico, Ms. DiMinico's husband. Ms. DiMinico disclaims
beneficial ownership of the shares held by Mr. DiMinico, and Mr. DiMinico
disclaims beneficial ownership of shares held by Ms. DiMinico.
(2) Ms. DiMinico and Mr. DiMinico have each been promised 144,528 Common Shares
in LearningExpress.com Incentive Plan LLC. Such shares vest as follows: 1/3 on
the date of grant, 1/3 180 days after the launch of our online store and 1/3
upon the closing of an underwritten initial public offering of our securities.
On a fully diluted bases and assuming all of the shares are issued in this
offering, Ms. DiMinico and Mr. DiMinico will each have a 2.1% interest in
LearningExpress.com LLC. In addition, Ms. DiMinico and Mr. DiMinico each have
the right to receive Series A Convertible Preferred Shares if we default on our
loan with Citizens Bank and they are required to fulfill their obligations
pursuant to personal guarantees. See "Interest of Management and Others in
Certain Transactions on page 38."
(3) As the owner of a The Learning Express, Inc. franchisee, Mr. Sanders has the
right to receive 14,250 Common Shares in this offering if he executes an
amendment to his franchise agreement. Mr. Sanders has been promised 289,056
Common Shares in LearningExpress.com Incentive Plan LLC. Such shares vest as
follows: 1/3 on the date of grant, 1/3 180 days after the launch of our online
store and 1/3 upon the closing of an underwritten initial public offering of our
securities. On a fully diluted bases and assuming all of the shares are issued
in this offering, Mr. Sanders will have a 4.3% interest in LearningExpress.com
LLC.
(4) Mr. Manfredi has been promised 289,056 Common Shares in LearningExpress.com
Incentive Plan LLC. Such shares vest as follows: 1/3 on the date of grant, 1/3
180 days after the launch of our online store and 1/3 upon the closing of an
underwritten initial public offering of our securities. On a fully diluted bases
and assuming all of the shares are issued in this offering, Mr. Manfredi will
have a 4.3% interest in LearningExpress.com LLC.
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<PAGE> 40
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT OWNED PERCENTAGE AMOUNT OWNED PERCENTAGE
TITLE OF CLASS OF OWNER BEFORE THIS BEFORE THIS AFTER THIS AFTER THIS
OFFERING OFFERING OFFERING OFFERING
-------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Common Shares and Robert E. Cunningham
Series A c/o Learning Express.com 0 0% 0(6) 0%
Convertible 29 Buena Vista Street
Preferred Shares Ayer, MA 01432
Common Shares and All Officers and Managers
Series A as a Group (5 persons) 299,964 48.8% 314,214 6.6%
Convertible
Preferred Shares
Common Shares and Hal Cook
Series A c/o H.D.C. Toys 142,857 23.3% 171,357(7) 3.6%
Convertible 6818 Snider Plaza
Preferred Shares Dallas, TX 78759
Common Shares and Chip Will
Series A c/o KAW Corp. 114,286 18.6% 157,036(8) 3.3%
Convertible 32 Park Street
Preferred Shares Andover, MA 01810
Common Shares and Jerry Pope
Series A c/o Hamil Express, Inc. 57,143 9.3% 71,393(9) 1.5%
Convertible 19904 Hamil Circle
Preferred Shares Gaithersburg, MD 20879
</TABLE>
INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
LearningExpress.com LLC/The Learning Express, Inc. License Agreement
LearningExpress.com LLC and The Learning Express, Inc. are parties to a license
agreement pursuant to which The Learning Express, Inc. licenses the Learning
Express name, image, methods, manuals, procedures and "look and feel" components
to LearningExpress.com LLC for use in operation and promotion of the online
store. The license agreement provides that the license will be the only license
granted by The Learning Express, Inc. for Internet-based use of the Learning
Express system. In consideration of the license, commencing January 1, 2002,
LearningExpress.com LLC will pay The Learning Express, Inc. a royalty equal to
three percent (3%) of the gross revenues of the online store, less costs and
charges in connection with returned products and related shipping and handling.
The license term will continue unless terminated by one party on account of an
uncured material breach \by the other party. The license agreement includes
mutual non-competition covenants applicable during the term and also provides
that LearningExpress.com LLC will not compete with The Learning Express, Inc.
(other than
- --------
(5) Mr. Davis has been promised 192,704 Common Shares in LearningExpress.com
Incentive Plan LLC. Such shares vest as follows: 1/3 on the date of grant, 1/3
180 days after the launch of our online store and 1/3 upon the closing of an
underwritten initial public offering of our securities. On a fully diluted bases
and assuming all of the shares are issued in this offering, Mr. Davis will have
a 2.8% interest in LearningExpress.com LLC.
(6) Mr. Cunningham has been promised 70,000 Common Shares in LearningExpress.com
Incentive Plan LLC. Such shares vest as follows: 1/3 on each of Mr. Cunningham's
first, second and third anniversaries of his date of hire. On a fully diluted
bases and assuming all of the shares are issued in this offering, Mr. Cunningham
will have a 1.0% interest in LearningExpress.com LLC.
(7) As the owner of a The Learning Express, Inc. franchise and a region, Mr.
Cook has the right to receive 28,500 shares of Common Shares in this offering if
he executes amendments to his franchise and regional owner license agreements.
(8) As the owner of two The Learning Express, Inc. franchises and a region, Mr.
Will has the right to receive 42,750 shares of Common Shares in this offering if
he executes amendments to his franchise and regional owner license agreements.
(9) As the owner of a The Learning Express, Inc. region, Mr. Pope has the right
to receive 14,250 shares of Common Shares in this offering if he executes an
amendment to his regional owner license agreement.
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<PAGE> 41
through Internet based sales through the online store) for a period of two years
following any termination of the license agreement.
LearningExpress Holdings LLC/LearningExpress.com LLC/The Learning Express, Inc.
Management Services Agreement
LearningExpress Holdings LLC, The Learning Express, Inc. and LearningExpress.com
LLC are parties to a management services agreement that has a term coextensive
with that of the license agreement between LearningExpress.com LLC and The
Learning Express, Inc. described above. Under the management services agreement,
The Learning Express, Inc. agreed to use its best efforts to have franchisees
execute a franchise agreement amendment in the form attached to this prospectus
as Annex A and to ensure that future franchise agreements include terms
consistent with those of the amendments. The Learning Express, Inc. also has
agreed to
- share with LearningExpress.com relevant business information
for operation of the online store, including with respect to
The Learning Express, Inc.'s sales, buying programs, marketing
programs, customers, vendors and services and
- promote LearningExpress.com and the online store in all
marketing, advertising and promotion campaigns relating to the
Learning Express stores.
Under the agreement LearningExpress.com LLC is required to pay to The Learning
Express, Inc. a monthly commission equal to the commissions payable by The
Learning Express, Inc. to franchisees under the franchise agreement amendments.
LearningExpress.com LLC also agreed to
- share with The Learning Express, Inc. business information
regarding the operation of the online store;
- coordinate and cooperate with The Learning Express, Inc. in
sales and marketing campaigns that promote both the online
store and retail stores operated by franchisees who
participate in the online store program;
- cooperate with participating franchisees in product returns
and product coupon programs.
In the management services agreement LearningExpress.com Holdings LLC agreed to
issue Common Shares of LearningExpress.com Holdings LLC to franchisees who
execute amendments to their franchise agreements and regional owners who execute
amendments to their regional franchise license agreements.
US Trust Loan to LearningExpress.com LLC
In December 1999, US Trust n/k/a Citizens Bank loaned $750,000 to
LearningExpress.com Holdings LLC. The loan has an annual interest rate of 9% and
has a term of 5 years. The loan was personally guaranteed by each of Sharon
DiMinico and Louis DiMinico and two entities controlled by Ms. DiMinico and Mr.
DiMinico, The Learning Express, Inc. and Toy Building, LLC. In the event that
any of the guarantors are required to make payments to Citizens Bank as a result
of the guarantee, such guarantors will each be entitled to receive from
LearningExpress.com Holdings LLC one Series A Preferred Share for each $1.75
that they pay to Citizens Bank.
SUMMARY OF OPERATING AGREEMENT/DESCRIPTION OF SECURITIES
The structure of the operations of LearningExpress.com Holdings LLC,
including the method by which holders of Common Shares and Series A Convertible
Preferred Shares will receive cash distributions and certain management issues,
is governed by the First Amended and Restated Limited Liability Company
Operating Agreement attached to this prospectus as Annex 3 and, to the extent
that any issue is not
39
<PAGE> 42
addressed in the operating agreement, by the Delaware Limited Liability Company
Act. Each person acquiring the Common Shares or Series A Convertible Preferred
Shares offered by this prospectus will be required to become a party to the
operating agreement.
THE FOLLOWING SUMMARY OF THE OPERATING AGREEMENT DESCRIBES ONLY CERTAIN
ASPECTS OF THE OPERATING AGREEMENT AND IS NOT INTENDED TO BE A COMPREHENSIVE
DESCRIPTION OF ALL THE TERMS AND PROVISIONS OF THE OPERATING AGREEMENT. THIS
SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE OPERATING AGREEMENT, A COPY OF WHICH
IS ATTACHED HERETO ANNEX 3. WE RECOMMEND THAT YOU READ THE OPERATING AGREEMENT
IN ITS ENTIRETY.
Purpose/Relationship to Other Limited Liability Companies
LearningExpress.com Holdings LLC holds a 70.5% in LearningExpress.com
LLC, which is an operating company formed to serve as the e-commerce
distribution channel of The Learning Express, Inc. LearningExpress.com Holdings
also holds 100% of the residual interest in LearningExpress.com Incentive Plan
LLC, which we formed to act as the employee incentive vehicle pursuant to which
key employees, managers and consultants of LearningExpress.com Holdings and
LearningExpress.com will be granted indirect ownership interests in
LearningExpress.com. LearningExpress.com Incentive Plan LLC in turn holds a
29.5% interest in LearningExpress.com.
This three-company limited liability company structure of the issuer
and its subsidiaries is designed to simulate a single-entity corporate structure
where key employees and managers from time to time receive grants of options or
capital stock subject to vesting, while retaining a passthrough entity structure
for tax purposes. As the holder of 70.5% of LearningExpress.com LLC and 100% of
the residual interest in LearningExpress.com Incentive Plan LLC, the issuer
holds, directly or indirectly, the entire equity interest in LearningExpress.com
LLC not held by employees and others through their ownership of incentive shares
in LearningExpress.com Incentive Plan LLC. LearningExpress.com Holdings is not
entitled to distributions from LearningExpress.com Incentive Plan LLC until
distributions are made to the holders of common shares of LearningExpress.com
Incentive Plan LLC employees and others who have received grants of incentive
shares. The distributions to LearningExpress.com Holdings, however, are
determined to be all distributions less amounts payable to holders of common
shares. An employee or other person who holds common shares of
LearningExpress.com Incentive Plan LLC typically shares in profits of
LearningExpress.com LLC through LearningExpress.com Incentive Plan LLC only to
the extent such profits exceed a certain threshold value existing in
LearningExpress.com LLC at the time such person receives common shares of
LearningExpress.com Incentive Plan LLC. By virtue of the issuer's ownership of
shares in both LearningExpress.com LLC and LearningExpress.com Incentive Plan
LLC, we intend that the holders of Common Shares and Series A Convertible
Preferred Shares of the issuer will own the same economic interest in
LearningExpress.com LLC as if they owned shares directly in LearningExpress.com
LLC and employees, managers and consultants of LearningExpress.com LLC were
granted shares directly in LearningExpress.com LLC from time to time, and those
shares would participate only in any appreciation in the value of
LearningExpress.com LLC that occurred after the date of the grant.
Types of Securities/Management
There are two classes of equity interests issued by LearningExpress.com
Holdings: (1) Common Shares and (2) Series A Convertible Preferred Shares. The
number of Common Shares authorized is 5,000,000. The number of Series A
Convertible Preferred Shares authorized is 3,000,000.
The operating agreement provides that LearningExpress.com Holdings is
controlled by a Board of Managers, which initially consists of seven Managers.
The Chairman of the Board of Managers (at present, Steven Manfredi) and the
Manager designated by The Learning Express, Inc. (at present, Sharon DiMinico)
each will possess two votes until seven Managers have been appointed to the
Board of Managers, and all other Managers each will possess one vote. After the
full seven Managers have been appointed, all Managers each will possess one
vote. Decisions of the Board of Managers require the affirmative vote or consent
of more than 50 percent of the Manager votes. The Board of Managers is selected
as described above under the heading "Managers, Executive Officers and
Significant Employees." Holders of Common
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<PAGE> 43
Shares and Series A Convertible Preferred Shares of the issuer generally have no
voting rights or power to act for or on behalf of the issuer.
Distributions
Since the issuer holds shares in LearningExpress.com LLC and
LearningExpress.com Incentive Plan LLC, the issuer may receive distributions
from LearningExpress.com LLC and LearningExpress.com Incentive Plan LLC which
will be distributed to holders of Common Shares or Series A Convertible
Preferred Shares. Except in the case of liquidating distributions, distributions
of cash or property by the issuer will be made to holders of Common Shares and
Series A Convertible Preferred Shares in proportion to the number of Common
Shares they hold, with the Series A Convertible Preferred Shares deemed, only
for that purpose, to have been converted into Common Shares as provided in the
operating agreement. In the event of any voluntary or involuntary liquidation or
dissolution of the issuer, distributions will be payable with respect to the
Series A Convertible Preferred Shares prior to any distributions on the Common
Shares. The amount payable with respect to the Series A Convertible Preferred
Shares will be the greater of (i) the original purchase price for the Series A
Convertible Preferred Shares plus an amount equal to an annual cumulative
distribution of 8% compounded annually on such original purchase price or (ii)
the amount that would have been payable to holders of Series A Convertible
Preferred Shares had the Series A Convertible Preferred Shares been converted to
Common Shares immediately prior to such liquidation or dissolution. We do not
intend to make any distributions in the foreseeable future, other than
distributions made to cover any estimated tax liability of holders of Common
Shares or Series A Convertible Preferred Shares resulting from any taxable
income of the issuer allocated to them. See "Distribution Policy" above and
"Federal Tax Consequences" below.
Conversion Rights
Holders of Series A Convertible Preferred Shares will have the right to
convert their shares into Common Shares at any time without the payment of any
additional consideration. Each Series A Convertible Preferred Share is
convertible into one Common Share, subject to adjustment for stock splits,
combinations, recapitalizations, and distributions on the Common Shares
consisting of Common Shares or other securities of the issuer.
Relationship to LearningExpress.com LLC
The primary purpose of LearningExpress.com Holdings is to hold shares
in LearningExpress.com LLC directly, and indirectly through ownership of the
residual interest in LearningExpress.com Incentive Plan LLC. Prior to the time,
if ever, that LearningExpress.com LLC initiates an underwritten initial public
offering of its shares, we expect that LearningExpress.com LLC will be converted
into a corporation and that shares of the common stock of that corporation would
be sold in the initial public offering. Unless otherwise determined by the Board
of Managers, upon the occurrence of such an underwritten public offering,
LearningExpress.com Holdings will be liquidated, without any vote of the holders
of Common Shares or Series A Convertible Preferred Shares, and the holders of
Common Shares and Series A Convertible Preferred Shares will receive shares of
capital stock of the successor corporation of LearningExpress.com LLC. Each
Common Share of LearningExpress.com Holdings will be exchanged for one share of
common stock of the successor corporation. Each Series A Convertible Preferred
Share will be converted into one Common Share of the issuer, subject to
adjustment for stock splits, combinations, recapitalizations, and distributions
on the Common Shares consisting of Common Shares or other securities of the
issuer, and immediately after that conversion, each Common Share received on
conversion will be converted into one share of the common stock of the successor
corporation.
Transfer Restrictions
Series A Convertible Preferred Shares purchased in this offering will
be freely tradable under the Securities Act of 1933, other than Series A
Convertible Preferred Shares held by persons deemed to be "affiliates" of the
issuer. Affiliates will not be able to transfer their Series A Convertible
Preferred Shares unless an exemption from the registration requirements of the
Securities Act of 1933 is available with
41
<PAGE> 44
respect to such transfer. Generally, members of the Board of Managers and
executive officers of the issuer, persons holding 10% or more of the equity of
the issuer, and other persons deemed to be able to "control" the issuer will be
deemed to be affiliates. Although Series A Convertible Preferred Shares not held
by affiliates will be freely tradable under the Securities Act of 1933, there is
no established trading market for shares of the issuer, and we do not expect any
market to develop. Therefore purchasers of Series A Convertible Preferred Shares
should be prepared to hold their Series A Convertible Preferred Shares
indefinitely.
In addition to the restrictions placed on Common Shares held by persons
deemed to be "affiliates" of the issuer as described above, the Common Shares
are subject to substantial transfer restrictions set forth in the operating
agreement of the issuer, which prohibits the transfer of the Common Shares until
the issuer or a successor has completed a firm commitment underwritten initial
public offering of its equity securities except:
(1) with the consent of the Board of Managers;
(2) as a collateral pledge to an institutional lender of solely the
economic interest in the Common Shares and
(3) to a family member, trusts for the benefit of family members or to
the executor or administrator of the estate of a deceased shareholder.
Further, prior to the completion of a firm commitment underwritten
initial public offering of equity securities of the issuer or a successor,
Common Shares held by any franchisee or "regional owner" will be forfeited to
the issuer immediately upon the termination of such franchisee's or regional
owner's franchise agreement or franchise license agreement, as the case may be,
with The LearningExpress, Inc. or the termination of the amendment thereto
pursuant to which the franchisee or regional owner received its Common Shares.
In addition, in the event of an underwritten public offering of shares
of the issuer or any successor, all shares of the issuer or such successor will
be restricted from transfer for a period not to exceed 180 days from the
effective date of the registration statement for the offering.
FEDERAL TAX CONSEQUENCES
There are certain tax risks and consequences associated with the
acquisition of shares of LearningExpress.com Holdings. The following summary of
the principal federal income tax considerations regarding an investment in
LearningExpress.com Holdings is based on current law and does not deal with all
aspects of taxation that may be relevant to particular franchisees, regional
owners and other prospective investors in the light of their personal investment
or tax circumstances, or to certain types of shareholders, including foreign
corporations, persons who are not citizens or residents of the United States, or
persons otherwise subject to special treatment under the federal income tax
laws.
The information set forth below is based on the Internal Revenue Code
of 1986, final, temporary and proposed Treasury regulations promulgated
thereunder, and current administrative interpretations and court decisions as of
the date of this summary. Future legislation, regulations, administrative
interpretations, and court decisions might significantly change the law and
thereby affect the accuracy of this discussion. Any such change in law could
apply retroactively.
The following summary is not intended to be comprehensive. The
discussion covers only federal income tax laws and does not cover state or local
tax laws or any other federal laws. FRANCHISEES, REGIONAL OWNERS AND OTHER
PROSPECTIVE INVESTORS SHOULD CONSULT WITH THEIR OWN TAX ADVISERS WITH RESPECT TO
THE FEDERAL INCOME TAX CONSIDERATIONS DISCUSSED HEREIN AND SHOULD ALSO CONSULT
WITH THEIR TAX ADVISERS WITH REGARD TO OTHER APPLICABLE TAX LAWS.
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<PAGE> 45
Classification as a Partnership
Holders of Common Shares and holders of Series A Convertible Preferred
Shares will be required to include in income their distributive share of the
issuer's income and will be entitled to deduct their distributive share of the
issuer's losses only if the issuer is classified for federal income tax purposes
as a partnership, rather than an association taxable as a corporation. The
issuer, which is eligible to be and is classified as a partnership under the
applicable Treasury regulations, does not intend to elect otherwise.
If for any reason the issuer was taxable as a corporation, rather than
as a partnership, for federal income tax purposes, items of income and deduction
of the issuer would not pass through to holders of Common Shares and holders of
Series A Convertible Preferred Shares, who would be treated as shareholders of a
Subchapter C corporation for tax purposes. Consequently, the issuer would be
required to pay income tax at corporate tax rates on its net income, and
distributions to its partners would constitute dividends that would not be
deductible in computing the issuer's taxable income.
Shareholders, not the LLC, subject to tax
A partnership, unless it constitutes a publicly traded partnership or
otherwise elects, is not a taxable entity for federal income tax purposes. Each
holder of Common Shares or Series A Convertible Preferred Shares will be
required to take into account such holder's allocable share of the issuer's
income, gains, losses, deductions, and credits for the taxable year of the
issuer ending with or within the tax year of the holder, without regard to
whether the holder has received or will receive any distribution from the
issuer. To decrease the likelihood that a holder may have to report a holder's
allocable share of taxable income without receiving sufficient cash
distributions to pay the tax attributable to such taxable income, the operating
agreement provides that the Board of Managers will, to the extent of cash then
available, make a tax distribution to the holders. To the extent necessary, the
tax distribution will be made four times per year.
Basis in LLC interest
In general, a holder's adjusted tax basis in its Common Shares or
Series A Convertible Preferred Shares will be equal to (a) the amount paid by
the holder for the shares, plus (b) the holder's allocable share of the issuer's
profits, plus (c) the holder's allocable share of indebtedness (including
increases), if any, of the issuer, minus (d) the holder's allocable share of the
issuer's losses, minus (e) the amount of cash and the tax basis of any property
distributed to the holder, minus (f) constructive distributions resulting from a
decrease in the holder's allocable share of the issuer's indebtedness.
If the allocation of a holder's distributive share of the issuer's loss
would reduce the adjusted tax basis of the holder's interest in the issuer below
zero, the loss will be suspended and not become available for use until the
holder's adjusted tax basis in the issuer is increased. To the extent that a
cash distribution by the issuer or any decrease in a holder's allocable share of
the indebtedness of the issuer (each such decrease being considered a
constructive distribution to the holders), would otherwise reduce the holders'
adjusted tax basis below zero, these distributions will constitute taxable
income to the holders to the extent of such excess. Such excess distributions
and constructive distributions will normally be characterized as a capital gain
(except to the extent of the holders' share of potential depreciation recapture
and unrealized receivables of the issuer) and, if a holder's interest in the
issuer has been held for longer than the long-term gain holding period
(currently one year), the distributions and constructive distributions generally
will constitute long-term capital gain.
Passive Activity Loss and At Risk Rules and Other Loss Limitations
Profits and losses of the issuer will be allocated to the holders of
Common Shares and Series A Convertible Preferred Shares. The Internal Revenue
Code, however, imposes many limitations on the holders' ability to utilize any
such losses. These limitations include, but are not limited to, "passive
activity loss rules" and the "at risk rules" discussed below. We do not
represent in any way that any holder of
43
<PAGE> 46
Common Shares or Series A Convertible Preferred Shares will be able to utilize
any of the losses allocated to such holder.
Section 469 disallows losses from passive activities engaged in by
individuals, estates, trusts, closely held C corporations and personal service
corporations. A "passive activity" is defined as any activity which involves the
conduct of a trade or business and in which the taxpayer does not materially
participate. We believe that the income and loss received from the issuer will
be income or loss from a passive activity for most holders of Common Shares or
Series A Convertible Preferred Shares.
Section 465 limits certain taxpayer's losses to the amount the taxpayer
actually has at risk in an activity. A taxpayer is at risk with respect to an
activity only to the extent of (1) the amount of money and the adjusted basis of
other property contributed to the activity and (2) the amounts borrowed with
respect to the activity if the taxpayer is personally liable for repayment of
the borrowed amount or pledges property as security for the borrowed amount
other than property used in the activity. Individuals, trusts, estates,
partners, shareholders in S corporations, personal holding companies and
certainly closely held C corporations are subject to the at risk rules. We
anticipate that all holders of Common Shares or Series A Convertible Preferred
Shares will be subject to the at risk rules.
Tax Consequences Upon Conversion of Series A Convertible Preferred
Shares to Common Shares
In the event that the Series A Convertible Preferred Shares are
converted into Common Shares, there should be no gain or loss to the holders
pursuant to Section 721 of the Internal Revenue Code. The basis of the Common
Shares received upon such conversion will be equal to the basis of the Series A
Convertible Preferred Shares relinquished immediately prior to such conversion.
In addition, the holding period (for purposes of determining whether any gain or
loss is classified as long-term or short-term) of the Common Shares will include
the length of time the Series A Convertible Preferred Shares were held prior to
the conversion.
Tax Consequences Upon Exchange of Common Shares of Holdings for Common
Shares of a Subchapter C Corporation
If LearningExpress.com LLC is converted into a C corporation as
contemplated by the issuer's operating agreement, we anticipate that the
conversion will be non-taxable pursuant to Section 351 of the Internal Revenue
Code. Upon any such conversion, LearningExpress.com LLC will receive shares of
common stock of the C corporation which will be distributed to the issuer and
LearningExpress.com Incentive Plan LLC in liquidation of LearningExpress.com
LLC. Upon receipt of the shares of common stock of the C corporation, the issuer
and LearningExpress.com Incentive Plan LLC will distribute those shares in
liquidation of the issuer and of LearningExpress.com Incentive Plan LLC. Holders
of Common Shares or Series A Convertible Preferred Shares will not incur tax
liability upon the receipt of the shares of common stock in the C corporation
received upon liquidation of the issuer and LearningExpress.com Incentive Plan
LLC. The holder's basis in the shares will be equal to the holder's basis in the
Common Shares or Series A Convertible Preferred Shares immediately prior to the
foregoing exchange. In the event that the Internal Revenue Service successfully
challenged any aspect of the foregoing analysis of the exchange, adverse tax
consequences could result.
Transfers of Interests at Death
The estate or heirs of a deceased holder of Common Shares or Series A
Convertible Preferred Shares will have a tax basis in the shares owned by the
deceased holder equal to the fair market value of such shares on the date of
death (or the alternative valuation date in the event an alternative valuation
date election is made under Section 2032 of the Internal Revenue Code).
State, Local, and Foreign Tax Considerations
In addition to the federal income tax considerations described herein,
franchisees, regional owners and other prospective investors should consider the
potential state, local and foreign tax consequences of an
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<PAGE> 47
investment in the Common Shares or the Series A Convertible Preferred Shares. In
particular, a holder may be required to file annual income tax returns in states
or municipalities where the holder would not otherwise be obligated to file, but
where the issuer is deemed to own real property or to do business.
EACH POTENTIAL INVESTOR IS ADVISED TO CONSULT HIS OR HER OWN TAX
ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO SUCH PERSON OF THE
ACQUISITION AND OWNERSHIP OF COMMON SHARES OR SERIES A CONVERTIBLE PREFERRED
SHARES, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES
OF SUCH ACQUISITION AND OWNERSHIP AND OF POTENTIAL CHANGES IN APPLICABLE TAX
LAWS.
LEGAL PROCEEDINGS
We are not a party to any pending legal proceedings or governmental
agency proceedings, nor, to our knowledge, is any proceeding threatened against
us.
LEGAL MATTERS
Goulston & Storrs, P.C., Boston, Massachusetts, will deliver an opinion
as to the validity of the Common Shares and Series A Convertible Preferred
Shares being offered hereby.
EXPERTS
The financial statements of LearningExpress.com Holdings LLC as of
December 31, 1999 for the fiscal year ended December 31, 1999 included in this
prospectus have been audited by Charles L. Burke, C.P.A., as stated in their
report thereon appearing elsewhere herein, and have been so incorporated in
reliance upon the reports of such firm given upon their authority as experts in
accounting.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We filed a registration statement on Form S-1 under the Securities Act
of 1933 relating to the Common Shares and Series A Convertible Preferred Shares
offered by this prospectus with the Securities and Exchange Commission in
Washington, D.C. This prospectus does not contain all of the information set
forth in the registration statement and the exhibits and schedules to the
registration statement, certain portions having been omitted from this
prospectus in accordance with the rules and regulations of the Securities and
Exchange Commission. Statements contained in this prospectus concerning the
contents of any contract or any other document referred to are not necessarily
complete; reference is made in each instance to the copy of such contract or
document filed as an exhibit to the registration statement, each such statement
being qualified in all respects by such reference. For further information with
respect to the Common Shares and Series A Convertible Preferred Shares we are
offering hereby, we refer investors to the registration statement, the exhibits
thereto and the financial statements, notes and schedules filed as a part
thereof.
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<PAGE> 48
Investors may inspect and copy these reports at the Securities and
Exchange Commission's Public Reference Room at 450 Fifth Street, N.W.,
Washington D.C. 20549 and at the Securities and Exchange Commission's regional
offices at Seven World Trade Center, New York, New York 10048 and 500 West
Madison Street, Chicago, Illinois 60661. Investors may obtain information on the
operation of the SEC's Public Reference Room by calling the SEC at 1(800)
SEC-0330. This information also is available at the Securities and Exchange
Commission's World Wide Web site at http://www.sec.gov.
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<PAGE> 49
LEARNINGEXPRESS.COM LLC
(A Delaware Limited Liability Company)
(Also a Company in the Development Stage)
Index to Financial Statements
<TABLE>
<CAPTION>
<S> <C>
Independent Auditor's Opinion F-2
Financial Statements
Balance Sheet as of December 31, 1999 F-3
Statement of Operations for the Initial Fiscal Period
Ended December 31, 1999 F-4
Statement of Changes in Member's Equity for the
Initial Fiscal Period Ended December 31, 1999 F-5
Statement of Cash Flows for the Initial Fiscal Period
Ended December 31, 1999 F-6
Notes to the Financial Statements F-7
</TABLE>
F-1
<PAGE> 50
INDEPENDENT AUDITOR'S REPORT
To the Members of
LearningExpress.com LLC
29 Buena Vista Street
Ayer, Massachusetts, 01432
I have audited the accompanying balance sheet of LearningExpress.com
LLC (a Delaware Limited Liability Company) as of December 31, 1999, and the
related statement of operations, changes in member's equity (deficit), and cash
flows for the initial fiscal period then ended. These financial statements are
the responsibility of the Company's management. My responsibility is to express
an opinion on these financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing
standards. Those standards require that I plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test, basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. I believe that my audit provides a reasonable basis for my
opinion.
In my opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of LearningExpress.com
LLC as of December 31, 1999 and the results of its operations and its
cash flows for the initial fiscal period then ended in conformity with generally
accepted accounting principles.
The accompanying financial statements for the initial period ended
December 31, 1999 have been prepared assuming that LearningExress.com LLC will
continue as a going concern. As discussed in Note 1 to the financial
statements, LearningExpress.com LLC is a development stage company subject to a
number of risks which raise substantial doubt about its ability to continue as
a going concern. These risks include the risks of Website development,
successful marketing of its products, the ability to raise additional financing
and dependence on key individuals. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
/s/ Charles L. Burke,
Certified Public Accountant
Stoneham, Massachusetts
March 21, 2000
F-2
<PAGE> 51
LEARNINGEXPRESS.com LLC
(A DEVELOPMENT STAGE COMPANY)
Balance Sheet
December 31, 1999
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current Assets
Cash $ 787,820
Miscellaneous receivable 3,759
Refundable deposits 25,000
---------
Total Current Assets 816,579
Property and Equipment (Note 1)
Computers $ 8,374
Software 98,126
---------
Total, at Cost 106,500
Less: Accumulated Depreciation 142
---------
Property and Equipment (Net of Depreciation) 106,358
Intangible Assets (Note 1)
Internet domain name 5,000
Less: Accumulated Amortization 83
---------
Intangible Assets (Net of Amortization) 4,917
---------
Total Assets $ 927,854
=========
LIABILITIES AND MEMBER'S EQUITY
Current Liabilities
Current portion of long-term debt (Note 2) $ 60,793
Accounts payable 165,216
Accrued payroll and related taxes 37,235
---------
Total Current Liabilities 263,244
Long-Term Debt 689,207
Member's Equity (Deficit) (24,597)
---------
Total Liabilities and Member's Equity (Deficit) $ 927,854
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 52
LEARNINGEXPRESS.com LLC
(A DEVELOPMENT STAGE COMPANY)
Statement of Income (Loss)
Initial Fiscal Period Ended December 31, 1999
<TABLE>
<CAPTION>
<S> <C>
Sales $ --
Operating Expenses
Website development expenses $ 84,309
Payroll and related taxes 97,787
Consulting expense 18,544
Travel expense 3,380
Depreciation and amortization 225
Other expenses 3,627
---------
Total Expenses 220,584
---------
Net Income (Loss) ($220,584)
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 53
LEARNINGEXPRESS.com LLC
(A DEVELOPMENT STAGE COMPANY)
Statement of Changes in Member's Equity (Deficiency)
Initial Fiscal Period Ended December 31, 1999
<TABLE>
<CAPTION>
Net Income Members'
(Loss) Equity Total
---------- -------- -----
<S> <C> <C> <C>
Balance, November 5, 1999 (Inception) $ -- $ -- $ --
Member Contributions -- 195,987 195,987
Less: Net Loss for Initial Fiscal
Period Ended December 31, 1999 (220,584) -- (220,584)
--------- --------- ---------
Totals ($220,584) $ 195,987 ($ 24,597)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 54
LEARNINGEXPRESS.com LLC
(A DEVELOPMENT STAGE COMPANY)
Statement of Cash Flows
Initial Fiscal Period Ended December 31, 1999
<TABLE>
<CAPTION>
<S> <C>
Cash Flows Applied to Development Stage Operations
Net income (loss) ($220,584)
Adjustment to reconcile net loss to cash:
Depreciation and amortization 225
Increase in Assets
Miscellaneous receivables (3,759)
Refundable deposits (25,000)
Increase in Liabilities
Accounts payable 165,216
Accrued payroll and related taxes 37,235
---------
Net Cash Applied to Operations (46,667)
Cash Flows From Investing Activities
Acquisition of property and equipment ($106,500)
Acquisition of intangibles (5,000)
---------
Net Cash Applied to Investing Activities (111,500)
Cash Flows From Financing Activities
Member's contributions 195,987
Proceeds on Long-Term Debt 750,000
---------
Net Cash Provided by Financing Activities 945,987
---------
Net Increase in Cash 787,820
Cash - November 5, 1999 --
---------
Cash - December 31, 1999 $ 787,820
=========
Supplemental Cash Disclosures
Cash Paid During the Initial Period For:
Interest $ --
Income Taxes $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 55
LEARNINGEXPRESS.com LLC
(A DEVELOPMENT STAGE COMPANY)
Notes to the Financial Statements
December 31, 1999
Note 1 - Summary of Significant Accounting Policies
A. Company's Activities
LearningExpress.com LLC (the "Company") was organized as a
Delaware limited liability company on November 5, 1999. The
Company is developing an online store and plans to sell toys and
related products over the Internet. The Company is presently in
the development stage and its activities to date have consisted
primarily of raising financing and the development of its online
store. The Company is subject to a number of risks typical of
companies in the early states of development, including the risks
of Website development, successful marketing of its products, the
ability to raise additional financing and dependence on key
individuals. The Company expect to complete its online store and
emerge from the development stage in 2000.
B. Cash Equivalents
For purposes of the statement of cash flows, the Company considers
all highly liquid debt instruments purchases with original
maturities of three months or less to be considered cash
equivalents.
C. Property and Equipment
Property and equipment, stated at cost, is being depreciated over
its estimated useful life using the straight-line method, and
includes the cost of purchased accounting software.
D. Estimates
Management has used estimates and assumptions in preparing these
financial statements in accordance with generally accepted
accounting principles. Those estimates and assumptions affect the
reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities, and the reported revenues and
expenses. Actual results could vary from the estimates that were
used.
E. Intangibles
The Company acquired the Internet domain name "Letoy.com" for
$5,000. The acquisition cost will be amortized over 60 months.
F. Research and Development
The Company has incurred expenditures on software used to create
and maintain its website. The Company applies Statement of
Position ("SOP") 98-1, which requires compute software costs
associated with internal use to be charged to operations as
incurred until certain capitalization criteria are met. To date,
no costs have been capitalized under SOP 98-1.
F-7
<PAGE> 56
LEARNINGEXPRESS.com LLC
(A DEVELOPMENT STAGE COMPANY)
Notes to the Financial Statements
December 31, 1999
G. Stock-Based Compensation
The Company uses the intrinsic-value method of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees," to account for stock awards granted to
employees. Therefore, compensation expense related to employee
stock awards is recorded only if, on the date of grant, the fair
value of the underlying equity exceeds the option exercise price.
Such compensation expense is recognized on a straight-line basis
over the vesting period.
Note 2 - Long-Term Debt
On December 29, 1999, the Company borrowed $750,000 from U.S. Trust, a
Massachusetts Trust Company. The loan has a fixed interest rate of 9%. Principal
repayments will begin in July 2000. The loan has been guaranteed by two of the
Company's members.
Repayment of the debt is scheduled as follows:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 60,793
2001 130,075
2002 142,277
2003 155,624
2004 170,222
2005 91,009
---------
$750,000
========
</TABLE>
Note 3 - Cash
The Company maintains a checking account with U.S. Trust, an FDIC
insured financial institution.
<TABLE>
<CAPTION>
<S> <C>
Cash on deposit at December 31, 1999 $789,993
Outstanding checks (2,173)
--------
Cash balance $787,820
========
</TABLE>
Note 4 - Income Taxes
For income tax purposes, the Company is classified as a sole
proprietorship. As such, no provision is made in the financial statements for
income taxes, as this is the responsibility of the member.
Note 5 - Members' Equity (Deficiency)
As of December 31, 1999, the Company had no formal stock based
incentive plan for management and employees. However, the Company has agreed to
issue to three management employees, restricted common shares representing
eight percent (8%) of members' equity. One third of the restricted shares vested
prior to December 31, 1999. One third of the restricted shares will vest 180
days after the launch of the Company's online store and the remaining one third
will vest upon the closing of an underwritten public offering of securities.
The Company has also agreed to issue an additional 85,000 restricted
common shares to its three other employees. The restricted shares generally
vest in three equal installments beginning on the first anniversary of the
employee's hiring date.
F-8
<PAGE> 57
ANNEX A
AMENDMENT TO
FRANCHISE AGREEMENT/LOCAL FRANCHISE LICENSE AGREEMENT
AMENDMENT (this "Amendment"), dated as of ____ _____, _____, by and
between THE LEARNING EXPRESS, INC. a Massachusetts corporation ("Franchisor"),
and ________________, a _______________ _____________ (the "Franchisee").
BACKGROUND
A. Franchisor and Franchisee are parties to that certain Franchise
Agreement/Local Franchise License Agreement dated as of ____ _____,
_____ by and between Franchisor and Franchisee (the "Franchise
Agreement") pursuant to the terms and conditions of which Franchisor
has granted a franchise to Franchisee to operate a retail specialty toy
store (the "Retail Store") using Franchisor's "System" and "Marks" in
the "Protected Territory," all as defined in the Franchise Agreement.
B. Franchisor has entered into a License Agreement, dated as of November
5, 1999 (the "LEC Agreement") with LearningExpress.com, LLC, a Delaware
limited liability company ("LEC"), pursuant to the terms and conditions
of which Franchisor has licensed certain components of the System and
the Marks to enable LEC to develop, operate and promote an
Internet-based on-line specialty toy store under the name
LearningExpress.com (the "On-Line Store").
C. Franchisor has entered into Management Services Agreement, dated as of
November 5, 1999 (the "Management Agreement") by and among Franchisor,
LEC and LearningExpress.com Holdings LLC ("LECH"), the principal owner
of LEC, pursuant to the terms and conditions of which, among other
matters, Franchisor has agreed to (1) support LEC's use of the System
in the On-Line Store through assistance with marketing, promotion and
exchange of information regarding sales, customers, vendors, and (2)
contract with each of Franchisor's franchisees on the terms and
conditions set forth in this Amendment.
D. Franchisor and Franchisee believe that the On-Line Store will enhance
Franchisor's and Franchisee's respective businesses by, among other
things, promoting the "Learning Express" image and good will to
consumers who use the Internet and enhancing customer traffic to the
Retail Store and other retail stores operated by other franchisees of
Franchisor.
E. Accordingly, Franchisor and Franchisee are entering into this Amendment
to facilitate the development, operation and promotion of the On-Line
Store by LEC and to set forth: (i) certain services that Franchisee has
agreed to provide to Franchisee's and LEC's customers with respect to
the On-Line Store and (ii) certain specified payments and other
benefits that Franchisee will receive in consideration thereof.
Now therefore, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. AMENDMENT OF FRANCHISE AGREEMENT; CAPITALIZED TERMS. The terms and provisions
of this Amendment amend the Franchise Agreement. In the event of any conflict
between the terms of the Franchise Agreement and the terms of this Amendment,
the terms of this Amendment shall govern. Capitalized terms not otherwise
defined herein shall have the same meaning(s) as set forth in the Franchise
Agreement.
A-1
<PAGE> 58
2. AMENDMENT TO LEARNING EXPRESS CONFIDENTIAL OPERATIONS MANUAL.
(a) Franchisee consents and agrees to all of the amendments to the
LEARNING EXPRESS CONFIDENTIAL OPERATIONS Manual (the "Manual") set forth on
Exhibit A hereto (the "Manual Amendment").
3. TERM. Franchisee's and Franchisor's obligations under this Amendment, shall
commence on , 2000 and continue until the earlier to occur of: (i) termination
of the Franchise Agreement in accordance with its terms (without giving effect
to this Amendment), (ii) the occurrence of a material breach by Franchisee of
the terms and conditions of this Amendment following written notice to
Franchisee by Franchisor detailing such alleged breach and Franchisee's failure
to remedy any such actual breach within ten (10) days, or such other period as
may be required by applicable state law, following such notice, or (iii) upon
Franchisor's election, exercised in its sole discretion by written notice to
Franchisee, to terminate this Amendment incident to a breach by LEC of the LEC
Agreement or the Management Agreement. The foregoing period is referred to
herein as the "Term".
Upon any termination in accordance with subsection (iii) of the
foregoing paragraph, all obligations of the Franchisor and the Franchisee under
this Amendment shall terminate but the Franchise Agreement and all obligations
of the parties thereunder shall continue in full force and effect in accordance
with their terms unaffected hereby.
4. EQUITY AND COMMISSION
(a) Equity of LECH.
(i) In consideration of Franchisee's agreement to execute
and consummate the terms and conditions of this
Amendment, Franchisor shall cause LECH to issue to
Franchisee 14,250 Common Shares of LECH for each
Retail Store operated by Franchisee (such shares, the
"Shares").
(ii) Prior to issuance of the Shares, LECH may require
Franchisee to execute an investment letter or letters
to the effect that the Shares are being acquired by
Franchisee for Franchisee's own account for
investment purposes, that Franchisee has no present
intention of offering, distributing or otherwise
disposing of the Shares, and that Franchisee shall
agree not to dispose of the Shares unless a
registration statement or appropriate qualification
is then in effect under applicable state "Blue Sky"
laws with respect to the Shares or in the opinion of
counsel for LECH the Shares are exempt from the
registration or qualification requirements of such
laws.
(iii) Prior to issuance of the Shares, Franchisee shall
execute and enter into the then current Operating
Agreement for LECH and be bound thereby as a member
of LECH. Such Operating Agreement shall provide,
among other matters, that, until such time as LECH,
or a successor entity, has completed an "Initial
Public Offering" (defined below), all of the Shares
shall be forfeited to LECH immediately upon the
termination of either or both of the Franchise
Agreement or this Amendment, provided, however, that
the Shares shall not be subject to forfeiture in the
case where either or both of the Franchise Agreement
and this Amendment are terminated in connection with
the sale or transfer of Franchisee's Retail Store to
a New Franchisee.
(iv) Franchisee agrees that Franchisee will not, for a
period of at least 180 days following the effective
date of any "Initial Public Offering" (defined below)
by LECH (or its successor-in-interest) or by LEC (or
its successor-in-interest), directly or indirectly,
sell, offer to sell or otherwise dispose of the
Shares other than any securities which are included
in such Initial Public Offering, provided,
A-2
<PAGE> 59
however, that LECH shall be under no obligation to
include the Shares or any portion thereof in any
Initial Public Offering. If the managing underwriter
of any such Initial Public Offering determines that a
shorter time period is appropriate, the
aforementioned 180 day period may be shortened
consistent with the requirements of such managing
underwriter. An "Initial Public Offering" shall mean
LECH's, or a successor entity's, initial distribution
of securities in a firm commitment underwritten
public offering to the general public pursuant to a
registration statement filed with the Securities and
Exchange Commission.
(b) On-Line Commission.
(i) In consideration of Franchisee's performance of
Franchisee's obligations hereunder, Franchisor shall
pay to Franchisee a commission (the "On-Line
Commission") equal to a percentage (the
"Percentage"), of the On-Line Store's "Net Sales in
Territory" accrued during each calendar month (or
portion thereof) during the Term. "Percentage" shall
mean (a) five percent (5%) through the second
anniversary of the "On-Line Store Date," defined
below, and (b) for the period thereafter, the
percentage established from time to time by the Board
of Managers of LEC based on experience of sales and
cash flow of the On-Line Store, provided, however,
that, (1) without limitation of the foregoing, LEC
presently intends to maintain the Percentage during
such period at the 5% level and (2) notwithstanding
anything herein to the contrary such percentage
determined by the Board of Managers shall never be
less than 2.5%. "Net Sales in Territory" shall mean:
(A) LEC's gross revenues accrued from the sale
through the On-Line Store of On-Line Store products
("Products") ordered by customers ("Customers") whose
"bill-to" address for the applicable order is within
the "Protected Territory" as defined in the Franchise
Agreement minus (B) all costs and charges incurred in
connection with returned products and shipping and
handling charges in connection therewith. "On-Line
Store Date" shall mean the date on which the On-Line
Store first commences operation on the Internet for
the sale of Products to the general public.
(ii) The On-Line Commission will be payable to the
Franchisee within 35 days after the end of the
calendar month in which LEC accrues the applicable
sale(s).
(iii) In addition, Franchisor need not pay the On-Line
Commission to Franchisee to the extent that LEC,
under and pursuant to that certain Management
Services Agreement by and among Franchisor, LEC and
LearningExpress.com Holdings LLC (the "MSA"), has not
paid to Franchisor the component of the "On-Line
Commission," as defined in the MSA, corresponding to
the On-Line Commission otherwise payable by
Franchisor to Franchisee hereunder.
(iv) Franchisor may suspend payment of the On-Line
Commission to Franchisee if Franchisor determines
that Franchisee continues to be materially
noncompliant with the Manual, as amended from time to
time, following written notice by Franchisor to
Franchisee of such noncompliance and a subsequent
thirty (30) day opportunity to cure such
non-compliance.
(c) Except for payment of the On-Line Commission and the other
consideration provided for in this Agreement, Franchisee shall have no rights
under the Franchise Agreement or otherwise against Franchisor or any other party
with respect to the operations and sales of LEC and the On-Line Store regardless
of the billing address, shipping address or other location of the Customer or
other person to whom any Product is delivered or otherwise on account of any
sale of any Product.
A-3
<PAGE> 60
5. FURTHER COOPERATION. Each of the parties hereto covenants and agrees that it
shall furnish to the other party hereto such reasonably necessary information
and reasonable assistance, including without limitation execution of documents,
certificates and instruments, as such other party may reasonably require to
effectuate the provisions of this Amendment.
6. CONFIRMATION OF FRANCHISE AGREEMENT. The parties hereto acknowledge, agree
and confirm that subject to Sections 2(a) and 4(c) hereof, all terms and
conditions of the Franchise Agreement not inconsistent with the terms of this
Amendment shall continue and remain in full force and effect unaffected by this
Amendment.
7. EFFECTIVENESS OF THIS AGREEMENT. This Agreement shall not be effective until
a copy executed by Franchisee and delivered to Franchisor has been countersigned
by Franchisor and delivered to Franchisee.
8. MISCELLANEOUS.
8.1 Notices.
Any notice required or permitted to be given to Franchisor hereunder shall be
addressed as follows:
The Learning Express, Inc.
Devens Business Community
29 Buena Vista Street
Ayer, MA 01432
Attn: Chief Executive Officer
Any notice required or permitted to be given to Franchisee hereunder shall be
addressed as follows:
or such other address as any party may give the others notice of pursuant to
this Section.
8.2 Counterparts. This Amendment may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
8.3 Headings. Headings in this Amendment are included for reference
only and shall have no effect upon the construction or interpretation of any
part of this Agreement.
8.4 Sealed Instrument. This Amendment shall have the effect of an
instrument executed under seal.
[continues on next page]
A-4
<PAGE> 61
IN WITNESS WHEREOF, this Amendment has been executed as of the date
first above written.
THE LEARNING EXPRESS, INC. FRANCHISEE
PRINT NAME OF LEGAL ENTITY (IF ANY):
By:
-------------------------- ----------------------------------------------
Name:
Title:
BY:
-------------------------------------------
PRINT NAME OF SIGNER:
-------------------------
PRINT TITLE OF SIGNER:
------------------------
(if more than one signer, continue signatures
below)
BY:
-------------------------------------------
PRINT NAME OF SIGNER:
-------------------------
PRINT TITLE OF SIGNER:
------------------------
BY:
-------------------------------------------
PRINT NAME OF SIGNER:
-------------------------
PRINT TITLE OF SIGNER:
------------------------
BY:
-------------------------------------------
PRINT NAME OF SIGNER:
-------------------------
PRINT TITLE OF SIGNER:
------------------------
A-5
<PAGE> 62
EXHIBIT A
SUPPLEMENT TO LEARNING EXPRESS, INC. OPERATIONS MANUAL
This supplement is intended to outline the key operational requirements of each
Learning Express franchisee that will facilitate cooperation thereby enhancing
the development of the On-Line Store as well as the franchised stores. It does
not address in detail all operational procedures that will facilitate a seamless
environment for the Learning Express customer when shopping either through a
franchised location, the On-Line Store or both. Those detailed procedures are
under development and will be incorporated, along with the following, as part of
the Learning Express, Inc. Policies and Procedures section of the Operations
Manual.
1. IN-STORE KIOSK
A cooperative program between Learning Express franchisee and
LearningExpress.com E-commerce Company ("On-Line Store") that will
enhance customer service and broaden product offerings by enabling
access to the On-Line Store via a Kiosk unit.
OPERATIONAL REQUIREMENTS: Learning Express franchisee will provide the
appropriate retail space inside franchised location for placement of the
Kiosk. Franchisee will provide the appropriate utility connections as
well as subscription service to an Internet Service Provider ("ISP") for
access to the World Wide Web. Customer will have access only to the
LearningExpress.com URL.
COST TO FRANCHISEE: Ongoing communications (i.e., telephone line and ISP
subscription costs). On-line store will provide equipment and fixture to
franchisee at no cost.
2. MARKETING AND BRAND DEVELOPMENT
Learning Express, Inc. believes that the development of the On-Line
Store will enhance the business of its Franchisees by creating additional
awareness of the Learning Express name through various cooperative marketing and
advertising programs.
OPERATIONAL REQUIREMENTS: Learning Express franchisee will allow the
marketing and promotion of the On-Line Store as well as display the
LearningExpress.com URL on marketing materials including; catalogs, print ads,
marketing and advertising materials, bags and in-store display materials.
COST TO FRANCHISEE: Minimal, if any.
OPERATIONAL REQUIREMENTS: Learning Express franchisee will allow up to
four direct mailings to customer mailing list that will promote in a joint
fashion, the On-Line Store and that particular local store.
COST TO FRANCHISEE: None
OPERATIONAL REQUIREMENTS: Learning Express franchisee will accept
On-Line Store gift certificates and coupons utilizing the same process as now
used for the franchised store system. On-Line Store gift certificates and
coupons will be validated via telephonic or electronic means.
COST TO FRANCHISEE: None
3. PRODUCT RETURNS
In order to provide seamless customer service and distinguish the
Learning Express On-Line Store from other like e-commerce companies, a
cooperative return process between the On-Line Store and the franchised store is
necessary.
A-6
<PAGE> 63
OPERATIONAL REQUIREMENTS: Learning Express franchised store will accept
product returns from Learning Express On-Line Store customers following the same
inter-store procedure as outlined in the current Operations Manual.
- Returned products that are on the Learning Express "Buying
Program" will be retained into inventory by store for sale at
retail. Store will receive reimbursement from On-Line Store for
cost of item.
- Returned products that are not on "Buying Program" may be
returned to the On-Line Store fulfillment center. Store will
receive full reimbursement of credit given to customer.
- Customer will receive instructions for those items carried by
the On-Line Store (i.e., direct ship by mfg., affiliate sales,
etc.) that are not returnable to a franchised store location.
COST TO FRANCHISEE: Minimal to none
A-7
<PAGE> 64
ANNEX B
AMENDMENT TO REGIONAL FRANCHISE LICENSE AGREEMENT
THIS AMENDMENT, made and entered into this _____ day of _______________,
2000, by and between The Learning Express, Inc., a Delaware corporation ("LEI")
and ________________ ____________________, a _________________ _________________
("Regional Owner").
RECITALS
A. LEI and Regional Owner entered into a Learning Express
Regional Franchise License Agreement dated __________,
_______________ (as amended from time to time, the "License
Agreement");
B. LEI has entered into a License Agreement dated as of November
5, 1999 (the "LEI/LEC Agreement"), with LearningExpress.com, LLC,
a Delaware limited liability company ("LEC"), pursuant to the
terms and conditions of which LEI has granted LEC a license (the
"License") to use the System, as defined in the LEI/LEC
Agreement, in the development, operation and promotion of an
Internet based, on-line store (the "On-Line Store");
C. As consideration for the License, LEC will pay LEI a royalty
(the "Royalty"), as defined in the LEI/LEC Agreement with respect
to "Net Sales," as defined in the LEI/LEC Agreement, accrued by
LEC via the On-Line Store;
D. LEI has entered into a Management Services Agreement, dated as
of November 5, 1999 (the "Management Agreement"), by and among
LEI, LEC and LearningExpress.com Holdings LLC, a Delaware limited
liability company ("LECH"), the principal owner of LEC, pursuant
to the terms and conditions of which, among other matters, LEI
has agreed, among other matters, to (1) support LEC's use of the
System in the On-Line Store through assistance with marketing,
promotion and exchange of information regarding sales, customers,
vendors, and (2) contract with each of LEI's regional owners on
the terms and conditions set forth in an Amendment to each
regional owner's respective Regional Franchise License Agreement;
and
E. LEI and Regional Owner wish to amend the License Agreement
and reflect the amendment in writing.
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. The foregoing recitals are true and correct and are incorporated herein
by this reference.
2. (a) In consideration of Regional Owner's agreement to execute and
consummate the terms and conditions of this Amendment, LEI shall
cause LECH to issue to Regional Owner, 14,250 Common Shares of
LECH (the "Shares"), for each Regional Territory granted by LEI
to Regional Owner.
(b) Prior to issuance of the Shares, LECH may require Regional Owner
to execute an investment letter or letters to the effect that
the Shares are being acquired by Regional Owner for Regional
Owner's own account for investment purposes, that Regional Owner
has no present intention of offering, distributing or otherwise
disposing of the Shares, and that Regional Owner shall agree not
to dispose of the Shares unless a registration statement or
appropriate qualification is then in effect under applicable
state "Blue Sky" laws with respect to the Shares or in the
opinion of counsel for LECH the Shares are exempt from the
registration or qualification requirements of such laws.
B-1
<PAGE> 65
(c) Prior to issuance of the Shares, Regional Owner shall execute
and enter into the then current Operating Agreement for LECH and
be bound thereby, as a member of LECH. Such Operating Agreement
shall provide, among other matters, that, until such time as
LECH, or a successor entity, has completed an "Initial Public
Offering" (defined below), that all of the Shares shall be
forfeited to LECH immediately upon the termination of either or
both of the License Agreement or this Amendment, provided,
however, that the Shares shall not be subject to forfeiture in
the case where either or both of the License Agreement and this
Amendment are terminated in connection with the sale or transfer
of Regional Owner's rights and obligations under the License
Agreement to a new regional owner.
(d) Regional Owner agrees that Regional Owner will not, for a period
of at least 180 days following the effective date of any
"Initial Public Offering" (defined below) by LECH (or its
successor-in-interest) or by LEC (or its successor-in-interest),
directly or indirectly, sell, offer to sell or otherwise dispose
of the Shares other than any securities which are included in
such Initial Public Offering, provided, however, that LECH shall
be under no obligation to include the Shares or any portion
thereof in any Initial Public Offering. If the managing
underwriter of any such Initial Public Offering determines that
a shorter time period is appropriate, the aforementioned 180 day
period may be shortened consistent with the requirements of such
managing underwriter. An "Initial Public Offering" shall mean
LECH's, or a successor entity's, initial distribution of
securities in a firm commitment underwritten public offering to
the general public pursuant to a registration statement filed
with the Securities and Exchange Commission.
3. (a) In consideration of Regional Owner's performance of Regional
Owner's obligations hereunder, LEI shall pay Regional Owner with
respect to each calendar month (or portion thereof) during the
Term, commencing with the month ended January 31, 2002, unless
LEC is in breach of the LEI/LEC Agreement, a fee (the "Fee")
equal to the greater of (i) 50% of the Royalty and (ii) 1.5%
of "Net Sales," as defined in the LEI/LEC Agreement, in either
case as accrued during such month from the sale through the
On-Line Store of products ordered by customers whose "bill to"
address is within the "Regional Territory", as defined in the
License Agreement.
(b) Each installment of the Fee shall be payable to the Regional
Owner within 60 days after the end of the applicable calendar
month. Each payment shall be accompanied by a statement from LEI,
providing the basis for the calculation of the Fee. For any
amount not paid by LEI when due in accordance with the foregoing,
LEI shall pay Regional Owner a late payment penalty equal to one
percent (1%) per month of such unpaid amount, or if less, the
maximum amount permissible under applicable law.
(c) LEI shall have no obligation to pay the Fee in the event LEC
ceases operating the On-Line Store, if LEC becomes insolvent or
makes a general assignment for the benefit of creditors, or
unless otherwise prohibited by law, if a petition in bankruptcy
is filed by LEC, or such a petition is filed against and
consented to by LEC or not dismissed within 30 days, or if a
bill in equity or other proceeding for the appointment of a
receiver of LEC or other custodian for LEC's business or assets
is filed and consented to by LEC or if a receiver or other
custodian (permanent or temporary) of LEC's assets or property,
or any part thereof, is appointed.
(d) Within 120 days following the end of each fiscal year, LEI shall
make available for review by Regional Owner, a statement
prepared by LEI's chief financial officer, for all Net Sales for
such fiscal year in the Regional Territory. LEI shall cause LEC
to maintain accurate books and records pertaining to Net Sales
for a period of two (2) years following the close of the fiscal
year for which such determinations have been made and permit
Regional Owner and its representatives, upon at least 10 days
prior written notice to LEI, to make examinations of such books
and records during the usual business hours (without
B-2
<PAGE> 66
interrupting LEC's normal conduct of its business) and at the
place LEC usually keeps its books and records.
4. Except for issuance of the Shares and payment of the Fee, Regional Owner
shall have no rights under the License Agreement or otherwise against
LEI or any other party with respect to the operations and sales of LEC
and the On-Line Store regardless of the billing address, shipping
address or other location of the applicable customer or other person to
whom any product purchased through the On-Line Store is delivered or
otherwise on account of any sale of any such product.
5. Except as modified by this Amendment, the License Agreement remains in
full force and effect.
In Witness Whereof, the parties hereto have executed this Amendment the
day and date first above written.
LEI:
THE LEARNING EXPRESS, INC.
By:
--------------------------
REGIONAL OWNER:
-----------------------------
-----------------------------
-----------------------------
-----------------------------
B-3
<PAGE> 67
ANNEX C
LEARNINGEXPRESS.COM HOLDINGS LLC
FIRST AMENDED AND RESTATED
LIMITED LIABILITY COMPANY OPERATING AGREEMENT
This First Amended and Restated Limited Liability Company Operating
Agreement (the "Agreement"), effective as of the ___ day of ___________, 2000,
is entered into by and among the Persons identified as Members in Schedule A
annexed hereto, made a part hereof and hereby incorporated herein, each (for
such period of time as it shall remain a Member hereunder) referred to
individually as a "Member" and collectively as the "Members."
WHEREAS, LearningExpress.com Operations LLC (the "LLC") was formed
pursuant to the Delaware Limited Liability Company Act (the "Act") by the filing
on March 15, 2000 of a Certificate of Formation (as such Certificate may be
amended from time to time, the "Certificate of Formation") in the office of the
Secretary of State of the State of Delaware;
WHEREAS, pursuant to an amendment to the Certificate of Formation filed
in the office of the Secretary of State of the State of Delaware on March 31,
2000, the name of the LLC was changed to LearningExpress.com LLC;
WHEREAS, pursuant to an amendment to the Certificate of Formation filed
in the office of the Secretary of State of the State of Delaware on April 12,
2000, the name of the LLC was changed to LearningExpress.com Holdings LLC;
WHEREAS, Sharon DiMinico, Louis DiMinico, Steven P. Manfredi, Hal Cook,
Charles Will and Jerry Pope entered into that certain LearningExpress.com
Holdings LLC Operating Agreement as of April 13, 2000 (the "Original
Agreement");
WHEREAS, the Members (including those Persons being admitted as Members
pursuant to the execution hereof) hereby wish to amend and restate the Original
Agreement in its entirety; and
WHEREAS, capitalized terms used herein, and not otherwise defined
herein, have the meanings ascribed to them in Appendix I annexed hereto, made a
part hereof and hereby incorporated herein;
NOW, THEREFORE, in consideration of the mutual covenants herein
expressed, the Original Agreement is hereby amended and restated in its entirety
as follows:
1. Principal Office; Registered Office and Registered Agent. The principal
office of the LLC shall initially be 29 Buena Vista Street, Ayer, MA 01432. The
name and address of the registered agent of the LLC for service of process
pursuant to the Act shall initially be The Corporation Trust Company, 1209
Orange Street, Wilmington, Delaware 19801, and the LLC's registered office in
the State of Delaware shall be c/o The Corporation Trust Company, 1209 Orange
Street, Wilmington, Delaware 19801. The Board of Managers may, upon compliance
with the applicable provisions of the Act, change the LLC's principal office,
its registered office or registered agent from time to time, all as determined
by the Board of Managers.
2. Purpose. The LLC was formed for the purpose of engaging in any lawful act or
activity for which limited liability companies may be formed under the Act,
including, without limitation, holding membership interests in
LearningExpress.com LLC, a Delaware limited liability company, and engaging in
any and all activities necessary, advisable, convenient or incidental thereto.
The LLC shall have all the powers necessary or convenient to carry out the
purposes for which it is formed, including the powers granted by the Act. Except
as otherwise required by the Act or other applicable law, in connection
therewith, the Board of Managers shall have the authority to (i) exercise all
the powers and privileges granted to an LLC by the Act or any other law or this
Agreement, together with any powers incidental thereto, so far as such powers
are necessary or convenient to the conduct, promotion or attainment of the
business, trade, purposes or activities of the LLC in the State of Delaware or
in any other jurisdiction in
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which the LLC shall conduct business and (ii) take any other action not
prohibited under the Act or other applicable law; and, except as provided in
Section 3(a) hereof, no Member acting in its capacity as a Member shall have any
authority, power or privilege to act on behalf of or to bind the LLC.
3. Management.
(a) Designation and Removal of Managers. The LLC shall initially have
seven managers (each, a "Manager"). For purposes of this Agreement, the term
"Board of Managers" shall mean the Managers of the LLC in the aggregate acting
as the governing body of the LLC. The Managers of the LLC shall be designated as
follows:
(i) So long as that certain License Agreement, dated as of November
5, 1999 by and between The Learning Express, Inc., a
Massachusetts corporation ("LEI") and LearningExpress.com LLC is
in full force and effect, one Manager (the "LEI-Designated
Manager") shall be designated by LEI, which Manager shall
initially be Sharon DiMinico.
(ii) One Manager, who shall also be the Chairman of the Board of
Managers, shall be the Person currently serving as Chief
Executive Officer of the LLC, which Manager shall initially be
Steven Manfredi.
(iii) Three Managers (the "Franchisee-Designated Managers") shall be
selected by the unanimous vote of the LEI-Designated Manager and
the Chairman of the Board of Managers from a list of nominees
submitted by LEI's Franchisee Advisory Board, which nominees
must initially and continue to be franchisees in good standing
with LEI. Such Managers shall initially be Kenneth Levinsohn,
Ira Marks and W. Edmund Hobson.
(iv) Two Managers (the "Independent Managers") shall initially be
selected by the unanimous vote of the other five members of the
Board of Managers.
Additional Managers may be appointed by Consent of the Board of Managers so long
as two of the Managers voting in favor of such appointment are the
LEI-Designated Manager and the Chairman of the Board of Managers. If at any time
there is no Manager, the number of Managers may be determined, and one or more
Managers may be designated, by approval of a Majority in Interest of the
Members. A Manager's status as a Manager may be terminated, and a vacancy on the
Board of Managers may be filled, as follows:
(I) The LEI-Designated Manager may be removed or designated at any
time by LEI.
(II) If the Person currently serving as the Chief Executive Officer
of the LLC is terminated and replaced by another Person, such
other Person shall automatically replace such first Person as
Manager and the Chairman of the Board of Managers.
(III) Each of both the Franchisee-Designated Managers and the
Independent Managers may be removed or designated at any time by
the Consent of the Board of Managers.
No Manager may resign from, retire from, abandon or otherwise terminate its
status as a Manager except upon prior notice to the LLC. Any vacancy on the
Board of Managers may be filled by Consent of the Board of Managers.
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(b) Actions of Board of Managers. Except as otherwise provided in
Section 3(a) hereof, all decisions or actions to be made or taken by the Board
of Managers shall require the "Consent of the Board of Managers," which shall
mean the affirmative vote of more than fifty percent (50%) of the votes
represented on the Board of Managers. Until there are seven Managers, each of
both the LEI-Designated Manager and the Chairman of the Board of Managers shall
have two votes to cast on all matters coming before the Board of Managers. The
remaining Managers shall each have one vote. For avoidance of doubt, so long as
the LLC has seven Managers, the Consent of the Board of Managers shall mean four
affirmative votes, so long as the LLC has six Managers, the Consent of the Board
of Managers shall mean five affirmative votes, so long as the LLC has five or
four Managers, the Consent of the Board of Managers shall mean four affirmative
votes and so long as the LLC has three Managers, the Consent of the Board of
Managers shall mean three affirmative votes.
(c) Transactions with Affiliates. The Board of Managers may cause the
LLC to enter into one or more agreements, leases, contracts or other
arrangements for the furnishing to or by the LLC of goods, services or space
with any Member, Manager or an Affiliate thereof, and may pay compensation
thereunder for such goods, services or space, provided in each case the Board of
Managers has determined in good faith that the terms of any such arrangements
are in, or not opposed to, the best interests of the LLC.
(d) Power of Managers to Bind the LLC. The signature of any Manager
acting alone on any agreement, contract, instrument or other document shall be
sufficient to bind the LLC in respect thereof and conclusively evidence the
authority of the Board of Managers and the LLC with respect thereto, and no
third party need look to any other evidence or require joinder or consent of any
other party to bind the LLC or to evidence such authority.
(e) Appointment of Officers and Other Agents. The Board of Managers may
appoint one or more individuals as agents of the LLC with, in each case, such
title and duties and power and authority as the Board of Managers shall
determine from time to time, and such agents may be referred to as officers of
the LLC; provided, however, that no such appointment by the Board of Managers
shall by itself cause any Manager to cease to be a "manager" of the LLC within
the meaning of the Act or this Agreement or restrict the ability of any Manager
to exercise the powers so delegated. Unless the authority of the agent
designated as the officer in question is limited in the document appointing such
officer or is otherwise specified by the Board of Managers, any officer so
appointed shall have the same authority to act for the LLC as a corresponding
officer of a Delaware corporation would have to act for a Delaware corporation
in the absence of a specific delegation of authority. The initial officers of
the LLC shall be as follows:
<TABLE>
<S> <C>
Chairman of the Board of Managers: Steven P. Manfredi
Chief Executive Officer: Steven P. Manfredi
Chief Operating Officer: Michael J. Sanders
Chief Financial Officer: Glenn E. Davis
</TABLE>
(f) Standard of Care for Board of Managers. The Managers shall perform
their duties hereunder in good faith and with that degree of care that an
ordinarily prudent Person in a like position would use under similar
circumstances. The Board of Managers shall be entitled to rely, in the
performance of such duties, on information, opinions, reports or statements,
including financial statements, in each case prepared by one or more agents or
employees, counsel, public accountants or other Persons employed by the LLC, as
to matters that such Managers believe to be within such Persons' special
competence.
(g) Board of Manager Observer. So long as that certain License Agreement
by and between The Learning Express, Inc. and LearningExpress.com LLC is in full
force and effect, the LEI-Designated Manager may invite one observer to the
Board of Managers who, while having no voting rights, shall be permitted to
attend meetings of the Board of Managers. Such observer to the Board of Managers
must be a member of management of The Learning Express, Inc. and may be removed
at any time by the LEI-Designated Manager.
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4. Capital Contributions; Capital Accounts; and Liability of Members.
(a) Capital of Members. The capital contributions that each Member has
made to the LLC on or before the date of this Agreement are set forth on
Schedule A, and the number of Shares owned by such Member is also set forth on
such Schedule A. The Board of Managers shall amend Schedule A from time to time
to properly reflect any changes in the capital contributions made by, or the
number of Shares owned by, the Members.
(b) Additional Capital. No Member shall be obligated to contribute any
additional capital to the LLC.
(c) Capital Accounts. A separate capital account (each, a "Capital
Account") shall be established for each Member and shall be maintained in
accordance with applicable regulations ("Treasury Regulations") under the
Internal Revenue Code of 1986, as amended (the "Code").
(d) Liability of Members. The liability of a Member for the losses,
debts and obligations of the LLC shall be limited to its capital contributions
theretofore made to the LLC by such Member (or its predecessor in interest)
which have not been repaid to or withdrawn by such Member (or its predecessor in
interest) in accordance with the terms of this Agreement. No Member, in its
capacity as a Member, shall have any liability to restore any negative balance
in its Capital Account.
(e) Admission of Additional Members. Subject to any restrictions or
other applicable procedures imposed by this Agreement (including the Statement
of Designations attached hereto as Appendix II), additional members may be
admitted to the LLC on such terms and conditions as may be specified by the
Board of Managers. In connection with any such admission, including any
admission due to a Transfer of all or part of an interest under Section 8
hereof, Schedule A shall be amended by the Board of Managers to reflect the
inclusion of the additional Member(s). The Board of Managers is hereby
authorized to amend this Agreement, without the consent of any Member, to
provide for additional classes or groups of members of the LLC having such
relative rights, powers and duties as the Board of Managers shall determine in
its sole discretion, including but not limited to rights, power and duties
senior to existing classes or groups of members.
5. Return of Contributions. No Member shall have the right to withdraw or to be
repaid any capital contributed by it or to receive any other payment in respect
of such Member's interest in the LLC, including without limitation as a result
of the withdrawal or resignation of such Member from the LLC, except as
specifically provided in this Agreement.
6. Distributions.
(a) Statement of Designations Incorporated by Reference. The Statement
of Designations attached hereto as Appendix II (the "Statement of Designations")
is incorporated herein by reference, and its provisions, including without
limitation its provisions regarding distributions with respect to Series A
Preferred Shares, constitute an integral part of this Agreement.
(b) Distributions. Except as otherwise provided in the Statement of
Designations with respect to distributions upon liquidation of the LLC, the
Board of Managers may determine in its sole discretion to cause the LLC to make
distributions of net cash flow available for distribution, less expenses of the
LLC and reasonable reserves, all as determined by the Board of Managers, among
the Members in accordance with the provisions of Section 4 of the Statement of
Designations. All distributions on liquidation of the LLC shall be made in
accordance with the provisions of Section 5 of the Statement of Designations.
(c) Distributions of Cash and Other Property. Except as the Board of
Managers may otherwise determine, all distributions to Members shall be made in
cash. If any assets of the LLC are distributed in kind, such assets shall be
distributed on the basis of their fair market value as determined by the Board
of Managers. Any amounts not distributed upon liquidation of the LLC pursuant to
Section 6(b)
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hereof on account of expenses and reserves shall serve to reduce the
distributions made to each Member pursuant to Section 6(b) hereof in a manner
reasonably determined by the Board of Managers. Any such reserves as remain
after payment of contingent liabilities shall be distributed to the Members in
the manner in which they served to reduce the distributions thereto.
(d) Tax Distributions. The Board of Managers shall, to the extent of the
cash then available to the LLC, make a distribution (a "Tax Distribution") to
the Members entitled thereto not later than the date specified below. The LLC
shall make a Tax Distribution prior to the tenth day of April, June, September
and January of each fiscal year in an amount equal to one quarter (1/4) of the
Members' Estimated Tax Liability. For purposes of this Section 6(d), the
"Members' Estimated Tax Liability" means the product of (i) the taxable income
of the LLC for the then current fiscal year (except that the January
distribution shall be for the previous calendar quarter), as projected from time
to time in good faith by the Board of Managers multiplied by (ii) the Tax
Distribution Rate, which amount shall be distributed among the Members pro rata
in proportion to their respective estimated allocable shares of such taxable
income for such year, as so projected; provided, however, that the Tax
Distribution payable to the Members for a fiscal year (or portion thereof) shall
be reduced to reflect net losses and deductions (i.e., the excess of losses and
deductions over income and gains) and credits allocated by the LLC to the
Members generally for federal income tax purposes in any and all earlier periods
(except to the extent previously applied to reduce a Tax Distribution or to the
extent the carryforward period for such losses or credits has expired). For
purposes of this Section 6(d), the "Tax Distribution Rate" shall initially mean
45% or such other percentage as may be approved by the Board of Managers from
time to time as the approximate highest current marginal combined federal and
state income tax rate applicable to an individual resident in Massachusetts
(determined after giving effect to the deduction (if allowable) of state income
taxes for federal income tax purposes). All amounts distributed to Members
pursuant to this Section 6(d) shall be advances of amounts otherwise
distributable to Members under the provisions of Section 6 hereof.
(e) Withholding of Taxes. Each Member hereby authorizes the LLC to
withhold and pay over any withholding or other taxes payable by the LLC as a
result of such Member's status as a Member. Such Member shall be deemed for all
purposes of this Agreement to have received a distribution from the LLC in the
amount and as of the time each such withholding is paid by the LLC.
7. Allocations and Certain Tax Matters.
(a) Allocations of Income, Gain, Deduction and Loss. All items of
income, gain, deduction and loss of the LLC as determined for federal income tax
purposes shall be allocated among the Members, and shall be credited or debited
to their respective Capital Accounts in accordance with Treasury Regulation
Section 1.704-1(b)(2)(iv), so as to ensure to the maximum extent possible that
such allocations satisfy the economic effect equivalence test of Treasury
Regulation Section 1.704-1(b)(2)(ii)(i). In accordance therewith, all items that
can have economic effect shall be allocated in such a manner that the balance of
each Member's Capital Account at the end of any taxable year of the LLC
(increased by the sum of (1) such Member's "share of partnership minimum gain"
as defined in Treasury Regulation Section 1.704-2(g)(1) plus (2) such Member's
"share of partner nonrecourse debt minimum gain" as defined in Treasury
Regulation Section 1.704-2(i)(5)) would be positive in the amount of cash that
such Member would receive if the LLC sold all of its assets for an amount of
cash equal to the book value (as determined pursuant Treasury Regulation Section
1.704-1(b)(2)(iv)(g)) of such assets (reduced, but not below zero, by the amount
of nonrecourse debt to which such property is subject) and all of the cash of
the LLC remaining after payment of all liabilities (other than nonrecourse
liabilities) of the LLC were distributed in liquidation of the LLC immediately
following the end of such taxable year pursuant to Section 6(b) hereof. All
items of income, gain, deduction and loss that cannot have economic effect
(including nonrecourse deductions) shall be allocated in accordance with the
Members' interests in the LLC, which, unless otherwise required by Code Section
704(b) and the Treasury Regulations thereunder, shall be in proportion to the
number of Common Shares held by each Member (treating all Series A Preferred
Shares as having been converted into Common Shares for purposes of this
calculation).
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(b) Tax Allocations. Items of income, gain, deduction and loss for
purposes of determining the Members' Capital Accounts (that is, for "book
purposes") shall be determined in accordance with the same principles as such
items are determined for reporting such items on the LLC's federal income tax
return. All items of income, gain, deduction, loss or credit for tax purposes
shall be determined in accordance with the Code and, except to the extent
otherwise required by the Code, allocated to and among the Members in the same
percentages in which the Members share in such items for book purposes.
Notwithstanding the foregoing, if the book value of property differs from its
tax basis, then for the purposes of this Agreement, all determinations of
income, gain, deduction and loss for tax purposes shall be determined with
respect to such book value in accordance with the rules of Treasury Regulation
Section 1.704-1(b)(2)(iv)(g).
(c) Certain Allocations with Respect to Contributed Property. In
accordance with Code Section 704(c) and the Treasury Regulations thereunder,
items of depreciation, amortization, gain, loss, and deduction with respect to
any property contributed to the capital of the LLC shall, solely for tax
purposes, be allocated among the Members so as to take account of any variation
between the adjusted basis of such property to the LLC for federal income tax
purposes and its initial book value, such allocation to be made by the Board of
Managers in accordance with the so-called "traditional method with curative
allocations solely in the case of a sale of property" as provided under Treasury
Regulation Section 1.704-3(c)(iii)(B).
(d) Tax Elections. Any elections or other decisions relating to
allocations of income, gain, deduction, loss or credit hereunder or any other
tax elections (including elections under Code Section 754) that must be made at
the LLC level (as opposed to by the LLC's Members) shall be made (or not made)
by the Board of Managers in its sole discretion.
(e) Shares Held During Portion of Taxable Year. For purposes of
determining the income, gain, loss, deduction or credit, or any other items
allocable to any period, such items shall be determined on a daily, monthly, or
other basis, as determined by the Board of Managers using any permissible method
under Code Section 706 and the Treasury Regulations thereunder.
(f) Consistent Reporting. The Members are aware of the income tax
consequences of the allocations made by this Section 7 and hereby agree to be
bound by the provisions of this Section 7 in reporting their distributive shares
of LLC income and loss for income tax purposes.
8. Restrictions on Transfers of Shares.
(a) Restrictions in General. Prior to the completion of a firm
commitment underwritten initial public offering of equity securities of the LLC
or any successor, no Common Member may Transfer such Member's interest in the
LLC or any part thereof, or in all or any part of the assets of the LLC, and no
Common Member may withdraw from, resign from, retire from, abandon or otherwise
terminate its status as a Member, except as follows:
(1) with the Consent of the Board of Managers in connection with
an approved assignment of such Member's franchise agreement or regional
franchise license agreement with LEI;
(2) as a collateral pledge of its economic interest only, to an
institutional lender, and the lender will not have the right to be admitted to
the LLC as a Member; or
(3) to an individual Common Member's family members (or the
family members of any individual who controls an entity that is a Common Member)
and trusts for the benefit of such family members for estate planning purposes
or to a deceased individual Common Member's executor or administrator.
Notwithstanding anything to the contrary herein, no Member shall transfer its
interest in the LLC to the extent that such transfer would violate the
Securities Act of 1933, as amended, or any other federal or state securities or
blue sky laws. Subject to the immediately preceding sentence and Section 8(c)
hereof, Shares held by the
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Series A Members (including, without limitation, Common Shares issued upon
conversion of Series A Preferred Shares) shall be freely transferable.
(b) Issuance of Shares. During the term of this Agreement, the LLC shall
not issue any Shares to any Person (other than a Person which is already a
Member hereunder) unless such Person agrees in writing to be bound by all of the
provisions of this Agreement applicable to a Member of the relevant Member
Group.
(c) Market Stand-Off Agreement. No Member shall sell, dispose of,
transfer, make any short sale of, grant any option for the purchase of, or enter
into any hedging or similar transaction with the same economic effect as a sale,
any interest in or other securities of the LLC or any successor-in-interest held
by such Member or, as the case may be, the respective successors, successors in
title, heirs and assigns of each such Member (including the Common Shares), for
a period of time specified by a managing underwriter (not to exceed one hundred
eighty (180) days in the case of any initial public offering and not to exceed
ninety (90) days) in the case of any subsequent public offering) following the
effective date of a registration statement of the LLC or any
successor-in-interest filed under the Securities Act with respect to a firm
commitment underwritten public offering. Each Member agrees to execute and
deliver such other agreements as may be reasonably requested by the LLC or any
successor-in-interest and/or the managing underwriter which are consistent with
the foregoing or which are necessary to give further effect thereto. In order to
enforce the foregoing covenant, the LLC or any successor-in-interest may impose
stop-transfer instructions with respect to the Common Shares until the end of
such period.
(d) Forfeiture Upon Termination of Franchise Agreement. Prior to the
completion of a firm commitment underwritten initial public offering of equity
securities of the LLC or any successor, Common Shares held by any franchisee or
"regional owner" of LEI shall be forfeited to the LLC immediately upon the
termination of such franchisee's or regional owner's franchise agreement or
franchise license agreement, as the case may be, with LEI or the termination of
the amendment thereto pursuant to which such franchisee or regional owner
received its Common Shares; provided, however, that Common Shares shall not be
subject to forfeiture in the case where a franchisee's franchise agreement or
regional owner's regional franchise license agreement is terminated in
connection with the sale or transfer of such franchisee's retail store to a new
franchisee or of the sale or transfer of such regional owner's region to a new
regional owner.
9. Priorities. No Member shall have any rights or priority over any other
Members as to contributions or as to distributions or compensation by way of
income, except as specifically provided in this Agreement (including the
Statement of Designations).
10. Term; Dissolution of the LLC.
(a) Term. The term of the LLC shall be perpetual, unless sooner
terminated as hereinafter provided.
(b) Events of Dissolution or Liquidation. The LLC shall be dissolved
upon the happening of any of the following events:
(1) the Consent of the Board of Managers;
(2) the sale of all or substantially all of the assets of
the LLC; or
(3) the entry of a decree of judicial dissolution under the
Act.
Following any of the foregoing events, the Board of Managers shall proceed
diligently to liquidate the assets of the LLC in a manner consistent with
commercially reasonable business practices.
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(c) Distributions upon Liquidation. In connection with the liquidation
of the LLC, the assets of the LLC shall be applied and distributed in the
following order of priority:
(1) to creditors of the LLC, including Members, in the order of
priority provided by law, and the creation of a reserve of cash or other
assets of the LLC for contingent liabilities in an amount, if any,
determined by the Board of Managers to be appropriate for such purposes;
and
(2) to the Members in accordance with the provisions of Section
6.
11. Financial and Accounting Matters.
(a) Books and Records. The Board of Managers shall keep or cause to be
kept complete and accurate books and records of the LLC, using the same methods
of accounting that are used in preparing the federal income tax returns of the
LLC to the extent applicable and otherwise in accordance with generally accepted
accounting principles consistently applied. Such books and records shall be
maintained and available, in addition to any documents and information required
to be furnished to the Members under the Act, at the principal business office
of the LLC for examination and copying by any Member or Manager, or its duly
authorized representative, at its reasonable request and at its expense during
ordinary business hours. A current list of the full name and last known address
of each Member and Manager, a copy of this Agreement, any amendments thereto and
the Certificate of Formation, executed copies of all powers of attorney, if any,
pursuant to which this Agreement, any amendment, or the Certificate of Formation
has been executed, copies of the LLC's financial statements and federal, state
and local income tax returns and reports, if any, for each of the last 6 fiscal
years, shall be maintained at the principal business office of the LLC along
with such other information, if any, as may be required to be made available to
Members pursuant to Section 18-305 of the Act. On or before the due date
(including extensions) of the federal income tax return of the LLC for each
fiscal year of the LLC, each Member shall be furnished with copies of the LLC's
federal income tax return for the fiscal year then ended and any other tax
information reasonably required for state or local tax purposes.
(b) Bank Accounts. Bank accounts and/or other accounts of the LLC shall
be maintained in such banking and/or other financial institution(s) as shall be
selected by the Board of Managers, and withdrawals shall be made and other
activity conducted on such signature or signatures as shall be designated by the
Board of Managers.
(c) Fiscal Year. Except as otherwise required by the Code, the fiscal
year (and taxable year) of the LLC shall end on December 31 of each year.
(d) Tax Matters Partner. Steven Manfredi shall be the "tax matters
partner" of the LLC for purposes of the Code, until his bankruptcy, insolvency,
resignation or the designation of his successor, whichever occurs sooner. Any
subsequent "tax matters partner" shall be designated from time to time by the
Board of Managers.
12. Indemnity; Other Business.
(a) Indemnity. Each Member, each Manager and any other entity or
individual authorized to act on behalf of the LLC shall be entitled to indemnity
from the LLC for any liability incurred and/or for any act performed within the
scope of the authority conferred, and/or for any act omitted to be performed,
which indemnification shall include all reasonable expenses incurred, including
reasonable legal and other professional fees and expenses; provided, however,
that such Person acted in good faith and in a manner reasonably believed to be
in or not opposed to the best interests of the LLC.
(b) Outside Interests. The Members, the Managers, and any Affiliates of
any of them may engage in and possess interests in other business ventures and
investment opportunities of every kind and description, independently or with
others, including serving as manager and general partner of other limited
liability companies and partnerships; provided, however, that no such other
business venture or investment opportunity shall be in direct competition with
the business and activities of the LLC. Neither the LLC nor
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any other Member or Manager shall have any rights in or to such ventures or
opportunities or the income or profits therefrom.
13. Miscellaneous.
(a) Binding Effect. Subject to the restrictions on Transfers set forth
herein, the terms of this Agreement shall be binding upon and shall inure to the
benefit of the Members, their respective successors, successors-in-title, heirs
and assigns; and each and every successor-in-interest to any Member, whether
such successor acquires a Share by way of inheritance, gift, purchase,
foreclosure or any other method, shall hold such Share subject to all of the
terms and provisions of this Agreement. None of the provisions of this Agreement
shall be for the benefit of or enforceable by any Person not a party hereto, who
is a creditor of the LLC (including any Member acting in its capacity as a
creditor of the LLC) or a creditor of any Member.
(b) Amendment. No change, modification or amendment of this Agreement
shall be valid or binding unless such change, modification or amendment is made
with the consent of a Majority in Interest of the Members.
(c) Liquidation upon IPO of LearningExpress.com LLC or any Affiliate.
Each Member hereby acknowledges and agrees that, unless determined otherwise by
the Board of Managers, effective upon determination of the Board of Managers in
connection with completion of an initial public offering of equity securities by
a corporate successor to LearningExpress.com LLC or any of its Affiliates
(including the LLC), the LLC will be liquidated, without further consent or
agreement of any Member, and the Members will receive shares of capital stock of
the corporate successor to LearningExpress.com LLC or such Affiliate having
substantially similar preferences, rights, qualifications and restrictions as
pertain to their Shares immediately prior to such liquidation.
(d) Governing Law. This Agreement and the rights and obligations of the
parties hereunder shall be governed by and interpreted and enforced in
accordance with the laws of the State of Delaware, notwithstanding any choice of
law rules to the contrary.
(e) Counterparts. This Agreement may be executed in any number of
counterparts, all of which together shall for all purposes constitute one
Agreement, binding on all the Members notwithstanding that all Members have not
signed the same counterpart.
(f) Notices. Any and all notices under this Agreement shall be effective
(i) on the fifth business day after being sent by certified mail, return receipt
requested, postage prepaid, or (ii) on the first business day after being sent
by express mail, telecopy, or commercial expedited delivery service providing a
receipt for delivery. All such notices in order to be effective shall be
addressed, if to the LLC at its registered office under the Act, if to a Member
at the last address of record on the LLC's books, and copies of such notices
shall also be sent to the last address for the recipient which is known to the
sender, if different from the address so specified. Copies of such notices shall
also be sent to Goulston & Storrs, P.C., 400 Atlantic Avenue, Boston, MA 02110,
Attention: Kitt Sawitsky, Esquire.
(g) Interpretation. As used herein, the singular shall include the
plural and the masculine gender shall include the feminine and neuter, and
vice-versa, unless the context otherwise requires.
(h) Entire Agreement. This Agreement, including all Schedules and
Appendices attached hereto and the Certificate of Formation, which are hereby
incorporated herein, embodies the entire agreement and understanding among the
parties hereto with respect to the subject matter hereof and supersedes all
prior agreements and understandings relating to such subject matter.
(i) Severability. If one or more provisions of this Agreement are held
to be unenforceable under applicable law, the parties agree to renegotiate such
provision in good faith. In the event that the parties cannot reach a mutually
agreeable and enforceable replacement for such provision, then (a) such
provision shall be excluded from this Agreement, (b) the balance of this
Agreement shall be interpreted as
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if such provision were so excluded, and (c) the balance of this Agreement shall
be enforceable in accordance with its terms.
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IN WITNESS WHEREOF, the Managers and Members have executed this
Agreement as of the date first above written.
MANAGERS:
- ----------------------
Sharon DiMinico
- ----------------------
Steven Manfredi
- ----------------------
Kenneth Levinsohn
- ----------------------
Ira Marks
- ----------------------
W. Edmund Hobson
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SERIES A MEMBER SIGNATURE PAGES
- ----------------------
Sharon DiMinico
- ----------------------
Louis DiMinico
- ----------------------
Charles Will
- ----------------------
Steven P. Manfredi
- ----------------------
Hal Cook
- ----------------------
Jerry Pope
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COMMON MEMBER SIGNATURE PAGES
PRINT NAME OF LEGAL ENTITY (IF ANY):
___________________________________________
BY: _______________________
PRINT NAME OF SIGNER: ____________________
PRINT TITLE OF SIGNER: _____________________
(if more than one signer, continue signatures below)
BY: _______________________
PRINT NAME OF SIGNER: ____________________
PRINT TITLE OF SIGNER: _____________________
BY: _______________________
PRINT NAME OF SIGNER: ____________________
PRINT TITLE OF SIGNER: _____________________
BY: _______________________
PRINT NAME OF SIGNER: ____________________
PRINT TITLE OF SIGNER: _____________________
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SCHEDULE A
TO
LIMITED LIABILITY COMPANY OPERATING AGREEMENT
OF
LEARNINGEXPRESS.COM HOLDINGS LLC
<TABLE>
<CAPTION>
MEMBER CAPITAL CONTRIBUTION CLASS OF SHARES NUMBER OF SHARES
------ -------------------- --------------- ----------------
<S> <C> <C> <C>
Sharon DiMinico $0 Common 14,250
Franchisees/Regional $0 Common 2,607,750
Sharon DiMinico $149,999.50 Series A Preferred 85,714
Lou DiMinico $149,999.50 Series A Preferred 85,714
Steven P. Manfredi $200,000.00 Series A Preferred 114,286
Hal Cook $250,000.00 Series A Preferred 142,857
Charles Will $200,000.00 Series A Preferred 114,286
Jerry Pope $100,000.00 Series A Preferred 57,143
Reg. A Series A Investors $2,712,500.00 Series A Preferred 1,550,000
TOTAL $3,762,499 FULLY DILUTED COMMON 4,772,000
SHARES
</TABLE>
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APPENDIX I
DEFINED TERMS
The following capitalized terms shall have the meanings specified in
this Appendix I. Other capitalized terms are defined in the Statement of
Designations attached hereto as Appendix II, and those terms shall have the
meanings respectively ascribed to them.
"Act" shall have the meaning set forth in the first recital to this
Agreement.
"Affiliate" means, with respect to a specified Person, any other Person
that directly or indirectly controls, is under common control with, or is
controlled by the specified Person. As used herein, the term "control" means the
possession by a Person, directly or indirectly, of the power to direct or cause
the direction of the management and policies of another Person, whether through
ownership of voting securities, by contract or otherwise.
"Agreement" shall have the meaning set forth in the Preamble to this
Agreement.
"Board of Managers" shall have the meaning set forth in Section 3(a).
"Capital Account" shall have the meaning set forth in Section 4(c).
"Certificate of Formation" shall have the meaning set forth in the first
recital to this Agreement.
"Code" shall have the meaning set forth in Section 4(c).
"Common Member" means any holder of Common Shares who is not a Series A
Member.
"Common Shares" means the Shares in the LLC other than Series A
Preferred Shares.
"Consent of the Board of Managers" shall have the meaning set forth in
Section 3(b).
"Franchisee-Designated Managers" shall have the meaning set forth in
Section 3(a)(iii).
"Independent Managers" shall have the meaning set forth in Section
3(a)(iv).
"LEI-Designated Manager" shall have the meaning set forth in Section
3(a)(i).
"LEI" shall have the meaning set forth in Section 3(a)(i).
"LLC" shall have the meaning set forth in the first recital to this
Agreement.
"Majority in Interest" means, with respect to any Member Group (or
multiple Member Groups when voting collectively as a single group), more than
fifty percent (50%) of the number of Common Shares owned by all Members of such
Member Group (or such combined Member Groups) in the aggregate. For purposes of
this definition, Series A Members shall be deemed to own the number of Common
Shares into which their Series A Preferred Shares are convertible, and the
number of such Series A Members' Series A Preferred Shares shall be disregarded.
"Majority in Interest of the Franchisees" means franchisees and regional
owners in good standing holding more than fifty percent (50%) of the franchised
locations and regional territories of LEI.
"Manager" shall have the meaning set forth in Section 3(a).
"Member" and "Members" shall have the meanings set forth in the Preamble
to this Agreement.
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"Member Group" means a group of Members consisting solely of the Common
Members collectively or the Series A Members collectively, as the context may
indicate.
"Members' Estimated Tax Liability" shall have the meaning set forth in
Section 6(d).
"Original Agreement" shall have the meaning set forth in the fourth
recital to this Agreement.
"Person" means any natural person or any general partnership, limited
partnership, limited liability partnership, corporation, joint venture, trust,
business trust, cooperative, association, or limited liability company, and
shall include the heirs, executors, administrators, legal representatives,
successors and assigns of such Person where the context so admits.
"Series A Members" means the Members holding Series A Preferred Shares
(and any Common Shares issued upon conversion of Series A Preferred Shares) and
their respective successors and assigns in respect of such Shares. All Series A
Members shall retain their status as such regardless of the conversion of all or
any portion of their Series A Preferred Shares into Common Shares.
"Series A Preferred Shares" means the Series A Convertible Preferred
Shares, having the rights, limitations and preferences established by the
Statement of Designations.
"Shares" means all units of membership interest in the LLC held by each
Member, whether now owned or hereafter acquired. The term "Shares" includes,
collectively, Common Shares and Series A Preferred Shares.
"Statement of Designations" shall have the meaning set forth in Section
6(a).
"Tax Distribution" shall have the meaning set forth in Section 6(d).
"Tax Distribution Rate" shall have the meaning set forth in Section
6(d).
"Transfer" means, when used as a noun, any disposition of Shares or any
interest therein, for value or otherwise, including, without limitation, any
sale, gift, bequest, assignment, pledge or encumbrance, and whether effected by
contract, by operation of law or otherwise. "Transfer," when used as a verb,
shall have a correlative meaning.
"Treasury Regulations" shall have the meaning set forth in Section 4(c).
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APPENDIX II
STATEMENT OF DESIGNATIONS, PREFERENCES
AND RIGHTS OF COMMON SHARES AND SERIES A CONVERTIBLE PREFERRED SHARES OF
LEARNINGEXPRESS.COM HOLDINGS LLC
This Statement of Designations (the "Statement of Designations")
constitutes an integral part of the Limited Liability Company Operating
Agreement (the "Operating Agreement"), effective as of the 5th day of November,
1999, by and among the Persons listed as Members on Schedule A of the Operating
Agreement, and any other Person who may be admitted as a Member pursuant to
Section 4(e) thereof, for all purposes as if the Statement of Designations had
been contained in the main section thereof rather than attached thereto as an
Appendix. The following is a statement of the designation and the preferences,
rights, qualifications and restrictions relating to the Common Shares and the
Series A Convertible Preferred Shares:
1. Definitions. All capitalized terms used in this Statement of
Designations, and not otherwise defined herein, shall have the meanings ascribed
to them below. Other capitalized terms shall have the same meanings ascribed to
them in the Operating Agreement. Section references used herein are to Sections
of this Statement of Designations (unless otherwise specified).
(a) "Convertible Securities" shall mean any evidences of
indebtedness, Shares or other securities directly or indirectly convertible into
or exchangeable for Common Shares.
(b) "Conversion Price" shall have the meaning set forth in
Section 7(a) hereof.
(c) "Conversion Rights" shall have the meaning set forth in
Section 7(a) hereof.
(d) "Equity Securities" means any Share or other similar security
of the LLC, including, without limitation, securities containing equity features
and securities containing profit participation features, and any debt or equity
security convertible or exchangeable, with or without consideration, into or for
any Share or similar security, or any security carrying any warrant, option or
right to subscribe for or to purchase any of the foregoing.
(e) "Mandatory Conversion Date" shall have the meaning set forth
in Section 7(c)(ii) hereof.
(f) "Original Issue Date" shall mean the date on which the first
Series A Preferred Share is originally issued.
(g) "Public Offering" shall mean an underwritten public offering
of Common Shares of LearningExpress.com LLC or any of its Affiliates (including
the LLC) (or common stock of any successor corporation to LearningExpress.com
LLC or any such Affiliate), subsequent to which the Common Shares of
LearningExpress.com LLC or such Affiliates (or shares of LearningExpress.com
LLC's or such Affiliate's successor's common stock) are listed on a national
securities exchange or on the Nasdaq Stock Market pursuant to an effective
registration statement under the Securities Act of 1933, as amended, or any
successor federal statute thereto.
(h) "Security" means Common Shares, Series A Preferred Shares and
any other securities of any type whatsoever convertible or exchangeable for
Equity Securities.
(i) "Series A Liquidation Value" shall have the meaning set forth
in Section 5(a) hereof.
2. Designation. The series of Shares designated hereunder shall be (a)
the "Common Shares" and (b) the "Series A Convertible Preferred Shares."
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3. Authorized Number. The number of Common Shares shall be 5,000,000.
The number of Series A Preferred Shares shall be 3,000,000.
4. Distributions.
All distributions made by the LLC with respect to Shares (other than
distributions in liquidation governed by Section 5 hereof) shall be made to all
Members in proportion to the number of Common Shares held by each Member. For
purposes of this Section 4, all Series A Preferred Shares will be deemed to have
been converted into Common Shares.
For purposes of this Section 4, unless the context requires otherwise,
"distribution" shall mean the transfer of cash or property without
consideration, whether by way of distribution or otherwise, payable other than
in Common Shares or other securities of the LLC, or the purchase or redemption
of Shares of the LLC for cash or property, including any such transfer, purchase
or redemption by an Affiliate of the LLC.
5. Liquidation, Dissolution or Winding Up.
(a) Series A Members. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the LLC, the Series A
Members shall be entitled to be paid out of the assets of the LLC available for
distribution to its Members before any payment shall be made to the Common
Members, or owners of any other class or series of Shares, by reason of their
ownership thereof, an amount equal to the greater of (i) $1.75 per Series A
Preferred Share (subject to appropriate adjustment in the event of any Share
distribution, Share split, combination or other similar recapitalization
affecting such Shares) (the "Series A Liquidation Value"), together with an
amount equal to an annual cumulative distribution of 8%, compounded annually, of
the Series A Liquidation Value, calculated from the Original Issue Date to the
date of such distribution, or (ii) such amount per Share as would have been
payable to the Series A Members had such Series A Preferred Shares (and any
other outstanding Convertible Securities) been converted into Common Shares
pursuant to Section 7 hereof immediately prior to such liquidation, dissolution
or winding up. If upon any such liquidation, dissolution or winding up of the
LLC, the remaining assets of the LLC available for distribution to its Members
shall be insufficient to pay the Series A Members the full amount to which they
shall be entitled under clause (i) above, the Series A Members and Members
owning any class or series of Shares ranking on liquidation on a parity with the
Series A Preferred Shares shall share ratably in any distribution of the
remaining assets and funds of the LLC in proportion to the respective amounts
that would otherwise be distributable in respect of the Shares held by them upon
such distribution if all amounts distributable on or with respect to such Shares
were paid in full.
(b) Liquidation in Connection with IPO of LearningExpress.com LLC
or an Affiliate. For purposes of this Section 5, the liquidation of the LLC
pursuant to Section 13(c) of the Operating Agreement shall not be treated as a
dissolution and liquidation of the LLC.
6. Voting. Except as otherwise provided herein or by law, with respect
to any matter requiring a vote of the Members, each Common Share shall entitle
its owner to cast one vote, and each Series A Preferred Share shall entitle its
owner to cast, with respect to each such matter, a number of votes equal to the
number of whole Common Shares into which such Share shall then be convertible.
7. Conversion of Series A Preferred Shares into Common Shares. The
Series A Members shall have conversion rights, and shall be subject to mandatory
conversion, as follows:
(a) Right to Convert. Each Series A Preferred Share shall be
convertible, at the option of the Series A Member that owns such Share, and
without the payment of additional consideration by such Member, into such number
of Common Shares as is determined by dividing (i) the Series A Liquidation Value
by (ii) the Conversion Price (as defined below) in effect at the time of
conversion. The "Conversion Price" shall initially be $1.75 per Series A
Preferred Share. Such initial Conversion Price, and the rate at which Series A
Preferred Shares may be converted into Common Shares, shall be subject to
adjustment as provided below.
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In the event of the liquidation of the LLC or any redemption of
Series A Preferred Shares, the rights of the Series A Members to convert such
Shares as provided in this Section 7 (the "Conversion Rights") shall terminate
at the close of business on (i) the third full business day preceding the date
fixed for the payment of any amounts distributable on liquidation or redemption
to the Series A Members or (ii) any earlier Mandatory Conversion Date.
(b) Automatic Conversion. Each Series A Preferred Share shall,
without any action required on the part of any Series A Member, automatically be
converted into such number of Common Shares as is determined by dividing (i) the
Series A Liquidation Value by (ii) the Conversion Price in effect at the time of
conversion, upon the occurrence of a Public Offering. Upon such occurrence, any
Member entitled to receive the Common Shares issuable upon conversion of the
Series A Preferred Shares shall not be deemed to have converted such Series A
Preferred Shares until immediately prior to the closing of such Public Offering.
(c) Mechanics of Conversion.
(i) Before any Series A Member shall be entitled to receive
Common Shares issuable upon conversion of Series A Preferred Shares pursuant to
Section 7(a) hereof, it shall give written notice to the LLC that it elects to
convert the same and shall state therein its name or the name or names of its
nominees in which it wishes the Common Shares to be issued. The Board of
Managers shall, as soon as practicable after receipt of such notice by the LLC
or after a conversion pursuant to Section 7(b) hereof, amend Schedule A of the
Operating Agreement accordingly.
(ii) Voluntary conversions pursuant to Section 7(a) hereof shall
be deemed to have been made immediately prior to the close of business on the
date of such surrender of the Series A Preferred Shares, and the Person or
Persons entitled to receive the Common Shares issuable upon conversion shall be
treated for all purposes as the record owner or owners of such Common Shares on
such date. Automatic conversions pursuant to Section 7(b) hereof shall be deemed
to have been made on the date (the "Mandatory Conversion Date") and at the time
specified in Section 7(b) hereof and the Person or Persons entitled to receive
the Common Shares issuable upon conversion shall be treated for all purposes as
the record owner or owners of such Common Shares on such date and at such time.
(d) Adjustment for Share Splits and Combinations. If the LLC
shall at any time or from time to time after the Original Issue Date effect a
subdivision of the outstanding Common Shares, the Conversion Price then in
effect with respect to the Series A Preferred Shares immediately before that
subdivision shall be proportionately decreased. If the LLC shall at any time or
from time to time after the Original Issue Date combine the outstanding Common
Shares, the Conversion Price with respect to the Series A Preferred Shares then
in effect immediately before the combination shall be proportionately increased.
Any adjustment under this Section 7(d) shall become effective at the close of
business on the date the subdivision or combination becomes effective.
(e) Adjustment for Certain Distributions. In the event the LLC at
any time or from time to time after the Original Issue Date shall make or issue,
or fix a record date for the determination of Common Members entitled to
receive, a distribution payable in additional Common Shares, then and in each
such event the Conversion Price for the Series A Preferred Shares then in effect
shall be decreased as of the time of such issuance or, in the event such a
record date shall have been fixed, as of the close of business on such record
date, by multiplying the Conversion Price then in effect by a fraction:
(1) the numerator of which shall be the total number of
Common Shares issued and outstanding immediately prior to the
time of such issuance or the close of business on such record
date, and
(2) the denominator of which shall be the total number of
Common Shares issued and outstanding immediately prior to the
time of such issuance or the close of business on such record
date plus the number of Common Shares issuable in payment of such
distribution;
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provided, however, if such record date shall have been fixed and such
distribution is not fully paid or if such distribution is not fully made on the
date fixed therefor, the Conversion Price for the Series A Preferred Shares
shall be recomputed accordingly as of the close of business on such record date,
and thereafter the Conversion Price for the Series A Preferred Shares shall be
adjusted pursuant to this Section 7(e) as of the time of actual payment of such
distributions; and provided further, however, that no such adjustment shall be
made if the Series A Members simultaneously receive a distribution of Common
Shares in a number equal to the number of Common Shares they would have received
if all outstanding Series A Preferred Shares had been converted into Common
Shares on the date of such event.
(f) Adjustments for Other Distributions. In the event the LLC at
any time or from time to time after the Original Issue Date of the Series A
Preferred Shares shall make or issue, or fix a record date for the determination
of Common Members entitled to receive, a distribution payable in Securities of
the LLC other than Common Shares, then, and in each such event, provision shall
be made so that the Series A Members shall receive upon conversion thereof in
addition to the number of Common Shares receivable thereupon, the amount of
Securities of the LLC that they would have received had the Series A Preferred
Shares been converted into Common Shares on the date of such event and had they
thereafter, during the period from the date of such event to and including the
conversion date, retained such Securities receivable by them as aforesaid during
such period, giving application to all adjustments called for during such period
under this Section 7(f) with respect to the rights of the Series A Members; and
provided further, however, that no such adjustment shall be made if the Series A
Members simultaneously receive a distribution of such Securities in an amount
equal to the amount of such securities they would have received if all
outstanding Series A Preferred Shares had been converted into Common Shares on
the date of such event.
(g) Adjustment for Reclassification, Exchange or Substitution. If
the Common Shares shall be changed into the same or a different number of Shares
of any class or classes of Shares, whether by capital reorganization,
reclassification, or otherwise (other than a subdivision or combination of
Shares or distribution of Shares provided for above, or a reorganization,
merger, consolidation, or sale of assets provided for below), then, and in each
such event, the Series A Members shall have the right thereafter to convert such
Common Shares into the kind and amount of Shares and other securities and
property receivable upon such reorganization, reclassification, or other change,
as would be received by owners of the number of Common Shares into which such
Series A Preferred Shares might have been converted immediately prior to such
reorganization, reclassification, or change, all subject to further adjustment
as provided herein.
(h) Adjustment for Merger or Reorganization, Etc. In case of any
consolidation or merger of the LLC with or into another entity or the sale of
all or substantially all of the assets of the LLC to another entity, each Series
A Preferred Share shall thereafter be convertible (or shall be converted into a
security which shall be convertible) into the kind and amount of Shares or other
securities or property to which an owner of the number of Common Shares
deliverable upon conversion of such Series A Preferred Share would have been
entitled upon such consolidation, merger or sale; and, in such case, appropriate
adjustment (as determined in good faith by the Board of Managers) shall be made
in the application of the provisions set forth in this Section 7 with respect to
the rights and interest thereafter of the Series A Members, to the end that the
provisions set forth in this Section 7 (including provisions with respect to
changes in and other adjustments of the Conversion Price applicable to such
Series A Preferred Shares) shall thereafter be applicable, as nearly as
reasonably may be, in relation to any Shares or other property thereafter
deliverable upon the conversion of the Series A Preferred Shares.
(i) No Impairment. The LLC will not, by amendment of its
Certificate of Formation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of Securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the LLC, but will at all
times in good faith assist in the carrying out of all the provisions of this
Section 7 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the Series A Members
against impairment.
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(j) Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of the Conversion Price applicable to any Series A
Preferred Shares pursuant to this Section 7, the LLC at its expense shall
promptly compute such adjustment or readjustment in accordance with the terms
hereof and furnish to each Series A Member a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The LLC shall, upon the written request at
any time of any Series A Member, furnish or cause to be furnished to such Member
a similar certificate setting forth (i) such adjustments and readjustments, (ii)
the Conversion Price applicable to the Series A Preferred Shares then in effect,
and (iii) the number of Common Shares and the amount, if any, of other property
which then would be received upon the conversion of a Series A Preferred Share.
(k) Notice of Record Date. In the event:
(i) that the LLC makes a distribution with respect to its Common
Shares payable in Common Shares or other Securities of the LLC;
(ii) that the LLC subdivides or combines its outstanding Common
Shares;
(iii) of any reclassification of the Common Shares of the LLC
(other than a subdivision or combination of its outstanding
Common Shares or a distribution of Shares with respect to Common
Shares), or of any consolidation or merger of the LLC into or
with another entity, or of the sale of all or substantially all
of the assets of the LLC; or
(iv) of the involuntary or voluntary dissolution, liquidation or
winding up of the LLC;
then the LLC shall cause to be filed at its principal office or at the office of
the transfer agent of Series A Preferred Shares, and shall cause to be mailed to
the Members at their last known addresses as shown on the records of the LLC or
such transfer agent, at least ten days prior to the date specified in (1) below
or twenty days before the date specified in (2) below, a notice stating:
(1) the record date of such distribution, subdivision or
combination, or, if a record is not to be taken, the date as of which
the Common Members of record to be entitled to such distribution,
subdivision or combination are to be determined, or
(2) the date on which such reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up is
expected to become effective, and the date as of which it is expected
that Common Members of record shall be entitled to exchange their Common
Shares for securities or other property deliverable upon such
reclassification, consolidation, merger, sale, dissolution or winding
up.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses to be incurred in connection
with the sale and distribution of the securities being registered.
<TABLE>
<CAPTION>
<S> <C>
SEC Registration Fee............. $______
Brokers' Fees.................... $______
Blue Sky Fees and Expenses....... $______
Fees and Expenses................ $______
Printing and Engraving Costs..... $______
Legal............................ $______
Accounting Fees.................. $______
Total $______
</TABLE>
All amounts listed above are estimates.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Pursuant to the operating agreement of LearningExpress.com Holdings LLC,
managers and officers of LearningExpress.com Holdings are entitled to indemnity
from the LLC for any liability incurred and/or for any act performed within the
scope of the authority conferred, and/or for any act omitted to be performed,
which indemnification shall include all reasonable expenses incurred, including
reasonable legal and other professional fees and expenses; provided, however,
that such manager or officer acted in good faith and in a manner reasonably
believed to be in or not opposed to the best interests of LearningExpress.com
Holdings LLC.
ITEM 15. RECENT SALE OF UNREGISTERED SECURITIES.
1. At the time of its initial organization, LearningExpress.com Holdings
LLC issued 14,250 Common Shares to Sharon DiMinico for a nominal price.
2. Prior to this offering, the following individuals purchased Series A
Convertible Preferred Shares for a purchase price of $1.75 per share, or
an aggregate price of $1,049,999.00:
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
---- ----------------
<S> <C>
Sharon DiMinico 85,714
Louis DiMinico 85,714
Steven P. Manfredi 114,286
Hal Cook 142,857
Chip Will 114,286
Jerry Pope 57,143
</TABLE>
The Common Shares and the Series A Convertible Preferred Shares were
sold to accredited investors only, pursuant to the exemption from the
registration requirements of the Securities Act of 1933 provided by Section 4(2)
of the Securities Act and Rule 506 under the Securities Act.
47
<PAGE> 89
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) See the Exhibit Index included immediately preceding the exhibits to this
Registration Statement.
(b) There are no schedules required under the instructions relating to the
applicable accounting regulations of the Securities and Exchange Commission or
are inapplicable, and therefore have been omitted.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
48
<PAGE> 90
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO.
- --------
<S> <C>
3.1 Amended Certificate of Formation of LearningExpress.com Holdings LLC
3.2 Amended Certificate of Formation of LearningExpress.com LLC
3.3 Certificate of Formation of LearningExpress.com Incentive Plan LLC
3.4 Limited Liability Company Operating Agreement of LearningExpress.com
Holdings LLC
3.5 Form of First Amended and Restated Limited Liability Company Operating
Agreement of LearningExpress.com Holdings LLC
3.6 First Amended and Restated Limited Liability Company Operating Agreement
of LearningExpress.com LLC
3.7 Liability Company Operating Agreement of LearningExpress.com Incentive
Plan LLC
4.1 Form of Subscription Agreement for Series A Convertible Preferred Shares
(to be filed by amendment to the registration statement)
4.2 Letter Agreement between LearningExpress.com Holdings LLC and Sharon
DiMinico, Louis DiMinico, The Learning Express, Inc. and Toy Building,
LLC dated as of December 29, 1999
5 Opinion of Goulston & Storrs, P.C. with respect to the legality of the
securities being offered
10.1 License Agreement between The Learning Express, Inc. and Learning
Express.com LLC dated as of November 5, 1999
10.2 Management Services Agreement between The Learning Express, Inc.,
LearningExpress.com LLC and LearningExpress.com Holdings LLC dated
as of November 5, 1999
10.3 Loan Agreement between LearningExpress.com and USTrust dated as of
December 29, 1999
10.4 Web Site Development Agreement between LearningExpress.com LLC and
Miller Systems, Inc. dated December 17, 1999.
21 Subsidiaries of the Registrant
23.1 Consent of Charles L. Burke, C.P.A.
23.2 Consent of Goulston & Storrs, P.C. (included in Exhibit 5)
24 Power of Attorney
27 Financial Data Schedule
99.1 Guaranty (Unlimited) executed by Sharon DiMinico in favor of USTrust
dated December 29, 1999
99.2 Guaranty (Unlimited) executed by Louis DiMinico in favor of USTrust
dated December 29, 1999
</TABLE>
49
<PAGE> 91
<TABLE>
<S> <C>
99.3 Guaranty (Unlimited) executed by The Learning Express, Inc. in favor of
USTrust dated December 29, 1999
99.4 Guaranty (Unlimited) executed by Toy Building, LLC in favor of USTrust
dated December 29, 1999
99.5 Form of Amendment to Franchise Agreement
99.6 Form of Amendment to Regional Franchise License Agreement
99.7 The Learning Express, Inc. Operations Manual Supplement
</TABLE>
50
<PAGE> 92
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has
duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Ayer, Commonwealth of
Massachusetts, on April 19, 2000.
LEARNINGEXPRESS.COM HOLDINGS LLC
/s/ Steven P. Manfredi
By: Steven P. Manfredi
------------------
Chief Executive Officer and
Manager
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Steven P. Manfredi Chief Executive Officer and April 19, 2000
- -----------------------------
Steven P. Manfredi Manager (principal executive
officer)
/s/ Glenn E. Davis Chief Financial Officer and April 19, 2000
- ----------------------
Glenn E. Davis Vice President, Finance
(principal financial and
accounting officer)
/s/ Michael J. Sanders Chief Operating Officer April 19, 2000
- -----------------------------
Michael J. Sanders
/s/ Sharon DiMinico Manager April 19, 2000
- -----------------------------
Sharon DiMinico
</TABLE>
51
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF FORMATION
OF
LEARNINGEXPRESS.COM LLC
Pursuant to the provisions of the Delaware Limited Liability Company
Act, the following hereby further amends the Certificate of Formation of
LearningExpress.com LLC (the "LLC"):
FIRST. The name of the LLC shall be:
LearningExpress.com Holdings LLC
IN WITNESS WHEREOF, the undersigned has caused this Certificate of
Amendment of Certificate of Formation to be duly executed as of the 12th day of
April, 2000.
/s/ Sharon DiMinico
---------------------------
Sharon DiMinico, Manager
<PAGE> 2
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF FORMATION
OF
LEARNINGEXPRESS.COM OPERATIONS LLC
Pursuant to the provisions of the Delaware Limited Liability Company
Act, the following hereby amends the Certificate of Formation of
LearningExpress.com Operations LLC (the "LLC"):
FIRST. The name of the LLC shall be:
LearningExpress.com LLC
IN WITNESS WHEREOF, the undersigned has caused this Certificate of
Amendment of Certificate of Formation to be duly executed as of the 31st day of
March, 2000.
/s/ Antonia E. Lopes
---------------------------
Antonia E. Lopes
Authorized Person
2
<PAGE> 1
EXHIBIT 3.2
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF FORMATION
OF
LEARNINGEXPRESS.COM HOLDINGS LLC
Pursuant to the provisions of the Delaware Limited Liability Company
Act, the following hereby further amends the Certificate of Formation of
LearningExpress.com Holdings LLC (the "LLC"):
FIRST. The name of the LLC shall be:
LearningExpress.com LLC
IN WITNESS WHEREOF, the undersigned has caused this Certificate of
Amendment of Certificate of Formation to be duly executed as of the 10th day of
April, 2000.
/s/ Sharon DiMinico
---------------------------
Sharon DiMinico, Manager
<PAGE> 1
EXHIBIT 3.3
CERTIFICATE OF FORMATION
OF
LEARNINGEXPRESS.COM INCENTIVE PLAN LLC
This Certificate of Formation of LearningExpress.com Incentive Plan LLC
(the "LLC") is being duly executed and filed by Eleanor Coleman, as an
authorized person, to form a limited liability company under the Delaware
Limited Liability Company Act (6 Del.Code Ann. Section 18-101, et seq.)
FIRST. The name of the limited liability company formed hereby is:
LearningExpress.com Incentive Plan LLC
SECOND. The address of the registered office of the LLC in the State of
Delaware is c/o The Corporation Trust Company, 1209 Orange Street, Wilmington,
Delaware 19801.
THIRD. The name and address of the registered agent for service of
process on the LLC in the State of Delaware is The Corporation Trust Company,
1209 Orange Street, Wilmington, Delaware 19801.
IN WITNESS WHEREOF, the undersigned, an authorized person of the LLC,
has caused this Certificate of Formation to be duly executed as of the 15th day
of March, 2000.
/s/ Eleanor Coleman
---------------------------
Eleanor Coleman
Authorized Person
1
<PAGE> 1
EXHIBIT 3.4
LEARNINGEXPRESS.COM HOLDINGS LLC
LIMITED LIABILITY COMPANY OPERATING AGREEMENT
This Limited Liability Company Operating Agreement (the "Agreement"),
effective as of the 13th day of April, 2000, is entered into by and among the
Persons identified as Members in Schedule A annexed hereto, made a part hereof
and hereby incorporated herein, each (for such period of time as it shall remain
a Member hereunder) referred to individually as a "Member" and collectively as
the "Members."
WHEREAS, LearningExpress.com Operations LLC (the "LLC") was formed
pursuant to the Delaware Limited Liability Company Act (the "Act") by the filing
on March 15, 2000 of a Certificate of Formation (as such Certificate may be
amended from time to time, the "Certificate of Formation") in the office of the
Secretary of State of the State of Delaware;
WHEREAS, pursuant to an amendment to the Certificate of Formation filed in
the office of the Secretary of State of the State of Delaware on March 31, 2000,
the name of the LLC was changed to LearningExpress.com LLC;
WHEREAS, pursuant to an amendment to the Certificate of Formation filed in
the office of the Secretary of State of the State of Delaware on April 12, 2000,
the name of the LLC was changed to LearningExpress.com Holdings LLC; and
WHEREAS, capitalized terms used herein, and not otherwise defined herein,
have the meanings ascribed to them in Appendix I annexed hereto, made a part
hereof and hereby incorporated herein;
NOW, THEREFORE, in consideration of the mutual covenants herein expressed,
the parties hereto agree as follows:
1. Principal Office; Registered Office and Registered Agent. The principal
office of the LLC shall initially be 29 Buena Vista Street, Ayer, MA 01432. The
name and address of the registered agent of the LLC for service of process
pursuant to the Act shall initially be The Corporation Trust Company, 1209
Orange Street, Wilmington, Delaware 19801, and the LLC's registered office in
the State of Delaware shall be c/o The Corporation Trust Company, 1209 Orange
Street, Wilmington, Delaware 19801. The Board of Managers may, upon compliance
with the applicable provisions of the Act, change the LLC's principal office,
its registered office or registered agent from time to time, all as determined
by the Board of Managers.
2. Purpose. The LLC was formed for the purpose of engaging in any lawful act or
activity for which limited liability companies may be formed under the Act,
including, without limitation, holding membership interests in
LearningExpress.com LLC and LearningExpress.com Incentive Plan LLC, both
Delaware limited liability companies,
-1-
<PAGE> 2
and engaging in any and all activities necessary, advisable, convenient or
incidental thereto. The LLC shall have all the powers necessary or convenient to
carry out the purposes for which it is formed, including the powers granted by
the Act. Except as otherwise required by the Act or other applicable law, in
connection therewith, the Board of Managers shall have the authority to (i)
exercise all the powers and privileges granted to an LLC by the Act or any other
law or this Agreement, together with any powers incidental thereto, so far as
such powers are necessary or convenient to the conduct, promotion or attainment
of the business, trade, purposes or activities of the LLC in the State of
Delaware or in any other jurisdiction in which the LLC shall conduct business
and (ii) take any other action not prohibited under the Act or other applicable
law; and, except as provided in Section 3(a) hereof, no Member acting in its
capacity as a Member shall have any authority, power or privilege to act on
behalf of or to bind the LLC.
3. Management.
(a) Designation and Removal of Managers. The LLC shall initially have two
managers (each, a "Manager"). For purposes of this Agreement, the term "Board of
Managers" shall mean the Managers of the LLC in the aggregate acting as the
governing body of the LLC. The Managers of the LLC shall initially be Sharon
DiMinico and Steven Manfredi. Ms. DiMinico shall have two votes to cast and Mr.
Manfredi shall have one vote to cast on all matters coming before the Board of
Managers. Additional Managers may be appointed by Consent of the Board of
Managers. No Manager may resign from, retire from, abandon or otherwise
terminate its status as a Manager except upon prior notice to the LLC. Any
vacancy on the Board of Managers may be filled by Consent of the Board of
Managers.
(b) Actions of Board of Managers. Except as otherwise provided in Section
3(a) hereof, all decisions or actions to be made or taken by the Board of
Managers shall require the "Consent of the Board of Managers," which shall mean
the affirmative vote of more than fifty percent (50%) of the votes represented
on the Board of Managers.
(c) Transactions with Affiliates. The Board of Managers may cause the LLC
to enter into one or more agreements, leases, contracts or other arrangements
for the furnishing to or by the LLC of goods, services or space with any Member,
Manager or an Affiliate thereof, and may pay compensation thereunder for such
goods, services or space, provided in each case the Board of Managers has
determined in good faith that the terms of any such arrangements are in, or not
opposed to, the best interests of the LLC.
(d) Power of Managers to Bind the LLC. The signature of any Manager acting
alone on any agreement, contract, instrument or other document shall be
sufficient to bind the LLC in respect thereof and conclusively evidence the
authority of the Board of Managers and the LLC with respect thereto, and no
third party need look to any other evidence or require joinder or consent of any
other party to bind the LLC or to evidence such authority.
-2-
<PAGE> 3
(e) Appointment of Officers and Other Agents. The Board of Managers may
appoint one or more individuals as agents of the LLC with, in each case, such
title and duties and power and authority as the Board of Managers shall
determine from time to time, and such agents may be referred to as officers of
the LLC; provided, however, that no such appointment by the Board of Managers
shall by itself cause any Manager to cease to be a "manager" of the LLC within
the meaning of the Act or this Agreement or restrict the ability of any Manager
to exercise the powers so delegated. Unless the authority of the agent
designated as the officer in question is limited in the document appointing such
officer or is otherwise specified by the Board of Managers, any officer so
appointed shall have the same authority to act for the LLC as a corresponding
officer of a Delaware corporation would have to act for a Delaware corporation
in the absence of a specific delegation of authority.
(f) Standard of Care for Board of Managers. The Managers shall perform
their duties hereunder in good faith and with that degree of care that an
ordinarily prudent Person in a like position would use under similar
circumstances. The Board of Managers shall be entitled to rely, in the
performance of such duties, on information, opinions, reports or statements,
including financial statements, in each case prepared by one or more agents or
employees, counsel, public accountants or other Persons employed by the LLC, as
to matters that such Managers believe to be within such Persons' special
competence.
4. Capital Contributions; Capital Accounts; and Liability of Members.
(a) Capital of Members. The capital contributions that each Member has
made to the LLC on or before the date of this Agreement are set forth on
Schedule A, and the number of Shares owned by such Member is also set forth on
such Schedule A. The Board of Managers shall amend Schedule A from time to time
to properly reflect any changes in the capital contributions made by, or the
number of Shares owned by, the Members.
(b) Additional Capital. No Member shall be obligated to contribute any
additional capital to the LLC.
(c) Capital Accounts. A separate capital account (each, a "Capital
Account") shall be established for each Member and shall be maintained in
accordance with applicable regulations ("Treasury Regulations") under the
Internal Revenue Code of 1986, as amended (the "Code").
(d) Liability of Members. The liability of a Member for the losses, debts
and obligations of the LLC shall be limited to its capital contributions
theretofore made to the LLC by such Member (or its predecessor in interest)
which have not been repaid to or withdrawn by such Member (or its predecessor in
interest) in accordance with the terms of this Agreement. No Member, in its
capacity as a Member, shall have any liability to restore any negative balance
in its Capital Account.
-3-
<PAGE> 4
(e) Admission of Additional Members. Subject to any restrictions or other
applicable procedures imposed by this Agreement (including the Statement of
Designations attached hereto as Appendix II), additional members may be admitted
to the LLC on such terms and conditions as may be specified by the Board of
Managers. In connection with any such admission, including any admission due to
a Transfer of all or part of an interest under Section 8 hereof, Schedule A
shall be amended by the Board of Managers to reflect the inclusion of the
additional Member(s). The Board of Managers is hereby authorized to amend this
Agreement, without the consent of any Member, to provide for additional classes
or groups of members of the LLC having such relative rights, powers and duties
as the Board of Managers shall determine in its sole discretion, including but
not limited to rights, power and duties senior to existing classes or groups of
members.
5. Return of Contributions. No Member shall have the right to withdraw or to be
repaid any capital contributed by it or to receive any other payment in respect
of such Member's interest in the LLC, including without limitation as a result
of the withdrawal or resignation of such Member from the LLC, except as
specifically provided in this Agreement.
6. Distributions.
(a) Statement of Designations Incorporated by Reference. The Statement of
Designations attached hereto as Appendix II (the "Statement of Designations") is
incorporated herein by reference, and its provisions, including without
limitation its provisions regarding distributions with respect to Series A
Preferred Shares, constitute an integral part of this Agreement.
(b) Distributions. Except as otherwise provided in the Statement of
Designations with respect to distributions upon liquidation of the LLC, the
Board of Managers may determine in its sole discretion to cause the LLC to make
distributions of net cash flow available for distribution, less expenses of the
LLC and reasonable reserves, all as determined by the Board of Managers, among
the Members in accordance with the provisions of Section 4 of the Statement of
Designations. All distributions on liquidation of the LLC shall be made in
accordance with the provisions of Section 5 of the Statement of Designations.
(c) Distributions of Cash and Other Property. Except as the Board of
Managers may otherwise determine, all distributions to Members shall be made in
cash. If any assets of the LLC are distributed in kind, such assets shall be
distributed on the basis of their fair market value as determined by the Board
of Managers. Any amounts not distributed upon liquidation of the LLC pursuant to
Section 6(b) hereof on account of expenses and reserves shall serve to reduce
the distributions made to each Member pursuant to Section 6(b) hereof in a
manner reasonably determined by the Board of Managers. Any such reserves as
remain after payment of contingent liabilities shall be distributed to the
Members in the manner in which they served to reduce the distributions thereto.
-4-
<PAGE> 5
(d) Tax Distributions. The Board of Managers shall, to the extent of the
cash then available to the LLC, make a distribution (a "Tax Distribution") to
the Members entitled thereto not later than the date specified below. The LLC
shall make a Tax Distribution prior to the tenth day of April, June, September
and January of each fiscal year in an amount equal to one quarter (1/4) of the
Members' Estimated Tax Liability. For purposes of this Section 6(d), the
"Members' Estimated Tax Liability" means the product of (i) the taxable income
of the LLC for the then current fiscal year (except that the January
distribution shall be for the previous calendar quarter), as projected from time
to time in good faith by the Board of Managers multiplied by (ii) the Tax
Distribution Rate, which amount shall be distributed among the Members pro rata
in proportion to their respective estimated allocable shares of such taxable
income for such year, as so projected; provided, however, that the Tax
Distribution payable to the Members for a fiscal year (or portion thereof) shall
be reduced to reflect net losses and deductions (i.e., the excess of losses and
deductions over income and gains) and credits allocated by the LLC to the
Members generally for federal income tax purposes in any and all earlier periods
(except to the extent previously applied to reduce a Tax Distribution or to the
extent the carryforward period for such losses or credits has expired). For
purposes of this Section 6(d), the "Tax Distribution Rate" shall initially mean
45% or such other percentage as may be approved by the Board of Managers from
time to time as the approximate highest current marginal combined federal and
state income tax rate applicable to an individual resident in Massachusetts
(determined after giving effect to the deduction (if allowable) of state income
taxes for federal income tax purposes). All amounts distributed to Members
pursuant to this Section 6(d) shall be advances of amounts otherwise
distributable to Members under the provisions of Section 6 hereof.
(e) Withholding of Taxes. Each Member hereby authorizes the LLC to
withhold and pay over any withholding or other taxes payable by the LLC as a
result of such Member's status as a Member. Such Member shall be deemed for all
purposes of this Agreement to have received a distribution from the LLC in the
amount and as of the time each such withholding is paid by the LLC.
7. Allocations and Certain Tax Matters.
(a) Allocations of Income, Gain, Deduction and Loss. All items of income,
gain, deduction and loss of the LLC as determined for federal income tax
purposes shall be allocated among the Members, and shall be credited or debited
to their respective Capital Accounts in accordance with Treasury Regulation
Section 1.704-1(b)(2)(iv), so as to ensure to the maximum extent possible that
such allocations satisfy the economic effect equivalence test of Treasury
Regulation Section 1.704-1(b)(2)(ii)(i). In accordance therewith, all items that
can have economic effect shall be allocated in such a manner that the balance of
each Member's Capital Account at the end of any taxable year of the LLC
(increased by the sum of (1) such Member's "share of partnership minimum gain"
as defined in Treasury Regulation Section 1.704-2(g)(1) plus (2) such Member's
"share of partner nonrecourse debt minimum gain" as defined in Treasury
Regulation Section 1.704-2(i)(5)) would be positive in the amount of cash that
such Member would receive if
-5-
<PAGE> 6
the LLC sold all of its assets for an amount of cash equal to the book value (as
determined pursuant Treasury Regulation Section 1.704-1(b)(2)(iv)(g)) of such
assets (reduced, but not below zero, by the amount of nonrecourse debt to which
such property is subject) and all of the cash of the LLC remaining after payment
of all liabilities (other than nonrecourse liabilities) of the LLC were
distributed in liquidation of the LLC immediately following the end of such
taxable year pursuant to Section 6(b) hereof. All items of income, gain,
deduction and loss that cannot have economic effect (including nonrecourse
deductions) shall be allocated in accordance with the Members' interests in the
LLC, which, unless otherwise required by Code Section 704(b) and the Treasury
Regulations thereunder, shall be in proportion to the number of Common Shares
held by each Member (treating all Series A Preferred Shares as having been
converted into Common Shares for purposes of this calculation).
(b) Tax Allocations. Items of income, gain, deduction and loss for
purposes of determining the Members' Capital Accounts (that is, for "book
purposes") shall be determined in accordance with the same principles as such
items are determined for reporting such items on the LLC's federal income tax
return. All items of income, gain, deduction, loss or credit for tax purposes
shall be determined in accordance with the Code and, except to the extent
otherwise required by the Code, allocated to and among the Members in the same
percentages in which the Members share in such items for book purposes.
Notwithstanding the foregoing, if the book value of property differs from its
tax basis, then for the purposes of this Agreement, all determinations of
income, gain, deduction and loss for tax purposes shall be determined with
respect to such book value in accordance with the rules of Treasury Regulation
Section 1.704-1(b)(2)(iv)(g).
(c) Certain Allocations with Respect to Contributed Property. In
accordance with Code Section 704(c) and the Treasury Regulations thereunder,
items of depreciation, amortization, gain, loss, and deduction with respect to
any property contributed to the capital of the LLC shall, solely for tax
purposes, be allocated among the Members so as to take account of any variation
between the adjusted basis of such property to the LLC for federal income tax
purposes and its initial book value, such allocation to be made by the Board of
Managers in accordance with the so-called "traditional method with curative
allocations solely in the case of a sale of property" as provided under Treasury
Regulation Section 1.704-3(c)(iii)(B).
(d) Tax Elections. Any elections or other decisions relating to
allocations of income, gain, deduction, loss or credit hereunder or any other
tax elections (including elections under Code Section 754) that must be made at
the LLC level (as opposed to by the LLC's Members) shall be made (or not made)
by the Board of Managers in its sole discretion.
(e) Shares Held During Portion of Taxable Year. For purposes of
determining the income, gain, loss, deduction or credit, or any other items
allocable to any period, such items shall be determined on a daily, monthly, or
other basis, as determined by the Board of Managers using any permissible method
under Code Section 706 and the Treasury Regulations thereunder.
-6-
<PAGE> 7
(f) Consistent Reporting. The Members are aware of the income tax
consequences of the allocations made by this Section 7 and hereby agree to be
bound by the provisions of this Section 7 in reporting their distributive shares
of LLC income and loss for income tax purposes.
8. Restrictions on Transfers of Shares.
(a) Restrictions in General. Prior to the completion of a firm commitment
underwritten initial public offering of equity securities of the LLC or a
successor, without the written consent of the Board of Managers, no Common
Member may Transfer such Member's interest in the LLC or any part thereof, or in
all or any part of the assets of the LLC, and no Common Member may withdraw
from, resign from, retire from, abandon or otherwise terminate its status as a
Member, except as follows:
(1) as a collateral pledge of its economic interest only, to an
institutional lender, and the lender will not have the right to be admitted to
the LLC as a Member; or
(2) to an individual Common Member's family members (or the family
members of any individual who controls an entity that is a Common Member) and
trusts for the benefit of such family members for estate planning purposes or to
a deceased individual Common Member's executor or administrator.
Notwithstanding anything to the contrary herein, no Member shall transfer its
interest in the LLC to the extent that such transfer would violate the
Securities Act of 1933, as amended, or any other federal or state securities or
blue sky laws. Subject to the immediately preceding sentence and Section 8(c)
hereof, Shares held by the Series A Members (including, without limitation,
Common Shares issued upon conversion of Series A Preferred Shares) shall be
freely transferable.
(b) Issuance of Shares. During the term of this Agreement, the LLC shall
not issue any Shares to any Person (other than a Person which is already a
Member hereunder) unless such Person agrees in writing to be bound by all of the
provisions of this Agreement applicable to a Member of the relevant Member
Group.
(c) Market Stand-Off Agreement. No Member shall sell, dispose of,
transfer, make any short sale of, grant any option for the purchase of, or enter
into any hedging or similar transaction with the same economic effect as a sale,
any interest or other securities of the LLC or any successor-in-interest held by
such Member or, as the case may be, the respective successors, successors in
title, heirs and assigns of each such Member (including the Common Shares), for
a period of time specified by a managing underwriter (not to exceed one hundred
eighty (180) days in the case of any initial public offering and not to exceed
ninety (90) days) in the case of any subsequent public offering) following the
effective date of a registration statement of the LLC or any
successor-in-interest filed under the Securities Act with respect to a firm
commitment
-7-
<PAGE> 8
underwritten public offering. Each Member agrees to execute and deliver such
other agreements as may be reasonably requested by the LLC or any
successor-in-interest thereof and/or the managing underwriter which are
consistent with the foregoing or which are necessary to give further effect
thereto. In order to enforce the foregoing covenant, the LLC or any
successor-in-interest may impose stop-transfer instructions with respect to the
Common Shares until the end of such period.
9. Priorities. No Member shall have any rights or priority over any other
Members as to contributions or as to distributions or compensation by way of
income, except as specifically provided in this Agreement (including the
Statement of Designations).
10. Term; Dissolution of the LLC.
(a) Term. The term of the LLC shall be perpetual, unless sooner terminated
as hereinafter provided.
(b) Events of Dissolution or Liquidation. The LLC shall be dissolved upon
the happening of any of the following events:
(1) the Consent of the Board of Managers;
(2) the sale of all or substantially all of the assets of the LLC;
or
(3) the entry of a decree of judicial dissolution under the Act.
Following any of the foregoing events, the Board of Managers shall proceed
diligently to liquidate the assets of the LLC in a manner consistent with
commercially reasonable business practices.
(c) Distributions upon Liquidation. In connection with the liquidation of
the LLC, the assets of the LLC shall be applied and distributed in the following
order of priority:
(1) to creditors of the LLC, including Members, in the order of
priority provided by law, and the creation of a reserve of cash or other
assets of the LLC for contingent liabilities in an amount, if any,
determined by the Board of Managers to be appropriate for such purposes;
and
(2) to the Members in accordance with the provisions of Section 6.
11. Financial and Accounting Matters.
(a) Books and Records. The Board of Managers shall keep or cause to be
kept complete and accurate books and records of the LLC, using the same methods
of accounting that are used in preparing the federal income tax returns of the
LLC to the extent applicable and otherwise in accordance with generally accepted
accounting
-8-
<PAGE> 9
principles consistently applied. Such books and records shall be maintained and
available, in addition to any documents and information required to be furnished
to the Members under the Act, at the principal business office of the LLC for
examination and copying by any Member or Manager, or its duly authorized
representative, at its reasonable request and at its expense during ordinary
business hours. A current list of the full name and last known address of each
Member and Manager, a copy of this Agreement, any amendments thereto and the
Certificate of Formation, executed copies of all powers of attorney, if any,
pursuant to which this Agreement, any amendment, or the Certificate of Formation
has been executed, copies of the LLC's financial statements and federal, state
and local income tax returns and reports, if any, for each of the last 6 fiscal
years, shall be maintained at the principal business office of the LLC along
with such other information, if any, as may be required to be made available to
Members pursuant to Section 18-305 of the Act. On or before the due date
(including extensions) of the federal income tax return of the LLC for each
fiscal year of the LLC, each Member shall be furnished with copies of the LLC's
federal income tax return for the fiscal year then ended and any other tax
information reasonably required for state or local tax purposes.
(b) Bank Accounts. Bank accounts and/or other accounts of the LLC shall be
maintained in such banking and/or other financial institution(s) as shall be
selected by the Board of Managers, and withdrawals shall be made and other
activity conducted on such signature or signatures as shall be designated by the
Board of Managers.
(c) Fiscal Year. Except as otherwise required by the Code, the fiscal year
(and taxable year) of the LLC shall end on December 31 of each year.
(d) Tax Matters Partner. Steven Manfredi shall be the "tax matters
partner" of the LLC for purposes of the Code, until his bankruptcy, insolvency,
resignation or the designation of his successor, whichever occurs sooner. Any
subsequent "tax matters partner" shall be designated from time to time by the
Board of Managers.
12. Indemnity; Other Business.
(a) Indemnity. Each Member, each Manager and any other entity or
individual authorized to act on behalf of the LLC shall be entitled to indemnity
from the LLC for any liability incurred and/or for any act performed within the
scope of the authority conferred, and/or for any act omitted to be performed,
which indemnification shall include all reasonable expenses incurred, including
reasonable legal and other professional fees and expenses; provided, however,
that such Person acted in good faith and in a manner reasonably believed to be
in or not opposed to the best interests of the LLC.
(b) Outside Interests. The Members, the Managers, and any Affiliates of
any of them may engage in and possess interests in other business ventures and
investment opportunities of every kind and description, independently or with
others, including serving as manager and general partner of other limited
liability companies and partnerships; provided, however, that no such other
business venture or investment
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<PAGE> 10
opportunity shall be in direct competition with the business and activities of
the LLC. Neither the LLC nor any other Member or Manager shall have any rights
in or to such ventures or opportunities or the income or profits therefrom.
13. Miscellaneous.
(a) Binding Effect. Subject to the restrictions on Transfers set forth
herein, the terms of this Agreement shall be binding upon and shall inure to the
benefit of the Members, their respective successors, successors-in-title, heirs
and assigns; and each and every successor-in-interest to any Member, whether
such successor acquires a Share by way of inheritance, gift, purchase,
foreclosure or any other method, shall hold such Share subject to all of the
terms and provisions of this Agreement. None of the provisions of this Agreement
shall be for the benefit of or enforceable by any Person not a party hereto who
is a creditor of the LLC (including any Member acting in its capacity as a
creditor of the LLC), or any creditor of any Member.
(b) Amendment. No change, modification or amendment of this Agreement
shall be valid or binding unless such change, modification or amendment is made
with the consent of a Majority in Interest of the Members.
(c) Liquidation upon IPO of LearningExpress.com LLC or any Affiliate. Each
Member hereby acknowledges and agrees that, unless determined otherwise by the
Board of Managers, effective upon determination of the Board of Managers in
connection with completion of an initial public offering of equity securities by
a corporate successor to LearningExpress.com LLC or any of its Affiliates, the
LLC will be liquidated, without further consent or agreement of any Member, and
the Members will receive shares of capital stock of the corporate successor to
LearningExpress.com LLC or such Affiliate having substantially similar
preferences, rights, qualifications and restrictions as pertain to their Shares
immediately prior to such liquidation.
(d) Governing Law. This Agreement and the rights and obligations of the
parties hereunder shall be governed by and interpreted and enforced in
accordance with the laws of the State of Delaware, notwithstanding any choice of
law rules to the contrary.
(e) Counterparts. This Agreement may be executed in any number of
counterparts, all of which together shall for all purposes constitute one
Agreement, binding on all the Members notwithstanding that all Members have not
signed the same counterpart.
(f) Notices. Any and all notices under this Agreement shall be effective
(i) on the fifth business day after being sent by registered or certified mail,
return receipt requested, postage prepaid, or (ii) on the first business day
after being sent by express mail, telecopy, or commercial expedited delivery
service providing a receipt for delivery. All such notices in order to be
effective shall be addressed, if to the LLC at its registered office under the
Act, if to a Member at the last address of record on the LLC's books, and
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<PAGE> 11
copies of such notices shall also be sent to the last address for the recipient
which is known to the sender, if different from the address so specified. Copies
of such notices shall also be sent to Goulston & Storrs, P.C., 400 Atlantic
Avenue, Boston, MA 02110, Attention: Kitt Sawitsky, Esquire.
(g) Interpretation. As used herein, the singular shall include the plural
and the masculine gender shall include the feminine and neuter, and vice-versa,
unless the context otherwise requires.
(h) Entire Agreement. This Agreement, including all Schedules and
Appendices attached hereto and the Certificate of Formation, which are hereby
incorporated herein, embodies the entire agreement and understanding among the
parties hereto with respect to the subject matter hereof and supersedes all
prior agreements and understandings relating to such subject matter.
(i) Severability. If one or more provisions of this Agreement are held to
be unenforceable under applicable law, the parties agree to renegotiate such
provision in good faith. In the event that the parties cannot reach a mutually
agreeable and enforceable replacement for such provision, then (a) such
provision shall be excluded from this Agreement, (b) the balance of this
Agreement shall be interpreted as if such provision were so excluded, and (c)
the balance of this Agreement shall be enforceable in accordance with its terms.
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<PAGE> 12
IN WITNESS WHEREOF, the Managers and Members have executed this Agreement
as of the date first above written.
MANAGERS:
/s/ Sharon DiMinico
- -------------------------
Sharon DiMinico
/s/ Steven P. Manfredi
- -------------------------
Steven P. Manfredi
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<PAGE> 13
MEMBER SIGNATURE PAGES
COMMON MEMBERS:
/s/ Sharon DiMinico
- -------------------------
Sharon DiMinico
SERIES A MEMBERS:
/s/ Sharon DiMinico
- -------------------------
Sharon DiMinico
/s/ Louis DiMinico
- -------------------------
Louis DiMinico
/s/ Charles Will
- -------------------------
Charles Will
/s/ Steven P. Manfredi
- -------------------------
Steven P. Manfredi
/s/ Hal Cook
- -------------------------
Hal Cook
/s/ Jerry Pope
- -------------------------
Jerry Pope
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<PAGE> 14
SCHEDULE A
TO
LIMITED LIABILITY COMPANY OPERATING AGREEMENT
OF
LEARNINGEXPRESS.COM HOLDINGS LLC
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
MEMBER CAPITAL CLASS OF SHARES NUMBER OF
CONTRIBUTION SHARES
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Sharon DiMinico $ 0 Common 14,250
- ------------------------------------------------------------------------------
Sharon DiMinico $149,999.50 Series A Preferred 85,714
- ------------------------------------------------------------------------------
Louis DiMinico $149,999.50 Series A Preferred 85,714
- ------------------------------------------------------------------------------
Steven P. Manfredi $200,000.00 Series A Preferred 114,286
- ------------------------------------------------------------------------------
Hal Cook $250,000.00 Series A Preferred 142,857
- ------------------------------------------------------------------------------
Charles Will $200,000.00 Series A Preferred 114,286
- ------------------------------------------------------------------------------
Jerry Pope $100,000.00 Series A Preferred 57,143
- ------------------------------------------------------------------------------
TOTAL $ 1,049,999 FULLY DILUTED 614,250
COMMON SHARES
- ------------------------------------------------------------------------------
</TABLE>
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<PAGE> 15
APPENDIX I
DEFINED TERMS
The following capitalized terms shall have the meanings specified in this
Appendix I. Other capitalized terms are defined in the Statement of Designations
attached hereto as Appendix II, and those terms shall have the meanings
respectively ascribed to them.
"Act" shall have the meaning set forth in the first recital to this
Agreement.
"Affiliate" means, with respect to a specified Person, any other Person
that directly or indirectly controls, is under common control with, or is
controlled by the specified Person. As used herein, the term "control" means the
possession by a Person, directly or indirectly, of the power to direct or cause
the direction of the management and policies of another Person, whether through
ownership of voting securities, by contract or otherwise.
"Agreement" shall have the meaning set forth in the Preamble to this
Agreement.
"Board of Managers" shall have the meaning set forth in Section 3(a).
"Capital Account" shall have the meaning set forth in Section 4(c).
"Certificate of Formation" shall have the meaning set forth in the first
recital to this Agreement.
"Code" shall have the meaning set forth in Section 4(c).
"Common Member" means any holder of Common Shares who is not a Series A
Member.
"Common Shares" means the Shares in the LLC other than Series A Preferred
Shares.
"Consent of the Board of Managers" shall have the meaning set forth in
Section 3(b).
"LLC" shall have the meaning set forth in the first recital to this
Agreement.
"Majority in Interest" means, with respect to any Member Group (or
multiple Member Groups when voting collectively as a single group), more than
fifty percent (50%) of the number of Common Shares owned by all Members of such
Member Group (or such combined Member Groups) in the aggregate. For purposes of
this definition, Series A Members shall be deemed to own the number of Common
Shares into which
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<PAGE> 16
their Series A Preferred Shares are convertible, and the number of such Series A
Members' Series A Preferred Shares shall be disregarded.
"Manager" shall have the meaning set forth in Section 3(a).
"Member" and "Members" shall have the meanings set forth in the
Preamble to this Agreement.
"Member Group" means a group of Members consisting solely of the Common
Members collectively or the Series A Members collectively, as the context may
indicate.
"Members' Estimated Tax Liability" shall have the meaning set forth in
Section 6(d).
"Person" means any natural person or any general partnership, limited
partnership, limited liability partnership, corporation, joint venture, trust,
business trust, cooperative, association, or limited liability company, and
shall include the heirs, executors, administrators, legal representatives,
successors and assigns of such Person where the context so admits.
"Series A Members" means the Members holding Series A Preferred Shares
(and any Common Shares issued upon conversion of Series A Preferred Shares) and
their respective successors and assigns in respect of such Shares. All Series A
Members shall retain their status as such regardless of the conversion of all or
any portion of their Series A Preferred Shares into Common Shares.
"Series A Preferred Shares" means the Series A Convertible Preferred
Shares, having the rights, limitations and preferences established by the
Statement of Designations.
"Shares" means all units of membership interest in the LLC held by each
Member, whether now owned or hereafter acquired. The term "Shares" includes,
collectively, Common Shares and Series A Preferred Shares.
"Statement of Designations" shall have the meaning set forth in Section
6(a).
"Tax Distribution" shall have the meaning set forth in Section 6(d).
"Tax Distribution Rate" shall have the meaning set forth in Section
6(d).
"Transfer" means, when used as a noun, any disposition of Shares or any
interest therein, for value or otherwise, including, without limitation, any
sale, gift, bequest, assignment, pledge or encumbrance, and whether effected by
contract, by operation of law or otherwise. "Transfer," when used as a verb,
shall have a correlative meaning.
"Treasury Regulations" shall have the meaning set forth in Section 4(c).
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<PAGE> 17
APPENDIX II
STATEMENT OF DESIGNATIONS, PREFERENCES
AND RIGHTS OF COMMON SHARES AND SERIES A CONVERTIBLE PREFERRED SHARES OF
LEARNINGEXPRESS.COM HOLDINGS LLC
This Statement of Designations (the "Statement of Designations")
constitutes an integral part of the Limited Liability Company Operating
Agreement (the "Operating Agreement"), effective as of the April 13, 1999, by
and among the Persons listed as Members on Schedule A of the Operating
Agreement, and any other Person who may be admitted as a Member pursuant to
Section 4(e) thereof, for all purposes as if the Statement of Designations had
been contained in the main section thereof rather than attached thereto as an
Appendix. The following is a statement of the designation and the preferences,
rights, qualifications and restrictions relating to the Common Shares and the
Series A Convertible Preferred Shares:
1. Definitions. All capitalized terms used in this Statement of
Designations, and not otherwise defined herein, shall have the meanings ascribed
to them below. Other capitalized terms shall have the same meanings ascribed to
them in the Operating Agreement. Section references used herein are to Sections
of this Statement of Designations (unless otherwise specified).
(a) "Convertible Securities" shall mean any evidences of
indebtedness, Shares or other securities directly or indirectly convertible into
or exchangeable for Common Shares.
(b) "Conversion Price" shall have the meaning set forth in Section
7(a) hereof.
(c) "Conversion Rights" shall have the meaning set forth in Section
7(a) hereof.
(d) "Equity Securities" means any Share or other similar security of
the LLC, including, without limitation, securities containing equity features
and securities containing profit participation features, and any debt or equity
security convertible or exchangeable, with or without consideration, into or for
any Share or similar security, or any security carrying any warrant, option or
right to subscribe for or to purchase any of the foregoing.
(e) "Mandatory Conversion Date" shall have the meaning set forth in
Section 7(c)(ii) hereof.
(f) "Original Issue Date" shall mean the date on which the first
Series A Preferred Share is originally issued.
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<PAGE> 18
(g) "Public Offering" shall mean an underwritten public offering of
Common Shares of LearningExpress.com LLC or any of its Affiliates (including the
LLC) (or common stock of any successor corporation to LearningExpress.com LLC or
any such Affiliate), subsequent to which the Common Shares of
LearningExpress.com LLC or such Affiliates (or shares of LearningExpress.com
LLC's or such Affiliate's successor's common stock) are listed on a national
securities exchange or on the Nasdaq Stock Market pursuant to an effective
registration statement under the Securities Act of 1933, as amended, or any
successor federal statute thereto.
(h) "Security" means Common Shares, Series A Preferred Shares and
any other securities of any type whatsoever convertible or exchangeable for
Equity Securities.
(i) "Series A Liquidation Value" shall have the meaning set forth in
Section 5(a) hereof.
2. Designation. The series of Shares designated hereunder shall be (a) the
"Common Shares" and (b) the "Series A Convertible Preferred Shares."
3. Authorized Number. The number of Common Shares shall be 5,000,000. The
number of Series A Preferred Shares shall be 3,000,000.
4. Distributions.
All distributions made by the LLC with respect to Shares (other than
distributions in liquidation governed by Section 5 hereof) shall be made to all
Members in proportion to the number of Common Shares held by each Member. For
purposes of this Section 4, all Series A Preferred Shares will be deemed to have
been converted into Common Shares.
For purposes of this Section 4, unless the context requires otherwise,
"distribution" shall mean the transfer of cash or property without
consideration, whether by way of distribution or otherwise, payable other than
in Common Shares or other securities of the LLC, or the purchase or redemption
of Shares of the LLC for cash or property, including any such transfer, purchase
or redemption by an Affiliate of the LLC.
5. Liquidation, Dissolution or Winding Up.
(a) Series A Members. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the LLC, the Series A Members shall be
entitled to be paid out of the assets of the LLC available for distribution to
its Members before any payment shall be made to the Common Members, or owners of
any other class or series of Shares, by reason of their ownership thereof, an
amount equal to the greater of (i) $1.75 per Series A Preferred Share (subject
to appropriate adjustment in the event of any Share distribution, Share split,
combination or other similar recapitalization affecting such Shares) (the
"Series A Liquidation Value"), together with an amount equal to an
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<PAGE> 19
annual cumulative distribution of 8%, compounded annually, of the Series A
Liquidation Value, calculated from the Original Issue Date to the date of such
distribution, or (ii) such amount per Share as would have been payable to the
Series A Members had such Series A Preferred Shares (and any other outstanding
Convertible Securities) been converted into Common Shares pursuant to Section 7
hereof immediately prior to such liquidation, dissolution or winding up. If upon
any such liquidation, dissolution or winding up of the LLC, the remaining assets
of the LLC available for distribution to its Members shall be insufficient to
pay the Series A Members the full amount to which they shall be entitled under
clause (i) above, the Series A Members and Members owning any class or series of
Shares ranking on liquidation on a parity with the Series A Preferred Shares
shall share ratably in any distribution of the remaining assets and funds of the
LLC in proportion to the respective amounts that would otherwise be
distributable in respect of the Shares held by them upon such distribution if
all amounts distributable on or with respect to such Shares were paid in full.
(b) Liquidation in Connection with IPO of LearningExpress.com LLC or
an Affiliate. For purposes of this Section 5, the liquidation of the LLC
pursuant to Section 13(c) of the Operating Agreement shall not be treated as a
dissolution and liquidation of the LLC.
6. Voting. Except as otherwise provided herein or by law, with respect to
any matter requiring a vote of the Members, each Common Share shall entitle its
owner to cast one vote, and each Series A Preferred Share shall entitle its
owner to cast, with respect to each such matter, a number of votes equal to the
number of whole Common Shares into which such Share shall then be convertible.
7. Conversion of Series A Preferred Shares into Common Shares. The Series
A Members shall have conversion rights, and shall be subject to mandatory
conversion, as follows:
(a) Right to Convert. Each Series A Preferred Share shall be
convertible, at the option of the Series A Member that owns such Share, and
without the payment of additional consideration by such Member, into such number
of Common Shares as is determined by dividing (i) the Series A Liquidation Value
by (ii) the Conversion Price (as defined below) in effect at the time of
conversion. The "Conversion Price" shall initially be $1.75 per Series A
Preferred Share. Such initial Conversion Price, and the rate at which Series A
Preferred Shares may be converted into Common Shares, shall be subject to
adjustment as provided below.
In the event of the liquidation of the LLC or any redemption of
Series A Preferred Shares, the rights of the Series A Members to convert such
Shares as provided in this Section 7 (the "Conversion Rights") shall terminate
at the close of business on (i) the third full business day preceding the date
fixed for the payment of any amounts distributable on liquidation or redemption
to the Series A Members or (ii) any earlier Mandatory Conversion Date.
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<PAGE> 20
(b) Automatic Conversion. Each Series A Preferred Share shall,
without any action required on the part of any Series A Member, automatically be
converted into such number of Common Shares as is determined by dividing (i) the
Series A Liquidation Value by (ii) the Conversion Price in effect at the time of
conversion, upon the occurrence of a Public Offering. Upon such occurrence, any
Member entitled to receive the Common Shares issuable upon conversion of the
Series A Preferred Shares shall not be deemed to have converted such Series A
Preferred Shares until immediately prior to the closing of such Public Offering.
(c) Mechanics of Conversion.
(i) Before any Series A Member shall be entitled to receive Common
Shares issuable upon conversion of Series A Preferred Shares pursuant to Section
7(a) hereof, it shall give written notice to the LLC that it elects to convert
the same and shall state therein its name or the name or names of its nominees
in which it wishes the Common Shares to be issued. The Board of Managers shall,
as soon as practicable after receipt of such notice by the LLC or after
conversion pursuant to Section 7(b) hereof, amend Schedule A of the Operating
Agreement accordingly.
(ii) Voluntary conversions pursuant to Section 7(a) hereof shall be
deemed to have been made immediately prior to the close of business on the date
of such surrender of the Series A Preferred Shares, and the Person or Persons
entitled to receive the Common Shares issuable upon conversion shall be treated
for all purposes as the record owner or owners of such Common Shares on such
date. Automatic conversions pursuant to Section 7(b) hereof shall be deemed to
have been made on the date (the "Mandatory Conversion Date") and at the time
specified in Section 7(b) hereof and the Person or Persons entitled to receive
the Common Shares issuable upon conversion shall be treated for all purposes as
the record owner or owners of such Common Shares on such date and at such time.
(d) Adjustment for Share Splits and Combinations. If the LLC shall
at any time or from time to time after the Original Issue Date effect a
subdivision of the outstanding Common Shares, the Conversion Price then in
effect with respect to the Series A Preferred Shares immediately before that
subdivision shall be proportionately decreased. If the LLC shall at any time or
from time to time after the Original Issue Date combine the outstanding Common
Shares, the Conversion Price with respect to the Series A Preferred Shares then
in effect immediately before the combination shall be proportionately increased.
Any adjustment under this Section 7(d) shall become effective at the close of
business on the date the subdivision or combination becomes effective.
(e) Adjustment for Certain Distributions. In the event the LLC at
any time or from time to time after the Original Issue Date shall make or issue,
or fix a record date for the determination of Common Members entitled to
receive, a distribution payable in additional Common Shares, then and in each
such event the Conversion Price for the Series A Preferred Shares then in effect
shall be decreased as of the time of such issuance or, in the event such a
record date shall have been fixed, as of the close of
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<PAGE> 21
business on such record date, by multiplying the Conversion Price then in effect
by a fraction:
(1) the numerator of which shall be the total number of Common
Shares issued and outstanding immediately prior to the time of such
issuance or the close of business on such record date, and
(2) the denominator of which shall be the total number of
Common Shares issued and outstanding immediately prior to the time
of such issuance or the close of business on such record date plus
the number of Common Shares issuable in payment of such
distribution;
provided, however, if such record date shall have been fixed and such
distribution is not fully paid or if such distribution is not fully made on the
date fixed therefor, the Conversion Price for the Series A Preferred Shares
shall be recomputed accordingly as of the close of business on such record date,
and thereafter the Conversion Price for the Series A Preferred Shares shall be
adjusted pursuant to this Section 7(e) as of the time of actual payment of such
distributions; and provided further, however, that no such adjustment shall be
made if the Series A Members simultaneously receive a distribution of Common
Shares in a number equal to the number of Common Shares they would have received
if all outstanding Series A Preferred Shares had been converted into Common
Shares on the date of such event.
(f) Adjustments for Other Distributions. In the event the LLC at any
time or from time to time after the Original Issue Date of the Series A
Preferred Shares shall make or issue, or fix a record date for the determination
of Common Members entitled to receive, a distribution payable in Securities of
the LLC other than Common Shares, then, and in each such event, provision shall
be made so that the Series A Members shall receive upon conversion thereof in
addition to the number of Common Shares receivable thereupon, the amount of
Securities of the LLC that they would have received had the Series A Preferred
Shares been converted into Common Shares on the date of such event and had they
thereafter, during the period from the date of such event to and including the
conversion date, retained such Securities receivable by them as aforesaid during
such period, giving application to all adjustments called for during such period
under this Section 7(f) with respect to the rights of the Series A Members; and
provided further, however, that no such adjustment shall be made if the Series A
Members simultaneously receive a distribution of such Securities in an amount
equal to the amount of such securities they would have received if all
outstanding Series A Preferred Shares had been converted into Common Shares on
the date of such event.
(g) Adjustment for Reclassification, Exchange or Substitution. If
the Common Shares shall be changed into the same or a different number of Shares
of any class or classes of Shares, whether by capital reorganization,
reclassification, or otherwise (other than a subdivision or combination of
Shares or distribution of Shares provided for above, or a reorganization,
merger, consolidation, or sale of assets provided for below), then, and in each
such event, the Series A Members shall have the right thereafter to
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<PAGE> 22
convert such Common Shares into the kind and amount of Shares and other
securities and property receivable upon such reorganization, reclassification,
or other change, as would be received by owners of the number of Common Shares
into which such Series A Preferred Shares might have been converted immediately
prior to such reorganization, reclassification, or change, all subject to
further adjustment as provided herein.
(h) Adjustment for Merger or Reorganization, Etc. In case of any
consolidation or merger of the LLC with or into another entity or the sale of
all or substantially all of the assets of the LLC to another entity, each Series
A Preferred Share shall thereafter be convertible (or shall be converted into a
security which shall be convertible) into the kind and amount of Shares or other
securities or property to which an owner of the number of Common Shares
deliverable upon conversion of such Series A Preferred Share would have been
entitled upon such consolidation, merger or sale; and, in such case, appropriate
adjustment (as determined in good faith by the Board of Managers) shall be made
in the application of the provisions set forth in this Section 7 with respect to
the rights and interest thereafter of the Series A Members, to the end that the
provisions set forth in this Section 7 (including provisions with respect to
changes in and other adjustments of the Conversion Price applicable to such
Series A Preferred Shares) shall thereafter be applicable, as nearly as
reasonably may be, in relation to any Shares or other property thereafter
deliverable upon the conversion of the Series A Preferred Shares.
(i) No Impairment. The LLC will not, by amendment of its Certificate
of Formation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of Securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed hereunder by the LLC, but will at all times in good faith
assist in the carrying out of all the provisions of this Section 7 and in the
taking of all such action as may be necessary or appropriate in order to protect
the Conversion Rights of the Series A Members against impairment.
(j) Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of the Conversion Price applicable to any Series A
Preferred Shares pursuant to this Section 7, the LLC at its expense shall
promptly compute such adjustment or readjustment in accordance with the terms
hereof and furnish to each Series A Member a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The LLC shall, upon the written request at
any time of any Series A Member, furnish or cause to be furnished to such Member
a similar certificate setting forth (i) such adjustments and readjustments, (ii)
the Conversion Price applicable to the Series A Preferred Shares then in effect,
and (iii) the number of Common Shares and the amount, if any, of other property
which then would be received upon the conversion of a Series A Preferred Share.
(k) Notice of Record Date. In the event:
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<PAGE> 23
(i) that the LLC makes a distribution with respect to its Common
Shares payable in Common Shares or other Securities of the LLC;
(ii) that the LLC subdivides or combines its outstanding Common
Shares;
(iii) of any reclassification of the Common Shares of the LLC (other
than a subdivision or combination of its outstanding Common Shares
or a distribution of Shares with respect to Common Shares), or of
any consolidation or merger of the LLC into or with another entity,
or of the sale of all or substantially all of the assets of the LLC;
or
(iv) of the involuntary or voluntary dissolution, liquidation or
winding up of the LLC;
then the LLC shall cause to be filed at its principal office or at the office of
the transfer agent of Series A Preferred Shares, and shall cause to be mailed to
the Members at their last known addresses as shown on the records of the LLC or
such transfer agent, at least ten days prior to the date specified in (1) below
or twenty days before the date specified in (2) below, a notice stating:
(1) the record date of such distribution, subdivision or
combination, or, if a record is not to be taken, the date as of which the
Common Members of record to be entitled to such distribution, subdivision
or combination are to be determined, or
(2) the date on which such reclassification, consolidation,
merger, sale, dissolution, liquidation or winding up is expected to become
effective, and the date as of which it is expected that Common Members of
record shall be entitled to exchange their Common Shares for securities or
other property deliverable upon such reclassification, consolidation,
merger, sale, dissolution or winding up.
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<PAGE> 1
EXHIBIT 3.5
LEARNINGEXPRESS.COM HOLDINGS LLC
FIRST AMENDED AND RESTATED
LIMITED LIABILITY COMPANY OPERATING AGREEMENT
This First Amended and Restated Limited Liability Company Operating
Agreement (the "Agreement"), effective as of the ___ day of ___________, 2000,
is entered into by and among the Persons identified as Members in Schedule A
annexed hereto, made a part hereof and hereby incorporated herein, each (for
such period of time as it shall remain a Member hereunder) referred to
individually as a "Member" and collectively as the "Members."
WHEREAS, LearningExpress.com Operations LLC (the "LLC") was formed
pursuant to the Delaware Limited Liability Company Act (the "Act") by the filing
on March 15, 2000 of a Certificate of Formation (as such Certificate may be
amended from time to time, the "Certificate of Formation") in the office of the
Secretary of State of the State of Delaware;
WHEREAS, pursuant to an amendment to the Certificate of Formation filed in
the office of the Secretary of State of the State of Delaware on March 31, 2000,
the name of the LLC was changed to LearningExpress.com LLC;
WHEREAS, pursuant to an amendment to the Certificate of Formation filed in
the office of the Secretary of State of the State of Delaware on April 12, 2000,
the name of the LLC was changed to LearningExpress.com Holdings LLC;
WHEREAS, Sharon DiMinico, Louis DiMinico, Steven P. Manfredi, Hal Cook,
Charles Will and Jerry Pope entered into that certain LearningExpress.com
Holdings LLC Operating Agreement as of April 13, 2000 (the "Original
Agreement");
WHEREAS, the Members (including those Persons being admitted as Members
pursuant to the execution hereof) hereby wish to amend and restate the Original
Agreement in its entirety; and
WHEREAS, capitalized terms used herein, and not otherwise defined herein,
have the meanings ascribed to them in Appendix I annexed hereto, made a part
hereof and hereby incorporated herein;
NOW, THEREFORE, in consideration of the mutual covenants herein expressed,
the Original Agreement is hereby amended and restated in its entirety as
follows:
1. Principal Office; Registered Office and Registered Agent. The principal
office of the LLC shall initially be 29 Buena Vista Street, Ayer, MA 01432. The
name and address of the registered agent of the LLC for service of process
pursuant to the Act shall initially be The Corporation Trust Company, 1209
Orange Street, Wilmington, Delaware 19801,
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<PAGE> 2
and the LLC's registered office in the State of Delaware shall be c/o The
Corporation Trust Company, 1209 Orange Street, Wilmington, Delaware 19801. The
Board of Managers may, upon compliance with the applicable provisions of the
Act, change the LLC's principal office, its registered office or registered
agent from time to time, all as determined by the Board of Managers.
2. Purpose. The LLC was formed for the purpose of engaging in any lawful act or
activity for which limited liability companies may be formed under the Act,
including, without limitation, holding membership interests in
LearningExpress.com LLC, a Delaware limited liability company, and engaging in
any and all activities necessary, advisable, convenient or incidental thereto.
The LLC shall have all the powers necessary or convenient to carry out the
purposes for which it is formed, including the powers granted by the Act. Except
as otherwise required by the Act or other applicable law, in connection
therewith, the Board of Managers shall have the authority to (i) exercise all
the powers and privileges granted to an LLC by the Act or any other law or this
Agreement, together with any powers incidental thereto, so far as such powers
are necessary or convenient to the conduct, promotion or attainment of the
business, trade, purposes or activities of the LLC in the State of Delaware or
in any other jurisdiction in which the LLC shall conduct business and (ii) take
any other action not prohibited under the Act or other applicable law; and,
except as provided in Section 3(a) hereof, no Member acting in its capacity as a
Member shall have any authority, power or privilege to act on behalf of or to
bind the LLC.
3. Management.
(a) Designation and Removal of Managers. The LLC shall initially have
seven managers (each, a "Manager"). For purposes of this Agreement, the term
"Board of Managers" shall mean the Managers of the LLC in the aggregate acting
as the governing body of the LLC. The Managers of the LLC shall be designated as
follows:
(i) So long as that certain License Agreement, dated as of
November 5, 1999 by and between The Learning Express, Inc., a
Massachusetts corporation ("LEI") and LearningExpress.com LLC
is in full force and effect, one Manager (the "LEI-Designated
Manager") shall be designated by LEI, which Manager shall
initially be Sharon DiMinico.
(ii) One Manager, who shall also be the Chairman of the Board of
Managers, shall be the Person currently serving as Chief
Executive Officer of the LLC, which Manager shall initially be
Steven Manfredi.
(iii) Three Managers (the "Franchisee-Designated Managers") shall be
selected by the unanimous vote of the LEI-Designated Manager
and the Chairman of the Board of Managers from a list of
nominees submitted by LEI's Franchisee Advisory Board, which
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<PAGE> 3
nominees must initially and continue to be franchisees in good
standing with LEI. Such Managers shall initially be Kenneth
Levinsohn, Ira Marks and W. Edmund Hobson.
(iv) Two Managers (the "Independent Managers") shall initially be
selected by the unanimous vote of the other five members of
the Board of Managers.
Additional Managers may be appointed by Consent of the Board of Managers so long
as two of the Managers voting in favor of such appointment are the
LEI-Designated Manager and the Chairman of the Board of Managers. If at any time
there is no Manager, the number of Managers may be determined, and one or more
Managers may be designated, by approval of a Majority in Interest of the
Members. A Manager's status as a Manager may be terminated, and a vacancy on the
Board of Managers may be filled, as follows:
(I) The LEI-Designated Manager may be removed or designated at any
time by LEI.
(II) If the Person currently serving as the Chief Executive Officer
of the LLC is terminated and replaced by another Person, such
other Person shall automatically replace such first Person as
Manager and the Chairman of the Board of Managers.
(III) Each of both the Franchisee-Designated Managers and the
Independent Managers may be removed or designated at any time
by the Consent of the Board of Managers.
No Manager may resign from, retire from, abandon or otherwise terminate its
status as a Manager except upon prior notice to the LLC. Any vacancy on the
Board of Managers may be filled by Consent of the Board of Managers.
(b) Actions of Board of Managers. Except as otherwise provided in Section
3(a) hereof, all decisions or actions to be made or taken by the Board of
Managers shall require the "Consent of the Board of Managers," which shall mean
the affirmative vote of more than fifty percent (50%) of the votes represented
on the Board of Managers. Until there are seven Managers, each of both the
LEI-Designated Manager and the Chairman of the Board of Managers shall have two
votes to cast on all matters coming before the Board of Managers. The remaining
Managers shall each have one vote. For avoidance of doubt, so long as the LLC
has seven Managers, the Consent of the Board of Managers shall mean four
affirmative votes, so long as the LLC has six Managers, the Consent of the Board
of Managers shall mean five affirmative votes, so long as the LLC has five or
four Managers, the Consent of the Board of Managers shall mean four affirmative
votes and so long as the LLC has three Managers, the Consent of the Board of
Managers shall mean three affirmative votes.
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<PAGE> 4
(c) Transactions with Affiliates. The Board of Managers may cause the LLC
to enter into one or more agreements, leases, contracts or other arrangements
for the furnishing to or by the LLC of goods, services or space with any Member,
Manager or an Affiliate thereof, and may pay compensation thereunder for such
goods, services or space, provided in each case the Board of Managers has
determined in good faith that the terms of any such arrangements are in, or not
opposed to, the best interests of the LLC.
(d) Power of Managers to Bind the LLC. The signature of any Manager acting
alone on any agreement, contract, instrument or other document shall be
sufficient to bind the LLC in respect thereof and conclusively evidence the
authority of the Board of Managers and the LLC with respect thereto, and no
third party need look to any other evidence or require joinder or consent of any
other party to bind the LLC or to evidence such authority.
(e) Appointment of Officers and Other Agents. The Board of Managers may
appoint one or more individuals as agents of the LLC with, in each case, such
title and duties and power and authority as the Board of Managers shall
determine from time to time, and such agents may be referred to as officers of
the LLC; provided, however, that no such appointment by the Board of Managers
shall by itself cause any Manager to cease to be a "manager" of the LLC within
the meaning of the Act or this Agreement or restrict the ability of any Manager
to exercise the powers so delegated. Unless the authority of the agent
designated as the officer in question is limited in the document appointing such
officer or is otherwise specified by the Board of Managers, any officer so
appointed shall have the same authority to act for the LLC as a corresponding
officer of a Delaware corporation would have to act for a Delaware corporation
in the absence of a specific delegation of authority. The initial officers of
the LLC shall be as follows:
Chairman of the Board of Managers: Steven P. Manfredi
Chief Executive Officer: Steven P. Manfredi
Chief Operating Officer: Michael J. Sanders
Chief Financial Officer: Glenn E. Davis
(f) Standard of Care for Board of Managers. The Managers shall perform
their duties hereunder in good faith and with that degree of care that an
ordinarily prudent Person in a like position would use under similar
circumstances. The Board of Managers shall be entitled to rely, in the
performance of such duties, on information, opinions, reports or statements,
including financial statements, in each case prepared by one or more agents or
employees, counsel, public accountants or other Persons employed by the LLC, as
to matters that such Managers believe to be within such Persons' special
competence.
(g) Board of Manager Observer. So long as that certain License Agreement
by and between The Learning Express, Inc. and LearningExpress.com LLC is in
full force and effect, the LEI-Designated Manager may invite one observer to
the Board of Managers who, while having no voting rights, shall be permitted to
attend meetings of the Board of Managers. Such observer to the Board of
Managers must be a member of management of The Learning Express, Inc. and may
be removed at any time by the LEI-Designated Manager.
4. Capital Contributions; Capital Accounts; and Liability of Members.
(a) Capital of Members. The capital contributions that each Member has
made to the LLC on or before the date of this Agreement are set forth on
Schedule A, and
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<PAGE> 5
the number of Shares owned by such Member is also set forth on such Schedule A.
The Board of Managers shall amend Schedule A from time to time to properly
reflect any changes in the capital contributions made by, or the number of
Shares owned by, the Members.
(b) Additional Capital. No Member shall be obligated to contribute any
additional capital to the LLC.
(c) Capital Accounts. A separate capital account (each, a "Capital
Account") shall be established for each Member and shall be maintained in
accordance with applicable regulations ("Treasury Regulations") under the
Internal Revenue Code of 1986, as amended (the "Code").
(d) Liability of Members. The liability of a Member for the losses, debts
and obligations of the LLC shall be limited to its capital contributions
theretofore made to the LLC by such Member (or its predecessor in interest)
which have not been repaid to or withdrawn by such Member (or its predecessor in
interest) in accordance with the terms of this Agreement. No Member, in its
capacity as a Member, shall have any liability to restore any negative balance
in its Capital Account.
(e) Admission of Additional Members. Subject to any restrictions or other
applicable procedures imposed by this Agreement (including the Statement of
Designations attached hereto as Appendix II), additional members may be admitted
to the LLC on such terms and conditions as may be specified by the Board of
Managers. In connection with any such admission, including any admission due to
a Transfer of all or part of an interest under Section 8 hereof, Schedule A
shall be amended by the Board of Managers to reflect the inclusion of the
additional Member(s). The Board of Managers is hereby authorized to amend this
Agreement, without the consent of any Member, to provide for additional classes
or groups of members of the LLC having such relative rights, powers and duties
as the Board of Managers shall determine in its sole discretion, including but
not limited to rights, power and duties senior to existing classes or groups of
members.
5. Return of Contributions. No Member shall have the right to withdraw or to be
repaid any capital contributed by it or to receive any other payment in respect
of such Member's interest in the LLC, including without limitation as a result
of the withdrawal or resignation of such Member from the LLC, except as
specifically provided in this Agreement.
6. Distributions.
(a) Statement of Designations Incorporated by Reference. The Statement of
Designations attached hereto as Appendix II (the "Statement of Designations") is
incorporated herein by reference, and its provisions, including without
limitation its provisions regarding distributions with respect to Series A
Preferred Shares, constitute an integral part of this Agreement.
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<PAGE> 6
(b) Distributions. Except as otherwise provided in the Statement of
Designations with respect to distributions upon liquidation of the LLC, the
Board of Managers may determine in its sole discretion to cause the LLC to make
distributions of net cash flow available for distribution, less expenses of the
LLC and reasonable reserves, all as determined by the Board of Managers, among
the Members in accordance with the provisions of Section 4 of the Statement of
Designations. All distributions on liquidation of the LLC shall be made in
accordance with the provisions of Section 5 of the Statement of Designations.
(c) Distributions of Cash and Other Property. Except as the Board of
Managers may otherwise determine, all distributions to Members shall be made in
cash. If any assets of the LLC are distributed in kind, such assets shall be
distributed on the basis of their fair market value as determined by the Board
of Managers. Any amounts not distributed upon liquidation of the LLC pursuant to
Section 6(b) hereof on account of expenses and reserves shall serve to reduce
the distributions made to each Member pursuant to Section 6(b) hereof in a
manner reasonably determined by the Board of Managers. Any such reserves as
remain after payment of contingent liabilities shall be distributed to the
Members in the manner in which they served to reduce the distributions thereto.
(d) Tax Distributions. The Board of Managers shall, to the extent of the
cash then available to the LLC, make a distribution (a "Tax Distribution") to
the Members entitled thereto not later than the date specified below. The LLC
shall make a Tax Distribution prior to the tenth day of April, June, September
and January of each fiscal year in an amount equal to one quarter (1/4) of the
Members' Estimated Tax Liability. For purposes of this Section 6(d), the
"Members' Estimated Tax Liability" means the product of (i) the taxable income
of the LLC for the then current fiscal year (except that the January
distribution shall be for the previous calendar quarter), as projected from time
to time in good faith by the Board of Managers multiplied by (ii) the Tax
Distribution Rate, which amount shall be distributed among the Members pro rata
in proportion to their respective estimated allocable shares of such taxable
income for such year, as so projected; provided, however, that the Tax
Distribution payable to the Members for a fiscal year (or portion thereof) shall
be reduced to reflect net losses and deductions (i.e., the excess of losses and
deductions over income and gains) and credits allocated by the LLC to the
Members generally for federal income tax purposes in any and all earlier periods
(except to the extent previously applied to reduce a Tax Distribution or to the
extent the carryforward period for such losses or credits has expired). For
purposes of this Section 6(d), the "Tax Distribution Rate" shall initially mean
45% or such other percentage as may be approved by the Board of Managers from
time to time as the approximate highest current marginal combined federal and
state income tax rate applicable to an individual resident in Massachusetts
(determined after giving effect to the deduction (if allowable) of state income
taxes for federal income tax purposes). All amounts
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<PAGE> 7
distributed to Members pursuant to this Section 6(d) shall be advances of
amounts otherwise distributable to Members under the provisions of Section 6
hereof.
(e) Withholding of Taxes. Each Member hereby authorizes the LLC to
withhold and pay over any withholding or other taxes payable by the LLC as a
result of such Member's status as a Member. Such Member shall be deemed for all
purposes of this Agreement to have received a distribution from the LLC in the
amount and as of the time each such withholding is paid by the LLC.
7. Allocations and Certain Tax Matters.
(a) Allocations of Income, Gain, Deduction and Loss. All items of income,
gain, deduction and loss of the LLC as determined for federal income tax
purposes shall be allocated among the Members, and shall be credited or debited
to their respective Capital Accounts in accordance with Treasury Regulation
Section 1.704-1(b)(2)(iv), so as to ensure to the maximum extent possible that
such allocations satisfy the economic effect equivalence test of Treasury
Regulation Section 1.704-1(b)(2)(ii)(i). In accordance therewith, all items that
can have economic effect shall be allocated in such a manner that the balance of
each Member's Capital Account at the end of any taxable year of the LLC
(increased by the sum of (1) such Member's "share of partnership minimum gain"
as defined in Treasury Regulation Section 1.704-2(g)(1) plus (2) such Member's
"share of partner nonrecourse debt minimum gain" as defined in Treasury
Regulation Section 1.704-2(i)(5)) would be positive in the amount of cash that
such Member would receive if the LLC sold all of its assets for an amount of
cash equal to the book value (as determined pursuant Treasury Regulation Section
1.704-1(b)(2)(iv)(g)) of such assets (reduced, but not below zero, by the amount
of nonrecourse debt to which such property is subject) and all of the cash of
the LLC remaining after payment of all liabilities (other than nonrecourse
liabilities) of the LLC were distributed in liquidation of the LLC immediately
following the end of such taxable year pursuant to Section 6(b) hereof. All
items of income, gain, deduction and loss that cannot have economic effect
(including nonrecourse deductions) shall be allocated in accordance with the
Members' interests in the LLC, which, unless otherwise required by Code Section
704(b) and the Treasury Regulations thereunder, shall be in proportion to the
number of Common Shares held by each Member (treating all Series A Preferred
Shares as having been converted into Common Shares for purposes of this
calculation).
(b) Tax Allocations. Items of income, gain, deduction and loss for
purposes of determining the Members' Capital Accounts (that is, for "book
purposes") shall be determined in accordance with the same principles as such
items are determined for reporting such items on the LLC's federal income tax
return. All items of income, gain, deduction, loss or credit for tax purposes
shall be determined in accordance with the Code and, except to the extent
otherwise required by the Code, allocated to and among the Members in the same
percentages in which the Members share in such items for book purposes.
Notwithstanding the foregoing, if the book value of property differs from its
tax basis, then for the purposes of this Agreement, all determinations of
income, gain,
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deduction and loss for tax purposes shall be determined with respect to such
book value in accordance with the rules of Treasury Regulation Section
1.704-1(b)(2)(iv)(g).
(c) Certain Allocations with Respect to Contributed Property. In
accordance with Code Section 704(c) and the Treasury Regulations thereunder,
items of depreciation, amortization, gain, loss, and deduction with respect to
any property contributed to the capital of the LLC shall, solely for tax
purposes, be allocated among the Members so as to take account of any variation
between the adjusted basis of such property to the LLC for federal income tax
purposes and its initial book value, such allocation to be made by the Board of
Managers in accordance with the so-called "traditional method with curative
allocations solely in the case of a sale of property" as provided under Treasury
Regulation Section 1.704-3(c)(iii)(B).
(d) Tax Elections. Any elections or other decisions relating to
allocations of income, gain, deduction, loss or credit hereunder or any other
tax elections (including elections under Code Section 754) that must be made at
the LLC level (as opposed to by the LLC's Members) shall be made (or not made)
by the Board of Managers in its sole discretion.
(e) Shares Held During Portion of Taxable Year. For purposes of
determining the income, gain, loss, deduction or credit, or any other items
allocable to any period, such items shall be determined on a daily, monthly, or
other basis, as determined by the Board of Managers using any permissible method
under Code Section 706 and the Treasury Regulations thereunder.
(f) Consistent Reporting. The Members are aware of the income tax
consequences of the allocations made by this Section 7 and hereby agree to be
bound by the provisions of this Section 7 in reporting their distributive shares
of LLC income and loss for income tax purposes.
8. Restrictions on Transfers of Shares.
(a) Restrictions in General. Prior to the completion of a firm commitment
underwritten initial public offering of equity securities of the LLC or any
successor, no Common Member may Transfer such Member's interest in the LLC or
any part thereof, or in all or any part of the assets of the LLC, and no Common
Member may withdraw from, resign from, retire from, abandon or otherwise
terminate its status as a Member, except as follows:
(1) with the Consent of the Board of Managers in connection with an
approved assignment of such Member's franchise agreement or regional franchise
license agreement with LEI;
(2) as a collateral pledge of its economic interest only, to an
institutional lender, and the lender will not have the right to be admitted to
the LLC as a Member; or
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<PAGE> 9
(3) to an individual Common Member's family members (or the family
members of any individual who controls an entity that is a Common Member) and
trusts for the benefit of such family members for estate planning purposes or to
a deceased individual Common Member's executor or administrator.
Notwithstanding anything to the contrary herein, no Member shall transfer its
interest in the LLC to the extent that such transfer would violate the
Securities Act of 1933, as amended, or any other federal or state securities or
blue sky laws. Subject to the immediately preceding sentence and Section 8(c)
hereof, Shares held by the Series A Members (including, without limitation,
Common Shares issued upon conversion of Series A Preferred Shares) shall be
freely transferable.
(b) Issuance of Shares. During the term of this Agreement, the LLC shall
not issue any Shares to any Person (other than a Person which is already a
Member hereunder) unless such Person agrees in writing to be bound by all of the
provisions of this Agreement applicable to a Member of the relevant Member
Group.
(c) Market Stand-Off Agreement. No Member shall sell, dispose of,
transfer, make any short sale of, grant any option for the purchase of, or enter
into any hedging or similar transaction with the same economic effect as a sale,
any interest in or other securities of the LLC or any successor-in-interest held
by such Member or, as the case may be, the respective successors, successors in
title, heirs and assigns of each such Member (including the Common Shares), for
a period of time specified by a managing underwriter (not to exceed one hundred
eighty (180) days in the case of any initial public offering and not to exceed
ninety (90) days) in the case of any subsequent public offering) following the
effective date of a registration statement of the LLC or any
successor-in-interest filed under the Securities Act with respect to a firm
commitment underwritten public offering. Each Member agrees to execute and
deliver such other agreements as may be reasonably requested by the LLC or any
successor-in-interest and/or the managing underwriter which are consistent with
the foregoing or which are necessary to give further effect thereto. In order to
enforce the foregoing covenant, the LLC or any successor-in-interest may impose
stop-transfer instructions with respect to the Common Shares until the end of
such period.
(d) Forfeiture Upon Termination of Franchise Agreement. Prior to the
completion of a firm commitment underwritten initial public offering of equity
securities of the LLC or any successor, Common Shares held by any franchisee or
"regional owner" of LEI shall be forfeited to the LLC immediately upon the
termination of such franchisee's or regional owner's franchise agreement or
franchise license agreement, as the case may be, with LEI or the termination of
the amendment thereto pursuant to which such franchisee or regional owner
received its Common Shares.
9. Priorities. No Member shall have any rights or priority over any other
Members as to contributions or as to distributions or compensation by way of
income, except as specifically provided in this Agreement (including the
Statement of Designations).
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10. Term; Dissolution of the LLC.
(a) Term. The term of the LLC shall be perpetual, unless sooner terminated
as hereinafter provided.
(b) Events of Dissolution or Liquidation. The LLC shall be dissolved upon
the happening of any of the following events:
(1) the Consent of the Board of Managers;
(2) the sale of all or substantially all of the assets of the LLC;
or
(3) the entry of a decree of judicial dissolution under the Act.
Following any of the foregoing events, the Board of Managers shall proceed
diligently to liquidate the assets of the LLC in a manner consistent with
commercially reasonable business practices.
(c) Distributions upon Liquidation. In connection with the liquidation of
the LLC, the assets of the LLC shall be applied and distributed in the following
order of priority:
(1) to creditors of the LLC, including Members, in the order of
priority provided by law, and the creation of a reserve of cash or other
assets of the LLC for contingent liabilities in an amount, if any,
determined by the Board of Managers to be appropriate for such purposes;
and
(2) to the Members in accordance with the provisions of Section 6.
11. Financial and Accounting Matters.
(a) Books and Records. The Board of Managers shall keep or cause to be
kept complete and accurate books and records of the LLC, using the same methods
of accounting that are used in preparing the federal income tax returns of the
LLC to the extent applicable and otherwise in accordance with generally accepted
accounting principles consistently applied. Such books and records shall be
maintained and available, in addition to any documents and information required
to be furnished to the Members under the Act, at the principal business office
of the LLC for examination and copying by any Member or Manager, or its duly
authorized representative, at its reasonable request and at its expense during
ordinary business hours. A current list of the full name and last known address
of each Member and Manager, a copy of this Agreement, any amendments thereto and
the Certificate of Formation, executed copies of all powers of attorney, if any,
pursuant to which this Agreement, any amendment, or the Certificate of Formation
has been executed, copies of the LLC's financial statements and federal, state
and local income tax returns and reports, if any, for each of the last 6 fiscal
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years, shall be maintained at the principal business office of the LLC along
with such other information, if any, as may be required to be made available to
Members pursuant to Section 18-305 of the Act. On or before the due date
(including extensions) of the federal income tax return of the LLC for each
fiscal year of the LLC, each Member shall be furnished with copies of the LLC's
federal income tax return for the fiscal year then ended and any other tax
information reasonably required for state or local tax purposes.
(b) Bank Accounts. Bank accounts and/or other accounts of the LLC shall be
maintained in such banking and/or other financial institution(s) as shall be
selected by the Board of Managers, and withdrawals shall be made and other
activity conducted on such signature or signatures as shall be designated by the
Board of Managers.
(c) Fiscal Year. Except as otherwise required by the Code, the fiscal year
(and taxable year) of the LLC shall end on December 31 of each year.
(d) Tax Matters Partner. Steven Manfredi shall be the "tax matters
partner" of the LLC for purposes of the Code, until his bankruptcy, insolvency,
resignation or the designation of his successor, whichever occurs sooner. Any
subsequent "tax matters partner" shall be designated from time to time by the
Board of Managers.
12. Indemnity; Other Business.
(a) Indemnity. Each Member, each Manager and any other entity or
individual authorized to act on behalf of the LLC shall be entitled to indemnity
from the LLC for any liability incurred and/or for any act performed within the
scope of the authority conferred, and/or for any act omitted to be performed,
which indemnification shall include all reasonable expenses incurred, including
reasonable legal and other professional fees and expenses; provided, however,
that such Person acted in good faith and in a manner reasonably believed to be
in or not opposed to the best interests of the LLC.
(b) Outside Interests. The Members, the Managers, and any Affiliates of
any of them may engage in and possess interests in other business ventures and
investment opportunities of every kind and description, independently or with
others, including serving as manager and general partner of other limited
liability companies and partnerships; provided, however, that no such other
business venture or investment opportunity shall be in direct competition with
the business and activities of the LLC. Neither the LLC nor any other Member or
Manager shall have any rights in or to such ventures or opportunities or the
income or profits therefrom.
13. Miscellaneous.
(a) Binding Effect. Subject to the restrictions on Transfers set forth
herein, the terms of this Agreement shall be binding upon and shall inure to the
benefit of the Members, their respective successors, successors-in-title, heirs
and assigns; and each and every successor-in-interest to any Member, whether
such successor acquires a Share by
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way of inheritance, gift, purchase, foreclosure or any other method, shall hold
such Share subject to all of the terms and provisions of this Agreement. None of
the provisions of this Agreement shall be for the benefit of or enforceable by
any Person not a party hereto, who is a creditor of the LLC (including any
Member acting in its capacity as a creditor of the LLC) or a creditor of any
Member.
(b) Amendment. No change, modification or amendment of this Agreement
shall be valid or binding unless such change, modification or amendment is made
with the consent of a Majority in Interest of the Members.
(c) Liquidation upon IPO of LearningExpress.com LLC or any Affiliate. Each
Member hereby acknowledges and agrees that, unless determined otherwise by the
Board of Managers, effective upon determination of the Board of Managers in
connection with completion of an initial public offering of equity securities by
a corporate successor to LearningExpress.com LLC or any of its Affiliates
(including the LLC), the LLC will be liquidated, without further consent or
agreement of any Member, and the Members will receive shares of capital stock of
the corporate successor to LearningExpress.com LLC or such Affiliate having
substantially similar preferences, rights, qualifications and restrictions as
pertain to their Shares immediately prior to such liquidation.
(d) Governing Law. This Agreement and the rights and obligations of the
parties hereunder shall be governed by and interpreted and enforced in
accordance with the laws of the State of Delaware, notwithstanding any choice of
law rules to the contrary.
(e) Counterparts. This Agreement may be executed in any number of
counterparts, all of which together shall for all purposes constitute one
Agreement, binding on all the Members notwithstanding that all Members have not
signed the same counterpart.
(f) Notices. Any and all notices under this Agreement shall be effective
(i) on the fifth business day after being sent by certified mail, return receipt
requested, postage prepaid, or (ii) on the first business day after being sent
by express mail, telecopy, or commercial expedited delivery service providing a
receipt for delivery. All such notices in order to be effective shall be
addressed, if to the LLC at its registered office under the Act, if to a Member
at the last address of record on the LLC's books, and copies of such notices
shall also be sent to the last address for the recipient which is known to the
sender, if different from the address so specified. Copies of such notices shall
also be sent to Goulston & Storrs, P.C., 400 Atlantic Avenue, Boston, MA 02110,
Attention: Kitt Sawitsky, Esquire.
(g) Interpretation. As used herein, the singular shall include the plural
and the masculine gender shall include the feminine and neuter, and vice-versa,
unless the context otherwise requires.
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(h) Entire Agreement. This Agreement, including all Schedules and
Appendices attached hereto and the Certificate of Formation, which are hereby
incorporated herein, embodies the entire agreement and understanding among the
parties hereto with respect to the subject matter hereof and supersedes all
prior agreements and understandings relating to such subject matter.
(i) Severability. If one or more provisions of this Agreement are held to
be unenforceable under applicable law, the parties agree to renegotiate such
provision in good faith. In the event that the parties cannot reach a mutually
agreeable and enforceable replacement for such provision, then (a) such
provision shall be excluded from this Agreement, (b) the balance of this
Agreement shall be interpreted as if such provision were so excluded, and (c)
the balance of this Agreement shall be enforceable in accordance with its terms.
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IN WITNESS WHEREOF, the Managers and Members have executed this Agreement
as of the date first above written.
MANAGERS:
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Sharon DiMinico
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Steven Manfredi
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Kenneth Levinsohn
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Ira Marks
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W. Edmund Hobson
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<PAGE> 15
MEMBER SIGNATURE PAGES
COMMON MEMBERS:
- ----------------------
Sharon DiMinico
SERIES A MEMBERS:
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Sharon DiMinico
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Louis DiMinico
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Charles Will
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Steven P. Manfredi
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Hal Cook
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Jerry Pope
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<PAGE> 16
SCHEDULE A
TO
LIMITED LIABILITY COMPANY OPERATING AGREEMENT
OF
LEARNINGEXPRESS.COM HOLDINGS LLC
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
MEMBER CAPITAL CLASS OF NUMBER OF
CONTRIBUTION SHARES SHARES
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sharon DiMinico $ 0 Common 14,250
- ----------------------------------------------------------------------------------------
Franchisees/Regional $ 0 Common 2,607,750
- ----------------------------------------------------------------------------------------
Sharon DiMinico $ 149,999.50 Series A Preferred 85,714
- ----------------------------------------------------------------------------------------
Lou DiMinico $ 149,999.50 Series A Preferred 85,714
- ----------------------------------------------------------------------------------------
Steven P. Manfredi $ 200,000.00 Series A Preferred 114,286
- ----------------------------------------------------------------------------------------
Hal Cook $ 250,000.00 Series A Preferred 142,857
- ----------------------------------------------------------------------------------------
Charles Will $ 200,000.00 Series A Preferred 114,286
- ----------------------------------------------------------------------------------------
Jerry Pope $ 100,000.00 Series A Preferred 57,143
- ----------------------------------------------------------------------------------------
Reg. A Series A Investors $2,712,500.00 Series A Preferred 1,550,000
- ----------------------------------------------------------------------------------------
TOTAL $ 3,762,499 FULLY DILUTED 4,772,000
COMMON SHARES
- ----------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 17
APPENDIX I
DEFINED TERMS
The following capitalized terms shall have the meanings specified in this
Appendix I. Other capitalized terms are defined in the Statement of Designations
attached hereto as Appendix II, and those terms shall have the meanings
respectively ascribed to them.
"Act" shall have the meaning set forth in the first recital to this
Agreement.
"Affiliate" means, with respect to a specified Person, any other Person
that directly or indirectly controls, is under common control with, or is
controlled by the specified Person. As used herein, the term "control" means the
possession by a Person, directly or indirectly, of the power to direct or cause
the direction of the management and policies of another Person, whether through
ownership of voting securities, by contract or otherwise.
"Agreement" shall have the meaning set forth in the Preamble to this
Agreement.
"Board of Managers" shall have the meaning set forth in Section 3(a).
"Capital Account" shall have the meaning set forth in Section 4(c).
"Certificate of Formation" shall have the meaning set forth in the first
recital to this Agreement.
"Code" shall have the meaning set forth in Section 4(c).
"Common Member" means any holder of Common Shares who is not a Series A
Member.
"Common Shares" means the Shares in the LLC other than Series A Preferred
Shares.
"Consent of the Board of Managers" shall have the meaning set forth in
Section 3(b).
"Franchisee-Designated Managers" shall have the meaning set forth in
Section 3(a)(iii).
"Independent Managers" shall have the meaning set forth in Section
3(a)(iv).
"LEI-Designated Manager" shall have the meaning set forth in Section
3(a)(i).
"LEI" shall have the meaning set forth in Section 3(a)(i).
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<PAGE> 18
"LLC" shall have the meaning set forth in the first recital to this
Agreement.
"Majority in Interest" means, with respect to any Member Group (or
multiple Member Groups when voting collectively as a single group), more than
fifty percent (50%) of the number of Common Shares owned by all Members of such
Member Group (or such combined Member Groups) in the aggregate. For purposes of
this definition, Series A Members shall be deemed to own the number of Common
Shares into which their Series A Preferred Shares are convertible, and the
number of such Series A Members' Series A Preferred Shares shall be disregarded.
"Majority in Interest of the Franchisees" means franchisees and regional
owners in good standing holding more than fifty percent (50%) of the franchised
locations and regional territories of LEI.
"Manager" shall have the meaning set forth in Section 3(a).
"Member" and "Members" shall have the meanings set forth in the Preamble
to this Agreement.
"Member Group" means a group of Members consisting solely of the Common
Members collectively or the Series A Members collectively, as the context may
indicate.
"Members' Estimated Tax Liability" shall have the meaning set forth in
Section 6(d).
"Original Agreement" shall have the meaning set forth in the fourth
recital to this Agreement.
"Person" means any natural person or any general partnership, limited
partnership, limited liability partnership, corporation, joint venture, trust,
business trust, cooperative, association, or limited liability company, and
shall include the heirs, executors, administrators, legal representatives,
successors and assigns of such Person where the context so admits.
"Series A Members" means the Members holding Series A Preferred Shares
(and any Common Shares issued upon conversion of Series A Preferred Shares) and
their respective successors and assigns in respect of such Shares. All Series A
Members shall retain their status as such regardless of the conversion of all or
any portion of their Series A Preferred Shares into Common Shares.
"Series A Preferred Shares" means the Series A Convertible Preferred
Shares, having the rights, limitations and preferences established by the
Statement of Designations.
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<PAGE> 19
"Shares" means all units of membership interest in the LLC held by each
Member, whether now owned or hereafter acquired. The term "Shares" includes,
collectively, Common Shares and Series A Preferred Shares.
"Statement of Designations" shall have the meaning set forth in Section
6(a).
"Tax Distribution" shall have the meaning set forth in Section 6(d).
"Tax Distribution Rate" shall have the meaning set forth in Section 6(d).
"Transfer" means, when used as a noun, any disposition of Shares or any
interest therein, for value or otherwise, including, without limitation, any
sale, gift, bequest, assignment, pledge or encumbrance, and whether effected by
contract, by operation of law or otherwise. "Transfer," when used as a verb,
shall have a correlative meaning.
"Treasury Regulations" shall have the meaning set forth in Section 4(c).
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<PAGE> 20
APPENDIX II
STATEMENT OF DESIGNATIONS, PREFERENCES
AND RIGHTS OF COMMON SHARES AND SERIES A CONVERTIBLE PREFERRED SHARES OF
LEARNINGEXPRESS.COM HOLDINGS LLC
This Statement of Designations (the "Statement of Designations")
constitutes an integral part of the Limited Liability Company Operating
Agreement (the "Operating Agreement"), effective as of the 5th day of November,
1999, by and among the Persons listed as Members on Schedule A of the Operating
Agreement, and any other Person who may be admitted as a Member pursuant to
Section 4(e) thereof, for all purposes as if the Statement of Designations had
been contained in the main section thereof rather than attached thereto as an
Appendix. The following is a statement of the designation and the preferences,
rights, qualifications and restrictions relating to the Common Shares and the
Series A Convertible Preferred Shares:
1. Definitions. All capitalized terms used in this Statement of
Designations, and not otherwise defined herein, shall have the meanings ascribed
to them below. Other capitalized terms shall have the same meanings ascribed to
them in the Operating Agreement. Section references used herein are to Sections
of this Statement of Designations (unless otherwise specified).
(a) "Convertible Securities" shall mean any evidences of
indebtedness, Shares or other securities directly or indirectly convertible into
or exchangeable for Common Shares.
(b) "Conversion Price" shall have the meaning set forth in Section
7(a) hereof.
(c) "Conversion Rights" shall have the meaning set forth in Section
7(a) hereof.
(d) "Equity Securities" means any Share or other similar security of
the LLC, including, without limitation, securities containing equity features
and securities containing profit participation features, and any debt or equity
security convertible or exchangeable, with or without consideration, into or for
any Share or similar security, or any security carrying any warrant, option or
right to subscribe for or to purchase any of the foregoing.
(e) "Mandatory Conversion Date" shall have the meaning set forth in
Section 7(c)(ii) hereof.
(f) "Original Issue Date" shall mean the date on which the first
Series A Preferred Share is originally issued.
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<PAGE> 21
(g) "Public Offering" shall mean an underwritten public offering of
Common Shares of LearningExpress.com LLC or any of its Affiliates (including the
LLC) (or common stock of any successor corporation to LearningExpress.com LLC or
any such Affiliate), subsequent to which the Common Shares of
LearningExpress.com LLC or such Affiliates (or shares of LearningExpress.com
LLC's or such Affiliate's successor's common stock) are listed on a national
securities exchange or on the Nasdaq Stock Market pursuant to an effective
registration statement under the Securities Act of 1933, as amended, or any
successor federal statute thereto.
(h) "Security" means Common Shares, Series A Preferred Shares and
any other securities of any type whatsoever convertible or exchangeable for
Equity Securities.
(i) "Series A Liquidation Value" shall have the meaning set forth in
Section 5(a) hereof.
2. Designation. The series of Shares designated hereunder shall be (a) the
"Common Shares" and (b) the "Series A Convertible Preferred Shares."
3. Authorized Number. The number of Common Shares shall be 5,000,000. The
number of Series A Preferred Shares shall be 3,000,000.
4. Distributions.
All distributions made by the LLC with respect to Shares (other than
distributions in liquidation governed by Section 5 hereof) shall be made to all
Members in proportion to the number of Common Shares held by each Member. For
purposes of this Section 4, all Series A Preferred Shares will be deemed to have
been converted into Common Shares.
For purposes of this Section 4, unless the context requires otherwise,
"distribution" shall mean the transfer of cash or property without
consideration, whether by way of distribution or otherwise, payable other than
in Common Shares or other securities of the LLC, or the purchase or redemption
of Shares of the LLC for cash or property, including any such transfer, purchase
or redemption by an Affiliate of the LLC.
5. Liquidation, Dissolution or Winding Up.
(a) Series A Members. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the LLC, the Series A Members shall be
entitled to be paid out of the assets of the LLC available for distribution to
its Members before any payment shall be made to the Common Members, or owners of
any other class or series of Shares, by reason of their ownership thereof, an
amount equal to the greater of (i) $1.75 per Series A Preferred Share (subject
to appropriate adjustment in the event of any Share distribution, Share split,
combination or other similar recapitalization affecting such Shares) (the
"Series A Liquidation Value"), together with an amount equal to an
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<PAGE> 22
annual cumulative distribution of 8%, compounded annually, of the Series A
Liquidation Value, calculated from the Original Issue Date to the date of such
distribution, or (ii) such amount per Share as would have been payable to the
Series A Members had such Series A Preferred Shares (and any other outstanding
Convertible Securities) been converted into Common Shares pursuant to Section 7
hereof immediately prior to such liquidation, dissolution or winding up. If upon
any such liquidation, dissolution or winding up of the LLC, the remaining assets
of the LLC available for distribution to its Members shall be insufficient to
pay the Series A Members the full amount to which they shall be entitled under
clause (i) above, the Series A Members and Members owning any class or series of
Shares ranking on liquidation on a parity with the Series A Preferred Shares
shall share ratably in any distribution of the remaining assets and funds of the
LLC in proportion to the respective amounts that would otherwise be
distributable in respect of the Shares held by them upon such distribution if
all amounts distributable on or with respect to such Shares were paid in full.
(b) Liquidation in Connection with IPO of LearningExpress.com LLC or
an Affiliate. For purposes of this Section 5, the liquidation of the LLC
pursuant to Section 13(c) of the Operating Agreement shall not be treated as a
dissolution and liquidation of the LLC.
6. Voting. Except as otherwise provided herein or by law, with respect to
any matter requiring a vote of the Members, each Common Share shall entitle its
owner to cast one vote, and each Series A Preferred Share shall entitle its
owner to cast, with respect to each such matter, a number of votes equal to the
number of whole Common Shares into which such Share shall then be convertible.
7. Conversion of Series A Preferred Shares into Common Shares. The Series
A Members shall have conversion rights, and shall be subject to mandatory
conversion, as follows:
(a) Right to Convert. Each Series A Preferred Share shall be
convertible, at the option of the Series A Member that owns such Share, and
without the payment of additional consideration by such Member, into such number
of Common Shares as is determined by dividing (i) the Series A Liquidation Value
by (ii) the Conversion Price (as defined below) in effect at the time of
conversion. The "Conversion Price" shall initially be $1.75 per Series A
Preferred Share. Such initial Conversion Price, and the rate at which Series A
Preferred Shares may be converted into Common Shares, shall be subject to
adjustment as provided below.
In the event of the liquidation of the LLC or any redemption of
Series A Preferred Shares, the rights of the Series A Members to convert such
Shares as provided in this Section 7 (the "Conversion Rights") shall terminate
at the close of business on (i) the third full business day preceding the date
fixed for the payment of any amounts distributable on liquidation or redemption
to the Series A Members or (ii) any earlier Mandatory Conversion Date.
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<PAGE> 23
(b) Automatic Conversion. Each Series A Preferred Share shall,
without any action required on the part of any Series A Member, automatically be
converted into such number of Common Shares as is determined by dividing (i) the
Series A Liquidation Value by (ii) the Conversion Price in effect at the time of
conversion, upon the occurrence of a Public Offering. Upon such occurrence, any
Member entitled to receive the Common Shares issuable upon conversion of the
Series A Preferred Shares shall not be deemed to have converted such Series A
Preferred Shares until immediately prior to the closing of such Public Offering.
(c) Mechanics of Conversion.
(i) Before any Series A Member shall be entitled to receive Common
Shares issuable upon conversion of Series A Preferred Shares pursuant to Section
7(a) hereof, it shall give written notice to the LLC that it elects to convert
the same and shall state therein its name or the name or names of its nominees
in which it wishes the Common Shares to be issued. The Board of Managers shall,
as soon as practicable after receipt of such notice by the LLC or after a
conversion pursuant to Section 7(b) hereof, amend Schedule A of the Operating
Agreement accordingly.
(ii) Voluntary conversions pursuant to Section 7(a) hereof shall be
deemed to have been made immediately prior to the close of business on the date
of such surrender of the Series A Preferred Shares, and the Person or Persons
entitled to receive the Common Shares issuable upon conversion shall be treated
for all purposes as the record owner or owners of such Common Shares on such
date. Automatic conversions pursuant to Section 7(b) hereof shall be deemed to
have been made on the date (the "Mandatory Conversion Date") and at the time
specified in Section 7(b) hereof and the Person or Persons entitled to receive
the Common Shares issuable upon conversion shall be treated for all purposes as
the record owner or owners of such Common Shares on such date and at such time.
(d) Adjustment for Share Splits and Combinations. If the LLC shall
at any time or from time to time after the Original Issue Date effect a
subdivision of the outstanding Common Shares, the Conversion Price then in
effect with respect to the Series A Preferred Shares immediately before that
subdivision shall be proportionately decreased. If the LLC shall at any time or
from time to time after the Original Issue Date combine the outstanding Common
Shares, the Conversion Price with respect to the Series A Preferred Shares then
in effect immediately before the combination shall be proportionately increased.
Any adjustment under this Section 7(d) shall become effective at the close of
business on the date the subdivision or combination becomes effective.
(e) Adjustment for Certain Distributions. In the event the LLC at
any time or from time to time after the Original Issue Date shall make or issue,
or fix a record date for the determination of Common Members entitled to
receive, a distribution payable in additional Common Shares, then and in each
such event the Conversion Price for the Series A Preferred Shares then in effect
shall be decreased as of the time of such issuance or, in the event such a
record date shall have been fixed, as of the close of
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<PAGE> 24
business on such record date, by multiplying the Conversion Price then in effect
by a fraction:
(1) the numerator of which shall be the total number of Common
Shares issued and outstanding immediately prior to the time of such
issuance or the close of business on such record date, and
(2) the denominator of which shall be the total number of
Common Shares issued and outstanding immediately prior to the time
of such issuance or the close of business on such record date plus
the number of Common Shares issuable in payment of such
distribution;
provided, however, if such record date shall have been fixed and such
distribution is not fully paid or if such distribution is not fully made on the
date fixed therefor, the Conversion Price for the Series A Preferred Shares
shall be recomputed accordingly as of the close of business on such record date,
and thereafter the Conversion Price for the Series A Preferred Shares shall be
adjusted pursuant to this Section 7(e) as of the time of actual payment of such
distributions; and provided further, however, that no such adjustment shall be
made if the Series A Members simultaneously receive a distribution of Common
Shares in a number equal to the number of Common Shares they would have received
if all outstanding Series A Preferred Shares had been converted into Common
Shares on the date of such event.
(f) Adjustments for Other Distributions. In the event the LLC at any
time or from time to time after the Original Issue Date of the Series A
Preferred Shares shall make or issue, or fix a record date for the determination
of Common Members entitled to receive, a distribution payable in Securities of
the LLC other than Common Shares, then, and in each such event, provision shall
be made so that the Series A Members shall receive upon conversion thereof in
addition to the number of Common Shares receivable thereupon, the amount of
Securities of the LLC that they would have received had the Series A Preferred
Shares been converted into Common Shares on the date of such event and had they
thereafter, during the period from the date of such event to and including the
conversion date, retained such Securities receivable by them as aforesaid during
such period, giving application to all adjustments called for during such period
under this Section 7(f) with respect to the rights of the Series A Members; and
provided further, however, that no such adjustment shall be made if the Series A
Members simultaneously receive a distribution of such Securities in an amount
equal to the amount of such securities they would have received if all
outstanding Series A Preferred Shares had been converted into Common Shares on
the date of such event.
(g) Adjustment for Reclassification, Exchange or Substitution. If
the Common Shares shall be changed into the same or a different number of Shares
of any class or classes of Shares, whether by capital reorganization,
reclassification, or otherwise (other than a subdivision or combination of
Shares or distribution of Shares provided for above, or a reorganization,
merger, consolidation, or sale of assets provided for below), then, and in each
such event, the Series A Members shall have the right thereafter to
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<PAGE> 25
convert such Common Shares into the kind and amount of Shares and other
securities and property receivable upon such reorganization, reclassification,
or other change, as would be received by owners of the number of Common Shares
into which such Series A Preferred Shares might have been converted immediately
prior to such reorganization, reclassification, or change, all subject to
further adjustment as provided herein.
(h) Adjustment for Merger or Reorganization, Etc. In case of any
consolidation or merger of the LLC with or into another entity or the sale of
all or substantially all of the assets of the LLC to another entity, each Series
A Preferred Share shall thereafter be convertible (or shall be converted into a
security which shall be convertible) into the kind and amount of Shares or other
securities or property to which an owner of the number of Common Shares
deliverable upon conversion of such Series A Preferred Share would have been
entitled upon such consolidation, merger or sale; and, in such case, appropriate
adjustment (as determined in good faith by the Board of Managers) shall be made
in the application of the provisions set forth in this Section 7 with respect to
the rights and interest thereafter of the Series A Members, to the end that the
provisions set forth in this Section 7 (including provisions with respect to
changes in and other adjustments of the Conversion Price applicable to such
Series A Preferred Shares) shall thereafter be applicable, as nearly as
reasonably may be, in relation to any Shares or other property thereafter
deliverable upon the conversion of the Series A Preferred Shares.
(i) No Impairment. The LLC will not, by amendment of its Certificate
of Formation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of Securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed hereunder by the LLC, but will at all times in good faith
assist in the carrying out of all the provisions of this Section 7 and in the
taking of all such action as may be necessary or appropriate in order to protect
the Conversion Rights of the Series A Members against impairment.
(j) Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of the Conversion Price applicable to any Series A
Preferred Shares pursuant to this Section 7, the LLC at its expense shall
promptly compute such adjustment or readjustment in accordance with the terms
hereof and furnish to each Series A Member a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The LLC shall, upon the written request at
any time of any Series A Member, furnish or cause to be furnished to such Member
a similar certificate setting forth (i) such adjustments and readjustments, (ii)
the Conversion Price applicable to the Series A Preferred Shares then in effect,
and (iii) the number of Common Shares and the amount, if any, of other property
which then would be received upon the conversion of a Series A Preferred Share.
(k) Notice of Record Date. In the event:
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<PAGE> 26
(i) that the LLC makes a distribution with respect to its Common
Shares payable in Common Shares or other Securities of the LLC;
(ii) that the LLC subdivides or combines its outstanding Common
Shares;
(iii) of any reclassification of the Common Shares of the LLC (other
than a subdivision or combination of its outstanding Common Shares
or a distribution of Shares with respect to Common Shares), or of
any consolidation or merger of the LLC into or with another entity,
or of the sale of all or substantially all of the assets of the LLC;
or
(iv) of the involuntary or voluntary dissolution, liquidation or
winding up of the LLC;
then the LLC shall cause to be filed at its principal office or at the office of
the transfer agent of Series A Preferred Shares, and shall cause to be mailed to
the Members at their last known addresses as shown on the records of the LLC or
such transfer agent, at least ten days prior to the date specified in (1) below
or twenty days before the date specified in (2) below, a notice stating:
(1) the record date of such distribution, subdivision or
combination, or, if a record is not to be taken, the date as of which the
Common Members of record to be entitled to such distribution, subdivision
or combination are to be determined, or
(2) the date on which such reclassification, consolidation,
merger, sale, dissolution, liquidation or winding up is expected to become
effective, and the date as of which it is expected that Common Members of
record shall be entitled to exchange their Common Shares for securities or
other property deliverable upon such reclassification, consolidation,
merger, sale, dissolution or winding up.
-26-
<PAGE> 1
EXHIBIT 3.6
LEARNINGEXPRESS.COM LLC
FIRST AMENDED AND RESTATED
LIMITED LIABILITY COMPANY OPERATING AGREEMENT
This First Amended and Restated Limited Liability Company Operating
Agreement (the "Agreement"), effective as of the 13th day of April, 2000, is
entered into by and among the Persons identified as Members in Schedule A
annexed hereto, made a part hereof and hereby incorporated herein, each (for
such period of time as it shall remain a Member hereunder) referred to
individually as a "Member" and collectively as the "Members."
WHEREAS, LearningExpress.com LLC (the "LLC") has been formed pursuant to
the Delaware Limited Liability Company Act (the "Act") by the filing on November
5, 1999 of a Certificate of Formation (as such Certificate may be amended from
time to time, the "Certificate of Formation") in the office of the Secretary of
State of the State of Delaware;
WHEREAS, pursuant to an amendment to the Certificate of Formation filed in
the office of the Secretary of State of the State of Delaware on March 29, 2000,
the name of the LLC was changed to LearningExpress.com Holdings LLC;
WHEREAS, pursuant to an amendment to the Certificate of Formation filed in
the office of the Secretary of State of the State of Delaware on April 12, 2000,
the name of the LLC was changed to LearningExpress.com LLC;
WHEREAS, Sharon DiMinico entered into that certain LearningExpress.com LLC
Limited Liability Company Operating Agreement, effective as of November 5, 1999
(the "Original Agreement");
WHEREAS, the Members (including those Persons being admitted as Members
pursuant to the execution hereof) hereby wish to amend and restate the Original
Agreement in its entirety; and
WHEREAS, capitalized terms used herein, and not otherwise defined herein,
have the meanings ascribed to them in Appendix I annexed hereto, made a part
hereof and hereby incorporated herein;
NOW, THEREFORE, in consideration of the mutual covenants herein expressed,
the Original Agreement is hereby amended and restated in its entirety as
follows:
1. Principal Office; Registered Office and Registered Agent. The principal
office of the LLC shall initially be 29 Buena Vista Street, Ayer, MA 01432. The
name and address of the registered agent of the LLC for service of process
pursuant to the Act shall initially be The Corporation Trust Company, 1209
Orange Street, Wilmington, Delaware 19801,
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<PAGE> 2
and the LLC's registered office in the State of Delaware shall be c/o The
Corporation Trust Company, 1209 Orange Street, Wilmington, Delaware 19801. The
Manager may, upon compliance with the applicable provisions of the Act, change
the LLC's principal office, its registered office or registered agent from time
to time, all as determined by the Manager.
2. Purpose. The LLC was formed for the purpose of engaging in any lawful act or
activity for which limited liability companies may be formed under the Act,
including, without limitation, serving as the e-commerce distribution channel of
Learning Express, Inc., a Massachusetts corporation ("LE Inc."), and engaging in
any and all activities necessary, advisable, convenient or incidental thereto.
The LLC shall have all the powers necessary or convenient to carry out the
purposes for which it is formed, including the powers granted by the Act. Except
as otherwise required by the Act or other applicable law, in connection
therewith, the Manager shall have the authority to (i) exercise all the powers
and privileges granted to an LLC by the Act or any other law or this Agreement,
together with any powers incidental thereto, so far as such powers are necessary
or convenient to the conduct, promotion or attainment of the business, trade,
purposes or activities of the LLC in the State of Delaware or in any other
jurisdiction in which the LLC shall conduct business and (ii) take any other
action not prohibited under the Act or other applicable law; and, except as
provided in Section 3(a) hereof, no Member acting in its capacity as a Member
shall have any authority, power or privilege to act on behalf of or to bind the
LLC.
3. Management.
(a) Designation and Removal of Manager. The sole manager (the "Manager")
of the LLC shall be LearningExpress.com Holdings LLC, a Delaware limited
liability company. Additional Managers may be appointed by approval of a
Majority in Interest of the Members. If at any time there is no Manager, the
number of Managers may be determined and one or more Managers may be designated
by approval of a Majority in Interest of the Members. A Manager's status as a
Manager may be terminated at any time by approval of a Majority in Interest of
the Members. The Manager may resign from, retire from, abandon or otherwise
terminate its status as a Manager upon prior notice to the LLC.
(b) Transactions with Affiliates. The Manager may cause the LLC to enter
into one or more agreements, leases, contracts or other arrangements for the
furnishing to or by the LLC of goods, services or space with any Member, Manager
or an Affiliate thereof, and may pay compensation thereunder for such goods,
services or space, provided in each case the Manager has determined in good
faith that the terms of any such arrangements are in, or not opposed to, the
best interests of the LLC.
(c) Power of Manager to Bind the LLC. The signature of the Manager acting
alone on any agreement, contract, instrument or other document shall be
sufficient to bind the LLC in respect thereof and conclusively evidence the
authority of the Manager and the LLC with respect thereto, and no third party
need look to any other evidence or require joinder or consent of any other party
to bind the LLC or to evidence such authority.
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<PAGE> 3
(d) Appointment of Officers and Other Agents. The Manager may appoint one
or more individuals as agents of the LLC with, in each case, such title and
duties and power and authority as the Manager shall determine from time to time,
and such agents may be referred to as officers of the LLC; provided, however,
that no such appointment by the Manager shall by itself cause the Manager to
cease to be a "manager" of the LLC within the meaning of the Act or this
Agreement or restrict the ability of the Manager to exercise the powers so
delegated. Unless the authority of the agent designated as the officer in
question is limited in the document appointing such officer or is otherwise
specified by the Manager, any officer so appointed shall have the same authority
to act for the LLC as a corresponding officer of a Delaware corporation would
have to act for a Delaware corporation in the absence of a specific delegation
of authority.
(e) Standard of Care for Manager. The Manager shall perform its duties
hereunder in good faith and with that degree of care that an ordinarily prudent
Person in a like position would use under similar circumstances. The Manager
shall be entitled to rely, in the performance of such duties, on information,
opinions, reports or statements, including financial statements, in each case
prepared by one or more agents or employees, counsel, public accountants or
other Persons employed by the LLC, as to matters that the Manager believes to be
within such Persons' special competence.
4. Capital Contributions; Capital Accounts; and Liability of Members.
(a) Capital of Members. The capital contributions that each Member has
made to the LLC on or before the date of this Agreement are set forth on
Schedule A, and the number of Shares owned by such Member is also set forth on
such Schedule A. The Manager shall amend Schedule A from time to time to
properly reflect any changes in the capital contributions made by, or the number
of Shares owned by, the Members.
(b) Additional Capital. No Member shall be obligated to contribute any
additional capital to the LLC.
(c) Capital Accounts. A separate capital account (each, a "Capital
Account") shall be established for each Member and shall be maintained in
accordance with applicable regulations ("Treasury Regulations") under the
Internal Revenue Code of 1986, as amended (the "Code").
(d) Liability of Members. The liability of a Member for the losses, debts
and obligations of the LLC shall be limited to its capital contributions
theretofore made to the LLC by such Member (or its predecessor in interest)
which have not been repaid to or withdrawn by such Member (or its predecessor in
interest) in accordance with the terms of this Agreement. No Member, in its
capacity as a Member, shall have any liability to restore any negative balance
in its Capital Account.
(e) Admission of Additional Members. Subject to any restrictions or other
applicable procedures imposed by this Agreement (including the Statement of
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Designations attached hereto as Appendix II), additional members may be admitted
to the LLC on such terms and conditions as may be specified by the Manager. In
connection with any such admission, including any admission due to a Transfer of
all or part of an interest under Section 8 hereof, Schedule A shall be amended
by the Manager to reflect the inclusion of the additional Member(s). The Manager
is hereby authorized to amend this Agreement, without the consent of any Member,
to provide for additional classes or groups of members of the LLC having such
relative rights, powers and duties as the Manager shall determine in its sole
discretion, including but not limited to rights, power and duties senior to
existing classes or groups of members.
5. Return of Contributions. No Member shall have the right to withdraw or to be
repaid any capital contributed by it or to receive any other payment in respect
of such Member's interest in the LLC, including without limitation as a result
of the withdrawal or resignation of such Member from the LLC, except as
specifically provided in this Agreement.
6. Distributions.
(a) Statement of Designations Incorporated by Reference. The Statement of
Designations attached hereto as Appendix II (the "Statement of Designations") is
incorporated herein by reference, and its provisions, including without
limitation its provisions regarding distributions with respect to Series A
Preferred Shares, constitute an integral part of this Agreement.
(b) Distributions. Except as otherwise provided in the Statement of
Designations with respect to distributions upon liquidation of the LLC, the
Manager may determine in its sole discretion to cause the LLC to make
distributions of net cash flow available for distribution, less expenses of the
LLC and reasonable reserves, all as determined by the Manager, among the Members
in accordance with the provisions of Section 4 of the Statement of Designations.
All distributions on liquidation of the LLC shall be made in accordance with the
provisions of Section 5 of the Statement of Designations.
(c) Distributions of Cash and Other Property. Except as the Manager may
otherwise determine, all distributions to Members shall be made in cash. If any
assets of the LLC are distributed in kind, such assets shall be distributed on
the basis of their fair market value as determined by the Manager. Any amounts
not distributed upon liquidation of the LLC pursuant to Section 6(b) hereof on
account of expenses and reserves shall serve to reduce the distributions made to
each Member pursuant to Section 6(b) hereof in a manner reasonably determined by
the Manager. Any such reserves as remain after payment of contingent liabilities
shall be distributed to the Members in the manner in which they served to reduce
the distributions thereto.
(d) Tax Distributions. The Manager shall, to the extent of the cash then
available to the LLC, make a distribution (a "Tax Distribution") to the Members
entitled thereto not later than the date specified below. The LLC shall
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make a Tax Distribution prior to the tenth day of April, June, September and
January of each fiscal year in an amount equal to one quarter (1/4) of the
Members' Estimated Tax Liability. For purposes of this Section 6(d), the
"Members' Estimated Tax Liability" means the product of (i) the taxable income
of the LLC for the then current fiscal year (except that the January
distribution shall be for the previous calendar quarter), as projected from time
to time in good faith by the Manager multiplied by (ii) the Tax Distribution
Rate, which amount shall be distributed among the Members pro rata in proportion
to their respective estimated allocable shares of such taxable income for such
year, as so projected; provided, however, that the Tax Distribution payable to
the Members for a fiscal year (or portion thereof) shall be reduced to reflect
net losses and deductions (i.e., the excess of losses and deductions over income
and gains) and credits allocated by the LLC to the Members generally for federal
income tax purposes in any and all earlier periods (except to the extent
previously applied to reduce a Tax Distribution or to the extent the
carryforward period for such losses or credits has expired). For purposes of
this Section 6(d), the "Tax Distribution Rate" shall initially mean 45% or such
other percentage as may be approved by the Manager from time to time as the
approximate highest current marginal combined federal and state income tax rate
applicable to an individual resident in Massachusetts (determined after giving
effect to the deduction (if allowable) of state income taxes for federal income
tax purposes). All amounts distributed to Members pursuant to this Section 6(d)
shall be advances of amounts otherwise distributable to Members under the
provisions of Section 6 hereof.
(e) Withholding of Taxes. Each Member hereby authorizes the LLC to
withhold and pay over any withholding or other taxes payable by the LLC as a
result of such Member's status as a Member. Such Member shall be deemed for all
purposes of this Agreement to have received a distribution from the LLC in the
amount and as of the time each such withholding is paid by the LLC.
7. Allocations and Certain Tax Matters.
(a) Allocations of Income, Gain, Deduction and Loss. All items of income,
gain, deduction and loss of the LLC as determined for federal income tax
purposes shall be allocated among the Members, and shall be credited or debited
to their respective Capital Accounts in accordance with Treasury Regulation
Section 1.704-1(b)(2)(iv), so as to ensure to the maximum extent possible that
such allocations satisfy the economic effect equivalence test of Treasury
Regulation Section 1.704-1(b)(2)(ii)(i). In accordance therewith, all items that
can have economic effect shall be allocated in such a manner that the balance of
each Member's Capital Account at the end of any taxable year of the LLC
(increased by the sum of (1) such Member's "share of partnership minimum gain"
as defined in Treasury Regulation Section 1.704-2(g)(1) plus (2) such Member's
"share of partner nonrecourse debt minimum gain" as defined in Treasury
Regulation Section 1.704-2(i)(5)) would be positive in the amount of cash that
such Member would receive if the LLC sold all of its assets for an amount of
cash equal to the book value (as determined pursuant Treasury Regulation Section
1.704-1(b)(2)(iv)(g)) of such assets
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(reduced, but not below zero, by the amount of nonrecourse debt to which such
property is subject) and all of the cash of the LLC remaining after payment of
all liabilities (other than nonrecourse liabilities) of the LLC were distributed
in liquidation of the LLC immediately following the end of such taxable year
pursuant to Section 6(b) hereof. All items of income, gain, deduction and loss
that cannot have economic effect (including nonrecourse deductions) shall be
allocated in accordance with the Members' interests in the LLC, which, unless
otherwise required by Code Section 704(b) and the Treasury Regulations
thereunder, shall be in proportion to the number of Common Shares held by each
Member (treating all Series A Preferred Shares as having been converted into
Common Shares for purposes of this calculation).
(b) Tax Allocations. Items of income, gain, deduction and loss for
purposes of determining the Members' Capital Accounts (that is, for "book
purposes") shall be determined in accordance with the same principles as such
items are determined for reporting such items on the LLC's federal income tax
return. All items of income, gain, deduction, loss or credit for tax purposes
shall be determined in accordance with the Code and, except to the extent
otherwise required by the Code, allocated to and among the Members in the same
percentages in which the Members share in such items for book purposes.
Notwithstanding the foregoing, if the book value of property differs from its
tax basis, then for the purposes of this Agreement, all determinations of
income, gain, deduction and loss for tax purposes shall be determined with
respect to such book value in accordance with the rules of Treasury Regulation
Section 1.704-1(b)(2)(iv)(g).
(c) Certain Allocations with Respect to Contributed Property. In
accordance with Code Section 704(c) and the Treasury Regulations thereunder,
items of depreciation, amortization, gain, loss, and deduction with respect to
any property contributed to the capital of the LLC shall, solely for tax
purposes, be allocated among the Members so as to take account of any variation
between the adjusted basis of such property to the LLC for federal income tax
purposes and its initial book value, such allocation to be made by the Manager
in accordance with the so-called "traditional method with curative allocations
solely in the case of a sale of property" as provided under Treasury Regulation
Section 1.704-3(c)(iii)(B).
(d) Tax Elections. Any elections or other decisions relating to
allocations of income, gain, deduction, loss or credit hereunder or any other
tax elections (including elections under Code Section 754) that must be made at
the LLC level (as opposed to by the LLC's Members) shall be made (or not made)
by the Manager in its sole discretion.
(e) Shares Held During Portion of Taxable Year. For purposes of
determining the income, gain, loss, deduction or credit, or any other items
allocable to any period, such items shall be determined on a daily, monthly, or
other basis, as determined by the Manager using any permissible method under
Code Section 706 and the Treasury Regulations thereunder.
(f) Consistent Reporting. The Members are aware of the income tax
consequences of the allocations made by this Section 7 and hereby agree to be
bound by
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the provisions of this Section 7 in reporting their distributive shares of LLC
income and loss for income tax purposes.
8. Restrictions on Transfers of Shares.
(a) Restrictions in General. No Member may Transfer such Member's interest
in the LLC or any part thereof, or in all or any part of the assets of the LLC,
and no Member may withdraw from, resign from, retire from, abandon or otherwise
terminate its status as a Member, without the prior written consent of the
Manager. Notwithstanding anything to the contrary herein, no Member shall
transfer its interest in the LLC to the extent that such transfer would violate
the Securities Act of 1933, as amended, or any other federal or state securities
or blue sky laws.
(b) Issuance of Shares. During the term of this Agreement, the LLC shall
not issue any Shares to any Person (other than a Person which is already a
Member hereunder) unless such Person agrees in writing to be bound by all of the
provisions of this Agreement.
(c) Market Stand-Off Agreement. No Member shall sell, dispose of,
transfer, make any short sale of, grant any option for the purchase of, or enter
into any hedging or similar transaction with the same economic effect as a sale,
any interest in or other securities of the LLC or any successor-in-interest held
by such Member or, as the case may be, the respective successors, successors in
title, heirs and assigns of each such Member, for a period of time specified by
a managing underwriter (not to exceed one hundred eighty (180) days in the case
of any initial public offering and not to exceed ninety (90) days) in the case
of any subsequent public offering) following the effective date of a
registration statement of the LLC or any successor-in-interest filed under the
Securities Act with respect to a firm commitment underwritten public offering.
Each Member agrees to execute and deliver such other agreements as may be
reasonably requested by the LLC or any successor-in-interest and/or the managing
underwriter which are consistent with the foregoing or which are necessary to
give further effect thereto. In order to enforce the foregoing covenant, the LLC
or any successor-in-interest may impose stop-transfer instructions with respect
to the Shares until the end of such period.
9. Priorities. No Member shall have any rights or priority over any other
Members as to contributions or as to distributions or compensation by way of
income, except as specifically provided in this Agreement (including the
Statement of Designations).
10. Term; Dissolution of the LLC.
(a) Term. The term of the LLC shall be perpetual, unless sooner terminated
as hereinafter provided.
(b) Events of Dissolution or Liquidation. The LLC shall be dissolved upon
the happening of any of the following events:
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(1) the consent of the Manager;
(2) the sale of all or substantially all of the assets of the LLC;
or
(3) the entry of a decree of judicial dissolution under the Act.
Following any of the foregoing events, the Manager shall proceed diligently to
liquidate the assets of the LLC in a manner consistent with commercially
reasonable business practices.
(c) Distributions upon Liquidation. In connection with the liquidation of
the LLC, the assets of the LLC shall be applied and distributed in the following
order of priority:
(1) to creditors of the LLC, including Members, in the order of
priority provided by law, and the creation of a reserve of cash or other
assets of the LLC for contingent liabilities in an amount, if any,
determined by the Manager to be appropriate for such purposes; and
(2) to the Members in accordance with the provisions of Section 6.
11. Financial and Accounting Matters.
(a) Books and Records. The Manager shall keep or cause to be kept complete
and accurate books and records of the LLC, using the same methods of accounting
that are used in preparing the federal income tax returns of the LLC to the
extent applicable and otherwise in accordance with generally accepted accounting
principles consistently applied. Such books and records shall be maintained and
available, in addition to any documents and information required to be furnished
to the Members under the Act, at the principal business office of the LLC for
examination and copying by any Member or Manager, or its duly authorized
representative, at its reasonable request and at its expense during ordinary
business hours. A current list of the full name and last known address of each
Member and Manager, a copy of this Agreement, any amendments thereto and the
Certificate of Formation, executed copies of all powers of attorney, if any,
pursuant to which this Agreement, any amendment, or the Certificate of Formation
has been executed, copies of the LLC's financial statements and federal, state
and local income tax returns and reports, if any, for each of the last 6 fiscal
years, shall be maintained at the principal business office of the LLC along
with such other information, if any, as may be required to be made available to
Members pursuant to Section 18-305 of the Act. On or before the due date
(including extensions) of the federal income tax return of the LLC for each
fiscal year of the LLC, each Member shall be furnished with copies of the LLC's
federal income tax return for the fiscal year then ended and any other tax
information reasonably required for state or local tax purposes.
(b) Bank Accounts. Bank accounts and/or other accounts of the LLC shall be
maintained in such banking and/or other financial institution(s) as shall be
selected by the
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Manager, and withdrawals shall be made and other activity conducted on such
signature or signatures as shall be designated by the Manager.
(c) Fiscal Year. Except as otherwise required by the Code, the fiscal year
(and taxable year) of the LLC shall end on December 31 of each year.
(d) Tax Matters Partner. LearningExpress.com Holdings LLC shall be the
"tax matters partner" of the LLC for purposes of the Code, until its bankruptcy,
insolvency, resignation or the designation of its successor, whichever occurs
sooner. Any subsequent "tax matters partner" shall be designated from time to
time by the Manager.
12. Indemnity; Other Business.
(a) Indemnity. Each Member, the Manager and any other entity or individual
authorized to act on behalf of the LLC shall be entitled to indemnity from the
LLC for any liability incurred and/or for any act performed within the scope of
the authority conferred, and/or for any act omitted to be performed, which
indemnification shall include all reasonable expenses incurred, including
reasonable legal and other professional fees and expenses; provided, however,
that such Person acted in good faith and in a manner reasonably believed to be
in or not opposed to the best interests of the LLC.
(b) Outside Interests. The Members, the Manager, and any Affiliates of any
of them may engage in and possess interests in other business ventures and
investment opportunities of every kind and description, independently or with
others, including serving as manager and general partner of other limited
liability companies and partnerships; provided, however, that no such other
business venture or investment opportunity shall be in direct competition with
the business and activities of the LLC, except for activities required or
permitted under franchisee agreements. Neither the LLC nor any other Member or
Manager shall have any rights in or to such ventures or opportunities or the
income or profits therefrom.
13. Miscellaneous.
(a) Binding Effect. Subject to the restrictions on Transfers set forth
herein, the terms of this Agreement shall be binding upon and shall inure to the
benefit of the Members, their respective successors, successors-in-title, heirs
and assigns; and each and every successor-in-interest to any Member, whether
such successor acquires a Share by way of inheritance, gift, purchase,
foreclosure or any other method, shall hold such Share subject to all of the
terms and provisions of this Agreement. None of the provisions of this Agreement
shall be for the benefit of or enforceable by any Person not a party hereto who
is a creditor of the LLC (including any Member acting in its capacity as a
creditor of the LLC), or any creditor of any Member.
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<PAGE> 10
(b) Amendment. No change, modification or amendment of this Agreement
shall be valid or binding unless such change, modification or amendment is made
with the consent of a Majority in Interest of the Members.
(c) Conversion to Corporation. Each Member hereby acknowledges and agrees
that, unless determined otherwise by the Manager, effective upon determination
of the Manager in connection with completion of an initial public offering of
securities by the LLC or one of its Affiliates, the LLC will be converted,
through a merger, exchange of securities or otherwise, without further consent
or agreement of any Member, into a corporation and that each membership interest
will be converted into shares of capital stock of such corporation having
substantially similar preferences, rights, qualifications and restrictions as
pertain to such membership interest immediately prior to such conversion.
(d) Governing Law. This Agreement and the rights and obligations of the
parties hereunder shall be governed by and interpreted and enforced in
accordance with the laws of the State of Delaware, notwithstanding any choice of
law rules to the contrary.
(e) Counterparts. This Agreement may be executed in any number of
counterparts, all of which together shall for all purposes constitute one
Agreement, binding on all the Members notwithstanding that all Members have not
signed the same counterpart.
(f) Notices. Any and all notices under this Agreement shall be effective
(i) on the fifth business day after being sent by registered or certified mail,
return receipt requested, postage prepaid, or (ii) on the first business day
after being sent by express mail, telecopy, or commercial expedited delivery
service providing a receipt for delivery. All such notices in order to be
effective shall be addressed, if to the LLC at its registered office under the
Act, if to a Member at the last address of record on the LLC's books, and copies
of such notices shall also be sent to the last address for the recipient which
is known to the sender, if different from the address so specified. Copies of
such notices shall also be sent to Goulston & Storrs, P.C., 400 Atlantic Avenue,
Boston, MA 02110, Attention: Kitt Sawitsky, Esquire.
(g) Interpretation. As used herein, the singular shall include the plural
and the masculine gender shall include the feminine and neuter, and vice-versa,
unless the context otherwise requires.
(h) Entire Agreement. This Agreement, including all Schedules and
Appendices attached hereto and the Certificate of Formation, which are hereby
incorporated herein, embodies the entire agreement and understanding among the
parties hereto with respect to the subject matter hereof and supersedes all
prior agreements and understandings relating to such subject matter.
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(i) Severability. If one or more provisions of this Agreement are held to
be unenforceable under applicable law, the parties agree to renegotiate such
provision in good faith. In the event that the parties cannot reach a mutually
agreeable and enforceable replacement for such provision, then (a) such
provision shall be excluded from this Agreement, (b) the balance of this
Agreement shall be interpreted as if such provision were so excluded, and (c)
the balance of this Agreement shall be enforceable in accordance with its terms.
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IN WITNESS WHEREOF, the Manager and Members have executed this Agreement
as of the date first above written.
MANAGER:
LEARNINGEXPRESS.COM HOLDINGS LLC
/s/
By: _____________________
Its Manager
MEMBERS:
COMMON MEMBERS:
LEARNINGEXPRESS.COM HOLDINGS LLC
/s/
By: _____________________
Its Manager
LEARNINGEXPRESS.COM INCENTIVE PLAN LLC
By: LEARNINGEXPRESS.COM HOLDINGS LLC
Its Manager
/s/
By: ______________________
Its Manager
SERIES A MEMBER:
LEARNINGEXPRESS.COM HOLDINGS LLC
/s/
By: _____________________
Its Manager
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<PAGE> 13
SCHEDULE A
TO
LIMITED LIABILITY COMPANY OPERATING AGREEMENT
OF
LEARNINGEXPRESS.COM LLC
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
MEMBER CAPITAL CLASS OF SHARES NUMBER OF
CONTRIBUTION SHARES
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
LearningExpress.com $ 0 Common 2,622,000
Holdings LLC
- ------------------------------------------------------------------------------
LearningExpress.com $ 0 Common 2,000,000
Incentive Plan LLC
- ------------------------------------------------------------------------------
LearningExpress.com $1,049,999.00 Series A Preferred 2,150,000
Holdings LLC
- ------------------------------------------------------------------------------
TOTAL $1,049,999.00 FULLY DILUTED 6,772,000
COMMON SHARES
- ------------------------------------------------------------------------------
</TABLE>
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<PAGE> 14
APPENDIX I
DEFINED TERMS
The following capitalized terms shall have the meanings specified in this
Appendix I. Other capitalized terms are defined in the Statement of Designations
attached hereto as Appendix II, and those terms shall have the meanings
respectively ascribed to them.
"Act" shall have the meaning set forth in the first recital to this
Agreement.
"Affiliate" means, with respect to a specified Person, any other Person
that directly or indirectly controls, is under common control with, or is
controlled by the specified Person. As used herein, the term "control" means the
possession by a Person, directly or indirectly, of the power to direct or cause
the direction of the management and policies of another Person, whether through
ownership of voting securities, by contract or otherwise.
"Agreement" shall have the meaning set forth in the Preamble to this
Agreement.
"Capital Account" shall have the meaning set forth in Section 4(c).
"Certificate of Formation" shall have the meaning set forth in the first
recital to this Agreement.
"Code" shall have the meaning set forth in Section 4(c).
"Common Member" means any holder of Common Shares who is not a Series A
Member.
"Common Shares" means the Shares in the LLC other than Series A Preferred
Shares.
"LE Inc." shall have the meaning set forth in Section 2.
"LLC" shall have the meaning set forth in the first recital to this
Agreement.
"Majority in Interest" means, with respect to any Member Group (or all
Members when voting collectively as a single group), more than fifty percent
(50%) of the number of Common Shares owned by all Members of such Member Group
(or such combined Member Groups) in the aggregate. For purposes of this
definition, the Series A Member shall be deemed to own the number of Common
Shares into which its Series A Preferred Shares are convertible, and the number
of the Series A Member' Series A Preferred Shares shall be disregarded.
"Manager" shall have the meaning set forth in Section 3(a).
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<PAGE> 15
"Member" and "Members" shall have the meanings set forth in the Preamble
to this Agreement.
"Member Group" means a group of Members consisting solely of the Common
Members collectively.
"Members' Estimated Tax Liability" shall have the meaning set forth in
Section 6(d).
"Original Agreement" shall have the meaning set forth in the fourth
recital to this Agreement.
"Person" means any natural person or any general partnership, limited
partnership, limited liability partnership, corporation, joint venture, trust,
business trust, cooperative, association, or limited liability company, and
shall include the heirs, executors, administrators, legal representatives,
successors and assigns of such Person where the context so admits.
"Series A Member" means LearningExpress.com Holdings LLC and its
successors and assigns. LearningExpress.com Holdings LLC shall retain its status
as such regardless of the conversion of all or any portion of their Series A
Preferred Shares into Common Shares.
"Series A Preferred Shares" means the Series A Convertible Preferred
Shares, having the rights, limitations and preferences established by the
Statement of Designations.
"Shares" means all units of membership interest in the LLC held by each
Member, whether now owned or hereafter acquired. The term "Shares" includes,
collectively, Common Shares and Series A Preferred Shares.
"Statement of Designations" shall have the meaning set forth in Section
6(a).
"Tax Distribution" shall have the meaning set forth in Section 6(d).
"Tax Distribution Rate" shall have the meaning set forth in Section 6(d).
"Transfer" means, when used as a noun, any disposition of Shares or any
interest therein, for value or otherwise, including, without limitation, any
sale, gift, bequest, assignment, pledge or encumbrance, and whether effected by
contract, by operation of law or otherwise. "Transfer," when used as a verb,
shall have a correlative meaning.
"Treasury Regulations" shall have the meaning set forth in Section 4(c).
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APPENDIX II
STATEMENT OF DESIGNATIONS, PREFERENCES
AND RIGHTS OF COMMON SHARES AND SERIES A CONVERTIBLE PREFERRED SHARES OF
LEARNINGEXPRESS.COM LLC
This Statement of Designations (the "Statement of Designations")
constitutes an integral part of the Limited Liability Company Operating
Agreement (the "Operating Agreement"), effective as of the ___ day of
_______________, 2000, by and among the Persons listed as Members on Schedule A
of the Operating Agreement, and any other Person who may be admitted as a Member
pursuant to Section 4(e) thereof, for all purposes as if the Statement of
Designations had been contained in the main section thereof rather than attached
thereto as an Appendix. The following is a statement of the designation and the
preferences, rights, qualifications and restrictions relating to the Common
Shares and the Series A Convertible Preferred Shares:
1. Definitions. All capitalized terms used in this Statement of
Designations, and not otherwise defined herein, shall have the meanings ascribed
to them below. Other capitalized terms shall have the same meanings ascribed to
them in the Operating Agreement. Section references used herein are to Sections
of this Statement of Designations (unless otherwise specified).
(a) "Convertible Securities" shall mean any evidences of
indebtedness, Shares or other securities directly or indirectly convertible into
or exchangeable for Common Shares.
(b) "Conversion Price" shall have the meaning set forth in Section
7(a) hereof.
(c) "Conversion Rights" shall have the meaning set forth in Section
7(a) hereof.
(d) "Equity Securities" means any Share or other similar security of
the LLC, including, without limitation, securities containing equity features
and securities containing profit participation features, and any debt or equity
security convertible or exchangeable, with or without consideration, into or for
any Share or similar security, or any security carrying any warrant, option or
right to subscribe for or to purchase any of the foregoing.
(e) "Mandatory Conversion Date" shall have the meaning set forth in
Section 7(c)(ii) hereof.
(f) "Original Issue Date" shall mean the date on which the first
Series A Preferred Share is originally issued.
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<PAGE> 17
(g) "Public Offering" shall mean an underwritten public offering of
Common Shares of the LLC (or common stock of any successor corporation to the
LLC), subsequent to which the Common Shares of the LLC (or shares of its common
stock) are listed on a national securities exchange or on the Nasdaq System
pursuant to an effective registration statement under the Securities Act of
1933, as amended, or any successor federal statute thereto.
(h) "Security" means Common Shares, Series A Preferred Shares and
any other securities of any type whatsoever convertible or exchangeable for
Equity Securities.
(i) "Series A Liquidation Value" shall have the meaning set forth in
Section 5(a) hereof.
2. Designation. The series of Shares designated hereunder shall be (a) the
"Common Shares" and (b) the "Series A Convertible Preferred Shares."
3. Authorized Number. The number of Common Shares shall be 5,000,000. The
number of Series A Preferred Shares shall be 3,000,000.
4. Distributions.
All distributions made by the LLC with respect to Shares (other than
distributions in liquidation governed by Section 5 hereof) shall be made to all
Members in proportion to the number of Common Shares held by each Member. For
purposes of this Section 4, all Series A Preferred Shares will be deemed to have
been converted into Common Shares.
For purposes of this Section 4, unless the context requires otherwise,
"distribution" shall mean the transfer of cash or property without
consideration, whether by way of distribution or otherwise, payable other than
in Common Shares or other securities of the LLC, or the purchase or redemption
of Shares of the LLC for cash or property, including any such transfer, purchase
or redemption by an Affiliate of the LLC.
5. Liquidation, Dissolution or Winding Up.
(a) Series A Member. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the LLC, the Series A Member shall be
entitled to be paid out of the assets of the LLC available for distribution to
its Members before any payment shall be made to the Common Members, or owners of
any other class or series of Shares, by reason of their ownership thereof, an
amount equal to the greater of (i) $1.75 per Series A Preferred Share (subject
to appropriate adjustment in the event of any Share distribution, Share split,
combination or other similar recapitalization affecting such Shares) (the
"Series A Liquidation Value"), together with an amount equal to an annual
cumulative distribution of 8%, compounded annually, of the Series A Liquidation
Value, calculated from the Original Issue Date to the date of such distribution,
or (ii)
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<PAGE> 18
such amount per Share as would have been payable to the Series A Member had such
Series A Preferred Shares (and any other outstanding Convertible Securities)
been converted into Common Shares pursuant to Section 7 hereof immediately prior
to such liquidation, dissolution or winding up. If upon any such liquidation,
dissolution or winding up of the LLC, the remaining assets of the LLC available
for distribution to its Members shall be insufficient to pay the Series A Member
the full amount to which it shall be entitled under clause (i) above, the Series
A Member and Members owning any class or series of Shares ranking on liquidation
on a parity with the Series A Preferred Shares shall share ratably in any
distribution of the remaining assets and funds of the LLC in proportion to the
respective amounts that would otherwise be distributable in respect of the
Shares held by them upon such distribution if all amounts distributable on or
with respect to such Shares were paid in full.
(b) Conversion to Corporation Not Treated as Liquidation. For
purposes of this Section 5, the conversion of the LLC into a corporation
pursuant to Section 13(c) of the Operating Agreement shall not be treated as a
dissolution and liquidation of the LLC.
6. Voting. Except as otherwise provided herein or by law, with respect to
any matter requiring a vote of the Members, each Common Share shall entitle its
owner to cast one vote, and each Series A Preferred Share shall entitle its
owner to cast, with respect to each such matter, a number of votes equal to the
number of whole Common Shares into which such Share shall then be convertible.
7. Conversion of Series A Preferred Shares into Common Shares. The Series
A Member shall have conversion rights, and shall be subject to mandatory
conversion, as follows:
(a) Right to Convert. Each Series A Preferred Share shall be
convertible, at the option of the Series A Member, and without the payment of
additional consideration by such Member, into such number of Common Shares as is
determined by dividing (i) the Series A Liquidation Value by (ii) the Conversion
Price (as defined below) in effect at the time of conversion. The "Conversion
Price" shall initially be $1.75 per Series A Preferred Share. Such initial
Conversion Price, and the rate at which Series A Preferred Shares may be
converted into Common Shares, shall be subject to adjustment as provided below.
In the event of the liquidation of the LLC or any redemption of
Series A Preferred Shares, the rights of the Series A Member to convert such
Shares as provided in this Section 7 (the "Conversion Rights") shall terminate
at the close of business on (i) the third full business day preceding the date
fixed for the payment of any amounts distributable on liquidation or redemption
to the Series A Member or (ii) any earlier Mandatory Conversion Date.
(b) Automatic Conversion. Each Series A Preferred Share shall,
without any action required on the part of the Series A Member, automatically be
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converted into such number of Common Shares as is determined by dividing (i) the
Series A Liquidation Value by (ii) the Conversion Price in effect at the time of
conversion, upon the occurrence of a Public Offering. Upon such occurrence, any
Member entitled to receive the Common Shares issuable upon conversion of the
Series A Preferred Shares shall not be deemed to have converted such Series A
Preferred Shares until immediately prior to the closing of such Public Offering.
(c) Mechanics of Conversion.
(i) Before the Series A Member shall be entitled to receive Common
Shares issuable upon conversion of Series A Preferred Shares pursuant to Section
7(a) hereof, it shall give written notice to the LLC that it elects to convert
the same and shall state therein its name or the name or names of its nominees
in which it wishes the Common Shares to be issued. The Board of Managers shall,
as soon as practicable after receipt of such notice by the LLC or after a
conversion pursuant to Section 7(b) hereof, amend Schedule A of the Operating
Agreement accordingly.
(ii) Voluntary conversions pursuant to Section 7(a) hereof shall be
deemed to have been made immediately prior to the close of business on the date
of such surrender of the Series A Preferred Shares, and the Person or Persons
entitled to receive the Common Shares issuable upon conversion shall be treated
for all purposes as the record owner or owners of such Common Shares on such
date. Automatic conversions pursuant to Section 7(b) hereof shall be deemed to
have been made on the date (the "Mandatory Conversion Date") and at the time
specified in Section 7(b) hereof and the Person or Persons entitled to receive
the Common Shares issuable upon conversion shall be treated for all purposes as
the record owner or owners of such Common Shares on such date and at such time.
(d) Adjustment for Share Splits and Combinations. If the LLC shall
at any time or from time to time after the Original Issue Date effect a
subdivision of the outstanding Common Shares, the Conversion Price then in
effect with respect to the Series A Preferred Shares immediately before that
subdivision shall be proportionately decreased. If the LLC shall at any time or
from time to time after the Original Issue Date combine the outstanding Common
Shares, the Conversion Price with respect to the Series A Preferred Shares then
in effect immediately before the combination shall be proportionately increased.
Any adjustment under this Section 7(d) shall become effective at the close of
business on the date the subdivision or combination becomes effective.
(e) Adjustment for Certain Distributions. In the event the LLC at
any time or from time to time after the Original Issue Date shall make or issue,
or fix a record date for the determination of Common Members entitled to
receive, a distribution payable in additional Common Shares, then and in each
such event the Conversion Price for the Series A Preferred Shares then in effect
shall be decreased as of the time of such issuance or, in the event such a
record date shall have been fixed, as of the close of business on such record
date, by multiplying the Conversion Price then in effect by a fraction:
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(1) the numerator of which shall be the total number of Common
Shares issued and outstanding immediately prior to the time of such
issuance or the close of business on such record date, and
(2) the denominator of which shall be the total number of
Common Shares issued and outstanding immediately prior to the time
of such issuance or the close of business on such record date plus
the number of Common Shares issuable in payment of such
distribution;
provided, however, if such record date shall have been fixed and such
distribution is not fully paid or if such distribution is not fully made on the
date fixed therefor, the Conversion Price for the Series A Preferred Shares
shall be recomputed accordingly as of the close of business on such record date,
and thereafter the Conversion Price for the Series A Preferred Shares shall be
adjusted pursuant to this Section 7(e) as of the time of actual payment of such
distributions; and provided further, however, that no such adjustment shall be
made if the Series A Member simultaneously receives a distribution of Common
Shares in a number equal to the number of Common Shares it would have received
if all outstanding Series A Preferred Shares had been converted into Common
Shares on the date of such event.
(f) Adjustments for Other Distributions. In the event the LLC at any
time or from time to time after the Original Issue Date of the Series A
Preferred Shares shall make or issue, or fix a record date for the determination
of Common Members entitled to receive, a distribution payable in Securities of
the LLC other than Common Shares, then, and in each such event, provision shall
be made so that the Series A Member shall receive upon conversion thereof in
addition to the number of Common Shares receivable thereupon, the amount of
Securities of the LLC that it would have received had the Series A Preferred
Shares been converted into Common Shares on the date of such event and had they
thereafter, during the period from the date of such event to and including the
conversion date, retained such Securities receivable by it as aforesaid during
such period, giving application to all adjustments called for during such period
under this Section 7(f) with respect to the rights of the Series A Member; and
provided further, however, that no such adjustment shall be made if the Series A
Member simultaneously receives a distribution of such Securities in an amount
equal to the amount of such securities it would have received if all outstanding
Series A Preferred Shares had been converted into Common Shares on the date of
such event.
(g) Adjustment for Reclassification, Exchange or Substitution. If
the Common Shares shall be changed into the same or a different number of Shares
of any class or classes of Shares, whether by capital reorganization,
reclassification, or otherwise (other than a subdivision or combination of
Shares or distribution of Shares provided for above, or a reorganization,
merger, consolidation, or sale of assets provided for below), then, and in each
such event, the Series A Member shall have the right thereafter to convert such
Common Shares into the kind and amount of Shares and other securities and
property receivable upon such reorganization, reclassification, or other change,
as would
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be received by owners of the number of Common Shares into which such Series A
Preferred Shares might have been converted immediately prior to such
reorganization, reclassification, or change, all subject to further adjustment
as provided herein.
(h) Adjustment for Merger or Reorganization, Etc. In case of any
consolidation or merger of the LLC with or into another entity or the sale of
all or substantially all of the assets of the LLC to another entity, each Series
A Preferred Share shall thereafter be convertible (or shall be converted into a
security which shall be convertible) into the kind and amount of Shares or other
securities or property to which an owner of the number of Common Shares
deliverable upon conversion of such Series A Preferred Share would have been
entitled upon such consolidation, merger or sale; and, in such case, appropriate
adjustment (as determined in good faith by the Manager) shall be made in the
application of the provisions set forth in this Section 7 with respect to the
rights and interest thereafter of the Series A Member, to the end that the
provisions set forth in this Section 7 (including provisions with respect to
changes in and other adjustments of the Conversion Price applicable to such
Series A Preferred Shares) shall thereafter be applicable, as nearly as
reasonably may be, in relation to any Shares or other property thereafter
deliverable upon the conversion of the Series A Preferred Shares.
(i) No Impairment. The LLC will not, by amendment of its Certificate
of Formation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of Securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed hereunder by the LLC, but will at all times in good faith
assist in the carrying out of all the provisions of this Section 7 and in the
taking of all such action as may be necessary or appropriate in order to protect
the Conversion Rights of the Series A Member against impairment.
(j) Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of the Conversion Price applicable to any Series A
Preferred Shares pursuant to this Section 7, the LLC at its expense shall
promptly compute such adjustment or readjustment in accordance with the terms
hereof and furnish to the Series A Member a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The LLC shall, upon the written request at
any time of the Series A Member, furnish or cause to be furnished to such Member
a similar certificate setting forth (i) such adjustments and readjustments, (ii)
the Conversion Price applicable to the Series A Preferred Shares then in effect,
and (iii) the number of Common Shares and the amount, if any, of other property
which then would be received upon the conversion of a Series A Preferred Share.
(k) Notice of Record Date. In the event:
(i) that the LLC makes a distribution with respect to its Common
Shares payable in Common Shares or other Securities of the LLC;
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(ii) that the LLC subdivides or combines its outstanding Common
Shares;
(iii) of any reclassification of the Common Shares of the LLC (other
than a subdivision or combination of its outstanding Common Shares
or a distribution of Shares with respect to Common Shares), or of
any consolidation or merger of the LLC into or with another entity,
or of the sale of all or substantially all of the assets of the LLC;
or
(iv) of the involuntary or voluntary dissolution, liquidation or
winding up of the LLC;
then the LLC shall cause to be filed at its principal office or at the office of
the transfer agent of Series A Preferred Shares, and shall cause to be mailed to
the Members at their last known addresses as shown on the records of the LLC or
such transfer agent, at least ten days prior to the date specified in (1) below
or twenty days before the date specified in (2) below, a notice stating:
(1) the record date of such distribution, subdivision or
combination, or, if a record is not to be taken, the date as of which the
Common Members of record to be entitled to such distribution, subdivision
or combination are to be determined, or
(2) the date on which such reclassification, consolidation,
merger, sale, dissolution, liquidation or winding up is expected to become
effective, and the date as of which it is expected that Common Members of
record shall be entitled to exchange their Common Shares for securities or
other property deliverable upon such reclassification, consolidation,
merger, sale, dissolution or winding up.
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EXHIBIT 3.7
LEARNINGEXPRESS.COM INCENTIVE PLAN LLC
LIMITED LIABILITY COMPANY OPERATING AGREEMENT
This Limited Liability Company Operating Agreement (the "Agreement"),
effective as of the 13th day of April, 2000, is entered into by and among the
Persons identified as Members in Schedule A annexed hereto, made a part hereof
and hereby incorporated herein, each (for such period of time as it shall remain
a Member hereunder) referred to individually as a "Member" and collectively as
the "Members."
WHEREAS, LearningExpress.com Incentive Plan LLC (the "LLC") has been
formed pursuant to the Delaware Limited Liability Company Act (the "Act") by the
filing on March 15, 2000 of a Certificate of Formation (as such Certificate may
be amended from time to time, the "Certificate of Formation") in the office of
the Secretary of State of the State of Delaware; and
WHEREAS, capitalized terms used herein, and not otherwise defined herein,
have the meanings ascribed to them in Appendix I annexed hereto, made a part
hereof and hereby incorporated herein;
NOW, THEREFORE, in consideration of the mutual covenants herein expressed,
the parties hereto hereby agree as follows:
1. Principal Office; Registered Office and Registered Agent. The principal
office of the LLC shall initially be 29 Buena Vista Street, Ayer, MA 01432. The
name and address of the registered agent of the LLC for service of process
pursuant to the Act shall initially be The Corporation Trust Company, 1209
Orange Street, Wilmington, Delaware 19801, and the LLC's registered office in
the State of Delaware shall be c/o The Corporation Trust Company, 1209 Orange
Street, Wilmington, Delaware 19801. The Manager may, upon compliance with the
applicable provisions of the Act, change the LLC's principal office, its
registered office or registered agent from time to time, all as determined by
the Manager.
2. Purpose. The LLC was formed for the purpose of engaging in any lawful act or
activity for which limited liability companies may be formed under the Act,
including, without limitation, holding membership interests in
LearningExpress.com LLC, a Delaware limited liability company, and engaging in
any and all activities necessary, advisable, convenient or incidental thereto.
The LLC shall have all the powers necessary or convenient to carry out the
purposes for which it is formed, including the powers granted by the Act. Except
as otherwise required by the Act or other applicable law, in connection
therewith, the Manager shall have the authority to (i) exercise all the powers
and privileges granted to an LLC by the Act or any other law or this Agreement,
together with any powers incidental thereto, so far as such powers are necessary
or convenient to the conduct, promotion or attainment of the business, trade,
purposes or activities of the LLC in the State of Delaware or in any other
jurisdiction in which the LLC shall conduct business and (ii) take any other
action not prohibited under the Act or other applicable
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<PAGE> 2
law; and, except as provided in Sections 3(a) and 13(b) hereof, no Member acting
in its capacity as a Member shall have any authority, power or privilege to act
on behalf of or to bind the LLC.
3. Management.
(a) Designation of Manager. The sole manager (the "Manager") of the LLC
shall be LearningExpress.com Holdings LLC, a Delaware limited liability company.
If at any time there is no Manager, the number of Managers may be determined and
one or more Managers may be designated by approval of a Majority in Interest of
the Common Members. The Manager may resign from, retire from, abandon or
otherwise terminate its status as a Manager upon prior notice to the LLC.
(b) Transactions with Affiliates. The Manager may cause the LLC to enter
into one or more agreements, leases, contracts or other arrangements for the
furnishing to or by the LLC of goods, services or space with any Member, Manager
or an Affiliate thereof, and may pay compensation thereunder for such goods,
services or space, provided in each case the Manager has determined in good
faith that the terms of any such arrangements are in, or not opposed to, the
best interests of the LLC.
(c) Power of Manager to Bind the LLC. The signature of the Manager acting
alone on any agreement, contract, instrument or other document shall be
sufficient to bind the LLC in respect thereof and conclusively evidence the
authority of the Manager and the LLC with respect thereto, and no third party
need look to any other evidence or require joinder or consent of any other party
to bind the LLC or to evidence such authority.
(d) Appointment of Officers and Other Agents. The Manager may appoint one
or more individuals as agents of the LLC with, in each case, such title and
duties and power and authority as the Manager shall determine from time to time,
and such agents may be referred to as officers of the LLC; provided, however,
that no such appointment by the Manager shall by itself cause the Manager to
cease to be a "manager" of the LLC within the meaning of the Act or this
Agreement or restrict the ability of the Manager to exercise the powers so
delegated. Unless the authority of the agent designated as the officer in
question is limited in the document appointing such officer or is otherwise
specified by the Manager, any officer so appointed shall have the same authority
to act for the LLC as a corresponding officer of a Delaware corporation would
have to act for a Delaware corporation in the absence of a specific delegation
of authority.
(e) Standard of Care for Manager. The Manager shall perform its duties
hereunder in good faith and with that degree of care that an ordinarily prudent
Person in a like position would use under similar circumstances. The Manager
shall be entitled to rely, in the performance of such duties, on information,
opinions, reports or statements, including financial statements, in each case
prepared by one or more agents or employees, counsel, public accountants or
other Persons employed by the LLC, as to matters that the Manager believes to be
within such Persons' special competence.
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<PAGE> 3
4. Capital Contributions; Capital Accounts; and Liability of Members.
(a) Capital of Members. The capital contributions that each Member has
made to the LLC on or before the date of this Agreement are set forth on
Schedule A, and the number of Shares owned by such Member is also set forth on
such Schedule A. The Manager shall amend Schedule A from time to time to
properly reflect any changes in the capital contributions made by, or the number
of Shares owned by, the Members.
(b) Additional Capital. No Member shall be obligated to contribute any
additional capital to the LLC.
(c) Capital Accounts. A separate capital account (each, a "Capital
Account") shall be established for each Member and shall be maintained in
accordance with applicable regulations ("Treasury Regulations") under the
Internal Revenue Code of 1986, as amended (the "Code").
(d) Liability of Members. The liability of a Member for the losses, debts
and obligations of the LLC shall be limited to its capital contributions
theretofore made to the LLC by such Member (or its predecessor in interest)
which have not been repaid to or withdrawn by such Member (or its predecessor in
interest) in accordance with the terms of this Agreement. No Member, in its
capacity as a Member, shall have any liability to restore any negative balance
in its Capital Account.
(e) Admission of Additional Members. Subject to any restrictions or other
applicable procedures imposed by this Agreement, additional members may be
admitted to the LLC on such terms and conditions as may be specified by the
Manager. In connection with any such admission, including any admission due to a
Transfer of all or part of an interest under Section 8 hereof, Schedule A shall
be amended by the Manager to reflect the inclusion of the additional Member(s).
The Manager is hereby authorized to amend this Agreement, without the consent of
any Member, to provide for additional classes or groups of members of the LLC
having such relative rights, powers and duties as the Manager shall determine in
its sole discretion, including but not limited to rights, power and duties
senior to existing classes or groups of members.
5. Return of Contributions. No Member shall have the right to withdraw or to be
repaid any capital contributed by it or to receive any other payment in respect
of such Member's interest in the LLC, including without limitation as a result
of the withdrawal or resignation of such Member from the LLC, except as
specifically provided in this Agreement.
6. Distributions.
(a) Distributions Other Than in Liquidation of the LLC. Except as
otherwise provided by Section 6(b), all distributions shall be made to the
Members in the following order of priority:
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(i) First, to each Common Member, such Common Member's Pro Rata
Share of the aggregate amount of any distribution made to the LLC by
LearningExpress.com LLC (and not previously taken into account under
this Section 6(a)(i); and
(ii) Thereafter, to the Residual Member.
(b) Distributions upon Liquidation. All distributions upon liquidation and
dissolution of the LLC shall be made in the following order of priority:
(i) First, to each Common Member, an amount equal to the excess of
(A) such Member's Pro Rata Share of the aggregate amount available
for distribution by the LLC minus (B) the aggregate Reserve Amounts
with respect to all Shares held by such Member; and
(ii) Thereafter, to the Residual Member.
(c) Distributions of Cash and Other Property. Except as the Manager may
otherwise determine, all distributions to Members shall be made in cash. If any
assets of the LLC are distributed in kind, such assets shall be distributed on
the basis of their fair market value as determined by the Manager. Any amounts
not distributed upon liquidation of the LLC pursuant to Section 6(b) hereof on
account of expenses and reserves shall serve to reduce the distributions made to
each Member pursuant to Section 6(b) hereof in a manner reasonably determined by
the Manager. Any such reserves as remain after payment of contingent liabilities
shall be distributed to the Members in the manner in which they served to reduce
the distributions thereto.
(d) Tax Distributions. The Manager shall, to the extent of the cash then
available to the LLC, make a distribution (a "Tax Distribution") to the Members
entitled thereto not later than the date specified below. The LLC shall make a
Tax Distribution prior to the tenth day of April, June, September and January of
each fiscal year in an amount equal to one quarter (1/4) of the Members'
Estimated Tax Liability. For purposes of this Section 6(d), the "Members'
Estimated Tax Liability" means the product of (i) the taxable income of the LLC
for the then current fiscal year (except that the January distribution shall be
for the previous calendar quarter), as projected from time to time in good faith
by the Manager multiplied by (ii) the Tax Distribution Rate, which amount shall
be distributed among the Members pro rata in proportion to their respective
estimated allocable shares of such taxable income for such year, as so
projected; provided, however, that the Tax Distribution payable to the Members
for a fiscal year (or portion thereof) shall be reduced to reflect net losses
and deductions (i.e., the excess of losses and deductions over income and gains)
and credits allocated by the LLC to the Members generally for federal income tax
purposes in any and all earlier periods (except to the extent previously applied
to reduce a Tax Distribution or to the extent the carryforward period for such
losses or credits has expired). For purposes of this Section 6(d), the "Tax
Distribution Rate" shall
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initially mean 45% or such other percentage as may be approved by the Manager
from time to time as the approximate highest current marginal combined federal
and state income tax rate applicable to an individual resident in Massachusetts
(determined after giving effect to the deduction (if allowable) of state income
taxes for federal income tax purposes). All amounts distributed to Members
pursuant to this Section 6(d) shall be advances of amounts otherwise
distributable to Members under the provisions of Section 6 hereof.
(e) Withholding of Taxes. Each Member hereby authorizes the LLC to
withhold and pay over any withholding or other taxes payable by the LLC as a
result of such Member's status as a Member. Such Member shall be deemed for all
purposes of this Agreement to have received a distribution from the LLC in the
amount and as of the time each such withholding is paid by the LLC.
7. Allocations and Certain Tax Matters.
(a) Allocations of Income, Gain, Deduction and Loss. All items of income,
gain, deduction and loss of the LLC as determined for federal income tax
purposes shall be allocated among the Members, and shall be credited or debited
to their respective Capital Accounts in accordance with Treasury Regulation
Section 1.704-1(b)(2)(iv), so as to ensure to the maximum extent possible that
such allocations satisfy the economic effect equivalence test of Treasury
Regulation Section 1.704-1(b)(2)(ii)(i). In accordance therewith, all items that
can have economic effect shall be allocated in such a manner that the balance of
each Member's Capital Account at the end of any taxable year of the LLC
(increased by the sum of (1) such Member's "share of partnership minimum gain"
as defined in Treasury Regulation Section 1.704-2(g)(1) plus (2) such Member's
"share of partner nonrecourse debt minimum gain" as defined in Treasury
Regulation Section 1.704-2(i)(5)) would be positive in the amount of cash that
such Member would receive if the LLC sold all of its assets for an amount of
cash equal to the book value (as determined pursuant Treasury Regulation Section
1.704-1(b)(2)(iv)(g)) of such assets (reduced, but not below zero, by the amount
of nonrecourse debt to which such property is subject) and all of the cash of
the LLC remaining after payment of all liabilities (other than nonrecourse
liabilities) of the LLC were distributed in liquidation of the LLC immediately
following the end of such taxable year pursuant to Section 6(b) hereof. All
items of income, gain, deduction and loss that cannot have economic effect
(including nonrecourse deductions) shall be allocated in accordance with the
Members' interests in the LLC, which, unless otherwise required by Code Section
704(b) and the Treasury Regulations thereunder, shall be (A) to each Common
Member, such Common Member's Pro Rata Share of the aggregate amount of such
allocation and (B) the remainder of the aggregate amount of such allocation to
the Residual Member.
(b) Tax Allocations. Items of income, gain, deduction and loss for
purposes of determining the Members' Capital Accounts (that is, for "book
purposes") shall be determined in accordance with the same principles as such
items are determined for reporting such items on the LLC's federal income tax
return. All items of income, gain, deduction, loss or credit for tax purposes
shall be determined in accordance with the
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Code and, except to the extent otherwise required by the Code, allocated to and
among the Members in the same percentages in which the Members share in such
items for book purposes. Notwithstanding the foregoing, if the book value of
property differs from its tax basis, then for the purposes of this Agreement,
all determinations of income, gain, deduction and loss for tax purposes shall be
determined with respect to such book value in accordance with the rules of
Treasury Regulation Section 1.704-1(b)(2)(iv)(g).
(c) Certain Allocations with Respect to Contributed Property. In
accordance with Code Section 704(c) and the Treasury Regulations thereunder,
items of depreciation, amortization, gain, loss, and deduction with respect to
any property contributed to the capital of the LLC shall, solely for tax
purposes, be allocated among the Members so as to take account of any variation
between the adjusted basis of such property to the LLC for federal income tax
purposes and its initial book value, such allocation to be made by the Manager
in accordance with the so-called "traditional method with curative allocations
solely in the case of a sale of property" as provided under Treasury Regulation
Section 1.704-3(c)(iii)(B).
(d) Tax Elections. Any elections or other decisions relating to
allocations of income, gain, deduction, loss or credit hereunder or any other
tax elections (including elections under Code Section 754) that must be made at
the LLC level (as opposed to by the LLC's Members) shall be made (or not made)
by the Manager in its sole discretion.
(e) Shares Held During Portion of Taxable Year. For purposes of
determining the income, gain, loss, deduction or credit, or any other items
allocable to any period, such items shall be determined on a daily, monthly, or
other basis, as determined by the Manager using any permissible method under
Code Section 706 and the Treasury Regulations thereunder.
(f) Consistent Reporting. The Members are aware of the income tax
consequences of the allocations made by this Section 7 and hereby agree to be
bound by the provisions of this Section 7 in reporting their distributive shares
of LLC income and loss for income tax purposes.
(g) Section 83(b) Elections. Each Person who receives a Share shall timely
file an election with respect to such Share under section 83(b) of the Code on a
form to be provided to such Person by the Manager.
8. Restrictions on Transfers of Shares.
(a) Restrictions in General. No Member may Transfer such Member's interest
in the LLC or any part thereof, or in all or any part of the assets of the LLC,
and no Member may withdraw from, resign from, retire from, abandon or otherwise
terminate its status as a Member, without the prior written consent of the
Manager. Notwithstanding anything to the contrary herein, no Member shall
transfer its interest in the LLC to the extent that such transfer would violate
the Securities Act of 1933, as amended, or any other federal or state securities
or blue sky laws.
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(b) Issuance of Shares. During the term of this Agreement, the LLC shall
not issue any Shares to any Person (other than a Person which is already a
Member hereunder) unless such Person agrees in writing to be bound by all of the
provisions of this Agreement.
9. Priorities. No Member shall have any rights or priority over any other
Members as to contributions or as to distributions or compensation by way of
income, except as specifically provided in this Agreement.
10. Term; Dissolution of the LLC.
(a) Term. The term of the LLC shall be perpetual, unless sooner terminated
as hereinafter provided.
(b) Events of Dissolution or Liquidation. The LLC shall be dissolved upon
the happening of any of the following events:
(1) the consent of the Manager;
(2) the sale of all or substantially all of the assets of the LLC or
of LearningExpress.com LLC;
(3) the liquidation and dissolution of LearningExpress.com LLC;
(4) a public offering of equity securities of a corporate successor
to LearningExpress.com LLC; or
(5) the entry of a decree of judicial dissolution under the Act.
Following any of the foregoing events, the Manager shall proceed diligently to
liquidate the assets of the LLC in a manner consistent with commercially
reasonable business practices.
(c) Distributions upon Liquidation. In connection with the liquidation of
the LLC, the assets of the LLC shall be applied and distributed in the following
order of priority:
(1) to creditors of the LLC, including Members, in the order of
priority provided by law, and the creation of a reserve of cash or other
assets of the LLC for contingent liabilities in an amount, if any,
determined by the Manager to be appropriate for such purposes; and
(2) to the Members in accordance with the provisions of Section 6.
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11. Financial and Accounting Matters.
(a) Books and Records. The Manager shall keep or cause to be kept complete
and accurate books and records of the LLC, using the same methods of accounting
that are used in preparing the federal income tax returns of the LLC to the
extent applicable and otherwise in accordance with generally accepted accounting
principles consistently applied. Such books and records shall be maintained and
available, in addition to any documents and information required to be furnished
to the Members under the Act, at the principal business office of the LLC for
examination and copying by any Member or Manager, or its duly authorized
representative, at its reasonable request and at its expense during ordinary
business hours. A current list of the full name and last known address of each
Member and Manager, a copy of this Agreement, any amendments thereto and the
Certificate of Formation, executed copies of all powers of attorney, if any,
pursuant to which this Agreement, any amendment, or the Certificate of Formation
has been executed, copies of the LLC's financial statements and federal, state
and local income tax returns and reports, if any, for each of the last 6 fiscal
years, shall be maintained at the principal business office of the LLC along
with such other information, if any, as may be required to be made available to
Members pursuant to Section 18-305 of the Act. On or before the due date
(including extensions) of the federal income tax return of the LLC for each
fiscal year of the LLC, each Member shall be furnished with copies of the LLC's
federal income tax return for the fiscal year then ended and any other tax
information reasonably required for state or local tax purposes.
(b) Bank Accounts. Bank accounts and/or other accounts of the LLC shall be
maintained in such banking and/or other financial institution(s) as shall be
selected by the Manager, and withdrawals shall be made and other activity
conducted on such signature or signatures as shall be designated by the Manager.
(c) Fiscal Year. Except as otherwise required by the Code, the fiscal year
(and taxable year) of the LLC shall end on December 31 of each year.
(d) Tax Matters Partner. LearningExpress.com Holdings LLC shall be the
"tax matters partner" of the LLC for purposes of the Code, until its bankruptcy,
insolvency, resignation or the designation of its successor, whichever occurs
sooner. Any subsequent "tax matters partner" shall be designated from time to
time by the Manager.
12. Indemnity; Other Business.
(a) Indemnity. Each Member, the Manager and any other entity or individual
authorized to act on behalf of the LLC shall be entitled to indemnity from the
LLC for any liability incurred and/or for any act performed within the scope of
the authority conferred, and/or for any act omitted to be performed, which
indemnification shall include all reasonable expenses incurred, including
reasonable legal and other professional fees and expenses; provided, however,
that such Person acted in good faith and in a manner reasonably believed to be
in or not opposed to the best interests of the LLC.
-8-
<PAGE> 9
(b) Outside Interests. The Members, the Manager, and any Affiliates of any
of them may engage in and possess interests in other business ventures and
investment opportunities of every kind and description, independently or with
others, including serving as manager and general partner of other limited
liability companies and partnerships; provided, however, that no such other
business venture or investment opportunity shall be in direct competition with
the business and activities of the LLC. Neither the LLC nor any other Member or
Manager shall have any rights in or to such ventures or opportunities or the
income or profits therefrom.
13. Miscellaneous.
(a) Binding Effect. Subject to the restrictions on Transfers set forth
herein, the terms of this Agreement shall be binding upon and shall inure to the
benefit of the Members, their respective successors, successors-in-title, heirs
and assigns; and each and every successor-in-interest to any Member, whether
such successor acquires a Share by way of inheritance, gift, purchase,
foreclosure or any other method, shall hold such Share subject to all of the
terms and provisions of this Agreement. None of the provisions of this Agreement
shall be for the benefit of or enforceable by any Person not a party hereto,
including without limitation any creditor of any Member (including any Member
acting in its capacity as a creditor of the LLC).
(b) Amendment. No change, modification or amendment of this Agreement
shall be valid or binding unless such change, modification or amendment is made
with the consent of the Manager and the consent of a Majority in Interest of the
Common Members.
(c) Liquidation upon IPO of LearningExpress.com LLC or any Affiliate. Each
Member hereby acknowledges and agrees that, unless determined otherwise by the
Manager, effective upon determination of the Manager in connection with
completion of an initial public offering of equity securities by a corporate
successor to LearningExpress.com LLC or any of its Affiliates, the LLC will be
liquidated, without further consent or agreement of any Member, and the Members
will receive shares of capital stock of the corporate successor to
LearningExpress.com LLC or such Affiliate having substantially similar
preferences, rights, qualifications and restrictions as pertain to their
interests in the LLC immediately prior to such liquidation.
(d) Governing Law. This Agreement and the rights and obligations of the
parties hereunder shall be governed by and interpreted and enforced in
accordance with the laws of the State of Delaware, notwithstanding any choice of
law rules to the contrary.
(e) Counterparts. This Agreement may be executed in any number of
counterparts, all of which together shall for all purposes constitute one
Agreement, binding on all the Members notwithstanding that all Members have not
signed the same counterpart.
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<PAGE> 10
(f) Notices. Any and all notices under this Agreement shall be effective
(i) on the fifth business day after being sent by certified mail, return receipt
requested, postage prepaid, or (ii) on the first business day after being sent
by express mail, telecopy, or commercial expedited delivery service providing a
receipt for delivery. All such notices in order to be effective shall be
addressed, if to the LLC at its registered office under the Act, if to a Member
at the last address of record on the LLC's books, and copies of such notices
shall also be sent to the last address for the recipient which is known to the
sender, if different from the address so specified. Copies of such notices shall
also be sent to Goulston & Storrs, P.C., 400 Atlantic Avenue, Boston, MA 02110,
Attention: Kitt Sawitsky, Esquire.
(g) Interpretation. As used herein, the singular shall include the plural
and the masculine gender shall include the feminine and neuter, and vice-versa,
unless the context otherwise requires.
(h) Entire Agreement. This Agreement, including all Schedules and
Appendices attached hereto and the Certificate of Formation, which are hereby
incorporated herein, embodies the entire agreement and understanding among the
parties hereto with respect to the subject matter hereof and supersedes all
prior agreements and understandings relating to such subject matter.
(i) Severability. If one or more provisions of this Agreement are held to
be unenforceable under applicable law, the parties agree to renegotiate such
provision in good faith. In the event that the parties cannot reach a mutually
agreeable and enforceable replacement for such provision, then (a) such
provision shall be excluded from this Agreement, (b) the balance of this
Agreement shall be interpreted as if such provision were so excluded, and (c)
the balance of this Agreement shall be enforceable in accordance with its terms.
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<PAGE> 11
IN WITNESS WHEREOF, the Manager and Members have executed this Agreement
as of the date first above written.
MANAGER:
LEARNINGEXPRESS.COM HOLDINGS LLC
By:/s/
--------------------------------
Its Manager
MEMBERS:
COMMON MEMBERS:
RESIDUAL MEMBER:
LEARNINGEXPRESS.COM HOLDINGS LLC
By: /s/
--------------------------------
Its Manager
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<PAGE> 12
SCHEDULE A
TO
LIMITED LIABILITY COMPANY OPERATING AGREEMENT
OF
LEARNINGEXPRESS.COM INCENTIVE PLAN LLC
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
MEMBER CAPITAL CLASS OF SHARES NUMBER OF
CONTRIBUTION SHARES
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
LearningExpress.com $ 0 Residual 1
Holdings LLC
- ------------------------------------------------------------------------------
[Employees] $ 0 Common [Up to 2,000,000]
- ------------------------------------------------------------------------------
TOTAL COMMON SHARES $ 0 [UP TO 2,000,000]
- ------------------------------------------------------------------------------
</TABLE>
-12-
<PAGE> 13
APPENDIX I
DEFINED TERMS
The following capitalized terms shall have the meanings specified in this
Appendix I.
"Act" shall have the meaning set forth in the first recital to this
Agreement.
"Affiliate" means, with respect to a specified Person, any other Person
that directly or indirectly controls, is under common control with, or is
controlled by the specified Person. As used herein, the term "control" means the
possession by a Person, directly or indirectly, of the power to direct or cause
the direction of the management and policies of another Person, whether through
ownership of voting securities, by contract or otherwise.
"Agreement" shall have the meaning set forth in the Preamble to this
Agreement.
"Capital Account" shall have the meaning set forth in Section 4(c).
"Certificate of Formation" shall have the meaning set forth in the first
recital to this Agreement.
"Code" shall have the meaning set forth in Section 4(c).
"Common Member" means any Member other than the Residual Member.
"LLC" shall have the meaning set forth in the first recital to this
Agreement.
"Majority in Interest of the Common Members" means more than fifty percent
(50%) of the number of Shares owned by all Common Members in the aggregate.
"Manager" shall have the meaning set forth in Section 3(a).
"Member" and "Members" shall have the meanings set forth in the Preamble
to this Agreement.
"Members' Estimated Tax Liability" shall have the meaning set forth in
Section 6(d).
"Person" means any natural person or any general partnership, limited
partnership, limited liability partnership, corporation, joint venture, trust,
business trust, cooperative, association, or limited liability company, and
shall include the heirs, executors, administrators, legal representatives,
successors and assigns of such Person where the context so admits.
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<PAGE> 14
"Pro Rata Share" means, for any Common Member with respect to any amount
to be allocated or distributed by the LLC, the product of (A) the aggregate
amount to be allocated or distributed by the LLC, as the case may be, multiplied
by (B) a fraction, the numerator of which is the aggregate number of Shares held
by such Member and the denominator of which is the aggregate number of Common
Shares of LearningExpress.com LLC held by the LLC.
"Reserve Amount" means, with respect to any Share, an amount equal to the
fair market value of such Share, as determined in good faith by the Manager, at
the time such Share is transferred by the LLC to a Member (but prior to taking
into account the Reserve Amount with respect to such Share).
"Residual Member" means LearningExpress.com Holdings LLC and its
successors and assigns.
"Residual Share" means, with respect to any distribution made by the LLC
at a particular time, an amount equal to the excess of (i) the total amount
available for distribution at such time over (ii) the aggregate amount of
distributions made to the Common Members at such time.
"Shares" means all units of membership interest in the LLC held by each
Common Member, whether now owned or hereafter acquired. Except as provided in
Section 6(b)(ii) with respect to Reserve Amounts, each Share shall entitle the
Common Member holding such Share to an amount of distributions from the LLC at
least equal to the amount of any distributions made to the LLC on one Common
Share of LearningExpress.com LLC.
"Tax Distribution" shall have the meaning set forth in Section 6(d).
"Tax Distribution Rate" shall have the meaning set forth in Section 6(d).
"Transfer" means, when used as a noun, any disposition of Shares or any
interest therein, for value or otherwise, including, without limitation, any
sale, gift, bequest, assignment, pledge or encumbrance, and whether effected by
contract, by operation of law or otherwise. "Transfer," when used as a verb,
shall have a correlative meaning.
"Treasury Regulations" shall have the meaning set forth in Section 4(c).
-14-
<PAGE> 1
Exhibit 4.2
As of April 14, 2000
Sharon and Louis DiMinico
76 Farmers Row
Groton, MA 01450
Sharon DiMinico, President
The Learning Express, Inc.
29 Buena Vista Street
Ayer, MA 01432
Sharon DiMinico, Manager
Louis DiMinico, Manager
Toy Building, LLC
29 Buena Vista Street
Ayer, MA 01432
Dear Sharon and Lou:
Reference is made to (1) that certain Guaranty (Unlimited) dated
December 29, 1999 executed by Sharon DiMinico (the "Sharon DiMinico Guarantee");
(2) that certain Guaranty (Unlimited) dated December 29, 1999 executed by Louis
DiMinico (the "Louis DiMinico Guarantee"); (3) that certain Guaranty (Unlimited)
dated December 29, 1999 executed by The Learning Express, Inc. (the "Learning
Express Guarantee"); and (4) that certain Guaranty (Unlimited) dated December
29, 1999 executed by Toy Building, LLC (the "Toy Building Guarantee") (the
Sharon DiMinico Guarantee, the Louis DiMinico Guarantee, the Learning Express
Guarantee and the Toy Building Guarantee together, the "Guarantees", and Sharon
DiMinico, Louis DiMinico, The Learning Express, Inc. and Toy Building, LLC
individually, a "Guarantor" and collectively, the "Guarantors"). Pursuant to the
Guarantees, the Guarantors have each agreed to guarantee the Obligations (as
defined in the Guarantees) of LearningExpress.com LLC, a subsidiary of
LearningExpress.com Holdings LLC (the "Company"), in connection with that
certain Loan Agreement dated December 29, 1999, by and between
LearningExpress.com LLC and USTrust n/k/a Citizens Bank (the "Bank").
In consideration of the Guarantors' agreeing to guarantee the
Obligations of LearningExpress.com LLC to the Bank, the Company agrees to the
following:
1. If Sharon DiMinico makes payments to the Bank in satisfaction of her
obligations under the Sharon DiMinico Guarantee, the Company will issue to Ms.
DiMinico one Series A Convertible Preferred Share of the Company for each $1.75
she so pays to the Bank.
2. If Louis DiMinico makes payments to the Bank in satisfaction of his
obligations under the Louis DiMinico Guarantee, the Company will issue to
1
<PAGE> 2
Mr. DiMinico one Series A Convertible Preferred Share of the Company for each
$1.75 he so pays to the Bank.
3. If The Learning Express, Inc. makes payments to the Bank in satisfaction of
its obligations under the Learning Express Guarantee, the Company will issue to
The Learning Express, Inc. one Series A Convertible Preferred Share of the
Company for each $1.75 it so pays to the Bank.
4. If Toy Building, LLC makes payments to the Bank in satisfaction of its
obligations under the Toy Building Guarantee, the Company will issue to Toy
Building, LLC one Series A Convertible Preferred Share of the Company for each
$1.75 it so pays to the Bank.
By countersigning this letter agreement below, each Guarantor agrees
that:
- prior to the issuance of any Series A Convertible Preferred
Shares (the "Shares") to a Guarantor, the Guarantor will
execute and enter into the then current Operating Agreement of
the Company and be bound thereby as a member of the Company;
- the Guarantor acquiring the Shares will be acquiring such
Shares for its own account for investment purposes, the
Guarantor has no intention of offering, distributing or
otherwise disposing of the Shares, and the Guarantor will not
dispose of any Shares unless a registration statement under
the Securities Act of 1933 is then in effect with respect to
the Shares or, in the opinion of counsel for the Company, the
Shares are exempt from the registration requirements of the
Securities Act of 1933; and
- the Guarantor will not, for a period of at least 180 days
following the effective date of any "Initial Public Offering"
by the Company (or its successor-in-interest) or by
LearningExpress.com LLC (or its successor-in-interest),
directly or indirectly, sell, offer to sell or otherwise
dispose of the Shares or any shares of LearningExpress.com LLC
(or its successor-in-interest) received in exchange for the
Shares, other than any securities which are included in such
Initial Public Offering; provided, however, that the Company
shall be under no obligation to include such shares or any
portion thereof in any Initial Public Offering. For purposes
of this letter agreement, an "Initial Public Offering" shall
mean the Company's (or its successor-in-interest's) or
LearningExpress.com LLC's (or its successor-in-interest's)
initial distribution of securities in an underwritten public
offering to the general public pursuant to a registration
statement filed with the Securities and Exchange Commission.
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<PAGE> 3
The obligations of the Company pursuant to this letter agreement will
terminate upon termination of the Guarantees.
LEARNINGEXPRESS.COM HOLDINGS LLC
By: /s/ Steven P. Manfredi
-------------------------------
Steven P. Manfredi
Chief Executive Officer
Accepted and agreed to:
/s/ Sharon DiMinico
- -------------------------
Sharon DiMinico
/s/ Louis DiMinico
- -------------------------
Louis DiMinico
THE LEARNING EXPRESS,
INC.
By: /s/ Sharon DiMinico
- -------------------------
Sharon DiMinico
President
TOY BUILDING, LLC
By: /s/ Sharon DiMinico
- -------------------------
Sharon DiMinico
Manager
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<PAGE> 1
EXHIBIT 5
[GOULSTON & STORRS LETTERHEAD]
April 19, 2000
LearningExpress.com Holdings LLC
29 Buena Vista Street
Ayer, Massachusetts 01432
Ladies and Gentlemen:
This opinion is furnished to you in connection with a registration
statement on Form S-1 (the "Registration Statement"), filed with the Securities
and Exchange Commission under the Securities Act of 1933, as amended, for the
offering of 2,607,750 Common Shares and 1,550,000 Series A Convertible Preferred
Shares (collectively, the "Shares"), of LearningExpress.com Holdings LLC, a
Delaware limited liability company (the "Company").
We have examined such documents, records, and matters of law as we have
deemed necessary for purposes of this opinion, and based thereon we are of the
opinion that the Shares to be offered by the Company, when issued and sold by
the Company in accordance with the terms of the Registration Statement, will be
validly issued and fully paid and no owner of the Shares will be obligated
personally for any debt, obligation or liability of the Company solely by reason
of owning the Shares and thereby being a member of the Company.
It is understood that this opinion is to be used only in connection with
the offer and sale of the Shares while the Registration Statement is in effect.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the reference to our firm in the prospectus
contained in the Registration Statement under the caption "Legal Matters."
Very truly yours,
/s/ Goulston & Storrs, P.C.
TBB/KS
<PAGE> 1
EXHIBIT 10.1
LICENSE AGREEMENT
This LICENSE AGREEMENT, dated as of November 5, 1999 (this
"Agreement"), is entered into by and between LEARNINGEXPRESS.COM, LLC., a
Delaware limited liability company ("LEC"), and THE LEARNING EXPRESS, INC. a
Massachusetts corporation ("LEI").
BACKGROUND
A. LEI has developed plans, methods, manuals, systems and
procedures, a uniform and recognizable marketing image and
reputation for toy stores and the sale of related products and
services under the name, trademark and service mark "Learning
Express" (referred to herein as the "System") and has licensed
the System to franchisees ("Franchisees") who own and operate
retail toy stores ("Retail Stores") under the name Learning
Express.
B. LEC wishes to develop, operate and promote an Internet-based
on-line store at www.learningexpress.com (all operations of
LEC on or through www.learningexpress.com are, collectively,
the "On-Line Store") to adapt the System for electronic
commerce and, accordingly, LEC wishes to obtain a license to
certain of LEI's intellectual property all as described in
this Agreement .
C. LEI believes that the development of the On-Line Store will
enhance the business of its Franchisees and thereby LEI's own
business and, accordingly, LEI is willing to license LEC to
use the System to develop, operate and promote the On-Line
Store on the terms set forth in this Agreement.
Now therefore, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. DEFINITIONS. Capitalized terms not otherwise defined herein shall have the
meanings set forth below:
"Content" means any text, graphics, photographs, video, audio or other data or
information published, displayed or broadcast by or on behalf of LEC
that contains or includes a Mark or includes the distinctive components
of the Trade Dress.
"Domain Name" shall mean the Internet domain name LEARNINGEXPRESS.COM,
registered by LEI with Network Solutions, Inc. ("NSI").
"Domain Name Related Properties" shall have the meaning set forth in Section
2(a)(ii).
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<PAGE> 2
"Intellectual Property" shall mean the Marks, the Trade Dress and the Domain
Name Related Properties.
"Licenses" shall have the meaning set forth in Section 2(a).
"On-Line Store" shall have the meaning set forth in paragraph B of the
introductory paragraphs to this Agreement.
"Person" shall mean a natural person, corporation, association, trust,
(including a business trust), partnership, limited liability company,
joint stock company, organization or proprietorship or similar entity.
"Product" shall mean any product sold through the On-Line Store.
"Royalty" shall have the meaning set forth in Section 4(a).
"System" shall have the meaning set forth in paragraph A of the introductory
paragraphs to this Agreement.
"Term" shall have the meaning set forth in Section 9(a).
"Trade Dress" shall have the meaning set forth in Section 2(a)(iii).
2. LICENSES AND RELATED RIGHTS.
(a) Licenses. Effective upon the date hereof, LEI grants to LEC an
exclusive (even as to LEI) world-wide, non-transferable, limited
license to use:
(i) the LEI names and trademarks set forth on Schedule 2(a)(i)
hereto and made a part hereof, and the Domain Name (all such names and
trademarks, including the Domain Name, are the "Marks");
(ii) all of LEI's other rights of any kind in, to and under
the Web site currently operated under the Domain Name, including
without limitation any (A) content, including without limitation
documents, text, web-site architecture, photographs, video, pictures,
animation, sound recordings, computer programs and all other works of
authorship; (B) copyrights and applications, registrations, recordings
and renewals in connection therewith; (C) trade secrets and
confidential business information; (D) computer software including
without limitation all computer programming codes, object codes, source
codes, associated procedural codes and designs directly or indirectly
associated therewith; all algorithms, formulas and protectable concepts
embodied therein as well as all cards, tapes, disks, other media,
documentation, specifications or other physical embodiments, or
modifications, improvements and enhancements embodying, relating to or
containing any of the foregoing; (E) other proprietary rights in
connection
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<PAGE> 3
therewith; (F) licenses, agreements and permissions with respect to any
of the foregoing; (G) all rights corresponding to any of the foregoing
throughout the world; and (H) all of the foregoing items, if any,
provided or licensed by third parties to LEI pursuant to any agreement
or arrangement, including without limitation any development, license
or sublicense agreement or arrangement (all of the foregoing (i) and
(ii) are, collectively, the "Domain Name Related Properties"); and
(iii) the color schemes, presentation styles, fonts and other
"look and feel" components of the System as used and developed by LEI
from time to time (all such components of the System are the "Trade
Dress"),
in all cases solely in connection with the creation, marketing (including
without limitation through catalogs and direct mail advertising of the On-Line
Store), promotion, and operation of the On-Line Store during the Term (as
defined below), provided, however that the License shall only permit LEC to
distribute printed catalogs if each such catalog (a) expressly and prominently
encourages consumers to check the On-Line Store to locate the Retail Store
nearest them, and (b) is not distributed by LEC within the "Protected Territory"
(as such term is defined in the Franchise Agreement between LEI and the
applicable Franchisee) of any Retail Store. In addition, LEI hereby grants to
LEC the right to sublicense any component of the Intellectual Property solely to
enable development of software, conduct of marketing and promotional activities
and/or processing and/or delivery of Products, in each case in connection with
the operation of the On-Line Store, provided that LEC shall obtain the prior
written consent of LEI to any such sublicense and the term thereof, which
consent shall not be unreasonably withheld or delayed, and provided further that
any such sublicensee agrees in writing to the provisions of Section 2(b)(viii)
hereof.
The licenses set forth in this Section 2(a) (the "Licenses") shall be
the only licenses to any of the Marks, the Domain Name Related Properties or the
Trade Dress granted to any Person by LEI for use in Internet-based commerce
during the Term.
(b) Covenants Regarding the Intellectual Property.
(i) Except for the Licenses, LEI shall be and remain the
absolute owner of all of the Intellectual Property and during the Term
shall have all rights to use and license the Intellectual Property
(other than the Domain Name) outside of the scope of the Licenses. Any
goodwill generated by LEC's use of Intellectual Property shall inure to
LEI's benefit. LEC waives all rights LEC may have to question, contest
or challenge, either during or after the Term, LEI's ownership of the
Intellectual Property. LEC shall not register or attempt to register
any Mark.
(ii) If during the Term LEC shall create or have the benefit
of any proprietary right in any of the Intellectual Property, such
proprietary right shall immediately and automatically vest in LEI.
Notwithstanding the foregoing, LEC shall be entitled to use
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<PAGE> 4
any such new proprietary right during the Term as though it had
specifically been included in the Licenses.
(iii) With respect to each Mark listed on Schedule 2(a)(i) as
a federally registered trademark or service mark, LEI shall throughout
the Term pay all registration and renewal fees and other fees and costs
associated with maintaining such Marks so registered in good standing
in the records of the United States Patent and Trademark Office.
(iv) If LEC learns of any infringement, threatened
infringement or passing off of any of the Intellectual Property, or
that any Person claims or alleges that any of the Intellectual Property
is liable to cause deception or confusion to the public, then LEC shall
promptly notify LEI and recommend a course of action, including without
limitation commencing litigation or other legal proceedings, that LEC
considers to be necessary to protect the Intellectual Property from
infringement by any person or party. Unless LEI elects, within twenty
(20) days following receipt of any such notice from LEC, to prosecute
the actions recommended by LEC at LEI's expense, then LEC, at LEC's
expense, may take the recommended actions, provided that LEC shall
consult with LEI from time to time and takes steps to reasonably
accommodate LEI's interests in any such actions, and provided further
that settlement of any actions taken by LEC shall be subject to the
approval of LEI, which approval shall not be unreasonably withheld.
Nothing in this Agreement shall limit or impair LEI's rights, during or
after the Term, to protect any of the Intellectual Property from
infringement by any person or entity, including LEC.
(v) Upon the termination of this Agreement, LEC shall cease
all use of the Intellectual Property, as soon as commercially and
technically practicable, and shall remove or erase all Intellectual
Property and attributes thereof from the On-Line Store and any
advertising and promotional materials, as soon as commercially and
technically practicable, given customary Internet business practices,
but in no event shall any such material be used by LEC or otherwise
remain on the On-Line Store or in any advertising or promotional
materials then being distributed or published by LEC more than 30 days
following termination of this Agreement.
(vi) LEC shall cause the notice "(R)" or "TM" or "SM" and/or
the legend "[description of Mark] is a trademark/service mark of
Learning Express, Inc. and is used under license" (or such other legend
as LEI may reasonably request from time to time), to appear in
connection with each Mark, wherever published or displayed by or on
behalf of LEC, in accordance with LEI's reasonable instructions.
(vii) LEC shall not file any application in any country to
register a trademark which is the same as or confusingly similar to any
Mark or any other trademark of LEI. If any application for registration
is filed in contravention of the foregoing sentence, LEI
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<PAGE> 5
may take appropriate action against LEC to prohibit or otherwise
restrain LEC's use of the Mark for which the application was filed.
(viii) LEC shall (A) maintain LEI's quality and product
standards with respect to LEC's use of the Marks and the Trade Dress,
(B) maintain the prestige and goodwill of the Marks and the Trade
Dress, (C) not take any action that would materially denigrate the
value of any of the Marks or the Trade Dress and (D) use the Marks and
the Trade Dress in compliance with any restrictions or requirements
reasonably requested by LEI to maintain such quality standards. Without
limiting the foregoing, if LEI reasonably believes that any product,
service or content available on the On-Line Store is not reasonably
consistent with the standards set forth in this Section 2(b)(viii), LEI
may so state in writing to LEC and, unless LEI shall subsequently
withdraw LEI's objection, LEC shall remove the objectionable product,
service or content from the On-Line Store as soon as possible and in
all events within three (3) business days following such notice from
LEI.
(ix) At least ten (10) days prior to publication, broadcast,
display or distribution of any Content by LEC, LEC shall provide LEI an
advance copy of such Content for approval, which approval shall not be
unreasonably withheld, provided that such approval shall not be
required for any Content that is not materially different from Content
previously approved by LEI in accordance with this Section 2(b)(ix).
3. MAINTENANCE OF DOMAIN NAME REGISTRATION. Throughout the Term, LEC on behalf
of LEI shall pay all fees and otherwise take all steps necessary to maintain in
good standing the registration of the Domain Name with NSI or any applicable
successor Internet domain name registration service.
4. CONSIDERATION TO LEI. In consideration of the Licenses, LEC shall:
(a) pay to LEI a royalty (the "Royalty") with respect to each calendar
month (or portion thereof) during the Term (in each case within twenty (20) days
following the end of such calendar month), commencing with the month ended
January 31, 2002, an amount equal to three percent (3%) of "Net Sales" accrued
during such month (or portion thereof for any partial months during the Term).
For the purposes of the foregoing, "Net Sales" shall mean (A) LEC's gross
revenues accrued from the sale of Products through the On-Line Store minus (B)
all costs and charges incurred in connection with returned Products and shipping
and handling charges in connection therewith.
(b) within ninety (90) days following the end of each fiscal year
during the Term (or portion of such fiscal year if the Term does not extend
during an entire fiscal year), transmit to LEI a statement certified by LEC's
chief financial officer detailing the calculation of Net Sales for such fiscal
year then ended.
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<PAGE> 6
(c) maintain accurate books and records supporting the calculations of
Net Sales set forth in the foregoing subsection throughout the Term and for a
period of two (2) years following the fiscal years for which such determinations
have been made and permit LEI and its representatives, upon at least ten (10)
days prior written notice to LEC, to make examinations of such books and records
during usual business hours and at the place at which LEC usually keeps its
books and records.
(d) for any Royalty not paid by LEC when due, pay LEI a late payment
penalty equal to one percent (1%) per month of such unpaid amount, or if less,
the maximum amount permissible under applicable law.
5. FURTHER COOPERATION. Each of the parties hereto covenants and agrees that it
shall furnish to the other party hereto such reasonably necessary information
and reasonable assistance, including without limitation execution of documents,
certificates and instruments, as such other party may reasonably require to
effectuate the provisions of this Agreement.
6. REPRESENTATIONS AND WARRANTIES BY LEI
(a) General. LEI represents and warrants to LEC that: (i) LEI is a
corporation duly organized and validly existing under the laws of the
Commonwealth of Massachusetts; (ii) LEI has the requisite corporate power and
authority to execute and deliver, and to perform LEI's obligations under, this
Agreement; and (iii) neither the execution and delivery of this Agreement by LEI
nor the performance by LEI of LEI's obligations hereunder will violate or
conflict with (A) the provisions of any agreement to which LEI is a party, or
(B) the provisions of any law, statute, rule, regulation, judgment, order, or
decree of any domestic or foreign governmental, administrative, or judicial
authority which, if violated, would have a material adverse effect on the
ability of LEI to perform LEI's obligations hereunder.
(b) Regarding the Intellectual Property. LEI represents and warrants to
LEC that: (i) LEI possesses all right, title, and interest in and to the
Intellectual Property, free and clear of any encumbrance, license (other than
pursuant to this Agreement or any agreements with Franchisees) or other
restriction and LEI is hereby licensing and or assigning the Intellectual
Property, as applicable, to LEC free and clear of any encumbrance, license or
other restriction other than as set forth herein; and (ii) each of the
Intellectual Property and the License does not interfere with, infringe upon, or
misappropriate any patent, copyright, trade secret or other intellectual
property rights of any Person.
7. REPRESENTATIONS AND WARRANTIES BY LEC. LEC represents and warrants to LEI
that: (i) LEC is a limited liability company duly organized and validly existing
under the laws of the State of Delaware; (ii) LEC has the requisite limited
liability company power and authority to execute and deliver, and to perform
LEC's obligations under, this Agreement; and (iii) neither the execution and
delivery of this Agreement by LEC nor the performance by LEC of LEC's
obligations hereunder will violate or conflict with (A) the provisions of any
agreement to which LEC is a party, or (B) the provisions of any law, statute,
rule, regulation, judgment, order, or decree of any domestic or foreign
governmental, administrative, or judicial authority which, if violated, would
have a material adverse effect on the ability of LEC to perform LEC's
obligations hereunder.
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8. NON-COMPETITION.
(a) During the Term, LEI shall not directly or indirectly engage in,
either as principal, agent, consultant, proprietor or stockholder or participate
in the ownership, management, operation or control of any other business engaged
in any activity which is or may reasonably be construed to be the creation,
marketing, promotion, or operation of any business that directly or indirectly
markets or distributes through the Internet (or any similar global computer
network) books, toys, or other child-related consumer products or any other
products produced, marketed or sold by LEC during the Term.
(b) During the Term and for a period of two (2) years following the
termination of this Agreement, LEC shall not directly or indirectly engage in,
either as principal, agent, consultant, proprietor or stockholder or participate
in the ownership, management, operation or control of any other business engaged
in any activity which is or may reasonably be construed to be competitive,
directly or indirectly, in whole or in part, with LEI in any business that
manufactures, markets or distributes through retail (other than the Internet) or
direct marketing channels (including without limitation printed catalogs
consistent with the provisions of Section 2(a) hereof and mail-order but
excluding the Internet (or any similar global computer network)) toys, books or
other child-related consumer products anywhere in the world or any other
products produced, marketed or distributed by LEI during the Term.
Notwithstanding anything herein to the contrary, LEC is authorized to promote
the On-Line Store by any means and in any media now or hereafter existing,
including without limitation catalogs describing Products available through the
On-Line Store and direct mail advertising.
9. TERM AND TERMINATION.
(a) This Agreement shall commence on the date hereof and continue for
an indefinite period in full force and effect until it is terminated in
accordance with this Section 9 (such period is, the "Term").
(b) Either party shall have the right but not the obligation to
terminate this Agreement immediately if at any time: (i) the other party shall
be in material breach of any of its obligations hereunder, and such breach shall
not be cured within twenty (20) days following receipt of written notice
thereof, except that for breaches under Section 2(b)(viii) of this Agreement the
period for such cure shall be a total of three (3) days including the period set
forth in said Section 2(b)(viii); (ii) the other party shall be the subject of a
voluntary petition in bankruptcy or any voluntary proceeding relating to
insolvency, receivership, liquidation or assignment for the benefit of
creditors; (iii) the other party shall become the subject of any involuntary
petition in bankruptcy or any involuntary proceeding relating to insolvency,
receivership, liquidation or assignment for the benefit of creditors, and such
petition or proceeding shall not be dismissed within sixty (60) days of filing;
(iv) the business of the other party shall be liquidated or otherwise terminated
on any basis; or (v) the other party shall become insolvent or unable to pay its
debts as they become due.
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(c) A party may exercise its right to terminate this Agreement pursuant
to this Section 9 by written notice to the other party. No exercise by a party
of its rights under this Section 9 shall limit its remedies by reason of the
other party's default, the party's rights to exercise any other rights under
this Section 9 or any other rights of that party.
(d) The provisions of Sections 2(b)(i), 2(b)(ii), 2(b)(v), 2(b)(vii), 4
(for Royalties and records of Net Sales accrued prior to a termination), 5,
8(b), 9(d), 10 and 11 shall survive any termination of this Agreement.
10. SPECIFIC ENFORCEMENT. LEI and LEC each acknowledge that the other party will
be irreparably damaged in the event that this Agreement is not specifically
enforced. Upon a breach or threatened breach of the terms, covenants or
conditions of this Agreement by either LEI or LEC, the other party shall, in
addition to all other remedies, be entitled to a temporary or permanent
injunction, without showing any actual damage, or a decree for specific
performance, in accordance with the provisions hereof.
11. MISCELLANEOUS.
11.1. Notices. Any notice required or permitted to be given hereunder shall
be in writing and shall be deemed to be properly given on the date of postmark
when sent by registered or certified mail, return receipt requested, addressed
as follows:
If to LEI:
The Learning Express, Inc.
Devens Business Community
29 Buena Vista Street
Ayer, MA 01432
Attn: Chief Executive Officer
If to LEC:
LearningExpress.com, LLC
Devens Business Community
29 Buena Vista Street
Ayer, MA 01432
Attn: Chief Executive Officer
or such other address as any party may give the others notice of pursuant to
this Section.
11.2. Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the Commonwealth of Massachusetts, without regard
to conflicts of laws principles thereof. Any action to enforce, arising out of,
or relating in any way to, any of
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the provisions of this Agreement shall be brought and prosecuted in the state
courts of the Commonwealth of Massachusetts or the United States District Court
for the District of Massachusetts and the parties consent to the jurisdiction of
said courts and to service of process by registered mail, return receipt
requested, or by any other manner provided by law.
11.3. Waivers; Amendments. No waiver of any right hereunder by any party
shall operate as a waiver of any other right, or of the same right with respect
to any subsequent occasion for its exercise, or of any right to damages. No
waiver by either party of any breach of this Agreement shall be held to
constitute a waiver of any other breach or a continuation of the same breach.
All remedies provided by this Agreement are in addition to all other remedies
provided by law, in equity or otherwise. This Agreement may not be amended
except in a writing signed by the parties hereto.
11.4. Successors and Assigns. This Agreement shall be binding upon and
shall inure to the benefit of the respective legal representatives, successors
and assigns of the parties hereto.
11.5. Severability. If any provision of this Agreement shall be declared
void or unenforceable by any judicial or administrative authority, the validity
of any other provisions and of the entire Agreement shall not be affected
thereby.
11.6. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
11.7. Prior Understandings. This Agreement represents the complete
agreement of the parties with respect to the transactions contemplated hereby
and supersedes all prior agreements and understandings.
11.8. Headings. Headings in this Agreement are included for reference only
and shall have no effect upon the construction or interpretation of any part of
this Agreement.
11.9. Sealed Instrument. This Agreement shall have the effect of an
instrument executed under seal.
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IN WITNESS WHEREOF, this Agreement has been executed as of the date
first above written.
THE LEARNING EXPRESS, INC. LEARNINGEXPRESS.COM, LLC
By: /s/ Sharon DiMinico By: /s/ Steven P. Manfredi
----------------------- -----------------------
Name: Name:
Title: Title:
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SCHEDULE 2(a)(i): MARKS
MARK REGISTERED FEDERAL TRADEMARK?
"Learning Express" Yes
(Words Only)
Registration Date: July 16, 1991
Registration No.: 1,651,110
"Learning Express" Yes
(Train Logo)
Registration Date: April 16, 1991
Registration No.: 1,641,650
"Learning Express" Yes
(Logo)
Registration Date: November 12, 1996
Registration No.: 2,015,571
LearningExpress.com No
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<PAGE> 1
EXHIBIT 10.2
MANAGEMENT SERVICES AGREEMENT
This MANAGEMENT SERVICES AGREEMENT, dated as of November 5, 1999 (this
"Agreement"), is entered into by and among LEARNINGEXPRESS.COM, LLC., a Delaware
limited liability company ("LEC"), a subsidiary of LEARNINGEXPRESS.COM HOLDINGS
LLC., a Delaware limited liability company ("LECH"), LECH and THE LEARNING
EXPRESS, INC. a Massachusetts corporation ("LEI").
BACKGROUND
A. LEI has developed plans, manuals, methods, systems and procedures, a
uniform and recognizable marketing image and reputation for toy stores
and the sale of related products and services under the name, trademark
and service mark "Learning Express" (referred to herein as the
"System") and has (i) licensed the System to franchisees
("Franchisees") who own and operate retail toy stores under the name
Learning Express (the "Retail Stores") and (ii) established a network
of service providers ("Regional Owners") responsible for marketing
local store franchises, making proper disclosures under state and
federal franchise laws, assisting in site selection and lease
negotiations, assisting in pre-opening operations and training, and
furnishing on-going support in various regions of the United States.
B. LEC wishes to develop, operate and promote an Internet-based on-line
store (the "On-Line Store") to adapt the System for electronic commerce
and, accordingly, LEC has licensed from LEI certain of LEI's
intellectual property pursuant to the terms and conditions of a License
Agreement, dated as of the date hereof (the "License Agreement"), by
and between LEI and LEC.
C. In order to facilitate the development of the On-Line Store, LEC wishes
to have LEI contract with such of the Franchisees as are agreeable (any
such Franchisee is a "Participating Franchisee") to (a) provide space
for an Internet kiosk and certain related services in each Retail Store
such Participating Franchisee operates to enable access to the On-Line
Store, (b) promote the On-Line Store in such Participating Franchisee's
advertising materials, including but not limited to such Participating
Franchisee's catalogues, direct mail, and other printed materials, (c)
cooperate with LEC in promotions and other similar activities and (d)
support product fulfillment and returns for customers of the On-Line
Store, all as described in this Agreement and in the form of the
Amendment to Franchise Agreement (and attachments thereto) attached
hereto as EXHIBIT A (the "Franchise Amendment").
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<PAGE> 2
D. LEI believes that the development of the On-Line Store will enhance the
business of its Franchisees and thereby LEI's own business and,
accordingly, LEI is willing to facilitate cooperation among LEI's
franchisees and LEC on the terms set forth in this Agreement and in the
Franchise Amendment and to make certain arrangements with the Regional
Owners as set forth in an amendment to the Regional Franchise License
Agreement between each Regional Owner and LEI (each such amendment is a
"Regional Amendment").
E. LECH desires to enhance and enable the business plan of its subsidiary,
LEC, through LECH's compliance with the terms and conditions of this
Agreement.
Now therefore, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. DEFINITIONS. Capitalized terms not otherwise defined herein shall have the
meanings set forth below:
"Franchise Agreement" shall have the meaning set forth in Section 2(a).
"Franchise Amendment" shall have the meaning set forth in paragraph C of the
introductory paragraphs to this Agreement.
"Franchisees" shall have the meaning set forth in paragraph A of the
introductory paragraphs to this Agreement.
"Regional Amendment" shall have the meaning set forth in paragraph D of the
introductory paragraphs to this Agreement.
"New Agreement" shall have the meaning set forth in Section 2(b).
"New Franchisee" shall have the meaning set forth in Section 2(b).
"On-Line Commission" shall have the meaning set forth in Section 3(b).
"On-Line Store" shall have the meaning set forth in paragraph B of the
introductory paragraphs to this Agreement.
"On-Line Store Date" shall mean the date on which the On-Line Store first
commences operation on the Internet for the sale of Products to the general
public.
"Participating Franchisee" shall have the meaning set forth in paragraph C of
the introductory paragraphs to this Agreement.
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"Person" shall mean a natural person, corporation, association, trust,
(including a business trust), partnership, limited liability company, joint
stock company, organization or proprietorship or similar entity.
"Product" shall mean any product sold through the On-Line Store.
"Protected Territory" shall have the meaning set forth in Section 3(a)(i).
"System" shall have the meaning set forth in paragraph A of the introductory
paragraphs to this Agreement.
"Term" shall have the meaning set forth in Section 10(a).
2. COVENANTS OF LEI.
(a) Participating Franchisees. As soon as practicable after the date
hereof, and subject to LECH's compliance with the Securities Act of 1933 and all
applicable state securities laws related to LECH's issuance of securities of
LECH to the Participating Franchisees, LEI shall exercise best efforts so that
each Franchisee existing as of April 10, 2000 execute an amendment to such
Franchisee's existing franchise agreement or agreements (prior to such
amendment, the "Franchise Agreement") in the form of the Franchise Amendment. In
connection with the execution of each such Franchise Amendment, LEI shall ensure
that (i) the "Commission Territory" shall be defined therein so as not to cause
the On-Line Commission to be due with respect to more than one Retail Store for
a single sale and (ii) the Commission Territory shall not encompass any zip code
that is not at least partially within the applicable Participating Franchisee's
"Protected Territory," as defined in the applicable Franchise Agreement.
(b) New Franchisees. LEI shall ensure that any agreement with any new
franchisee for any Retail Store (a "New Franchisee") shall obligate such New
Franchisee to support the operations of the On-Line Store to the same extent as
all Participating Franchisees; provided that the On-Line Commission for New
Franchisees shall be the same as the On-Line Commission paid to Participating
Franchisees and the New Franchisees shall not be entitled to receive Common
Shares or other equity of LECH (any franchise agreement with a New Franchisee on
terms consistent with this Section 2(b) is a "New Agreement").
(c) Amendments to Learning Express Confidential Operations Manual. From
time to time LEI may materially modify the Learning Express Confidential
Operations Manual sections that require Franchisees to support and promote the
On-Line Store ("On-Line Store Sections"), provided that LEC shall have consented
to any such modification, which consent shall not be unreasonably withheld. LEI
shall modify the On-Line Store Sections in accordance with LEC's reasonable
requests.
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(d) LEI's Operation of Retail Stores. If and to the extent LEI becomes
a direct operator of any Retail Store, LEI shall agree to and abide by all the
provisions of the Franchise Agreement, as amended by the Franchise Amendment,
with respect to the On-Line Store, including without limitation with respect to
all matters addressed in the Manual Amendment, as defined in the Franchise
Amendment; provided that LEI shall not be entitled to receive Common Shares or
other equity of LECH.
(e) Business Information of LEI Relevant to the System. Throughout the
Term, LEI shall make appropriate staff available at reasonable times and places
to provide information (including information received from Franchisees and
Regional Owners) to LEC regarding the current operation of the System by LEI,
the Franchisees and the Regional Owners, including information with respect to
LEI's sales, buying programs, marketing programs, customers, vendors and
services. LEC may use such information for its own business purposes throughout
the Term provided that such use is consistent with the terms and conditions of
(1) the License Agreement and (2) this Agreement, including without limitation
the provisions of Section 9 hereof.
(f) Marketing and Promotion of the On-Line Store. Throughout the Term,
LEI shall promote LEC and the On-Line Store in all marketing, advertising and
promotion campaigns relating to the Retail Stores. The foregoing shall include
without limitation a prominent listing of the name, URL and a brief description,
such as "Shop for Learning Express toys and games on-line at
www.LearningExpress.com," for the On-Line Store in all catalogs, periodic
product newsletters and any other marketing, advertising or promotional
materials prepared by or on behalf of LEI for use by the Regional Owners,
Franchisees and/or Retail Stores.
3. COVENANTS OF LEC.
(a) On-Line Commission to LEI.
(i) LEC shall pay to LEI a commission (the "On-Line
Commission") with respect to each calendar month (or portion thereof)
during the Term (in each case within 20 days following the end of such
calendar month), equal to a "Percentage" of "Net Sales in Territory"
accrued during such month (or portion thereof during the Term).
"Percentage" shall mean (a) five percent (5%) through the second
anniversary of On-Line Store Date and (b) for the period thereafter,
LEC presently intends to maintain the Percentage at the 5% level but
reserves the right to have the Board of Managers of LEC establish a
different level from time to time based on experience of sales and cash
flow of the On-Line Store, provided, however, that such percentage
determined by the Board of Managers shall not be less than 2.5%. "Net
Sales in Territory" shall mean (A) LEC's gross revenues from the sale
through the On-Line Store of Products ordered by customers of the
On-Line Store whose "bill-to" address for the applicable order is
within any "Protected Territory" as
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defined in the Franchise Amendments as then in effect minus (B)
all costs and charges incurred in connection with returned
products and shipping and handling charges in connection
therewith.
(ii) Within ninety (90) days following the end of each fiscal
year during the Term (or portion of such fiscal year if the Term
does not extend during an entire fiscal year), LEC shall
transmit to LEI a statement certified by LEC's chief financial
officer detailing the calculation of Net Sales for such fiscal
year then ended.
(iii) LEC shall maintain accurate books and records supporting
the calculations of Net Sales set forth in the foregoing
subsection throughout the Term and for a period of two (2) years
following the fiscal years for which such determinations have
been made and permit LEI and its representatives, upon at least
10 days prior written notice to LEC, to make examinations of
such books and records during usual business hours and at the
place at which LEC usually keeps its books and records.
(b) Throughout the Term and to the extent reasonable practicable, LEC
shall include in marketing, advertising and promotional campaigns relating to
the On-Line Store statements to encourage consumers to shop at Retail Stores
operated by Franchisees.
(c) LEC shall post on the On-Line Store, and update within a reasonable
period of time after LEI provides updated information, a listing of the names,
addresses and telephone numbers for the Retail Store(s) operated by each
Franchisee.
(d) LEC shall share with LEI information with respect to LEC's sales,
inventory, customers, vendors and products to the extent consistent with any
confidentiality or other contractual arrangements with the parties providing
such information to LEC. LEI may use such information for LEI's own business
purposes throughout the Term provided that such use is consistent with the terms
and conditions of this Agreement, including without limitation the provisions of
Section 9 hereof.
(e) Regarding Retail Stores. Promptly following full execution of each
Franchise Amendment and each New Agreement, LEC shall (i) assist Participating
Franchisees and New Franchisees with the procurement, installation and operation
of the Kiosk Equipment and the Kiosk throughout the Term as provided in the
Manual Amendment (or the sections corresponding thereto in the applicable New
Agreement), (ii) provide all reasonable cooperation, assistance and payments to
the applicable Participating Franchisee or New Franchisee as may be required to
effectuate the provisions of the applicable Franchise Amendment and the Manual
Amendment, as defined therein, (and/or the sections corresponding thereto in the
applicable New Agreement), and (iii) effectuate and otherwise make all payments
required to be made to the applicable Participating Franchisee or New Franchisee
in connection with the Product order,
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<PAGE> 6
fulfillment and return functions described in the Manual Amendment (or the
sections corresponding thereto in the applicable New Agreement);
4. COVENANTS OF LECH
(a) Subject to LECH's compliance with the Securities Act of 1933 and
all applicable state securities laws, issue to each Participating Franchisee who
has executed a Franchise Amendment, upon such execution or as soon as shall be
practicable thereafter, Common Shares of LECH in accordance with the terms and
conditions of Section 5(a) of such Franchisee's Franchise Amendment.
(b) Subject to LECH's compliance with the Securities Act of 1933 and
all applicable state securities laws, issue to each Regional Owner who has
executed a Regional Amendment upon such execution or as soon as shall be
practicable thereafter, Common Shares of LECH in accordance with the terms and
conditions of Section 2(a) of the applicable Regional Amendment.
5. FURTHER COOPERATION. Each of the parties hereto covenants and agrees that it
shall furnish to the other party hereto such reasonably necessary information
and reasonable assistance, including without limitation execution of documents,
certificates and instruments, as such other party may reasonably require to
effectuate the provisions of this Agreement.
6. REPRESENTATIONS AND WARRANTIES BY LEI
(a) General. LEI represents and warrants to LEC and LECH that: (i) LEI
is a corporation duly organized and validly existing under the laws of the
Commonwealth of Massachusetts; (ii) LEI has the requisite corporate power and
authority to execute and deliver, and to perform LEI's obligations under, this
Agreement; and (iii) neither the execution and delivery of this Agreement by LEI
nor the performance by LEI of LEI's obligations hereunder will violate or
conflict with (A) the provisions of any agreement to which LEI is a party, or
(B) the provisions of any law, statute, rule, regulation, judgment, order, or
decree of any domestic or foreign governmental, administrative, or judicial
authority which, if violated, would have a material adverse effect on the
ability of LEI to perform LEI's obligations hereunder.
7. REPRESENTATIONS AND WARRANTIES BY LEC. LEC represents and warrants to LEI
that: (i) LEC is a limited liability company duly organized and validly existing
under the laws of the State of Delaware; (ii) LEC has the requisite limited
liability company power and authority to execute and deliver, and to perform
LEC's obligations under, this Agreement; and (iii) neither the execution and
delivery of this Agreement by LEC nor the performance by LEC of LEC's
obligations hereunder will violate or conflict with (A) the provisions of any
agreement to which LEC is a party, or (B) the provisions of any law, statute,
rule, regulation, judgment, order, or decree of any domestic or foreign
governmental, administrative, or judicial authority which, if
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<PAGE> 7
violated, would have a material adverse effect on the ability of LEC to perform
LEC's obligations hereunder.
8. REPRESENTATIONS AND WARRANTIES BY LECH. LECH represents and warrants to LEI
that: (i) LECH is a limited liability company duly organized and validly
existing under the laws of the State of Delaware; (ii) LECH has the requisite
limited liability company power and authority to execute and deliver, and to
perform LECH's obligations under, this Agreement; and (iii) neither the
execution and delivery of this Agreement by LECH nor the performance by LECH of
LECH's obligations hereunder will violate or conflict with (A) the provisions of
any agreement to which LECH is a party, or (B) the provisions of any law,
statute, rule, regulation, judgment, order, or decree of any domestic or foreign
governmental, administrative, or judicial authority which, if violated, would
have a material adverse effect on the ability of LECH to perform LECH's
obligations hereunder.
9. CONFIDENTIALITY.
(a) Except as expressly provided in this Agreement, no party hereto,
without the prior written consent of the other parties hereto, shall disclose to
any third party (i) any information regarding the terms of this Agreement or
exchanged in connection with the negotiation of this Agreement or regarding the
transactions contemplated hereby (such information the "Agreement-Specific
Information"), or (ii) any information regarding the actual or anticipated
business or technology of the other party(ies), in either case to the extent
disclosed by such other party(ies) in connection with the transactions
contemplated hereby or the performance by the other party of such other
party(ies)'s obligations hereunder, including, without limitation, information
regarding or which includes customers, business practices, business prospects,
financial condition, pricing policies, processes, technical data or
specifications, source code or any other proprietary information (such
information is, the "Proprietary Information").
(b) Notwithstanding the foregoing, each party hereto may (i) disclose
the Proprietary Information of the other party(ies) to such party's employees,
directors, advisers, consultants, and representatives with a "need to know,"
including without limitation Franchisees and Regional Owners and who agree to be
subject to the confidentiality restrictions set forth in this Section 9, (ii)
disclose all or such portion of the Agreement-Specific Information or the
Proprietary Information of the other party(ies) as such party shall be ordered
to disclose to a judicial or administrative agency of competent jurisdiction,
provided that such party shall give the original disclosing party reasonable
notice of such order and a timely opportunity to attempt to preclude or limit
such production, (iii) disclose the terms hereof to the extent necessary to
comply with any applicable securities laws; and (iv) disclose the existence,
general terms and the length of term of this Agreement to such party's current
and prospective business partners and investors.
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(c) The obligations in this Section 9 shall not apply to any
information disclosed by any party to any other party hereunder to the extent
that, and after such time as, such information (i) becomes publicly available
other than by a breach of this Agreement, (ii) is rightfully received by the
non-disclosing party from a third party who is not under an obligation of
confidentiality with respect thereto, (iii) can be demonstrated to have been
independently developed by the non-disclosing party without access to or use of
any of the Proprietary Information of the other party, or (iv) is known to the
non-disclosing at the time of disclosure, provided that the non-disclosing party
shall have promptly delivered to the other party written notice of such prior
knowledge.
(d) Each party agrees (except to the extent that such party has rights
to such Proprietary Information in accordance with this Agreement) to (i) cease
using the Proprietary Information of the other party(ies) upon the expiration or
termination of this Agreement and (ii) promptly return to the applicable other
party all materials embodying the Proprietary Information of such other party
upon the expiration or termination of this Agreement and, at any time prior
thereto, promptly upon the written request of such other party (except to the
extent the non-disclosing party has rights to such Proprietary Information in
accordance with this Agreement).
10. TERM AND TERMINATION.
(a) This Agreement shall commence on the date hereof and continue for
an indefinite period in full force and effect until it is terminated in
accordance with this Section 10 (such period is, the "Term").
(b) Any party shall have the right but not the obligation to terminate
this Agreement immediately if at any time: (i) any other party shall be in
material breach of any of its obligations hereunder or under the License
Agreement, and such breach shall not be cured within 20 days following receipt
of written notice thereof; (ii) any other party shall be the subject of a
voluntary petition in bankruptcy or any voluntary proceeding relating to
insolvency, receivership, liquidation or assignment for the benefit of
creditors; (iii) any other party shall become the subject of any involuntary
petition in bankruptcy or any involuntary proceeding relating to insolvency,
receivership, liquidation or assignment for the benefit of creditors, and such
petition or proceeding shall not be dismissed within 60 days of filing; (iv) the
business of any other party shall be liquidated or otherwise terminated on any
basis; or (v) any other party shall become insolvent or unable to pay its debts
as they become due.
(c) A party may exercise its right to terminate this Agreement pursuant
to this Section 10 by written notice to the other parties. No exercise by a
party of its rights under this Section 10 shall limit its remedies by reason of
any other party's default, the party's rights to exercise any other rights under
this Section 10 or any other rights of that party.
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<PAGE> 9
(d) The provisions of Sections 3(b) (with respect to Commissions
accrued through the effective date of such termination), 5, 9, 10(d), 11 and 12
shall survive any termination of this Agreement.
11. SPECIFIC ENFORCEMENT. The parties hereto each acknowledge that the other
parties hereto will be irreparably damaged in the event that this Agreement is
not specifically enforced. Upon a breach or threatened breach of the terms,
covenants or conditions of this Agreement by any party, the other parties hereto
shall, in addition to all other remedies, be entitled to a temporary or
permanent injunction, without showing any actual damage, or a decree for
specific performance, in accordance with the provisions hereof.
12. MISCELLANEOUS.
12.1 Notices. Any notice required or permitted to be given hereunder
shall be in writing and shall be deemed to be properly given on the date of
postmark when sent by registered or certified mail, return receipt requested,
addressed as follows:
If to LEI:
The Learning Express, Inc.
Devens Business Community
29 Buena Vista Street
Ayer, MA 01432
Attn: Chief Executive Officer
If to LEC:
LearningExpress.com, LLC
Devens Business Community
29 Buena Vista Street
Ayer, MA 01432
Attn: Chief Executive Officer
If to LECH
LearningExpress.com Holdings LLC
Devens Business Community
29 Buena Vista Street
Ayer, MA 01432
Attn: Chief Executive Officer
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<PAGE> 10
or such other address as any party may give the others notice of pursuant to
this Section.
12.2 Governing Law. This Agreement shall be governed by, and construed
in accordance with, the laws of the Commonwealth of Massachusetts, without
regard to conflicts of laws principles thereof. Any action to enforce, arising
out of, or relating in any way to, any of the provisions of this Agreement shall
be brought and prosecuted in the state courts of the Commonwealth of
Massachusetts or the United States District Court for the District of
Massachusetts and the parties consent to the jurisdiction of said courts and to
service of process by registered mail, return receipt requested, or by any other
manner provided by law.
12.3 Waivers; Amendments. No waiver of any right hereunder by any party
shall operate as a waiver of any other right, or of the same right with respect
to any subsequent occasion for its exercise, or of any right to damages. No
waiver by any party of any breach of this Agreement shall be held to constitute
a waiver of any other breach or a continuation of the same breach. All remedies
provided by this Agreement are in addition to all other remedies provided by
law, in equity or otherwise. This Agreement may not be amended except in a
writing signed by the parties hereto.
12.4 Successors and Assigns. This Agreement shall be binding upon and
shall inure to the benefit of the respective legal representatives, successors
and assigns of the parties hereto.
12.5 Severability. If any provision of this Agreement shall be declared
void or unenforceable by any judicial or administrative authority, the validity
of any other provisions and of the entire Agreement shall not be affected
thereby.
12.6 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
12.7 Prior Understandings. This Agreement represents the complete
agreement of the parties with respect to the transactions contemplated hereby
and supersedes all prior agreements and understandings.
12.8 Headings. Headings in this Agreement are included for reference
only and shall have no effect upon the construction or interpretation of any
part of this Agreement.
12.9 Sealed Instrument. This Agreement shall have the effect of an
instrument executed under seal.
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<PAGE> 11
IN WITNESS WHEREOF, this Agreement has been executed as of the date
first above written.
THE LEARNING EXPRESS, INC. LEARNINGEXPRESS.COM, LLC
By: /s/ Sharon DiMinico By: /s/ Steven P. Manfredi
----------------------- -----------------------
Name: Name:
Title: Title:
LEARNINGEXPRESS.COM HOLDINGS LLC
By: /s/ Steven P. Manfredi
-----------------------
Name:
Title:
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<PAGE> 12
Exhibit A
AMENDMENT TO
FRANCHISE AGREEMENT/LOCAL FRANCHISE LICENSE AGREEMENT
AMENDMENT (this "Amendment"), dated as of ____ _____, _____, by and
between THE LEARNING EXPRESS, INC. a Massachusetts corporation ("Franchisor"),
and ________________, a _______________ _____________ (the "Franchisee").
BACKGROUND
A. Franchisor and Franchisee are parties to that certain Franchise
Agreement/Local Franchise License Agreement dated as of ____ _____,
_____ by and between Franchisor and Franchisee (the "Franchise
Agreement") pursuant to the terms and conditions of which Franchisor
has granted a franchise to Franchisee to operate a retail specialty toy
store (the "Retail Store") using Franchisor's "System" and "Marks" in
the "Protected Territory," all as defined in the Franchise Agreement.
B. Franchisor has entered into a License Agreement, dated as of November
5, 1999 (the "LEC Agreement") with LearningExpress.com, LLC, a Delaware
limited liability company ("LEC"), pursuant to the terms and conditions
of which Franchisor has licensed certain components of the System and
the Marks to enable LEC to develop, operate and promote an
Internet-based on-line specialty toy store under the name
LearningExpress.com (the "On-Line Store").
C. Franchisor has entered into Management Services Agreement, dated as of
November 5, 1999 (the "Management Agreement") by and among Franchisor,
LEC and LearningExpress.com Holdings LLC ("LECH"), the principal owner
of LEC, pursuant to the terms and conditions of which, among other
matters, Franchisor has agreed to (1) support LEC's use of the System
in the On-Line Store through assistance with marketing, promotion and
exchange of information regarding sales, customers, vendors, and (2)
contract with each of Franchisor's franchisees on the terms and
conditions set forth in this Amendment.
D. Franchisor and Franchisee believe that the On-Line Store will enhance
Franchisor's and Franchisee's respective businesses by, among other
things, promoting the "Learning Express" image and good will to
consumers who use the Internet and enhancing customer traffic to the
Retail Store and other retail stores operated by other franchisees of
Franchisor.
E. Accordingly, Franchisor and Franchisee are entering into this Amendment
to facilitate the development, operation and promotion of the On-Line
Store by LEC
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<PAGE> 13
and to set forth: (i) certain services that Franchisee has agreed to
provide to Franchisee's and LEC's customers with respect to the On-Line
Store and (ii) certain specified payments and other benefits that
Franchisee will receive in consideration thereof.
Now therefore, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. AMENDMENT OF FRANCHISE AGREEMENT; CAPITALIZED TERMS. The terms and
provisions of this Amendment amend the Franchise Agreement. In the event of any
conflict between the terms of the Franchise Agreement and the terms of this
Amendment, the terms of this Amendment shall govern. Capitalized terms not
otherwise defined herein shall have the same meaning(s) as set forth in the
Franchise Agreement.
2. AMENDMENT TO LEARNING EXPRESS CONFIDENTIAL OPERATIONS MANUAL.
(a) Franchisee consents and agrees to all of the amendments to the
LEARNING EXPRESS CONFIDENTIAL OPERATIONS Manual (the "Manual") set forth on
Exhibit A hereto (the "Manual Amendment").
3. TERM. Franchisee's and Franchisor's obligations under this Amendment,
shall commence on , 2000 and continue until the earlier to occur of: (i)
termination of the Franchise Agreement in accordance with its terms (without
giving effect to this Amendment), (ii) the occurrence of a material breach by
Franchisee of the terms and conditions of this Amendment following written
notice to Franchisee by Franchisor detailing such alleged breach and
Franchisee's failure to remedy any such actual breach within ten (10) days, or
such other period as may be required by applicable state law, following such
notice, or (iii) upon Franchisor's election, exercised in its sole discretion by
written notice to Franchisee, to terminate this Amendment incident to a breach
by LEC of the LEC Agreement or the Management Agreement. The foregoing period is
referred to herein as the "Term".
Upon any termination in accordance with subsection (iii) of the
foregoing paragraph, all obligations of the Franchisor and the Franchisee under
this Amendment shall terminate but the Franchise Agreement and all obligations
of the parties thereunder shall continue in full force and effect in accordance
with their terms unaffected hereby.
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<PAGE> 14
4. EQUITY AND COMMISSION
(a) Equity of LECH.
(i) In consideration of Franchisee's agreement to execute
and consummate the terms and conditions of this
Amendment, Franchisor shall cause LECH to issue to
Franchisee 14,250 Common Shares of LECH for each
Retail Store operated by Franchisee (such shares, the
"Shares").
(ii) Prior to issuance of the Shares, LECH may require
Franchisee to execute an investment letter or letters
to the effect that the Shares are being acquired by
Franchisee for Franchisee's own account for
investment purposes, that Franchisee has no present
intention of offering, distributing or otherwise
disposing of the Shares, and that Franchisee shall
agree not to dispose of the Shares unless a
registration statement or appropriate qualification
is then in effect under applicable state "Blue Sky"
laws with respect to the Shares or in the opinion of
counsel for LECH the Shares are exempt from the
registration or qualification requirements of such
laws.
(iii) Prior to issuance of the Shares, Franchisee shall
execute and enter into the then current Operating
Agreement for LECH and be bound thereby as a member
of LECH. Such Operating Agreement shall provide,
among other matters, that, until such time as LECH,
or a successor entity, has completed an "Initial
Public Offering" (defined below), all of the Shares
shall be forfeited to LECH immediately upon the
termination of either or both of the Franchise
Agreement or this Amendment, provided, however, that
the Shares shall not be subject to forfeiture in the
case where either or both of the Franchise Agreement
and this Amendment are terminated in connection with
the sale or transfer of Franchisee's Retail Store to
a New Franchisee.
(iv) Franchisee agrees that Franchisee will not, for a
period of at least 180 days following the effective
date of any "Initial Public Offering" (defined below)
by LECH (or its successor-in-interest) or by LEC (or
its successor-in-interest), directly or indirectly,
sell, offer to sell or otherwise dispose of the
Shares other than any securities which are included
in such Initial Public Offering, provided, however,
that LECH shall be under no obligation to include the
Shares or any portion thereof in any Initial Public
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<PAGE> 15
Offering. If the managing underwriter of any such
Initial Public Offering determines that a shorter
time period is appropriate, the aforementioned 180
day period may be shortened consistent with the
requirements of such managing underwriter. An
"Initial Public Offering" shall mean LECH's, or a
successor entity's, initial distribution of
securities in a firm commitment underwritten public
offering to the general public pursuant to a
registration statement filed with the Securities and
Exchange Commission.
(b) On-Line Commission.
(i) In consideration of Franchisee's performance of
Franchisee's obligations hereunder, Franchisor shall
pay to Franchisee a commission (the "On-Line
Commission") equal to a percentage (the
"Percentage"), of the On-Line Store's "Net Sales in
Territory" accrued during each calendar month (or
portion thereof) during the Term. "Percentage" shall
mean (a) five percent (5%) through the second
anniversary of the "On-Line Store Date," defined
below, and (b) for the period thereafter, the
percentage established from time to time by the Board
of Managers of LEC based on experience of sales and
cash flow of the On-Line Store, provided, however,
that, (1) without limitation of the foregoing, LEC
presently intends to maintain the Percentage during
such period at the 5% level and (2) notwithstanding
anything herein to the contrary such percentage
determined by the Board of Managers shall never be
less than 2.5%. "Net Sales in Territory" shall mean:
(A) LEC's gross revenues accrued from the sale
through the On-Line Store of On-Line Store products
("Products") ordered by customers ("Customers") whose
"bill-to" address for the applicable order is within
the "Protected Territory" as defined in the Franchise
Agreement minus (B) all costs and charges incurred in
connection with returned products and shipping and
handling charges in connection therewith. "On-Line
Store Date" shall mean the date on which the On-Line
Store first commences operation on the Internet for
the sale of Products to the general public.
(ii) The On-Line Commission will be payable to the
Franchisee within 35 days after the end of the
calendar month in which LEC accrues the applicable
sale(s).
(iii) In addition, Franchisor need not pay the On-Line
Commission to Franchisee to the extent that LEC,
under and pursuant to that
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<PAGE> 16
certain Management Services Agreement by and among
Franchisor, LEC and LearningExpress.com Holdings LLC
(the "MSA"), has not paid to Franchisor the component
of the "On-Line Commission," as defined in the MSA,
corresponding to the On-Line Commission otherwise
payable by Franchisor to Franchisee hereunder.
(iv) Franchisor may suspend payment of the On-Line
Commission to Franchisee if Franchisor determines
that Franchisee continues to be materially
noncompliant with the Manual, as amended from time to
time, following written notice by Franchisor to
Franchisee of such noncompliance and a subsequent
thirty (30) day opportunity to cure such
non-compliance.
(c) Except for payment of the On-Line Commission and the other
consideration provided for in this Agreement, Franchisee shall have no rights
under the Franchise Agreement or otherwise against Franchisor or any other party
with respect to the operations and sales of LEC and the On-Line Store regardless
of the billing address, shipping address or other location of the Customer or
other person to whom any Product is delivered or otherwise on account of any
sale of any Product.
5. FURTHER COOPERATION. Each of the parties hereto covenants and agrees
that it shall furnish to the other party hereto such reasonably necessary
information and reasonable assistance, including without limitation execution of
documents, certificates and instruments, as such other party may reasonably
require to effectuate the provisions of this Amendment.
6. CONFIRMATION OF FRANCHISE AGREEMENT. The parties hereto acknowledge,
agree and confirm that subject to Sections 2(a) and 4(c) hereof, all terms and
conditions of the Franchise Agreement not inconsistent with the terms of this
Amendment shall continue and remain in full force and effect unaffected by this
Amendment.
7. EFFECTIVENESS OF THIS AGREEMENT. This Agreement shall not be effective
until a copy executed by Franchisee and delivered to Franchisor has been
countersigned by Franchisor and delivered to Franchisee.
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<PAGE> 17
8. MISCELLANEOUS.
8.1 Notices.
Any notice required or permitted to be given to Franchisor hereunder shall be
addressed as follows:
The Learning Express, Inc.
Devens Business Community
29 Buena Vista Street
Ayer, MA 01432
Attn: Chief Executive Officer
Any notice required or permitted to be given to Franchisee hereunder shall be
addressed as follows:
or such other address as any party may give the others notice of pursuant to
this Section.
8.2 Counterparts. This Amendment may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
8.3 Headings. Headings in this Amendment are included for reference
only and shall have no effect upon the construction or interpretation of any
part of this Agreement.
8.4 Sealed Instrument. This Amendment shall have the effect of an
instrument executed under seal.
[continues on next page]
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<PAGE> 18
IN WITNESS WHEREOF, this Amendment has been executed as of the date
first above written.
THE LEARNING EXPRESS, INC. FRANCHISEE
PRINT NAME OF LEGAL ENTITY (IF ANY):
By: _______________________ ________________________________________
Name:
Title:
BY: _______________________
PRINT NAME OF SIGNER: ____________________
PRINT TITLE OF SIGNER: _____________________
(if more than one signer, continue
signatures below)
BY: _______________________
PRINT NAME OF SIGNER: ____________________
PRINT TITLE OF SIGNER: _____________________
BY: _______________________
PRINT NAME OF SIGNER: ____________________
PRINT TITLE OF SIGNER: _____________________
BY: _______________________
PRINT NAME OF SIGNER: ____________________
PRINT TITLE OF SIGNER: _____________________
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<PAGE> 19
EXHIBIT A
SUPPLEMENT TO LEARNING EXPRESS, INC. OPERATIONS MANUAL
This supplement is intended to outline the key operational requirements of each
Learning Express franchisee that will facilitate cooperation thereby enhancing
the development of the On-Line Store as well as the franchised stores. It does
not address in detail all operational procedures that will facilitate a seamless
environment for the Learning Express customer when shopping either through a
franchised location, the On-Line Store or both. Those detailed procedures are
under development and will be incorporated, along with the following, as part of
the Learning Express, Inc. Policies and Procedures section of the Operations
Manual.
1. IN-STORE KIOSK
A cooperative program between Learning Express franchisee and
LearningExpress.com E-commerce Company ("On-Line Store") that will
enhance customer service and broaden product offerings by enabling
access to the On-Line Store via a Kiosk unit.
OPERATIONAL REQUIREMENTS: Learning Express franchisee will provide the
appropriate retail space inside franchised location for placement of
the Kiosk. Franchisee will provide the appropriate utility connections
as well as subscription service to an Internet Service Provider ("ISP")
for access to the World Wide Web. Customer will have access only to the
LearningExpress.com URL.
COST TO FRANCHISEE: Ongoing communications (i.e., telephone line and
ISP subscription costs). On-line store will provide equipment and
fixture to franchisee at no cost.
2. MARKETING AND BRAND DEVELOPMENT
Learning Express, Inc. believes that the development of the On-Line
Store will enhance the business of its Franchisees by creating additional
awareness of the Learning Express name through various cooperative marketing and
advertising programs.
OPERATIONAL REQUIREMENTS: Learning Express franchisee will allow the
marketing and promotion of the On-Line Store as well as display the
LearningExpress.com URL on marketing materials including; catalogs, print ads,
marketing and advertising materials, bags and in-store display materials.
COST TO FRANCHISEE: Minimal, if any.
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<PAGE> 20
OPERATIONAL REQUIREMENTS: Learning Express franchisee will allow up to
four direct mailings to customer mailing list that will promote in a joint
fashion, the On-Line Store and that particular local store.
COST TO FRANCHISEE: None
OPERATIONAL REQUIREMENTS: Learning Express franchisee will accept
On-Line Store gift certificates and coupons utilizing the same process as now
used for the franchised store system. On-Line Store gift certificates and
coupons will be validated via telephonic or electronic means.
COST TO FRANCHISEE: None
3. PRODUCT RETURNS
In order to provide seamless customer service and distinguish the
Learning Express On-Line Store from other like e-commerce companies, a
cooperative return process between the On-Line Store and the franchised store is
necessary.
OPERATIONAL REQUIREMENTS: Learning Express franchised store will accept
product returns from Learning Express On-Line Store customers following the same
inter-store procedure as outlined in the current Operations Manual.
- Returned products that are on the Learning Express
"Buying Program" will be retained into inventory by
store for sale at retail. Store will receive
reimbursement from On-Line Store for cost of item.
- Returned products that are not on "Buying Program"
may be returned to the On-Line Store fulfillment
center. Store will receive full reimbursement of
credit given to customer.
- Customer will receive instructions for those items
carried by the On-Line Store (i.e., direct ship by
mfg., affiliate sales, etc.) that are not returnable
to a franchised store location.
COST TO FRANCHISEE: Minimal to none
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<PAGE> 1
EXHIBIT 10.3
USTRUST LOAN AGREEMENT
THIS AGREEMENT made this 29th day of December, 1999, by and between
LearningExpress.com LLC, a Delaware corporation with an address and principal
place of business at 29 Buena Vista Street, Ayer, Massachusetts 01432
(hereinafter called the "BORROWER") and USTrust, a Massachusetts trust company
with a usual place of business at 30 Court Street, Boston, Massachusetts, 02108.
W I T N E S S E T H :
The following constitutes the agreement of the parties:
SECTION 1
AMOUNT AND TERMS OF CREDIT AND INTEREST
THE TERM LOAN
1.1 Subject to the terms and conditions of this Agreement, the Bank will make a
term loan to the Borrower on the date of execution of this Agreement (the
"LOAN"), in the amount of seven hundred fifty thousand ($750,000.00) dollars, as
evidenced by a Secured Term Note of even date in the original principal amount
of $ 750,000.00 (the "TERM NOTE").
1.2 Interest on the principal balance of the Term Loan shall be payable
monthly in arrears commencing on the first day of the first month next
succeeding the date hereof at the fixed rate of nine percent (9%) per annum.
Interest shall be computed on the basis of a 360-day year, for the actual
number of days elapsed. Default interest shall be charged in accordance with the
terms of the Term Note.
1.3 The Term Loan shall be payable (after six (6) consecutive monthly
installments of interest only) in sixty (60) consecutive monthly installments of
principal and interest in the amount of $15,568.77 each (except the last
payment, which shall be in the amount of the outstanding principal balance,
together with accrued but unpaid interest thereon), with payments to be made
monthly in arrears on the first day of each month. On any date on which a
payment of interest or principal is due hereunder, the Bank may charge the
Borrower's demand deposit account(s) with the amount thereof. The failure of the
Bank so to charge such account shall not relieve the Borrower of its obligations
to make payments hereunder.
1.4 The Bank need not enter payments of interest and principal upon the
Term Note, but may maintain a record thereof on a separate ledger maintained by
the Bank.
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<PAGE> 2
1.5 All of the Borrower's obligations to the Bank, of every kind and
description, including those arising under this Agreement, direct or indirect,
absolute or contingent, due or to become due, now existing or hereafter arising,
regardless of how they arise or by what agreement or instrument they may be
evidenced, including those arising under any other agreements, instruments or
documents executed in conjunction herewith, or whether evidenced by an agreement
or instrument, including obligations to perform acts and refrain from taking
action, as well as obligations to repay the Loans, shall constitute the
Borrower's "LIABILITIES" to the Bank, as the same may be modified, amended,
replaced or extended from time to time.
1.6 The Term Note is incorporated herein to the same extent as if it was
set forth in full in this Agreement.
SECTION 2
WARRANTIES AND REPRESENTATIONS
2.1 To induce the Bank to enter into this Loan Agreement and to make the
Loan, the Borrower warrants and represents that, as of this date:
(a) The Borrower is a duly organized and existing limited liability
company under the laws of the State of Delaware and is in good
standing under the laws of said State of Delaware.
(b) The Borrower is duly qualified to do business and in good standing
as a foreign limited liability company in each state or other
jurisdiction where the nature of the business conducted by it or the
property owned by it requires such qualification.
(c) The Borrower has good and clear record and marketable title to all
properties and assets which it purports to own, free and clear of
all mortgages, liens, pledges, charges, security interests and
encumbrances, other than those being granted to the Bank, if any,
and those reflected on EXHIBIT A attached hereto.
(d) The Borrower owns and holds or leases all real and personal property
necessary or incidental to the present conduct of its business,
including, without limitation, patents, trademarks, service marks,
trade names, copyrights and licenses and other rights with respect
to the foregoing.
(e) All books and records of the Borrower, including, but not limited
to, books of account, are accurate and reflect all matters and
transactions which should currently be reflected therein.
(f) The general nature of the Borrower's business is as
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<PAGE> 3
set forth on EXHIBIT A attached hereto.
(g) The Borrower has no subsidiaries and no investments in the stock or
securities of any other corporation, firm, trust or other entity,
except as set forth on EXHIBIT A.
(h) Except as set forth on EXHIBIT A, there are no actions, suits,
investigations or proceedings pending, or to the knowledge of the
Borrower threatened, against the Borrower or any of its properties
in any court, before any governmental authority, arbitration board,
or any other tribunal which, singly or in the aggregate, if decided
adversely to the Borrower, would materially and adversely affect the
business, properties or condition (whether financial or otherwise)
of the Borrower. The Borrower is not, nor by execution and delivery
of this Agreement and the performance of its obligations hereunder
(with or without the passage of time) will the Borrower be in
default with respect to any order of any court, governmental
authority, arbitration board or other tribunal.
(i) The Borrower has furnished to the Bank the financial statements for
the time period indicated on EXHIBIT A attached hereto. Said
statements fairly present the condition of the Borrower at the dates
thereof, and the statements of operation contained therein fairly
present the results of the operations of the Borrower for the
periods indicated, all in conformity with generally accepted
accounting principles consistently applied.
(j) Except to the extent reflected or reserved against in the financial
statements referred to above, the Borrower, as of the date of said
financial statements, had no liabilities of any nature, whether
accrued, absolute, contingent or otherwise, including, without
limitation, tax liabilities, due or to become due, or arising out of
transactions entered into or any state of facts existing prior
thereto.
(k) Since the date of the financial statements referred to in Section
2.1(i), and except as shown on EXHIBIT A, and except as to assets
transferred to the Borrower, there has not been:
(i) any change in the condition of the Borrower's assets or
liabilities, other than changes in its ordinary course of
business, none of which has been materially adverse, nor has
there been any depletion of cash or decrease of working
capital which has been materially adverse;
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<PAGE> 4
(ii) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the Borrower's
properties or business;
(iii) any declaration of, setting aside of, or making of a payment
of any dividend or other distribution with respect to the
Borrower's capital stock or any direct or indirect redemption,
purchase or other acquisition of any such stock, except for
distributions to its stockholders to satisfy federal and state
tax liabilities on undistributed income (if Borrower is a
Subchapter "S" corporation); or
(iv) any materially adverse:
(1) controversy with any labor organization or employees;
(2) claim or controversy involving any federal, state or
local governmental agencies; or
(3) other event or condition materially affecting the
business or properties of the Borrower.
(l) The Borrower has filed all federal and state income tax returns,
excise tax returns, and all other tax returns of every kind and
nature which are required to be filed by the Borrower as of the date
hereof and has paid all taxes shown to be due on said returns.
(m) The Borrower keeps all records concerning its accounts (as said term
is defined in the Massachusetts Uniform Commercial Code) and has its
chief executive office and principal place of business at the
address set forth at the beginning of the Agreement. The Borrower
has no other addresses at which the Borrower has an office, conducts
business or at which any of the Borrower's property is located
except as set forth on EXHIBIT A.
(n) The execution and delivery of this Agreement, the borrowing by the
Borrower as herein provided, the execution and delivery by the
Borrower of all instruments, agreements and documents of every kind
and nature pursuant hereto and the performance by the Borrower of
all of its obligations to the Bank hereunder have been duly
authorized by the Manager of the Borrower and, to the extent
required by law or otherwise, and this Agreement and all
instruments, agreements and documents executed pursuant hereto are
valid and binding obligations of the Borrower enforceable in
accordance with their terms except to the extent such enforceability
may be limited by laws of general application affecting the rights
of
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<PAGE> 5
creditors.
(o) There is no provision in the Limited Liability Company Operating
Agreement of the Borrower, or any indenture, contract or agreement
to which it is a party or by which it is bound, which prohibits the
execution and delivery of this Agreement or the performance by the
Borrower of its obligations hereunder.
(p) No event has occurred and no condition exists, which, upon the
execution and delivery of this Agreement would constitute a default
or an Event of Default hereunder. Neither the nature of the Borrower
or any of its business or properties, nor any relationships between
the Borrower and any other person, nor any circumstances in
connection with the execution or delivery of this Agreement, is such
as to require a consent, approval, or authorization of or filing,
registration, or qualification with, any governmental authority on
the part of the Borrower as a condition of the execution and
delivery of this Agreement or any other instrument, agreement or
document contemplated hereby, or the performance by the Borrower of
its obligations hereunder or thereunder.
(q) The Borrower has no pension, profit sharing, stock option, Employee
Stock Ownership Trust ("ESOT"), insurance or other similar plan
providing for a program of deferred compensation or benefits for any
employee or officer, except as indicated on EXHIBIT A hereto.
SECTION 3
AFFIRMATIVE COVENANTS
3.1 The Borrower will duly and punctually pay all interest and principal
becoming due to the Bank and will duly and punctually perform all things on its
part to be done or performed under this Agreement, or pursuant to any
instrument, document or agreement executed pursuant hereto.
3.2 The Borrower will, at all times, keep proper books of account in which
full, true and correct entries will be made of its transactions in accordance
with generally accepted accounting principles consistently applied.
3.3 The Borrower will, at all reasonable times, make its books and records
available, in its offices, for inspection, examination and copying by the Bank
and the Bank's representatives and will, at all reasonable times, permit
inspection of its properties by the Bank and the Bank's representatives.
3.4 The Borrower will, from time to time, furnish the Bank with such
information and statements as the Bank may reasonably request and with copies of
all financial statements and reports that it shall send or make available to its
members.
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3.5 The Borrower will furnish the Bank monthly, within twenty (20) days
after the close of each fiscal monthly period, commencing with the monthly
period in which this Agreement is executed, a balance sheet and income and
surplus statement reflecting the financial condition of the Borrower at the end
of each such period and the results of its operation during each such period.
Each statement shall also contain comparative statements for the same period
during the prior fiscal year. Each balance sheet and income and surplus
statement is to be certified by the Manager of the Borrower, such certification
to state that such balance sheet and income and surplus statement fairly present
the financial condition and the result of operations of the Borrower at the end
of such period and during such period in accordance with generally accepted
accounting principles consistently applied, subject, however, to ordinary
year-end adjustments, none of which will be materially adverse.
3.6 The Borrower will furnish the Bank annually, within ninety (90) days
after the close of each fiscal year, a balance sheet and income and surplus
statement reflecting the financial condition of the Borrower at the end of each
such fiscal year and the results of its operation during such fiscal year. Each
such statement shall also contain comparative statements for the prior fiscal
year. Each such balance sheet and income and surplus statement is to be audited
by an independent certified public accountant satisfactory to the Bank with an
audit quality statement to be issued by the accountant and signed by the Manager
of the Borrower representing that neither the accounting firm nor the Manager of
the Borrower is aware of any material modifications necessary to the financial
statements for them to be in conformity with generally accepted accounting
principles consistently applied.
3.7 The Borrower shall cause Sharon DiMinico, Louis DiMinico, The Learning
Express, Inc. and Toy Building, LLC, the Guarantors, to furnish their personal
financial statement and tax return with original signatures to the Bank
annually, not later than April 30th of each year, in form and substance
satisfactory to Bank.
3.8 The Borrower shall make its books and records available to the Bank
for audit at any time and from time to time at the Bank's discretion and at the
Borrower's expense, provided, however, that absent the reoccurrence of an Event
of Default hereunder, Borrower shall not be responsible for the cost of more
than one (1) audit per fiscal year.
3.9 The Borrower will maintain its existence in good standing, comply with
all laws and regulations of the United States, of any state or states thereof,
of any political subdivision thereof and of any governmental authority which may
be applicable to the Borrower or to the Borrower's business.
3.10 The Borrower will pay all real and personal property taxes,
assessments and charges and all franchise, income, unemployment, old age
benefit, withholding, sales and other taxes assessed against it or payable by it
at such times and in such manner to prevent any
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penalty from accruing or any lien or charge from attaching to its properties.
The provisions of this section, however, shall not preclude the Borrower from
contesting in good faith and diligently prosecuting any such tax, provided,
however, that the Borrower shall, upon request of the Bank, deposit with the
Bank funds sufficient to discharge such tax in the event such contest is
resolved against the Borrower. The Borrower shall not be in default under this
Section by reason of the existence of a lien for taxes not then due.
3.11 The Borrower will put and maintain its properties in good repair,
working condition and order and, from time to time, make all needful and proper
repairs, renewals and replacements.
3.12 The Borrower will maintain insurance at all times covering such risks
and in such amounts as the Bank may reasonably require in accordance with
industry standards, all such insurance to be in such form and for such periods
and written by such companies as shall be reasonably acceptable to the Bank.
3.13 The Borrower will pay or reimburse the Bank, on demand, for all
expenses (including, without limitation, reasonable counsel fees and expenses)
incurred or paid by the Bank in connection with the preparation, amendment,
interpretation, extension or negotiation of this Agreement, and any instrument,
agreement or document to be delivered pursuant hereto; the enforcement by the
Bank of its rights as against the Borrower or any other person primarily or
secondarily liable to the Bank hereunder or thereunder; the administration,
supervision, protection or realization on any Collateral held by the Bank as
security for any obligation of the Borrower or any other person primarily or
secondarily liable with respect thereto and in the defense of any action against
the Bank with respect to its rights or liabilities hereunder or thereunder.
3.14 The Borrower will punctually and promptly make all payments and
perform all other obligations which may be required of it with respect to any
indebtedness (whether for money borrowed, goods purchased, services rendered or
however such indebtedness may otherwise arise) owing to persons, firms or
corporations other than the Bank, including, without limitation, indebtedness
which may be secured by a security interest in assets of the Borrower or
property of the Borrower, and all obligations under the terms of any lease in
which the Borrower is the lessee. The provisions of this section shall not
preclude the Borrower from contesting in good faith and diligently prosecuting
any such indebtedness or obligation.
3.15 The Borrower shall pay or cause to be paid when due all amounts
necessary to fund in accordance with their terms all the Borrower's deferred
compensation plans whether now in existence or hereafter created, and the
Borrower will not withdraw from participation in, permit the termination or
partial termination of, or permit the occurrence of any other event with respect
to any deferred compensation plan maintained for the benefit of its employees
under circumstances that could result in liability to the Pension Benefit
Guaranty Corporation, or any of its successors or assigns, or to the entity
which provides funds for such deferred
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compensation plan.
3.16 The Borrower shall maintain its primary operating accounts at the
Bank.
SECTION 4
NEGATIVE COVENANTS
4.1 The Borrower will not issue evidences of indebtedness or create,
assume, become contingently liable for, or suffer to exist indebtedness in
addition to indebtedness to the Bank, except for debt to its officers and
members that is subordinated to the Loans on terms satisfactory to the Bank (the
"SUBORDINATED DEBT"); provided, however, that the Borrower may incur liabilities
which are incurred or arise in the ordinary course of the Borrower's business
(other than liabilities incurred or arising with respect to money borrowed) and
purchase money security interests in acquired assets as reflected on EXHIBIT A.
4.2 The Borrower will not make any loans or advances to any individual,
firm or corporation, including, without limitation, its members and employees;
provided, however, that the Borrower may make advances to its employees,
including its members, with respect to expenses incurred by such employees,
which expenses are reimbursable by the Borrower and directly related to the
conduct of the Borrower's business.
4.3 The Borrower will not invest in or purchase any stock or securities of
any individual, firm or corporation, except for short term "overnight"
financing; provided, however, the Borrower may invest in direct obligations of
the United States of America having a maturity of one year or less from the date
of investment.
4.4 The Borrower will not merge or consolidate or be merged or
consolidated with or into any other corporation.
4.5 The Borrower will not sell or dispose of any of its assets except for
sales of inventory in the ordinary and usual course of its business; provided,
however, that the Borrower may dispose of (or trade in) equipment which is no
longer required for the conduct of the Borrower's business so long as the
Borrower receives therefor a sum (or credit) substantially equal to such
equipment's fair value.
4.6 Except as set forth on EXHIBIT A, the Borrower will not grant or
suffer to exist any mortgage, pledge, title retention agreement, security
interest, lien, charge or encumbrance with respect to any of its assets,
tangible or intangible, whether now owned or hereafter acquired, or subject any
of such assets to the prior payment of any indebtedness, or transfer in any
manner any of such assets with the intent or purpose, directly or indirectly, of
subjecting such assets to the payment of indebtedness.
4.7 The Borrower will not engage in any business other than the business
in which it is currently engaged or a business reasonably allied thereto.
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SECTION 5
SECURITY AND GUARANTIES
5.1 The Bank shall have and hold as security for the repayment of the
Loans and all other Liabilities of the Borrower to the Bank a security interest
in substantially all of the Borrower's business assets (the "COLLATERAL"), and
the Borrower will execute and deliver all agreements, instruments and documents,
in form and substance satisfactory to the Bank, to establish, create and perfect
the same, including, without limitation, a Security Agreement (All Assets) of
even date (the "SECURITY AGREEMENT").
5.2 The Loans will be guaranteed on an unlimited basis by Sharon DiMinico,
Louis DiMinico, Toy Building, LLC and The Learning Express, Inc. (each and
together the "GUARANTOR") by guarantys of even date.
5.3 Any and all deposits or other sums at any time credited by or due from
the Bank to the Borrower shall at all times constitute additional security for
all obligations of the Borrower to the Bank and may be set off against any such
obligations at any time after the occurrence of an Event of Default, as
applicable, whether or not security held by the Bank is deemed to be adequate.
Any and all instruments, documents, policies and certificates of insurance,
securities, goods, accounts receivable, choses in action, chattel paper, cash,
property and the proceeds thereof owned by the Borrower or in which the Borrower
has an interest, which now or hereafter are at any time in possession or control
of the Bank or in transit by mail or carrier to or from the Bank or in the
possession of any third party acting in the Bank's behalf, without regard to
whether the Bank received the same in pledge, for safekeeping, as agent for
collection or transmission or otherwise or whether the Bank has conditionally
released the same, shall constitute additional security for such obligations and
may be applied at any time after the occurrence of an Event of Default, as
applicable, to such obligations, whether due or not.
SECTION 6
DEFAULT
6.1 The occurrence of any of the following events (after the expiration of
any applicable grace period) shall be an Event of Default hereunder:
(a) The Borrower shall fail to pay any installment of principal or
interest on account of the Loans when such payment is due, or on
demand, if such payment is due on demand.
(b) The Borrower shall fail to observe or perform any covenant or
agreement contained in this Agreement or in any instrument,
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document or agreement executed pursuant hereto and the expiration of
thirty (30) days from such failure.
(c) Any warranty, representation or statement made or furnished to the
Bank by or on behalf of the Borrower proves to have been false in
any material respect when made or furnished.
(d) Any event which results in the acceleration of the maturity of the
indebtedness of the Borrower to others in excess of $10,000.00 under
any indenture, agreement, undertaking or otherwise.
(e) Death, dissolution, termination of existence, insolvency, or
business failure of the Borrower or any Guarantor, provided,
however, that the death of a Guarantor shall not constitute an Event
of Default hereunder if: within sixty (60) days of the death of any
Guarantor, the Borrower provides the Bank with a substitute
Guarantor acceptable to the Bank and/or provides the Bank with a
plan for the continued future business operations of the Borrower,
acceptable to the Bank in all respects, and the Bank remains
satisfied with collateral for the Loan, the remaining Guarantor's
support of the Loan and the financial condition of the Borrower.
(f) The Borrower shall: (i) cease, be unable, or admit in writing its
inability to pay its debts as they mature, or make a general
assignment for the benefit of, or enter into any composition, trust
mortgage or other arrangement with creditors; (ii) apply for, or
consent (by admission of material allegations of a petition or
otherwise) to the appointment of a receiver, trustee or liquidator
of the Borrower or of a substantial part of its assets, or authorize
such application or consent, or proceedings seeking such appointment
shall be commenced against the Borrower and continue undismissed for
sixty (60) days; or (iii) apply for, or consent (by admission of
material allegations of a petition or otherwise) to the application
of any bankruptcy, reorganization, readjustment of debt, insolvency,
dissolution, liquidation or other similar law of any jurisdiction,
or authorize such application or consent, or proceedings to such end
shall be instituted against the Borrower and remain unstayed and
undismissed for sixty (60) days, be approved as properly instituted
or result in adjudication of bankruptcy or insolvency. Upon the
filing of any involuntary petition, Bank's agreement to consider
making additional Loans hereunder shall be delayed until such time
as such proceedings have been dismissed, whereupon, if such
proceedings have not been dismissed then Bank's agreement to
consider making additional Loans hereunder shall terminate.
(g) The calling or sufferance by the Borrower of a meeting of the
creditors of the Borrower or the occurrence of a meeting by the
Borrower or a representative thereof with a formal or informal
committee of creditors of the Borrower.
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(h) Termination of any guaranty by any Guarantor.
(i) The occurrence of any of the foregoing events by The Learning
Express, Inc. as if that entity was the Borrower hereunder,
including an Event of Default under the financial covenants
contained in Section 4 of the Loan Agreement between The Learning
Express, Inc. and the Bank, as may be amended.
(j) The occurrence of any of the foregoing events by Toy Building, LLC
as if that entity was the Borrower hereunder.
6.2 Upon the occurrence of any Event of Default, all Liabilities of the
Borrower to the Bank shall, at the Bank's option and without notice or demand,
and notwithstanding any terms of payment in any note or other instrument
evidencing such Liabilities, become immediately due and payable, and any
obligation of the Bank to consider making Loans pursuant to Section 1 shall
terminate.
SECTION 7
NOTICE
7.1 All notices and other communications hereunder shall be made by
telegram, telex, electronic transmitter, overnight air courier, or certified or
registered mail, return receipt requested, and shall be deemed to be received by
the party to whom it was sent one (1) business day after sending, if sent by
telegram, telex, electronic transmitter, or overnight air courier, and three (3)
business days after mailing if sent by certified or registered mail. All such
notices and other communications to a party hereto shall be addressed to such
party at the address set forth at the beginning of this Agreement or to such
other address as such party may designate for itself in a notice to the other
party given in accordance with this section.
7.2 The addresses to which such communications shall be sent are as
follows:
(a) If intended for the Borrower, to:
LearningExpress.com LLC
29 Buena Vista Street
Ayer, MA 01432
Attn: Sharon DiMinico, Manager
Telephone: (978) 889-1000
Fax: (978) 889-1010
with copies to:
Kitt Sawitsky, Esq.
Goulston & Storrs, PC
400 Atlantic Avenue
Boston, MA 02110
Telephone: (617) 482-1776
Fax: (617) 574-4112
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(b) If intended for the Bank, to:
USTrust
97 Lowell Road
Concord, MA 01742
Attn: Christopher J. Degenhardt, Vice President
Telephone: (978) 371-3426
Fax: (978) 371-3434
with copies to:
Brian T. Garrity, Esq.
Shapiro, Israel & Weiner, P.C.
100 North Washington Street
Boston, MA 02114
Telephone: (617) 742-4200
Fax: (617) 742-2355
7.3 The addresses set forth herein may be changed by notice hereunder.
SECTION 8
MISCELLANEOUS
8.1 The Borrower will from time to time execute and deliver to the Bank
all such other and further instruments and documents and take or cause to be
taken all such other and further action as the Bank may reasonably request in
order to effect and confirm or vest more securely in the Bank all rights
contemplated in this Agreement.
8.2 The Borrower may take any action herein prohibited or omit to perform
any act required to be performed by the Borrower if the Borrower shall obtain
the Bank's prior written consent to each such action, or omission to act. No
waiver on the Bank's part on any one occasion shall be deemed a waiver on any
other occasion. The Bank shall not be deemed to have waived any of its rights
hereunder unless such waiver shall be in writing and duly signed by an
authorized officer of the Bank.
8.3 This Agreement may be amended only by an instrument in writing and
duly signed by the Borrower and an authorized officer of the Bank.
8.4 All covenants, agreements, representations and warranties contained in
this Agreement shall bind the Borrower, its respective successors and assigns,
and shall inure to the Bank's benefit and the benefit of the Bank's successors
and assigns, whether expressed or not.
8.5 All rights of the Bank hereunder shall be cumulative. The Bank shall
not be required to have recourse to any Collateral before enforcing its rights
or remedies against the Borrower or any
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Guarantor. The Borrower and any Guarantor hereby waives presentment and protest
of any instrument and any notice thereof.
8.6 If any provisions of this Agreement shall be held to be illegal or
unenforceable, such illegality or unenforceability shall relate solely to such
provision and shall not affect the remainder of this Agreement.
8.7 This Agreement shall be construed and enforced in accordance with the
laws of the Commonwealth of Massachusetts.
8.8 This Agreement shall take effect as an instrument under seal.
8.9 BORROWER AND BANK EACH HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY
WAIVES ANY RIGHT IT MAY HAVE OR HEREAFTER HAVE TO A TRIAL BY JURY IN RESPECT OF
ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT.
Borrower hereby certifies that neither Bank nor any of its representatives,
agents or counsel has represented, expressly or otherwise, that Bank would not,
in the event of any such suit, action or proceeding, seek to enforce this waiver
of right to trial by jury. Borrower acknowledges that Bank has been induced to
enter into this Agreement by, among other things, this waiver. Borrower
acknowledges that it has read the provisions of this Agreement and in
particular, this Section; has consulted legal counsel; understands the right it
is granting in this Agreement and is waiving in this Section in particular, and
makes the above waiver knowingly, voluntarily and intentionally.
8.10 Borrower and Bank agree that any action or proceeding to enforce or
arising out of this Agreement may be commenced in any court of the Commonwealth
of Massachusetts sitting in the counties of Suffolk or Middlesex, or in the
District Court of the United States for the District of Massachusetts, and
Borrower waives personal service of process and agrees that a summons and
complaint commencing an action or proceeding in any such court shall be properly
served and confer personal jurisdiction if served by registered or certified
mail to Borrower or as otherwise provided by the laws of the Commonwealth of
Massachusetts or the United States of America.
8.11 The exhibit annexed hereto as EXHIBIT A is the only exhibit to be
annexed to this Agreement, and the material contained therein shall be
incorporated herein.
8.12 The captions herein contained are inserted as a matter of convenience
only and such captions do not form a part of this Agreement and shall not be
utilized in the construction hereof.
WITNESS: USTRUST
(AS TO BOTH) By: /s/ Christopher J. Degenhardt
--------------------------------------
Christopher J. Degenhardt,
Vice President
/s/ Brian T. Garrity
- ---------------------
Brian T. Garrity
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LEARNINGEXPRESS.COM LLC
By: /s/ Sharon DiMinico
------------------------------------
Sharon DiMinico, Manager
EXHIBIT A
2.1(c) Encumbrances
SECURED PARTY OR LESSOR: COLLATERAL:
2.1(f) General Nature of Borrower's Business
2.1(g) Subsidiaries and Investments
2.1(h) Litigation
2.1(i) Date and Period Covered of Most Recent Financial
Statements Furnished to the Bank
2.1(k) Material Changes in Operations
2.1(m) Other Locations
2.1(q) Deferred Compensation Plans
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EXHIBIT 10.4
WEB SITE DEVELOPMENT AGREEMENT
This AGREEMENT (the "Agreement") is made and entered into as of the
17th day of December, 1999 (the "Effective Date"), by and between Miller
Systems, Inc., a Massachusetts corporation with offices at 364 Boylston Street,
Boston Massachusetts ("Developer") and LearningExpress.com LLC, a Delaware
limited liability company with offices at 29 Buena Vista Street, Ayer, MA
01432("Client").
W I T N E S S E T H
WHEREAS, Developer is in the business of offering Internet services
relating to, among other things, development of sites on the World Wide Web
portion of the Internet, and is willing to provide services to Client on the
terms and subject to the conditions set forth below; and
WHEREAS, Client desires to engage Developer, and Developer desires to
be engaged by Client, to provide Internet services on the terms and subject to
the conditions set forth below.
NOW, THEREFORE, in consideration of the mutual promises set forth
herein, Developer and Client (collectively, the "Parties") hereby agree as
follows:
1. DEVELOPER SERVICES
Developer agrees to provide Client with services relating to the
development of an online store as set forth or described in "Part II.
Functionality specifications for online store" of Exhibit A (the "Development
Services") attached hereto and made a part hereof. Obligations of Developer, if
any, to provide ongoing maintenance tasks for the on-line store described in the
Development Services (the "On-Line Store") shall be set forth and included as
part a separate agreement between the parties. (The Development Services are
hereinafter referred to collectively as the "Services.") Client agrees that
Developer is responsible only for providing the Services, and Developer is not
responsible for providing any services or performing any tasks not specifically
set forth in the Services.
2. DEVELOPMENT SERVICES
2.1 SPECIFICATIONS AND CLIENT CONTENT
Developer, in consultation with Client, has developed written
specifications for the Development Services. (the "Specifications")-- which are
attached hereto as Part II of Exhibit A.
2.2 DELIVERY OF CLIENT CONTENT
"Client Content" shall mean any materials provided by Client for
incorporation in the On-Line Store, including, but not limited to, any images,
photographs, illustrations, graphics, audio clips, video clips or text. Client
shall deliver the Client Content to Developer in an electronic file format
specified and accessible by Developer (e.g., .txt, .gif) or as otherwise
specified in the Specifications. Any services required to convert or input
Client Content not set forth in the Specifications shall be charged on a time
and materials basis pursuant to the fees schedule listed in the COSTS portion of
Exhibit A hereto. Client shall promptly deliver all Client Content to Developer
as reasonably required by Developer.
<PAGE> 2
2.3 INITIAL VERSION
Upon Developer's receipt of the Client Content and any fees then due
and payable in accordance with the COSTS portion of Exhibit A hereto, Developer
shall commence tasks associated with the completing the Development Services
and, to the extent applicable, making the initial version available to Client
(an "Initial Version"). Developer shall use combinations of technology as
Developer, in consultation with the Client, deems appropriate to the Development
Services.
2.4 REVISIONS
Client shall have ten (10) days, or such time as otherwise agreed by
the Parties in writing, from the date of a written notice of completion of the
Initial Version (or any version completed pursuant to a "Change Order," as
defined below, any such version is a "Change Order Version")) from Developer to
review and request in writing from Developer revisions to the Initial Version
(or such Change Order Version). Upon receipt of such requests, Developer shall
use commercially reasonable efforts to implement such revision requests that are
within the scope of, and consistent with, the Specifications. If Client wishes
to implement any revisions to the On-Line Store that deviate in any material
respect from the Specifications, Client shall submit to Developer a written
change order containing (i) such revisions in detail and (ii) a request for a
price quote for each change (collectively, the "Change Order"). Developer shall
promptly evaluate the Change Order and submit to Client for its written
acceptance a proposal for undertaking the applicable tasks and a price quote
reflecting all fees associated with Client's Change Order. Client shall have ten
(10) business days from receipt of such proposal to accept or reject Developer's
proposal in writing. If Client accepts Developer's proposal to undertake the
work described in by the Change Order, then the Change Order, as supplemented
and/or modified by Developer's proposal, shall amend and become a part of the
Specifications and the COSTS portion of Exhibit A hereto, and Developer shall
proceed to implement such revisions in accordance with the Specifications and
such costs structure as so modified. If Client has not made any requests for
revisions by the end of ten (10) days from the date of written notice of
completion of the an Initial Version (or a Change Order Version) from Developer,
or by such time as otherwise agreed by the Parties in writing, the Initial
Version (or such Change Order Version) shall be deemed accepted by Client
("Acceptance").
Any accepted Change Order, any failure of the Client to comply with the
timeframes contained in this Section 2.4, or any mutually agreed deviations from
such timeframes, may materially alter the timeframes in which the Development
Services are to be provided, and Developer shall notify Client promptly in
writing of the projected alterations to the timeframes caused by any such event.
2.5 TRANSFER
Upon Acceptance of the Services and payment of all fees called for in
Exhibit A hereto, Developer shall transfer the online store to the computer
system owned and operated by Client's designated third party contractor, through
which the online store may be accessed via the World Wide Web portion of the
Internet (the "Host Server").
2.6 ADDITIONAL WORK
Subsequent to the execution of this Agreement by the Parties, the
Developer shall perform services for the Client which are not in the original
scope of Services hereunder only pursuant to a written agreement between the
parties.
3. PROPRIETARY RIGHTS
3.1 PROPRIETARY RIGHTS OF CLIENT
As between Client and Developer, Client Content and "DC Content," as
defined in Section 3.2, shall remain the sole and exclusive property of Client,
including, without limitation, all copyrights, trademarks,
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<PAGE> 3
patents, trade secrets, and any other proprietary rights. Nothing in this
Agreement shall be construed to grant Developer any ownership right in, or
license to, the Client Content or the DC Content, except as provided in Section
4.1 of this Agreement. To the extent, if any, that ownership of the Client
Content, or the DC Content does not automatically vest in Client by virtue of
this Agreement or otherwise, Developer hereby transfers and assigns to Client
all right, title and interest which Developer may have in and to the Client
Content and/or the DC Content.
3.2 PROPRIETARY RIGHTS OF DEVELOPER
Subject to Client's ownership interest in Client Content, all materials,
including, but not limited, to any computer software (in object code and source
code form), script, programming code, data, or information developed or provided
by Developer or its suppliers under this Agreement (with the exception of
original elements of audiovisual displays and/or any HTML script created
hereunder specifically for Client, which shall be the sole and exclusive
property of Client and shall be referred to herein as "DC Content), and any
trade secrets, know-how, methodologies and processes related to Developer's
products or services, shall remain the sole and exclusive property of Developer
or its suppliers, including, without limitation, all copyrights, trademarks,
patents, trade secrets, and any other proprietary rights inherent therein and
appurtenant thereto (collectively "Developer Materials"). To the extent, if any,
that ownership of the Developer Materials does not automatically vest in
Developer by virtue of this Agreement or otherwise, Client hereby transfers and
assigns to Developer all rights, title and interest which Client may have in and
to the Developer Materials. Client acknowledges and agrees that Developer is in
the business of designing and hosting Web sites, and that Developer shall have
the right to provide to third parties services which are the same or similar to
the Services, and to use or otherwise exploit any Developer Materials in
providing such services.
3.3 CONFIDENTIALITY
Each party agrees that during the course of this Agreement, information
that is confidential or proprietary may be disclosed to the other party,
including, but not limited to software, technical processes and formulas
(including without limitation, the parameters applicable to Client's VIP program
and Client's proposed multi-facility distribution and fulfillment network),
source codes, product designs, sales, cost and other unpublished financial
information, product and business plans, advertising revenues, usage rates,
advertising relationships, projections, and marketing data ("Confidential
Information"). Confidential Information shall not include information that the
receiving party can demonstrate (a) is, as of the time of its disclosure, or
thereafter becomes part of the public domain through a source other than the
receiving party, (b) was known to the receiving party as of the time of its
disclosure, (c) is independently developed by the receiving party, (d) is
subsequently learned from a third party not under a confidentiality obligation
to the providing party, or (e) is required to be disclosed by a duly issued
order of a court of competent jurisdiction, provided that the party so ordered
to disclose shall use best efforts to notify the other party hereto prior to
such disclosure. Except as provided for in this Agreement, each party shall not
make any disclosure of the Confidential Information to anyone other than its
employees who have a need to know in connection with this Agreement. Each party
shall notify its employees of their confidentiality obligations with respect to
the Confidential Information and shall require its employees to comply with
these obligations. The confidentiality obligations of each party and its
employees shall survive the expiration or termination of this Agreement.
3.4 DEVELOPER NOTICES
Unless otherwise agreed to in writing by the Parties, Developer shall
have the right to place the proprietary notices of Developer set forth on
Exhibit 3.4 attached hereto and made part hereof (the "Developer Notice"), on
the bottom of the home page for the On-Line Store in a font and typeface and
type size reasonably acceptable to Client. In no event may Client remove or
alter the Developer Notice from the On-Line Store without Developer's prior
written consent.
4. LICENSE
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<PAGE> 4
4.1 GRANT OF LICENSE -- CLIENT
Client hereby grants to Developer a non-exclusive, worldwide,
royalty-free license for the Initial Term and any Renewal Term (as those terms
are hereinafter defined) to edit, modify, adapt, translate, exhibit, publish,
transmit, participate in the transfer of, reproduce, create derivative works
from, distribute, perform, display, and otherwise use Client Content and the DC
Content as necessary to render the Services to Client under this Agreement.
4.2 GRANT OF LICENSE -- DEVELOPER
Subject to Section 10, Developer hereby grants to Client a perpetual,
limited, non-exclusive, nontransferable license to make use of the Developer
Materials which are incorporated in the online store and which are required for
the operation of the On-Line Store solely to allow the Client to operate and
utilize the On-Line Store (the "License"). Developer hereby reserves for itself
all rights in and to the Developer Materials not expressly granted to Client in
the immediately foregoing sentence. Other than as expressly set forth in this
Agreement, in no event shall Client use any trademarks or service marks of
Developer without Developer's prior written consent. The License is not
transferable or assignable without the prior written consent of the Developer,
except in the case of a sale of a majority of the assets or equity of the Client
or a merger, consolidation or reorganization of the Client, in which case the
License may be assigned without the prior written consent of the Developer.
5. CLIENT CONTENT
5.1 ACCURACY AND REVIEW OF CLIENT CONTENT
Client assumes sole responsibility for: (a) acquiring any
authorization(s) necessary for hypertext links to third party Web sites; and (b)
the accuracy of materials provided to Developer, including, without limitation,
Client Content, descriptive claims, warranties, guarantees, nature of business,
and address where business is conducted; and (c) ensuring that the Client
Content does not infringe or violate any right of any third party.
5.2 LIMITATIONS ON CLIENT CONTENT
Client shall provide Client Content that does not contain any content
or materials which are obscene, threatening, malicious, which infringe on or
violate any applicable law or regulation or any proprietary, contract, moral,
privacy or other third party right, or which otherwise expose Developer to civil
or criminal liability. Any such materials provided by Client to Developer which
do not satisfy the foregoing requirements in this Section 5.2 shall be deemed to
be a material breach of this Agreement.
6. FEES AND TAXES
6.1 ON-LINE STORE SERVICES FEES
In consideration for the Services, the Client shall pay to the
Developer the fees listed in the COSTS portion of Exhibit A hereto pursuant to
the timeframe listed in such Exhibit A. Any hourly rates listed in Exhibit A are
good through December 1, 2000, and thereafter are subject to change in
Developer's sole discretion.
6.2 MAINTENANCE FEES
The fee for any maintenance services that Developer provides to Client
shall be set forth in the separate maintenance agreement executed by the
parties.
-4-
<PAGE> 5
6.3 LATE PAYMENT
Client shall pay to Developer all fees not specifically itemized on Exhibit A
within thirty (30) days following the receipt of the applicable Developer
invoice. If Client fails to pay any fees within thirty (30) days from the date
due according to Exhibit A, or within (30) days from the date of an invoice,
where applicable, late charges of the greater of one point five percent (1.5%)
per month or the maximum allowable under applicable law shall also become
payable by Client to Developer. In addition, failure of Client to fully pay any
fees within sixty (60) days after the applicable due date shall be deemed a
material breach of this Agreement, justifying suspension of the performance of
the Services by Developer, and will be sufficient cause for immediate
termination of this Agreement by Developer. Any such suspension does not relieve
Client from paying past due fees plus interest and in event of collection
enforcement, Client shall be liable for any costs associated with such
collection, including, but not limited to, legal costs, attorneys' fees, court
costs, and collection agency fees.
6.4 TAXES
Client shall pay or reimburse Developer for all sales, use, transfer,
privilege, excise, and all other taxes and all duties, whether international,
national, state or local, however designated, which are levied or imposed by
reason of the performance by Developer under this Agreement; excluding, however,
income taxes on profits which may be levied against Developer.
7. WARRANTIES
7.1 DEVELOPER WARRANTIES
Developer represents and warrants that (a) Developer has the power and
authority to enter into and perform its obligations under this Agreement, and
(b) Developer's Services under this Agreement shall be performed in a
workmanlike manner. Developer further represents and warrants that, (i) for a
period of sixty 60 days after Client's Acceptance thereof, the On-Line Store
will operate substantially in accordance with the Specifications relating
thereto. Developer further warrants to Client that, no component of the
Developer Materials or the DC Content does or shall infringe on or violate any
applicable law, regulation or right of a third party, including, without
limitation, export laws, or any proprietary, contract, moral, or privacy right
or any other third party right, and that Developer owns the Developer Materials
and (except as assigned to Client) the DC Content or otherwise has and shall
have the right to place the Developer Materials and the DC Content on the
On-Line Store, provided, however, that Developer shall not be deemed to have
breached such warranty to the extent that Client or its agent(s) have modified
the On-Line Store in any material manner or to the extent any purported breach
arises in connection with the Client's incorporation in the On-Line Store
unauthorized third-party materials, through framing or otherwise.
7.2 CLIENT WARRANTIES
Client represents and warrants that (a) Client has the power and
authority to enter into and perform its obligations under this Agreement, (b)
Client Content does not and shall not contain any content, materials,
advertising or services that are inaccurate or that infringe on or violate any
applicable law, regulation or right of a third party, including, without
limitation, export laws, or any proprietary, contract, moral, or privacy right
or any other third party right, and that Client owns the Client Content or
otherwise has the right to place the Client Content on the On-Line Store, and
(c) Client has obtained any authorization(s) necessary for hypertext links from
the On-Line Store to other third party Web sites.
7.3 DISCLAIMER OF WARRANTY
EXCEPT FOR THE LIMITED WARRANTY SET FORTH IN SECTION 7.1, DEVELOPER
MAKES NO WARRANTIES HEREUNDER, AND DEVELOPER EXPRESSLY DISCLAIMS ALL OTHER
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<PAGE> 6
WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
8. INDEMNIFICATION
8.1 CLIENT
Client agrees to indemnify, defend, and hold harmless Developer, its
directors, officers, employees and agents, and defend any action brought against
same with respect to any claim, demand, cause of action, debt or liability,
including reasonable attorneys' fees, to the extent that such action is based
upon a claim that: (i) if true, would constitute a breach of any of Client's
representations, warranties, or agreements hereunder; (ii) arises out of the
negligence or willful misconduct of Client; or (iii) any of the Client Content
to be provided by Client hereunder or other material on the On-Line Store
infringes or violates any rights of third parties, including, without
limitation, rights of publicity, rights of privacy, patents, copyrights,
trademarks, trade secrets and/or licenses.
8.2 DEVELOPER
Developer agrees to indemnify, defend, and hold harmless Client, its directors,
officers, employees and agents, and defend any action brought against same with
respect to any claim, demand, cause of action, debt or liability, including
reasonable attorneys' fees, to the extent that such action is based upon a claim
that: (i) if true, would constitute a breach of any of Developer's
representations, warranties, or agreements hereunder; (ii) arises out of the
negligence or willful misconduct of Developer; or (iii) any of the Developer
Materials or DC Content to be provided by Developer hereunder infringes or
violates any rights of third parties, including, without limitation, rights of
publicity, rights of privacy, patents, copyrights, trademarks, trade secrets
and/or licenses.
8.3 NOTICE
In claiming any indemnification hereunder, the indemnified party shall
promptly provide the indemnifying party with written notice of any claim which
the indemnified party believes falls within the scope of the foregoing
paragraphs. The indemnified party may, at its own expense, assist in the defense
if it so chooses, provided that the indemnifying party shall control such
defense and all negotiations relative to the settlement of any such claim and
further provided that any settlement intended to bind the indemnified party
shall not be final without the indemnified party's written consent, which shall
not be unreasonably withheld.
9. LIMITATION OF LIABILITY
DEVELOPER SHALL HAVE NO LIABILITY WITH RESPECT TO DEVELOPER'S
OBLIGATIONS UNDER THIS AGREEMENT OR OTHERWISE FOR CONSEQUENTIAL, EXEMPLARY,
SPECIAL, INCIDENTAL, OR PUNITIVE DAMAGES EVEN IF DEVELOPER HAS BEEN ADVISED OF
THE POSSIBILITY OF SUCH DAMAGES. OTHER THAN WITH RESPECT TO DEVELOPER'S
OBLIGATIONS IN SECTION 8.2(III), THE LIABILITY OF DEVELOPER TO CLIENT FOR ANY
REASON AND UPON ANY CAUSE OF ACTION SHALL BE LIMITED TO THE AMOUNT ACTUALLY PAID
TO DEVELOPER BY CLIENT UNDER THIS AGREEMENT. THIS LIMITATION APPLIES TO ALL
CAUSES OF ACTION IN THE AGGREGATE, INCLUDING, WITHOUT LIMITATION, BREACH OF
CONTRACT, BREACH OF WARRANTY, NEGLIGENCE, STRICT LIABILITY, MISREPRESENTATIONS,
AND OTHER TORTS.
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<PAGE> 7
10. TERMINATION AND RENEWAL
10.1 TERM
This Agreement shall be effective when signed by the Parties and shall continue
in effect thereafter indefinitely unless terminated by either party pursuant to
the terms of Section 10.2 (the "Term").
10.2 TERMINATION
Either party may terminate this Agreement if the other party materially
breaches any of its representations, warranties or obligations under this
Agreement, and such breach is not cured within thirty (30) days of receipt of
notice specifying the breach, except that there shall be no cure period for
beaches of either party's obligations under Section 3.3 Confidentiality
10.3 TERMINATION AND PAYMENT
Upon any termination or expiration of this Agreement, Client shall pay
all unpaid and outstanding fees due and payable through the effective date of
termination or expiration of this Agreement.
11. DESIGNATED CONTACT
Each party shall designate one person who will act as the primary
liaison for all communications regarding the Services to be rendered by
Developer hereunder.
12. MISCELLANEOUS
12.1 ENTIRE AGREEMENT
This Agreement and attached Schedules constitute the entire agreement
between Client and Developer with respect to the subject matter hereof and there
are no representations, understandings or agreements which are not fully
expressed in this Agreement.
12.2 COOPERATION
The Parties acknowledge and agree that successful completion of the
Services shall require the full and mutual good faith cooperation of each of the
Parties.
12.3 INDEPENDENT CONTRACTORS
Developer and its personnel, in performance of this Agreement, are
acting as independent contractors and not employees or agents of Client.
12.4 AMENDMENTS
No amendment, change, waiver, or discharge hereof shall be valid unless
in writing and signed by the party against which such amendment, change, waiver,
or discharge is sought to be enforced.
12.5 CLIENT IDENTIFICATION
Developer may use the name of and identify Client as a Developer client, in
advertising, publicity, or similar materials distributed or displayed to
prospective clients, provided that Developer shall provide advance written
notice to Client including therein a copy of such materials and Client shall
have approved in writing the form and substance of any such materials prior to
distribution, publication or display thereof by Developer, which approval shall
not be unreasonably withheld and which
-7-
<PAGE> 8
approval shall be deemed to have been granted if Client does not respond in
writing to Developer within ten (10) days following such written notice from
Developer.
12.6 FORCE MAJEURE
Except for the payment of fees by Client, if the performance of any
part of this Agreement by either party is prevented, hindered, delayed or
otherwise made impracticable by reason of any flood, riot, fire, judicial or
governmental action, labor disputes, act of God or any other causes beyond the
control of either party, that party shall be excused from such to the extent
that it is prevented, hindered or delayed by such causes.
12.7 MASSACHUSETTS LAW
This Agreement shall be governed in all respects by the laws of the
Commonwealth of Massachusetts without regard to its conflict of laws principles,
and Client and Developer agree that the sole venue and jurisdiction for disputes
arising from this Agreement shall be the appropriate state or federal court
located in the City of Boston, and Client and Developer hereby submit to the
jurisdiction of such courts.
12.8 ASSIGNMENT
Client shall not assign, without the prior written consent of
Developer, its rights, duties or obligations under this Agreement to any person
or entity, in whole or in part, whether by assignment, merger, transfer of
assets, sale of stock, operation of law or otherwise, and any attempt to do so
shall be deemed a material breach of this Agreement.
12.9 NOTICE
Any notice provided pursuant to this Agreement, if specified to be in
writing, shall be in writing and shall be deemed given (i) if by hand delivery,
upon receipt thereof, (ii) if by mail, three (3) days after deposit in the
United States mails, postage prepaid, certified mail, return receipt requested,
(iii) if by facsimile transmission, upon electronic confirmation thereof, or
(iv) if by next day delivery service, upon such delivery. All notices shall be
addressed as follows (or such other address as either party may in the future
specify in writing to the other):
In the case of Developer:
Miller Systems, Inc.
364 Boylston Street
Boston, MA 02116
Attention: General Counsel
In the case of Client:
Devens Business Community
29 Buena Vista Street
Ayer, MA 01432 Fax: (978) 889-1010
Attention: President
12.10 WAIVER
The waiver of failure of either party to exercise any right in any
respect provided for herein shall not be deemed a waiver of any further right
hereunder.
-8-
<PAGE> 9
12.11 SEVERABILITY
If any provision of this Agreement is determined to be invalid under
any applicable statute or rule of law, it is to that extent to be deemed
omitted, and the balance of the Agreement shall remain enforceable.
12.12 COUNTERPARTS
This Agreement may be executed in several counterparts, all of which
taken together shall constitute the entire agreement between the Parties hereto.
12.13 HEADINGS
The section headings used herein are for reference and convenience only
and shall not enter into the interpretation hereof.
12.14 APPROVALS AND SIMILAR ACTIONS
Where agreement, approval, acceptance, consent or similar action by
either party hereto is required by any provision of this Agreement, such action
shall not be unreasonably delayed or withheld.
12.15 SURVIVAL
All provisions of this Agreement relating to Client warranties,
confidentiality, non-disclosure, proprietary rights, limitation of liability,
Client indemnification obligations and payment obligations shall survive the
termination or expiration of this Agreement.
13. RESTRICTIONS ON DEVELOPER
For one (1) year after Acceptance by Client of the Development
Services, Developer will not assist any third party in creating an online store,
if such party earns forty one percent (41%) or more of their online revenues
from the sale of children's toys.
IN WITNESS WHEREOF, the Parties have caused this Agreement to be
executed by their duly authorized representatives as of the date first written
above.
LEARNINGEXPRESS.COM LLC DEVELOPER
By: /s/ Michael Sanders By: /s/ Seth A. Miller
----------------------------- -----------------------------
(Signature) (Signature)
Name: Michael Sanders Name: Seth A. Miller
--------------------------- -----------------------------
Title: Chief Operating Officer Title: Chief Operating Officer
--------------------------- -----------------------------
Date: December 17, 1999 Date: December 17, 1999
--------------------------- -----------------------------
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EXHIBIT A
LEARNING EXPRESS/LEARNING EXPRESS.COM
WEBSITE IMPLEMENTATION PLAN
AND
ONLINE STORE FUNCTIONALITY SPECIFICATIONS
Dear Mike:
It has been a pleasure speaking with you over the last couple of weeks. We here
at Miller Systems genuinely appreciate this opportunity to work with Learning
Express.
We have reviewed all of the delivered materials and our notes in detail
regarding both the near-term corporate website objectives as well as the online
store (.com business) goals. We are pleased to provide Learning Express with the
following materials:
I. Implementation plan for the corporate website
II. Functionality specification for online store
III. Costs for implementation of site as well as development of online store
I. IMPLEMENTATION OF THE CORPORATE WEBSITE
Per our conversations, the corporate website is being developed by Hunt &
Gather. Once we receive the final delivery of the site, Miller Systems will
provide the following implementation services to post the static website for
November 22, 1999:
- - Standard Miller Systems QA process on the site, including HTML syntax,
link integrity, page weight, browser compatibility, etc.
- - Temporary hosting of the site on one of our servers co-located at
Exodus in Waltham
- - Coordinate DNS change with Bill Doyno/UltraNet (where DNS currently
lives)
Within a sixty-day timeframe of the initial launch, Miller Systems will perform
the following additional services for the corporate website:
- - Manage the implementation/installation of the hosting solution with
Cable and Wireless (or other vendor)
- - Manage the DNS changes & move of the site to Cable and Wireless (or
other vendor)
- - Implement Miller Systems dataDriver(TM) content management tools for:
- Press Room (Press Releases, articles, events)
- Employment opportunities (Job Board)
- E-mail subscription service (e-push)
- Recall listing
- Toy facts
EXPLANATION OF dataDriver(TM) CONTENT MANAGEMENT TOOLS
As discussed, Miller Systems is in a unique position to assist Learning Express
in implementing a number of critical data driven content management tools. As
you are aware, Miller Systems has a "shrink-wrapped" application suite called
dataDriver(TM). These tools were built to empower our clients to manage the most
frequently changing pieces of content, without requiring personnel possessing
programming or HTML skills.
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This has been a tremendous success for many of our clients and their websites.
dataDriver(TM) PRESS ROOM
As demonstrated, dataDriver(TM) Press Room allows specified Learning Express
users to add, edit, and publish press releases, articles, and other news content
to the website by using a simple browser interface. As part of the project,
Miller Systems will design up to three different templates for different types
of news items. Further demonstration of dataDriver(TM) Press Room is available
upon your request.
Once items are entered into the database (and marked Active) via the management
interface, they are published dynamically each time a site visitor accesses the
news page(s). News items can be pre-entered into the database and set to run at
a specific date and time, alleviating the need for personnel to be present as
items run over wire services or are otherwise announced.
Each item in the database can be designated as a "Latest News" or "Hot" item,
which publishes these items to the site's home page and news summaries. This
allows Learning Express a great deal of flexibility and control over the content
on the site.
dataDriver(TM) JOB BOARD
Miller Systems also publishes an application for managing employment
opportunities on websites called dataDriver(TM) Job Board. Job Board has three
basic areas of functionality:
1) An administrative front end with the ability to manage Positions,
Departments, and Locations, for the purposes of publishing open positions
to the website.
2) A public front end where online resumes are collected from applicants. This
already includes a file upload capability so applicants can attach PDF or
Word versions of their resume in addition to any general profile
information they submit.
3) The ability to specify a (potentially different) set of Learning Express
users who can browse the applicants information as captured by the front
end. In a typical scenario, Human Resources manages the positions that are
published, and the department that submitted the position has the ability
to the browse the applicants in the database. dataDriver(TM) Job Board
notifies the subscribed department members via e-mail when a new applicant
submits their resume.
dataDriver(TM) E-PUSH
The third module in our dataDriver suite is called "E-push". The E-push module
allows Learning Express to provide an opt-in mechanism on the web site for
visitors/customers to subscribe to e-mail broadcasts. A robust administrative
interface allows Learning Express to search this database, create lists of
subscribers, and then create different messages. Lists are then married to
messages, and broadcasted out. The entire application, like the other dataDriver
modules, is configured and administered from the browser.
ONGOING MAINTENANCE AND MANAGEMENT
As time goes on, there will be other maintenance and development items that will
be required to further the mission of the corporate site. Miller Systems will
ensure that the site is kept up to date with content and applications, as well
as to ensure that the proper level of integration with the online store is
provided for.
HOSTING INFRASTRUCTURE
Miller Systems offers a full hosting solutions for our development clients. Our
web servers are DELL Windows NT boxes equipped with the following components:
<TABLE>
<S> <C>
- - MICROSOFT WINDOWS NT 4.0 - DUAL PROCESSOR PENTIUM II OR BETTER
- - COMPUTER ASSOCIATES' ArcServeIT - MICROSOFT SQL SERVER
- - A RAID 5 DISK SYSTEM AND TAPE BACKUP - NETSCAPE'S ENTERPRISE SERVER
</TABLE>
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<PAGE> 12
<TABLE>
<S> <C>
- - ALLAIRE'S ColdFusion PROFESSIONAL SERVER - WEBTRENDS PROFESSIONAL EDITION
</TABLE>
To address the high cost of this infrastructure for our clients, Miller Systems
has invested in a solid hosting solution consisting of Windows NT servers with
all of the above components installed and configured. These servers sit on a
very well managed network at Exodus Communications facility in Waltham,
Massachusetts. Exodus is a world class, Tier 1 data center provider. The
facility is equipped with unparalleled redundancy in power, bandwidth, and
monitoring. Much more information about this facility is available on the Exodus
website at http://www.exodus.com. This hosting infrastructure allows Miller
Systems to offer sophisticated development services and highly available
data-driven web hosting for very reasonable costs.
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II. FUNCTIONALITY SPECIFICATIONS FOR THE ONLINE STORE
The following are the written functionality specification and initial design for
your online store. The materials consist of:
1. A grouped list of functions/features for the front and administrative
interfaces
2. Database table definitions
3. A proposed database schema
4. A proposed process model for the front end purchase mechanism
1. FEATURE LISTING BY FUNCTION
After thoroughly reviewing the delivered materials and our notes from the
meetings, we have come up with the following list of features for the system:
CUSTOMER FRONT END FEATURES
- - PERSONALIZED SERVICES FOR CUSTOMERS
- Create an account on the system (done ahead of or during a
purchase)
- Define multiple ship-to addresses
- Define multiple billing methods (multiple credit
cards if desired)
- E-mail password if forgotten
- Loyalty program - LE VIPCards
- Sign up
- Reminder service - put in birthdays, etc. and receive e-mail x
days in advance
- Wish List/Gift Registry
- Create a wish list (shopping cart w/o buying -
essentially a gift registry)
- Send wish list to specified e-mail addresses
- Purchase items for other people's wish list
- Get on mailing list (eventual store integration with e-push)
- - SHOPPING CART FUNCTIONS
- Browse Toy Catalog
- Search toys by Keyword/Description
- Multiple shipping addresses for each item in single order
- Different wrapping paper for each item purchased
- Store informs customers of inventory status (e.g., in stock,
ships in x days, etc)
- Store suggests accessories or alternative items for products
chosen
- Survey/Demographic questions
- E-mail confirmation of order
- E-mail confirmation of shipping (with shipping info)
- Save items in multiple shopping carts for later purchases
- Link to LivePerson.com for personalized shopping
- Find out order status
- - OTHER CUSTOMER FEATURES
- Store locator
- Community comments on items (to be moderated by LE staff) -
amazon.com style reviews (moderated message board per product)
- Listing of Recalls
- Random Toy facts
- Purchase gift certificates for use only in online store
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<PAGE> 14
- Links to "great kid sites"
ADMINISTRATIVE FRONT END FEATURES
- - ITEM ADMINISTRATION
- Define source location on an item by item basis (ex: Brio gets
drop shipped from factory, other items from fulfillment house)
- Enter descriptions, keywords, upload pictures of items
- Price items
- Group/classify items
- Define accessories for items
- Suggestive sell for similar items/accessories
(horizontal)
- Export item data
- Inventory controls (data replicated from acctg system -
details TBD)
- Reports
- Define ETA on backordered items
- - CATALOG INVENTORY
- Track "in stock" supply
- Track "will ship in x days"
- Hold descriptions, title, SKU, retail price, image
- Track price change history on items
- Associate items with different fulfillment houses
- Items associated with vendors
- - DISCOUNTING/PROMOTION MODULE
- Define "wow! Toys" (featured items)
- Define/Enable discounts for items based on URL (banner ads or
referrals) or source codes
- Run "specials/sales" based on dates
- LE VIPCard members can get special discounts/offers
- Franchise owners get discounts
- - FINANCE ADMINISTRATION
- CyberCash tie out module
- - CUSTOMER MANAGEMENT
- Edit customer contact & billing info
- Search for customers
- Quick Search
- First Name, Last name, city, state, zip,
customer or VIP #
- Power Search
- Search by item(s) purchased
- Search by territory
- Search by dollars spent
- Search by last purchase date
- Find customers with shipped/unshipped orders
- Find customers by demographics answers
- Create lists of customers based on search results
- Export customer data
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<PAGE> 15
- - TRACK CUSTOMER INFORMATION
- Customizable survey with versioning
- Track name, age, e-mail etc.
- Track multiple shipping and billing addresses
- Store favorite credit cards
- Store gift certificates purchased with balance available
- Create reminder lists of special dates
- Create wish list with distribution to multiple recipients
- - GENERAL CONTENT MANAGEMENT
- Define customized text messages for
standard screens
- - REPORTING
- Sales reports
- By time period
- By item
- By promotion
- Referrals/discounts
- By territory (need this for reimbursement to brick &
mortar stores)
- Fulfillment reports
SECURITY MODEL - USERS & GROUPS MODEL
- Administer Discounts
- Enter new orders for customers
- Read customer data
- Credit card tie out
- Process refunds
- Reports
- Search rights
ADVERTISING
- Schedule banner ads to run for specified dates or impressions
- Track click-through on banners
- Rotate banners
- Assign banners to specific pages
BACK END FUNCTIONALITY
- Online CyberCash Credit Card Processing
- Interface to Acctg system for:
- Inventory
- Fulfillment
- Shipping info
- Customer info
- Don't charge until shipped (see fulfillment)
- Capture shipping info from carrier (UPS, Fedex, Airborne,
etc.)
- Fulfillment
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- Electronic notification of order to fulfillment house
- Receive electronic shipping confirmation info back from
fulfillment house
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<PAGE> 17
2. DATABASE TABLE DEFINITIONS
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C>
accessory_items Holds information relating products that are part of same product
line.
- ------------------------------------------------------------------------------------------------------------------------------
advertisers Advertisers on site. Each advertiser can purchase multiple banner
ads.
- ------------------------------------------------------------------------------------------------------------------------------
article_run_dates Used to schedule publishing of information in articles table.
- ------------------------------------------------------------------------------------------------------------------------------
article_texts Holds text of articles published on site. Name, source, author are
stored in articles table.
- ------------------------------------------------------------------------------------------------------------------------------
articles Holds editorial articles of interest to site visitors. Table holds
name, author and source information. Article text is stored in
article_texts.
- ------------------------------------------------------------------------------------------------------------------------------
associated_items Holds information relating products that are similar or have
been purchased in combination by other customers.
- ------------------------------------------------------------------------------------------------------------------------------
banner_ads Info on banner ad. URL, NAME
- ------------------------------------------------------------------------------------------------------------------------------
banner_ads_s_site_pages Holds information relating banner_ads to s_site_pages. Table is
responsible to assigning a banner ad to a page location.
- ------------------------------------------------------------------------------------------------------------------------------
catalog_item_inventory Holds replicated data from accounting/inventory system on current
inventory of catalog items.
- ------------------------------------------------------------------------------------------------------------------------------
catalog_item_price_histories Holds information on history of price changes on catalog items.
- ------------------------------------------------------------------------------------------------------------------------------
catalog_items Holds description, SKU, retail price, etc. on catalog items. May
be replicated from accounting/inventory system.
- ------------------------------------------------------------------------------------------------------------------------------
customer_addresses Holds customer address information on billing address and multiple
shipping addresses.
- ------------------------------------------------------------------------------------------------------------------------------
customer_comments Holds moderated comments entered by public about specific
products. Content is moderated through admin interface.
- ------------------------------------------------------------------------------------------------------------------------------
customer_gift_certificates Information on a customer's gift certificates redeemable by
customers.
- ------------------------------------------------------------------------------------------------------------------------------
customer_payment_methods Information about a customer's individuals payment methods.
Customers MC or AMEX number.
- ------------------------------------------------------------------------------------------------------------------------------
customer_reminder_list_details Holds specific dates and events entered for customer-defined
reminders.
- ------------------------------------------------------------------------------------------------------------------------------
customer_reminder_lists Holds basic information on customer-defined reminders.
- ------------------------------------------------------------------------------------------------------------------------------
customer_shopping_cart_items Hold information on a customer's shopping cart. They can leave a
session and return to the shopping cart information stored in this
table.
- ------------------------------------------------------------------------------------------------------------------------------
customer_shopping_carts Holds basic information on a customer's shopping cart such as NAME
and DATE CREATED. A customer can have multiple shopping carts.
- ------------------------------------------------------------------------------------------------------------------------------
customer_survey_answers Holds responses to customer surveys.
- ------------------------------------------------------------------------------------------------------------------------------
customer_wish_list_distributions Holds e-mail addresses of people to receive a customer's wish
list.
- ------------------------------------------------------------------------------------------------------------------------------
customer_wish_list_line_items Holds specific items from the catalog on a customer's wish list.
- ------------------------------------------------------------------------------------------------------------------------------
customer_wish_lists Basic information on a customer's wish list such as LIST NAME,
CUSTOMER_ID.
- ------------------------------------------------------------------------------------------------------------------------------
customers Holds basic customer information, NAME, EMAIL, PHONE.
- ------------------------------------------------------------------------------------------------------------------------------
dynamic_text_texts Holds actual text of dynamic_texts table.
- ------------------------------------------------------------------------------------------------------------------------------
dynamic_texts Holds information on generic text that needs to maintained
through the admin interface and presented dynamically on the site.
- ------------------------------------------------------------------------------------------------------------------------------
featured_catalog_item_run_dates Schedules the time to display items in the featured_catalog_items
table.
- ------------------------------------------------------------------------------------------------------------------------------
featured_catalog_items Holds information on catalog items to be featured on site.
- ------------------------------------------------------------------------------------------------------------------------------
featured_catalog_items_s_site_pages Assigns items in featured_catalog_items to specific page(s) of the
site.
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-17-
<PAGE> 18
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C>
franchise_regions Contains information on regions used to group franchise stores.
- ------------------------------------------------------------------------------------------------------------------------------
franchise_store_addresses Contains address information on franchise stores.
- ------------------------------------------------------------------------------------------------------------------------------
franchise_store_events Listing of event and promotions at franchise stores.
- ------------------------------------------------------------------------------------------------------------------------------
franchise_stores Information on franchise stores. NAME, DESCRIPTION.
- ------------------------------------------------------------------------------------------------------------------------------
fulfillment_houses Information on all available fulfillment houses to e-store.
- ------------------------------------------------------------------------------------------------------------------------------
groups Admin security associating users with like security access needs
into same group. Security access rights are then applied to the
group.
- ------------------------------------------------------------------------------------------------------------------------------
groups_s_security_attributes Associates groups with s_security_attributes. Used to assign
security rights to groups.
- ------------------------------------------------------------------------------------------------------------------------------
link_run_dates Data schedules the publication of data in the links table.
- ------------------------------------------------------------------------------------------------------------------------------
links Holds information of links of interest to be published on the
site. Schedule publication with data in link_run_dates.
- ------------------------------------------------------------------------------------------------------------------------------
m_countries Admin-defined meta data containing list of countries.
- ------------------------------------------------------------------------------------------------------------------------------
m_gift_certificates Admin-defined meta data containing list of types of gift
certificates.
- ------------------------------------------------------------------------------------------------------------------------------
m_survey_answers Admin-defined meta data containing list of possible answers
associated with m_survey_questions for customer surveys.
- ------------------------------------------------------------------------------------------------------------------------------
m_survey_questions Admin-defined meta data containing list of questions asked on
customer survey.
- ------------------------------------------------------------------------------------------------------------------------------
m_survey_versions Admin-defined meta data containing list version of surveys as the
survey is changed over time.
- ------------------------------------------------------------------------------------------------------------------------------
m_wrapping_papers Admin-defined meta data containing list of available wrapping
papers. Papers are assigned to order line items.
- ------------------------------------------------------------------------------------------------------------------------------
order_line_items Information on specific line items contained in an order.
- ------------------------------------------------------------------------------------------------------------------------------
order_line_items_shipping_addresses Holds specific shipping address information on an order with
multiple ship-to addresses.
- ------------------------------------------------------------------------------------------------------------------------------
order_payments Payment information for order.
- ------------------------------------------------------------------------------------------------------------------------------
order_shipping_addresses Primary shipping address for order. If multiple shipping addresses
are used they are stored in the customer_shopping_cart_items
table.
- ------------------------------------------------------------------------------------------------------------------------------
orders Holds general information on a customer's order. DATE,
CUSTOMER_ID.
- ------------------------------------------------------------------------------------------------------------------------------
promotion_catalog_items Items in the catalog related to a promotion.
- ------------------------------------------------------------------------------------------------------------------------------
promotions Hold information on promotions of e-store. Linked to catalog items
via promotion_catalog_items.
- ------------------------------------------------------------------------------------------------------------------------------
recall_run_dates Used to schedule publishing of information in recalls table.
- ------------------------------------------------------------------------------------------------------------------------------
recall_texts Holds text of recalls published on site. Name, source, author are
stored in recalls table.
- ------------------------------------------------------------------------------------------------------------------------------
recalls Holds information on recalls. Can be scheduled to publish via
recall_run_dates.
- ------------------------------------------------------------------------------------------------------------------------------
s_catalog_item_statuses System-defined meta data on catalog items. AVAILABLE,
DISCONTINUED, DELETED etc.
- ------------------------------------------------------------------------------------------------------------------------------
s_customer_address_types System-defined meta data on types of addresses for a customer.
SHIPPING, BILLING, etc.
- ------------------------------------------------------------------------------------------------------------------------------
s_customer_comment_statuses System-defined meta data on status of customer-input comments.
PENDING APPROVAL, PUBLISHED, DELETED.
- ------------------------------------------------------------------------------------------------------------------------------
s_customer_types System-defined meta data on types of customers accessing the
system. PUBLIC, STORE etc.
- ------------------------------------------------------------------------------------------------------------------------------
s_franchise_region_statuses System-defined meta data on franchise regions statuses. OK,
DELETED.
- ------------------------------------------------------------------------------------------------------------------------------
s_franchise_store_statuses System-defined meta data on status of franchise store. OPEN,
OPENING SOON, CLOSED etc.
- ------------------------------------------------------------------------------------------------------------------------------
s_order_types System-defined meta data on types of order a customer or admin
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-18-
<PAGE> 19
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C>
person can place. PURCHASE, REFUND
- ------------------------------------------------------------------------------------------------------------------------------
s_payment_methods System-defined meta data on payment methods available to public, MC,
VISA, GIFT CERTIFICATE etc.
- ------------------------------------------------------------------------------------------------------------------------------
s_security_attributes System-defined meta data on levels of security available to the
admin interface. s_security_attributes are assigned to groups via
the groups_s_security_attributes table.
- ------------------------------------------------------------------------------------------------------------------------------
s_site_pages System-defined meta data related to each page of site where dynamic
content would be presented.
- ------------------------------------------------------------------------------------------------------------------------------
s_survey_question_types System-defined meta data on display of survey questions. Checkbox,
Select Menu, Radio Buttons etc.
- ------------------------------------------------------------------------------------------------------------------------------
toy_fact_run_dates Schedules display of information in toy_facts table.
- ------------------------------------------------------------------------------------------------------------------------------
toy_fact_texts Holds text of toy facts published on site. Name, source, author
are stored in toy_facts table.
- ------------------------------------------------------------------------------------------------------------------------------
toy_facts Listing of fact to be randomly displayed on site. Use
toy_fact_run_dates to schedule display.
- ------------------------------------------------------------------------------------------------------------------------------
Users Admin user's login information for maintaining system.
- ------------------------------------------------------------------------------------------------------------------------------
users_groups Table relating users to multiple groups.
- ------------------------------------------------------------------------------------------------------------------------------
util_table_comments System utility table holding documentation of tables in ERD.
- ------------------------------------------------------------------------------------------------------------------------------
Vendors Holds information on vendors. Used to group products by maker.
- ------------------------------------------------------------------------------------------------------------------------------
vip_cards Loyalty program information for each user participating.
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
3. PROPOSED DATABASE SCHEMA
Please see attached PDF file (2 versions - 1 page and 4 page)
4. PROPOSED PROCESS MODEL FOR FRONT END OF ONLINE STORE
Please see attached PDF file (2 versions - 1 page and 4 page)
-19-
<PAGE> 20
COSTS
I. IMPLEMENTATION OF THE CORPORATE WEBSITE
<TABLE>
<S> <C>
QA website & make changes/fixes................................................................ T&M*
Host website on Miller Systems server.......................................................... $500/month
License & integrate dataDriver Press Room...................................................... $ 7,500
License & integrate dataDriver Job Board....................................................... 5,000
License & integrate dataDriver e-push.......................................................... 7,500
Build Custom Dynamic Toy Facts Application..................................................... T&M*
Build Custom Dynamic recall list Application................................................... T&M*
TOTAL FIXED COSTS (ONE TIME)................................................................... $20,000
TOTAL MONTHLY RECURRING COSTS (TEMPORARY, UNTIL
FINAL HOSTING SOLUTION IS IN PLACE)............................................................ $500
</TABLE>
*T&M RATE SCHEDULE:
<TABLE>
<S> <C>
Project management............................................................................. $150/hour
Application & database design/architecture..................................................... $150/hour
Systems administration......................................................................... $125/hour
Engineering/Development (ASP/COM/database programming)......................................... $125/hour
Graphic Design/Production/Optimization/QA...................................................... $115/hour
HTML Production/QA............................................................................. $115/hour
</TABLE>
*The above rate schedule for standard site development services has been reduced
for 60 days in acknowledgment of the larger development project. The standard
rate schedule starting 60 days after implementation of the corporate site will
be as follows:
<TABLE>
<S> <C>
Project management............................................................................. $175/hour
Application & database design/architecture..................................................... $175/hour
Systems administration......................................................................... $150/hour
Engineering/Development (ASP/database programming)............................................. $150/hour
Graphic Design/Production/Optimization/QA...................................................... $135/hour
HTML Production/QA............................................................................. $125/hour
</TABLE>
-20-
<PAGE> 21
III. COSTS FOR IMPLEMENTATION OF SITE AND DEVELOPMENT OF ONLINE STORE
<TABLE>
<CAPTION>
TASK HOURS REQUIRED
-----------------------------------------------------------------------------------------------------
<S> <C>
BACK END
Design & Architecture.................................................................... 60
Programming.............................................................................. 200
SHOPPING FRONT END
Detailed Design & Architecture .......................................................... 80
Page Design.............................................................................. 80
Programming & implementation............................................................. 200
ADMIN FRONT END
Design & Architecture.................................................................... 100
Programming.............................................................................. 350
INTEGRATION WITH OUTSIDE SYSTEMS
Work with integration firm to outline specs, determine API's, etc. ...................... T&M
IMPLEMENTATION
QA & Testing............................................................................. 135
Implementation/Systems Admin............................................................. 40
TOTAL NUMBER OF HOURS REQUIRED........................................................... 1245
-----------------------------------------------------------------------------------------------
</TABLE>
REDUCED RATES FOR STORE DEVELOPMENT
Because Miller Systems has a strategic interest in building the online
store for Learning Express, will charge a reduced rate for development as
follows:
RATE SCHEDULE
<TABLE>
<S> <C>
Project management............................................................................. $150/hour
Application & database design/architecture..................................................... $150/hour
Systems administration......................................................................... $125/hour
Engineering/Development (ASP/database programming)............................................. $125/hour
Graphic Design/Production/Optimization/QA...................................................... $115/hour
HTML Production/QA............................................................................. $115/hour
</TABLE>
This cost reduction yields the following result in cost for the store
development:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
TASK HOURS RATE TOTAL
-----------------------------------------------------------------------------------------------
BACK END
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Design & Architecture 60 150 9000
-----------------------------------------------------------------------------------------------
Programming 200 125 25000
-----------------------------------------------------------------------------------------------
SHOPPING FRONT END
-----------------------------------------------------------------------------------------------
Detailed Design & Architecture 80 150 12000
-----------------------------------------------------------------------------------------------
Page Design 80 115 9200
-----------------------------------------------------------------------------------------------
</TABLE>
-21-
<PAGE> 22
<TABLE>
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Programming & implementation 200 125 25000
-----------------------------------------------------------------------------------------------
ADMIN FRONT END
-----------------------------------------------------------------------------------------------
Design & Architecture 100 150 15000
-----------------------------------------------------------------------------------------------
Programming 350 125 43750
-----------------------------------------------------------------------------------------------
INTEGRATION T&M T&M T&M
-----------------------------------------------------------------------------------------------
IMPLEMENTATION
-----------------------------------------------------------------------------------------------
QA & Testing 135 115 15525
-----------------------------------------------------------------------------------------------
Implementation/Systems Admin 40 125
-----------------------------------------------------------------------------------------------
TOTAL HOURS/COST 1245 $154,475
</TABLE>
These reduced rates yield a total savings of $25,270 for Learning Express.
**IMPORTANT: It is important to note that there are certain components to the
project that are largely undefined, and the hours allocated are estimates. In
particular, our work with the integration firm will be billed on a Time and
Materials basis.
TIMEFRAMES FOR DELIVERY
Looking at the feature specifications and the workload and resource allocation
at Miller Systems, we believe that the project can be started on December 1st,
and completed by March 15th. We have discussed the prospect of a phased approach
in order to reduce the time to market. This may be possible - but could
significantly affect the cost of the project, as there will be data integrity,
DBA, and revision control implications associated with such an approach. It will
not be possible to determine the scope of the phases until we are at least 30
days into the project.
PAYMENT SCHEDULE
Miller Systems will invoice Learning Express at the following increments:
<TABLE>
<S> <C>
30% at the onset of the project (required to begin work)............................................ $46,342.50
15% at first milestone.............................................................................. 23,171.25
15% at second milestone............................................................................. 23,171.25
10% at third milestone.............................................................................. 15,447.50
30% on final delivery............................................................................... 46,342.50
</TABLE>
MILESTONE SCHEDULE
MILESTONE 1 (WEEK OF DECEMBER 20TH):
- - Deliver Database design o Process Flow
- - Page Flow Design
- - Sign off on data elements for Store Home Page, Search results, and Toy
Description detail screens
- - Design (non-working version) Customer Front End Prototype of Store Home
Page, Search results, and Toy Description detail screens
MILESTONE 2 (JANUARY 15TH):
-22-
<PAGE> 23
- - Working version of Customer Front End Prototype of Store Home Page,
Search results, and Toy Description detail screens
- - Deliver Prototype of remaining Customer Front End pages
- - Admin Design & Architecture delivery
MILESTONE 3 (JANUARY 25TH):
- - Deliver working Admin Prototype
MILESTONE 4 (FEBRUARY 10):
- - Migration of development materials to target servers
- - Availability of Online Store for integration testing
MILESTONE 5 (1ST WEEK OF MARCH):
Store goes live, 1st shopper purchases toy
MAINTENANCE OF THE ONLINE STORE
Maintenance will be handled in a separate agreement.
-23-
<PAGE> 1
EXHIBIT 21
Subsidiaries of LearningExpress.com Holdings LLC
------------------------------------------------
LearningExpress.com LLC
LearningExpress.com Incentive Plan LLC
<PAGE> 1
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this registration statement on Form S-1 of
LearningExpress.com Holdings LLC of our report dated March 21, 2000 appearing in
the prospectus which is part of this registration statement, and to the
reference to us under the heading "Experts" in the prospectus.
/s/ Charles L. Burke, Certified Public Accountant
Stoneham, Massachusetts
April 19, 2000
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
hereby constitutes and appoints Steven P. Manfredi and Glenn E. Davis, and each
of them, his true and lawful proxies, attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to (i) act on, sign and title with the
Securities and Exchange Commission any and all amendments to the registration
statement of LearningExpress.com Holdings LLC on Form S-1, together with all
exhibits thereto, (ii) act, sign and file such certificates, instruments,
agreements and other documents as may be necessary or appropriate in connection
therewith, and (iii) take any and all actions which may be necessary or
appropriate in connection therewith, granting unto such agents, proxies and
attorneys-in-fact, and each of them and his and their substitute or substitutes,
full power and authority to do and perform each and every act and thing
necessary or appropriate to be done in connection therewith, as fully for all
intents and purposes as he might or could do in person, hereby approving,
ratifying and confirming all that such agents, proxies and attorneys-in-fact,
any of them or any of his or their substitute or substitutes may lawfully do or
cause to be done by virtue hereof.
<TABLE>
<CAPTION>
Signature Title Date
- ----------------- ----------------- ----------
<S> <C> <C>
/s/ Steven P. Manfredi Chief Executive Officer April 19, 2000
- ---------------------- and Manager
Steven P. Manfredi
/s/ Glenn E. Davis Chief Financial Officer April 19, 2000
- ---------------------- and Vice President, Finance
Glenn E. Davis
/s/ Sharon DiMinico Manager April 19, 2000
- ----------------------
Sharon DiMinico
</TABLE>
-1-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
LEARNINGEXPRESS.COM LLC'S FINANCIAL STATEMENTS AS OF DECEMBER 31, 1999 INCLUDED
IN ITS PROSPECTUS, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> NOV-05-1999
<PERIOD-END> DEC-31-1999
<CASH> 787,820
<SECURITIES> 0
<RECEIVABLES> 3,759
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 816,579
<PP&E> 106,500
<DEPRECIATION> 142
<TOTAL-ASSETS> 927,854
<CURRENT-LIABILITIES> 263,244
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (24,597)
<TOTAL-LIABILITY-AND-EQUITY> 927,854
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 220,584
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (220,584)
<INCOME-TAX> 0
<INCOME-CONTINUING> (220,584)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (220,584)
<EPS-BASIC> 0.000
<EPS-DILUTED> 0.000
</TABLE>
<PAGE> 1
EXHIBIT 99.1
USTRUST GUARANTY (UNLIMITED)
SHARON DIMINICO
In consideration of USTrust (hereinafter called the "BANK") extending
credit or otherwise in its discretion giving time, financial or other
accommodations to LEARNINGEXPRESS.COM LLC (hereinafter called the "BORROWER"),
the undersigned (hereinafter called the "GUARANTOR") hereby unconditionally
guarantees to the Bank that (a) the Borrower will duly and punctually pay or
perform, at the place specified therefor, or if no place is specified, at the
Bank's Head Office or at the branch of the Bank where this Guaranty is given,
all indebtedness, obligations and liabilities, direct or indirect, matured or
unmatured, primary or secondary, certain or contingent, of the Borrower to the
Bank, now or hereafter owing or incurred (including without limitation costs and
expenses incurred by the Bank in attempting to collect or enforce any of the
foregoing) which are chargeable to the Borrower either by law or under the terms
of the Bank's arrangements with the Borrower accrued in each case to the date of
payment hereunder (collectively the "OBLIGATIONS" and individually an
"OBLIGATION"); and (b) if there is an agreement or instrument evidencing or
executed and delivered in connection with any Obligation, the Borrower will
perform in all other respects strictly in accordance with the terms thereof.
This Guaranty is an absolute, unconditional and continuing guaranty of
the full and punctual payment and performance by the Borrower of the Obligations
and not of their collectibility only and is in no way conditioned upon any
requirement that the Bank first attempt to collect any of the Obligations from
the Borrower or any other party primarily or secondarily liable with respect
thereto or resort to any security or other means of obtaining payment of any of
the Obligations which the Bank now has or may acquire after the date hereof, or
upon any other contingency whatsoever.
Upon any default by the Borrower in the full and punctual payment and
performance of the Obligations, the liabilities and obligations of the Guarantor
hereunder shall, at the option of the Bank, become forthwith due and payable to
the Bank without demand or notice of any nature, all of which are expressly
waived by the Guarantor. Payments by the Guarantor hereunder may be required by
the Bank on any number of occasions.
The Guarantor further agrees, as the principal obligor and not as a
guarantor only, to pay to the Bank forthwith upon demand, in funds immediately
available to the Bank, all costs and expenses (including court costs and legal
expenses) incurred or expended by the Bank in connection with this Guaranty and
the enforcement hereof, together with interest on amounts recoverable under this
Guaranty from the time such amounts become due until payment at the usual rate
charged by the Bank in similar circumstances.
The liability of the Guarantor hereunder shall be unlimited in amount.
-1-
<PAGE> 2
The obligations of the Guarantor under this Guaranty shall continue in
full force and effect until ten (10) days after the Bank shall have received
from the Guarantor written notice of the Guarantor's intention to discontinue
this Guaranty, notwithstanding any intermediate or temporary payment or
settlement of the whole or any part of the Obligations. No such notice shall
affect the liability of the Guarantor hereunder with respect to any Obligations
incurred by Borrower to the Bank or with respect to which the Bank has become
committed prior to ten (10) days after the receipt of such notice. In the event
of any such discontinuance of this Guaranty, all checks, drafts, notes,
instruments (negotiable or otherwise) and writings drawn or made by or for the
account of the Borrower on the Bank or any of its agents purporting to be dated
on or before ten (10) days after the date such discontinuance is received by the
Bank, although presented to and paid or accepted by the Bank after that date,
shall form part of the Obligations. No such notice shall be effective unless
received and acknowledged by an officer of the Bank at its Head Office or at the
branch of the Bank where this Guaranty is given.
The Guarantor grants to the Bank, as security for the full and punctual
payment and performance of the Guarantor's obligations hereunder, a continuing
lien on and security interest in all securities or other property belonging to
the Guarantor now or hereafter held by the Bank and in and in all deposits and
other sums credited by or due from the Bank to the Guarantor or subject to
withdrawal by the Guarantor; and regardless of the adequacy of any collateral or
other means of obtaining repayment of the Obligations, the Bank may at any time
and without notice to the Guarantor set off the whole or any portion or portions
of any or all such deposits and other sums against amounts payable under this
Guaranty, whether or not any other person or persons could also withdraw money
therefrom.
The Bank shall be at liberty, without giving notice to or obtaining the
assent of the Guarantor, and without relieving the Guarantor of any liability
hereunder, to deal with the Borrower and with each other party who now is or
after the date hereof becomes liable in any manner for any of the Obligations,
in such manner as the Bank in its sole discretion deems fit, and to this end the
Guarantor gives to the Bank full authority in its sole discretion to do any or
all of the following things: (a) extend credit, make loans and afford other
financial accommodations to the Borrower at such times, in such amounts and on
such terms as the Bank may approve; (b) vary the terms and grant extensions or
renewals of any present or future indebtedness or obligation to the Bank of the
Borrower or of any such other party; (c) grant time, waivers and other
indulgences in respect thereto; (d) vary, exchange, release or discharge, wholly
or partially, or delay in or abstain from perfecting and enforcing any security
or guaranty or other means of obtaining payment of any of the Obligations which
the Bank now has or acquires after the date hereof; (e) accept partial payments
from the Borrower or any such other party; (f) release or discharge, wholly or
partially, any endorser or guarantor; and (g) compromise or make any settlement
or other arrangement with the Borrower or any such other party.
-2-
<PAGE> 3
If for any reason the Borrower has no legal existence or is under no
legal obligation to discharge any of the Obligations undertaken or purported to
be undertaken by it or on its behalf, or if any of the moneys included in the
Obligations have become unrecoverable from the Borrower by operation of law or
for any other reason, this Guaranty shall nevertheless be binding on the
Guarantor to the same extent as if the Guarantor at all times had been the
principal debtor on all such Obligations. This Guaranty shall be in addition to
any other guaranty or other security for the Obligations, and it shall not be
prejudiced or rendered unenforceable by the invalidity of any such other
guaranty or security. Notwithstanding any payment by the Borrower to the Bank of
the whole or any portion of the Obligations, if the Bank shall be required to
pay any amount so paid to the Bank to a Trustee in Bankruptcy of the Borrower,
the Guarantor shall remain liable for any sums so paid to said Trustee.
The Guarantor waives notice of acceptance hereof, notice of any action
taken or omitted by the Bank in reliance hereon, and any requirement that the
Bank be diligent or prompt in making demands hereunder, giving notice to any
default by the Borrower or asserting any other right of the Bank hereunder. The
Guarantor also irrevocably waives, to the fullest extent permitted by law, all
defenses which at any time may be available in respect of the Guarantor's
Obligations hereunder by virtue of any homestead exemption, statute of
limitations, valuation, stay, moratorium law or other similar law now or
hereafter in effect.
The Guarantor will not, by paying any sum recoverable hereunder (whether
or not demanded by the Bank) or by any means or on any other ground, claim any
set off or counterclaim against the Borrower in respect of any liability of the
Guarantor to the Borrower or, in proceedings under the Bankruptcy Code or
insolvency proceedings of any nature, prove in competition with the Bank in
respect of any payment hereunder or be entitled to have the benefit of any
counterclaim or proof of claim or dividend or payment by or on behalf of the
Borrower or the benefit of any other security for any Obligation which, now or
hereafter, the Bank may hold or in which it may have any share or have any right
of subrogation, reimbursement or indemnity or right of recourse to any security
which the Bank may have or hold with respect to the Obligations until such
Obligations are paid in full.
Any demand on or notice to the Guarantor shall be in writing and shall be
effective when handed to the Guarantor or left at or mailed or sent by telegraph
to the Guarantor's usual or last known address.
No provision of this Guaranty can be changed, waived or discharged except
by an instrument in writing signed by the Bank and the Guarantor expressly
referring to the provision of this Guaranty to which such instrument relates,
and no such waiver shall extend to, affect, or impair any right with respect to
any Obligation which is not expressly dealt with therein. No course of dealing
or delay or omission on the part of the Bank in exercising any right shall
-3-
<PAGE> 4
operate as a waiver thereof or otherwise be prejudicial thereto.
This Guaranty is intended to take effect as a sealed instrument to be
governed by and construed in accordance with the laws of the Commonwealth of
Massachusetts and shall inure to the benefit of the Bank and its successors in
title and assigns, and shall be binding on the Guarantor and the Guarantor's
heirs, assigns and legal representatives.
IN WITNESS WHEREOF, the Guarantor has executed this Guaranty or has
caused this Guaranty to be executed on its behalf by an officer or other person
thereunto duly authorized on the 29th day of December, 1999.
Witness:
/s/ Brian T. Garrity /s/ Sharon DiMinico
- ------------------------- -------------------------------------
Sharon DiMinico, individually
76 Farmers Row
Groton, MA 01450
-4-
<PAGE> 1
EXHIBIT 99.2
USTRUST GUARANTY (UNLIMITED)
LOUIS DIMINICO
In consideration of USTrust (hereinafter called the "BANK") extending
credit or otherwise in its discretion giving time, financial or other
accommodations to LEARNINGEXPRESS.COM LLC (hereinafter called the "BORROWER"),
the undersigned (hereinafter called the "GUARANTOR") hereby unconditionally
guarantees to the Bank that (a) the Borrower will duly and punctually pay or
perform, at the place specified therefor, or if no place is specified, at the
Bank's Head Office or at the branch of the Bank where this Guaranty is given,
all indebtedness, obligations and liabilities, direct or indirect, matured or
unmatured, primary or secondary, certain or contingent, of the Borrower to the
Bank, now or hereafter owing or incurred (including without limitation costs and
expenses incurred by the Bank in attempting to collect or enforce any of the
foregoing) which are chargeable to the Borrower either by law or under the terms
of the Bank's arrangements with the Borrower accrued in each case to the date of
payment hereunder (collectively the "OBLIGATIONS" and individually an
"OBLIGATION"); and (b) if there is an agreement or instrument evidencing or
executed and delivered in connection with any Obligation, the Borrower will
perform in all other respects strictly in accordance with the terms thereof.
This Guaranty is an absolute, unconditional and continuing guaranty of
the full and punctual payment and performance by the Borrower of the Obligations
and not of their collectibility only and is in no way conditioned upon any
requirement that the Bank first attempt to collect any of the Obligations from
the Borrower or any other party primarily or secondarily liable with respect
thereto or resort to any security or other means of obtaining payment of any of
the Obligations which the Bank now has or may acquire after the date hereof, or
upon any other contingency whatsoever.
Upon any default by the Borrower in the full and punctual payment and
performance of the Obligations, the liabilities and obligations of the Guarantor
hereunder shall, at the option of the Bank, become forthwith due and payable to
the Bank without demand or notice of any nature, all of which are expressly
waived by the Guarantor. Payments by the Guarantor hereunder may be required by
the Bank on any number of occasions.
The Guarantor further agrees, as the principal obligor and not as a
guarantor only, to pay to the Bank forthwith upon demand, in funds immediately
available to the Bank, all costs and expenses (including court costs and legal
expenses) incurred or expended by the Bank in connection with this Guaranty and
the enforcement hereof, together with interest on amounts recoverable under this
Guaranty from the time such amounts become due until payment at the usual rate
charged by the Bank in similar circumstances.
The liability of the Guarantor hereunder shall be unlimited in amount.
The obligations of the Guarantor under this Guaranty shall
-1-
<PAGE> 2
continue in full force and effect until ten (10) days after the Bank shall have
received from the Guarantor written notice of the Guarantor's intention to
discontinue this Guaranty, notwithstanding any intermediate or temporary payment
or settlement of the whole or any part of the Obligations. No such notice shall
affect the liability of the Guarantor hereunder with respect to any Obligations
incurred by Borrower to the Bank or with respect to which the Bank has become
committed prior to ten (10) days after the receipt of such notice. In the event
of any such discontinuance of this Guaranty, all checks, drafts, notes,
instruments (negotiable or otherwise) and writings drawn or made by or for the
account of the Borrower on the Bank or any of its agents purporting to be dated
on or before ten (10) days after the date such discontinuance is received by the
Bank, although presented to and paid or accepted by the Bank after that date,
shall form part of the Obligations. No such notice shall be effective unless
received and acknowledged by an officer of the Bank at its Head Office or at the
branch of the Bank where this Guaranty is given.
The Guarantor grants to the Bank, as security for the full and punctual
payment and performance of the Guarantor's obligations hereunder, a continuing
lien on and security interest in all securities or other property belonging to
the Guarantor now or hereafter held by the Bank and in and in all deposits and
other sums credited by or due from the Bank to the Guarantor or subject to
withdrawal by the Guarantor; and regardless of the adequacy of any collateral or
other means of obtaining repayment of the Obligations, the Bank may at any time
and without notice to the Guarantor set off the whole or any portion or portions
of any or all such deposits and other sums against amounts payable under this
Guaranty, whether or not any other person or persons could also withdraw money
therefrom.
The Bank shall be at liberty, without giving notice to or obtaining the
assent of the Guarantor, and without relieving the Guarantor of any liability
hereunder, to deal with the Borrower and with each other party who now is or
after the date hereof becomes liable in any manner for any of the Obligations,
in such manner as the Bank in its sole discretion deems fit, and to this end the
Guarantor gives to the Bank full authority in its sole discretion to do any or
all of the following things: (a) extend credit, make loans and afford other
financial accommodations to the Borrower at such times, in such amounts and on
such terms as the Bank may approve; (b) vary the terms and grant extensions or
renewals of any present or future indebtedness or obligation to the Bank of the
Borrower or of any such other party; (c) grant time, waivers and other
indulgences in respect thereto; (d) vary, exchange, release or discharge, wholly
or partially, or delay in or abstain from perfecting and enforcing any security
or guaranty or other means of obtaining payment of any of the Obligations which
the Bank now has or acquires after the date hereof; (e) accept partial payments
from the Borrower or any such other party; (f) release or discharge, wholly or
partially, any endorser or guarantor; and (g) compromise or make any settlement
or other arrangement with the Borrower or any such other party.
If for any reason the Borrower has no legal existence or is
-2-
<PAGE> 3
under no legal obligation to discharge any of the Obligations undertaken or
purported to be undertaken by it or on its behalf, or if any of the moneys
included in the Obligations have become unrecoverable from the Borrower by
operation of law or for any other reason, this Guaranty shall nevertheless be
binding on the Guarantor to the same extent as if the Guarantor at all times had
been the principal debtor on all such Obligations. This Guaranty shall be in
addition to any other guaranty or other security for the Obligations, and it
shall not be prejudiced or rendered unenforceable by the invalidity of any such
other guaranty or security. Notwithstanding any payment by the Borrower to the
Bank of the whole or any portion of the Obligations, if the Bank shall be
required to pay any amount so paid to the Bank to a Trustee in Bankruptcy of the
Borrower, the Guarantor shall remain liable for any sums so paid to said
Trustee.
The Guarantor waives notice of acceptance hereof, notice of any action
taken or omitted by the Bank in reliance hereon, and any requirement that the
Bank be diligent or prompt in making demands hereunder, giving notice to any
default by the Borrower or asserting any other right of the Bank hereunder. The
Guarantor also irrevocably waives, to the fullest extent permitted by law, all
defenses which at any time may be available in respect of the Guarantor's
Obligations hereunder by virtue of any homestead exemption, statute of
limitations, valuation, stay, moratorium law or other similar law now or
hereafter in effect.
The Guarantor will not, by paying any sum recoverable hereunder (whether
or not demanded by the Bank) or by any means or on any other ground, claim any
set off or counterclaim against the Borrower in respect of any liability of the
Guarantor to the Borrower or, in proceedings under the Bankruptcy Code or
insolvency proceedings of any nature, prove in competition with the Bank in
respect of any payment hereunder or be entitled to have the benefit of any
counterclaim or proof of claim or dividend or payment by or on behalf of the
Borrower or the benefit of any other security for any Obligation which, now or
hereafter, the Bank may hold or in which it may have any share or have any right
of subrogation, reimbursement or indemnity or right of recourse to any security
which the Bank may have or hold with respect to the Obligations until such
Obligations are paid in full.
Any demand on or notice to the Guarantor shall be in writing and shall be
effective when handed to the Guarantor or left at or mailed or sent by telegraph
to the Guarantor's usual or last known address.
No provision of this Guaranty can be changed, waived or discharged except
by an instrument in writing signed by the Bank and the Guarantor expressly
referring to the provision of this Guaranty to which such instrument relates,
and no such waiver shall extend to, affect, or impair any right with respect to
any Obligation which is not expressly dealt with therein. No course of dealing
or delay or omission on the part of the Bank in exercising any right shall
operate as a waiver thereof or otherwise be prejudicial thereto.
-3-
<PAGE> 4
This Guaranty is intended to take effect as a sealed instrument to be
governed by and construed in accordance with the laws of the Commonwealth of
Massachusetts and shall inure to the benefit of the Bank and its successors in
title and assigns, and shall be binding on the Guarantor and the Guarantor's
heirs, assigns and legal representatives.
IN WITNESS WHEREOF, the Guarantor has executed this Guaranty or has
caused this Guaranty to be executed on its behalf by an officer or other person
thereunto duly authorized on the 29th day of December, 1999.
Witness:
/s/ Brian T. Garrity /s/ Louis DiMinico
- ------------------------- ------------------------------------
Louis DiMinico, individually
76 Farmers Row
Groton, MA 01450
-4-
<PAGE> 1
EXHIBIT 99.3
USTRUST GUARANTY (UNLIMITED)
THE LEARNING EXPRESS, INC.
In consideration of USTrust (hereinafter called the "BANK") extending
credit or otherwise in its discretion giving time, financial or other
accommodations to LEARNINGEXPRESS.COM LLC (hereinafter called the "BORROWER"),
the undersigned (hereinafter called the "GUARANTOR") hereby unconditionally
guarantees to the Bank that (a) the Borrower will duly and punctually pay or
perform, at the place specified therefor, or if no place is specified, at the
Bank's Head Office or at the branch of the Bank where this Guaranty is given,
all indebtedness, obligations and liabilities, direct or indirect, matured or
unmatured, primary or secondary, certain or contingent, of the Borrower to the
Bank, now or hereafter owing or incurred (including without limitation costs and
expenses incurred by the Bank in attempting to collect or enforce any of the
foregoing) which are chargeable to the Borrower either by law or under the terms
of the Bank's arrangements with the Borrower accrued in each case to the date of
payment hereunder (collectively the "OBLIGATIONS" and individually an
"OBLIGATION"); and (b) if there is an agreement or instrument evidencing or
executed and delivered in connection with any Obligation, the Borrower will
perform in all other respects strictly in accordance with the terms thereof.
This Guaranty is an absolute, unconditional and continuing guaranty of
the full and punctual payment and performance by the Borrower of the Obligations
and not of their collectibility only and is in no way conditioned upon any
requirement that the Bank first attempt to collect any of the Obligations from
the Borrower or any other party primarily or secondarily liable with respect
thereto or resort to any security or other means of obtaining payment of any of
the Obligations which the Bank now has or may acquire after the date hereof, or
upon any other contingency whatsoever.
Upon any default by the Borrower in the full and punctual payment and
performance of the Obligations, the liabilities and obligations of the Guarantor
hereunder shall, at the option of the Bank, become forthwith due and payable to
the Bank without demand or notice of any nature, all of which are expressly
waived by the Guarantor. Payments by the Guarantor hereunder may be required by
the Bank on any number of occasions.
The Guarantor further agrees, as the principal obligor and not as a
guarantor only, to pay to the Bank forthwith upon demand, in funds immediately
available to the Bank, all costs and expenses (including court costs and legal
expenses) incurred or expended by the Bank in connection with this Guaranty and
the enforcement hereof, together with interest on amounts recoverable under this
Guaranty from the time such amounts become due until payment at the usual rate
charged by the Bank in similar circumstances.
The liability of the Guarantor hereunder shall be unlimited in amount.
The obligations of the Guarantor under this Guaranty shall
-1-
<PAGE> 2
continue in full force and effect until ten (10) days after the Bank shall have
received from the Guarantor written notice of the Guarantor's intention to
discontinue this Guaranty, notwithstanding any intermediate or temporary payment
or settlement of the whole or any part of the Obligations. No such notice shall
affect the liability of the Guarantor hereunder with respect to any Obligations
incurred by Borrower to the Bank or with respect to which the Bank has become
committed prior to ten (10) days after the receipt of such notice. In the event
of any such discontinuance of this Guaranty, all checks, drafts, notes,
instruments (negotiable or otherwise) and writings drawn or made by or for the
account of the Borrower on the Bank or any of its agents purporting to be dated
on or before ten (10) days after the date such discontinuance is received by the
Bank, although presented to and paid or accepted by the Bank after that date,
shall form part of the Obligations. No such notice shall be effective unless
received and acknowledged by an officer of the Bank at its Head Office or at the
branch of the Bank where this Guaranty is given.
The Guarantor grants to the Bank, as security for the full and punctual
payment and performance of the Guarantor's obligations hereunder, a continuing
lien on and security interest in all securities or other property belonging to
the Guarantor now or hereafter held by the Bank and in and in all deposits and
other sums credited by or due from the Bank to the Guarantor or subject to
withdrawal by the Guarantor; and regardless of the adequacy of any collateral or
other means of obtaining repayment of the Obligations, the Bank may at any time
and without notice to the Guarantor set off the whole or any portion or portions
of any or all such deposits and other sums against amounts payable under this
Guaranty, whether or not any other person or persons could also withdraw money
therefrom.
The Bank shall be at liberty, without giving notice to or obtaining the
assent of the Guarantor, and without relieving the Guarantor of any liability
hereunder, to deal with the Borrower and with each other party who now is or
after the date hereof becomes liable in any manner for any of the Obligations,
in such manner as the Bank in its sole discretion deems fit, and to this end the
Guarantor gives to the Bank full authority in its sole discretion to do any or
all of the following things: (a) extend credit, make loans and afford other
financial accommodations to the Borrower at such times, in such amounts and on
such terms as the Bank may approve; (b) vary the terms and grant extensions or
renewals of any present or future indebtedness or obligation to the Bank of the
Borrower or of any such other party; (c) grant time, waivers and other
indulgences in respect thereto; (d) vary, exchange, release or discharge, wholly
or partially, or delay in or abstain from perfecting and enforcing any security
or guaranty or other means of obtaining payment of any of the Obligations which
the Bank now has or acquires after the date hereof; (e) accept partial payments
from the Borrower or any such other party; (f) release or discharge, wholly or
partially, any endorser or guarantor; and (g) compromise or make any settlement
or other arrangement with the Borrower or any such other party.
If for any reason the Borrower has no legal existence or is
-2-
<PAGE> 3
under no legal obligation to discharge any of the Obligations undertaken or
purported to be undertaken by it or on its behalf, or if any of the moneys
included in the Obligations have become unrecoverable from the Borrower by
operation of law or for any other reason, this Guaranty shall nevertheless be
binding on the Guarantor to the same extent as if the Guarantor at all times had
been the principal debtor on all such Obligations. This Guaranty shall be in
addition to any other guaranty or other security for the Obligations, and it
shall not be prejudiced or rendered unenforceable by the invalidity of any such
other guaranty or security. Notwithstanding any payment by the Borrower to the
Bank of the whole or any portion of the Obligations, if the Bank shall be
required to pay any amount so paid to the Bank to a Trustee in Bankruptcy of the
Borrower, the Guarantor shall remain liable for any sums so paid to said
Trustee.
The Guarantor waives notice of acceptance hereof, notice of any action
taken or omitted by the Bank in reliance hereon, and any requirement that the
Bank be diligent or prompt in making demands hereunder, giving notice to any
default by the Borrower or asserting any other right of the Bank hereunder. The
Guarantor also irrevocably waives, to the fullest extent permitted by law, all
defenses which at any time may be available in respect of the Guarantor's
Obligations hereunder by virtue of any homestead exemption, statute of
limitations, valuation, stay, moratorium law or other similar law now or
hereafter in effect.
The Guarantor will not, by paying any sum recoverable hereunder (whether 2
or not demanded by the Bank) or by any means or on any other ground, claim any
set off or counterclaim against the Borrower in respect of any liability of the
Guarantor to the Borrower or, in proceedings under the Bankruptcy Code or
insolvency proceedings of any nature, prove in competition with the Bank in
respect of any payment hereunder or be entitled to have the benefit of any
counterclaim or proof of claim or dividend or payment by or on behalf of the
Borrower or the benefit of any other security for any Obligation which, now or
hereafter, the Bank may hold or in which it may have any share or have any right
of subrogation, reimbursement or indemnity or right of recourse to any security
which the Bank may have or hold with respect to the Obligations until such
Obligations are paid in full.
Any demand on or notice to the Guarantor shall be in writing and shall be
effective when handed to the Guarantor or left at or mailed or sent by telegraph
to the Guarantor's usual or last known address.
No provision of this Guaranty can be changed, waived or discharged except
by an instrument in writing signed by the Bank and the Guarantor expressly
referring to the provision of this Guaranty to which such instrument relates,
and no such waiver shall extend to, affect, or impair any right with respect to
any Obligation which is not expressly dealt with therein. No course of dealing
or delay or omission on the part of the Bank in exercising any right shall
operate as a waiver thereof or otherwise be prejudicial thereto.
-3-
<PAGE> 4
This Guaranty is intended to take effect as a sealed instrument to be
governed by and construed in accordance with the laws of the Commonwealth of
Massachusetts and shall inure to the benefit of the Bank and its successors in
title and assigns, and shall be binding on the Guarantor and the Guarantor's
heirs, assigns and legal representatives.
IN WITNESS WHEREOF, the Guarantor has executed this Guaranty or has
caused this Guaranty to be executed on its behalf by an officer or other person
thereunto duly authorized on the 29th day of December, 1999.
Witness: THE LEARNING EXPRESS, INC.
/s/ Brian T. Garrity
- ----------------------------
By: /s/ Sharon DiMinico
----------------------------------
Sharon DiMinico, President
29 Buena Vista Street
Harvard, MA 01451
-4-
<PAGE> 1
EXHIBIT 99.4
USTRUST GUARANTY (UNLIMITED)
TOY BUILDING, LLC
In consideration of USTrust (hereinafter called the "BANK") extending
credit or otherwise in its discretion giving time, financial or other
accommodations to LEARNINGEXPRESS.COM LLC (hereinafter called the "BORROWER"),
the undersigned (hereinafter called the "GUARANTOR") hereby unconditionally
guarantees to the Bank that (a) the Borrower will duly and punctually pay or
perform, at the place specified therefor, or if no place is specified, at the
Bank's Head Office or at the branch of the Bank where this Guaranty is given,
all indebtedness, obligations and liabilities, direct or indirect, matured or
unmatured, primary or secondary, certain or contingent, of the Borrower to the
Bank, now or hereafter owing or incurred (including without limitation costs and
expenses incurred by the Bank in attempting to collect or enforce any of the
foregoing) which are chargeable to the Borrower either by law or under the terms
of the Bank's arrangements with the Borrower accrued in each case to the date of
payment hereunder (collectively the "OBLIGATIONS" and individually an
"OBLIGATION"); and (b) if there is an agreement or instrument evidencing or
executed and delivered in connection with any Obligation, the Borrower will
perform in all other respects strictly in accordance with the terms thereof.
This Guaranty is an absolute, unconditional and continuing guaranty of
the full and punctual payment and performance by the Borrower of the Obligations
and not of their collectibility only and is in no way conditioned upon any
requirement that the Bank first attempt to collect any of the Obligations from
the Borrower or any other party primarily or secondarily liable with respect
thereto or resort to any security or other means of obtaining payment of any of
the Obligations which the Bank now has or may acquire after the date hereof, or
upon any other contingency whatsoever.
Upon any default by the Borrower in the full and punctual payment and
performance of the Obligations, the liabilities and obligations of the Guarantor
hereunder shall, at the option of the Bank, become forthwith due and payable to
the Bank without demand or notice of any nature, all of which are expressly
waived by the Guarantor. Payments by the Guarantor hereunder may be required by
the Bank on any number of occasions.
The Guarantor further agrees, as the principal obligor and not as a
guarantor only, to pay to the Bank forthwith upon demand, in funds immediately
available to the Bank, all costs and expenses (including court costs and legal
expenses) incurred or expended by the Bank in connection with this Guaranty and
the enforcement hereof, together with interest on amounts recoverable under this
Guaranty from the time such amounts become due until payment at the usual rate
charged by the Bank in similar circumstances.
The liability of the Guarantor hereunder shall be unlimited in amount.
-1-
<PAGE> 2
The obligations of the Guarantor under this Guaranty shall continue in
full force and effect until ten (10) days after the Bank shall have received
from the Guarantor written notice of the Guarantor's intention to discontinue
this Guaranty, notwithstanding any intermediate or temporary payment or
settlement of the whole or any part of the Obligations. No such notice shall
affect the liability of the Guarantor hereunder with respect to any Obligations
incurred by Borrower to the Bank or with respect to which the Bank has become
committed prior to ten (10) days after the receipt of such notice. In the event
of any such discontinuance of this Guaranty, all checks, drafts, notes,
instruments (negotiable or otherwise) and writings drawn or made by or for the
account of the Borrower on the Bank or any of its agents purporting to be dated
on or before ten (10) days after the date such discontinuance is received by the
Bank, although presented to and paid or accepted by the Bank after that date,
shall form part of the Obligations. No such notice shall be effective unless
received and acknowledged by an officer of the Bank at its Head Office or at the
branch of the Bank where this Guaranty is given.
The Guarantor grants to the Bank, as security for the full and punctual
payment and performance of the Guarantor's obligations hereunder, a continuing
lien on and security interest in all securities or other property belonging to
the Guarantor now or hereafter held by the Bank and in and in all deposits and
other sums credited by or due from the Bank to the Guarantor or subject to
withdrawal by the Guarantor; and regardless of the adequacy of any collateral or
other means of obtaining repayment of the Obligations, the Bank may at any time
and without notice to the Guarantor set off the whole or any portion or portions
of any or all such deposits and other sums against amounts payable under this
Guaranty, whether or not any other person or persons could also withdraw money
therefrom.
The Bank shall be at liberty, without giving notice to or obtaining the
assent of the Guarantor, and without relieving the Guarantor of any liability
hereunder, to deal with the Borrower and with each other party who now is or
after the date hereof becomes liable in any manner for any of the Obligations,
in such manner as the Bank in its sole discretion deems fit, and to this end the
Guarantor gives to the Bank full authority in its sole discretion to do any or
all of the following things: (a) extend credit, make loans and afford other
financial accommodations to the Borrower at such times, in such amounts and on
such terms as the Bank may approve; (b) vary the terms and grant extensions or
renewals of any present or future indebtedness or obligation to the Bank of the
Borrower or of any such other party; (c) grant time, waivers and other
indulgences in respect thereto; (d) vary, exchange, release or discharge, wholly
or partially, or delay in or abstain from perfecting and enforcing any security
or guaranty or other means of obtaining payment of any of the Obligations which
the Bank now has or acquires after the date hereof; (e) accept partial payments
from the Borrower or any such other party; (f) release or discharge, wholly or
partially, any endorser or guarantor; and (g) compromise or make any settlement
or other arrangement with the Borrower or any such other party.
-2-
<PAGE> 3
If for any reason the Borrower has no legal existence or is under no
legal obligation to discharge any of the Obligations undertaken or purported to
be undertaken by it or on its behalf, or if any of the moneys included in the
Obligations have become unrecoverable from the Borrower by operation of law or
for any other reason, this Guaranty shall nevertheless be binding on the
Guarantor to the same extent as if the Guarantor at all times had been the
principal debtor on all such Obligations. This Guaranty shall be in addition to
any other guaranty or other security for the Obligations, and it shall not be
prejudiced or rendered unenforceable by the invalidity of any such other
guaranty or security. Notwithstanding any payment by the Borrower to the Bank of
the whole or any portion of the Obligations, if the Bank shall be required to
pay any amount so paid to the Bank to a Trustee in Bankruptcy of the Borrower,
the Guarantor shall remain liable for any sums so paid to said Trustee.
The Guarantor waives notice of acceptance hereof, notice of any action
taken or omitted by the Bank in reliance hereon, and any requirement that the
Bank be diligent or prompt in making demands hereunder, giving notice to any
default by the Borrower or asserting any other right of the Bank hereunder. The
Guarantor also irrevocably waives, to the fullest extent permitted by law, all
defenses which at any time may be available in respect of the Guarantor's
Obligations hereunder by virtue of any homestead exemption, statute of
limitations, valuation, stay, moratorium law or other similar law now or
hereafter in effect.
The Guarantor will not, by paying any sum recoverable hereunder (whether
or not demanded by the Bank) or by any means or on any other ground, claim any
set off or counterclaim against the Borrower in respect of any liability of the
Guarantor to the Borrower or, in proceedings under the Bankruptcy Code or
insolvency proceedings of any nature, prove in competition with the Bank in
respect of any payment hereunder or be entitled to have the benefit of any
counterclaim or proof of claim or dividend or payment by or on behalf of the
Borrower or the benefit of any other security for any Obligation which, now or
hereafter, the Bank may hold or in which it may have any share or have any right
of subrogation, reimbursement or indemnity or right of recourse to any security
which the Bank may have or hold with respect to the Obligations until such
Obligations are paid in full.
Any demand on or notice to the Guarantor shall be in writing and shall be
effective when handed to the Guarantor or left at or mailed or sent by telegraph
to the Guarantor's usual or last known address.
No provision of this Guaranty can be changed, waived or discharged except
by an instrument in writing signed by the Bank and the Guarantor expressly
referring to the provision of this Guaranty to which such instrument relates,
and no such waiver shall extend to, affect, or impair any right with respect to
any Obligation which is not expressly dealt with therein. No course of dealing
or delay or omission on the part of the Bank in exercising any right shall
-3-
<PAGE> 4
operate as a waiver thereof or otherwise be prejudicial thereto.
This Guaranty is intended to take effect as a sealed instrument to be
governed by and construed in accordance with the laws of the Commonwealth of
Massachusetts and shall inure to the benefit of the Bank and its successors in
title and assigns, and shall be binding on the Guarantor and the Guarantor's
heirs, assigns and legal representatives.
IN WITNESS WHEREOF, the Guarantor has executed this Guaranty or has
caused this Guaranty to be executed on its behalf by an officer or other person
thereunto duly authorized on the 29th day of December, 1999.
Witness: TOY BUILDING, LLC
/s/ Brian T. Garrity /s/ Sharon DiMinico
- ------------------------------- -----------------------------------
Sharon Diminico, Manager
Witness:
/s/ Brian T. Garrity By: Louis J. DiMinico
- ------------------------------- -----------------------------------
Louis J. DiMinico, Manager
29 Buena Vista Street
Harvard, MA 01451
-4-
<PAGE> 1
EXHIBIT 99.5
AMENDMENT TO
FRANCHISE AGREEMENT/LOCAL FRANCHISE LICENSE AGREEMENT
AMENDMENT (this "Amendment"), dated as of ____ _____, _____, by and
between THE LEARNING EXPRESS, INC. a Massachusetts corporation ("Franchisor"),
and ________________, a _______________ _____________ (the "Franchisee").
BACKGROUND
A. Franchisor and Franchisee are parties to that certain Franchise
Agreement/Local Franchise License Agreement dated as of ____ _____,
_____ by and between Franchisor and Franchisee (the "Franchise
Agreement") pursuant to the terms and conditions of which Franchisor
has granted a franchise to Franchisee to operate a retail specialty toy
store (the "Retail Store") using Franchisor's "System" and "Marks" in
the "Protected Territory," all as defined in the Franchise Agreement.
B. Franchisor has entered into a License Agreement, dated as of November
5, 1999 (the "LEC Agreement") with LearningExpress.com, LLC, a Delaware
limited liability company ("LEC"), pursuant to the terms and conditions
of which Franchisor has licensed certain components of the System and
the Marks to enable LEC to develop, operate and promote an
Internet-based on-line specialty toy store under the name
LearningExpress.com (the "On-Line Store").
C. Franchisor has entered into Management Services Agreement, dated as of
November 5, 1999 (the "Management Agreement") by and among Franchisor,
LEC and LearningExpress.com Holdings LLC ("LECH"), the principal owner
of LEC, pursuant to the terms and conditions of which, among other
matters, Franchisor has agreed to (1) support LEC's use of the System
in the On-Line Store through assistance with marketing, promotion and
exchange of information regarding sales, customers, vendors, and (2)
contract with each of Franchisor's franchisees on the terms and
conditions set forth in this Amendment.
D. Franchisor and Franchisee believe that the On-Line Store will enhance
Franchisor's and Franchisee's respective businesses by, among other
things, promoting the "Learning Express" image and good will to
consumers who use the Internet and enhancing customer traffic to the
Retail Store and other retail stores operated by other franchisees of
Franchisor.
-1-
<PAGE> 2
E. Accordingly, Franchisor and Franchisee are entering into this Amendment
to facilitate the development, operation and promotion of the On-Line
Store by LEC and to set forth: (i) certain services that Franchisee has
agreed to provide to Franchisee's and LEC's customers with respect to
the On-Line Store and (ii) certain specified payments and other
benefits that Franchisee will receive in consideration thereof.
Now therefore, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. AMENDMENT OF FRANCHISE AGREEMENT; CAPITALIZED TERMS. The terms and provisions
of this Amendment amend the Franchise Agreement. In the event of any conflict
between the terms of the Franchise Agreement and the terms of this Amendment,
the terms of this Amendment shall govern. Capitalized terms not otherwise
defined herein shall have the same meaning(s) as set forth in the Franchise
Agreement.
2. AMENDMENT TO LEARNING EXPRESS CONFIDENTIAL OPERATIONS MANUAL.
(a) Franchisee consents and agrees to all of the amendments to the
LEARNING EXPRESS CONFIDENTIAL OPERATIONS Manual (the "Manual") set forth on
Exhibit A hereto (the "Manual Amendment").
3. TERM. Franchisee's and Franchisor's obligations under this Amendment, shall
commence on , 2000 and continue until the earlier to occur of:
(i) termination of the Franchise Agreement in accordance with its terms
(without giving effect to this Amendment), (ii) the occurrence of a material
breach by Franchisee of the terms and conditions of this Amendment following
written notice to Franchisee by Franchisor detailing such alleged breach and
Franchisee's failure to remedy any such actual breach within ten (10) days,
or such other period as may be required by applicable state law, following such
notice, or (iii) upon Franchisor's election, exercised in its sole discretion
by written notice to Franchisee, to terminate this Amendment incident to a
breach by LEC of the LEC Agreement or the Management Agreement. The foregoing
period is referred to herein as the "Term".
Upon any termination in accordance with subsection (iii) of the
foregoing paragraph, all obligations of the Franchisor and the Franchisee under
this Amendment shall terminate but the Franchise Agreement and all obligations
of the parties thereunder shall continue in full force and effect in accordance
with their terms unaffected hereby.
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<PAGE> 3
4. EQUITY AND COMMISSION
(a) Equity of LECH.
(i) In consideration of Franchisee's agreement to execute
and consummate the terms and conditions of this
Amendment, Franchisor shall cause LECH to issue to
Franchisee 14,250 Common Shares of LECH for each
Retail Store operated by Franchisee (such shares, the
"Shares").
(ii) Prior to issuance of the Shares, LECH may require
Franchisee to execute an investment letter or letters
to the effect that the Shares are being acquired by
Franchisee for Franchisee's own account for
investment purposes, that Franchisee has no present
intention of offering, distributing or otherwise
disposing of the Shares, and that Franchisee shall
agree not to dispose of the Shares unless a
registration statement or appropriate qualification
is then in effect under applicable state "Blue Sky"
laws with respect to the Shares or in the opinion of
counsel for LECH the Shares are exempt from the
registration or qualification requirements of such
laws.
(iii) Prior to issuance of the Shares, Franchisee shall
execute and enter into the then current Operating
Agreement for LECH and be bound thereby as a member
of LECH. Such Operating Agreement shall provide,
among other matters, that, until such time as LECH,
or a successor entity, has completed an "Initial
Public Offering" (defined below), all of the Shares
shall be forfeited to LECH immediately upon the
termination of either or both of the Franchise
Agreement or this Amendment, provided, however, that
the Shares shall not be subject to forfeiture in the
case where either or both of the Franchise Agreement
and this Amendment are terminated in connection with
the sale or transfer of Franchisee's Retail Store to
a New Franchisee.
(iv) Franchisee agrees that Franchisee will not, for a
period of at least 180 days following the effective
date of any "Initial Public Offering" (defined below)
by LECH (or its successor-in-interest) or by LEC (or
its successor-in-interest), directly or indirectly,
sell, offer to sell or otherwise dispose of the
Shares other than any securities which are included
in such Initial Public Offering, provided, however,
that LECH shall be under no obligation to include the
Shares or any portion thereof in any Initial Public
Offering. If the managing underwriter of any such
Initial Public Offering determines that a shorter
time period is appropriate, the aforementioned 180
day period may be shortened consistent with the
requirements of such managing underwriter. An
"Initial Public
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<PAGE> 4
Offering" shall mean LECH's, or a successor entity's,
initial distribution of securities in a firm
commitment underwritten public offering to the
general public pursuant to a registration statement
filed with the Securities and Exchange Commission.
(b) On-Line Commission.
(i) In consideration of Franchisee's performance of
Franchisee's obligations hereunder, Franchisor shall
pay to Franchisee a commission (the "On-Line
Commission") equal to a percentage (the
"Percentage"), of the On-Line Store's "Net Sales in
Territory" accrued during each calendar month (or
portion thereof) during the Term. "Percentage" shall
mean (a) five percent (5%) through the second
anniversary of the "On-Line Store Date," defined
below, and (b) for the period thereafter, the
percentage established from time to time by the Board
of Managers of LEC based on experience of sales and
cash flow of the On-Line Store, provided, however,
that, (1) without limitation of the foregoing, LEC
presently intends to maintain the Percentage during
such period at the 5% level and (2) notwithstanding
anything herein to the contrary such percentage
determined by the Board of Managers shall never be
less than 2.5%. "Net Sales in Territory" shall mean:
(A) LEC's gross revenues accrued from the sale
through the On-Line Store of On-Line Store products
("Products") ordered by customers ("Customers") whose
"bill-to" address for the applicable order is within
the "Protected Territory" as defined in the Franchise
Agreement minus (B) all costs and charges incurred in
connection with returned products and shipping and
handling charges in connection therewith. "On-Line
Store Date" shall mean the date on which the On-Line
Store first commences operation on the Internet for
the sale of Products to the general public.
(ii) The On-Line Commission will be payable to the
Franchisee within 35 days after the end of the
calendar month in which LEC accrues the applicable
sale(s).
(iii) In addition, Franchisor need not pay the On-Line
Commission to Franchisee to the extent that LEC,
under and pursuant to that certain Management
Services Agreement by and among Franchisor, LEC and
LearningExpress.com Holdings LLC (the "MSA"), has not
paid to Franchisor the component of the "On-Line
Commission," as defined in the MSA, corresponding to
the
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<PAGE> 5
On-Line Commission otherwise payable by Franchisor to
Franchisee hereunder.
(iv) Franchisor may suspend payment of the On-Line
Commission to Franchisee if Franchisor determines
that Franchisee continues to be materially
noncompliant with the Manual, as amended from time to
time, following written notice by Franchisor to
Franchisee of such noncompliance and a subsequent
thirty (30) day opportunity to cure such
non-compliance.
(c) Except for payment of the On-Line Commission and the other
consideration provided for in this Agreement, Franchisee shall have no rights
under the Franchise Agreement or otherwise against Franchisor or any other party
with respect to the operations and sales of LEC and the On-Line Store regardless
of the billing address, shipping address or other location of the Customer or
other person to whom any Product is delivered or otherwise on account of any
sale of any Product.
5. FURTHER COOPERATION. Each of the parties hereto covenants and agrees that it
shall furnish to the other party hereto such reasonably necessary information
and reasonable assistance, including without limitation execution of documents,
certificates and instruments, as such other party may reasonably require to
effectuate the provisions of this Amendment.
6. CONFIRMATION OF FRANCHISE AGREEMENT. The parties hereto acknowledge, agree
and confirm that subject to Sections 2(a) and 4(c) hereof, all terms and
conditions of the Franchise Agreement not inconsistent with the terms of this
Amendment shall continue and remain in full force and effect unaffected by this
Amendment.
7. EFFECTIVENESS OF THIS AGREEMENT. This Agreement shall not be effective until
a copy executed by Franchisee and delivered to Franchisor has been countersigned
by Franchisor and delivered to Franchisee.
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<PAGE> 6
8. MISCELLANEOUS.
8.1 Notices.
Any notice required or permitted to be given to Franchisor hereunder shall be
addressed as follows:
The Learning Express, Inc.
Devens Business Community
29 Buena Vista Street
Ayer, MA 01432
Attn: Chief Executive Officer
Any notice required or permitted to be given to Franchisee hereunder shall be
addressed as follows:
or such other address as any party may give the others notice of pursuant to
this Section.
8.2 Counterparts. This Amendment may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
8.3 Headings. Headings in this Amendment are included for reference
only and shall have no effect upon the construction or interpretation of any
part of this Agreement.
8.4 Sealed Instrument. This Amendment shall have the effect of an
instrument executed under seal.
[continues on next page]
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<PAGE> 7
IN WITNESS WHEREOF, this Amendment has been executed as of the date
first above written.
THE LEARNING EXPRESS, INC. [FRANCHISEE]
By: _______________________ By: _______________________
Name: Name:
Title: Title:
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<PAGE> 8
EXHIBIT A
SUPPLEMENT TO LEARNING EXPRESS, INC. OPERATIONS MANUAL
This supplement is intended to outline the key operational requirements of each
Learning Express franchisee that will facilitate cooperation thereby enhancing
the development of the On-Line Store as well as the franchised stores. It does
not address in detail all operational procedures that will facilitate a seamless
environment for the Learning Express customer when shopping either through a
franchised location, the On-Line Store or both. Those detailed procedures are
under development and will be incorporated, along with the following, as part of
the Learning Express, Inc. Policies and Procedures section of the Operations
Manual.
1. IN-STORE KIOSK
A cooperative program between Learning Express franchisee and
LearningExpress.com E-commerce Company ("On-Line Store") that will
enhance customer service and broaden product offerings by enabling
access to the On-Line Store via a Kiosk unit.
OPERATIONAL REQUIREMENTS: Learning Express franchisee will provide the
appropriate retail space inside franchised location for placement of
the Kiosk. Franchisee will provide the appropriate utility connections
as well as subscription service to an Internet Service Provider ("ISP")
for access to the World Wide Web. Customer will have access only to the
LearningExpress.com URL.
COST TO FRANCHISEE: Ongoing communications (i.e., telephone line and
ISP subscription costs). On-line store will provide equipment and
fixture to franchisee at no cost.
2. MARKETING AND BRAND DEVELOPMENT
Learning Express, Inc. believes that the development of the On-Line
Store will enhance the business of its Franchisees by creating additional
awareness of the Learning Express name through various cooperative marketing and
advertising programs.
OPERATIONAL REQUIREMENTS: Learning Express franchisee will allow the
marketing and promotion of the On-Line Store as well as display the
LearningExpress.com URL on marketing materials including; catalogs, print ads,
marketing and advertising materials, bags and in-store display materials.
COST TO FRANCHISEE: Minimal, if any.
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<PAGE> 9
OPERATIONAL REQUIREMENTS: Learning Express franchisee will allow up to
four direct mailings to customer mailing list that will promote in a joint
fashion, the On-Line Store and that particular local store.
COST TO FRANCHISEE: None
OPERATIONAL REQUIREMENTS: Learning Express franchisee will accept
On-Line Store gift certificates and coupons utilizing the same process as now
used for the franchised store system. On-Line Store gift certificates and
coupons will be validated via telephonic or electronic means.
COST TO FRANCHISEE: None
3. PRODUCT RETURNS
In order to provide seamless customer service and distinguish the
Learning Express On-Line Store from other like e-commerce companies, a
cooperative return process between the On-Line Store and the franchised store is
necessary.
OPERATIONAL REQUIREMENTS: Learning Express franchised store will accept
product returns from Learning Express On-Line Store customers following the same
inter-store procedure as outlined in the current Operations Manual.
- Returned products that are on the Learning Express "Buying
Program" will be retained into inventory by store for sale at
retail. Store will receive reimbursement from On-Line Store
for cost of item.
- Returned products that are not on "Buying Program" may be
returned to the On-Line Store fulfillment center. Store will
receive full reimbursement of credit given to customer.
- Customer will receive instructions for those items carried by
the On-Line Store (i.e., direct ship by mfg., affiliate sales,
etc.) that are not returnable to a franchised store location.
COST TO FRANCHISEE: Minimal to none
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<PAGE> 1
EXHIBIT 99.6
AMENDMENT TO
REGIONAL FRANCHISE LICENSE AGREEMENT
THIS AMENDMENT, made and entered into this _____ day of
_______________, 2000, by and between The Learning Express, Inc., a Delaware
corporation ("LEI") and ________________ ____________________, a
_________________ _________________ ("Regional Owner").
RECITALS
A. LEI and Regional Owner entered into a Learning Express
Regional Franchise License Agreement dated __________,
_______________ (the "License Agreement");
B. LEI has entered into a License Agreement dated as of
November 5, 1999 (the "LEI/LEC Agreement"), with
LearningExpress.com, LLC, a Delaware limited liability company
("LEC"), pursuant to the terms and conditions of which LEI has
granted LEC a license (the "License") to use the System, as
defined in the LEI/LEC Agreement, in the development,
operation and promotion of an Internet based, on-line store
(the "On-Line Store");
C. As consideration for the License, LEC will pay LEI a
royalty (the "Royalty"), as defined in the LEI/LEC Agreement
with respect to "Net Sales," as defined in the LEI/LEC
Agreement, accrued by LEC via the On-Line Store;
D. LEI has entered into a Management Services Agreement, dated
as of November 5, 1999 (the "Management Agreement"), by and
among LEI, LEC and LearningExpress.com Holdings LLC, a
Delaware limited liability company ("LECH"), the principal
owner of LEC, pursuant to the terms and conditions of which,
among other matters, LEI has agreed, among other matters, to
(1) support LEC's use of the System in the On-Line Store
through assistance with marketing, promotion and exchange of
information regarding sales, customers, vendors, and (2)
contract with each of LEI's regional owners on the terms and
conditions set forth in an Amendment to each regional owner's
respective Regional Franchise License Agreement; and
E. LEI and Regional Owner wish to amend the License Agreement
and reflect the amendment in writing.
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. The foregoing recitals are true and correct and are incorporated herein by
this reference.
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<PAGE> 2
2. (a) In consideration of Regional Owner's agreement to execute and
consummate the terms and conditions of this Amendment, LEI
shall cause LECH to issue to Regional Owner, 14,250 Common
Shares of LECH (the "Shares"), for each Regional Territory
granted by LEI to Regional Owner.
(b) Prior to issuance of the Shares, LECH may require Regional
Owner to execute an investment letter or letters to the effect
that the Shares are being acquired by Regional Owner for
Regional Owner's own account for investment purposes, that
Regional Owner has no present intention of offering,
distributing or otherwise disposing of the Shares, and that
Regional Owner shall agree not to dispose of the Shares unless
a registration statement or appropriate qualification is then
in effect under applicable state "Blue Sky" laws with respect
to the Shares or in the opinion of counsel for LECH the Shares
are exempt from the registration or qualification requirements
of such laws.
(c) Prior to issuance of the Shares, Regional Owner shall execute
and enter into the then current Operating Agreement for LECH
and be bound thereby, as a member of LECH. Such Operating
Agreement shall provide, among other matters, that, until such
time as LECH, or a successor entity, has completed an "Initial
Public Offering" (defined below), that all of the Shares shall
be forfeited to LECH immediately upon the termination of
either or both of the License Agreement or this Amendment,
provided, however, that the Shares shall not be subject to
forfeiture in the case where either or both of the License
Agreement and this Amendment are terminated in connection with
the sale or transfer of Regional Owner's rights and
obligations under the License Agreement to a new regional
owner.
(d) Regional Owner agrees that Regional Owner will not, for a
period of at least 180 days following the effective date of
any "Initial Public Offering" (defined below) by LECH (or its
successor-in-interest) or by LEC (or its
successor-in-interest), directly or indirectly, sell, offer to
sell or otherwise dispose of the Shares other than any
securities which are included in such Initial Public Offering,
provided, however, that LECH shall be under no obligation to
include the Shares or any portion thereof in any Initial
Public Offering. If the managing underwriter of any such
Initial Public Offering determines that a shorter time period
is appropriate, the aforementioned 180 day period may be
shortened consistent with the requirements of such managing
underwriter. An "Initial Public Offering" shall mean LECH's,
or a successor entity's, initial distribution of securities in
a firm commitment underwritten public offering to the general
public pursuant to a registration statement filed with the
Securities and Exchange Commission.
3. (a) In consideration of Regional Owner's performance of Regional
Owner's obligations hereunder, LEI shall pay Regional Owner
with respect to each calendar month (or portion thereof)
during the Term, commencing with the month ended January 31,
2002, unless LEC is in breach of the LEI/LEC Agreement, a fee
(the "Fee") equal to the greater of (i) 50% of the Royalty and
(ii) 1.5% of "Net Sales," as defined in the LEI/LEC Agreement,
in
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<PAGE> 3
either case as accrued during such month from the sale
through the On-Line Store of products ordered by customers
whose "bill to" address is within the "Regional Territory", as
defined in the License Agreement.
(b) Each installment of the Fee shall be payable to the Regional
Owner within 60 days after the end of the applicable calendar
month. Each payment shall be accompanied by a statement from
LEI, providing the basis for the calculation of the Fee. For
any amount not paid by LEI when due in accordance with the
foregoing, LEI shall pay Regional Owner a late payment penalty
equal to one percent (1%) per month of such unpaid amount, or
if less, the maximum amount permissible under applicable law.
(c) LEI shall have no obligation to pay the Fee in the event LEC
ceases operating the On-Line Store, if LEC becomes insolvent
or makes a general assignment for the benefit of creditors, or
unless otherwise prohibited by law, if a petition in
bankruptcy is filed by LEC, or such a petition is filed
against and consented to by LEC or not dismissed within 30
days, or if a bill in equity or other proceeding for the
appointment of a receiver of LEC or other custodian for LEC's
business or assets is filed and consented to by LEC or if a
receiver or other custodian (permanent or temporary) of LEC's
assets or property, or any part thereof, is appointed.
(d) Within 120 days following the end of each fiscal year, LEI
shall make available for review by Regional Owner, a statement
prepared by LEI's chief financial officer, for all Net Sales
for such fiscal year in the Regional Territory. LEI shall
cause LEC to maintain accurate books and records pertaining to
Net Sales for a period of two (2) years following the close of
the fiscal year for which such determinations have been made
and permit Regional Owner and its representatives, upon at
least 10 days prior written notice to LEI, to make
examinations of such books and records during the usual
business hours (without interrupting LEC's normal conduct of
its business) and at the place LEC usually keeps its books and
records.
4. Except for issuance of the Shares and payment of the Fee, Regional
Owner shall have no rights under the License Agreement or otherwise
against LEI or any other party with respect to the operations and sales
of LEC and the On-Line Store regardless of the billing address,
shipping address or other location of the applicable customer or other
person to whom any product purchased through the On-Line Store is
delivered or otherwise on account of any sale of any such product.
5. Except as modified by this Amendment, the License Agreement remains in
full force and effect.
In Witness Whereof, the parties hereto have executed this Amendment the
day and date first above written.
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<PAGE> 4
LEI:
THE LEARNING EXPRESS, INC.
By:
-------------------------------
REGIONAL OWNER:
-----------------------------------
-----------------------------------
-----------------------------------
-----------------------------------
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<PAGE> 1
Exhibit 99.7
LEARNINGEXPRESS.COM, LLC ("ON-LINE STORE")
SUPPLEMENT TO LEARNING EXPRESS, INC. OPERATIONS MANUAL
This supplement is intended to outline the key operational requirements of each
Learning Express franchisee that will facilitate cooperation thereby enhancing
the development of the On-Line Store as well as the franchised stores. It does
not address in detail all operational procedures that will facilitate a seamless
environment for the Learning Express customer when shopping either through a
franchised location, the On-Line Store or both. Those detailed procedures are
under development and will be incorporated, along with the following, as part of
the Learning Express, Inc. Policies and Procedures section of the Operations
Manual.
-1-
<PAGE> 2
1. IN-STORE KIOSK
A cooperative program between Learning Express franchisee and
LearningExpress.com E-commerce Company ("On-Line Store") that will enhance
customer service and broaden product offerings by enabling access to the
On-Line Store via a Kiosk unit.
OPERATIONAL REQUIREMENTS: Learning Express franchisee will provide the
appropriate retail space inside franchised location for placement of the
Kiosk. Franchisee will provide the appropriate utility connections as well
as subscription service to an Internet Service Provider ("ISP") for access
to the World Wide Web. Customer will have access only to the
LearningExpress.com URL.
COST TO FRANCHISEE: Ongoing communications (i.e., telephone line and ISP
subscription costs). On-line store will provide equipment and fixture to
franchisee at no cost.
2. MARKETING AND BRAND DEVELOPMENT
Learning Express, Inc. believes that the development of the On-Line Store
will enhance the business of its Franchisees by creating additional
awareness of the Learning Express name through various cooperative
marketing and advertising programs.
OPERATIONAL REQUIREMENTS: Learning Express franchisee will allow the
marketing and promotion of the On-Line Store as well as display the
LearningExpress.com URL on marketing materials including; catalogs, print
ads, marketing and advertising materials, bags and in-store display
materials.
COST TO FRANCHISEE: Minimal, if any.
OPERATIONAL REQUIREMENTS: Learning Express franchisee will allow up to four
direct mailings to customer mailing list that will promote in a joint
fashion, the On-Line Store and that particular local store.
COST TO FRANCHISEE: None
OPERATIONAL REQUIREMENTS: Learning Express franchisee will accept On-Line
Store gift certificates and coupons utilizing the same process as now used
for the franchised store system.
COST TO FRANCHISEE: None
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<PAGE> 3
3. PRODUCT RETURNS
In order to provide seamless customer service and distinguish the Learning
Express On-Line Store from other like e-commerce companies, a cooperative
return process between the On-Line Store and the franchised store is
necessary.
OPERATIONAL REQUIREMENTS: Learning Express franchised store will accept
product returns from Learning Express On-Line Store customers following the
same inter-store procedure as outlined in the current Operations Manual.
* Returned products that are on the Learning Express "Buying
Program" will be retained into inventory by store for sale at
retail. Store will receive reimbursement from On-Line Store for
cost of item.
* Returned products that are not on "Buying Program" may be
returned to the On-Line Store fulfillment center. Store will
receive full reimbursement of credit given to customer.
* Customer will receive instructions for those items carried by the
On-Line Store (i.e., direct ship by mfg., affiliate sales, etc.)
that are not returnable to a franchised store location.
COST TO FRANCHISEE: Minimal to none
-3-
