-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Q9ZBgVdAv8Q9A5f7sPNzRYr3faQEfdyQi8Qa1/09B9qJvArRFJSSrGTzb6kQqxZR bAJ2CAPSLVOSJZmvlQ7wcg== 0000929624-00-000710.txt : 20000517 0000929624-00-000710.hdr.sgml : 20000517 ACCESSION NUMBER: 0000929624-00-000710 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 15 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARISTOTLE INTERNATIONAL INC CENTRAL INDEX KEY: 0001114361 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 61022613 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-37098 FILM NUMBER: 636590 BUSINESS ADDRESS: STREET 1: 2266 UNION STREET CITY: SAN FRANCISCO STATE: CA ZIP: 94123 BUSINESS PHONE: 4164402162 MAIL ADDRESS: STREET 1: 2266 UNION STREET CITY: SAN FRANCISCO STATE: CA ZIP: 94123 FORMER COMPANY: FORMER CONFORMED NAME: ARISTOTLE PUBLISHING INC DATE OF NAME CHANGE: 20000511 S-1 1 FORM S-1 Registration No. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- ARISTOTLE INTERNATIONAL, INC. (Exact name of registrant as specified in charter) --------------- Delaware 7372 061022613
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Number) Identification No.)
50 E Street, S.E., Suite 300 Washington, DC 20003 (202) 543-8345 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) --------------- John A. Phillips Chief Executive Officer 2266 Union Street San Francisco, California 94123 (415) 440-1102 (Name, address, including zip code, and telephone number, including area code, of agent for service) --------------- Copies to: David R. Snyder, Esq. Kristian E. Wiggert, Esq. Christopher M. Forrester, Esq. Melissa L. Mong, Esq. Christine K. Besnard, Esq. Craig M. Glantz, Esq. Pillsbury Madison & Sutro LLP Morrison & Foerster LLP 425 Market Street 11975 El Camino Real, Suite 200 San Francisco, California 94105 San Diego, California 92120 Phone: (415) 268-7000 Fax: (415) 268-7522 Phone: (858) 509-4052 Counsel to the Underwriter Fax: (858) 509-4010 Counsel to the Registrant --------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective. 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, 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, please check the following box. [_] --------------- CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Proposed Maximum Proposed Maximum Title of Each Class of Amount to Offering Price Aggregate Amount of Securities to be Registered be Registered Per Unit Offering Price(1) Registration Fee - ----------------------------------------------------------------------------------------------------------- Common Stock, par value $0.001 per share................................. $30,000,000 $7,920
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1)Estimated solely for purposes of calculating the registration fee pursuant to Rule 457(o) under the Securities Act. --------------- 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 this registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +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 offers to buy these + + securities in any state where the offer or sale is not permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED MAY 15, 2000 Aristotle International, Inc. Shares of Common Stock [LOGO OF ARISTOTLE] - - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- This is our initial public offering and no public market currently exists for our shares. We expect that the public offering price will be between $ and $ per share. The price may not reflect the market price of our shares after this offering.
THE OFFERING PER SHARE TOTAL ----------------------------------- Public Offering Price $ $ Underwriting Discount $ $ Proceeds to Aristotle International, Inc. $ $
We have granted the underwriters the right to purchase up to additional shares within 30 days to cover any overallotments. The underwriters expect to deliver the shares of common stock to purchasers on , 2000. The proposed Nasdaq National Market symbol is . The method of distribution being used by the underwriters in this offering differs somewhat from that traditionally employed in firm commitment underwritten public offerings. The public offering price and allocation of shares will be determined primarily by an auction process conducted by the underwriters and other securities dealers participating in this offering. A more detailed description of this process, known as OpenIPO, is included in Plan of Distribution. [Open IPO Logo] This offering involves a high degree of risk. You should purchase shares only if you can afford a complete loss of your investment. See Risk Factors beginning on page 7. - -------------------------------------------------------------------------------- Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. [WR HAMBRECHT + CO'S LOGO APPEARS HERE] The date of this prospectus is , 2000 [INSIDE FRONT COVER] [DESCRIPTION OF GRAPHICS TO COME ON AMENDMENT] You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. ---------------- TABLE OF CONTENTS
Page ---- Prospectus Summary....................................................... 3 The Offering............................................................. 5 Summary Financial Data................................................... 6 Risk Factors............................................................. 7 Cautionary Note on Forward-Looking Statements............................ 21 Use of Proceeds.......................................................... 22 Dividend Policy.......................................................... 22 Capitalization........................................................... 23 Dilution................................................................. 24 Selected Financial Data.................................................. 25 Management's Discussion and Analysis of Financial Condition and Results of Operations................................................... 26 Business................................................................. 32 Management............................................................... 42 Certain Relationships and Related Transactions........................... 49 Principal Stockholders................................................... 51 Description of Capital Stock............................................. 52 Shares Eligible for Future Sale.......................................... 55 Plan of Distribution..................................................... 57 Legal Matters............................................................ 63 Experts.................................................................. 63 Where You Can Find More Information...................................... 63 Index to Financial Statements............................................ F-1
---------------- We have one registered trademark application pending for the name Aristotle and no registered trademarks. Further, we have no registered or pending copyright or patent applications. We rely principally on common law for protection of our tradenames and proprietary rights. All service marks, trademarks or tradenames used in this prospectus are the property of the respective owners. i PROSPECTUS SUMMARY You should read the following summary together with the more detailed information about us, our common stock being sold in this offering and our financial statements and notes appearing elsewhere in this prospectus before making a decision to invest in our common stock. In this prospectus, unless the context indicates otherwise, the terms Aristotle, we, our or us refer to Aristotle International, Inc. Aristotle We are a technology company that provides information, products and services to political campaigns, advocacy organizations and commercial enterprises. Over the past ten years, we have compiled a large database of over 145 million registered voters in the United States. This database is our core strategic asset. We believe this database would be very difficult to replicate because many voter jurisdictions have different authorization requirements and restrictions on gathering and disclosure of voter records. We use our database to facilitate campaign management, Internet marketing and online fundraising. We also have created a database that contains records of over 37 million voters in the United Kingdom and a database that contains records from departments of motor vehicles throughout the United States. We believe that we are an industry leader in providing campaign management products and services and that we have significant knowledge and expertise in this field. Our products and services are designed to service the following three broad markets: . political campaigns or parties on the federal, state and local level; . advocacy organizations, including political action committees, non- profit organizations and issue-oriented organizations; and . commercial enterprises. As of April 30, 2000, our clients include over 50 U. S. Senators, over 200 members of the U.S. House of Representatives, approximately 46 Democratic and Republican state parties and numerous national advocacy groups and consulting firms. Furthermore, of the top 50 Senate and top 50 House of Representatives fundraisers for the 1999-2000 election cycle, as recorded by the Federal Election Commission, or FEC, as of May 2000 72% of the Senate candidates and 66% of the House candidates use at least one of our products or services. Our clients use our products and services to reach their audiences based on demographic, geographic or political criteria. Our campaign and advocacy clients use our software products to maintain lists of voters, contributors, prospective contributors, volunteers, members of the press and community organizers, and to comply with the reporting regulations of the FEC and state government agencies. Our targeted marketing clients use our products and services to combine our databases and software to reach potential constituents and supporters, generate campaign awareness and solicit contributions through the Internet, telephone, mail or door-to-door efforts. Our goal is to become a leading provider of targeted Internet marketing solutions and to expand our position within the campaign and advocacy industries. Key elements of our strategy are to: . continue to enhance the size and quality of our databases; . increase applications for our databases; . expand the scope of our comprehensive fundraising solutions; . extend international databases; and . broaden our sales and marketing efforts. 3 Our principal executive offices are located at 50 E Street, S.E., Suite 300, Washington, D.C. 20003. We also have a regional office in San Francisco, a sales office in Atlanta and sales representatives in Chicago, Dallas, Nashville, Seattle and London, England. Our phone number is (202) 543-8345. Our principal website is www.aristotle.com. The information on our website does not constitute part of this prospectus. Our business was originally founded by John A. Phillips and Dean A. Phillips under the laws of the State of Connecticut in 1983. In 1987, we incorporated under the laws of the District of Columbia under the name Aristotle Industries, Inc. In 1995, we changed our name to Aristotle Publishing, Inc. In March 1999, Aristotle Publishing, Inc. merged into its wholly-owned subsidiary, Aristotle Publishing, Inc., a corporation incorporated under the laws of the State of Delaware, with the Delaware corporation being the surviving corporation. On May 15, 2000, Aristotle Publishing, Inc. filed an amendment to its certificate of incorporation to change its name to Aristotle International, Inc. 4 THE OFFERING Common stock offered............. shares Common stock to be outstanding after this offering............. shares Use of proceeds:................. We expect to use the net proceeds from this offering for: .acquiring domestic and international voter records; .increasing our sales and marketing efforts; .increasing our product development efforts; and .working capital and general corporate purposes. Proposed Nasdaq National Market symbol..........................
The common stock to be outstanding after this offering is based on 4,384,777 shares outstanding as of April 30, 2000, after giving effect to: . the conversion of our outstanding shares of Series A Preferred Stock into 1,272,727 shares of common stock; and . the issuance of 112,050 shares of common stock from the conversion of our Notes payable-related parties into 112,050 shares of Series A Preferred Stock, which will convert into common stock upon the closing of this offering. The common stock to be outstanding after this offering excludes 543,194 shares of common stock issuable as of April 30, 2000 upon the exercise of outstanding stock options issued under our 1999 Stock Option Plan at a weighted average price of $2.26 per share. This offering will be made through the OpenIPO process, in which the allocation of shares and the public offering price are based primarily on an auction in which prospective purchasers are required to bid for the shares. This process is described under Plan of Distribution. Except as otherwise indicated, the information in this prospectus assumes no exercise of the underwriters' overallotment option. 5 SUMMARY FINANCIAL DATA
Year Ended December 31, ------------------------------- 1997 1998 1999 --------- --------- --------- (In thousands, except share and per share data) Statement of Operations Data: Revenue...................................... $ 1,718 $ 2,528 $ 3,913 Gross profit................................. 1,327 1,849 2,662 Loss from operations......................... (464) (692) (2,023) Net loss..................................... (249) (81) (1,915) ========= ========= ========= Basic and diluted loss per common share...... $ (0.08) $ (0.03) $ (0.64) ========= ========= ========= Shares used to compute basic and diluted net loss per common share....................... 3,000,000 3,000,000 3,000,000 ========= ========= ========= Pro forma unaudited basic and diluted net loss per common share....................... $ ========= Shares used to compute pro forma unaudited basic and diluted net loss per common share....................................... =========
The following table sets forth a summary of our balance sheet at December 31, 1999: . on an actual basis; . on an as adjusted basis giving effect to: . issuance of 1,272,727 shares of common stock upon conversion of all of our preferred stock outstanding as of December 31, 1999 into common stock at the closing of this offering, . issuance of 112,050 shares of common stock from the conversion of our Notes payable-related parties into 112,050 shares of Series A Preferred Stock, which will convert into common stock upon the closing of this offering; and . sale of shares of our common stock in this offering, assuming an offering price of $ per share after deducting underwriting discounts and commissions and our estimated offering expenses of $ million.
As of December 31, 1999 ----------------------------- Actual As Adjusted ------------- -------------- (In thousands) Balance Sheet Data: Cash and cash equivalents....................... $ 2,405 Working capital................................. 1,296 Total assets.................................... 3,802 Total liabilities............................... 2,318 Deferred revenue................................ 772 Convertible preferred stock..................... 3,500 Stockholders' equity (deficit).................. (2,016)
6 RISK FACTORS You should carefully consider the following risks and all other information contained in this prospectus before you decide to buy our common stock. If any of the following risks occur, our business, financial condition or operating results could suffer. If this occurs, the trading price of our common stock could decline, and you could lose all or part of your investment. Risks Relating to our Business We have a history of losses and expect to incur substantial losses in the future. We incurred net losses of approximately $401,000 for the year ended December 31, 1996, $249,000 for the year ended December 31, 1997, $81,000 for the year ended December 31, 1998 and $1.9 million for the year ended December 31, 1999. We have incurred significant expenses since September 1999 and expect to continue to expend substantial financial and other resources on developing and enhancing our products and services and expanding our sales, marketing and customer support organizations and infrastructure. We expect that our operating expenses will continue to increase in absolute dollars and may increase as a percentage of revenue. If our revenue does not increase to keep pace with our current and expected expenses, or is insufficient to achieve profitability, our business and operating results will be harmed. Further, even if our revenue does increase, failure to become profitable within the time frame expected by securities analysts or investors will likely cause our stock price to decline. Our entrance into new lines of business makes financial forecasting and evaluation of our business difficult. Although we have been offering products and services to campaign and advocacy organizations since 1983, we are shifting the emphasis of our product and service offerings towards a mixture of campaign, advocacy and commercial applications, with an increasing focus on advocacy and commercial applications. Our year-end operating results presented in this prospectus reflect only our historical business model and do not reflect our first quarter revenue or results of operations from our mixture of campaign, advocacy and commercial applications. Our revenue and income potential under this new business model is unproven and, therefore, it is difficult to evaluate our business and prospects. Further, because we have no operating results for our new commercial applications, we must forecast a portion of our expenses based on projected future activity. We will depend on the development of targeted Internet marketing for the growth of our Internet advertising operations. Although we have not received any significant revenue to date from targeted Internet marketing, we intend to increase our targeted Internet marketing efforts substantially in the next 12 months. The Internet advertising market is new and rapidly evolving, and it cannot yet be compared with traditional advertising media to gauge its effectiveness. As a result, demand and market acceptance for targeted Internet marketing solutions are uncertain. Most of our current or potential marketing clients have little or no experience using the Internet for marketing purposes and have allocated only a limited portion of their advertising budgets to Internet marketing. The adoption of Internet marketing, particularly by those entities that have historically relied upon traditional media for marketing, requires the acceptance of a new type of service. These potential clients may find Internet marketing to be less effective for promoting their products and services relative to traditional marketing media. If the market for Internet marketing fails to develop or develops more slowly than we expect, we will be unable to meet our forecasted revenues. Information in our databases may contain inaccuracies that could render advertising campaigns ineffective, which would in turn harm our ability to promote our Internet marketing efforts and could also subject us to liability. Further, filter software programs used by Internet users may limit or prevent advertising from being 7 delivered to a user's computer. Widespread acceptance of filter software would harm the commercial viability of Internet marketing, and in particular, banner advertising, and thus harm our business. We rely on access to advertising space from third parties to sell our targeted banner advertisements. As we increase our efforts to build our targeted advertising business, we expect to rely on contracts with third parties to provide us with advertising space for our targeted banner advertisements. We currently place advertisements with third-party ad-servers. If we were unable to continue to place advertisements with these entities, and were unable to replace the advertising space to be provided from these entities with advertising space from other ad- servers, Web portals or Internet Service Providers, or ISPs, we would be unable to deliver our targeted banner advertisements, which would preclude us from recognizing revenue. We may need additional financing. We may need to raise additional funds to develop or enhance our databases and our software and services, to fund our continued operations or to respond to competitive pressures. We may need to raise additional funds through the public or private sale of our debt or equity securities or by borrowing funds from an institution. We may not be able borrow money on commercially reasonable terms, or at all, and any sale of our equity securities may result in dilution to our stockholders. The price of our common stock may decline if our revenue and operating results fluctuate or we fail to meet market expectations. Variations in our quarterly operating results are difficult to predict and may fluctuate significantly from period to period, particularly because our operating results under our new business model are uncertain. Therefore, our quarter-to-quarter operating results may not be a good indication of our future performance. Our quarterly revenue or operating results may fall below the expectations of investors or public market analysts. In addition to other factors discussed in these Risk Factors, specific factors that may cause fluctuations in our revenue or operating results include: . timing of releases of new products and services by us or our competitors, in particular, the timing and release of new commercial applications; . seasonality of campaign products and services; . seasonality of advertising products, including our new targeted banner marketing products; . discretionary nature of our clients' purchasing and budgetary cycles; . changes in our pricing policies or those of our competitors; . changes in advertising rates; . timing or execution of large contracts that materially affect our operating results; . mixture of our domestic and international sales; . delayed receipt of accounts receivable from clients relying on federal matching funds; and . our ability to expand our operations and the amount and timing of expenditures related to this expansion. We depend significantly on sales of our Campaign Manager software and voter records and expect to depend significantly on sales of our PAC Manager software and targeted marketing services. For the years ended December 31, 1997, 1998 and 1999, we derived revenue of approximately 47%, 43% and 39% from the sale of our Campaign Manager and PAC Manager software and related services and 8 approximately 18%, 24% and 47% from the sale of our voter records. We anticipate that revenue related to these products will continue to constitute a substantial portion of our revenue in the future. Further, we have recently made significant investments in marketing and infrastructure to increase sales of our Campaign Manager and PAC Manager software, voter records and targeted marketing services, including targeted banner advertisements. Our results from operations would be adversely affected if we were unable to sell or increase sales of our Campaign Manager software, PAC Manager software and targeted marketing services. Our online fundraising service may be subject to complex regulations that could inhibit our ability to market the service. We have recently developed our online fundraising service CampaignContribution.com. Online fundraising is a new and evolving field and collection and processing of campaign contributions through the Internet is subject to state and federal laws, including the Federal Matching Act and the Federal Election Campaign Act, and subject to regulation by government agencies, including the FEC. Although we believe that our products and services comply with safe harbors established by FEC advisory opinions, we could be subject to liability under FEC regulations if we were found to have participated in a prohibited campaign fundraising effort. Any liability could: . cause us to incur losses as a result of fines or civil liabilities; . increase governmental scrutiny of our products and services; . decrease the use of the Internet for campaign or fundraising efforts; and . decrease the demand for our products and services. Use of CampaignContribution.com for non-profit fundraising online is also subject to complex federal and state regulations. We are currently in the process of becoming registered to conduct online fundraising activities in states that require registration for these activities. Further, additional states may begin to regulate non-profit fundraising online, which may increase our compliance expense and decrease the desirability of our services. As a result of the expense of complying with the numerous federal, state and local laws and the resulting impact on demand for our services, we may ultimately determine that offering our contribution services are not practical in all jurisdictions, in which case we may elect to discontinue these services. We may face increased governmental regulation on our collection and use of personal information from commercial and public records. Our collection and use of the information in our databases are governed by federal, state, local and foreign regulations. Specifically, our voter records are limited in use and access in approximately one half of the states, and there is a prohibition on the use of the information collected from the FEC contributor lists for soliciting contributions or for commercial purposes. Further, information collected from departments of motor vehicle records is regulated by the Drivers Privacy Protection Act of 1994 and the laws of the states from which the information is obtained, and the information collected from the U.S. Postal Service relating to change of address notifications is regulated by the Privacy Act of 1974. Future regulations may preclude access to, resale of and use of the information obtained from the commercial or public records in our databases, which in turn would limit our ability to market and sell our products and services. A failure to manage our growth could lead to inefficiencies in conducting our business and subject us to increased expenses. From December 31, 1999 to April 30, 2000, we expanded our operations from 69 to 96 employees. This growth has placed a significant strain on our management, financial and personnel resources. Our technical, data acquisition, sales, marketing and customer support organizations may be unable to effectively compete with larger and more established organizations because of their limited experience working together. We expect 9 to continue to hire employees at an accelerated pace and any additional growth will further strain our management, financial, personnel, internal training and other resources. To manage any additional growth effectively, we must improve our financial and accounting systems, controls, reporting systems and procedures, integrate new personnel and manage expanded operations. Our failure to manage our growth could adversely affect the quality of our products and services, our ability to respond to clients and our ability to retain key personnel. We derived 21% of our revenue from a single client in the year ended December 31, 1999. For the year ended December 31, 1999, we derived approximately 21% of our revenue from a contract with the National Rifle Association. Since we have completed this contract with the NRA, we do not expect to derive substantial revenue from this client in the current fiscal year. If we do not replace the revenue we received from this client, our revenue in the current fiscal year will be substantially reduced. We rely on a third-party database program to store our voter and departments of motor vehicle records, and our ability to deliver our products would be impaired if we were unable to use that database program. Our voter and departments of motor vehicle records are stored on a database program that we license from a third party. Our license agreement with this third party provides that if we breach a material provision of the agreement, the third party could terminate our use of the database program immediately. If we were required to obtain alternative software as a result of an immediate termination, our ability to offer our voter and departments of motor vehicle records and our products and services associated with these records could be adversely impacted, which could in turn lead to dissatisfied clients, potential liability to clients, damage to our reputation and loss of any competitive advantage we enjoy. Our reputation and results of operations may be harmed if information contained in our databases is incorrect, out of date or incomplete. We regard our databases as our most significant assets. Several of our software products and services are built on providing information about individuals to our clients. We collect the data for our databases from registered voter records through the United States and the United Kingdom, and from departments of motor vehicle records throughout the United States and FEC contributor lists. We enhance this data by contracting with third-party data collection services, which provide additional information about the individuals in our database. We rely on federal, state and local government agencies to provide this data, and on our relationships with third-party data collection services. If these relationships were to deteriorate, our ability to maintain and update our databases on a timely basis could be harmed. The information in our databases will become stale if we are unable to update it. In addition, the information that we obtain from voter records, departments of motor vehicle records or our third-party data collection services may be inaccurate or incomplete. As a result, our clients may no longer be willing to pay us for access to and use of the information and we may be unable to attract or retain additional clients. Our Internet-based products and services could be interrupted as a result of technical problems with our computer and communications systems. Our clients rely on the Internet to use features in many of our products and services. Although we host our own servers, we rely on PSINet as our ISP to provide interconnectivity to our clients. From time to time, our clients have experienced technical problems communicating with our website. These technical difficulties have resulted from failures in our servers and computer systems and in the servers and computer systems of our ISP. We believe these interruptions will continue to occur from time to time. Substantially all of our computer and communications systems are located in our offices in Washington, D.C. and substantially all of PSINet's systems are located in Northern Virginia. These systems and operations are vulnerable to damage or 10 interruption from human error, natural disasters, telecommunications failures, break-ins, sabotage, computer viruses, intentional acts of vandalism and similar adverse events. Given our reliance on our servers and computer systems and those of PSINet, delivery of our products and services to our clients could be delayed if: . our servers and computer systems were to experience significant and continuing technical problems; or . PSINet were unable to continue to provide us with uninterrupted access to the Internet for any of the reasons described above, and we were unable to secure a replacement ISP in a timely and cost-effective manner. We have a limited disaster recovery plan, and in the event of damage or interruption our insurance policies may not adequately compensate us for any loss that we may incur. Any system failure could harm our relationships with our clients and result in reduced revenue. We may not be able to use the Aristotle brand name for our Internet activities. We have received a letter from a third party engaged in website design, Web hosting and Internet access service requesting that we cease and desist from using the name Aristotle in connection with our online activities. If this third party is able to prove that it has superior rights to use the Aristotle name, we may be unable to use the name Aristotle for our activities on the Internet. If we are unable to use our brand name for these activities, we will be required to develop and build a new brand name. We intend to expand our operations into international markets, which could subject us to foreign regulations and litigation regarding collection and use of personal information. We have collected voter records in the United Kingdom, and we plan to collect voter data and expand our sales efforts in other countries as well. Use of our products and services in foreign jurisdictions may be heavily regulated. For example, in order to collect campaign contributions online in the United Kingdom, a website operator may have to comply with the legislative requirements contained in the Political Parties, Elections and Referendums Bill, which has not yet been finally approved by the British Parliament. Although we believe that this legislation will place restrictions on access to and use of information about registered voters in the United Kingdom, we cannot foresee its ultimate impact on our operations since the legislation has not yet become law. If our collection and use of voter records were ultimately too heavily restricted to make our products commercially viable, our investment in acquiring this data would be lost. Similarly, other countries into which we intend to expand our operations may enact their own privacy regulations that may result in limits on the collection and use of voter information, which, if applied to the sale of our software, could negatively impact our results of operations. Expanding our operations into international markets will increase our exposure to risks of foreign litigation. If we do not comply with foreign laws and regulations, which are often complex and subject to variation and unexpected changes, we could incur unexpected costs and potential litigation. The governments of foreign countries might also attempt to regulate our products and services or levy sales or other taxes relating to our activities. In addition, foreign countries may impose tariffs, duties, price controls or other restrictions on foreign currencies or trade barriers, any of which could make it more difficult to conduct our business. We have limited experience in international operations and our international expansion efforts could divert our management's attention. The expansion of our international operations will require significant management attention and financial resources. We have very limited experience in marketing, selling and supporting our products and services abroad and we may face difficulties in accomplishing our expansion plans, including funding, adequate staffing and management resources for our international operations. We have limited experience in developing customized versions of our software for international markets and in marketing our software internationally. 11 Customizing our software for international markets may take longer than we anticipate due to difficulties in translation and delays we may experience in recruiting and training international staff. In addition to these requirements, to successfully expand our operations into international markets, we will need to, among other things: . establish and expand international voter data acquisition channels, sales channels and management and support organizations; and . develop relationships with international service providers and additional distributors and systems integrators. Our investment in acquiring records of voters and residents of, and establishing operations in, other countries may not become profitable. Even if we do establish and expand our international operations successfully, we may not be able to maintain or increase international market sales of our products and services. We rely on limited common law rights to protect our intellectual property. Our success and ability to compete depend, in part, upon the protection of our proprietary rights. We rely on a combination of common law rights and contractual restrictions, including confidentiality agreements and licenses, to establish and protect these rights. We currently have one registered trademark application pending and no registered trademarks. Further, we have no copyrights or patents and no copyright or patent applications pending. Despite any precautions that we may take to protect our proprietary rights: . laws and contractual restrictions may not be sufficient to prevent inappropriate use of our technology or deter others from developing similar technologies; . current federal laws that prohibit software copying provide only limited protection from software infringement, and effective trademark, copyright and trade secret protection may be unavailable or limited in foreign countries; . other companies may claim common law trademark rights based upon state or foreign laws that precede our claim to our marks; and . policing unauthorized use of our products and trademarks is difficult, expensive and time-consuming, and we may be unable to determine the extent of the unauthorized use. Also, the laws of other countries in which we market our products may offer little or no effective protection of our technology. Reverse engineering, unauthorized copying or misappropriation of our technology could enable third parties to benefit from our technology without paying us for it, which would significantly harm our business. We may become subject to expensive and time-consuming litigation over proprietary rights. Substantial litigation regarding intellectual property rights exists in our industry. We expect that software in our industry may be increasingly subject to third-party infringement claims as the number of competitors grows and the functionality of products in different industry segments overlaps. Our products and services or other technology we use could infringe on patents currently held by, or which may be issued to, third parties. Any of these third parties might make a claim of infringement against us. Many of our customer agreements require that we indemnify our clients from any claim or finding of intellectual property infringement. Any litigation, brought by us or others, could result in the expenditure of significant financial resources and the diversion of our management's time and efforts. In addition, any litigation in which we could be accused of infringement might delay our delivery of our products and services, require us to develop non-infringing technology or require us to enter into royalty or license agreements, which might not be available on acceptable terms, or at all. Our business would be harmed if a successful claim of infringement were made against us and we could not develop non-infringing technology or license the infringed or similar technology on a timely and cost- effective basis. 12 We may be subject to privacy claims if our security system is breached. Our databases contain sensitive information about individuals that we make available to our clients, including over the Internet. A fundamental requirement for online communications and transactions is the secure transmission of confidential information over public networks. Although we have implemented network security measures, our servers are vulnerable to computer viruses, physical and electronic break-ins and similar disruptions, which could lead to theft or misuse of the information contained in our databases. Individuals about whom our databases contain information or entities from which we collect information could assert claims of invasion of privacy, inappropriate disclosure or use or loss of information against us or our clients. We may be liable to these individuals or entities or to our clients for any release of confidential information, whether as a result of a breach of our security or by accident. Third parties may attempt to breach our security or that of our clients. In particular, a substantial amount of the information contained on our database can only be released to authorized individuals. We may be subject to federal, state and local fines and to civil and criminal liability if we were to inadvertently release this information for unauthorized use as a result of: . errors in our software; . human errors; or . because we are defrauded or deceived by the person seeking the information into believing that he or she is an authorized user of the information. Further, we may be required to expend significant additional capital and other resources to license encryption technology and additional technologies to protect against security breaches or to alleviate problems caused by any breach. Difficulties in implementing our PAC Manager software may prevent us from meeting our revenue projections. We expect to derive a substantial portion of our revenue in the next fiscal year from the sales and implementation of our PAC Manager software. This implementation process involves sophisticated software, computing and communications systems. If we are required to devote significant customer support, engineering and other resources to a particular project, we may experience difficulties with implementation of our PAC Manager software for other clients. In this case, our relationships with our clients may be harmed, which could adversely affect our sales efforts. Further, if our new or existing clients have difficulty deploying our PAC Manager software or require significant amounts of our professional services support or customized features, our ability to complete the implementation and fully recognize revenue could be delayed and our costs could increase. We may face liability claims that could result in unexpected costs and damage to our reputation. Provisions in our software license agreements are designed to limit potential product and service liability claims. Further, our software license agreements generally limit the amounts recoverable for damages by our clients as a result of errors in our products and services. Despite these precautions, we may be subject to liability as a result of errors in our products and services, including liability relating to damages to our clients' internal computer systems. Any product or service liability claim, whether or not successful, could harm our business by increasing our costs, damaging our reputation and distracting our management. We may also be subject to claims for indemnity to the extent that our clients are sued for errors in our products or services. Our software products and services have long sales cycles that make it difficult to plan our expenses and forecast our revenue. The sale of our Campaign Manager and PAC Manager software typically takes an average of one to six months to complete, and it can take significantly longer. It is therefore difficult to predict the quarter in which a 13 particular sale will occur and to plan our expenses accordingly. The period between our initial contact with potential clients and their purchases of our products and services is relatively long due to the following factors: . implementation periods for our campaign products and services, in particular, our PAC Manager software; . requirement of a significant upfront investment of resources by clients; . clients' budgetary cycles might affect the timing of their purchasing decisions; . clients may require competitive evaluations and internal approval before purchasing our software; . delays in our development and release of new software; and . announcements or planned introductions of new software by us or our competitors. The delay or failure to complete a sale in a particular quarter could reduce our revenue in that quarter, as well as subsequent quarters over which revenue for the sale would likely be recognized. If our sales cycle unexpectedly lengthens in general or for one or more large orders, it would adversely affect the timing of our revenue and harm our ability to meet forecasts for a given quarter. We may lose sales and revenue if our products and services do not remain compatible with widely-used software programs. Our software is designed to assist our clients in collecting and analyzing data about their constituents and supporters, assist them in customizing their advertising and marketing efforts and receive donations through the Internet. Accordingly, our software is designed to interact with software used by our clients on their existing systems, including Microsoft Windows, Windows NT and other popular operating systems. Further, in order to access our databases through the Internet, our clients must use a standard browser, for example, Microsoft Internet Explorer or Netscape Navigator. We may lose clients if we do not update our products to remain compatible with newer versions of these programs or other programs that may become more popular in the future. This may result, for example, from our failure to obtain developer versions of these software programs as they are upgraded. Our results of operations will be adversely affected if we lose clients as a result of our failure to keep our products compatible with the most recent versions of widely-used software programs. We rely on third parties to provide us with information necessary to enhance our databases. As we continue to enhance the information contained within our databases, we expect to rely on contracts with third-party data collection services. While we currently obtain enhanced information from several sources, we rely heavily upon one source. If we are unable to continue to obtain enhanced data from this source, and unable to obtain similar information from an alternative source, our databases would be impaired, which may render our products and services obsolete. Our sales and reputation may be harmed by delays in the development or enhancements of, or by errors in, our products and services. We must develop and introduce new products and services and enhance our existing products and services on a timely basis to remain competitive in our industry. Our clients rely on our software to comply with federal, state and local campaign contribution reporting laws, and to manage their complicated databases. If we experience delays in the introduction or enhancements of our products and services or if our software contains undetected errors, we could experience: . loss of or delay in revenue and an immediate and significant loss of market share; . loss of existing and future clients; . failure to achieve market acceptance; 14 . diversion of development resources; . damage to our reputation; . increased service and warranty costs; . legal actions by our clients against us; and . increased insurance costs. Our efforts to remain competitive in product development and enhancements and to avoid product and service delays may not be successful, and we may lose clients as a result. Delays in bringing to market new products or services or in enhancing our existing products and services, or the existence of defects in new products or our existing products, could be exploited by our competitors. Our operating results could be harmed if we were to lose market share as a result of lapses in our product and service management. We may engage in future acquisitions that could require additional funding, which could dilute our existing stockholders, cause us to incur significant expenses or harm our business. We may review acquisition or investment prospects that would complement our current business or enhance our technological capabilities. Integrating any newly acquired businesses, technologies or products may be expensive and time- consuming. To finance these acquisitions, developments and enhancements, we may need to raise additional funds through the public or private sale of our debt or equity securities or by borrowing funds from an institution. We may not be able borrow money on commercially reasonable terms, or at all, and any sale of our equity securities may result in dilution to our stockholders. Further, the rights, preferences and privileges of any securities we may sell may be senior to those of our current stockholders. In addition, our business will be harmed if we are unable to integrate effectively and efficiently any acquired business, technology or product into our business or to operate any acquired business profitability. Future acquisitions by us could also result in large and immediate write-offs, incurrence of debt and contingent liabilities, or amortization of expenses related to goodwill and other intangibles, any of which could adversely affect our operating results. Our revenues may be negatively impacted by fluctuations in foreign exchange rates. We may sell our products and services in foreign countries based on a U.S. dollar-denominated pricing schedule. Therefore, a weakening of foreign currencies versus the U.S. dollar could make our products and services less competitive in foreign markets. Alternatively, we may receive international revenue denominated in local currencies. We would, therefore, also be subject to risks of foreign exchange losses. We do not currently engage in currency hedging activities. We are recording stock compensation expense relating to recent stock option grants. The amortization of this compensation expense will result in a charge to our earnings over the next five years. Stock compensation represents an expense associated with the recognition of the difference between the deemed fair market value of common stock at the time of an option grant and the option exercise price. Stock compensation is amortized over the vesting period of the options, generally five years. In addition, we expect to record an additional deferred compensation charge relating to option grants made after December 31, 1999, but prior to the completion of the offering. We estimate the charge relating to these additional grants for the year ending December 31, 2000 will be approximately $ based upon an assumed offering price of $ per share. Loss of our Chief Executive Officer, President and other key personnel could harm our business. We depend substantially on the skills, experience and efforts of our senior management for our success. In particular, we rely on the continued services of John A. Phillips, our Chief Executive Officer, and Dean A. Phillips, our President. The loss of service from any of these individuals could seriously harm our business. 15 Additionally, we depend for our success on our ability to hire and retain qualified personnel, particularly in sales, data acquisition, customer service, marketing, product development and support. Competition for qualified personnel in the technology industry is intense. If we are unable to successfully hire or retain qualified personnel, we may not be able to effectively grow our business. We have adopted anti-takeover defenses that could delay or prevent an acquisition of our company. Our certificate of incorporation and bylaws contain provisions that could delay or prevent a change in control of our company. These provisions could limit the price that investors might be willing to pay in the future for shares of our common stock. Some of these provisions include: . authorizing the issuance of preferred stock with rights senior to the common stock that can be created and issued by our board of directors without prior stockholder approval, commonly referred to as blank check preferred stock; . prohibiting stockholder action by written consent; and . staggering terms for our board of directors so that not all of our directors can be elected at any single annual meeting. Our executive officers and directors will exercise control over stockholder voting matters. After this offering, our executive officers and directors, their affiliates and other substantial stockholders will together control approximately % of our outstanding common stock. As a result, these stockholders may collectively be able to control all matters requiring approval of a majority of our stockholders, including the election of directors and significant corporate transactions. This concentration of ownership: . could delay, prevent or deter a change in control of our company; . could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company or our assets; and . might affect the prevailing market price of our common stock. 16 Risks Relating to our Industry Governmental regulation and legal uncertainties could impair the growth of the Internet and decrease demand for our products and services or increase our cost of doing business. Although there are currently few laws and regulations exclusively applicable to the Internet and the use of the Internet as a commercial medium, a number of laws have been proposed involving the Internet. These proposed laws include laws addressing user privacy, pricing and content, copyrights, distribution, antitrust and characteristics and quality of products and services. Further, the growth and development of the market for commercial online transactions may result in more stringent consumer protection laws that may impose additional burdens on companies engaged in electronic commerce. We face competition across two industries. We face competition from a number of companies across two major industries of campaign and advocacy solution providers and marketers. Many of our competitors, especially in the marketing industry: . offer lower prices; . have closer or longer-standing relationships with potential clients; . have longer operating histories in the advertising industry; . offer more diversified lines of products and services; and . have greater financial, marketing and other resources. Additionally, in the case of our campaign and advocacy products and services, we face competition from state or local jurisdictions and political parties that may have easier or lower cost access to registered voter data. We may also face increased competition if a competitor or another entity creates a similar or more expansive database than our database. Many of our competitors may enter into strategic or commercial relationships with larger, more established and better-financed companies. These competitors may be able to undertake more extensive marketing campaigns, adopt more aggressive pricing policies and make more attractive offerings to clients to induce them to use their products and services. In the campaign and advocacy industries, we believe that the principal competitive factors include: . quality and size of database; . functionality of software and contribution processing services; . availability of technical support; and . effectiveness of sales force. In the online marketing industry, we believe that the principal competitive factors include: . the timing and market acceptance of new solutions and enhancements to existing solutions developed either by us or our competitors; . the continued and increasing acceptance by advertisers of targeted Internet marketing as an effective and cost-efficient means of advertising; . the ability to adapt to the rapidly changing trends of the Internet; . customer service and support efforts; . sales and marketing efforts; 17 . ability to adapt and scale our technology as customer needs change and grow; and . ease of use, performance, price and reliability of solutions developed either by us or our competitors. As we expand the scope of our Web services, we may also face greater competition from a number of websites and other media companies across a wide range of different Web services. We may also face competition from providers of inventory and data management products and services that may enter into the targeted marketing business. In addition, we may face competition from a number of large Web publishers and portals, which have large databases of information about their users, and from providers of traditional marketing mediums, for example, television, radio and print. Our ability to maintain and use information in our databases for targeted banner advertisements may be challenged in the future. We collect and compile information in our databases that we use in connection with our campaign products and services and for our targeted marketing products. Although we collect a significant portion of this information from public records, we also rely on commercial data collection efforts to enhance our records. Individuals have claimed, and may claim in the future, that collection of this information is illegal. Although we believe that we have the right to use and compile the information in these databases, our ability to do so may not remain lawful. Moreover, there may be no trade secret, copyright or other intellectual property protection that is or becomes available for databases that protects our rights. In addition, third parties may assert claims to information contained in our databases. There is also a substantial risk that public perception and approval of the use of information acquired through the Internet to engage in targeted marketing and other commercial purposes may deteriorate. We will only be able to execute our business plan if Internet usage continues to grow. The continued growth of the Internet may be limited by various factors, many of which are outside our control. These factors include: . the inability of Internet infrastructure to support the demands placed on it; . a decline in the performance and reliability of the Internet as usage grows; . security and authentication concerns with respect to transmission over the Internet of confidential information, such as credit card numbers, and attempts by unauthorized computer users, so-called hackers, to penetrate online security systems; and . privacy concerns, including those related to the ability of websites to gather information. Our business would be harmed if efficient transmission of data over the Internet is interrupted or does not continue to grow at the pace at which it has grown recently. We may become subject to litigation over privacy concerns. There are several lawsuits pending against our competitors alleging, among other things, that our competitors have unlawfully obtained and sold Internet users' personal information. Further, the Federal Trade Commission has commenced an inquiry concerning the collection and maintenance of information about Internet users by companies. If we become involved in litigation over privacy concerns, or if we become subject to a governmental investigation, our management and financial resources would be diverted from our daily operations. Further, any order or judgment that might be rendered against us could significantly harm our ability to pursue our business strategies and may deplete our resources. There is also a substantial risk that public perception and approval of the use of information acquired through the Internet to engage in commercial purposes, including targeted marketing, may deteriorate. We may also face liability for defamation, negligence and copyright, patent or trademark infringement as a result of targeted banner advertisements we design or display for our clients. 18 Risks Related to Our Offering We have broad discretion to use the proceeds from this offering and our use of these proceeds may not yield a favorable return on your investment. The net proceeds of this offering are not allocated for specific uses other than: . acquisition of domestic and international voter records; . increasing our sales and marketing efforts; . continuing our product development efforts; and . working capital and general corporate purposes. Thus, our management has broad discretion over how these proceeds will be used and could spend the proceeds in a manner with which you may not agree. The proceeds may not ultimately be invested in a manner that yields a favorable, or any, return on your investment. Our stock price may be volatile and you may not be able to sell your shares at or above the price you paid for our common stock. Our common stock has not been publicly traded, and an active trading market may not develop or be sustained after this offering. You may not be able to sell your shares at or above the price you paid for our common stock. The price at which our common stock will trade after this offering is likely to be highly volatile and may fluctuate substantially due to, among other things, one or more of the following factors: . actual or anticipated fluctuations in our operating results; . changes in or our failure to meet investors' and securities analysts' expectations; . announcements of technological innovations; . introduction of new products and services by us or our competitors; . developments with respect to intellectual property rights; . conditions and trends in the Internet and technology industries; and . general market conditions. We may become involved in securities class action litigation that could divert our management's attention. The stock market has from time to time experienced significant price and volume fluctuations that have affected the market price for the common stock of technology companies, particularly companies conducting business on the Internet. These broad fluctuations may cause the market price of our common stock to decline. In the past, following periods of volatility in the market price of a particular company's securities, securities class action litigation has often been brought against the company. We may become involved in this type of litigation in the future. Litigation is often expensive and diverts management's attention and resources, which could harm our ability to execute our business plan. Future sales of our common stock may depress our stock price. Sales of a substantial number of shares of our common stock in the public market after this offering or after the expiration of contractually or legally required holding periods could cause the market price of our common stock to decline. After this offering, we will have approximately shares of common stock outstanding. All of the shares sold in this offering will be freely tradable. The remaining shares of common stock outstanding after this offering are subject to contractual lock-ups agreements that prohibit the 19 sale of shares for 180 days after the date of this prospectus. Immediately after the expiration of the 180-day period, shares that will be outstanding immediately after this offering will become available for sale and shares will become available for sale at various times thereafter upon the expiration of one-year holding periods. Purchasers of our common stock will suffer immediate and substantial dilution. As of December 31, 1999, we had a negative book value of $0.67 per share. Purchasers of our common stock in this offering will suffer immediate dilution of $ per share in the pro forma net tangible book value per share of common stock, based on an initial public offering price of $ per share. Purchasers will also experience additional dilution upon the exercise of outstanding stock options. The initial public offering price is expected to be substantially higher than the book value per share of our common stock. Some elements of our market value do not originate from measurable transactions. Therefore, there is not a corresponding rise in book or historical accounting value for our rise in market value, if any. Examples of these elements include: . the perceived value associated with our strategic relationships; . the perceived growth prospects of our markets; and . our perceived competitive position within the market. We do not intend to pay dividends. We have never declared or paid any cash dividend on our capital stock, and we do not intend to pay dividends in the foreseeable future. We intend to invest our future earnings, if any, to fund our growth. Therefore, you will not receive any funds without selling your shares. You may not receive a return on your investment when and if you sell your shares and you may lose all or a substantial portion of your investment upon sale of your shares. Our revenue could be adversely affected if we suffer computer problems as a result of the year 2000 problem or if clients delay implementation of our products and services as a result of year 2000 problems. We have not experienced any year 2000 problems and have not been informed of any material year 2000 problems by our clients or vendors. However, the performance of our products may be impaired by the existence of any undiscovered year 2000 problems with our system or one of our client's systems. Although we cannot control the year 2000 compliance of our clients and their third party vendors, we may still be subject to claims and liability because our products provided incorrect data. These claims could divert our resources, and we may not have adequate commercial insurance to cover these claims. Further, we may not be able to resolve year 2000 problems that we may discover in our products before we suffer losses. In 1999, many companies devoted substantial financial resources to testing and fixing systems for year 2000 problems. Some companies may delay installation or implementation of new systems or applications to avoid having to perform additional year 2000 tests on their existing systems. If these companies also defer purchases of our products until their year 2000 problems have been tested or resolved, it will reduce our sales in the new term, which may harm our business. 20 CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS Some of the matters discussed under the captions Prospectus Summary, Risk Factors, Management's Discussion and Analysis of Financial Condition and Results of Operations, Business and elsewhere in this prospectus include forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events, including, among other things: . implementing our business strategy; . attracting and retaining clients; . obtaining and expanding market acceptance of the products and services we offer; . forecasts of Internet usage and the size and growth of relevant markets; and . competition in our market. In some cases, you can identify forward-looking statements by terminology such as may, will, should, could, predicts, potential, continue, expects, anticipates, future, intends, plans, believes, estimates and similar expressions. These statements are based on our current beliefs, expectations and assumptions and are subject to a number of risks and uncertainties. Actual results, levels of activity, performance, achievements and events may vary significantly from those implied by the forward-looking statements. A description of risks that could cause our results to vary appears under the caption Risk Factors and elsewhere in this prospectus. These forward-looking statements are made as of the date of this prospectus, and except as required under applicable securities law, we assume no obligation to update them or to explain the reasons why actual results may differ. 21 USE OF PROCEEDS The net proceeds we will receive from the sale of the shares of common stock offered by us are estimated to be between $ and $ or $ and $ if the underwriters' over-allotment option is exercised in full. This assumes the deduction of the underwriting discounts and commissions and the estimated offering expenses payable by us based on the initial public offering price of between $ and $ per share. We intend to use the net proceeds for: . acquiring domestic and international voter records; . increasing our sales and marketing efforts; . increasing our product development efforts; and . working capital and general corporate purposes. We have not yet determined the expected expenditures and thus cannot estimate the amounts to be used for each of these purposes. The actual amounts and timing of these expenditures will vary significantly depending on a number of factors, including the amount of cash used in or generated by our operations and the market response to the introduction of any new product or service offerings. In addition, we may use a portion of the net proceeds of this offering to acquire or invest in businesses, products, services or technologies complementary to our current businesses, through mergers, acquisitions or joint ventures. However, we have no specific agreements or commitments and are not currently engaged in any negotiations with respect to such transactions. Accordingly, our management will retain broad discretion as to the allocation of the net proceeds of this offering. We intend to invest the net proceeds of this offering in short-term, interest-bearing investment grade securities until they are used. DIVIDEND POLICY We have never declared or paid dividends on shares of our capital stock and do not anticipate paying any dividends in the foreseeable future. We currently intend to retain our earnings, if any, for the development of our business. 22 CAPITALIZATION The following table sets forth our capitalization as of December 31, 1999: . on an actual basis; . on an as adjusted basis giving effect to: . conversion of all shares of our Series A Preferred Stock outstanding as of December 31, 1999 into 1,272,727 shares of common stock, which will occur upon the closing of this offering; . the issuance of 112,050 shares of common stock from the conversion of our Notes payable-related parties into 112,050 shares of our Series A Preferred Stock, which will convert into common stock upon the closing of this offering; and . sale of shares of our common stock in this offering, assuming an offering price of $ per share, after deducting underwriting discounts and commissions and our estimated offering expenses of $ million. The presentation below does not include 423,047 shares of common stock issuable upon exercise of stock options outstanding as of December 31, 1999. You should read this information together with our financial statements and related notes appearing elsewhere in this prospectus.
As of December 31, 1999 ----------------------- Actual As Adjusted ------------- -------------- (In thousands, except share and per share data) Convertible preferred stock: Series A Preferred Stock, $0.001 par value, 1,400,000 shares authorized, 1,272,727 shares issued and outstanding, actual; no shares authorized, issued and outstanding, as adjusted.. $ 3,500 $ -- ------------- --------- Stockholders' equity: Common stock, $0.001 par value, 10,000,000 shares authorized; 3,000,000 shares issued and outstanding, actual; shares issued and outstanding, as adjusted........................................ 3 -- Additional paid-in capital........................ 410 -- Accumulated deficit............................... (2,429) -- ------------- --------- Total stockholders' equity (deficit).............. (2,016) -- ------------- --------- Total capitalization.............................. $ 1,484 $ -- ============= =========
23 DILUTION Our pro forma net tangible book value as of December 31, 1999 was approximately $ , or $ per share of common stock. We have determined pro forma net tangible book value per share by dividing pro forma stockholder's equity by pro forma shares of common stock outstanding as of December 31, 1999. The preceding pro forma information gives effect to the conversion of all shares of convertible preferred stock outstanding as of the date of this prospectus into 1,272,727 shares of common stock, and the issuance of 112,050 shares of common stock from the conversion of Notes payable-related parties into 112,050 shares of Series A Preferred Stock, which will convert into common stock upon the closing of this offering. If we sell shares of our common stock in this offering at an initial public offering price of $ per share and assume our receipt of the estimated net proceeds therefrom, our pro forma adjusted net tangible book value as of December 31, 1999 would have been approximately $ million, or $ per share. These numbers represent an immediate increase in such net tangible book value of $ per share to existing stockholders and an immediate dilution of $ per share to new investors. The following table illustrates this per share dilution. Initial public offering price per share............................... $ Pro forma net tangible book value as of December 31, 1999............. $ Increase per share of common stock attributable to the offering(1).... --- Pro forma net tangible book value after the offering(1)............... ---- Net tangible book value dilution to new investors(1).................. $ ====
- -------- (1) Does not include options to purchase our common stock outstanding as of December 31, 1999. As of December 31, 1999, there were options outstanding to purchase a total of 423,047 shares of common stock with a weighted average per share exercise price of $2.13 per share. To the extent that any of the options are exercised, there would be further dilution to new investors. The following table summarizes on a pro forma basis as of December 31, 1999, the total number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid by existing stockholders and by new investors, at an assumed initial offering price of $ per share and without giving effect to the underwriting discount and estimated offering expenses.
Total Average Shares Purchased Consideration Price ----------------- ------------------ Per Number Percent Amount Percent Share --------- ------- ---------- ------- ------- Existing stockholders........... 4,272,727 % $3,575,000 % $0.84 New investors................... --------- ----- ---------- ----- ----- Total......................... 100.0% $ 100.0% ========= ===== ========== =====
24 SELECTED FINANCIAL DATA The selected data presented below under the captions Selected Statement of Operations Data and Selected Balance Sheet Data for, and as of the end of, each of the years in the five-year period ended December 31, 1999, are derived from our financial statements. Our financial statements as of December 31, 1997 and 1998 and for each of the years then ended have been audited by Keller Bruner & Company, LLP, independent certified public accountants. Our financial statements as of December 31, 1999 and for the year then ended have been audited by KMPG LLP, independent certified public accountants. The financial statements as of December 31, 1998 and 1999, and for each of the years in the three-year period ended December 31, 1999, and the reports thereon, are included elsewhere in this prospectus.
Year Ended December 31, ------------------------------------------------------------ 1995 1996 1997 1998 1999 ----------- ---------- ---------- ---------- ----------- (Unaudited) Statement of Operations Data: Revenue: Products............... $ 1,397,821 $2,175,317 $1,187,812 $1,715,426 $ 2,815,431 Services............... 277,545 358,054 530,476 812,914 1,097,132 ----------- ---------- ---------- ---------- ----------- Total revenue.......... 1,675,366 2,533,371 1,718,288 2,528,340 3,912,563 ----------- ---------- ---------- ---------- ----------- Cost of revenue: Products............... 518,019 590,876 290,966 555,410 987,220 Services............... 126,536 162,848 100,420 123,564 262,844 ----------- ---------- ---------- ---------- ----------- Total cost of revenue.. 644,555 753,724 391,386 678,974 1,250,064 ----------- ---------- ---------- ---------- ----------- Gross profit............ 1,030,811 1,779,647 1,326,902 1,849,366 2,662,499 ----------- ---------- ---------- ---------- ----------- Operating expenses: General and administrative........ 1,976,250 1,469,097 856,905 1,253,200 2,654,033 Sales and marketing.... 527,013 757,633 817,697 1,195,237 1,633,054 Product development.... 210,839 243,412 116,313 93,143 398,097 ----------- ---------- ---------- ---------- ----------- Total operating expenses.............. 2,714,102 2,470,142 1,790,915 2,541,580 4,685,184 ----------- ---------- ---------- ---------- ----------- Loss from operations.... (1,683,291) (690,495) (464,013) (692,214) (2,022,685) Other income (expense), net.................... 2,039,569 71,076 65,496 634,544 75,178 Interest income......... 12,403 21,426 19 -- 40,199 Interest expense........ (9,956) (13,137) (24,506) (23,698) (7,263) ----------- ---------- ---------- ---------- ----------- Loss before income taxes.................. (358,725) (611,130) (423,004) (81,368) (1,914,571) Provision for (benefit from) income taxes..... 39,310 (209,767) (173,909) -- -- ----------- ---------- ---------- ---------- ----------- Net income (loss)....... $ 319,415 $ (401,363) $ (249,095) $ (81,368) $(1,914,571) =========== ========== ========== ========== =========== Basic and diluted net income (loss) per common share........... $ 0.11 $ (0.13) $ (0.08) $ (0.03) $ (0.64) =========== ========== ========== ========== =========== Shares used to compute basic and diluted net loss per common share.. 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000 =========== ========== ========== ========== =========== Pro forma unaudited basic and diluted net loss per common share.. $ =========== Shares used to compute pro forma unaudited basic and diluted net loss per common share.. =========== As of December 31, ------------------------------------------------------------ 1995 1996 1997 1998 1999 ----------- ---------- ---------- ---------- ----------- Balance Sheet Data: Cash and cash equivalents............ $ -- $ -- $ 24,444 $ 44,399 $ 2,404,956 Working capital (deficit).............. 188,535 (246,272) (438,385) (530,018) 1,296,416 Total assets............ 1,564,824 554,210 532,358 561,665 3,801,617 Deferred revenue........ 79,301 118,596 194,591 342,648 771,505 Total liabilities....... 1,256,124 662,799 890,042 1,000,717 2,317,650 Convertible preferred stock.................. -- -- -- -- 3,500,000 Stockholders' equity (deficit).............. 308,700 (108,589) (357,684) (439,052) (2,016,033)
25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis in conjunction with our financial statements and related notes included elsewhere in this prospectus. The discussion in this prospectus contains certain forward-looking statements that involve risks and uncertainties. The principal factors that could cause or contribute to differences in our actual results are discussed in the section titled Risk Factors. Overview We are a technology company that provides information, products and services to political campaigns, advocacy organizations and commercial enterprises. Over the past ten years, we have compiled a large database of over 145 million registered voters in the United States. This database is our core strategic asset. We believe this database would be very difficult to replicate because many voter jurisdictions have different authorization requirements and restrictions on gathering and disclosure of voter records. We use our database to provide campaign management and Internet marketing and to facilitate online fundraising. We also have created a database that contains records of over 37 million voters in the United Kingdom and a database that contains records from departments of motor vehicles throughout the United States. We believe that we are an industry leader in providing campaign management products and services and that we have significant knowledge and expertise in this field. To date, we have generated the majority of our revenue from our software products, Campaign Manager and PAC Manager, and our database products, consisting principally of information from voter records provided to candidates running for public office or political action committees, or PACs. Our Campaign Manager software and PAC Manager software are designed to help campaigns and PACs manage their constituent and contributor lists and comply with reporting requirements imposed by the Federal Election Commission, or FEC, or state reporting agencies. For clients not requiring customized software, we deliver our software products on a CD, and recognize revenue upon delivery. For clients requiring customized software, we recognize revenue based on a percentage of completion. We also provide software maintenance services and telephone support services related to the software. Our customer support contracts typically have a one-year term and revenue is recognized ratably over the term of the contract. Campaign and advocacy organizations extract a demographically, geographically or politically defined list of potential contributors or constituents from our databases. We provide this information through one of three means, by accessing information on our website, www.voterlistsonline.com, by modem download through a file transfer protocol, or by delivery of a CD. We recognize revenue at the time of delivery. During 1999, we developed and introduced two new services that use our registered voter file database: CampaignContribution.com and targeted Internet marketing. These new services did not generate significant revenue during 1999. We anticipate devoting substantial resources to increase sales for each of these services. CampaignContribution.com permits campaign and advocacy organizations to process contributions online. The products provide for acceptance, processing, authentication, analysis and disclosure of contributions made online. We process the contribution on behalf of the donee and remit the contribution, net of our fees, to the donee. For each contribution, we charge a fee equal to a percentage of the transaction, plus a set cost per transaction. We recognize revenue based on only the fees charged to the donee. Our targeted Internet marketing services permit our clients to target potential constituents, based on demographic and geographic data. Our clients typically sign contracts where the fee is calculated based upon the number of impressions delivered. We recognize revenue based on delivery of impressions. We have incurred net losses and negative cash flows for each of the past three years. As of December 31, 1999, we had an accumulated deficit of $2.4 million. We had a net loss of $249,000 for the year ended 26 December 31, 1997, $81,000 for the year ended December 31, 1998, and $1.9 million for the year ended December 31, 1999. We intend to continue to invest in our technology and infrastructure, including significant investments in our databases. We also intend to increase our expenditures relating to sales and marketing and product development activities. As a result, we believe we will continue to incur operating losses and negative cash flows from operations and the rate at which these losses will be incurred may increase from the current level. Results of Operations The following table sets forth statement of operations data as a percentage of total revenue for the periods indicated. The historical results are not necessarily indicative of results to be expected for any future period:
Year Ended December 31, -------------- 1997 1998 1999 ---- ---- ---- Revenue: Products.................................................. 69% 68% 72% Services.................................................. 31% 32% 28% ---- ---- ---- Total revenue........................................... 100% 100% 100% Cost of revenue: Products.................................................. 17% 22% 25% Services.................................................. 6% 5% 7% ---- ---- ---- Total cost of revenue................................... 23% 27% 32% Gross margin: Products.................................................. 52% 46% 47% Services.................................................. 25% 27% 21% ---- ---- ---- Total gross margin...................................... 77% 73% 68% Operating expenses: General and administrative................................ 50% 50% 68% Selling and marketing..................................... 48% 47% 42% Product development....................................... 7% 4% 10% ---- ---- ---- Total operating expenses................................ 105% 101% 120%
Years Ended December 31, 1998 and 1999 Revenue. Total revenue, which consists of products revenue and services revenue, increased 55% from $2.5 million for the year ended December 31, 1998 to $3.9 million for the year ended December 31, 1999. Products revenue increased 64%, from $1.7 million for the year ended December 31, 1998 to $2.8 million for the year ended December 31, 1999. This increase was attributable primarily to purchases by the NRA of voter data in the amount of $807,000. Additional increases were attributable to a new release of multi- user versions of our Campaign Manager and PAC Manager software products and an overall increase in usage of our registered voter files due to an increased number of jurisdictions from which voter records were acquired. Services revenue increased 35% from $813,000 for the year ended December 31, 1998 to $1.1 million for the year ended December 31, 1999. This increase was attributable primarily to an increase in the number of software support contracts signed during 1999. Cost of revenue. Cost of revenue consists of cost of products revenue and cost of services revenue. Cost of products revenue consists primarily of external costs associated with acquisition, enhancements, updates and maintenance of voter records, as well as personnel costs associated with programming and customization of our software. Cost of services revenue consists primarily of personnel costs associated with our customer support department. 27 Total cost of revenue increased 84% from $679,000 for the year ended December 31, 1998 to $1.3 million for the year ended December 31, 1999. Cost of products revenue increased 78% from $555,000 for the year ended December 31, 1998 to $987,000 for the year ended December 31, 1999. This increase was attributable primarily to significant increases in the number of voter records in our database. Additional increases were due to increases in the number of personnel and increased compensation costs associated with data acquisition labor. We expect future increases in our data acquisition costs related to both the acquisition of the data and the labor associated with the department. Cost of services revenue increased 113% from $124,000 for the year ended December 31, 1998 to $263,000 for the year ended December 31, 1999. This increase was attributable primarily to increases in personnel costs expended to significantly improve the capabilities of our customer support department. We expect costs associated with our customer support department to increase in absolute dollars and may increase as a percentage of revenue. Gross margin. Total gross margin percentage decreased from 73% for the year ended December 31, 1998 to 68% for the year ended December 31, 1999. Products gross margin percentage decreased from 68% for the year ended December 31, 1998 to 65% for the year ended December 31, 1999. This decrease was attributed primarily to increases in our data acquisition costs. Services gross margin percentage decreased from 85% for the year ended December 31, 1998 to 76% for the year ended December 31, 1999. This decrease was attributed to a substantial increase in the number of our personnel in our customer support department. General and administrative expense. General and administrative expense consists primarily of management and support personnel expenses as well as facilities and professional fees. General and administrative expense increased 112% from $1.3 million for the year ended December 31, 1998 to $2.7 million for the year ended December 31, 1999. This increase was attributable primarily to changes in corporate infrastructure including increased headcount and facilities. We expect general and administrative expense to continue increasing as we continue to build and maintain our corporate infrastructure. Selling and marketing expense. Selling and marketing expense consists primarily of compensation costs associated with our sales and marketing personnel and associated benefits. Additional expenses include sales commissions and bonuses and advertising and promotions expense. Selling and marketing expense increased 37% from $1.2 million for the year ended December 31, 1998 to $1.6 million, for the year ended December 31, 1999. This increase was attributable primarily to increases in headcount and commission expense due to increased sales and expenses associated with producing marketing materials. We expect sales and marketing expense to continue increasing in absolute dollars. Product development expense. Product development expense consists primarily of employee compensation costs and related benefits associated with the development of our new products. Product development expense increased 327% from $93,000 for the year ended December 31, 1998 to $398,000 for the year ended December 31, 1999. This increase was attributable primarily to an increase in our headcount for new product and services development. We believe that a significant level of product development is required to remain competitive, and expect that the dollar amount of these expenses will continue to increase in future periods. Equity based compensation expense. We recorded equity-based compensation expense of $256,000 associated with options granted during 1999. We did not incur similar expense in 1998. We expect to incur equity-based compensation expense associated with the issuance of options with an exercise price less than market value from 2000 to 2005. This expense is allocated among the various components of cost of revenue and operating expenses. 28 Other income. During the year ended December 31, 1998, we received a cash payment from a legal settlement in the amount of $650,000 which we used to supplement our cash flow from operations. Interest income and interest expense. Net interest changed $57,000 from $24,000 in net interest expense for the year ended December 31, 1998 to $33,000 in net interest income for the year ended December 31, 1999. This change was a result of increases in cash available for short-term investments, which resulted principally from the sale of our Series A Preferred Stock in September 1999. Interest expense includes interest costs incurred on personal loans made by our stockholders. Income taxes. We did not pay income taxes during the years ended December 31, 1998 and 1999. As of December 31, 1999, we had a net operating loss carryforwards of approximately $1.9 million that expire through 2019. Years Ended December 31, 1997 and 1998 Revenue. Total revenue increased 47% from $1.7 million for the year ended December 31, 1997 to $2.5 million for the year ended December 31, 1998. Products revenue increased 44% from $1.2 million for the year ended December 31, 1997 to $1.7 million for the year ended December 31, 1998. This increase was attributable primarily to a phase out of our non-Windows based products, which necessitated that clients adopt updated versions of our Campaign Manager and PAC Manager software, and an increase in the number of jurisdictions for which we offered voter file data. Services revenue increased 53% from $530,000 for the year ended December 31, 1997 to $813,000 for the year ended December 31, 1998. This increase was attributable to an increase in the number of software contracts. Cost of revenue. Total cost of revenue increased 73% from $391,000 for the year ended December 31, 1997 to $679,000 for the year ended December 31, 1998. Cost of products revenue increased 91% from $291,000 for the year ended December 31, 1997 to $555,000 for the year ended December 31, 1998. This increase was attributable primarily to significant increases in the number of voter records in our database. Additional increases were due to increases in the number of personnel and increased compensation costs associated with data acquisition labor. Cost of services revenue increased 23% from $100,000 for the year ended December 31, 1997 to $124,000 for the year ended December 31, 1998. This increase was attributable primarily to increases in personnel costs. Gross margin. Total gross margin percentage decreased from 77% for the year ended December 31, 1997 to 73% for the year ended December 31, 1998. Products gross margin percentage decreased from 76% for the year ended December 31, 1997 to 68% for the year ended December 31, 1998. This decrease was attributable primarily to increases in our data acquisition costs. Services gross margin percentage increased from 81% for the year ended December 31, 1997 to 85% for the year ended December 31, 1998. This increase was attributable to increases in the number of support contracts. General and administrative expense. General and administrative expense increased 46% from $857,000 for the year ended December 31, 1997 to $1.3 million for the year ended December 31, 1998. This increase was attributable primarily to changes in our corporate infrastructure including increasing personnel and expenses related to our facilities. Selling and marketing expense. Selling and marketing expense increased 46% from $818,000 for the year ended December 31, 1997 to $1.2 million for the year ended December 31, 1998. The increase was attributable primarily to increases in our sales and marketing headcount and increases in bonuses and commissions. 29 Product development expense. Product development expense decreased 20% from $116,000 for the year ended December 31, 1997 to $93,000 for the year ended December 31, 1998. This decrease was attributable primarily to a decline in the average headcount in this department during the year. Interest income and expense. Net interest expense decreased 3% from $25,000 for the year ended December 31, 1997 to $24,000 for the year ended December 31, 1998. Income taxes. We did not pay income taxes during the years ended December 31, 1997 and 1998. As of December 31, 1998, we had a net operating loss carryforwards of approximately $44,000 that will expire in 2018. Liquidity and Capital Resources We had working capital of $1.3 million as of December 31, 1999. As of December 31, 1999, we had $2.4 million in cash and cash equivalents consisting of bank deposits and money market funds. Historically, our cash requirements have been financed through a combination of cash flow from operations, $3.5 million received upon the sale of Series A Preferred Stock in September 1999, and loans from our principal stockholders. Additionally, we have supplemented our cash from operations by receipt of two legal settlements of approximately $2.0 million in 1995 and $650,000 in 1998. As of December 31, 1999, we had accounts receivable of $1.0 million. Of this amount, approximately $500,000 was attributable to the sale of our voter records to a single client and was collected after the year end. The remaining $500,000 is attributable to sales of our campaign products and services to candidates, including candidates for the 1999-2000 presidential elections. Some of these candidates rely on matching funds from the federal government in order to pay the expenses of their campaigns. We expect to collect all or substantially all of these accounts receivable in 2000; however, the terms of the collection of these accounts may adversely affect our cash flow. The Series A Preferred Stock will automatically convert to 1,272,727 shares of common stock upon the closing of an initial public offering that raises at least $15.0 million in aggregate proceeds. In September 1999, our principal stockholders converted deferred compensation and other working capital advances into a convertible promissory note in the amount of $308,000. Concurrent with the closing of this offering, this note will be converted into 112,050 shares of common stock. For the year ended December 31, 1997, cash used by operations was $7,000, primarily attributable to net losses from operations of $249,000 and an increase in accounts receivable of $164,000, partially offset by a decrease in income tax refund receivable of $153,000 and an increase in accrued expenses of $103,000. For the year ended December 31, 1998, cash provided by operations was $116,000, primarily attributable to an increase in deferred revenue of $148,000 and a decrease in income tax receivable of $94,626, partially offset by an increase in prepaid expense on current assets of $101,000, a decrease in accounts payable of $96,000 and a net loss of $81,000. For the year ended December 31, 1999, cash used by operations was $1.1 million, primarily attributable to a net loss from operations of $1.9 million and an increase in accounts receivable of $900,000, partially offset by increases in accounts payable of $590,000, deferred revenue of $429,000 and accrued expense of $301,000. Our investing expenditures for our business have included capital expenditures totaling $12,000 for the year ended December 31, 1997, $115,000 for the year ended December 31, 1998 and $149,000 for the year ended December 31, 1999. These capital expenditures were incurred primarily to acquire computer hardware and software for our operations and internal use, as well as to expand our existing and newly leased space to accommodate increases in our employee headcount. We expect that as our client base and employee base grow, we will require additional computer hardware and software and we will incur additional expenses in leasehold improvements to accommodate existing and future leased spaces. 30 For the year ended December 31, 1997, cash provided by financing activities was $43,000, attributable primarily to proceeds from loans from stockholders, partially offset by repayments on loans from stockholders. For the year ended December 31, 1998, cash provided by financing activities was $18,000, attributable primarily to proceeds from loans from stockholders, partially offset by repayments on loans from stockholders. For the year ended December 31, 1999, cash provided by financing activities was $3.6 million, attributable primarily to proceeds from the issuance of Series A Preferred Stock of $3.5 million and proceeds from loans from stockholders of $196,000, partially offset by repayments on loans from stockholders of $129,000. We intend to invest the net proceeds of this offering in short-term, investment grade securities. We believe that the net proceeds from this offering, together with cash on hand, cash equivalents and borrowings, will be sufficient to meet our operating and capital requirements for at least the next 18 months. If our plans change due to changes in market conditions, competitive factors or new opportunities that may become available in the future, or if our assumptions change or prove to be inaccurate, or if the net proceeds of this offering or our cash flows prove to be insufficient to finance our growth strategy, we may be required to seek additional financing. Furthermore, we may need to seek additional financing to expand our operations in the future. Year 2000 Issues We currently are not aware of any year 2000 problem in any of our critical systems and products. However, the success to date of our year 2000 efforts cannot guarantee that a year 2000 problem affecting third parties upon which we rely will not become apparent in the future and interfere with our operations or otherwise harm our business. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities. The new standard establishes accounting and reporting standards for derivative instruments embedded in other contracts and for hedging activities. This statement, as amended, is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. The Company does not expect SFAS No. 133 to have a material affect on its financial position or results of operations. In March 2000, the Financial Accounting Standards Board issued FASB Interpretation No. 44, or FIN 44, Accounting for Certain Transactions Involving Stock Compensation. FIN 44 further defines the accounting consequence of various modifications to the terms of a previously fixed stock option or award under APB Opinion No. 25. FIN 44 becomes effective on July 1, 2000, but certain conclusions in FIN 44 cover specific events that occur after December 15, 1998 or January 12, 2000. We have not completed our evaluation of the impact of FIN 44 on our financial position or results of operations. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements. This SAB expresses the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. Registrants can apply the accounting and disclosure requirements of this SAB retrospectively, or may report a change in accounting principle no later than the first fiscal quarter of the fiscal year beginning after December 15, 1999. The Company does not expect the application of this SAB to have a material impact on the Company's financial statements. 31 BUSINESS Overview We are a technology company that provides information, products and services to political campaigns, advocacy organizations and commercial enterprises. Over the past ten years, we have compiled a large database of over 145 million registered voters in the United States. This database is our core strategic asset. We believe this database would be very difficult to replicate because many voter jurisdictions have different authorization requirements and restrictions on gathering and disclosure of voter records. We use our database to facilitate campaign management, Internet marketing and online fundraising. We also have created a database that contains records of over 37 million voters in the United Kingdom and a database with records from departments of motor vehicles. We believe that we are an industry leader in providing campaign management products and services and that we have significant knowledge and expertise in this field. Our products and services are designed to service the following three markets: . political campaigns or parties on the federal, state and local level; . advocacy organizations, including political action committees, or PACs, non-profit organizations and issue-oriented organizations; and . commercial enterprises. As of April 30, 2000 our clients include over 50 U.S. Senators, over 200 members of the U.S. House of Representatives, approximately 46 Democratic and Republican state parties and numerous national advocacy groups and consulting firms. Furthermore, of the top 50 Senate and top 50 House of Representative fundraisers for the 1999-2000 election cycle, as recorded by the Federal Election Committee, or FEC, as of May 2000 72% of the Senate candidates and 66% of the House candidates used at least one of our products or services. Our clients use our products and services to reach their audiences based on demographic, geographic or political criteria. Our campaign and advocacy clients use our software products to maintain lists of voters, contributors, prospective contributors, volunteers, members of the press and community organizers, and to comply with the reporting regulations of the FEC and state government agencies. Our targeted marketing clients use our products and services to combine our databases and software to reach potential constituents and supporters, generate campaign awareness and solicit contributions through the Internet, telephone, mail or door-to-door efforts. Industry Background The importance of sophisticated databases to facilitate communication through the Internet. The Internet has rapidly emerged as an important medium for facilitating communication, conducting commerce and gathering and disseminating information. International Data Corporation, or IDC, estimates that the number of worldwide Internet users exceeded 142 million in 1998 and will grow to approximately 502 million by 2003. IDC also estimates that worldwide commerce over the Internet will grow from approximately $50.4 billion in 1998 to approximately $1.3 trillion by 2003. As Internet usage has grown, the need for sophisticated databases to manage vast quantities of mission-critical information has significantly increased. These databases are used for various purposes, including: . targeted Internet and direct marketing; . authenticating identity for e-commerce transactions; . obtaining prospect lists online; and . electronic directory assistance or reference services. 32 A major challenge for organizations building databases is the gathering and maintaining of sufficient, valuable and accurate information. Building and maintaining comprehensive and accurate databases often requires a significant investment of resources and may require many years to complete. Organizations spend millions of dollars each year to acquire and maintain data on residents of the United States and other countries from traditional sources, including direct mail responses, telephone surveys, warranty cards and product information cards, as well as the Internet. For example, many organizations incur substantial advertising costs to attract visitors to their websites in order to build and enhance their database of user profiles. The information gathered through traditional means or through the Internet may be incomplete or inaccurate. Further, many organizations may only be able to obtain information for limited demographic segments or geographic regions. Organizations also incur costs compiling this data into usable formats and developing or configuring sophisticated software to manage their data. Ability of technology to facilitate management of campaign and advocacy organizations. Campaign and advocacy organizations are increasingly adopting new technologies to organize and communicate with constituents and supporters. The operation of campaign and advocacy organizations requires intensive efforts involving both professionals and volunteers who use large quantities of data. As the cost of communicating with constituents and supporters increases, these campaign and advocacy organizations are under increasing pressure to use information management tools and accurate databases to affect the outcome of elections or influence legislation. Comprehensive and accurate databases enable campaign and advocacy organizations to concentrate their communication efforts on those constituents able, and most likely, to support their efforts. With the increasing cost of campaigns and the proliferation of issues, many organizations now conduct fundraising efforts and operate on a year-round basis. These organizations raise funds for a variety of purposes, including: . media relations; . lobbying activities; . targeted constituent outreach programs; and . additional fundraising. Many of these organizations are seeking more efficient means of attracting and identifying potential supporters, soliciting funds and reporting information about their contributors to federal, state and local governments. At the federal and state levels, these organizations are increasingly regulated and are required by law in most jurisdictions to disclose the amount of receipts and disbursements, the amount and source of loans and the amount, source, employer and occupation of contributors. Advantages of targeted Internet marketing. In addition to campaign and advocacy organizations, commercial entities are also seeking new technologies to lower marketing costs and increase marketing effectiveness. To do this, many of these entities are increasingly using the Internet as a more effective and lower cost alternative to traditional media and for providing targeted marketing to potential client. Further, targeted Internet marketing enables entities to more easily generate public awareness of products, services or particular issues within specific demographic, geographic or political segments. Unlike traditional media, the Internet facilitates immediate feedback that enables these entities to continually optimize the effectiveness of their marketing and advertising strategies and evaluate the return on their expenditures. We believe that targeted Internet marketing has the potential to be more cost-effective, as well as easier to develop and implement, than traditional direct marketing or advertising campaigns. Our Solution Our databases, products, services and technology provide campaign and advocacy organizations, regardless of party affiliation, with campaign management, targeted Internet marketing, online fundraising and voter 33 authentication solutions. Our software is designed to extract and manipulate information from our databases about specific population demographics. Our clients include major political candidates, as well as advocacy groups, non- profit organizations and direct marketing firms. Our databases. Our databases, which we regard as our key assets, have been built and maintained over the past ten years and contain over 145 million domestic voter records, 37 million voter records from the United Kingdom and an aggregate of over 50 million departments of motor vehicle records in the United States. The registered voter records can contain information provided by the voter at the time of registration. In many jurisdictions this information may include: . date of birth; . date of registration; . residence address; . political jurisdiction; and . party affiliation. Where available, we have enhanced the records in our databases to include demographics not contained in the voter records. Examples of these enhancements include: . listed telephone number; . estimated income level; . ethnic surname; and . homeowner or renter status. Our comprehensive campaign management solutions. Our campaign and advocacy clients use our software to manage their organizations by maintaining their lists of voters, contributors, prospective contributors, volunteers, members of the press and community organizers in one database. Our clients also use our software to comply with FEC and state disclosure requirements. Technical support is available at our website or by a toll-free call 24 hours a day, seven days a week. Clients use our databases and software to target potential constituents and supporters, generate campaign awareness and solicit contributions through the Internet, or by telephone, mail or door-to-door efforts. We provide campaign and advocacy organizations with cost-effective tools to facilitate online fundraising. Campaign and advocacy organizations wishing to drive traffic to their websites, or to the website of a legislator they wish to influence, may purchase banner advertisements directed to constituents nationally or just those who reside in a particular state, congressional district or town. Targeted Internet marketing. We are using our databases as a targeted Internet marketing tool to allow our clients to reach their audience based on demographic, geographic or political criteria. We believe that our targeted marketing will increase clients' awareness and traffic flow to their websites in a more cost-effective manner than alternative online advertising or traditional media, such as mass mailings. Strategy Our goal is to become a leading provider of targeted Internet marketing and to expand our position within the campaign and advocacy industries. We intend to pursue our goal by the following actions: Continue to enhance size and quality of our databases. We believe that we have established one of the most comprehensive databases of voter records in the United States. We intend to continue to enhance the size and quality of our domestic databases by continuing to access domestic voter records, departments of motor 34 vehicle records and other records. We intend to continue to improve upon already established relationships with various state and local agencies in order to increase our efficiency in collecting and updating our voter records. By combining our frequently updated database with new database technologies and demographic targeting techniques, we believe that we will be able to offer our clients increasingly effective and comprehensive methods for targeting their intended audiences. Increase applications for our databases. Our clients can use our products and services to increase the efficiency of their marketing and fundraising efforts. We intend to use our database technologies and expertise to expand our service offerings to include targeted Internet marketing. By building relationships with Internet Service Providers, or ISPs, Web portals and third party ad- servers, we intend to assist our clients in increasing traffic to their websites by using targeted banner ads to customize advertising efforts for specific political, demographic and commercial segments. Further, we believe that there are other attractive potential uses for the information contained in our database. In addition to expanding our targeted Internet marketing in the commercial context, these opportunities, where permitted by law, include providing: . government mandated age authentication for use by websites in need of a verification tool for their user base, in order to protect children from products or communications intended for adults; . access to voter records online; and . online directory assistance or reference services. Expand the scope of our comprehensive fundraising solutions. We intend to continue to provide our clients with an effective means of campaign and advocacy fundraising by expanding the functionality of our campaign management Internet and software solutions. Specifically, we intend to provide our clients with solutions that more efficiently: . target prospective contributors; . accept, process, authenticate, analyze and disclose contributions received through Internet, direct and telephone marketing efforts as well as special events and PACs; . manage their contributor and constituent response efforts; . recruit volunteers and community members; and . enhance their press and public relations activities. Extend international databases. We intend to use our database technology and expertise to offer our products and services on an international scale. We recently acquired the voter records, or Electoral Roll, of the United Kingdom, which consists of records of over 37 million persons. We intend to build our international database by enhancing our United Kingdom records and acquiring voter records from other countries. We have had discussions with possible strategic partners in the following countries: . Australia . Italy . South Africa . Austria . Japan . South Korea . Canada . The Philippines . Spain . France . Poland . Switzerland . Germany . Russia
We also plan to enter into discussions with potential partners in other countries throughout Africa, Asia, Europe and South America in order to expand our databases. Broaden our sales and marketing efforts. To broaden our market coverage and expand our service offerings, we intend to continue to grow our sales and marketing organization to target new industries in the United States and internationally. We intend to complement our current staff of trained professionals with additional qualified personnel, including category sales and international specialists. We intend to focus on 35 expanding our current sales and marketing reach, cross-selling our software and Internet solutions and developing our sales and marketing efforts for new products and services. Products and Services We intend to continue to use our databases and installed client base to expand the use of multiple products among our existing clients and to increase the number of new clients using one or more of our integrated suites of products. Our products and services, which are listed by revenue produced during the year ending December 31, 1999, are described below: Political software. We are a leading provider of political management software to campaigns and PACs. Our Campaign Manager software is a database management program that facilitates the creation and manipulation of lists of a campaign's contributors, supporters, constituents, volunteers, press contacts and organizers. The program maintains the information necessary to submit disclosure reports that comply with the reporting requirements of federal and state agencies, including the FEC. Our programs are continuously upgraded to provide an interface between a campaign's database and popular word processing and email programs, and keep abreast of changing campaign disclosure regulations. Our PAC Manager software is used to maintain supporter lists and comply with disclosure requirements imposed by federal and state disclosure agencies. The program is used by more than 50 PACs to file federal or state reports. For the years ended December 31, 1997, 1998 and 1999, we derived revenue of approximately 47%, 43% and 39% from the sale of our Campaign Manager and PAC Manager software and related services. Voter lists. We provide our clients with enhanced lists of registered voters, in many formats, as requested. Users may order, pay for and obtain a list of constituents at our website, www.voterlistsonline.com. Clients input specific criteria related to the list of voters they wish to obtain directly at our website and after performing a search and viewing the results, a client can obtain the requested listing formatted as mailing labels, telephone sheets, walk lists, a polling sample or a file suitable for import into many popular software programs. We collect data to enhance our database from several sources, including Central Address Systems, Inc., or CAS. CAS provides us with the following data enhancements: . phone number verification; . inferred income; . presence of children; and . homeowner or renter status. This contract automatically renews annually unless notice of termination is provided by either party. Our failure to continue to obtain data from this source, if we cannot obtain it from an alternative source, may adversely affect our ability to maintain our enhanced database. For the years ended December 31, 1997, 1998 and 1999, we derived revenue of approximately 18%, 24% and 47% from the sale of our voter files. Online fundraising. CampaignContribution.com, or CC.com, facilitates Internet-based contributions to campaign and advocacy organizations. CC.com provides for the acceptance, processing, authentication, analysis and disclosure of contributions made at organizations' websites. Electronic directory assistance or reference services. Our www.governmentrecords.com service facilitates access by users to our databases of voter record information provided by state and local boards of 36 elections and departments of motor vehicles. Our website acts as a search engine to locate individuals or groups of records based on criteria specified by the user. Our primary marketing efforts for this service are aimed at government agencies, litigation support services, law firms and insurance companies. Targeted advertising. Using our database to customize their advertising efforts, our clients can reach up to 150 million individuals nationwide, representing an estimated 70% of the citizens of the United States age 18 or older. We also use geographic and demographic attributes from our database to deliver advertising to individuals online. We place our targeted banner advertisements through Web portals and third party ad-servers. To date, we have not received any material revenue from sales of our targeted marketing efforts. We have a two-year contract with MatchLogic, Inc., a subsidiary of Excite, under which we are obligated to purchase advertising space from MatchLogic and match our database with MatchLogic's database for targeted advertising. In connection with this agreement, we plan on selling the advertising space we purchase to our clients for their banner advertisements. Under the terms of the contract, either party may terminate the contract upon sixty days notice if the other party materially breaches the terms of the contract, or if less than $1,000,000 in advertisement fees are generated by October 2000. Further, under terms of the agreement, MatchLogic can refuse to serve any ads we may sell. We also have purchasing arrangements for ad-server space with one other third- party ad-server; however, we do not have any contractual rights to receive ad- space with this third-party server or any other third party ad-server, Web portal or ISP. We depend on securing space in order to place any targeted banner ads we might sell. Emerging and Prospective Products and Services Our knowledge of the market, client base and databases may give us the opportunity to provide clients with additional products and services. These products and services include: Age authentication. With the consent of the individual involved, our databases may be used for age authentication required by governmental agencies or sought by commercial entities wishing to regulate access to their website. For example, this age authentication tool could be used by a website to protect children from products or communications intended for adults. International campaign services. We have developed a database consisting of voter records of the United Kingdom, and intend to expand our databases to include voter records of other countries. A potential opportunity for using these international databases exists in established and emerging democracies where candidates and organizations are looking to implement U.S.-style campaigns. Web Wizard. We have developed a Web creation tool that facilitates the creation of websites. The tool is designed to meet the needs of smaller campaign and advocacy organizations that wish to establish a Web presence without retaining a professional Web design firm. Internet voting services. Although in its earliest stages, we are exploring the possibility of providing new products and services to registrars and secretaries of state to register and authenticate votes cast on the Internet. Sales and Marketing We sell our products and services in the United States and the United Kingdom through our sales and marketing team. As of April 30, 2000, our sales and marketing team consisted of 39 employees. Our sales and marketing team is organized by industry and geographic region. We believe we have assembled a sales and marketing staff that is well trained and experienced in their industries, thus possessing the skills required to provide our clients with the best software and targeted marketing solutions. We have developed an internal, custom-made training program for all new sales representatives to ensure that they are trained on our products and services and in their industries. Our sales and marketing personnel use a variety of marketing programs to generate demand for our products and services, build market awareness, develop customer leads and establish business relationships. Our 37 marketing activities include television ads, public relations, print advertisements. Our direct marketing activities include seminars, trade shows, special events, sponsorships and ongoing client communications programs. We also have consulted with advertising experts to assist us in learning more about our clients, through the use of focus groups within our clients' industries. Based on the information gathered through these efforts, we tailor marketing programs to address our clients' specific concerns and needs. Clients Our current principal client list consists of campaigns, advocacy and commercial clients. As of April 30, 2000, our clients include over 50 U.S. Senators, over 200 members of the U.S. House of Representatives, approximately 46 Democratic and Republican state parties and numerous national advocacy groups and consulting firms. Furthermore, of the top 50 Senate and top 50 House of Representative fundraisers for the 1999-2000 election cycle, as recorded by the FEC as of May 2000, 72% of the Senate candidates and 66% of the House candidates used at least one of our products or services. For the year ending December 31, 1999, the NRA accounted for approximately $807,000, or 21%, of our revenue. Other than described in the preceding sentence, we have not derived ten percent or more of our revenue from any single client in any fiscal year from 1997 to 1999. Customer Service Our software clients receive software maintenance and telephone support at no additional charge for 90 days from the date the software is delivered to the client. Thereafter, clients may choose to discontinue maintenance and telephone support, purchase maintenance only, or purchase maintenance and telephone support for a 12- or 24-month period. Maintenance consists of all updates to the software including changes made to keep the software in compliance with federal and state disclosure requirements. Telephone support allows the client to call an 800 number and request assistance 24 hours a day seven days a week. We currently have more than 350 clients under maintenance and telephone support, including federal and state candidates, PACs and associations, and national, state or local political parties. Our clients can also access our customer service department through our website www.aristotle.com and can email support questions to support@aristotle.com. As of April 30, 2000, we employed nine customer support representatives. These representatives are trained in both the technical aspects of software, data and networking and the political or organizational imperatives of our clients. Representatives handle client telephone calls in a help-desk role and are responsible for proactive customer service. They are also assigned a list of PAC or state party clients or clients in a specific geographic region for whom they serve as a primary contact, consultant and project manager. Clients call the help-desk for assistance with day-to-day questions or problems. If a problem or concern escalates, it is transferred to the representative responsible for that client. Product Development Based upon client feedback, competition and market analysis, our Internet services product group determines functions and specifications for future Internet-based services and enhancements to our current services. Our product development group develops these new services and enhances existing services. We have developed a managed release process for our Internet and software products to assist clients in the adoption of new product releases. This process includes testing and evaluating revisions, updating online and paper documentation to include new features, training customer support personnel and notifying and training customers. 38 Our product development department updates our software on a continuous basis. The software changes include updates to incorporate new FEC and state reporting requirements and enhancements to product features and performance. As of April 30, 2000, our product development group consisted of 20 full time employees. For the year ended December 31, 1999, we spent approximately $398,000 on product development activities. Government Regulation and Privacy Concerns We are subject to extensive government regulation, including: Federal regulation of databases. Our publication of departments of motor vehicle records is regulated by the Drivers Privacy Protection Act of 1994, or DPPA. The DPPA restricts our clients' use of this data to specific uses, including government use, and requires us to keep specific records of our sale of this data. The Federal Election Campaign Act of 1974 and FEC regulations prohibit the use of data regarding federal contributions that we publish for solicitation or other business purposes. State regulation of databases. Our publication of voter lists is regulated by the laws of the jurisdictions from which these records are obtained. While jurisdictions in which approximately one-half of the registered voters in the United States reside do not limit the use of voter records, the remaining jurisdictions generally limit the use to government and political purposes. Further, access to the voter lists is restricted in a small number of jurisdictions. Our publication of departments of motor vehicle records is subject to the laws of the states from which the records are obtained. Many of these state laws restrict the uses to which the data may be used by our clients, and require us to meet record-keeping standards for any sales of the data. International regulation. Currently, there are almost no government regulations on the collection and use of data about registered voters in the United Kingdom. However, the United Kingdom is currently implementing regulations that would limit access to and use of the complete Electoral Roll. As we expand our international products and services, we may also face government restrictions on our collection and use of data from other foreign jurisdictions. Precedent for use of our databases for age authentication. We are not aware of any government regulation limiting the use of our databases to authenticate an individual's age or identity through voter or departments of motor vehicle records with that person's consent. However, age and identity verification through use of voter or departments of motor vehicle records contained electronically in a database is a new and emerging field and government regulations may be adopted to limit these activities. Privacy concerns. We collect and compile information in our databases that we use in connection with our campaign products and services and for our targeted marketing products. Although we collect a significant portion of this information from public records, we also rely on commercial data collection efforts to enhance our records. Although we believe that we have the right to use and compile the information in these databases, our ability to do so may not remain lawful and there may be no trade secret, copyright or intellectual property protection that is available or becomes available for databases that enhances our rights. In addition, third parties may assert claims to information contained in our databases. There is also a substantial risk that public perception and approval of the use of information acquired through the Internet to engage in commercial purposes, including targeted marketing, may deteriorate. Public concern of targeted marketing techniques. The practice of matching offline marketing databases, and in particular personal medical or financial information, to website visitation patterns, or click-stream behavior, is highly controversial. This controversy has resulted in scrutiny of all targeted marketing where offline information is matched to personally identifiable information and where the informed consent of the individual has not first been obtained. While we use a public record database that does not contain information of a confidential nature, and we prohibit the linking of our databases to click-stream information, public 39 controversy engendered by questionable practices may limit our ability to deliver our services or secure sufficient inventory to place our clients' banner advertisements. Technology We use high performance SQL servers running Microsoft Windows NT to maintain our databases. Our systems employ commercially available technology and commercial payment processing services, including CyberCash, Signio/Telecheck and VeriSign. Our systems can be scaled to meet increased requirements for security, reliability, performance, expandability and affordability. Although we currently rely on employees and consultants to service our systems, if our network system demands increase, we may elect to out-source our network services to third-party providers. Our technology is designed to provide a high level of data security. Our operating system tracks all login attempts to prevent unauthorized usage. We also employ password and firewall protection to control access to sensitive information contained in our system. Competition We believe that we face competition in two major categories, including: Campaign and advocacy solutions providers. We face competition in various forms from within the campaign and advocacy solutions industries. Within these industries, our competitors are focused on the following areas: . software--Gnossos, Hannibal, NetFile, state and federal agencies that distribute compliance software at little or no cost to registered political committees and internally developed software; . voter files--Labels and Lists, Voter Contact Services, Blaemire Associates, Republican National Committee, state parties, local, county and state clerks and elections administrators and numerous smaller data providers; and . campaign contributions--Netivation, Campaign Solutions, Politicsonline and e-Contributor.com. We may also face competition from consultants to campaign and advocacy organizations. Many of our competitors offer lower prices, and some have closer or longer- standing relationships with potential clients, greater financial resources, or, in the case of state or local jurisdictions, easier or less expensive access to the registered voter data. We believe that the principal competitive factors in these markets include quality and size of database, functionality of software and contribution processing services, availability of technical support and the effectiveness of a sales force. Advertisers. The online advertising market is extremely competitive. We believe our ability to compete depends upon many factors both within and beyond our control, including the following: . timing and market acceptance of new and upgraded products and services developed either by us or our competitors; . continued and increasing acceptance by advertisers of targeted Internet marketing as an effective and cost-efficient means of marketing; . ability to adapt to the rapidly changing trends of the Internet; . our customer service and support efforts; . our sales and marketing efforts; . our ability to adapt and scale our technology as client needs change and grow; and . ease of use, performance, price and reliability of solutions developed either by us or our competitors. 40 As we expand the scope of our Web services, we may face greater competition from a number of websites and other media companies across a wide range of different Web services. Many of our competitors may have advantages over us in expertise, brand recognition, size, financial and personnel resources and other factors. Several companies offer competitive products or services through Web advertising networks, including 24/7 Media, DoubleClick, Flycast Communications and L90. Our business may also encounter competition from providers of advertising inventory and database management products and related services, including AdForce, DoubleClick and Engage Technologies. In addition, we may face potential competition from a number of large Web publishers, search engines and ISPs, including AOL, Excite, Infoseek, Juno and Yahoo!. Competition may also materialize from political or public policy websites, including Grassroots.com, Politics.com, SpeakOut.com, Vote.com, Votenet.com and Voter.com. We also compete with television, radio and print media companies for a share of the overall advertising budgets of advertisers. Employees As of April 30, 2000, we had a total of 96 employees, 39 of whom were in sales and marketing, 20 in product development, 17 in finance and administration, 20 in customer support and data acquisition. From time to time we also employ independent contractors. Our employees are not represented by a labor union, and we have never experienced a work stoppage. We believe our relations with our employees are good. Facilities Our principal executive offices and our product development facilities are located in Washington, D.C. We lease approximately 2,300 square feet for our corporate headquarters under a lease expiring January 15, 2001, for which we have monthly rental obligations of approximately $5,750, and commercial office space for our product development facility under a lease expiring May 31, 2001, for which we have monthly rental obligations of approximately $3,500. Our product development facility provides us with a secure area to store and operate our computer systems and capacity for communications links and Internet connectivity systems. We also lease space in San Francisco, California for sales and marketing under a lease expiring on November 30, 2002, for which we have monthly rental obligations of approximately $5,500. In addition, we have a sales and marketing office in Atlanta and we employ sales representatives in Chicago, Dallas, Nashville, Seattle and London, England. While we are continually evaluating our facility requirements, we believe our facilities are adequate to meet our current and anticipated needs. Legal Proceedings From time to time, we may be involved in litigation incidental to the conduct of our business. Except as described below, we are not currently party to any legal proceeding that we believe is material to our business or results of operations. We have received a letter from a third party engaged in website design and Web hosting requesting that we cease and desist from using the name Aristotle in connection with our online activities. Although the third party has a registered trademark for the use of the name Aristotle in connection with Internet access and website design and hosting, we believe that we have rights to use the name Aristotle in connection with our political, campaign and advocacy operations. We also believe we may have legal rights to use the name Aristotle in connection with our commercial and non-profit activities. There is a risk, however, that we may not be able to use the name Aristotle for these activities on the Internet. If we are unable to use our brand name for these activities we would be required to develop a new brand name for these activities, which could impact our sales and marketing activities, and therefore our ability to generate revenue. 41 MANAGEMENT Director, Executive Officers and Key Employees Our directors, executive officers and key employees and their positions and ages, as of May 1, 2000, are as follows:
Name Age Position ---- --- -------- John A. Phillips........ 44 Chairman of the Board and Chief Executive Officer Dean A. Phillips........ 42 President and Director T. Robert Christ........ 31 Chief Financial Officer J. Blair Richardson, Jr. ................... 44 General Counsel Gordon N. Stoll......... 33 Executive Vice President of Sales Nicholas Donatiello, Jr. ....................... 39 Director Esther Dyson............ 48 Director William R. Hambrecht.... 64 Director
John Aristotle Phillips co-founded us in 1983 and has since served as Chairman of our board of directors. From September 1999 to date, Mr. Phillips has served as our Chief Executive Officer, and from January 1983 to September 1999, Mr. Phillips served as our President. Mr. Phillips graduated from Princeton University in 1978 with a bachelors in science degree in aerospace engineering. While at Princeton, Mr. Phillips received international recognition for his design, from publicly available documents, of an atomic bomb. He is the co-author of Mushroom: the Story of the A-Bomb Kid, which was sold to a television network for a made for television movie. John Phillips is the brother of Dean Phillips, our President. Dean Aristotle Phillips co-founded us in 1983 and has since served as a director. Since September 1999, Mr. Phillips has served as our President. From 1994 to 1999, Mr. Phillips served as our Chief Executive Officer and from January 1983 to December 1994, Mr. Phillips served as our Vice President. Mr. Phillips graduated from MIT in 1980 with a bachelors in science from the Department of Engineering and Computer Science with a concentration in microcomputer design. Dean Phillips is the brother of John Phillips, our Chief Executive Officer. T. Robert Christ has served as our Chief Financial Officer since November of 1999. From August 1999 to October 1999 and following the acquisition of Pulsar Data Systems by Litronic, Inc., a publicly traded data security company, Mr. Christ served as vice president of finance for Litronic. Prior to that acquisition, from August 1998 to June 1999, Mr. Christ served as the chief financial officer of Pulsar Data Systems, a hardware solutions firm. From December 1994 to July 1998, Mr. Christ served as director of finance for The Centech Group, an information technology provider, and from August 1991 to October 1994, Mr. Christ worked as a senior accountant at Rubino and McGeehin, a Washington, D.C. accounting firm. Mr. Christ received a CPA certificate in May 1991. Mr. Christ obtained a bachelors of business administration in Accounting from James Madison University in 1991. J. Blair Richardson, Jr. has served as our General Counsel since November 1999. Prior to joining us, he served as our outside counsel from March 1992 to September 1999, providing legal advice on matters relating to data acquisition, regulatory compliance and privacy. From January 1984 to February 1992, Mr. Richardson worked as an attorney with Winston and Strawn, Washington, D.C., specializing in litigation. He received his juris doctorate from the Fordham University School of Law in 1982 and graduated from Princeton University in 1979 with a bachelor of arts from the Department of English. Gordon N. Stoll has served as our Executive Vice President of Sales since February 2000. Since 1991, Mr. Stoll has worked for us in the following capacities: Vice President of Sales & National Territory Sales Manager from January 1999 to February 2000, Vice President of Sales and Sales Manager for the Southeast Region from February 1993 to December 1998, Director of Southeast sales from June 1992 to January 1993 42 and Director of Government Accounts from March 1991 to June 1992. Prior to joining us in 1991, he served as Capitol Hill sales director for Cali Communications from December 1989 to February 1991. He received his bachelor of arts in 1989 from University of Georgia. Nicholas Donatiello, Jr. has served as a director since September 1999. Since 1993, Mr. Donatiello has served as president and chief executive officer of Odyssey Ventures, Inc., which is the general partner of Odyssey, L.P. Mr. Donatiello also served as campaign manager from July 1989 to March 1991 and the press secretary from July 1987 to June 1989 for U.S. Senator Bill Bradley, where he undertook a major study of the changing role of cable television, including work with market research companies, cable television providers, media buying firms and heads of major advertising agencies. Mr. Donatiello currently serves as a director of TV Guide, Inc. He earned his bachelor of science in engineering at Princeton in 1982 and received his masters in business administration from Stanford University. Esther Dyson has served as a director since March 2000. Since 1982, Ms. Dyson has served as chairman of Edventure Holdings, a company focused on emerging information technologies worldwide and on the emerging computer markets of central and Eastern Europe. Ms. Dyson currently serves on the board of directors of the following companies: Graphisoft, Internet Capital, Languageware.net, Medscape, PRT Group, Scala Business Solutions, Thinking Tools, Uproar.com and WPP Group. William R. Hambrecht has served as a director since September 1999. Mr. Hambrecht is the founder and chairman of WR Hambrecht + Co, a position he has held since January 1998. Prior to founding WR Hambrecht + Co, Mr. Hambrecht co- founded Hambrecht & Quist, LLC in 1968, an investment banking firm specializing in emerging high growth technology companies. Mr. Hambrecht began his career in the securities business in 1958. Mr. Hambrecht currently serves on the board of directors of GetThere.com. Mr. Hambrecht graduated with a bachelor of arts in 1957 from Princeton University. Board of Directors and Committees Following this offering, our board of directors will consist of between five and seven directors divided into three classes, with each class serving for a term of three years. At each annual meeting of stockholders, directors will be elected for a three-year term to succeed the directors whose terms are expiring. Effective as of this offering, one of our Class I director seats will be vacant and the other seat will be occupied by Esther Dyson. The terms for the Class I directors will expire in 2000. Dean A. Phillips and Nicholas Donatiello, Jr. will be Class II directors whose terms will expire in 2001. John A. Phillips and William R. Hambrecht will be Class III directors whose terms will expire in 2002. Our board of directors has a compensation committee and an audit committee. The compensation committee is responsible for making recommendations to our board of directors regarding salaries, incentives and other forms of compensation for our directors, officers and other employees. Messrs. Donatiello and Hambrecht and Ms. Dyson are the current members of the compensation committee. We did not have a compensation or audit committee in 1999. The audit committee reviews our annual audit and meets with our independent auditors to review our internal controls and financial management practices. Messrs. Donatiello and Hambrecht and Ms. Dyson are the current members of the audit committee. Our board of directors may establish, from time-to-time, other committees to facilitate the management of our business. Director Compensation Our directors do not receive compensation for attendance at board meetings. However, our directors are reimbursed for all reasonable out-of-pocket expenses incurred in connection with their attendance at board meetings. In March 2000, we granted Ms. Dyson an option to purchase 52,147 shares of our common stock, at an exercise price of $2.75 per share. 43 Compensation Committee Interlocks and Insider Participation Prior to May 14, 2000, our board of directors did not have a compensation committee and all compensation decisions were made by the full board of directors. The members of our compensation committee are currently Messrs. Donatiello and Hambrecht and Ms. Dyson. No interlocking relationship exists, or has existed in the past, between our board of directors or compensation committee and the board of directors or compensation committee of any other company. Executive Compensation The following table provides summary information concerning compensation earned by or paid to our chief executive officer and to each of our other executive officers whose total annual salary and bonus exceeded $100,000, for services rendered in all capacities to us during the fiscal year ended December 31, 1999. These individuals are referred to as the named executive officers. Summary Compensation Table
Long Term Compensation Annual Compensation Awards ----------------------------- ------------ Securities Other Annual Underlying Name and Principal Position Year Salary Bonus Compensation Options (#) - --------------------------- ---- -------- ------- ------------ ------------ John A. Phillips.............. 1999 $232,083 $ -- $-- -- Chairman and Chief Executive Officer Dean A. Phillips.............. 1999 232,083 -- -- -- President T. Robert Christ(1)........... 1999 11,704 10,000 -- 52,147 Chief Financial Officer J. Blair Richardson, Jr.(2)... 1999 16,250 -- -- 24,100 General Counsel Gordon N. Stoll............... 1999 134,513 -- -- 39,100 Executive Vice President of Sales
- -------- (1) Mr. Christ joined us in November 1999. (2) Mr. Richardson joined us in November 1999. In addition to the salary earned by Mr. Richardson in 1999, he received $90,000 and options to purchase 15,000 shares from us as outside counsel for the year ended December 31, 1999. 44 Stock Options The following tables summarize option grants and exercises during fiscal 1999 to or by our Chief Executive Officer and the named executive officers, and the value of the options held by such persons at the end of fiscal 1999. We have not granted any stock appreciation rights. Option Grants in Fiscal 1999
Potential Realizable Value at Assumed % of Total Annual Rates of Number of Options Stock Price Securities Granted to Exercise Appreciation for Underlying Employees or Base Option Term(3) Options in Fiscal Price Expiration ---------------- Name Granted(#)(1) Year (2) ($/Sh) Date 5% 10% - ---- ------------- ---------- -------- ---------- ------- -------- John A. Phillips........ -- -- -- -- -- -- Dean A. Phillips........ -- -- -- -- -- -- T. Robert Christ........ 52,147 11.90% $2.75 9/30/09 $90,653 $229,733 J. Blair Richardson, Jr.(4)................. 24,100 5.50 2.75 10/31/09 41,680 105,625 Gordon N. Stoll......... 15,000 3.42 1.50 3/31/09 44,692 84,492 Gordon N. Stoll......... 24,100 5.50 2.75 10/31/09 41,680 105,625
- -------- (1) The exercise price may be paid in cash, in shares of our common stock valued at fair market value on the exercise date or through a cashless exercise procedure involving a same-day sale of the purchased shares. We may also finance the option exercise by lending the optionee funds to pay the exercise price for the purchased shares. These options vest over five years at the rate of 25% of the shares subject to the option on the first anniversary of the vesting start date specified in the stock option agreement and 1.5625% every month after that date. Unvested shares are subject to our right of repurchase upon termination of employment. Upon specified changes in control, all shares that are then unvested will become vested. Options expire ten years from the date of grant. (2) We granted to employees options to acquire 438,047 shares of our common stock in 1999. (3) The potential realizable value of each grant of options has been calculated, pursuant to the regulations promulgated by the Securities and Exchange Commission, assuming that the market price of our common stock appreciates in value from the date of grant to the end of the option term at the annualized rates of 5% and 10%, respectively. These values do not represent our estimate or projection of future value of our common stock. There can be no assurance that any of the value reflected in the table will be achieved. (4) Excludes 15,000 options granted to Mr. Richardson for services he provided prior to becoming an employee. These options have an exercise price of $1.50 and expire March 31, 2009. 45 Aggregated Option Exercises in Fiscal 1999 and Value of Options At End of Fiscal 1999
Number of Securities Underlying Value of Unexercised Unexercised In-the-Money Options Options at End of Fiscal 1999 at End of Fiscal 1999(1) ------------------------------- ------------------------------- Name Exercisable(#) Unexercisable(#) Exercisable($) Unexercisable($) - ---- -------------- ---------------- -------------- ---------------- John A. Phillips........ -- -- $-- $ -- Dean A. Phillips........ -- -- -- -- T. Robert Christ........ -- 52,147 -- -- J. Blair Richardson, Jr..................... 15,000 24,100 -- Gordon N. Stoll......... 15,000 24,100 --
- -------- (1) Value is based on the difference between the option exercise price and , the estimated initial public offering price of our common stock, multiplied by the number of shares of our common stock underlying the option. No market existed for our common stock prior to this offering. 1999 Stock Option Plan In March 1999, our board of directors adopted, subject to the approval of our stockholders, the 1999 Stock Option Plan. Stockholder approval was obtained on March 16, 1999. The 1999 plan allows options to be granted either as incentive stock options or as non-qualified stock options. The aggregate number of shares authorized for issuance under the 1999 plan is 830,000. As of April 30, 2000: . options to purchase 560,728 shares were outstanding; . options to purchase 150,909 shares were vested; and . 0 options had been exercised. Following the closing of this offering, no additional options will be granted under the 1999 plan. Options granted under the 1999 plan are subject to the following terms: . options are exercisable within the times or upon the events as determined by the compensation committee and described in each grant. Each option must become exercisable at a rate of at least 20% per year over five years from the date the option is granted, and no incentive stock option granted to a 10% or greater stockholder shall be exercisable after the expiration of five years from the date the option was granted; . the exercise price of any non-qualifying option shall not be less than 85% of the fair market value of the share on the date the option is granted, and the exercise price of an incentive stock option shall not be less than 100% of the fair market value on the date the option is granted; . unless the stock option grant states differently, options granted under the plan terminate and may not be exercised if the optionee ceases to be employed by us or our affiliates; . options under the plan are not transferable or assignable; and . the plan provides that upon the occurrence of a change of control event, the surviving entity must either assume or substitute the options granted under the plan, or in the alternative, the options become fully exercisable. 2000 Omnibus Stock Plan We expect to adopt our 2000 Omnibus Stock Plan before the closing of this offering. The 2000 plan provides for a total of shares of our common stock to initially be reserved for issuance. The 2000 plan is designed to assist us in recruiting, retaining and motivating our employees, outside directors and independent contractors. Under the 2000 plan we can grant: . restricted shares; . stock units; 46 . incentive stock options; . nonstatutory stock options; and . stock appreciation rights. Our compensation committee will administer the 2000 plan and has the authority to determine to whom options will be granted and shares will be sold, the number of shares and the exercise and vesting terms. 401(k) Plan We sponsor a defined contribution plan intended to qualify under Section 401 of the Internal Revenue Code. All employees who are 21 years old and have one year of service are eligible to participate and may enter the 401(k) plan as of the first day of each plan year and the date six months later. Participants may make pre-tax contributions to the 401(k) plan of up to 15% of their eligible earnings, subject to a statutorily prescribed annual limit. We may make matching contributions, of up to five percent, to the 401(k) plan. Each participant is fully vested in his or her contributions, and vest in any matching contributions we make over a six-year vesting schedules. Contributions by us or the participants to the 401(k) plan, and the income earned on these contributions, are generally not taxable to the participants until withdrawn. Contributions by us, if any, will generally be deductible by us when made. Contributions of the participants and us are held in trust as required by law. Employment Agreements and Change of Control Arrangements John A. Phillips and Dean A. Phillips On September 17, 1999, we entered into a two-year employment agreement with each of John A. Phillips, our Chief Executive Officer, and Dean A. Phillips, our President. The annual salary under each of these agreements is $220,000. Under both agreements, we have the right to terminate the agreement on 30 days notice to the employee. However, if we terminate employment, we may become liable for a severance payment, as described below. In addition, under each agreement the employee may terminate his employment upon 30 days' notice if we breach the contract. Both agreements provide a non-compete restriction on the employee which has a duration of one year from the termination of the employment relationship. These non-compete agreements become void against the employee if the employee is terminated without cause or constructively terminated. Upon the occurrence of either an involuntary termination without cause or a constructive termination, including a constructive termination following a change in control, the company must make payments to the terminated employee, over the following four months, which in the aggregate equal 100% of the employee's annual base salary, plus any other incentive compensation payable to the employee. In addition, upon the occurrence of either of these events, any stock options granted to the employee shall become immediately vested and exercisable for each employee and our repurchase rights over 1,500,000 shares owned by each employee lapse. T. Robert Christ Under the terms of Mr. Christ's employment offer letter, dated October 10, 1999, he is entitled to an annual salary of $110,000. In addition, Mr. Christ is entitled to a bonus of $15,000 upon the consummation of this offering. Under this agreement, if Mr. Christ is terminated by us without cause during the first 12 twelve months of his employment, he is entitled to severance equal to the amount of his salary that he would have earned during the remaining initial 12 month period. In addition, 25% of the shares covered by Mr. Christ's initial option grant, or 13,037 shares of common stock, vest immediately in the event he is terminated without cause during the first 12 months of his employment with us. Mr. Christ is subject to a non-competition agreement for a period of one year from the termination of his employment. 47 J. Blair Richardson, Jr. Under the terms of Mr. Richardson's employment offer letter, dated November 2, 1999, he is entitled to an annual salary of $130,000, and a bonus of up to $15,000. Either party must give the other two weeks' notice in order to terminate the employment relationship. Mr. Richardson is subject to a non- competition agreement for a period of one year from the termination of his employment, which prevents him from soliciting any of our clients and from misusing any proprietary information. Gordon N. Stoll Under the terms of Mr. Stoll's employment arrangements, he is entitled to an annual salary of $30,000, plus commission. In 1998 and 1999, Mr. Stoll was paid commissions of approximately $70,000 and $105,000. Mr. Stoll is also entitled to a bonus if periodic sales targets are met. Either party must give the other two weeks' notice in order to terminate the employment, except that we may terminate Mr. Stoll's employment without notice if he breaches his employment terms or habitually neglects his duties. Limitation of Liability and Indemnification Matters Our certificate of incorporation limits the liability of directors to the maximum extent permitted by Delaware law. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except liability for: . any breach of their duty of loyalty to the corporation or its stockholders; . acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; . unlawful payments of dividends or unlawful stock repurchases or redemption; or . any transaction from which the director derived an improper personal benefit. This limitation of liability does not apply to liabilities arising under the federal securities laws and does not affect the availability of equitable remedies such as injunctive relief or rescission. Our certificate of incorporation and bylaws provide that we will indemnify our directors and executive officers and may indemnify our other officers and employees and other agents to the fullest extent permitted by law. Our certificate of incorporation and bylaws also permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in such capacity, regardless of whether the bylaws would permit indemnification. We intend to enter into agreements to indemnify our directors and executive officers, in addition to indemnification provided for in our certificate of incorporation and bylaws. We believe that these provisions and agreements are necessary to attract and retain qualified persons as directors and executive officers. 48 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Since the beginning of our last fiscal year, there has not been any transaction or series of transactions to which we were or are a party in which the amount involved exceeded or exceeds $60,000 and in which any director, executive officer, holder of more than 5% of any class of our voting securities or any member of the immediate family of any of the foregoing persons had or will have a direct or indirect material interest, other than the transactions described below. In September 1999, we sold and issued 1,272,727 shares of our Series A Preferred Stock for an aggregate consideration of $3,500,000, to raise capital to finance our operations. Upon completion of this offering, each share of Series A Preferred Stock will convert into one share of common stock. The following table summarizes purchases, valued in excess of $60,000, of shares of our Series A Preferred Stock by our directors, executive officers and 5% stockholders:
Number of Shares of Series A Purchaser Preferred Stock --------- --------------- W.R. Hambrecht/Aristotle, LLC............................ 727,273 ePartners................................................ 363,636
These affiliates purchased the securities described above at the same price and on the same terms and conditions as the unaffiliated investors in the private financing. Prior to December 31, 1995, John A. Phillips advanced to us $14,419 pursuant to oral lending agreements with us. Prior to December 31, 1995, Dean A. Phillips advanced to us $13,102 pursuant to oral lending agreements with us. At December 31, 1995, aggregate outstanding balances under these loans were $27,519. During the year ending December 31, 1996, John A. Phillips advanced to us $72,334 pursuant to oral lending agreements with us, and Dean A. Phillips advanced to us $75,343 pursuant to oral lending agreements with us. During the year ended December 31, 1996, we repaid $8,360 of outstanding advances to John A. Phillips. At year-end, the outstanding balance to John A. Phillips was $78,392 and the outstanding balance to Dean A. Phillips was $88,445. During the year ending December 31, 1997, John A. Phillips advanced to us $21,975 pursuant to oral lending agreements with us and Dean A. Phillips advanced to us $130,718 pursuant to oral lending agreements with us. During the year ended December 31, 1997, we repaid outstanding advances to John A. Phillips of $9,016 and outstanding advances to Dean A. Phillips of $87,800. At year-end, the outstanding balance to John A. Phillips was $91,352 and the outstanding balance to Dean A. Phillips was $131,363. During the year ending December 31, 1998, John A. Phillips advanced to us $679 pursuant to a oral lending agreement with us and Dean A. Phillips advanced to us $347,003 pursuant to oral lending agreements with us. During the year ended December 31, 1997, we repaid outstanding advances to John A. Phillips of $52,897 and outstanding advances to Dean A. Phillips of $276,363. At year-end, the outstanding balance to John A. Phillips was $39,134 and the outstanding balance to Dean A. Phillips was $202,003. During the period from January 1, 1999 through September 16, 1999 additional advances were made by Dean A. Phillips to us in the amount of $196,000 and repayments were made by us to John A. Phillips of $128,997. In connection with the sale of our Series A Preferred Stock, John A. Phillips and Dean A. Phillips converted these outstanding advances into a promissory note payable to John A. Phillips and Dean A. Phillips. This promissory note is convertible into Series A Preferred Stock and is due and payable upon the initial public offering of our common stock or upon a change of control. In connection with this conversion, all outstanding interest on the advances was waived by John A. Phillips and Dean A. Phillips. 49 Immediately prior to the effectiveness of this offering, John A. Phillips and Dean A. Phillips are converting the promissory note into shares of Series A Preferred Stock, which will in turn convert into 112,050 shares of common stock at the closing of this offering. Two of our directors, William Hambrecht and Nicholas Donatiello, Jr., are beneficial owners of W.R. Hambrecht/Aristotle LLC, a limited liability company that owns 727,723 shares of our Series A Preferred Stock. Additionally, Mr. Donatiello is a beneficial owner of Odyssey Capital II, LLC and ePartners. Our Chief Executive Officer, John A. Phillips, and our President, Dean A. Phillips, are brothers. We paid accrued deferred compensation charges of approximately $55,000 to our President in 2000. In June 1999, we entered an agreement with Aristotle Ventures, LLC an entity beneficially owned by our Chief Executive Officer, John A. Phillips, and our President, Dean A. Phillips, to lease our office building located at 2237 Union Street in San Francisco, California. Under the terms of the agreement, we paid monthly rent of $3,300. The lease was terminated in late 1999. 50 PRINCIPAL STOCKHOLDERS The following table sets forth information regarding beneficial ownership of common stock as of April 30, 2000, and as adjusted to reflect the sale of shares of common stock in this offering, by: .each person or entity known to us to own beneficially more than 5% of our common stock; .each of our directors; .each of the named executive officers; and .all of our executive officers and directors as a group. Except as otherwise indicated and subject to applicable community property laws, each person has sole investment and voting power with respect to the shares shown. Ownership information is based upon information furnished by the respective individuals or entities, as the case may be. The following table assumes no exercise of the underwriters' over-allotment option. Applicable percentage ownership is based on shares of common stock outstanding as of April 30, 2000, which assumes conversion of all Series A Preferred Stock, and shares outstanding immediately after completion of this offering. Unless otherwise indicated, the address for the following stockholders is Aristotle International, Inc., 50 E Street, S.E., Suite 300, Washington, D.C. 20003.
Shares Beneficially Percent of Shares Owned Outstanding ------------ ----------------- Before After Name and Address of Beneficial Owner Offering Offering - ------------------------------------ -------- -------- John A. Phillips(1)........................... 1,501,866 34% % Dean A. Phillips(2)........................... 1,610,164 37 * T. Robert Christ.............................. 0 * * J. Blair Richardson, Jr.(3)................... 15,000 * * Gordon N. Stoll(4)............................ 15,000 * * Nicholas Donatiello, Jr.(5)................... 1,272,727 29 Esther Dyson ................................. 0 * * William Hambrecht(6).......................... 727,273 17 WR Hambrecht + Co 539 Bryant Street, Suite 100 San Francisco, CA 94107 W.R. Hambrecht/Aristotle, LLC................. 727,273 17 WR Hambrecht + Co 539 Bryant Street, Suite 100 San Francisco, CA 94107 ePartners..................................... 363,636 8 1211 Avenue of the Americas New York, NY 10036 All directors and executive officers as a group (8 persons)(7)......................... 4,384,777 100% %
- ------- * Less than 1% (1) Includes 1,886 shares that will be issued pursuant to a convertible note as of the closing of this offering. (2) Includes 110,164 shares that will be issued pursuant to a convertible note as of the closing of this offering. (3) Includes 15,000 shares that are exercisable within 60 days of May 1, 2000. (4) Includes 15,000 shares that are exercisable within 60 days of May 1, 2000. (5) Includes 181,818 shares owned by Odyssey Capital II, LLC, 363,636 shares owned by ePartners, and 727,273 shares owned by W.R. Hambrecht/Aristotle, LLC. Mr. Donatiello is a managing member of each of these entities. Mr. Donatiello disclaims beneficial ownership of these shares except to the extent of his ownership interests in each of the entities. (6) Includes 727,273 shares held by W.R. Hambrecht/Aristotle, LLC. Mr. Hambrecht either controls or is affiliated with this entity. (7) Includes shares listed in footnotes (1), (2), (3), (4), (5), (6) and (7) above. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options held by that person that are currently exercisable or exercisable within 60 days of May 1, 2000 are deemed outstanding. These shares, however, are not deemed outstanding for the purposes of computing the percentage ownership of any other person. 51 DESCRIPTION OF CAPITAL STOCK Upon completion of this offering, and after giving effect to the conversion of all outstanding preferred stock into common stock and the amendment of our certificate of incorporation, our authorized capital stock will consist of shares of common stock, $0.001 par value, and 5,000,000 shares of preferred stock, $0.001 par value. Common Stock Subject to preferences that may be applicable to any preferred stock outstanding at the time, the holders of common stock are entitled to the following: Dividends. Holders of common stock are entitled to receive dividends out of assets legally available for the payment of dividends at the times and in the amounts as the board of directors from time to time may determine. Voting. Holders of common stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders, including the election of directors, and will not have cumulative voting rights unless we are subject to Section 2115 of the California Corporations Code. Cumulative voting for the election of directors is not authorized by our certificate of incorporation, which means that the holders of a majority of the shares voted can elect all of the directors then standing for election. Preemptive rights, conversion and redemption. Holders of the common stock are not entitled to preemptive rights and shares of common stock are not subject to conversion or redemption. Liquidation, dissolution and winding-up. Upon liquidation, dissolution or winding-up of us, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation of any preferred stock. Each outstanding share of common stock is, and all shares of common stock to be outstanding upon completion of this offering will be, upon payment therefore, duly and validly issued, fully paid and nonassessable. Preferred Stock and Bylaw Provisions Our board of directors is authorized, without action by the stockholders, to designate and issue up to 5,000,000 shares of preferred stock in one or more series. Our board of directors can also fix the rights, preferences and privileges of the shares of each series and any qualifications, limitations or restrictions on these shares. Our board of directors may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of common stock. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, may: . delay, defer or prevent a change in control; . discourage bids for the common stock at a premium over the market price of our common stock; . adversely affect the voting and other rights of the holders of our common stock; and . discourage acquisition proposals or tender offers for our shares and, as a consequence, inhibit fluctuations in the market price of our shares that could result from actual or rumored takeover attempts. 52 We have no current plans to issue any shares of preferred stock. Our bylaws provide that: . all stockholder action be taken at a stockholders' meeting; . special meetings of stockholders may only be called by the chairman of the board, the chief executive officer or the board of directors; and . our board of directors is divided into three classes, with each class serving a staggered three-year term. The provisions described above, together with the ability of our board of directors to issue preferred stock, may have the effect of deterring a hostile takeover or delaying a change in our control or management. Registration Rights Upon completion of this offering, the holders of 1,272,727 shares of common stock issuable upon conversion of the Series A Preferred Stock have the right to cause us to register these shares under the Securities Act as follows: . Demand registration rights. Six months after the closing of this offering, the holders of 25% or more of our common stock issuable or issued upon conversion of the Series A Preferred Stock may request that we register their shares with respect to all or part of their registrable securities having aggregate proceeds of at least $5,000,000. . Piggyback registration rights. The holders of registrable securities may request to have their shares registered any time we file a registration statement to register any of our securities for our own account or for the account of others. . S-3 registration rights. The holders of registrable securities have the right to request registrations on Form S-3 if we are eligible to use Form S-3, have not already effected one S-3 registration within the past 12 months, and if the aggregate proceeds from the registration will be more than $5,000,000. Messrs. John and Dean Phillips, who hold an aggregate of 3,000,000 shares of our common stock, also have piggyback registration rights. Registration of shares of common stock pursuant to the exercise of demand registration rights, piggyback registration rights or S-3 registration rights under the Securities Act would result in these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of such registration. We will pay all registration expenses, other than underwriting discounts and commissions, in connection with any demand or piggyback registration. We are not obligated to pay any expenses of registration in the case of a demand or S- 3 registration that is subsequently withdrawn at the request of the stockholders. The registration rights terminate five years following the closing of this offering, or, with respect to each holder of registrable securities, when the holder can sell all of the holder's shares in any 3-month period under Rule 144 under the Securities Act. We may be subject to Section 2115 of the California General Corporation Law. Section 2115 provides that, regardless of a company's legal domicile, certain provisions of California corporate law will apply to that company if more than 50% of its outstanding voting securities are held of record by persons having addresses in California and the majority of the company's operations occur in California. If we are subject to Section 2115, stockholders may cumulate votes in electing directors. Cumulative voting means that each stockholder may vote the number of votes equal to the number of candidates multiplied by the number of votes to which the stockholder's shares are normally entitled in favor of one candidate. This potentially allows minority stockholders to elect some members of the board of directors. If we are not subject to Section 2115, cumulative voting will not be allowed and a holder of 50% or more of our voting stock will be able to control the election of all directors. In addition to this difference, Section 2115 has the following additional effects: . enables removal of directors with or without cause with majority stockholder approval; . places limitations on the distribution of dividends; 53 . extends additional rights to dissenting stockholders in any reorganization, including a merger, sale of assets or exchange of shares; and . provides for information rights and required filings in the event we effect a sale of assets or complete a merger. We anticipate that our common stock will be qualified for trading as a national market security on the Nasdaq National Market and that we will have at least 800 stockholders of record by the record date for our 2000 annual meeting of stockholders. If these two conditions occur, then we will not be subject to Section 2115 as of the record date for our 2000 annual meeting of stockholders. Delaware Anti-Takeover Law and Charter Provisions Delaware takeover statute. We are subject to Section 203 of the Delaware General Corporation Law, which prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder, unless: . prior to this date, the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; . upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned (a) by persons who are directors and also officers and (b) by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or . on or subsequent to such date, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder. In general, Section 203 defines an interested stockholder as any entity or person who, together with his or her affiliates and associates owns, or within three years, beneficially owned, 15% or more of the outstanding voting stock of the corporation. The term business combination includes mergers, asset sales and other similar transactions resulting in a financial benefit to an interested stockholder. Transfer Agent and Registrar The transfer agent and registrar for our common stock is . Listing We have applied to have our common stock quoted on the Nasdaq National Market under the symbol . 54 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering there has been no public market for our common stock, and we cannot predict the effect, if any, that market sales of shares or the availability of shares for sale will have on the market price prevailing from time to time. As described below, only a limited number of shares will be available for sale shortly after this offering due to contractual and legal restrictions on resale. Nevertheless, sales of substantial amounts of our common stock in the public market after the restrictions lapse could cause the market price of our common stock to decline. When this offering is completed, we will have a total of shares of common stock outstanding, assuming no exercise of outstanding options. The shares offered by this prospectus will be freely tradable unless they are purchased by our affiliates, as defined in Rule 144 under the Securities Act. The remaining shares are restricted, which means they were originally sold in offerings that were not subject to a registration statement filed with the Securities and Exchange Commission. These restricted shares may be resold only through registration under the Securities Act or under an available exemption from registration, such as provided through Rule 144. Contractual Restrictions on Resales All of our officers, directors and stockholders have agreed not to transfer or dispose of, directly or indirectly, any of their shares of our common stock, or any securities convertible into or, exchangeable or exercisable for shares of our common stock, for a period of 180 days from the date of this prospectus. Subject to these contractual restrictions and to the provisions of Rule 144, shares of common stock will be available for sale in the public market commencing 180 days after the date of this prospectus. Rule 144 In general, under Rule 144, a person, or persons whose shares are aggregated, who has beneficially owned restricted securities for at least one year, including the holding period of any holder who is not an affiliate, is entitled to sell within any three-month period a number of our shares of common stock that does not exceed the greater of: . 1% of the then outstanding shares of our common stock, which will equal approximately shares upon completion of this offering; or . the average weekly trading volume of our common stock on the Nasdaq National Market during the four calendar weeks preceding the date on which notice of sale is filed with the Securities and Exchange Commission. Sales under Rule 144 are subject to restrictions relating to manner of sale, notice and the availability of current public information about us. Under Rule 144 and subject to volume limitations, of the restricted shares will be eligible for sale beginning 180 days after the date of the final prospectus, and the remaining restricted shares will become salable at various times thereafter. Rule 144(k) A person who is not deemed an affiliate of ours at any time during the 90 days preceding a sale and who has beneficially owned shares for at least two years, including the holding period of any prior owner who is not an affiliate, would be entitled to sell shares following this offering under Rule 144(k) without regard to the volume limitations, manner of sale provisions, public information or notice requirements of Rule 144. 55 Rule 701 In general, under Rule 701 of the Securities Act as currently in effect, any of our employees, consultants or advisors who purchases securities, including options, from us before the date of this prospectus through our stock option plans or through some other written agreement is eligible to resell those shares, including shares issued upon the exercise of options, 90 days after the effective date of this offering in reliance on Rule 144, but without compliance with the holding period, information and volume restrictions contained in Rule 144. 56 PLAN OF DISTRIBUTION In accordance with the terms of an underwriting agreement among us and W.R. Hambrecht + Co., LLC, , and as representative(s) of the underwriters, the underwriters will purchase from us the following respective number of shares of common stock at the public offering price less the underwriting discounts and commissions described on the cover page of this prospectus.
Number of Underwriter Shares ----------- ----------- W.R. Hambrecht + Co., LLC........................................ ..................................................... ----------- Total.......................................................... ===========
The underwriting agreement provides that the obligations of the underwriters are subject to conditions, including the absence of any material adverse change in our business, and the receipt of certificates, opinions and letters from us and our counsel and independent accountants. Subject to those conditions, the underwriters are committed to purchase all shares of our common stock offered if any of the shares are purchased. The underwriters propose to offer the shares of our common stock directly to the public at the offering price set forth on the cover page of this prospectus, as this price is determined by the OpenIPO process described below, and to certain dealers at this price less a concession not in excess of $ per share. Any dealers that participate in the distribution of our common stock may be deemed to be underwriters within the meaning of the Securities Act, and any discounts, commissions or concessions received by them and any provided by the sale of the shares by them might be deemed to be underwriting discounts and commissions under the Securities Act. After completion of the initial public offering of the shares, the public offering price and other selling terms may be changed by the underwriters. The underwriters have informed us that they do not intend discretionary sales to exceed 10% of the shares of the common stock offered by this prospectus. The following table shows the per share and total underwriting discount to be paid to the underwriters by us in connection with this offering. The underwriting discount will be determined through negotiations between us and the representatives of the underwriters, and will be calculated as a percentage of the offering price. These amounts are shown assuming both no exercise and full exercise of the over-allotment option.
Per share No Exercise Full Exercise --------- ----------- ------------- Public Offering Price.................... Underwriting Discounts................... Proceeds, before expenses, to us.........
The expenses of the offering, exclusive of the underwriting discounts, will be approximately $ . These fees and expenses are payable entirely by us. These fees include, among other things, our legal and accounting fees, our printing expenses, our expenses incurred in connection with meetings with potential investors, the filing fees of the Securities and Exchange Commission and the listing fees of the Nasdaq National Market. An electronic prospectus is available on the website maintained by WR Hambrecht + Co. Other than the prospectus in electronic format, the information on these websites relating to the offering is not part of this prospectus and has not been approved or endorsed by us and should not be relied on by prospective investors. W.R. Hambrecht/Aristotle, LLC is an affiliate of WR Hambrecht + Co, one of the underwriters in this offering. As described in Principal Stockholders, W.R. Hambrech/Aristotle, LLC owns an aggregate of 727,273 shares of common stock, which represent more than 10% of our outstanding common stock. As a result, under Rule 2720 of the Conduct Rules of the National Association of Securities Dealers, Inc., which provides that the public offering price of an equity security be no higher than that recommended by a qualified independent underwriter meeting certain standards, has assumed the responsibilities of acting as the qualified 57 independent underwriter for this offering and will recommend a price in compliance with the requirements of Rule 2720. In connection with this offering, is performing due diligence investigations and reviewing and participating in the preparation of this prospectus and the registration statement of which this prospectus forms a part. The Auction Process The method of distribution being used by the underwriters in this offering is known as the OpenIPO process. It differs from that traditionally employed in underwritten public offerings. In particular, the public offering price will be based primarily on an auction conducted by the underwriters. The allocation of shares of our common stock will be determined entirely by the auction process. The following describes how WR Hambrecht + Co, other underwriters and selected dealers will conduct the auction process and confirm bids from prospective investors: . Before the registration statement relating to this offering becomes effective, the underwriters and participating dealers will solicit bids from prospective investors through the Internet, telephone and facsimile. The bids will specify the number of shares of our common stock the potential investor proposes to purchase and the price the potential investor is willing to pay for the shares. These bids may be above or below the range set forth on the cover page of this prospectus. The minimum size of any bid is 100 shares. . The shares offered by this prospectus may not be sold nor may offers to buy be accepted prior to the time that the registration statement filed with the Securities and Exchange Commission becomes effective. A bid received by WR Hambrecht + Co involves no obligation or commitment of any kind prior to the closing of the auction. Bids can be modified or revoked at any time prior to the closing of the auction. . Approximately two business days prior to the registration statement being declared effective, prospective investors will receive, by e-mail, telephone or facsimile, a notice indicating the proposed effective date. On or after that time, WR Hambrecht + Co may post on its website an estimate of the clearing price. . After the registration statement relating to this offering becomes effective, potential investors who have submitted bids to WR Hambrecht + Co will be contacted by e-mail, telephone or facsimile. Potential investors will be advised that the registration statement has been declared effective and will be requested to confirm their bids. . The auction will close after the registration statement becomes effective at a time agreed to by us and WR Hambrecht + Co. The actual time at which the auction closes will be determined by us and WR Hambrecht + Co based on general market conditions during the period after the registration statement becomes effective. After the registration statement has been declared effective, the public offering price of our common stock may be set at a price that is outside of the range set forth on the cover of this prospectus. . All bids that are not confirmed before the time specified by the underwriters, or if the time is not specified, by the close of the auction, will be deemed withdrawn. . Once a potential investor affirmatively confirms its previous bid, the confirmation will remain valid unless subsequently withdrawn by the potential investor. Potential investors will be able to withdraw their bids at any time before the close of the auction by notifying WR Hambrecht + Co or a participating dealer. . If the public offering price range is changed before or after a potential investor affirmatively confirms a bid, or if the public offering price is outside the public offering range previously provided to the potential investor in the prospectus, the underwriters and participating dealers will notify potential investors of the change and that offers will not be accepted until the potential investor has again reconfirmed its bid regardless of whether the potential investor's initial bid was above, below or at the public offering price. . Following the closing of the auction, WR Hambrecht + Co will determine the highest price at which all of the shares offered, including shares that may be purchased by the underwriters to cover any overallotments, may be sold to potential investors. This price, which is called the clearing price, will be determined based on the results of all valid bids at the time the auction is closed. The clearing price will not necessarily be 58 the public offering price, which will be set as described in Determination of Public Offering Price below. The public offering price will determine the allocation of shares to potential investors, with all bids submitted at or above the public offering price receiving a pro rata portion of the shares bid for. . Once the auction closes and a clearing price is set as described below, WR Hambrecht + Co will accept the bids from those bidders whose bid is at or above the public offering price but may allocate to a prospective investor fewer shares than the number included in the investor's bid. . WR Hambrecht + Co or a participating dealer will notify successful bidders by email, telephone or facsimile that the auction has closed and that their confirmed bids have been accepted. Other bidders will be notified that their bids have not been accepted. . Potential investors may at any time expressly request that all, or any specific, communications between them and the underwriters and participating dealers be made by specific means of communication, including telephone and facsimile. Some underwriters and selected dealers that participate in this offering may request prospective investors to confirm their bids prior to the effective date of the registration statement, if that practice is used by these institutions in connection with initial public offerings that are not conducted using the OpenIPO process. Determination of Public Offering Price The public offering price for this offering will ultimately be determined by negotiation between the underwriters and us after the auction closes and will not necessarily bear any direct relationship to our assets, current earnings or book value or to any other established criteria of value, although these factors were considered in establishing the initial public offering price range. Prior to the offering, there has been no public market for our common stock. The principal factor in establishing the public offering price will be the clearing price resulting from the auction. The clearing price is the highest price at which all of the shares offered, including the shares that may be purchased by the underwriters to cover any overallotments, may be sold to potential investors, based on the valid bids at the time the auction is run. Factors considered in determining the initial public offering price range included an assessment of our management, operating results, capital structure and business potential and the demand for similar securities of comparable companies. Changes, if any, in the public offering price range will be based primarily on the bids received. The public offering price may be lower, but will not be higher, than the clearing price based on negotiations between the underwriters and us. The public offering price will always determine the allocation of shares to potential investors. Therefore, if the public offering price is below the clearing price, all bids that are at or above the public offering price will receive a pro rata portion of the shares bid for. If sufficient bids are not received, or if we do not consider the clearing price to be adequate, or if we and the underwriters are not able to reach agreement on the public offering price, then we and the underwriters will either postpone or cancel this offering. Alternatively, we may file a post-effective amendment to the registration statement in order to conduct a new auction. The following simplified example illustrates how the public offering price will be determined through the auction process: Company X offers to sell 100 shares in its public offering through the auction process. WR Hambrecht + Co, on behalf of Company X, receives five bids to purchase, all of which are kept confidential until the auction closes. The first bid is to pay $10 per share for 20 shares. The second bid is to pay $9 per share for 30 shares. The third bid is to pay $8 per share for 60 shares. The fourth bid is to pay $7 per share for 40 shares. The fifth bid is to pay $6 per share for 80 shares. Assuming that all of these bids are confirmed and not withdrawn or modified before the auction closes, and assuming that no additional bids are received, the clearing price used to determine the public offering price 59 would be $8 per share, which is the highest price at which all 100 shares offered may be sold to potential investors who have submitted valid bids. However, the shares may be sold at a price below $8 per share based on negotiations between the underwriters and Company X. If the public offering price is the same as the $8 per share clearing price, the underwriters will confirm bids at or above $8 per share. Because 110 shares were bid for at or above the clearing price, each of the three potential investors who bid $8 per share or more would receive approximately 90% of the shares for which bids were made. The two potential investors whose bids were below $8 per share would not receive any shares in this example. If the public offering price is $7 per share, the underwriters will confirm bids that were made at or above $7 per share. No bids made at a price of less than $7 per share will be accepted. The four potential investors with the highest bids would receive a pro rata portion of the 100 shares offered, based on the 150 shares they requested, or two-thirds of the shares for which bids were made. The potential investor with the lowest bid would not receive any shares in this example. The following table illustrates the example described above, assuming that the initial public offering price is set at $8.00 per share. The table also assumes that these bids are the final bids, and that they reflect any modifications that have been made to reflect any prior changes to the offering range, and to avoid the issuance of fractional shares.
Initial Public Offering of Company X Bid Information Auction Results --------------------------- ------------------------------------- Approximate Cumulative Allocated Shares Shares Bid Shares Requested Clearing Amount Requested Requested Price Allocated Shares Price Raised --------- ---------- ------ --------- ----------- -------- ------ 20 20 $10.00 18 90% $8.00 $144 30 50 9.00 27 90 8.00 216 Clearing Price (right arrow) 60 110 8.00 55 90 8.00 440 40 150 7.00 0 0 80 230 6.00 0 0 --- ---- Total: 100 $800 === ====
Requirements for Valid Bids Valid bids are those that meet the requirements, including eligibility, account status and size, established by the underwriters or participating dealers. In order to open a brokerage account with WR Hambrecht + Co, potential investors must deposit at least $2,000 in their account. This brokerage account will be a general account subject to WR Hambrecht + Co's customary rules, and will not be limited to this offering. In addition, once the registration statement becomes effective and the auction closes, a prospective investor submitting a bid through a WR Hambrecht + Co brokerage account must have an account balance equal to or in excess of the amount of its bid or its bid will not be accepted by WR Hambrecht + Co. However, other than the $2,000 described above, prospective investors will not be required to deposit any money into their accounts until after the registration statement becomes effective. No funds will be transferred to the underwriters, and any amounts in excess of $2,000 may be withdrawn, at any time until the acceptance of the bid and the subsequent closing of this offering. Conditions for valid bids, including eligibility standards and account funding requirements of other underwriters or participating dealers other than WR Hambrecht + Co, may vary. The Closing of the Auction and Allocation of Shares The auction will close on a date estimated and publicly disclosed in advance by the underwriters on the website of WR Hambrecht + Co at www.wrhambrecht.com or www.openipo.com. The shares 60 offered hereby, or shares if the underwriters' overallotment option is exercised in full, will be purchased from us by the underwriters and sold through the underwriters and participating dealers to investors who have submitted bids at or higher than the public offering price. These investors will be notified by e-mail, telephone or facsimile as soon as practicable following the closing of the auction that their bids have been accepted. Each participating dealer has agreed with the underwriters to sell the shares it purchases from the underwriters in accordance with the auction process described above, unless the underwriters otherwise consent. The underwriters reserve the right to reject bids that they deem manipulative or disruptive in order to facilitate the orderly completion of this offering, and they reserve the right, in exceptional circumstances, to alter this method of allocation as they deem necessary to ensure a fair and orderly distribution of the shares of our common stock. For example, large orders may be reduced to ensure a public distribution and bids may be rejected or reduced by the underwriters or participating dealers based on eligibility or creditworthiness criteria. In addition, the underwriters or the participating dealers may reject or reduce a bid by a prospective investor who has engaged in practices that could have a manipulative, disruptive or otherwise adverse effect upon the offering. Price and volume volatility in the market for our common stock may result from the somewhat unique nature of the proposed plan of distribution. Price and volume volatility in the market for our common stock after the completion of this offering may adversely affect the market price of our common stock. We have granted to the underwriters an option, exercisable no later than 30 days after the date of this prospectus, to purchase up to an aggregate of additional shares of our common stock at the offering price, less the underwriting discount, set forth on the cover page of this prospectus. To the extent that the underwriters exercise this option, the underwriters will have a firm commitment to purchase the additional shares, and we will be obligated to sell the additional shares to the underwriters. The underwriters may exercise the option only to cover over-allotments made in connection with the sale of shares offered. The underwriting agreement provides that we will indemnify the underwriters against specified liabilities, including liabilities under the Securities Act, or contribute to payments that the underwriters may be required to make. We have agreed not to offer, sell, contract to sell, or otherwise dispose of any shares of common stock, or any options or warrants to purchase common stock other than the shares of common stock or options to acquire common stock issued under our stock option plans and stock purchase plan, for a period of 180 days after the date of this prospectus, except with the prior written consent of WR Hambrecht + Co. Each of our directors, executive officers and additional holders of approximately shares of our outstanding capital stock has agreed to restrictions on his or her ability to sell, offer, contract or grant any option to sell, pledge, transfer or otherwise dispose of shares of our common stock for a period of 180 days after the date of this prospectus, without the prior written consent of WR Hambrecht + Co. In connection with the offering, persons participating in the offering may purchase and sell shares of common stock on the open market. These transactions may include short sales, stabilizing transactions in accordance with Rule 104 of Regulation M under the Securities Exchange Act of 1934, as amended, and purchases to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering which creates a syndicate short position. Stabilizing transactions consist of certain bids or purchases made for the purpose of preventing or retarding a decline in the market price of the common stock. The underwriters also may impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representative has repurchased shares sold by or for the account of that underwriter in stabilizing or short covering transactions. These activities by the underwriters may stabilize, maintain or otherwise affect the market price of our common stock. As a result, the price of our common stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued by the underwriters at any time. These transactions may be effected on the Nasdaq National Market, in the over-the-counter market or otherwise. 61 Persons participating in this offering may also engage in passive market making transactions in our common stock on the Nasdaq National Market. Passive market making consists of displaying bids on the Nasdaq National Market limited by the prices of independent market makers and affecting purchases limited by such prices and in response to order flow. Rule 103 of Regulation M promulgated by the SEC limits the amount of net purchases that each passive market may make and the displayed size of each bid. Passive market making may stabilize the market price of our common stock at a level above that which might otherwise prevail in the open market and, if commenced, may be discontinued at any time. WR Hambrecht + Co currently intends to act as a market maker for our common stock following this offering. However, WR Hambrecht + Co is not obligated to do so and may discontinue any market making at any time. WR Hambrecht + Co is an investment banking firm formed in February 1998. In addition to this offering, WR Hambrecht + Co has engaged in the business of public and private equity investing and financial advisory services since its inception. The manager of WR Hambrecht + Co, William R. Hambrecht, has 40 years of experience in the securities industry. 62 LEGAL MATTERS Selected legal matters with respect to the validity of the common stock offered by this prospectus are being passed upon for Aristotle by Pillsbury Madison & Sutro LLP, San Diego, California. Legal matters in connection with this offering will be passed upon for the underwriters by Morrison & Foerster LLP, San Francisco, California. EXPERTS Our financial statements and schedule as of December 31, 1999, and for the year then ended, have been included herein and in the registration statement in reliance upon the report of KPMG LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. Our financial statements and schedule as of December 31, 1998, and for each of the years in the two year period ended December 31, 1998, have been included in this prospectus and in the registration statement in reliance upon the report of Keller Bruner & Company, LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. WHERE YOU CAN FIND MORE INFORMATION We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the common stock offered hereby. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement or the exhibits and schedules which are part of the registration statement. For further information with respect to Aristotle and the common stock offered by this prospectus, we refer you to the registration statement and the exhibits and schedules filed as part of the registration statement. You may read and copy any document we file at the SEC's public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. Our SEC filings are also available to the public from the SEC's website at http://www.sec.gov. Upon completion of this offering, we will become subject to the information and periodic reporting requirements of the Securities and Exchange Act, as amended, and, in accordance therewith, will file periodic reports, proxy statements and other information with the SEC. These periodic reports, proxy statements and other information will be available for inspection and copying at the SEC's public reference rooms and the website of the SEC referred to above. 63 ARISTOTLE INTERNATIONAL, INC. INDEX TO FINANCIAL STATEMENTS
Page ---- Independent Auditors' Reports.............................................. F-2 Balance Sheets............................................................. F-4 Statements of Operations................................................... F-5 Statements of Stockholders' Equity (Deficit)............................... F-6 Statements of Cash Flows................................................... F-7 Notes to Financial Statements.............................................. F-8
F-1 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders Aristotle International, Inc.: We have audited the accompanying balance sheet of Aristotle International, Inc. as of December 31, 1999, and the related statements of operations, stockholders' equity (deficit) and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Aristotle International, Inc. as of December 31, 1999 and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. May 12, 2000 McLean, Virginia F-2 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders Aristotle International, Inc.: We have audited the accompanying balance sheet of Aristotle International, Inc. as of December 31, 1998, and the related statements of operations, stockholders' equity (deficit) and cash flows for the years ended December 31, 1997 and 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Aristotle International, Inc. as of December 31, 1998 and the results of its operations and its cash flows for the years ended December 31, 1997 and 1998 in conformity with generally accepted accounting principles. October 29, 1999 Bethesda, Maryland F-3 ARISTOTLE INTERNATIONAL, INC. BALANCE SHEETS
December 31, ----------------------- 1998 1999 ---------- ----------- Assets Current assets: Cash and cash equivalents........................... $ 44,399 $ 2,404,956 Accounts receivable, net............................ 178,725 1,003,727 Income tax receivable............................... 117,718 80,898 Other receivables................................... 27,386 13,067 Prepaid expenses and other current assets........... 102,471 100,000 ---------- ----------- Total current assets.............................. 470,699 3,602,648 Property and equipment, net......................... 89,014 175,921 Other assets........................................ 1,952 23,048 ---------- ----------- $ 561,665 $ 3,801,617 ========== =========== Liabilities and Stockholders' Equity (Deficit) Current liabilities: Current installments of obligations under capital lease.............................................. $ -- $ 3,665 Accounts payable.................................... 137,737 727,754 Accrued expenses.................................... 279,196 495,169 Deferred revenue.................................... 342,648 771,505 Notes payable--related parties...................... 241,136 308,139 ---------- ----------- Total current liabilities......................... 1,000,717 2,306,232 Obligations under capital lease, excluding current portion.............................................. -- 11,418 ---------- ----------- Total liabilities................................. 1,000,717 2,317,650 ---------- ----------- Convertible preferred stock........................... -- 3,500,000 ---------- ----------- Commitments and contingencies Stockholders' equity (deficit): Common stock, $0.001 par value; 10,000,000 shares authorized; 3,000,000 shares issued and outstanding........................................ 3,000 3,000 Additional paid-in capital.......................... 72,500 410,090 Accumulated deficit................................. (514,552) (2,429,123) ---------- ----------- (439,052) (2,016,033) ---------- ----------- $ 561,665 $ 3,801,617 ========== ===========
See accompanying notes to financial statements. F-4 ARISTOTLE INTERNATIONAL, INC. STATEMENTS OF OPERATIONS
Year Ended December 31, ----------------------------------- 1997 1998 1999 ---------- ---------- ----------- Revenue: Products................................ $1,187,812 $1,715,426 $ 2,815,431 Services................................ 530,476 812,914 1,097,132 ---------- ---------- ----------- Total revenue......................... 1,718,288 2,528,340 3,912,563 ---------- ---------- ----------- Cost of revenue: Products................................ 290,966 555,410 987,220 Services................................ 100,420 123,564 262,844 ---------- ---------- ----------- Total cost of revenue................. 391,386 678,974 1,250,064 ---------- ---------- ----------- Gross profit.............................. 1,326,902 1,849,366 2,662,499 ---------- ---------- ----------- Operating expenses: General and administrative.............. 856,905 1,253,200 2,654,033 Sales and marketing..................... 817,697 1,195,237 1,633,054 Product development..................... 116,313 93,143 398,097 ---------- ---------- ----------- Total operating expenses.............. 1,790,915 2,541,580 4,685,184 ---------- ---------- ----------- Loss from operations...................... (464,013) (692,214) (2,022,685) Other income (expense), net............... 65,496 634,544 75,178 Interest income........................... 19 -- 40,199 Interest expense.......................... (24,506) (23,698) (7,263) ---------- ---------- ----------- Loss before income taxes.................. (423,004) (81,368) (1,914,571) Benefit from income taxes................. (173,909) -- -- ---------- ---------- ----------- Net loss.................................. $ (249,095) $ (81,368) (1,914,571) ========== ========== =========== Basic and diluted net loss per share applicable to common stockholders........ $ (0.08) $ (0.03) $ (0.64) ========== ========== =========== Shares used to compute basic and diluted net loss per share applicable to common stockholders............................. 3,000,000 3,000,000 3,000,000 ========== ========== ===========
See accompanying notes to financial statements. F-5 ARISTOTLE INTERNATIONAL, INC. STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Total Common Stock Additional Stockholders' ---------------- Paid-In Accumulated Equity Shares Amount Capital Deficit (Deficit) --------- ------ ---------- ----------- ------------- Balance, December 31, 1996................... 3,000,000 $3,000 $ 72,500 $ (184,089) $ (108,589) Net loss................ -- -- -- (249,095) (249,095) --------- ------ -------- ----------- ----------- Balance, December 31, 1997................... 3,000,000 3,000 72,500 (433,184) (357,684) Net loss................ -- -- -- (81,368) (81,368) --------- ------ -------- ----------- ----------- Balance, December 31, 1998................... 3,000,000 3,000 72,500 (514,552) (439,052) Forgiveness of interest on amounts due to stockholders........... -- -- 81,483 -- 81,483 Equity-based compensation........... -- -- 256,107 -- 256,107 Net loss................ -- -- -- (1,914,571) (1,914,571) --------- ------ -------- ----------- ----------- Balance, December 31, 1999................... 3,000,000 $3,000 $410,090 $(2,429,123) $(2,016,033) ========= ====== ======== =========== ===========
See accompanying notes to financial statements. F-6 ARISTOTLE INTERNATIONAL, INC. STATEMENTS OF CASH FLOWS
Year ended December 31, --------------------------------- 1997 1998 1999 --------- --------- ----------- Reconciliation of net loss to net cash provided by (used in) operating activities: Net loss................................... $(249,095) $ (81,368) $(1,914,571) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization............. 46,770 71,399 71,368 Provision for bad debts................... -- 7,000 67,580 Loss on disposal of property and equipment................................ 21,410 30,546 4,242 Equity-based compensation expense......... -- -- 256,107 Change in assets and liabilities: (Increase) decrease in: Accounts receivable..................... (164,370) 702 (900,987) Income tax receivable................... 153,304 94,626 36,820 Prepaid expenses and other current assets................................. 380 (101,415) 25,195 Other assets............................ 399 2,500 (21,096) Increase (decrease) in: Accounts payable........................ 5,497 (95,654) 590,017 Accrued expenses........................ 102,890 39,850 301,456 Deferred revenue........................ 75,995 148,057 428,857 --------- --------- ----------- Net cash provided by (used in) operating activities.................. (6,820) 116,243 (1,055,012) --------- --------- ----------- Cash flows used in investing activities: Purchase of property and equipment......... (11,597) (114,710) (149,263) --------- --------- ----------- Net cash used in investing activities.. (11,597) (114,710) (149,263) --------- --------- ----------- Cash flows from financing activities: Decrease in disbursements in excess of available cash............................ (13,017) -- -- Proceeds from issuance of Series A Preferred Stock........................... -- -- 3,500,000 Principal payments on obligations under capital lease............................. -- -- (2,171) Proceeds from loans from stockholders...... 152,694 347,682 196,000 Repayments on loans from stockholders...... (96,816) (329,260) (128,997) --------- --------- ----------- Net cash provided by financing activities............................ 42,861 18,422 3,564,832 --------- --------- ----------- Net increase in cash................... 24,444 19,955 2,360,557 Cash and cash equivalents: Beginning of year.......................... -- 24,444 44,399 --------- --------- ----------- End of year................................ $ 24,444 $ 44,399 $ 2,404,956 ========= ========= =========== Supplemental disclosure of cash flow information: Cash paid during the year for interest..... $ 1,515 $ 40 $ 7,263 Cash received from income tax refunds...... $ 326,408 $ 95,023 $ 36,820 Supplemental disclosure of noncash investing and financing activities: The Company incurred additional capital lease obligations of approximately $16,643 during 1999 for new property and equipment.
See accompanying notes to financial statements. F-7 ARISTOLE INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS (1) Nature of Business and Significant Accounting Policies (a) Nature of Business Aristotle International, Inc. (formerly Aristotle Publishing, Inc.) ("Aristotle" or the "Company") is a technology company that provides information, products and services to political campaigns, advocacy organizations and commercial enterprises. Over the past ten years, Aristotle has compiled a large database of registered voters in the United States, which is the Company's core strategic asset. The Company uses its database to provide campaign management, Internet marketing and online fundraising. A summary of the significant accounting policies of the Company is as follows: (b) Revenue Recognition Revenue is generated from licensing software products and providing services, including maintenance and technical support, training and consulting. In October 1997, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") No. 97-2, Software Revenue Recognition. Subsequently, in March 1998 and December 1998, the AICPA issued SOP 98-4 and SOP 98-9, respectively, which defer until the Company's fiscal year beginning January 1, 2000, the application of several paragraphs and examples in SOP 97-2 that limit the definition of vendor specific objective evidence ("VSOE") for determining fair value of various elements in a multiple element arrangement. The provisions of SOP 97-2 have been applied to transactions entered into beginning January 1, 1998. Prior to 1998, the Company's revenue recognition policy was in accordance with the preceding authoritative guidance provided by SOP No. 91-1, Software Revenue Recognition. The adoption of SOP 97-2 did not have a material impact on the Company's financial statements. Further, management of the Company does not believe that the adoption of the remaining portions of SOP 97-2, which were deferred by SOP 98-4 and SOP 98-9, will have a material impact on the Company's financial statements. Software license revenue is recognized when there is an executed license agreement, the software has been delivered, collectibility from the customer is probable and there are no significant remaining obligations to the customer. The Company also provides Internet-based fund raising, in which the Company hosts the website, which may be accessed directly or through the customers' websites, and processes the contributions. Contributions are generally made via credit card. Revenue is recognized when the contributions are collected, and are based upon negotiated transaction fee, which may contain fixed charges as well as a percent of the contribution collected. The Company also has entered into contracts with various electronic commerce intermediaries to deliver targeted banner advertising to its customer base. The Company will contract with its client for the delivery of a specified number of impressions to its defined target market through the third-party websites. Revenue is recognized as the impressions are delivered. However, revenue from this activity was not significant during 1997, 1998 or 1999. The Company has entered into representation agreements with other web portals. Under the terms of these agreements, Aristotle earns a fee for banner advertising sold on the third-party portals. Revenue is recognized on a pro rata basis over the term of the advertising agreements, or as impressions are delivered based upon whether the contracts with the advertisers are for a specified period of time or a determined number of impressions. The Company records this revenue on a net commission basis. However, no revenue was recognized under these agreements during 1997, 1998 or 1999. F-8 ARISTOTLE INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Services revenue consists of maintenance and technical support, training and consulting. Revenue from maintenance and technical support, which consists of unspecified when and if available product updates and customer telephone support services, are recognized ratably over the term of the service period. Other services revenue is recognized as the related services are provided. (c) Cost of Revenue Cost of product revenue consists primarily of external costs associated with acquisition, enhancements, updates and maintenance of voter records, as well as personnel costs associated with programming and customization of the Company's software. Cost of service revenue consists primarily of personnel costs associated with our customer support department. (d) Property and Equipment Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The estimated useful lives used in determining depreciation are between three and five years for office and computer equipment and five years for automobiles. Leasehold improvements are amortized over the shorter of the useful life of the asset, generally five years, or the lease term. (e) Software Development Costs Software development costs are accounted for in accordance with SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed. Under the standard, capitalization of software development costs begins upon the establishment of technological feasibility, subject to net realizable value considerations. To date, the period between the establishment of technological feasibility and the general availability of such software has been short; therefore, software development costs qualifying for capitalization have been immaterial. Accordingly, the Company has not capitalized any software development costs and has charged all such costs to product development expense. Product development costs are expensed as incurred. (f) Income Taxes Deferred income taxes are provided on a liability method, whereby, deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates an the date of enactment. (g) Financial Credit Risk The Company maintains its cash in bank deposit accounts, that, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash. Financial instruments that potentially expose the Company to concentration of credit risk consist primarily of trade receivables. Substantially all of the Company's trade receivables are due from U.S. political candidates, their campaign organizations and political organizations or businesses engaged in lobbying activities. The trade receivables may age significantly prior to collection, which is frequently funded with Federal matching funds received several months after each campaign concludes. Changes to the Federal F-9 ARISTOTLE INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) campaign regulations or lobbying regulations could have an adverse impact on the Company's ability to collect its receivables. (h) Estimates The preparation of financial statements in conformity with generally accepted accounting principals requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. (i) Stock Split On March 24, 1999, the Board of Directors of the Company approved a 6,000- for-1 split of the Company's common stock. All share, per share and conversion amounts relating to common stock and stock options included in the accompanying financial statements, and accompanying notes, have been retroactively adjusted to reflect the stock split. (j) Stock-Based Compensation The Company accounts for equity-based compensation arrangements in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25 Accounting for Stock Issued to Employees, and related interpretations, and complies with the disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation. Under APB Opinion No. 25, compensation expense is based upon the difference, if any, on the date of grant, between the fair value of the Company's stock and the exercise price. All equity-based awards to non- employees are accounted for at their fair value in accordance with SFAS No. 123. (k) Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and Notes payable--related parties approximate the fair values due to the short-term nature of these instruments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. (l) Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities. The new standard establishes accounting and reporting standards for derivative instruments embedded in other contracts and for hedging activities. This statement, as amended, is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. The Company does not expect SFAS No. 133 to have a material affect on its financial position or results of operations. In March 2000, the Financial Accounting Standards Board issued FASB Interpretation No. 44 (FIN 44), Accounting for Certain Transactions Involving Stock Compensation. FIN 44 further defines the accounting consequence of various modifications to the terms of a previously fixed stock option or award under APB Opinion No. 25. FIN 44 becomes effective on July 1, 2000, but certain conclusions in FIN 44 cover specific events that occur after December 15, 1998 or January 12, 2000. The Company has not completed its evaluation of the impact of FIN 44 on its financial position or results of operations. F-10 ARISTOTLE INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial Statements. This SAB expresses the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. Registrants can apply the accounting and disclosure requirements of this SAB retrospectively, or may report a change in accounting principle no later than the first fiscal quarter of the fiscal year beginning after December 15, 1999. The Company does not expect the application of this SAB to have a material impact on the Company's financial statements. (m) Segment Information The Company operates under one business segment providing voter database related products and services. (2) Accounts Receivable Accounts receivable consists of the following as of December 31, 1998 and 1999:
1998 1999 -------- ---------- Accounts receivable.................................... $190,725 $1,078,557 Allowance for doubtful accounts........................ (12,000) (74,830) -------- ---------- $178,725 $1,003,727 ======== ==========
(3) Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets at December 31, 1998 consists primarily of equipment acquired for customer contracts that had not been installed as of the end of the year. As of December 31, 1999, prepaid expenses and other current assets is solely comprised of a prepaid contract fee with MatchLogic for future services. (4) Property and Equipment Property and equipment consists of the following as of December 31, 1998 and 1999:
1998 1999 --------- --------- Office and computer equipment.......................... $ 126,638 $ 167,550 Automobiles............................................ 45,779 65,422 Leasehold improvements................................. 29,806 111,828 --------- --------- 202,223 344,800 Less-accumulated depreciation and amortization......... (113,209) (168,879) --------- --------- $ 89,014 $ 175,921 ========= =========
(5) Accrued Expenses Accrued expenses consists of the following as of December 31, 1998 and 1999:
1998 1999 -------- -------- Accrued salaries and commissions.......................... $134,053 $425,784 Accrued vacation.......................................... 20,138 49,116 Accrued interest--related party........................... 81,483 -- Other accrued expenses.................................... 43,522 20,269 -------- -------- $279,196 $495,169 ======== ========
F-11 ARISTOTLE INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) (6) Notes Payable--Related Parties Notes payable-related parties are notes held by stockholders of the Company. As of December 31, 1998, notes payable in the amount of $241,136 were unsecured, bore interest at nine percent per annum, and were due upon demand. Accrued interest related to these notes totaled $43,929 as of December 31, 1998. During 1999, the Company converted the Notes payable-related parties aggregating $308,139 from interest bearing to non-interest bearing convertible notes and the stockholders forgave the associated accrued interest. The forgiveness of the interest was treated as a capital contribution. Interest expense related to these notes amounted to $25,255, $43,929 and $0 for the years ended December 31, 1997, 1998 and 1999, respectively. These notes are convertible at the option of the holder into Series A Preferred Stock, at a conversion rate of $2.75 per share, subject to certain adjustments. The notes are payable upon an initial public offering. (7) Accrued Compensation--Stockholder As of December 31, 1998 and 1999, the Company owed a stockholder/officer of the Company $55,381 in deferred salaries. The amount is attributed to unpaid salaries for the period from 1988 to 1994. The deferred salaries and interest are payable upon demand. The Company has accrued interest related to the liability at the rate of nine percent per annum through 1998 at which point further interest was waived. Accrued interest amounted to $37,554 and $0 as of December 31, 1998 and 1999, respectively. The amounts were paid during 2000. (8) Income Taxes Net deferred tax amounts consist of the following components as of December 31, 1997, 1998 and 1999:
1997 1998 1999 --------- -------- --------- Deferred tax liabilities--property and equipment................................ $ -- $ 3,059 $ -- --------- -------- --------- Deferred tax assets: Property and equipment.................. 6,463 -- 22,311 Accrued salaries........................ 22,976 22,974 22,974 Allowance for doubtful accounts......... 2,074 4,978 29,393 Accrued vacation........................ 5,677 8,354 19,493 Equity based compensation............... -- -- 100,599 Net operating loss carryforward......... -- 18,246 622,938 --------- -------- --------- 37,190 54,552 817,708 --------- -------- --------- 37,190 51,493 817,708 Less valuation allowance................ (37,190) (51,493) (817,708) --------- -------- --------- $ -- $ -- $ -- ========= ======== ========= Income tax expense charged to operations for the years ended December 31, 1997, 1998 and 1999, consists of the following: 1997 1998 1999 --------- -------- --------- Current tax (benefit): Federal................................. $(119,716) $ -- $ -- State................................... (54,193) -- -- --------- -------- --------- $(173,909) $ -- $ -- ========= ======== =========
F-12 ARISTOTLE INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) The income tax provision differs from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income for the years ended December 31, 1997, 1998 and 1999 due to the following.
1997 1998 1999 --------- -------- --------- Computed "expected" tax benefit............ $(143,821) $(27,665) (650,954) Increase (decrease) in income taxes resulting from: Other nondeductible expense.............. 10,492 5,437 5,027 State income taxes, net of federal tax benefit................................. (42,216) (8,120) (120,298) Other.................................... (35,554) (16,045) -- Increase in valuation allowance.......... 37,190 14,303 766,225 --------- -------- --------- Total.................................. $(173,909) $ -- $ -- ========= ======== =========
There was no income tax expense (benefit) for the years ended December 31, 1998 or 1999. Net operating loss carryforwards (NOLs) as of December 31, 1997, 1998 and 1999 are approximately $0, $43,900 and $1,874,850, respectively, which will expire, if unused, through 2019. The realization of the benefits of the NOLs is dependent on sufficient taxable income in future years. Lack of future earnings, a change in the ownership of the Company, or the application of the alternative minimum rules could adversely affect the Company's ability to utilize NOLs. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences become deductible. Management considers taxes paid during the previous three years, scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies that can be implemented by the Company in making this assessment. Management has established a valuation for the full amount of the net deferred tax assets at December 31, 1997, 1998 and 1999. The net change in the valuation allowance during the years ended December 31, 1998 and 1999 was an increase of $14,303 and $732,354, respectively. (9) Royalty Agreement In 1997, the Company renewed a Data License agreement with Survey Sampling, Inc. to receive royalties on Survey Sampling's sale of voter data. The agreement allowed for the Company to receive cash advances against future royalties earned, with additional royalties being paid on each six-month anniversary of the agreement for royalties due less the applicable cash advances paid against the royalties. The amount of royalty income receivable included as a component of other current assets was $19,811 and $8,405 as of December 31, 1998 and 1999, respectively. Royalty income included as a component of other income was $8,456, $46,267 and $23,558 for the years ended December 31, 1997, 1998 and 1999, respectively. (10) Stockholders' Equity The Company's Certificate of Incorporation, as amended, authorizes the Company to issue 10,000,000 shares of Common Stock and 1,400,000 shares of Series A Preferred Stock. F-13 ARISTOTLE INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) As of December 31, 1999, the Company had reserved shares of common stock for future issuance as follows: Conversion of Series A Preferred Stock.......................... 1,272,727 Exercise of stock options....................................... 830,000 --------- 2,102,727 =========
(11) Convertible Preferred Stock The Convertible Preferred Stock, as of December 31, 1999, consisted of 1,272,727 shares of Series A Preferred Stock (the "Series A"), par value $.001 per share and an original cost of $2.75 per share. The holders of the Series A have the following rights and preferences: (a) Voting Rights and Protective Provisions The holders of Series A may vote with the common stockholders as a single class on all actions taken by the stockholders on an as-if converted basis. The holders of Series A are also entitled to separately elect two members of the Board of Directors. The holders also have a right of first refusal to match the purchase price for any issuance of stock to retain their voting interest in the Company. Furthermore, consent of the holders of at least a majority of the Series A is necessary for (i) liquidation, sale or disposal of 50% of the voting power of the Company, (ii) modification of the rights, preferences or privileges of the Series A shares, (iii) issuance of any stock with a liquidation preference to the Series A shares, or (iv) a change in the number of the authorized Series A. (b) Dividends The Series A is entitled to dividends at a rate of $0.22 per year upon the declaration of a dividend by the Company. The dividends are not cumulative. No dividends have been declared or paid for any period presented. (c) Liquidation The Series A is senior to all common stock and has a liquidation preference of $2.75 per share, plus any declared and unpaid dividends. After the preference has been paid, Series A stockholders share on an equal basis with the common stockholders until total payments to the Series A stockholders have received 300% of the original cost of $2.75, including preference payments. (d) Redemption The stock is not redeemable; however, a change of control of the Company represents a liquidation as defined by the Certificate of Incorporation. (e) Conversion The Series A is immediately convertible into common stock at the option of the holder at a rate of $2.75 per share. Additionally, the stock will automatically convert upon the closing of an initial public offering with proceeds of at least $15 million or upon the consent of two-thirds of the Series A stockholders. F-14 ARISTOTLE INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) (f) Dilution Provisions The Series A includes provisions adjust the conversion price should any stock be sold at a price below the $2.75 per share paid by the Series A stockholders. (12) Employee Benefit Plans (a) 401(k) Plan The Company established a defined contribution profit sharing plan for those resident employees who have completed one year of service or 1,000 hours and have reached 21 years of age. Annual contributions to the plan are composed of discretionary amounts. Discretionary contributions are based on an integrated formula. The Company did not make matching contributions for the years ended December 31, 1997 and 1998. For 1999, the Company made a matching contribution of $45,000. After six years of service, a participant shall be 100 percent vested. The Company can terminate the plan at any time. (b) Stock Option Plan In March 1999, the Company's Board of Directors authorized the adoption of a stock option plan. The Company has reserved up to 830,000 shares for issuance under the stock option plan. All of the Company's employees, officers, directors, consultants and advisors are eligible to be granted options under the stock option plan. The exercise price and duration of the options are determined by the Board at the date of grant. Vesting of these options is generally 25 percent upon the first anniversary of the date of grant with the remaining amount vesting ratably over a period of four years. The options generally expire in ten years. The following table summarizes outstanding and exercisable options for the year ended December 31, 1999:
Options Outstanding Options Exercisable --------------------------------------------- ---------------------------- Number Weighted-Average Number Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average Exercise Prices at 12/31/99 Contractual Life Exercise Price at 12/31/99 Exercise Price - --------------- ----------- ---------------- ---------------- ----------- ---------------- $1.50 205,500 9.3 years $0.73 107,543 $1.50 2.34 22,500 9.7 years 0.12 -- -- 2.75 195,047 9.8 years 1.27 -- -- ------- ------- 423,047 9.6 years 2.12 107,543 1.50 ======= =======
The per share weighted average fair value of the options granted during 1999 was $1.16. The fair value of each option grant is estimated on the date of grant, using the Black-Scholes options-pricing model with the following weighted-average assumptions as of December 31, 1999: Average dividend yield................................................. -- Expected life in years................................................. 5.0 Risk-free interest rate................................................ 5.38% Expected volatility.................................................... --
The Company applies APB Opinion No. 25 and related interpretations in accounting for its stock options. As a result, the Company recorded equity- based compensation expense of approximately $163,377 relating to options to purchase 202,500 shares granted in 1999 equal to the difference between the fair market value of the Company's common stock on the grant date and the exercise price of the options. F-15 ARISTOTLE INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) SFAS No. 123 requires pro forma net income (loss) disclosures as if the Company had accounted for its stock options granted under the fair value method prescribed by that statement. Had the Company used the fair value methodology for determining compensation expense, the following table presents the proforma net loss that would have been recorded by the Company for options granted during 1999: Net loss: As reported.................................................. $(1,914,571) Pro forma.................................................... (2,028,509) Net loss per share--basic and diluted: As reported.................................................. (0.64) Pro forma.................................................... (0.68)
(13) Legal Settlement During the year ended December 31, 1998, the Company reached a settlement with a vendor regarding breach of contract. The vendor agreed to pay the Company $650,000 in consideration of the mutual release of all parties. The Company recognized other income of $650,000 in the year ended December 31, 1998. (14) Commitments and Contingencies (a) Capital and Operating Leases The Company leases its office space under various noncancelable agreements expiring through November 2002 and accounted for as operating leases. The basic rentals are subject to increases each year for operating expenses and real estate taxes. During 1999, the Company entered into a leasing agreement to finance the purchase of an automobile. Aggregate minimum rental payments under noncancelable leases as of December 31, 1999, are as follows:
Operating Capital --------- ------- 2000.................................................... $193,000 $ 5,211 2001.................................................... 86,000 5,211 2002.................................................... 61,000 5,210 2003.................................................... -- 2,795 -------- ------- Total future minimum payments......................... $340,000 18,427 ======== Less amount representing interest....................... (3,344) ------- Present value future minimum lease payments........... 15,083 Less current maturities of obligations under capital lease.................................................. (3,665) ------- Obligations under capital lease, net of current maturities........................................... $11,418 =======
The Company has entered into an agreement to sublease a portion of the leased office space that expires in August 1999. The sublease income was $0, $22,194 and $19,728 for the years ended December 31, 1997, 1998 and 1999, respectively. Total rental expense net of sublease receipts charged to operations for the years ended December 31, 1997, 1998 and 1999 amounted to $82,511, $72,517 and $117,406, respectively. F-16 ARISTOTLE INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) (b) Commitments The Company entered into an agreement in March 1998 with the United States Postal Service ("USPS") for use of USPS "Fastforward technology" whereby the Company shall make a yearly payment to the USPS in the amount of $10,000 for the right to use the technology. The license is contingent upon the Company making payment to the USPS no less than sixty days prior to the end of a particular term. The maximum number of terms that the license may be renewed is ten. (c) Employment and Stock Repurchase Options. In September 1999, the Company entered into an Employment and Stock Repurchase Agreement with the Company's founders. The Agreement provides for annual compensation, severance and relocation packages, and provides for the Company to repurchase the Company's stock at the Founder's cost upon termination. The Company also has employment agreements with other key executives. (d) Contingencies The Company is engaged in various litigation in the ordinary course of business. Management believes that there will be no material adverse effect on its financial position or results of operations as a result of these matters. We have received a letter from a third party engaged in website design and Web hosting requesting that we cease and desist from using the name Aristotle in connection with our online activities. Although the third party has a registered trademark for the use of the name Aristotle in connection with Internet access and website design and hosting, we believe that we have rights to use the name Aristotle in connection with our political, campaign and advocacy operations. We also believe we may have legal rights to use the name Aristotle in connection with our commercial and nonprofit activities, however, there is a risk that we may not be able to use the name Aristotle for these activities on the Internet. If we are unable to use our brand name for these activities we would be required to develop a new brand name for these activities, which could impact our sales and marketing activities, and therefore our ability to generate revenue. F-17 [INSIDE BACK COVER] [LOGO] Until , 2000, 25 days after the date of this offering, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer's obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by the registrant in connection with the sale of common stock being registered. All amounts are estimates, except the registration fee and the NASD filing fee.
Amount to be Paid ---------- SEC Registration Fee.............................................. $7,920 NASD Filing Fee................................................... 3,500 Nasdaq National Market Listing Fee................................ * Printing and Engraving............................................ * Legal Fees and Expenses........................................... * Accounting Fees and Expenses...................................... * Blue Sky Fees and Expenses........................................ * Transfer Agent Fees............................................... * Director & Officer Liability Insurance (1933 Act Premiums)........ * Miscellaneous..................................................... * ------ Total........................................................... $ * ======
Item 14. Indemnification of Directors and Officers Section 145 of the Delaware General Corporation Law authorizes a court to award, or a corporation's board of directors to grant, indemnity to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933, as amended (the "Securities Act"). As permitted by Delaware General Corporation Law, the registrant's certificate of incorporation includes a provision that eliminates the personal liability of its directors for monetary damages for breach of fiduciary duty as a director, except to the extent that exculpation from liability is not permitted under the Delaware General Corporation Law as in effect at the time such liability is determined. As permitted by the Delaware General Corporation Law, the bylaws of the registrant provide for indemnification of the registrant's directors, officers, employees and other agents to the extent and under the circumstances permitted by the Delaware General Corporation Law. The registrant intends to enter prior to the closing of this offering into agreements with its directors and executive officers that will require the registrant, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or executive officers to the fullest extent not prohibited by law. The registrant intends to purchased directors and officers liability insurance prior to the closing of this offering. Reference is also made to the Underwriting Agreement, which provides for the indemnification of officers, directors and controlling persons of the registrant against certain liabilities. Item 15. Recent Sales of Unregistered Securities During the past three years, the following securities were sold or issued by the registrant without registration under the Securities Act: (a) Issuances of capital stock: 1. In September 1999, the registrant issued and sold 1,272,727 shares of Series A Preferred Stock to three investors for an aggregate purchase price of $3,500,000. II-1 (b) Grants of stock options: 1. The registrant's 1999 Stock Option Plan was adopted by the board of directors in 1999. At various times since 1999, the registrant has granted 438,047 options for shares of common stock at a purchase price of between $1.50 per share and $2.75 per share. (c) Convertible Promissory Notes: 1. In September 1999, the registrant issued a convertible promissory note in the amount of $308,139.45, without interest, in satisfaction of certain payments made to it by certain directors of the registrant. The note is convertible upon demand of the holders into Series A Preferred Stock, which is in turn convertible into 112,050 shares of common stock at the closing of this offering. The number of shares subject to the conversion is determined by dividing the then outstanding principal amount of the Note by the original Series A issue price, as established in the registrant's Restated Certificate of Incorporation, and with certain adjustments as described in Article IV(B)(4)(d) therein. The sales of the above securities were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act, or Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b) of the Securities Act, as transactions by an issuer not involving a public offering or transactions pursuant to compensatory benefit plans and contracts relating to compensation as provided under Rule 701. The recipients of securities in each of these transactions represented their intention to acquire the securities for investment only and not with view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and instruments issued in such transactions. All recipients had adequate access, through their relationship with the Registrant, to information about the Registrant. Item 16. Exhibits and Financial Statement Schedules (a) Exhibits
Exhibit Number Description ------- ----------- *1.1 Form of Underwriting Agreement. *3.1 Restated Certificate of Incorporation of Aristotle International, Inc. *3.2 Bylaws of Aristotle International, Inc. *4.1 Form of Stock Certificate. 4.2 Aristotle Publishing, Inc., Investors' Rights Agreement, dated as of September 17, 1999, by and among the registrant and the parties who are signatories thereto. *5.1 Opinion of Pillsbury Madison & Sutro LLP. 10.1 Registrant's 1999 Stock Option Plan. *10.2 Registrant's 2000 Omnibus Stock Plan. 10.3 Employment and Stock Repurchase Agreement, dated as of September 17, 1999, by and between the registrant and John A. Phillips. 10.4 Employment and Stock Repurchase Agreement, dated as of September 17, 1999, by and between the registrant and Dean A. Phillips. 10.5 Letter Agreement, dated as of October 6, 1999, by and between the registrant and Rob Christ. 10.6 Letter Agreement, dated as of November 2, 1999, by and between the registrant and Blair Richardson. *10.7 Letter Agreement, dated as of , by and between the registrant and Gordon N. Stoll. *10.8 Form of Directors and Officers' Indemnification Agreement.
II-2 10.9 Agreement, dated as of February 9, 1998, between the registrant and Central Address Systems, Inc. 10.10 Lease Agreement, dated as of September 28, 1999, between the registrant and Colleen Brent, Leland Dobbs and Barrett G. Levine. 10.11 Office Lease Agreement, dated as of January 15, 2000, between the registrant and Council on American-Islamic Relations. 10.12 Lease Agreement, dated September 30, 1996, between the registrant and Sidney S. Zlotnick and Renee Z. Kraft. 10.13 Form of Proprietary Information and Inventions Agreement. 23.1 Consent of KPMG LLP, Independent Auditors. 23.2 Consent of Keller Bruner & Company, LLP. *23.3 Consent of Pillsbury Madison & Sutro LLP (contained in their opinion filed as Exhibit 5.1). 24.1 Power of attorney (reference is made to Page II-4). 27.1 Financial Data Schedule for Aristotle International, Inc.
- -------- * To be filed by amendment (b) Financial Statement Schedules See Schedule II attached. Item 17. Undertakings Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, 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, 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. II-3 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 San Francisco, State of California, on the 14th day of May, 2000. ARISTOTLE, INC. /s/ John A. Phillips By: _________________________________ John A. Phillips Chief Executive Officer and Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints John A. Phillips and T. Robert Christ, and each of them, his or her true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments, including post-effective amendments, to this Registration Statement, and any registration statement relating to the offering covered by this Registration Statement and filed pursuant to Rule 462(b) under the Securities Act of 1933 and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each of said attorneys- in-fact and agents or their substitute or substitutes may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
Name Title Date ---- ----- ---- /s/ John A. Phillips Chief Executive Officer May 14, 2000 ______________________________________ and Director (Principal John A. Phillips Executive Officer) /s/ T. Robert Christ Chief Financial Officer May 14, 2000 ______________________________________ (Principal financial T. Robert Christ Officer and Principal Accounting Officer) /s/ Dean A. Phillips President and Director May 14, 2000 ______________________________________ Dean A. Phillips /s/ Nicholas Donatiello, Jr. Director May 14, 2000 ______________________________________ Nicholas Donatiello, Jr. /s/ Esther Dyson Director May 14, 2000 ______________________________________ Esther Dyson /s/ William R. Hambrecht Director May 14, 2000 ______________________________________ William R. Hambrecht
II-4 ARISTOTLE INTERNATIONAL, INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES Years ended December 31, 1997, 1998 and 1999
Column A Column B Column C Column D Column E -------- ---------- ------------------- -------- -------- Additions Charged Balance Balance at Charged to to Other Amounts at End Beginning Costs and Accounts Written of Classification of Period Expenses Describe Off Period -------------- ---------- ---------- -------- -------- -------- Year ended December 31, 1997 Allowance for doubtful accounts................... $ 5,000 $ 4,264 $ -- $(4,264) $ 5,000 ======= ======== ===== ======= ======== Valuation allowance on deferred tax asset......... -- 37,190 -- -- 37,190 ======= ======== ===== ======= ======== Year ended December 31, 1998 Allowance for doubtful accounts................... 5,000 7,420 -- (420) 12,000 ======= ======== ===== ======= ======== Valuation allowance on deferred tax asset......... 37,190 14,303 -- -- 51,493 ======= ======== ===== ======= ======== Year ended December 31, 1999 Allowance for doubtful accounts................... 12,000 67,580 -- (4,750) 74,830 ======= ======== ===== ======= ======== Valuation allowance on deferred tax asset......... $51,493 $732,354 $ -- $ -- $783,847 ======= ======== ===== ======= ========
EXHIBIT INDEX
Exhibit Number Description ------- ----------- *1.1 Form of Underwriting Agreement. *3.1 Restated Certificate of Incorporation of Aristotle International, Inc. *3.2 Bylaws of Aristotle International, Inc. *4.1 Form of Stock Certificate. 4.2 Aristotle Publishing, Inc., Investors' Rights Agreement, dated as of September 17, 1999, by and among the registrant and the parties who are signatories thereto. *5.1 Opinion of Pillsbury Madison & Sutro LLP. 10.1 Registrant's 1999 Stock Option Plan. *10.2 Registrant's 2000 Omnibus Stock Plan. 10.3 Employment and Stock Repurchase Agreement, dated as of September 17, 1999, by and between the registrant and John A. Phillips. 10.4 Employment and Stock Repurchase Agreement, dated as of September 17, 1999, by and between the registrant and Dean A. Phillips. 10.5 Letter Agreement, dated as of October 6, 1999, by and between the registrant and Rob Christ. 10.6 Letter Agreement, dated as of November 2, 1999, by and between the registrant and Blair Richardson. *10.7 Letter Agreement, dated as of , by and between the registrant and Gordon N. Stoll. *10.8 Form of Directors and Officers' Indemnification Agreement. 10.9 Agreement, dated as of February 9, 1998, between the registrant and Central Address Systems, Inc. 10.10 Lease Agreement, dated as of September 28, 1999, between the registrant and Colleen Brent, Leland Dobbs and Barrett G. Levine. 10.11 Office Lease Agreement, dated as of January 15, 2000, between the registrant and Council on American-Islamic Relations. 10.12 Lease Agreement, dated September 30, 1996, between the registrant and Sidney S. Zlotnick and Renee Z. Kraft. 10.13 Form of Proprietary Information and Inventions Agreement. 23.1 Consent of KPMG LLP, Independent Auditors. 23.2 Consent of Keller Bruner & Company, LLP. *23.3 Consent of Pillsbury Madison & Sutro LLP (contained in their opinion filed as Exhibit 5.1). 24.1 Power of attorney (reference is made to Page II-4). 27.1 Financial Data Schedule for Aristotle International, Inc.
- -------- * To be filed by amendment EX-4.2 2 INVESTOR RIGHTS AGREEMENT EXHIBIT 4.2 ARISTOTLE PUBLISHING, INC. INVESTORS' RIGHTS AGREEMENT SEPTEMBER 17, 1999 TABLE OF CONTENTS
Page 1. Registration Rights ...................................................... 1 1.1 Definitions .................................................... 1 1.2 Request for Registration ....................................... 2 1.3 Company Registration ........................................... 3 1.4 Form-3 Registration ............................................ 5 1.5 Obligations of the Company ..................................... 6 1.6 Information from Holder ........................................ 6 1.7 Expenses of Registration ....................................... 7 1.8 Delay of Registration .......................................... 7 1.9 Indemnification ................................................ 7 1.10 Reports Under Securities Exchange Act of 1934 ................. 9 1.11 Assignment of Registration Rights ............................. 10 1.12 Limitations on Subsequent Registration Rights ................. 10 1.13 "Market Stand-Off' Agreement .................................. 10 1.14 Termination of Registration Rights ............................ 11 2. Covenants of the Company ................................................. 11 2.1 Delivery of Financial Statement ................................ 11 2.2 Inspection ..................................................... 12 2.3 Termination of Information and Inspection Covenants............. 12 2.4 Right of First Offer ........................................... 12 2.5 Board of Directors ............................................. 13 2.6 Observer Rights ................................................ 14 2.7 Termination of Certain Covenants ............................... 15 2.8 Confidentiality ................................................ 15 3. Miscellaneous ........................................................... 15 3.1 Successors and Assigns ......................................... 15 3.2 Governing Law .................................................. 15 3.3 Counterparts ................................................... 15 3.4 Titles and Subtitles ........................................... 16 3.5 Notices ........................................................ 16 3.6 Expenses ....................................................... 16 3.7 Entire Agreement: Amendments and Waivers ....................... 16 3.8 Severability ................................................... 16 3.9 Aggregation of Stock ........................................... 16
INVESTORS' RIGHTS AGREEMENT THIS INVESTORS' RIGHTS AGREEMENT is made as of the 17th day of September, 1999, by and among Aristotle Publishing, Inc., a Delaware corporation (the "Company") the investors listed on Schedule A hereto, each of which is herein referred to as an "Investor" and the holders of Common Stock listed on Schedule B hereto, each of which is herein referred to as a "Founder." RECITALS WHEREAS, the Company and the Investors are parties to the Series A Preferred Stock Purchase Agreement of even date herewith (the "Series A Agreement"); WHEREAS, in order to induce the Company and the Founders to approve the issuance of the Series A Preferred Stock and to induce the Investors to invest funds in the Company pursuant to the Series A Agreement, the Investors, the Founders and the Company hereby agree that this Agreement shall govern the rights of the Investors and the Founders to cause the Company to register shares of Common Stock issued or issuable to them and certain other matters as set forth herein; NOW, THEREFORE, THE PARTIES HEREBY AGREE AS FOLLOWS: 1. Registration Rights. The Company covenants and agrees as follows: ------------------- 1.1 Definitions. For purposes of this Section 1: (a) The term "Act" means the Securities Act of 1933, as amended. (b) The term "Form S-3" means such form under the Act as in effect on the date hereof or any registration form under the Act subsequently adopted by the SEC that permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the SEC. (c) The term "Holder" means any person owning or having the right to acquire Registrable Securities or any assignee thereof in accordance with Section 1.11 hereof. (d) The term "Initial Offering" means the Company's first firm commitment underwritten public offering of its Common Stock under the Act. (e) The term "1934 Act" means the Securities Exchange Act of 1934, as amended. (f) The term "register," "registered," and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with he Act, and the declaration or ordering of effectiveness of such registration statement or document. (g) The term "Registrable Securities" means (i) the Common Stock issuable or issued upon conversion of the Series A Preferred Stock, and (ii) any Common Stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right or other security that is issued as) a dividend or other distribution with respect to, or in exchange for, or in replacement of, the shares referenced in (i) above, excluding in all cases, however, any Registrable Securities sold by a person to the public either pursuant to Rule 144 or in a transaction in which his rights under this Section 1 are not assigned. (h) The number of shares of "Registrable Securities" outstanding shall be determined by the number of shares of Common Stock outstanding that are, and the number of shares of Common Stock issuable pursuant to then exercisable or convertible securities that are, Registrable Securities. (i) The term "SEC" shall mean the Securities and Exchange Commission. 1.2 Request for Registration. ------------------------ (a) Subject to the conditions of this Section 1.2, if the Company shall receive at any time after the earlier of (i) two (2) years after the date of this Agreement or (ii) six (6) months after the effective date of the Initial Offering, a written request from the Holders of twenty-five percent (25%) or more of the Registrable Securities then outstanding (the "Initiating Holders") that the Company file a registration statement under the Act covering the registration of Registrable Securities with an anticipated aggregate offering price of at least $5,000,000, then the Company shall, within twenty (20) days of the receipt thereof, give written notice of such request to all Holders, and subject to the limitations of this Section 1.2, use best efforts to effect, as soon as practicable, the registration under the Act of all Registrable Securities that the Holders request to be registered in a written request received by the Company within twenty (20) days of the mailing of the Company's notice pursuant to this Section 1.2(a). (b) If the Initiating Holders intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to this Section 1.2 and the Company shall include such information in the written notice referred to in Section 1.2(a). In such event the right of any Holder to include its Registrable Securities in such registration shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting (unless otherwise mutually agreed by a majority in interest of the Initiating Holders and such Holder) to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by a majority in interest of the Initiating Holders (which underwriter or underwriters shall be reasonably acceptable to the Company). Notwithstanding any other provision of this Section 1.2, if the underwriter advises the Company that marketing factors require a limitation of the number 2 of securities underwritten (including Registrable Securities), then the Company shall so advise all Holders of Registrable Securities that would otherwise be underwritten pursuant hereto, and the number of shares that may be included in the underwriting shall be allocated to the Holders of such Registrable Securities on a pro rata basis based on the number of Registrable Securities held by all such Holders (including the Initiating Holders). Any Registrable Securities excluded or withdrawn from such underwriting shall be withdrawn from the registration. (c) The Company shall not be required to effect a registration pursuant to this Section 1.2: (i) in any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, unless the Company is already subject to service in such jurisdiction and except as may be required under the Act; or (ii) after the Company has effected three (3) registrations pursuant to this Section 1.2, and such registrations have been declared or ordered effective; or (iii) during the period starting with the date sixty (60) days prior to the Company's good faith estimate of the date of the filing of, and ending on a date one hundred eighty (180) days following the effective date of, a Company-initiated registration subject to Section 1.3 below, provided that the Company is actively employing in good faith all reasonable efforts to cause such registration statement to become effective; or (iv) if the Initiating Holders propose to dispose of Registrable Securities that may be registered on Form S-3 pursuant to Section 1.4 hereof; or (v) if the Company shall furnish to Holders requesting a registration statement pursuant to this Section 1.2, a certificate signed by the Company's Chief Executive Officer Chairman of the Board stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its shareholders for such registration statement to be effected at such time, in which event the Company shall have the right to defer such filing for a period of not more than one hundred twenty (120) days after receipt of the request of the Initiating Holders, provided that such right to delay a request shall be exercised by the Company not more than once in any twelve (12)-month period. 1.3 Company Registration. -------------------- (a) If (but without any obligation to do so) the Company proposes to register (including for this purpose a registration effected by the Company for shareholders other than the Holders) any of its stock or other securities under the Act in connection with the public offering of such securities (other than a registration relating solely to the sale of securities to participants in a Company stock plan, a registration relating to a corporate reorganization or other transaction under Rule 145 of the Act, a registration on any form that does not include substantially the same information as would be required to be included in a registration statement covering the sale of the Registrable Securities, or a registration in which the only Common Stock 3 being registered is Common Stock issuable upon conversion of debt securities that are also being registered), the Company shall, at such time, promptly give each Holder written notice of such registration. Upon the written request of each Holder given within twenty (20) days after mailing of such notice by the Company in accordance with Section 3.5, the Company shall, subject to the provisions of Section 1.3(c), use all reasonable efforts to cause to be registered under the Act all of the Registrable Securities that each such Holder has requested to be registered. (b) Right to Terminate Registration. The Company shall ------------------------------- have the right to terminate or withdraw any registration initiated by it under this Section 1.3 prior to the effectiveness of such registration whether or not any Holder has elected to include securities in such registration. The expenses of such withdrawn registration shall be home by the Company in accordance with Section 1.7 hereof. (c) Underwriting Requirements. In connection with any ------------------------- offering involving an underwriting of shares of the Company's capital stock, the Company shall not be required under this Section 1.3 to include any of the Holders' securities in such underwriting unless they accept the terms of the underwriting as agreed upon between the Company and the underwriters selected by it (or by other persons entitled to select the underwriters) and enter into an underwriting agreement in customary form with an underwriter or underwriters selected by the Company, and then only in such quantity as the underwriters determine in their sole discretion will not jeopardize the success of the offering by the Company. If the total amount of securities, including Registrable Securities, requested by shareholders to be included in such offering exceeds the amount of securities sold other than by the Company that the underwriters determine in their sole discretion is compatible with the success of the offering, then the Company shall be required to include in the offering only that number of such securities, including Registrable Securities, that the underwriters determine in their sole discretion will not jeopardize the success of the offering (the securities so included to be apportioned pro rata among the selling Holders according to the total amount of securities entitled to be included therein owned by each selling Holder or in such other proportions as shall mutually be agreed to by such selling Holders), but in no event shall (i) the amount of securities of the selling Holders included in the offering be reduced below thirty percent (30%) of the total amount of securities included in such offering, unless such offering is the initial public offering of the Company's securities, in which case the selling Holders may be excluded if the underwriters make the determination described above and no other shareholder's securities are included, or (ii) notwithstanding (i) above, any shares being sold by a shareholder exercising a demand registration right similar to that granted in Section 1.2 be excluded from such offering. For purposes of the preceding parenthetical concerning apportionment, for any selling shareholder that is a Holder of Registrable Securities and that is a partnership or corporation, the partners, retired partners and shareholders of such Holder, or the estates and family members of any such partners and retired partners and any trusts for the benefit of any of the foregoing persons shall be deemed to be a single "selling Holder," and any pro rata reduction with respect to such "selling Holder" shall be based upon the aggregate amount of Registrable Securities owned by all such related entities and individuals. 4 1.4 Form S-3 Registration. In case the Company shall receive --------------------- from the Holders of Registrable Securities a written request or requests that the Company effect a registration on~Form S-3 and any related qualification or compliance with respect to all or a part of the Registrable Securities owned by such Holder or Holders, the Company shall: (a) promptly give written notice of the proposed registration, and any related qualification or compliance, to all other Holders; and (b) use best efforts to effect, as soon as practicable, such registration and all such qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Holders' Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any other Holders joining in such request as are specified in a written request given within fifteen (15) days after receipt of such written notice from the Company, provided, however, that the Company shall not be obligated to effect any such registration, qualification or compliance, pursuant to this section 1.4: (i) if Form S-3 is not available for such offering by the holders; (ii) if the Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities (if any) at an aggregate price to the public (net of any underwriters' discounts or commissions) of less than $5,000,000; (iii) if the Company shall furnish to the Holders a certificate signed by the Chief Executive Officer or Chairman of the Board of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its shareholders for such Form S-3 Registration to be effected at such time, in which event the Company shall have the right to defer the filing of the Form S-3 registration statement for a period of not more than one hundred twenty (120) days after receipt of the request of the Holder or Holders under this Section 1.4; provided, however, that the Company shall not utilize this right more than once in any twelve month period; (iv) if the Company has, within the twelve (12) month period preceding the date of such request, already effected one registration on Form S-3 for the Holders pursuant to this Section 1.4; or (v) in any particular jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance. (c) Subject to the foregoing, the Company shall file a registration statement covering the Registrable Securities and other securities so requested to be registered as soon as practicable after receipt of the request or requests of the Holders. Registrations effected pursuant to this Section 1.4 shall not be counted as requests for registration effected pursuant to Sections 1.2. 5 1.5 Obligations of the Company. Whenever required under this -------------------------- Section 1 to effect the registration of any Registrable Securities, the Company shall, as expeditiously sly as reasonably possible: (a) prepare and file with the SEC a registration statement with respect to such Registrable Securities and use best efforts to cause such registration statement to become effective, and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for a period of up to one hundred twenty (120) days or, if earlier, until the distribution contemplated in the Registration Statement has been completed; (b) prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement; (c) furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them; (d) use best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions; (e) in the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering; (f) notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Act or the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing; (g) cause all such Registrable Securities registered pursuant hereunder to be listed on each securities exchange on which similar securities issued by the Company are then listed; and (h) provide a transfer agent and registrar for all Registrable Securities registered pursuant hereunder and a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration. 1.6 Information from Holder. It shall be a condition precedent ----------------------- to the obligations of the Company to take any action pursuant to this Section 1 with respect to the 6 Registrable Securities of any selling Holder that such Holder shall furnish to the Company such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of such securities as shall be required to effect the registration of such Holder's Registrable Securities. 1.7 Expenses of Registration. All expenses other than ------------------------ underwriting discounts and commissions incurred in connection with registrations, filings or qualifications pursuant to Sections 1.2, 1.3 and 1.4, including (without limitation) all registration, filing and qualification fees, printers' and accounting fees, fees and disbursements of counsel for the Company and the reasonable fees and disbursements of one counsel for the selling Holders which fees and disbursements shall not exceed $30,000, shall be borne by the Company. Notwithstanding the foregoing, the Company shall not be required to pay for any expenses of any registration proceeding begun pursuant to Section 1.2 or Section 1.4 if the registration request is subsequently withdrawn at the request of the Holders of a majority of the Registrable Securities to be registered (in which case all participating Holders shall bear such expenses pro rata based upon the number of Registrable Securities that were to be requested in the withdrawn registration), unless, in the case of a registration requested under Section 1.2, the Holders of a majority of the Registrable Securities agree to forfeit their right to one demand registration pursuant to Section 1.2, provided, however, that if at the time of such withdrawal, the Holders have learned of a material adverse change in the condition, business, or prospects of the Company different from that known to, or not previously known by, the Holders at the time of their request and have withdrawn the request with reasonable promptness following disclosure by the Company of such material adverse change, then the Holders shall not be required to pay any of such expenses and shall retain their rights pursuant to Section 1.2 or 1.4. 1.8 Delay of Registration. No Holder shall have any right to --------------------- obtain or seer; an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 1. 1.9 Indemnification. In the event any Registrable Securities --------------- are included in a registration statement under this Section 1: (a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, the partners or officers, directors and shareholders of each Holder, legal counsel and accountants for each Holder, any underwriter (as defined in the Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Act or the 1934 Act, against any losses, claims, damages or liabilities (joint or several) to which they may become subject under the Act, the 1934 Act or any state securities laws, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the Act, the 1934 Act, any state securities laws or any rule or regulation promulgated under the Act, the 1934 Act 7 or any state securities laws; and the Company will reimburse each such Holder, underwriter or controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained in this subsection 1.9(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon a Violation that occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by any such Holder, underwriter controlling person; provided further, however, that the foregoing indemnity agreement with respect to any preliminary prospectus shall not inure to the benefit of any Holder or underwriter, or any person controlling such Holder or underwriter, from whom the person asserting any such losses, claims, damages or liabilities purchased shares in the offering, if a copy of the prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Holder or underwriter to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the shares to such person, and if the prospectus (as so amended or supplemented) would have cured the defect giving rise to such loss, claim, damage or liability. (b) To the extent permitted by law, each selling Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the registration statement, each person, if any, who controls the Company within the meaning of the Act, legal counsel and accountants for the Company, any underwriter, any other Holder selling securities in such registration statement and any controlling person of any such underwriter or other Holder, against any losses, claims, damages or liabilities (joint or several) to which any of the foregoing persons may become subject, under the Act, the 1934 Act or any state securities laws, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder expressly for use in connection with such registration; and each such Holder will reimburse any person intended to be indemnified pursuant to this subsection 1.9(b), for any legal or other expenses reasonably incurred by such person in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained in this subsection 1.9(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder (which consent shall not be unreasonably withheld), provided that in no event shall any indemnity under this subsection 1.9(b) exceed the net proceeds from the offering received by such Holder. (c) Promptly after receipt by an indemnified party under this Section 1.9 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 1.9, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, 8 that an indemnified party (together with all other indemnified parties that may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 1.9, but the omission so to deliver written notice to the indemnifying will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 1.9. (d) If the indemnification provided for in this Section 1.9 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage or expense referred to herein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage or expense in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage or expense, as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or Omission. (e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control. (f) The obligations of the Company and Holders under this Section 1.9 shall survive the completion of any offering of Registrable Securities in a registration statement under this Section 1, and otherwise. 1.10 Reports Under Securities Exchange Act of 1934. With a view --------------------------------------------- to making available to the Holders the benefits of Rule 144 promulgated under the Act and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration or pursuant to a registration on Form S-3, the Company agrees to: (a) make and keep public information available, as those terms are understood and defined in SEC Rule 144, at all times after ninety (90) days after the effective date of the Initial Offering; (b) file with the SEC in a timely manner all reports and other documents required of the Company under the Act and the 1934 Act; and 9 (c) furnish to any Holder, so long as the Holder owns any Registrable Securities, forthwith upon request (i) a written statement by the Company that it has complied with the reporting requirements of SEC Rule 144 (at any time after ninety (90) days after the effective date of the first registration statement filed by the Company), the Act and the 1934 Act (at any time after it has become subject to such reporting requirements), or that it qualifies as a registrant whose securities may be resold pursuant to Form S-3 (at any time after it so qualifies), (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested in availing any Holder of any rule or regulation of the SEC that permits the selling of any such securities without registration or pursuant to such form. 1.11 Assignment of Registration Rights. The rights to cause --------------------------------- the Company to register Registrable Securities pursuant to this Section I may be assigned (but only with all related obligations) by a Holder to a transferee or assignee of such securities that (i) is a subsidiary, parent, partner, limited partner, retired partner or shareholder of a Holder, (ii) is a Holder's family member or trust for the benefit of an individual Holder, or (iii) after such assignment or transfer, holds at least 125,000 shares of Registrable Securities (subject to appropriate adjustment for stock splits, stock dividends, combinations and other recapitalizations), provided: (a) the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned; (b) such transferee or assignee agrees in writing to be bound by and subject to the terms and conditions of this Agreement, including without limitation the provisions of Section 1.13 below; and (c) such assignment shall be effective only if immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the Act. 1.12 Limitations on Subsequent Registration Rights. From and --------------------------------------------- after the date of this Agreement, the Company shall not, without the prior written consent of the Holders of a majority of the Registrable Securities, enter into any agreement with any holder or prospective holder of any securities of the Company that would allow such holder or prospective holder (a) to include such securities in any registration filed under Section 1.3 hereof, unless under the terms of such agreement, such holder or prospective holder may include such securities in any such registration only to the extent that the inclusion of such securities will not reduce the amount of the Registrable Securities of the Holders that are included or (b) to demand registration of their securities. 1.13 "Market Stand-Off,' Agreement. Each Holder hereby agrees ----------------------------- that it will not, without the prior written consent of the managing underwriter, during the period commencing on the date of the final prospectus relating to the Company's initial public offering and ending on the date specified by the Company and the managing underwriter (such period not to exceed one hundred eighty (180) days) (i) lend, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock (whether such shares or any such securities are then owned by the Holder or are thereafter acquired), or (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any 10 such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing provisions of this Section 1.13 shall apply only to the Company's initial public offering of equity securities, shall not apply to the sale of any shares to an underwriter pursuant to an underwriting agreement, and shall only be applicable to the Holders if all officers and directors and greater than one percent (1%) shareholders of the Company enter into similar agreements. The underwriters in connection with the Company's initial public offering are intended third party beneficiaries of this Section 1.13 and shall have the right, power and authority to enforce the provisions hereof as though they were a party hereto. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to the Registrable Securities of each Holder (and the shares or securities of every other person subject to the foregoing restriction) until the end of such period. 1.14 Termination of Registration Rights. No Holder shall be ---------------------------------- entitled to exercise any right provided for in this Section 1 after five (5) years following the consummation of the Initial Offering or, as to any Holder, such earlier time at which all Registrable Securities held by such Holder (and any affiliate of the Holder with whom such Holder must aggregate its sales under Rule 144) can be sold in any three (3)-month period without registration in compliance with Rule 144 of the Act. 2. Covenants of the Company. ------------------------ 2.1 Delivery of Financial Statements. The Company shall deliver -------------------------------- to each Investor and each Holder, so long as each such Holder holds at least 125,000 shares of Registrable Securities (subject to appropriate adjustment for stock splits, stock dividends, combinations and other recapitalizations): (a) as soon as practicable, but in any event within ninety (90) days after the end of each fiscal year of the Company, an income statement for such fiscal year, a balance sheet of the Company and statement of shareholder's equity as of the end of such year, and a statement of cash flows for such year, such year-end financial reports to be in reasonable detail, prepared in accordance with generally accepted accounting principles ("GAAP"), and audited and certified by independent public accountants of nationally recognized standing selected by the Company; (b) as soon as practicable, but in any event within forty-five (45) days after the end of each of the first three (3) quarters of each fiscal year of the Company, an unaudited income statement, statement of cash flows for such fiscal quarter and an unaudited balance sheet as of the end of such fiscal quarter. (c) within thirty (30) days of the end of each month, an unaudited income statement and statement of cash flows and balance sheet for and as of the end of such month, in reasonable detail; 11 (d) as soon as practicable, but in any event at least thirty (30) days prior to the end of each fiscal year, a budget and business plan for the next fiscal year, prepared on a monthly basis, including balance sheets, income statements and statements of cash flows for such months and, as soon as prepared, any other budgets or revised budgets prepared by the Company; (e) with respect to the financial statements called for in subsections (b) and (c) of this Section 2.1, an instrument executed by the Chief Financial Officer or President of the Company certifying that such financials were prepared in accordance with GAAP consistently applied with prior practice for earlier periods (with the exception of -footnotes that may be required by GAAP) and fairly present the financial condition of the Company and its results of operation for the period specified, subject to year-end audit adjustment; and (f) such other information relating to the financial condition, business, prospects or corporate affairs of the Company as the Investor or any assignee of the Investor may from time to time request, provided, however, that the Company shall not be obligated under this subsection (f) or any other subsection of Section 2.1 to provide information that it deems in good faith to be a trade secret or similar confidential information. 2.2 Inspection. The Company shall permit each Investor, at such ---------- Investor's expense, to visit and inspect the Company's properties, to examine its books of account and records and to discuss the Company's affairs, finances and accounts with its officers, all at such reasonable times as may be requested by the Investor; provided, however. that the Company shall not be obligated pursuant to this Section 2.2 to provide access to any information that it reasonably considers to be a trade secret or similar confidential information. 2.3 Termination of Information and Inspection Covenants. The --------------------------------------------------- covenants set forth in Sections 2.1 and 2.2 shall terminate as to Investors and be of no further force or effect when the sale of securities pursuant to a registration statement filed by the Company under the Act in connection with the firm commitment underwritten offering of its securities to the general public is consummated or when the Company first becomes subject to the periodic reporting requirements of Sections 12(g) or 15(d) of the 1934 Act, whichever event shall first occur. 2.4 Right of First Offer. Subject to the terms and conditions -------------------- specified in this paragraph 2.4, the Company hereby grants to each Investor who holds at least 125,000 Registrable Securities (for purposes of this Section 2.4, a "Major Investor"), a right of first offer with respect to future sales by the Company of its Shares (as hereinafter defined). For purposes of this Section 2.4, Investor includes any general partners and affiliates of an Investor. An Investor shall be entitled to apportion the right of first offer hereby granted it among itself and its partners and affiliates in such proportions as it deems appropriate. Each time the Company proposes to offer any shares of, or securities convertible into or exchangeable or exercisable for any shares of, any class of its capital stock ("Shares"), the Company shall first make an offering of such Shares to each Investor in accordance with the following provisions. 12 (a) The Company shall deliver a notice in accordance with Section 3.5 ("Notice") to the Major Investors stating (i) its bona fide intention to offer such Shares, (ii) the number of such Shares to be offered, and (iii) the price and terms upon which it proposes to offer such Shares. (b) By written notification received by the Company, within fifteen (15) calendar days after receipt of the Notice, each Major Investor may elect to purchase or obtain, at the price and on the terms specified in the Notice, up to that portion of such Shares that equals the proportion that the number of shares of Common Stock issued and held, or issuable upon conversion of the Series A Preferred Stock then held, by such Major Investor bears to the total number of shares of Common Stock of the Company then outstanding (assuming full conversion of all convertible securities). The Company shall promptly, in writing, inform each Major Investor that elects to purchase all the shares available to it (a "Fully Exercising Investor") of any other Major Investor's failure to do likewise. During the ten (10) day period commencing after such information is given, each Fully Exercising Investor may elect to purchase that portion of the Shares for which Major Investors were entitled to subscribe but which were not subscribed for by the Major Investors that is equal to the proportion that the number of shares of Common Stock issued and held, or issuable upon conversion of Series A Preferred Stock then held, by such Fully Exercising Investor bears to the total number of shares of Common Stock issued and held, or issuable upon conversion of the Series A Preferred Stock then held, by all Fully Exercising Investors who wish to purchase some of the unsubscribed shares. (c) If all Shares that Major Investors are entitled to obtain pursuant to subsection 2.4(b) are not elected to be obtained as provided in subsection 2.4(b) hereof, the Company may, during the ninety (90) day period following the expiration of the period provided in subsection 2.4(b) hereof, offer the remaining unsubscribed portion of such Shares to any person or persons at a price not less than, and upon terms no more favorable to the offeree than those specified in the Notice. If the Company does not enter into an agreement for the sale of the Shares within such period, or if such agreement is not consummated within ninety (90) days of the execution thereof, the right provided hereunder shall be deemed to be revived and such Shares shall not be offered unless first reoffered to the Major Investors in accordance herewith. (d) The right of first offer in this paragraph 2.4 shall not be applicable to (i) the issuance or sale of shares of Common Stock (or options therefor) to employees, directors and consultants for the primary purpose of soliciting or retaining their services; (ii) the issuance of securities pursuant to a bona fide, firmly underwritten public offering of shares of Common Stock, registered under the Act, resulting in proceeds to the Company of at least $15,000,000 in the aggregate, (iii) the issuance of securities pursuant to the conversion or exercise of convertible or exercisable securities outstanding as of the date of this Agreement, or (iv) the issuance of securities in connection with a bona fide business acquisition of or by the Company, whether by merger, consolidation, sale of assets, sale or exchange of stock or otherwise. 2.5 Board of Directors; ------------------ (a) With respect to one (1) of the members of the Company's Board of Directors that the Company's Restated Certificate of Incorporation (the "Restated Certificate") provides are to be elected by the holders of Common Stock (the "Common Directors"), the 13 Investors and the Founders hereby agree to vote all of their shares of Common Stock and Preferred Stock now owned or hereafter acquired in favor of a person designated by the unanimous consent of the remaining members of the Board of Directors. (b) With respect to one (1) of the two (2) members of the Company's Board of Directors that the Restated Certificate provides are to be elected by the holders of the Series A Preferred Stock (the "Series A Directors"), the Investors hereby agree to vote all of their shares of Series A Preferred Stock now owned or hereafter acquired in favor of the election of a designee of entities affiliated with W.R. Hambrecht & Co., which designee shall initially be William R. Hambrecht ("Mr. Hambrecht") until such time as Mr. Hambrecht is no longer able to serve as director of the Company as a result of death or prolonged physical or mental incapacity. (c) Should the provisions of this Section 2.5 be construed to constitute the granting of proxies, such proxies shall be deemed coupled with an interest and are irrevocable for the term of this Agreement. It is agreed and understood that monetary damages would not adequately compensate an injured party for the breach of this Section 2.5 by any party, that this Section 2.5 shall be specifically enforceable, and that any breach or threatened breach of this Section 2.5 shall be the proper subject of a temporary or permanent injunction or restraining order. Further, each party hereto waives any claim or defense that there is an adequate remedy at law for such breach or threatened breach. (d) In the event of the resignation, death, removal or disqualification of a Series A Director, as the case may be, W.R. Hambrecht & Co. shall promptly nominate a new director, and, after written notice of the nomination has been given by W.R. Hambrecht & Co. to the other parties, each Investor and Founder shall vote its shares of capital stock of the Company entitled to vote in such election to elect such nominee to the Board of Directors. (e) Except with respect to Mr. Hambrecht, W.R. Hambrecht & Co. may remove its designated director(s) at any time and from time to time, with or without cause (subject to the Bylaws of the Company as in effect from time to time and any requirements of law), in its sole discretion, and, after written notice to each of the parties hereto of the new nominee to replace such director, each Investor and Founder shall promptly vote its shares of capital stock of the Company entitled to vote in such election to elect such nominee to the Board of Directors. 2.6 Observer Rights. The Company shall invite a representative of --------------- entities affiliated with W.R Hambrecht & Co., which representative shall initially be Scott Gibbs, to attend all meetings of its Board of Directors in a nonvoting observer capacity and, in this respect, shall give such representative copies of all notices, minutes, consents, and other materials that it provides to its directors; provided, however, that such representative shall agree to hold in confidence and trust and to act in a fiduciary manner with respect to all information so provided; and, provided further, that the Company reserves the right to withhold any information and to exclude such representative from any meeting or portion thereof if access to such information or attendance at such meeting could adversely affect the attorney-client privilege between the Company and its counsel or would result in disclosure of trade secrets to such representative or if such Investor or its representative is a direct competitor of the Company. 14 2.7 Termination of Certain Covenants. The covenants set forth in -------------------------------- Sections 2.4, 2.5 and 2.6 shall terminate and be of no further force or effect upon the earlier to occur of: (i) the sale of securities pursuant to a registration statement filed by the Company under the Act in connection with the firm commitment underwritten offering of its securities to the general public is consummated, resulting in at least $15,000,000 in aggregate proceeds to the Company; or (ii) the date upon which the Company first becomes subject to the periodic reporting requirements of Sections 12(g) or 15(d) of the 1934 Act. 2.8 Confidentiality. Each Holder shall agree to use, and to --------------- its best efforts to insure that its authorized representatives use, the same degree of care as such Holder uses to protect its own confidential information to keep confidential any information furnished to it, which the Company identifies as being confidential or proprietary (so long as such information is not in the public domain), except that such Holder may disclose such confidential and proprietary information to any partner, subsidiary or parent of such Holder for the sole purpose of evaluating its investment in the Company so long as such partner, subsidiary or parent is advised and agrees to the confidentiality provisions of this Section 2.8; provided, however, that the obligations under this Section 2.8 shall not apply to a Holder with respect to any information after five years following the disclosure thereof or any information that such Holder can document (i) is or becomes (through no improper action or inaction by such Holder or any affiliate, agent, consultant or employee thereof) generally available to the public, (ii) was in its possession or known by such Holder prior to receipt from the Company, (iii) was rightfully disclosed to such Holder by a third party, or (iv) was independently developed without use of any confidential information of the Company. Each Holder may make disclosures required by law or court order provided such Holder uses diligent reasonable efforts to limit disclosure and to obtain confidential treatment or a protective order and has allowed the Company to participate in the proceeding. 3. Miscellaneous. -------------- 3.1 Successors and Assigns. Except as otherwise provided herein, ---------------------- the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties (including transferees of any shares of Registrable Securities). Nothing in this Agreement, express or implied, is intended to confer upon any path than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 3.2 Governing Law. This Agreement shall be governed by and ------------- construed under the laws of the State of Delaware as applied to agreements among Delaware residents entered into and to be performed entirely within Delaware. 3.3 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. 15 3.4 Titles and Subtitles. The titles and subtitles used in this -------------------- Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 3.5 Notices. Unless otherwise provided, any notice required or ------- permitted under this Agreement shall be given in writing and shall be deemed effectively given upon personal delivery to the party to be notified or upon delivery by confirmed facsimile transmission, nationally recognized overnight courier service, or upon deposit with the United States Post Office, by registered or certified mail, postage prepaid and addressed to the party to be notified at the address indicated for such party on the signature page hereof, or at such other address as such party may designate by ten (10) days' advance written notice to the other parties. 3.6 Expenses. If any action at law or in equity is necessary to -------- enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 3.7 Entire Agreement: Amendments and Waivers. This Agreement ---------------------------------------- (including the Exhibits hereto, if any) constitutes the full and entire understanding and agreement among the parties with regard to the subjects hereof and thereof. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the holders of a majority of the Registrable Securities. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each holder of any Registrable Securities each future holder of all such Registrable Securities, and the Company. 3.8 Severability. If one or more provisions of this Agreement ------------ are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. 3.9 Aggregation of Stock. All shares of Registrable Securities -------------------- held or acquired by affiliated entities or persons shall be aggregated together for the purpose of determining the availability of any rights under this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. ARISTOTLE PUBLISHING, INC. By: /s/ John Phillips ________________________________ Name: John Phillips ______________________________ Title: CEO _____________________________ 16 INVESTORS: W. R. Hambrecht/Aristotle, LLC ------------------------------ Name of Investor By: /s/ W. R. Hambrecht/Aristotle Management LLC, Manager Name: M. Scott Gibbs -------------- Title: Manager ------- Address: 550 15/th/ Street, 2nd Floor San Francisco, Ca 94103 ------------------------ 17 INVESTORS: EPARTNERS --------- Name of Investor By: /s/ News American Incorporated, General Partner Name: Lawrence A. Jacobs Title: Senior Vice President Address: 1211 Avenue of the Americas New York, New York 10036 18 INVESTORS: Odyssey Capital II, LLC Name of Investor By: Odyssey Capital management, LLC Its: Managing Member Name: /s/ Nicholas Donatiello, Jr. Title: Management Member Address: 550 Fifteenth Street San Francisco, Ca 94103 19 FOUNDERS: /s/ John Phillips __________________________________ NAME __________________________________ NAME 20 FOUNDERS: ___________________________________ NAME /s/ Dean A. Phillips ___________________________________ NAME 21 SCHEDULE A ---------- List of Investors
Number of Series A Name and Address Shares Purchased ---------------- ----------------- WR Hambrecht/Aristotle, LLC $ 2,000,000.00 727,273 ePartners $ 1,000,000.00 363,636 Odyssey Capital II, LLC $ 500,000.00 181,818 Total $ 3,500,000.00 1,272,727
22 SCHEDULE B ---------- List of Founders
Number of Common Name and Address Shares Held ---------------- ----------- John A. Phillips 1,500,000 Dean A. Phillips 1,500,000
23 EX-10.1 3 1999 STOCK OPTION PLAN EXHIBIT 10.1 ARISTOTLE PUBLISHING, INC ------------------------- 1999 STOCK OPTION PLAN ---------------------- 1. PURPOSE. This 1999 Stock Option Plan/1/ ("Plan") is established as a ------- compensatory plan to attract, retain and provide equity incentives to selected persons to promote the financial success of Aristotle Publishing, Inc., a corporation organized under the laws of the District of Columbia (the "Company"). Capitalized terms not previously defined herein are defined in Section 17 of this Plan. 2. TYPES OF OPTIONS AND SHARES. Options granted under this Plan (the --------------------------- "Options") may be either (a) incentive stock options ("ISOs") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or (b) nonqualified stock options ("NQSOs"), as designated at the time of grant. The shares of stock that may be purchased upon exercise of Options granted under this Plan (the "Shares") are shares of the common stock of the Company. 3. NUMBER OF SHARES. The aggregate number of Shares that may be issued ---------------- pursuant to Options granted under this Plan is Fifty-five (55) Shares, subject to adjustment as provided in this Plan. If any Option expires or is terminated without being exercised in whole or in part, the unexercised or released Shares from such Option shall be available for future grant and purchase under this Plan. At all times during the term of this Plan, the Company shall reserve and keep available such number of Shares as shall be required to satisfy the requirements of outstanding Options under this Plan. 4. ELIGIBILITY. ----------- (a) General Rules of Eligibility. Options may be granted to ---------------------------- employees, officers, directors, consultants, independent contractors and advisors (provided such consultants, contractors and advisors render bona fide services not in connection with the offer and sale of securities in a capital- raising transaction) of the Company or any Parent, Subsidiary or Affiliate of the Company. ISOs may be granted only to employees (including officers and directors who are also employees) of the Company or a Parent or Subsidiary of the Company. The Committee (as defined in Section 14) in its sole discretion shall select the recipients of Options ("Optionees"). An Optionee may be granted more than one Option under this Plan. (b) Company Assumption of Options. The Company may also, from time ----------------------------- to time, assume outstanding options granted by another company, whether in connection with an acquisition of such other company or otherwise, by either (i) granting an Option under this Plan in replacement of the option assumed by the Company, or (ii) treating the assumed option as if it _____________ /1/ Approved by the Company Board of Directors on March 16, 1999. Approved by the Company shareholders on March 16, 1999. 1 had been granted under this Plan if the terms of such assumed option could be applied to an option granted under this Plan. Such assumption shall be permissible if the holder of the assumed option would have been eligible to be granted an option hereunder if the other company had applied the rules of this Plan to such grant. 5. TERMS AND CONDITIONS OF OPTIONS. The Committee shall determine ------------------------------- whether each Option is to be an ISO or an NQSO, the number of Shares subject to the Option, the exercise price of the Option, the period during which the Option may be exercised, and all other terms and conditions of the Option, subject to the following: (a) Form of Option Grant. Each Option granted under this Plan shall -------------------- be evidenced by a written Stock Option Grant (the "Grant") in substantially the form attached hereto as Exhibit A or such other form as shall be approved by the Committee. (b) Date of Grant. The date of grant of an Option shall be the date ------------- on which the Committee makes the determination to grant such Option unless otherwise specified by the Committee and subject to applicable provisions of the Code. The Grant representing the Option will be delivered to the Optionee with a copy of this Plan within a reasonable time after the date of grant; provided, however that if, for any reason, including a unilateral decision by the Company not to execute an agreement evidencing such option, a written Grant is not executed within sixty (60) days after the date of grant, such option shall be deemed null and void. No Option shall be exercisable until such Grant is executed by the Company and the Optionee. (c) Exercise Price. The exercise price of an NQSO shall be not less -------------- than eighty-five percent (85%) of the Fair Market Value of the Shares on the date the Option is granted. The exercise price of an ISO shall be not less than one hundred percent (100%) of the Fair Market Value of the Shares on the date the Option is granted. The exercise price of any Option granted to a person owning more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary of the Company ("Ten Percent Shareholders") shall not be less than one hundred and ten percent (110%) of the Fair Market Value of the Shares on the date the Option is granted. (d) Exercise Period. Options shall be exercisable within the times --------------- or upon the events determined by the Committee as set forth in the Grant; provided, however that each Option must become exercisable at a rate of at least twenty percent (20%) per year over five (5) years from the date the Option is granted; and provided, however, that no Option shall be exercisable after the expiration of ten (10) years from the date the Option is granted, and provided further that no ISO granted to a Ten Percent Shareholder shall be exercisable after the expiration of five (5) years from the date the Option is granted. (e) Limitations. ----------- (i) ISO Limitations. The aggregate Fair Market Value (determined as of the time an Option is granted) of stock with respect to which ISOs are exercisable for the first time by an Optionee during any calendar year (under this Plan or under any other 2 incentive stock option plan of the Company or any Parent or Subsidiary of the Company) shall not exceed one hundred thousand dollars ($100,000). If the Fair Market Value of stock with respect to which ISOs are exercisable for the first time by an Optionee during any calendar year exceeds $100,000, the Options for the amount in excess of $100,000 shall be treated as not being ISOs and shall be NQSOs. The foregoing shall be applied by taking Options into account in the order in which they were granted. In the event that the Code or the regulations promulgated thereunder are amended after the effective date of this Plan to provide for a different limit on the Fair Market Value of Shares permitted to be subject to ISOs, such different limit shall be incorporated herein and shall apply to any Options granted after the effective date of such amendment. (ii) NQSO Limitations. Limitations on Grants. The foregoing provisions of this Plan --------------------- notwithstanding, no Optionee shall be granted Options under this Plan in any one fiscal year which in the aggregate shall permit the Optionee to purchase more than _____ [sic] shares of Common Stock, provided that a newly-hired Optionee may in addition receive a one-time Option grant to purchase up to an additional _____ [sic] shares of Common Stock upon acceptance of employment with the Company or any Parent, Subsidiary or Affiliate of the Company. To the extent the Board of Directors of the Company determines that the limitations such as the provisions of this Section 5(e)(ii) are no longer required to preserve the deductibility for the Company of option-related compensation under Section 162(m) of the Code, the Board of Directors may modify or eliminate the limitations contained in this Section 5(e)(ii). (f) Options Non-Transferable. Options granted under this Plan, and ------------------------ any interest therein, shall not be transferable or assignable by the Optionee, and may not be made subject to execution, attachment or similar process, otherwise than by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Optionee only by the Optionee or any permitted transferee. (g) Assumed Options. In the event the Company assumes an option --------------- granted by another company in accordance with Section 4(b) above, the terms and conditions of such option shall remain unchanged (except the exercise price and the number and nature of shares issuable upon exercise, which will be adjusted appropriately pursuant to Section 424 of the Code and the Treasury Regulations applicable thereto). In the event the Company elects to grant a new option rather than assuming an existing option (as specified in Section 4), such new option need not be granted at Fair Market Value on the date of grant and may instead be granted with a similarly adjusted exercise price. (h) Termination of Options. Except as otherwise provided in an ---------------------- Optionee's grant, options granted under the Plan shall terminate and may not be exercised if the Optionee ceases to be employed by, or provide services to, the Company or any Parent or Subsidiary of the Company (or, in the case of a NQSO, by or to any Affiliate of the Company). An Optionee shall be considered to be employed by the Company for all purposes under this Section 5(h) if the 3 Optionee is an officer, director or full-time employee of the Company or any Parent, Subsidiary or Affiliate of the Company or if the Committee determines that the Optionee is rendering substantial services as a part-time employee, consultant, contractor or advisor to the Company or any Parent, Subsidiary or Affiliate of the Company. The Committee shall have discretion to determine whether an Optionee has ceased to be employed by the Company or any Parent, Subsidiary or Affiliate of the Company and the effective date on which such employment terminated (the "Termination Date"). (i) Termination Generally. If an Optionee ceases to be employed --------------------- by the Company and all Parents, Subsidiaries or Affiliates of the Company for any reason except death or disability, the Options which are vested (the "Vested Options"), to the extent (and only to the extent) exercisable by the Optionee on the Termination Date, may be exercised by the Optionee, but only within three months after the Termination Date or such shorter period of time as provided in the Grant, but in no event less than thirty (30) days; provided that the Option may not be exercised in any event after the expiration date of the Option (the "Expiration Date"). (ii) Death or Disability. If an Optionee's employment with the ------------------- Company and all Parents, Subsidiaries and Affiliates of the Company is terminated because of the death of the Optionee or the permanent and total disability of the Optionee within the meaning of Section 22(e)(3) of the Code, the Vested Options, to the extent (and only to the extent) exercisable by the Optionee on the Termination Date, may be exercised by the Optionee (or the Optionee's legal representative), but only within twelve (12) months after the Termination Date; and provided further that the Option may not be exercised in any event later than the Expiration Date. If an Optionee's employment with the Company and all Parents, Subsidiaries and Affiliates of the Company is terminated because of a disability of the Optionee which is not permanent and total within the meaning of Section 22(e)(3) of the Code, the Vested Options, to the extent (and only to the extent) exercisable by the Optionee on the Termination Date, may be exercised by the Optionee or the Optionee's legal representative, but only within six (6) months after the Termination Date; and provided further that the Option may not be exercised in any event later than the Expiration Date. 6. EXERCISE OF OPTIONS. ------------------- (a) Notices. Options may be exercised only by delivery to the Company of a written exercise agreement in a form approved by the Committee (which need not be the same for each Optionee), stating the number of Shares being purchased, the restrictions imposed on the Shares, if any, and such representations and agreements regarding the Optionee's investment intent and access to information, if any, as may be required by the Company to comply with applicable securities laws, together with payment in full of the exercise price for the number of Shares being purchased. (b) Payment. Payment for the Shares may be made in cash (by check) ------- or, where approved by the Committee in its sole discretion at the time of grant and where permitted 4 by law: (i) by cancellation of indebtedness of the Company to the Optionee, (ii) by surrender of shares of Common Stock of the Company already owned by the Optionee, having a Fair Market Value equal to the exercise price of the Option; (iii) by waiver of compensation due or accrued to Optionee for services rendered; (iv) through delivery of a promissory note for the full exercise price bearing interest at such rate with the note due at such time, on a secured or unsecured basis, as determined by the Committee; (v) through a guaranty by the Company of a loan to the Optionee by a third party of all or part of the option price (but not more than the option price), and such guaranty may be on an unsecured or secured basis as the Committee shall approve (including, without limitation, by a security interest in the shares of the Company); (vi) provided that a public market for the Company's stock exists, through a "same day sale" commitment from the Optionee and a broker-dealer that is a member of the National Association of Securities Dealers, Inc. (an "NASD Dealer") whereby the Optionee irrevocably elects to exercise the Option and to sell a portion of the Shares so purchased to pay for the exercise price and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the exercise price directly to the Company; (vii) provided that a public market for the Company's stock exists, through a "margin" commitment from the Optionee and an NASD Dealer whereby the Optionee irrevocably elects to exercise the Option and to pledge the Shares so purchased to the NASD Dealer in a margin account as security for a loan from the NASD Dealer in the amount of the exercise price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the exercise price directly to the Company; or (viii) by any combination of the foregoing. (c) Withholding Taxes. At the discretion of the Company, prior to ----------------- issuance of the Shares upon exercise of an Option, the Optionee shall pay or make adequate provision for any federal or state withholding obligations of the Company, if applicable. Where approved by the Committee in its sole discretion, the Optionee may provide for payment of withholding taxes upon exercise of the Option by requesting that the Company retain Shares with a Fair Market Value equal to the minimum amount of taxes required to be withheld. In such case, the Company shall issue the net number of Shares to the Optionee by deducting the Shares retained from the Shares exercised. The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined in accordance with Section 83 of the Code (the "Tax Date"). All elections by Optionees to have Shares withheld for this purpose shall be made in writing in a form acceptable to the Committee and shall be subject to the following restrictions: (i) the election must be made on or prior to the applicable Tax Date; (ii) once made, the election shall be irrevocable as to the particular Shares as to which the election is made; (iii) all elections shall be subject to the consent or disapproval of the Committee; (iv) if the Optionee is an officer or director of the Company or other person (in each case, an "Insider") whose transactions in the Company's Common Stock are subject 5 to Section 16(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and if the Company is subject to Section 16(b) of the Exchange Act, the election must comply with Rule 16b-3 as promulgated by the Securities and Exchange Commission ("Rule 16b-3"). (d) Limitations on Exercise. Notwithstanding anything else to the ----------------------- contrary in the Plan or any Grant, no Option may be exercisable later than the expiration date of the Option. 7. RESTRICTIONS ON SHARES. At the discretion of the Committee, the ---------------------- Company may reserve to itself and/or its assignee(s) in the Grant (a) a right of first refusal to purchase all Shares that an Optionee (or a subsequent transferee) may propose to transfer to a third party and/or (b) for so long as the Company's stock is not publicly traded, a right to repurchase a portion of or all Shares held by an Optionee upon the Optionee's termination of employment or service with the Company or its Parent, Subsidiary or Affiliate of the Company for any reason within a specified time as determined by the Committee at the time of grant at the higher of (i) the Optionee's original purchase price, (ii) the Fair Market Value of such Shares or (iii) a price determined by a formula or other provision set forth in the Grant. 8. MODIFICATION, EXTENSION AND RENEWAL OF OPTIONS. The Committee shall ---------------------------------------------- have the power to modify, extend or renew outstanding Options and to authorize the grant of new Options in substitution therefor, provided that any such action may not, without the written consent of the Optionee, impair any rights under any Option previously granted. Any outstanding ISO that is modified, extended, renewed or otherwise altered shall be treated in accordance with Section 424(h) of the Code. The Committee shall have the power to reduce the exercise price of outstanding options; provided, however, that the exercise price per share may not be reduced below the minimum exercise price that would be permitted under Section 5(c) of this Plan for options granted on the date the action is taken to reduce the exercise price. Notwithstanding any other provision of this Plan, the Committee may accelerate the earliest date or dates on which outstanding Options (or any installments thereof) are exercisable. 9. PRIVILEGES OF STOCK OWNERSHIP. No Optionee shall have any of the ----------------------------- rights of a shareholder with respect to any Shares subject to an Option until such Option is properly exercised. No adjustment shall be made for dividends or distributions or other rights for which the record date is prior to such date, except as provided in this Plan. The Company shall provide annually to each Optionee a copy of the annual financial statements of the Company. 10. NO OBLIGATION TO EMPLOY; NO RIGHT TO FUTURE GRANTS. Nothing in this -------------------------------------------------- Plan or any Option granted under this Plan shall confer on any Optionee any right (a) to continue in the employ of, or other relationship with, the Company or any Parent or Subsidiary of the Company or limit in any way the right of the Company or any Parent, Subsidiary or Affiliate of the Company to terminate the Optionee's employment or other relationship at any time, with or without cause or (b) to have any Option(s) granted to such Optionee under this Plan, or any other plan, or to acquire any other securities of the Company, in the future. 6 11. ADJUSTMENT OF OPTION SHARES. In the event that the number of --------------------------- outstanding shares of Common Stock of the Company is changed by a stock dividend, stock split, reverse stock split, combination, reclassification or similar change in the capital structure of the Company without consideration, or if a substantial portion of the assets of the Company are distributed, without consideration in a spin-off or similar transaction, to the shareholders of the Company, the number of Shares available under this Plan and the number of Shares subject to outstanding Options and the exercise price per share of such Options shall be proportionately adjusted, subject to any required action by the Board or shareholders of the Company and compliance with applicable securities laws; provided, however, that a fractional share shall not be issued upon exercise of any Option and any fractions of a Share that would have resulted shall either be cashed out at Fair Market Value or the number of Shares issuable under the Option shall be rounded down to the nearest whole number, as determined by the Committee; and provided further that the exercise price may not be decreased to below the par value, if any, for the Shares. 12. ASSUMPTION OF OPTION BY SUCCESSORS. ---------------------------------- (a) In the event of (i) a merger or consolidation in which the Company is not the surviving corporation (other than a merger or consolidation with a wholly-owned subsidiary or a Parent or where there is no substantial change in the shareholders of the corporation and the Options granted under this Plan are assumed by the successor corporation), or (ii) the sale of all or substantially all of the assets of the Company, any or all outstanding Options shall be assumed by the successor corporation, which assumption shall be binding on all Optionees, an equivalent option shall be substituted by such successor corporation or the successor corporation shall provide substantially similar consideration to Optionees as was provided to shareholders (after taking into account the existing provisions of the Optionees' options such as the exercise price and the vesting schedule), and, in the case of outstanding shares subject to a repurchase option, issue substantially similar shares or other property subject to repurchase restrictions no less favorable to the Optionee. (b) In the event (i) such successor corporation, if any, refuses to assume or substitute, as provided above, pursuant to an event described in subsection (a) above, or (ii) in the event of both (A) (x) a consolidation or merger in which the Company is not the surviving corporation (other than a consolidation or merger with a wholly owned subsidiary or a Parent), or any other corporate reorganization, in which the shareholders of the Company immediately prior to such consolidation, merger or reorganization, own less than fifty percent (50%) of the Company's voting power immediately after such consolidation, merger or reorganization, or any transaction or series of related transactions in which in excess of fifty percent (50%) of the Company's voting power is transferred, or (y) a sale, lease or other disposition of all or substantially all of the assets of the Company, and (B) an Optionee who is an employee of the Company prior to such consolidation, merger, other corporate reorganization or sale, lease, or other disposition and whose employment with the Company or such successor corporation is terminated within twelve (12) months of such consolidation, merger, other corporate reorganization or sale, lease or other disposition, then, notwithstanding any contrary terms in the Plan or Grant, the Options of each such Optionee so terminated shall become fully exercisable 7 for the entire number of Shares under such Option and be deemed to be "Vested Options" under the Grant. Such Vested Options may be exercised (1) in case of the event described in subsection (b)(i) above, after notice of refusal to assume or substitute (which notice must be given at least twenty (20) days prior to consummation of the event described in subsection (a) above) and at any time prior to the consummation of such event, or (2) in the case of the event described in subsection (b)(ii) above, within three (3) months after such termination. (c) In the event of a dissolution or liquidation of the Company, the Options shall, notwithstanding any contrary terms in the Grant, expire on a date specified in a written notice given by the Committee to the Optionees specifying the terms and conditions of such termination (which date must be at least twenty (20) days after the date the Committee gives the written notice). 13. ADOPTION AND SHAREHOLDER APPROVAL. This Plan shall become effective --------------------------------- on the date that it is adopted by the Board of the Company (the "Board"). This Plan shall be approved by the shareholders of the Company, in any manner permitted by applicable corporate law, within twelve (12) months before or after the date this Plan is adopted by the Board. 14. ADMINISTRATION. This Plan may be administered by the Board or a -------------- Committee appointed by the Board (the "Committee"). If, at any time after the Company registers under the Exchange Act, the Board desires the Plan to be administered by a Committee, the Board shall appoint a Committee consisting of not less than two directors, each of whom is a Nonemployee Director. As used in this Plan, references to the "Committee" shall mean either such Committee or the Board if no committee has been established. The interpretation by the Committee of any of the provisions of this Plan or any Option granted under this Plan shall be final and binding upon the Company and all persons having an interest in any Option or any Shares purchased pursuant to an Option. 15. TERM OF PLAN. Options may be granted pursuant to this Plan from time ------------ to time on or prior to February 28, 2009, a date which is less than ten years after the earlier of the date of approval of this Plan by the Board or the shareholders of the Company pursuant to Section 13 of this Plan. 16. AMENDMENT OR TERMINATION OF PLAN. The Board of Directors or Committee -------------------------------- may, at any time, amend, alter, suspend or discontinue the Plan, but no amendment, alteration, suspension or discontinuation shall be made which would impair the rights of any Optionee under any Option theretofore granted, without his or her consent, or which, without the approval of the shareholders of the Company would: (a) except as provided in Section 11 of the Plan, increase the total number of Shares reserved for the purposes of the Plan, (b) extend the duration of the Plan; 8 (c) extend the period during and over which Options may be exercised under the Plan. Without limiting the foregoing, the Committee may at any time or from time to time authorize the Company, with the consent of the respective Optionees, to issue new options in exchange for the surrender and cancellation of any or all outstanding Options. 17. CERTAIN DEFINITIONS. As used in this Plan, the following terms shall ------------------- have the following meanings: (a) "Affiliate" means any corporation that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, another corporation, where "control" (including the terms "controlled by" and "under common control with") means the possession, direct or indirect, of the power to cause the direction of the management and policies of the corporation, whether through the ownership of voting securities, by contract or otherwise. (b) "Fair Market Value" shall mean the fair market value of the Shares as determined by the Committee from time to time in good faith. If a public market exists for the Shares, the Fair Market Value shall be the average of the last reported bid and asked prices for Common Stock of the Company on the last trading day prior to the date of determination or, in the event the Common Stock of the Company is listed on a stock exchange or is a Nasdaq National Market security, the Fair Market Value shall be the closing price on such exchange or system on the last trading day prior to the date of determination. (c) "Nonemployee Director" shall have the meaning set forth in Rule 16b3(b)(3) as promulgated by the Securities and Exchange Commission under Section 16(b) of the Exchange Act, as such rule is amended from time to time and as interpreted by the Securities and Exchange Commission. (d) "Parent" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if, at the time of the granting of the Option, each of the corporations other than the Company owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. (e) "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if, at the time of the granting of the Option, each of the corporations other than the last corporation in the unbroken chain owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 9 EX-10.3 4 EMPLOYMENT AGREEMENT, JOHN PHILLIPS EXHIBIT 10.3 EMPLOYMENT AND STOCK REPURCHASE AGREEMENT FOR JOHN A. PHILLIPS THIS EMPLOYMENT AND STOCK REPURCHASE AGREEMENT (this "Agreement"), dated as of September 17, 1999 (the "Effective Date"), between ARISTOTLE PUBLISHING, INC., a Delaware corporation (the "Company"), having its principal place of business located at 205 Pennsylvania Avenue, S.E., Washington, D.C. 20003 and John A. Phillips, an individual and a founder of the Company (the "Founder"). R E C I T A L S A. The Founder is currently serving as the President and a Director of the Company. B. The parties acknowledge the valuable contributions Founder has made to the success of the Company, that the Founder's abilities and services are unique and essential to the continued success of the Company and that future investors will invest in the Company in partial reliance on the Founder's serving the Company pursuant to this Agreement. C. In light of the foregoing, the Company desires to employ the Founder as its Chairman of the Board, Chief Executive Officer and a Director, and the Founder desires to accept such employment. A G R E E M E N T ----------------- NOW, THEREFORE, in consideration of the Founder's past services to the Company, the parties hereto, intending to be legally bound, agree as follows: 1. Employment. The Company hereby employs the Founder and the Founder ---------- hereby accepts employment upon the terms and conditions hereinafter set forth. 2. Duties. The Founder shall be engaged initially with the title and ------ functions of Chairman of the Board, Chief Executive Officer and Director and, subject to the direction of the Board of Directors, shall perform and discharge faithfully and to the best of his ability the duties, which may be assigned to him from time to time by the Company in connection with such title and functions. The Founder shall devote substantially all of his time, attention and energies to the business of the Company as is reasonably necessary, appropriate or advisable to carry out the duties assigned to him. During the term of this Agreement, nothing shall prohibit the Founder from engaging (whether or not during normal business hours) in any other business or professional activity, whether or not such activity is pursued for gain, profit or other pecuniary advantage so long as such activity does not compete, directly or indirectly, with the Company's business as currently conducted or proposed to be conducted; including, without limitation, (a) investing his personal assets in businesses that do not compete with the Company's business as currently conducted or proposed to be conducted; (b) providing services as a director, consultant or advisor to businesses that do not compete with the Company's business as currently conducted 1 or proposed to be conducted; (c) purchasing securities in any corporation or other entity that do not compete with the Company's business as currently conducted or proposed to be conducted; (d) purchasing securities in any corporation whose securities are regularly traded (provided that such purchase shall not result in his collectively owning beneficially at any time five percent (5%) or more of the equity securities of any corporation engaged in a business competitive to that of the Company's business as currently conducted or proposed to be conducted; and (e) engaging in charitable activities, participating in conferences, preparing or publishing papers or books or teaching. 3. Compensation. For all services rendered under this Agreement: ------------- (a) The Company shall pay the Founder a base salary ("Base Salary") of Two Hundred Twenty Thousand Dollars ($220,000) per annum in equal semi-monthly installments, subject to applicable payroll tax withholding and any applicable contributions to employee benefit programs. The Board of Directors will review, at least annually, the Founder's compensation with a view to increasing it if, in the sole judgment of the Board of Directors, the results of operations of the Company or the services of the Founder merit such an increase. (b) During the term of this Agreement, the Founder shall be entitled to participate in any and all incentive compensation plans of the Company. (c) During the term of his employment, the Founder shall be entitled to participate in employee benefit plans or programs of the Company, including, without limitation, any plans or programs for Founders of the Company, subject to the rules and regulations applicable thereto. (d) During the terms of his employment, the Company will lease an automobile, reasonably satisfactory to Founder, for use by Founder. (e) The Founder shall be entitled to prompt reimbursement of all expenses incurred by him in the performance of his duties, subject to the presenting of appropriate vouchers in accordance with the Company's policy. 4. Term. This Agreement shall commence on the Effective Date and ---- shall terminate as of the earlier of: (a) two (2) years from the date hereof (the "Initial Term") unless either the Founder or the Company notifies the other that he or it elects to extend the term hereof for an additional one (1) year (the "Renewal Period"), such notice to be given within 90 days before the end of the Initial Term hereof or within 90 days before the end of each successive Renewal Period; (b) the death of the Founder; (c) thirty (30) days after notice is given by the Company to the Founder; or 2 (d) thirty (30) days after notice is given by the Founder to the Company, after a material breach of this Agreement by the Company. 5. Proprietary Information. Founder shall execute and abide by the ------------------------ Company's standard form of proprietary information and inventions agreement as set forth on Exhibit A, the terms of which are hereby incorporated by reference; provided, however, in the event that the terms of this Agreement conflict with the terms of such proprietary information and inventions agreement, the terms of this Agreement shall control. 6. Location of Performance: Relocation. ----------------------------------- (a) The Founder's services will be performed in San Francisco, California or its environs. The parties acknowledge, however, that the Founder may be required to travel extensively in connection with the performance of his duties hereunder. (b) If the Founder is required to change his place of residence from San Francisco, California to another location in order to perform hereunder and the Founder agrees to do so, then Company shall pay all the costs and expenses of the Founder and his family connected with such relocation, including reasonable moving and travel expenses and reasonable temporary dwelling costs (for a period not to exceed 180 days) and costs associated with purchasing and selling a permanent place of residence, all such expenses not to exceed $150,000. 7. Repurchase Option. Pursuant to this Agreement, One Million Five ----------------- Hundred Thousand (1,500,000) shares of Common Stock of the Company owned by Founder (the "Stock") shall be subject to the repurchase option of the Company set forth below ("Purchase Option"): (a) In the event that either (i) the Founder voluntarily ceases to be an employee of or associated with the Company or (ii) the Founder is terminated for Cause (as defined below), then the Company shall have the right at any time within sixty (60) days after such cessation to exercise its option to repurchase from the Founder or his personal representative, as the case may be, at the Founder's cost, up to but not exceeding the number of shares of stock which have not vested under the provisions of subsection (b) below. Engagement of the Founder solely as a director, consultant or advisor to the Company shall not be deemed as cessation of employment or association with the Company. As used herein, employment with the Company shall include employment with a "parent" or "subsidiary" of the Company as those terms are defined in Sections 424(e) and (f) of the Internal Revenue Code of 1986, as amended. (b) The Company may exercise its Purchase Option as to the maximum portion of the Stock specified in the following table: 3
If employment ceases: Stock subject to Purchase Option: ____________________ ________________________________ - ---------------------------------------------------------------------------------------------- At the Effective Date 750,000 shares - ---------------------------------------------------------------------------------------------- From the Effective Date until thirty (30) 750,000 minus (25,000 multiplied by number of _____ __________ - ---------------------------------------------------------------------------------------------- months after the Effective Date full months since the Effective Date) - ---------------------------------------------------------------------------------------------- Thereafter None - ----------------------------------------------------------------------------------------------
(c) The Purchase Option shall be exercised by written notice signed by an officer of the Company or by any assignee or assignees of the Company and delivered or mailed as provided in Section 11. Such notice shall identify the number of shares to be purchased and shall notify the Founder of the time, place and date for settlement of such purchase, which shall be scheduled by the Company within ninety (90) days from the date of cessation of employment or association. (d) The Founder shall not transfer by sale, assignment, hypothecation, donation or otherwise any of the Stock or any interest therein subject to the Purchase Option without the prior express written consent of the issuer of the shares. The parties agree to execute and deliver such further instruments and agreements and take such further actions as may reasonably be necessary to carry out the intent of this Agreement. (e) The Company shall not be required (i) to transfer on its books any shares of Stock of the Company which shall have been transferred in violation of any of the provisions set forth in this Agreement or (ii) to treat as owner of such shares or to accord the right to vote as such owner or to pay dividends to any transferee to whom such shares shall have been so transferred. (f) The Founder shall exercise all rights and privileges of a shareholder of the Company with respect to the Stock. (g) This Section 7 shall terminate upon the exercise in full or expiration of the Purchase Option or the closing of a firm commitment underwritten public offering of the Company's common stock pursuant to an effective registration statement under the Securities Act of 1933, as amended, whichever first occurs. 8. Severance. --------- (a) If the Founder's employment or association with the Company terminates due to an Involuntary Termination Without Cause at any time after the Effective Date or a Constructive Termination at any time after a Change in Control, the Founder shall be entitled to receive the benefits set forth in this Section 8. As used herein, employment or association with the Company shall include employment with a "parent" or "subsidiary" of the Company as those terms are defined in Sections 424(e) and (f) of the Internal Revenue Code of 1986, as amended. 4 (b) Within ten (10) days of Involuntary Termination Without Cause or a Constructive Termination, the Founder shall receive from the Company the first of a series of cash payments to occur twice monthly over a four-month period and which, in the aggregate, shall equal one hundred percent (100%) of the Founder's then Base Salary plus any other incentive compensation payable to the Founder, subject to applicable tax withholding. (c) Notwithstanding the language of the Founder's option agreement(s) or any other language to the contrary, the vesting of the Founder's stock option(s) shall accelerate and immediately become vested and exercisable with respect to all of those option shares, which otherwise would not be vested and exercisable on the date of such Founder's Involuntary Termination Without Cause or Constructive Termination. Notwithstanding any language to the contrary, the vesting of the Founder's Stock described in Section 7 above shall accelerate and immediately become vested and the Purchase Option will lapse with respect to all of Stock, which otherwise would not be vested on the date of the Founder's Involuntary Termination Without Cause or Constructive Termination. (d) The Founder and his covered dependents shall be eligible to continue their health care benefit coverage as permitted by COBRA (I. R. C. Section 4980B) at no cost to the Founder and his covered dependents for a period of twelve (12) months after the Founder's Involuntary Termination Without Cause or Constructive Termination; provided, however, that payment of such COBRA premiums by the Company shall cease upon the Founder commencing employment with a new employer that provides comparable benefits to the Founder and his covered dependents. (e) The Founder shall not be required to mitigate damages or the amount of any payment provided under this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided for under this Agreement be reduced by any compensation earned by the Founder as a result of employment by another employer or by any retirement benefits received by the Founder after the date of the Founder's Involuntary Termination Without Cause or Constructive Termination. (f) Upon the occurrence of the Founder's Involuntary Termination Without Cause or Constructive Termination, and prior to the receipt of any benefits under this Agreement on account of such termination, the Founder shall execute a release for the benefit of the Company in form and substance reasonably acceptable to the Company and in compliance with applicable law. (g) If the Employee has been disabled for a period of at least twelve (12) months during which period he was disabled for two hundred seventy (270) consecutive days, the Company may elect, upon notice to the Founder, to pay the Founder one-half (1/2) of the compensation the Founder would otherwise be entitled to pursuant to clause (i) above. Disability shall mean the Founder's inability, due to sickness or injury, to perform effectively his duties hereunder. 5 9. Registration Rights. The Founder shall be entitled to those ------------------- rights set forth in Section 1.3 (Piggy-back Rights) of that certain Investors' Rights Agreement, dated as of September 17, 1999 by and among the Company and its holders of its shares of Series A Preferred Stock (the "IRR"). Capital stock of the Company now owned or hereinafter acquired by the Founder shall be deemed Registrable Securities (as defined under the IRR) and the Founder shall be deemed a Holder (as defined under the IRR) for purposes of Section 1.3. The Company shall obtain the consents necessary to add the Founder as a party to the IRR. 10. Non-Compete. For the period of one year after termination of ------------ employment (other than for termination without Cause or Constructive Termination), Founder shall not enter into or engage generally in direct competition with the Company or its subsidiaries anywhere in the business of operating, creating, designing, programming, marketing, or selling political products, professional campaign services, campaign software, advertising, or databases derived from registered voter lists, for any other person or entity, including, specifically, but not limited to, any competitor, client, or former client of the Company, or any governmental entity. 11. Assignment: Notices. This Agreement may not be assigned by any ------------------- party hereto. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and sent by registered mail to the Founder at 2237 Union Street, San Francisco, CA 94123 or the Company at its address set forth above, Attention: Secretary. 12. Waiver of Breach. A waiver by the Company or the Founder of a ---------------- breach of any provision of this Agreement by the other party shall not operate or be construed as a waiver of any subsequent breach by the other party. 13. Entire Agreement. This Agreement contains the entire agreement of ---------------- the parties with respect to the subject matter hereof, and supersedes any and all prior agreements relating to the subject matter hereof. It may be changed only by an agreement in writing signed by a party against whom enforcement of any waiver, change, modification, extension or discharge is sought. 14. Governing Law. This Agreement shall be governed by, interpreted ------------- and construed in accordance with the laws of the State of California without regard to principles of conflicts of laws. The parties agree that any action brought by either party to interpret or enforce any provision of this Agreement shall be brought in, and each party agrees to, and does hereby, submit to the personal jurisdiction and venue of, the appropriate state or federal court for the district encompassing the Company's principal place of business. 15. Headings: Counterparts. The headings of the Sections hereof are ----------------------- inserted for convenience only and shall not be deemed to constitute a part hereof nor to affect the meaning thereof. This Agreement may be executed in one or more counterparts, each of which shall be an original and all of which taken together shall constitute one agreement. 16. Attorneys Fees. If either party hereto brings any claim or -------------- action to enforce his or its rights hereunder, the prevailing party shall be entitled to recover from the other party reasonable attorneys fees and costs incurred in connection with such claim or action, whether or 6 not a legal proceedings is actually commenced in connection with enforcing such party's rights hereunder. 17. Miscellaneous Definitions. ------------------------- (a) "Cause" shall mean (i) an act of dishonesty by Founder intended to result in gain or personal enrichment of Founder which causes material harm to the reputation of the Company; (ii) Founder personally engaging in illegal conduct which causes material harm to the reputation of the Company; (iii) Founder's continued failure to substantially perform the duties and obligations of his employment which are not remedied within twenty (20) days after notice thereof from the Board of Directors; (iv) Founder being convicted of a felony, misdemeanor or gross misdemeanor relating to, an act of dishonesty or fraud against, or a misappropriation of property belonging to, the Company; (v) Founder's engagement in substance abuse which substantially impairs his ability to perform the duties and obligations of Founder's employment or causes material harm to the reputation of the Company; (vi) Founder personally engaging in any act of moral turpitude that causes material harm to the reputation of the Company; or (vii) Founder knowingly and intentionally breaching in any material respect the terms of this Agreement (or any confidentiality agreement or invention or proprietary information agreement with the Company); provided, however, Cause shall not include any act or omission undertaken or omitted to be taken by the Founder that was done so at the direction of the Board of Directors, or that he believed in good faith at the time was not illegal after reasonable inquiry; it shall be deemed reasonable and in good faith for the Founder to rely on advice provided by the Company's legal counsel, with respect to legal issues, and the Company's accountants, with respect to accounting or accounting related issues. (b) "Change in Control" means the consummation of a merger or consolidation of the Company with or into another entity or any other corporate reorganization, if more than 40% of the combined voting power of the continuing or surviving entity's securities outstanding immediately after such merger, consolidation or other reorganization is owned by persons who were not shareholders of the Company immediately prior to such merger, consolidation or other reorganization; or the sale, transfer other disposition of all or substantially all of the Company's assets. A transaction shall not constitute a Change in Control if its sole purpose is to change the state of the Company's incorporation or to create a holding company that will be owned in substantially the same proportions by the persons who held the Company's securities immediately prior to such transaction. (c) "Constructive Termination" means that the Founder voluntarily terminates employment with the Company after any of the following are undertaken without the Founder's express written consent: (i) the assignment to the Founder of any duties or responsibilities that result in a material diminution or materially adverse change of the Founder's position, status or circumstances or employment; provided, however, that a mere change in the Founder's title or reporting relationship shall not constitute a Constructive Termination; 7 (ii) a reduction by the Company in the Founder's Base Salary; (iii) any failure by the Company to maintain in effect any benefit plan, including incentive plans, in which the Founder is participating, or the taking of any action by the Company that would materially adversely affect the Founder's participation in or reduce the Founder's benefits under any of such plans or deprive the Founder of any fringe benefit then enjoyed by the Founder; provided, however, that any such failure shall not be deemed a Constructive Termination if (A) the Company offers a range of benefit plans and programs that taken as a whole are comparable to existing benefit plans and programs of the Company, or (B) all similarly situated executive officers of the Company are affected in the same manner, (iv) a relocation of the Founder's business office to a location more than twenty-five (25) miles from the location at which the Founder performs duties as of the Effective Date, or such other location thereafter that the Founder consents to, except for required travel by the Founder contemplated in Section 6(a) hereof; (v) any material breach of this Agreement by the Company or any other agreement between the Founder and the Company that remains uncured for twenty (20) days after written notice thereof to the Chairman or any two members of the Company's Board of Directors; and (vi) after a Change in Control and failure by the Company to obtain the assumption by the Company's successor-in-interest or assignee of this Agreement or any other material agreement between the Founder and the Company relating to the Founder's employment. (d) "Involuntary Termination Without Cause" means the Founder's dismissal or discharge from the Company other than for Cause. The termination of the Founder's employment as a result of death or disability will not be deemed to be an Involuntary Termination Without Cause. [REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] 8 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first hereinabove written. ARISTOTLE PUBLISHING, INC. BY: /s/ John Phillips ___________________________________ Name: John Phillips ____________________________ Title: CEO ___________________________ FOUNDER _________________________________________ 9 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first hereinabove written. ARISTOTLE PUBLISHING, INC. BY: ___________________________________ Name: ____________________________ Title: ___________________________ FOUNDER /s/ John Phillips _________________________________________ 10 EXHIBIT A FORM OF PROPRIETARY INFORMATION AGREEMENT [see Exhibit 10.13] EX-10.4 5 EMPLOYMENT AGREEMENT, DEAN PHILLIPS EXHIBIT 10.4 EMPLOYMENT AND STOCK REPURCHASE AGREEMENT FOR DEAN A. PHILLIPS THIS EMPLOYMENT AND STOCK REPURCHASE AGREEMENT (this "Agreement"), dated as of September 17, 1999 (the "Effective Date"), between ARISTOTLE PUBLISHING, INC., a Delaware corporation (the "Company"), having its principal place of business located at 205 Pennsylvania Avenue, S.E., Washington, D.C. 20003 and Dean A. Phillips, an individual and a founder of the Company (the "Founder"). R E C I T A L S A. The Founder is currently serving as the Chief Executive Officer and a Director of the Company. B. The parties acknowledge the valuable contributions Founder has made to the success of the Company, that the Founder's abilities and services are unique and essential to the continued success of the Company and that future investors will invest in the Company in partial reliance on the Founder's serving the Company pursuant to this Agreement. C. In light of the foregoing, the Company desires to employ the Founder as its President and a Director, and the Founder desires to accept such employment. A G R E E M E N T ----------------- NOW, THEREFORE, in consideration of the Founder's past services to the Company, the parties hereto, intending to be legally bound, agree as follows: 1. Employment. The Company hereby employs the Founder and the ---------- Founder hereby accepts employment upon the terms and conditions hereinafter set forth. 2. Duties. The Founder shall be engaged initially with the title and ------ functions of President and Director and, subject to the direction of the Board of Directors, shall perform and discharge faithfully and to the best of his ability the duties, which may be assigned to him from time to time by the Company in connection with such title and functions. The Founder shall devote substantially all of his time, attention and energies to the business of the Company as is reasonably necessary, appropriate or advisable to carry out the duties assigned to him. During the term of this Agreement, nothing shall prohibit the Founder from engaging (whether or not during normal business hours) in any other business or professional activity, whether or not such activity is pursued for gain, profit or other pecuniary advantage so long as such activity does not compete, directly or indirectly, with the Company's business as currently conducted or proposed to be conducted; including, without limitation, (a) investing his personal assets in businesses that do not compete with the Company's business as currently conducted or proposed to be conducted; (b) providing services as a director, consultant or advisor to businesses that do not compete with the Company's business as currently conducted or proposed to be conducted; (c) 1 purchasing securities in any corporation or other entity that do not compete with the Company's business as currently conducted or proposed to be conducted; (d) purchasing securities in any corporation whose securities are regularly traded (provided that such purchase shall not result in his collectively owning beneficially at any time five percent (5%) or more of the equity securities of any corporation engaged in a business competitive to that of the Company's business as currently conducted or proposed to be conducted; and (e) engaging in charitable activities, participating in conferences, preparing or publishing papers or books or teaching. 3. Compensation. For all services rendered under this Agreement: -------------- (a) The Company shall pay the Founder a base salary ("Base Salary") of Two Hundred Twenty Thousand Dollars ($220,000) per annum in equal semi-monthly installments, subject to applicable payroll tax withholding and any applicable contributions to employee benefit programs. The Board of Directors will review, at least annually, the Founder's compensation with a view to increasing it if, in the sole judgment of the Board of Directors, the results of operations of the Company or the services of the Founder merit such an increase. (b) During the term of this Agreement, the Founder shall be entitled to participate in any and all incentive compensation plans of the Company. (c) Within thirty (30) days of the Effective Date, the Company shall pay to the Founder a lump sum, cash payment of Eighty-Five Thousand Two Hundred eighty-One Dollars and Twelve Cents ($85,281.12), which amount constitutes deferred salary and loans to the Company, less applicable payroll tax withholding and any applicable contributions to employee benefit programs. (d) During the term of his employment, the Founder shall be entitled to participate in employee benefit plans or programs of the Company, including, without limitation, any plans or programs for Founders of the Company, subject to the rules and regulations applicable thereto. (e) The Founder shall be entitled to prompt reimbursement of all expenses incurred by him in the performance of his duties, subject to the presenting of appropriate vouchers in accordance with the Company's policy. 4. Term. This Agreement shall commence on the Effective Date and ---- shall terminate as of the earlier of: (a) two (2) years from the date hereof (the "Initial Term") unless either the Founder or the Company notifies the other that he or it elects to extend the term hereof for an additional one (1) year (the "Renewal Period"), such notice to be given within 90 days before the end of the Initial Term hereof or within 90 days before the end of each successive Renewal Period; (b) the death of the Founder; 2 (c) thirty (30) days after notice is given by the Company to the Founder; or (d) thirty (30) days after notice is given by the Founder to the Company, after a material breach of this Agreement by the Company. 5. Proprietary Information. Founder shall execute and abide by the -------------------------- Company's standard form of proprietary information and inventions agreement as set forth on Exhibit A, the terms of which are hereby incorporated by reference; provided, however, in the event that the terms of this Agreement conflict with the terms of such proprietary information and inventions agreement, the terms of this Agreement shall control. 6. Location of Performance: Relocation. ----------------------------------- (a) The Founder's services will be performed in Washington, D.C. or its environs. The parties acknowledge, however, that the Founder may be required to travel extensively in connection with the performance of his duties hereunder. (b) If the Founder is required to change his place of residence from Washington, D.C. to another location in order to perform hereunder and the Founder agrees to do so, then Company shall pay all the costs and expenses of the Founder and his family connected with such relocation, including reasonable moving and travel expenses and reasonable temporary dwelling costs (for a period not to exceed 180 days) and costs associated with purchasing and selling a permanent place of residence, all such expenses not to exceed $150,000. 7. Repurchase Option. Pursuant to this Agreement, One Million Five ----------------- Hundred Thousand (1,500,000) shares of Common Stock of the Company owned by Founder (the "Stock") shall be subject to the repurchase option of the Company set forth below ("Purchase Option"): (a) In the event that either (i) the Founder voluntarily ceases to be an employee of or associated with the Company or (ii) the Founder is terminated for Cause (as defined below), then the Company shall have the right at any time within sixty (60) days after such cessation to exercise its option to repurchase from the Founder or his personal representative, as the case may be, at the Founder's cost, up to but not exceeding the number of shares of stock which have not vested under the provisions of subsection (b) below. Engagement of the Founder solely as a director, consultant or advisor to the Company shall not be deemed as cessation of employment or association with the Company. As used herein, employment with the Company shall include employment with a "parent" or "subsidiary" of the Company as those terms are defined in Sections 424(e) and (f) of the Internal Revenue Code of 1986, as amended. (b) The Company may exercise its Purchase Option as to the maximum portion of the Stock specified in the following table: 3 If employment ceases: Stock subject to Purchase Option: - --------------------- --------------------------------- - ------------------------------------------------------------------------------------------- At the Effective Date 750,000 shares - ------------------------------------------------------------------------------------------- From the Effective Date until thirty (30) 750,000 minus (25,000 multiplied by number ----- ---------- months after the Effective Date of full months since the Effective Date) - ------------------------------------------------------------------------------------------- Thereafter None - -------------------------------------------------------------------------------------------
(c) The Purchase Option shall be exercised by written notice signed by an officer of the Company or by any assignee or assignees of the Company and delivered or mailed as provided in Section 11. Such notice shall identify the number of shares to be purchased and shall notify the Founder of the time, place and date for settlement of such purchase, which shall be scheduled by the Company within ninety (90) days from the date of cessation of employment or association. (d) The Founder shall not transfer by sale, assignment, hypothecation, donation or otherwise any of the Stock or any interest therein subject to the Purchase Option without the prior express written consent of the issuer of the shares. The parties agree to execute and deliver such further instruments and agreements and take such further actions as may reasonably be necessary to carry out the intent of this Agreement. (e) The Company shall not be required (i) to transfer on its books any shares of Stock of the Company which shall have been transferred in violation of any of the provisions set forth in this Agreement or (ii) to treat as owner of such shares or to accord the right to vote as such owner or to pay dividends to any transferee to whom such shares shall have been so transferred. (f) The Founder shall exercise all rights and privileges of a shareholder of the Company with respect to the Stock. (g) This Section 7 shall terminate upon the exercise in full or expiration of the Purchase Option or the closing of a firm commitment underwritten public offering of the Company's common stock pursuant to an effective registration statement under the Securities Act of 1933, as amended, whichever first occurs. 8. Severance. --------- (a) If the Founder's employment or association with the Company terminates due to an Involuntary Termination Without Cause at any time after the Effective Date or a Constructive Termination at any time after a Change in Control, the Founder shall be entitled to receive the benefits set forth in this Section 8. As used herein, employment or association with the Company shall include employment with a "parent" or "subsidiary" of the Company as those terms are defined in Sections 424(e) and (f) of the Internal Revenue Code of 1986, as amended. 4 (b) Within ten (10) days of Involuntary Termination Without Cause or a Constructive Termination, the Founder shall receive from the Company the first of a series of cash payments to occur twice monthly over a four-month period and which, in the aggregate, shall equal one hundred percent (100%) of the Founder's then Base Salary plus any other incentive compensation payable to the Founder, subject to applicable tax withholding. (c) Notwithstanding the language of the Founder's option agreement(s) or any other language to the contrary, the vesting of the Founder's stock option(s) shall accelerate and immediately become vested and exercisable with respect to all of those option shares, which otherwise would not be vested and exercisable on the date of such Founder's Involuntary Termination Without Cause or Constructive Termination. Notwithstanding any language to the contrary, the vesting of the Founder's Stock described in Section 7 above shall accelerate and immediately become vested and the Purchase Option will lapse with respect to all of Stock, which otherwise would not be vested on the date of the Founder's Involuntary Termination Without Cause or Constructive Termination. (d) The Founder and his covered dependents shall be eligible to continue their health care benefit coverage as permitted by COBRA (I. R. C. Section 4980B) at no cost to the Founder and his covered dependents for a period of twelve (12) months after the Founder's Involuntary Termination Without Cause or Constructive Termination; provided, however, that payment of such COBRA premiums by the Company shall cease upon the Founder commencing employment with a new employer that provides comparable benefits to the Founder and his covered dependents. (e) The Founder shall not be required to mitigate damages or the amount of any payment provided under this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided for under this Agreement be reduced by any compensation earned by the Founder as a result of employment by another employer or by any retirement benefits received by the Founder after the date of the Founder's Involuntary Termination Without Cause or Constructive Termination. (f) Upon the occurrence of the Founder's Involuntary Termination Without Cause or Constructive Termination, and prior to the receipt of any benefits under this Agreement on account of such termination, the Founder shall execute a release for the benefit of the Company in form and substance reasonably acceptable to the Company and in compliance with applicable law. (g) If the Employee has been disabled for a period of at least twelve (12) months during which period he was disabled for two hundred seventy (270) consecutive days, the Company may elect, upon notice to the Founder, to pay the Founder one-half (1/2) of the compensation the Founder would otherwise be entitled to pursuant to clause (i) above. Disability shall mean the Founder's inability, due to sickness or injury, to perform effectively his duties hereunder. 5 9. Registration Rights. The Founder shall be entitled to those ------------------- rights set forth in Section 1.3 (Piggy-back Rights) of that certain Investors' Rights Agreement, dated as of September 17, 1999 by and among the Company and its holders of its shares of Series A Preferred Stock (the "IRR"). Capital stock of the Company now owned or hereinafter acquired by the Founder shall be deemed Registrable Securities (as defined under the IRR) and the Founder shall be deemed a Holder (as defined under the IRR) for purposes of Section 1.3. The Company shall obtain the consents necessary to add the Founder as a party to the IRR. 10. Non-Compete. For the period of one year after termination of ----------- employment (other than for termination without Cause or Constructive Termination), Founder shall not enter into or engage generally in direct competition with the Company or its subsidiaries anywhere in the business of operating, creating, designing, programming, marketing, or selling political products, professional campaign services, campaign software, advertising, or databases derived from registered voter lists, for any other person or entity, including, specifically, but not limited to, any competitor, client, or former client of the Company, or any governmental entity. 11. Assignment: Notices. This Agreement may not be assigned by any ------------------- party hereto. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and sent by registered mail to the Founder at [__________________________] [sic] or the Company at its address set forth above, Attention: Secretary. 12. Waiver of Breach. A waiver by the Company or the Founder of a ---------------- breach of any provision of this Agreement by the other party shall not operate or be construed as a waiver of any subsequent breach by the other party. 13. Entire Agreement. This Agreement contains the entire agreement ---------------- of the parties with respect to the subject matter hereof, and supersedes any and all prior agreements relating to the subject matter hereof. It may be changed only by an agreement in writing signed by a party against whom enforcement of any waiver, change, modification, extension or discharge is sought. 14. Governing Law. This Agreement shall be governed by, interpreted ------------- and construed in accordance with the laws of the State of California without regard to principles of conflicts of laws. The parties agree that any action brought by either party to interpret or enforce any provision of this Agreement shall be brought in, and each party agrees to, and does hereby, submit to the personal jurisdiction and venue of, the appropriate state or federal court for the district encompassing the Company's principal place of business. 15. Headings: Counterparts. The headings of the Sections hereof are ----------------------- inserted for convenience only and shall not be deemed to constitute a part hereof nor to affect the meaning thereof. This Agreement may be executed in one or more counterparts, each of which shall be an original and all of which taken together shall constitute one agreement. 16. Attorneys Fees. If either party hereto brings any claim or -------------- action to enforce his or its rights hereunder, the prevailing party shall be entitled to recover from the other party reasonable attorneys fees and costs incurred in connection with such claim or action, whether or 6 not a legal proceedings is actually commenced in connection with enforcing such party's rights hereunder. 17. Miscellaneous Definitions. ------------------------- (a) "Cause" shall mean (i) an act of dishonesty by Founder intended to result in gain or personal enrichment of Founder which causes material harm to the reputation of the Company; (ii) Founder personally engaging in illegal conduct which causes material harm to the reputation of the Company; (iii) Founder's continued failure to substantially perform the duties and obligations of his employment which are not remedied within twenty (20) days after notice thereof from the Board of Directors; (iv) Founder being convicted of a felony, misdemeanor or gross misdemeanor relating to, an act of dishonesty or fraud against, or a misappropriation of property belonging to, the Company; (v) Founder's engagement in substance abuse which substantially impairs his ability to perform the duties and obligations of Founder's employment or causes material harm to the reputation of the Company; (vi) Founder personally engaging in any act of moral turpitude that causes material harm to the reputation of the Company; or (vii) Founder knowingly and intentionally breaching in any material respect the terms of this Agreement (or any confidentiality agreement or invention or proprietary information agreement with the Company); provided, however, Cause shall not include any act or omission undertaken or omitted to be taken by the Founder that was done so at the direction of the Board of Directors, or that he believed in good faith at the time was not illegal after reasonable inquiry; it shall be deemed reasonable and in good faith for the Founder to rely on advice provided by the Company's legal counsel, with respect to legal issues, and the Company's accountants, with respect to accounting or accounting related issues. (b) "Change in Control" means the consummation of a merger or consolidation of the Company with or into another entity or any other corporate reorganization, if more than 40% of the combined voting power of the continuing or surviving entity's securities outstanding immediately after such merger, consolidation or other reorganization is owned by persons who were not shareholders of the Company immediately prior to such merger, consolidation or other reorganization; or the sale, transfer other disposition of all or substantially all of the Company's assets. A transaction shall not constitute a Change in Control if its sole purpose is to change the state of the Company's incorporation or to create a holding company that will be owned in substantially the same proportions by the persons who held the Company's securities immediately prior to such transaction. (c) "Constructive Termination" means that the Founder voluntarily terminates employment with the Company after any of the following are undertaken without the Founder's express written consent: (i) the assignment to the Founder of any duties or responsibilities that result in a material diminution or materially adverse change of the Founder's position, status or circumstances or employment; provided, however, that a mere change in the Founder's title or reporting relationship shall not constitute a Constructive Termination; 7 (ii) a reduction by the Company in the Founder's Base Salary; (iii) any failure by the Company to maintain in effect any benefit plan, including incentive plans, in which the Founder is participating, or the taking of any action by the Company that would materially adversely affect the Founder's participation in or reduce the Founder's benefits under any of such plans or deprive the Founder of any fringe benefit then enjoyed by the Founder; provided, however, that any such failure shall not be deemed a Constructive Termination if (A) the Company offers a range of benefit plans and programs that taken as a whole are comparable to existing benefit plans and programs of the Company, or (B) all similarly situated executive officers of the Company are affected in the same manner, (iv) a relocation of the Founder's business office to a location more than twenty-five (25) miles from the location at which the Founder performs duties as of the Effective Date, or such other location thereafter that the Founder consents to, except for required travel by the Founder contemplated in Section 6(a) hereof; (v) any material breach of this Agreement by the Company or any other agreement between the Founder and the Company that remains uncured for twenty (20) days after written notice thereof to the Chairman or any two members of the Company's Board of Directors; and (vi) after a Change in Control and failure by the Company to obtain the assumption by the Company's successor-in-interest or assignee of this Agreement or any other material agreement between the Founder and the Company relating to the Founder's employment. (d) "Involuntary Termination Without Cause" means the Founder's dismissal or discharge from the Company other than for Cause. The termination of the Founder's employment as a result of death or disability will not be deemed to be an Involuntary Termination Without Cause. [REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] 8 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first hereinabove written. ARISTOTLE PUBLISHING, INC. BY: /s/ John Phillips __________________________________ Name: John Phillips _________________________ Title: CEO ________________________ FOUNDER _____________________________________ 9 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first hereinabove written. ARISTOTLE PUBLISHING, INC. BY: __________________________________ Name: _________________________ Title: ________________________ FOUNDER /s/ John Phillips ______________________________________ 10 EXHIBIT A FORM OF PROPRIETARY INFORMATION AGREEMENT [see Exhibit 10.13] EX-10.5 6 EMPLOYMENT AGREEMENT, ROBERT CHRIST EXHIBIT 10.5 Aristotle Publishing, Inc. October 6, 1999 Rob Christ 19000 Gallop Drive Germantown, MD 20874 Dear Rob: Aristotle Publishing, Inc. (the "Company") is pleased to offer you employment on the following terms: 1. Position. You will serve in a full-time capacity as Chief Financial Officer of the Company. You will report to Chief Executive Officer. By signing this letter agreement, you represent and warrant to the Company that you are under no contractual commitments inconsistent with your obligations to the Company. 2. Salary. You will be paid a salary at the annual rate of $110,000, payable in semi-monthly installments in accordance with the Company's standard payroll practices for salaried employees. This salary will be subject to adjustment pursuant to the Company's employee compensation policies in effect from time to time. During your employment with the Company, you will also be eligible to receive (i) a cash bonus of $10,000 in the event the Company equals or exceeds its internal budgeted financial projections for the fourth fiscal quarter of 1999, and (ii) a cash bonus of $15,000 in the event the Company consummates a firmly underwritten initial public offering of the Company's common stock, payable in accordance with the Company's bonus policies in effect. After 90 days of continuous employment, you will be entitled to participate in the Company's employee medical and other benefit plans and programs, subject to the rules and regulations applicable thereto. 3. Stock Options. Subject to the approval of the Company's Board of Directors or its Compensation Committee, I will recommend to the Board of Directors that an option to purchase 52,147 shares of the Company's Common Stock be granted to you. The exercise price per share will be equal to the fair market value per share on the date the option is granted or on your first day of employment, whichever is later (which I anticipate will be $2.75 per share). The option will be subject to the terms and conditions applicable to options granted under the Company's 1999 Stock Option Plan, as described in that Plan and your stock option agreement. You will vest in 25% of the option shares after 12 months of service, and the balance will vest monthly over the next 4 years of service, as described in the applicable stock option agreement. 4. Proprietary Information And Inventions Agreement. Like all Company employees, you will be required as a condition to your employment with the Company to sign the Company's standard Proprietary Information and Inventions Agreement, a copy of which is attached hereto as Exhibit A. 5. Period Of Employment. Your employment with the Company will be "at will," meaning that either you or the Company will be entitled to terminate your employment at any time and for any reason, with or without cause. Any contrary representations which may have been made to you are superseded by this offer. This is the full and complete agreement between you and the Company on this term. Although your job duties, title, compensation and benefits, as well as the Company's personnel policies and procedures, may change from time to time, the "at will" nature of your employment may only be changed in an express written agreement signed by you and a duly authorized officer of the Company. If within the first twelve (12) months of your employment with the Company, you are terminated without cause, (i) you will be entitled to receive a pro rated portion of your annual salary that you otherwise would have 2 received had your employment not been terminated payable on a semi-monthly installments in accordance with the Company's standard payroll practices for salaried employees and (ii) 25% of your option shares will vest immediately and you shall be entitled to exercise such options pursuant to the terms and conditions applicable to options granted under the Company's 1999 Stock Option Plan, as described in that Plan and your stock option agreement. Thereafter, your option shares shall no longer vest and you shall not be entitled to exercise any additional options. Prior and as a condition to the receipt of any severance benefits or acceleration of option shares contemplated above, you will execute a release for the benefit of the Company, its directors, officers, agents and affiliates satisfactory to the Company and in compliance with applicable law. 6. Outside Activities. While you render services to the Company, you will not engage in any other gainful employment, business or activity without the written consent of the Company. While you render services to the Company, you also will not assist any person or organization in competing with the Company in preparing to compete with the Company or in hiring any employees of the Company. For the period of one year after your employment, you shall not enter into or engage generally in direct competition with the Company or its subsidiaries anywhere in the United States in the business of operating, creating, designing, programming, marketing or selling political products, professional campaign services, campaign software, advertising, or databases derived from registered voter lists, whether for your own business or for any other person or entity, including, specifically, but not limited to, any competitor, client, or former client of the Company, or any governmental entity. 7. Withholding Taxes. All forms of compensation referred to in this letter are subject to reduction to reflect applicable withholding and payroll taxes. 3 8. Entire Agreement. This letter and the Exhibit attached hereto contain all of the terms of your employment with the Company and supersede any prior understandings or agreements, whether oral or written, between you and the Company. 9. Amendment And Governing Law. This letter agreement may not be amended or modified except by an express written agreement signed by you and a duly authorized officer of the Company. The terms of this letter agreement and the resolution of any disputes will be governed by the laws of the District of Columbia. We hope that you find the foregoing terms acceptable. You may indicate your agreement with these terms and accept this offer by signing and dating both the enclosed duplicate original of this letter and the enclosed Proprietary Information and Inventions Agreement and returning them to me. As required by law, your employment with the Company is also contingent upon your providing legal proof of your identity and authorization to work in the United States. We look forward to having you join us on November 1, 1999. If you have any questions, please call me at (415) 440-1012. Very truly yours, Aristotle Publishing, Inc. By: /s/ John A. Phillips ______________________________ Name: John A. Phillips Title: Chief Executive Officer I have read and accept this employment offer: /s/ Rob Christ __________________________________ Name: Rob Christ Dated: October 10, 1999 ___________________________ 4 Exhibit A Form of Proprietary Information and Inventions Agreement [see Exhibit 10.13] EX-10.6 7 EMPLOYMENT AGREEMENT, BLAIR RICHARDSON EXHIBIT 10.6 Aristotle Publishing, Inc. November 2, 1999 Blair Richardson Dear Blair: Aristotle Publishing, Inc. and its subsidiaries (the "Company") is pleased to offer you employment on the following terms: 1. Position. You will serve in a full-time capacity as Legal Counsel of the Company. Your primary duties will be Business and Legal Affairs. By signing this letter agreement, you represent and warrant to the Company that you are under no contractual commitments inconsistent with your obligations to the Company. You shall work those hours necessary to accomplish the functions of your job but not less than (40) hours a week during the normal hours that the Company is open for business. You shall devote substantially all of this time, attention and energies to the business of the Company as is reasonably necessary, appropriate or advisable to carry out the duties assigned to you. 2. Salary/Commissions. You will be paid a salary at the annual rate of $130,000, payable in semi-monthly installments in accordance with the Company's standard payroll practices for salaried employees. This salary will be subject to adjustment pursuant to the Company's employee compensation policies in effect from time to time. In the event the company executes an agreement with one or more of the following listed prospective partners prior to 12/31/99, you will receive a $5,000 bonus for each executed agreement, up to a maximum cumulative amount of $15,000 for 3 or more executed agreements. The listed prospective partners are: ATT, 24/7, Juno, NYT, DNC, DCCC, DSCC, RNC, RCCC, and NRSC. 3. Stock Options. Subject to the approval of the Company's Board of Directors or its Compensation Committee, I have recommended to the Board of Directors that an option to purchase an additional 24,100 shares of the Company's Common Stock be granted to you, in addition to the option to purchase 15,000 shares already granted. The exercise price per share will be $2.75. The option will be subject to the terms and conditions applicable to options granted under the Company's 1999 Stock Option Plan, as described in that Plan and your stock option agreement. You will vest in 25% of the option shares after 12 months of service, and the balance will best monthly over the next 4 years of service, as described in the applicable stock option agreement. 4. Benefits. Under Company policy, benefits are available only to full time employees. You shall be entitled to annual vacation leave of four weeks, at full pay. Commencing immediately, paid vacation time will be earned on an accrual basis as determined by established Company policy (.42 day per pay period worked for salaried employees and .42 day per eighty (80) hours worked for hourly employees). The Company management reserves the right to determine your vacation time in order to assure the efficient and orderly operation of the Company. All annual computations for benefits are based on your date of hire. You shall be entitled to two (2) days personal leave annually at your base salary rate. Vacation time and personal leave not used within each year of employment may be rolled over to the next year according to established Aristotle policy. You do not have the right to take compensation in lieu of said time. In addition to paid annual vacation leave and annual personal leave, the Company management may, at management's sole discretion and governed by applicable local, state and 2 federal laws, grant you and unpaid leave. You shall be entitled to take all normal paid holidays as established by Company policy, other days the office is officially closed, and up to three (3) sick days at your base salary rate as established by Company policy. Please refer to your employee manual for more details. 5. Proprietary Information and Inventions Agreement. Like all Company employees, you have been required, as a condition to your employment with the Company, to sign the Company's standard Proprietary Information and Inventions Agreement, a copy of which is on file. 6. Period of Employment. Your employment with the Company will be "at will," meaning that either you or the Company will be entitled to terminate your employment at any time and for any reason, with or without cause, upon two (2) weeks written notice. Any contrary representations which may have been made to you are superseded by this offer. This is the full and complete agreement between you and the Company on this term. Although your job duties, title, compensation and benefits, as well as the Company's personnel policies and procedures, may change from time to time, the "at will" nature of your employment may only be changed in an express written agreement signed by you and a duly authorized officer of the Company. You shall be entitled only to such compensation that is fully accrued by you prior to the date of termination, except as explicitly provided for in this agreement, including accrued vacation time, personal days, and commissions. Upon termination, you will surrender all supplies, records, equipment and other property of the Company business. 7. Outside Activities. While you render services to the Company, you will not engage in any other gainful employment, business or activity without the written consent of the 3 Company. While you render services to the Company, you also will not assist any person or organization in competing with the Company, in preparing to compete with the Company or in hiring any employees of the Company. You agree further that for the period of your employment by the Company and for one (1) year after the date of termination of such employment by the Company you will not solicit the business of any client or customer of the Company (other than on behalf of the Company) or misuse in any way any Trade Secret of the Company (as such term is defined in the Proprietary Information and Inventions Agreement, attached hereto as Exhibit A). 8. Withholding Taxes. All forms of compensation referred to in this letter are subject to reduction to reflect applicable withholding and payroll taxes. 9. Entire Agreement. This letter and the Exhibit attached hereto contain all of the terms of your employment with the Company and supersede any prior understandings or agreements, whether oral or written, between you and the Company. 10. Amendment And Governing Law. This letter agreement may not be amended or modified except by an express written agreement signed by you and a duly authorized officer of the Company. The terms of this letter agreement and the resolution of any disputes will be governed by [California/Delaware/Washington D.C.] [sic] law. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 4 We hope that you find the foregoing terms acceptable. You may indicate your agreement with these terms and accept this offer by signing and dating both the enclosed duplicate original of this letter and the enclosed Proprietary Information and Inventions Agreement and returning them to me. As required by law, your employment with the Company is also contingent upon your providing legal proof to your identity and authorization to work in the United States. This offer, if not accepted, will expire at the close of business on November 15, 1999. Very truly yours, Aristotle Publishing, Inc. By: /s/ John Phillips ___________________________ Name: John Phillips Title: CEO I have read and accept this employment offer: /s/ Blair Richardson ____________________________________________ Name: Dated: 11/2, 1999 5 EXHIBIT A FORM OF PROPRIETARY INFORMATION AGREEMENT [see Exhibit 10.13] EX-10.9 8 AGREEMENT WITH CENTRAL ADDRESS SYSTEMS EXHIBIT 10.9 AGREEMENT --------- AGREEMENT, dated as of February 9, 1998 between ARISTOTLE INDUSTRIES, 205 Pennsylvania Avenue, SE, Washington, D.C. 20003 and CENTRAL ADDRESS SYSTEMS, INC. (Hereinafter referred to as "CAS", a Nebraska corporation with its principal place of business at 10303 Crown Point Avenue, Omaha, Nebraska 68134. WITNESSETH: WHEREAS, CAS is a direct mail data processor which provides a variety of data processing services for the industry. WHEREAS, CAS desires to process Consumer Phone Number Appending/Verifying Inferred Income Overlay, County FIPS, Presence of Children, Homeowner/Renter, Mail Order Buyer Code, Computer Owner, Census Tract Overlay, and Block Group Overlay for Aristotle Industries. WHEREAS, Aristotle Industries desires CAS to provide above mentioned data processing services. NOW, THEREFORE, in consideration of the mutual premises and subject to the following terms and conditions, the parties agree as follows: 1. CAS will process Phone Number Appending/Verifying, Block Group Overlay, Census Tract Overlay, Inferred Income Overlay, County FIPS, Presence of Children, Homeowner/Renter, Mail Order Buyer Code, Computer Owner, Census Tract Overlay, and Block Group Overlay for Aristotle Industries in accordance with the price schedule as annexed as Exhibit "A", which prices will be maintained during the term of this agreement. 2. TERM. This Agreement shall remain in effect for a period of twelve (12) months from the date hereof and shall be renewed for successive twelve (12) month period unless either party shall given written notice of its intent not to renew within ninety (90) days of the date of scheduled termination. 3. LAW GOVERNING. This Agreement shall be subject to and governed by the laws of the District of Columbia. 4. ARBITRATION. All disputes arising under this Agreement shall be settled by arbitration at a Nebraska office of the American Arbitration Association in accordance with the rules and provisions of the American Arbitration Association. 5. CHANGES. This Agreement may not be changed or modified except by a writing signed by both parties. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date set forth above. ARISTOTLE INDUSTRIES /s/ John Phillips ______________________________ John Phillips, President CAS, INC. /s/ Ken M. Strassberg ______________________________ Ken M. Strassberg, President 2 EXHIBIT "A" Pricing Agreement between CAS, Inc. and Aristotle Industries. Inferred Income Overlay Census Tract Overlay, Black Group Overlay, County FIPS Presence of Children, Homeowner/Rental Mail Order Buyer Code, Computer Owner, Census Tract Overlay, Block Group Overlay $ .20/M Hits Phone Append/Verify $ 3.90/M New Phones Output Cartridges $15.00/Cartridge Courier Costs Exchange of data on Exabyte tape or other AI compatible cartridge tape format. EX-10.10 9 LEASE AGREEMENT DATED 9/28/1999 EXHIBIT 10.10 [LOGO] LEASE (STANDARD FORM) THIS LEASE, made this 28th day of September, 1999, between Colleen Brent, Leland Dobbs, Barrett G. Levine hereinafter called "LESSOR", and Aristotle Publishing, Inc., a Delaware corporation hereinafter called "LESSEE". (The word "Lessor" and the word "Lessee" as used herein shall include the plural as well as the singular, and shall include, apply to and bind and benefit the heirs, executors, administrators, successors and assigns of Lessor and Lessee. If there are more than one Lessor or Lessee, the obligations hereunder imposed upon Lessor or Lessee shall be joint and several.) WITNESSETH: Upon the terms, covenants and conditions set forth herein, Lessor hereby leases to Lessee, and Lessee hires from Lessor, the following premises, situated in the City and of San Francisco, State of California: That certain commercial space located behind that certain 3 story building located on the northerly line of Union Street between Fillmore and Steiner Streets, together with the second floor bathroom, as found in San Francisco Assessor's Block #534, Lot #17, and commonly know and designated as 2266 Union Street. It is further mutually agreed between the Lessor and Lessee as follows: 1. TERM: The term of this Lease shall be for three (3) years, one (1) months, commencing November 1, 1999, and ending November 30, 2002. 2. RENT: Lessee agrees to pay to Lessor as minimum monthly rent for the premises the following in lawful money of the United States of America: See Page 1A. Rent is payable in advance of the first day of each and every month during the term of this Lease to Lessor without notice or demand and without deduction or offset. Said rent shall be paid at such place or places as may be designated in writing from time to time by Lessor, the first of said payments to be made upon execution of this Lease. Rent for any period during the term hereof which is for less than one month shall be a pro rata portion of the monthly installment. Lessee shall pay, as additional rental, all rentals, charges and other sums of money required to be paid by Lessee under this Lease (all such rentals, charges and sums other than minimum monthly rental being referred to in this Lease as "Additional Rental"), whether or not the same may be designated "Additional Rental". If such amounts are not paid at the time provided in this Lease, they shall nevertheless be collectible, together with any interest or late charge provided for herein, as Additional Rental with the next installment of minimum monthly rental thereafter following due, but nothing herein contained shall be deemed to suspend or delay the payment of any amount of money or charge at the time the same becomes due and payable hereunder, or limit any other remedy of Lessor. Where the time for payment of any Additional Rental is not specified herein, the same shall be due and payable ten (10) days after Lessor's invoice or demand is given. RENT: Lessee agrees to pay Lessor as minimum monthly rent for the premises the following in lawful money on the United States of America: For the first month of the lease term, namely from November 1, 1999, through November 30, 1999, no rent shall be due. For the next thirty-six months of the lease, namely from December 1, 1999, through November 30, 2002, in equal monthly payments of FIVE THOUSAND FIVE HUNDRED AND 00/100THS ($5,500.00) DOLLARS. 1A 3. USE OF PREMISES: Lessee shall use said premises continuously and constantly during the term hereof for the purposes of conducting therein the following and only the following business: General Office Use Lessee agrees not to conduct or permit to be conducted any fire sale, any bankruptcy sale, or any sale by auction on said premises. Lessee shall not display or sell merchandise nor allow carts, portable signs, devices or any other object to be stored or to remain outside the defined exterior walls, roof or permanent doorways of the premises, or in public hallways. Lessee acknowledges that no warranties or representations have been made by Lessor or Lessor's Agent regarding the fitness or suitability of the premises for the conduct of Lessee's business, and Lessee has made Lessee's own independent investigation to determine the fitness and suitability of the premises for Lessee's use, and Lessee takes possession hereunder subject to all laws, ordinances and regulations applicable to the premises and their use, and any covenants or restrictions of record. 5. LESSEE'S INSURANCE: Lessee shall purchase and maintain at Lessee's own expense the following types of minimum insurance which shall be in full force and effect during the term of this Lease and any extension thereto in a responsible company authorized to do business in the state where the demised premises are situated: (a) Bodily Injury, Personal Injury, and Property Damage Insurance with limits not less than $1,000,000, combined single limit, covering the demised premises and sidewalks in front of same, which shall name Lessor as an additional insured (agreeing that this insurance is considered primary for the protection of Lessor), and to furnish a certificate (or a full copy, if requested) of such policy to Lessor. Said policy shall contain a provision requiring thirty (30) days written notice from the insurance company to Lessor prior to reduction or cancellation, and each policy or certificate thereof shall be delivered to Lessor by Lessee upon commencement of the term of this Lease and upon each renewal of said insurance. No more frequently than each three (3) years, if, in the opinion of Lessor's lender or of the insurance broker retained by Lessor, the amount of Bodily Injury, Personal Injury, and Property Damage liability insurance coverage at that time is not adequate, Lessee shall, at Lessee's sole cost, increase the insurance coverage as required by either Lessor's lender or Lessor's insurance broker. (b) Full glass insurance for all glass in or on the premises, including coverage for upgrading where required by governmental code. (c) Worker's Compensation insurance as required by law. (d) Insurance covering Lessee's leasehold improvements, alterations, additions, and improvements permitted herein, trade fixtures, equipment, merchandise, inventory and other personal property of Lessee from time to time in, or upon, the premises in an amount not less than ninety (90%) percent of the full replacement cost thereof providing protection against any peril included within the classification, "Fire and Extended Coverage" together with insurance against sprinkler damage, vandalism and malicious mischief. Any proceeds shall be used for the repair or replacement of the property damaged or destroyed unless this Lease is terminated pursuant to the provisions of Paragraph 18 of this Lease. (e) Adequate insurance to cover any loss or damage caused by burglary, vandalism, forced entry or riot to Lessee's property, fixtures, merchandise, leasehold improvements, or to the demised premises, or to property, fixtures, or merchandise belonging to Lessee's agents, servants, contractors, employees, licensees, invitees or customers. The failure of Lessee to effect said insurance in the names herein called for and to pay the premiums therefor or to deliver certificates to Lessor shall permit Lessor to effect said insurance and pay the requisite premiums therefor, which premiums shall be repayable unto Lessor immediately upon notice to Lessee. The limits of said insurance shall not, however, limit the liability of Lessee. Lessee's failure to provide said insurance or to provide a certificate thereof to Lessor, or to reimburse Lessor for the costs in effecting said insurance, shall be a material breach of this Lease. 2 6. WAIVER OF SUBROGATION: Lessor and Lessee hereby waive any right that each may have against the other on account of any loss or damage arising in any manner which is covered by policies of insurance for fire and extended coverage, theft, public liability, worker's compensation or other insurance now or hereafter existing during the term of this Lease covering the property of which the demised premises are a portion or the demised premises or any portion thereof or operations therein, and the parties shall each have their respective insurance companies waive any rights of subrogation where possible that such companies may have against Lessor or Lessee, as the case may be. Each party shall obtain any special endorsements, if required by their insurer, to evidence compliance with the waiver of any rights of subrogation. Lessor and Lessee shall each indemnify the other against any loss or expense, including reasonable attorney's fees, resulting from the failure to obtain such a waiver when the same is reasonably available. 7. POSSESSION: Lessee agrees that in the event of the failure or inability of Lessor to deliver possession of said premises at the time herein agreed that Lessor shall not be liable for any damages of any kind caused thereby nor shall this Lease be void, nor shall the expiration date hereof be changed, but in such event there shall be a proportionate reduction of rent covering the period between the commencement of the said term and the time when Lessor can deliver possession. If Lessor has not tendered possession of the premises to Lessee within ninety (90) days after the commencement date, Lessee may terminate this Lease at any time after said ninety (90) day period by giving ten (10) days advance written notice to Lessor. In the event Lessor has not delivered possession of the premises within six (6) months after the commencement date as a result of causes beyond Lessor's control, Lessor may terminate this Lease by giving Lessee ten (10) days advance written notice. If either party terminates this Lease in accordance with this Paragraph, all money paid by Lessee to Lessor shall be refunded and both parties shall be released from all obligations under this Lease. 8. INDEMNIFICATION OF LESSOR: Lessee agrees to indemnify and hold Lessor harmless from and against any and all claims, actions, damages, liability and expense, including but not limited to reasonable attorney's fees, in connection with loss of life, personal injury, and/or damage to property arising from or out of any occurrence in, upon or at the leased premises, or any part thereof, or occasioned wholly or in part by any act or omission of Lessee, its agents, contractors, employees, servants, customers, invitees, tenants, or subtenants. Lessor shall not be liable for any damage to property of Lessee or of others located on the leased premises, nor for the loss of or damage to any property of Lessee or of others by theft or otherwise. Lessor shall not be liable for any injury or damage to persons or property resulting from fire, earthquake, flood, explosions, falling plaster, steam, gas, electricity, water, rain or snow, or leaks from any part of the leased premises or from the pipes, appliances or plumbing works or by any other cause of whatever nature. Lessor shall not be liable for any such damage caused by any other tenants or persons in the leased premises or the building of which the demised premises are a portion, occupants of adjacent property, or the public, or caused by operations in construction of any private, public or quasi-public work. Notwithstanding the above, this Paragraph shall not apply where such damage, loss of injury is caused by the willful act or gross negligence of Lessor. The provisions of this Paragraph shall survive the expiration or early termination of this Lease, except that any liability of Lessor shall be limited as set forth in Paragraph 31 hereof. 9. BURGLARY, THEFT, ROBBERY, VANDALISM, FORCED ENTRY, RIOT: Lessee shall not hold Lessor responsible for any loss or damage to Lessee's property, fixtures, merchandise, leasehold improvements, or to the demised premises, or to property, fixtures, or merchandise belonging to Lessee's agents, servants, contractors, employees, licensees, invitees or customers caused by burglary, theft, robbery, vandalism, forced entry or riot, and Lessee shall promptly repair any damage or loss on or about the premises caused by burglary, theft, robbery, vandalism, forced entry or riot at Lessee's sole cost and expense in accordance with Paragraph 13 of this Lease. 10. SIGNS: Lessor reserves the exclusive right to the roof and exterior walls of said premises; and no signs or notices shall be inscribed, painted or affixed by Lessee on or to the outside of the herein demised premises without the prior written consent of Lessor. All permitted signs, if any, shall satisfy all governmental code requirements. Upon the expiration of this Lease or earlier termination thereof, Lessee shall, at Lessor's option, remove all Lessee's signs and repair any damage caused by the erection or removal of said signs. 11. CONCESSIONS: Lessee agrees not to give, grant or otherwise permit a taxicab stand, video game machine, newspaper stand, public telephone, or any other street concession in or adjacent to said premises, without the prior written consent of Lessor. 12. LIENS: Lessee shall promptly pay or cause to be paid all costs of work done by Lessee or caused to be done by Lessee on the leased premises and shall keep the leased premises free and clear of all mechanic's and other liens. Lessee shall indemnify and hold Lessor and the leased premises harmless against loss, damage, interest, cost, attorney's fees and other expenses on account of claims of such liens. If Lessee shall desire to contest any claim of lien, Lessee shall first furnish Lessor a cash security in the amount of the claim, plus estimated costs and interest, or a bond from a responsible corporate surety in such amount conditioned on the discharge of the lien. If a final judgment establishing the validity or existence of a lien for any amount is entered, Lessee shall pay and satisfy the same not later than 30 days after entry of judgment. If Lessee shall be in default in paying any charge for which a mechanic's lien claim and suit to foreclose the lien have been filed and shall not have given Lessor security to protect the property and the Lessor against such claim of lien, Lessor may pay said claim and any costs. The amount so paid, together with reasonable attorney's fees incurred in connection therewith, shall be immediately due and owing from Lessee to Lessor. 3 13. CONDITION OF PREMISES, REPAIRS AND LAW OBSERVANCE: By entry hereunder, Lessee acknowledges to have received the demised premises in its "AS IS" condition. No alterations shall be made on any part of said demised premises without the written consent of Lessor first had and obtained, except as may be hereinafter provided. Lessee shall give Lessor written notice not less than five (5) working days prior to any work or improvements to be performed by Lessee to the demised premises thereby permitting Lessor to record and post Notices of Non-Responsibility. All applicable permits, authorizations and governmental approvals shall be obtained before commencement of the alterations, and the alterations shall be completed with due diligence in compliance with the plans and specifications approved by Lessor. Lessor shall not be required to do any construction whatsoever (save as required by Paragraph 18 hereof) after delivery of possession and shall not be required to install, maintain or repair any fixtures, plumbing or furnishings required by Lessee in the use of said premises and in connection with the business or occupations transacted therein, all of which shall be furnished solely by Lessee. Lessee agrees to conform to and comply with all laws, ordinances, rules and regulations of Federal, State, County and Municipal authority in the use and occupation and repair of the demised premises and to keep and maintain (except as hereinafter provided) the demised premises and appurtenances and every part thereof including glazing, interior surface of exterior walls, doors and appurtenances to doors, and showcases in good and sanitary order, condition and repair at Lessee's sole cost and expense during the entire term of this Lease. Lessor shall, during the term of this Lease, at Lessor's sole cost and expense, maintain in good condition and repair the roof (including any skylights) of said premises, the exterior walls (other than glazing and doors, door jambs, door frames, locks, bolts, door hardware, door closers, or appurtenances), foundations, sub-surface plumbing and sub-surface electrical systems within the walls or foundations of the premises (providing Lessee has not negligently used nor over-loaded said systems), and the sidewalks surrounding said premises except for any damage caused by the wrongful act of Lessee or its agents and except for loss or damage, the repair of which is Lessee's responsibility under Paragraph 8 and this Paragraph 13 of this Lease. Lessor shall not, however, be obligated to paint such exterior, nor shall Lessor be required to maintain the interior surface, windows, doors or glass, nor any electrical, plumbing, or other systems installed by Lessee. Lessor shall have no obligation to make repairs under this Paragraph until a reasonable time after receipt of written notice of the need for such repairs. Lessee expressly waives the benefits of any statute now or hereafter in effect which would otherwise afford Lessee the right to make repairs at Lessor's expense or to terminate this Lease because of Lessor's failure to keep the premises in good order, condition and repair. 14. CHARGES FOR PUBLIC UTILITIES AND SERVICES: Lessee hereby agrees to pay for all heat, air conditioning, water, sewer service charge, light, gas, power, telephone, custodial services, pest control, trash and garbage collection and other services supplied to said demised premises, together with any taxes thereon, during the term of this Lease. If any such services are not separately metered to Lessee, Lessee shall pay within five (5) days, after written demand is received from Lessor, a reasonable proportion to be determined by Lessor of all charges jointly metered with other premises. Lessor shall not be liable in damages or otherwise for any failure or interruption of any service being furnished the demised premises. 15. HAZARDOUS MATERIALS: Lessee shall not bring upon or generate toxic or hazardous substances within the demised premises, and should Lessee so act, then Lessee shall, at its sole cost and expense, comply with all Federal, State or local laws from time to time in effect ("Hazardous Materials Laws") concerning the management, use, generation, storage, transportation, presence, discharge or disposal of hazardous, toxic, radioactive or carcinogenic materials, substances or waste ("Hazardous Materials"). Lessee shall cause any and all hazardous materials brought onto or used, generated, stored or discharged in the demised premises to be removed from the premises and transported for disposal in accordance with applicable Hazardous Materials Laws. Lessor shall have the right to enter the demised premises from time to time to conduct tests, inspections and surveys concerning Hazardous Materials and to monitor Lessee's compliance with its obligations concerning Hazardous Materials and Hazardous Materials Laws. Lessee shall immediately notify Lessor in writing of any clean-up or removal action instituted or proposed by Lessee, any enforcement, clean-up, removal or other governmental or regulatory action instituted or threatened, or any claim made or threatened by any person against Lessee, the demised premises, or the building relating to Hazardous Materials or Hazardous Materials Laws. Lessee shall also supply to Lessor as promptly as possible, and in any event within five (5) business days after Lessee receives or sends same, copies of all claims, reports, complaints, notices, warnings or asserted violations relating in any way to the demised premises or Lessee's use thereof and concerning Hazardous Materials or Hazardous Materials laws. Lessee shall not negotiate or enter into any settlement agreement, consent decree or other compromise in respect to Hazardous Materials or Hazardous Materials Laws affecting the demised premises except after giving Lessor prior written notice and a full and fair opportunity to appear, intervene or otherwise assert and protect Lessor's rights and interests. Lessee shall indemnify, defend and hold Lessor harmless from any claims, causes of action, liabilities, costs or expenses (including all attorney's fees and costs) arising from or in connection with personal injury or death or property damage or clean-up costs caused or alleged to have been caused by the presence of Hazardous Materials brought upon or generated by Lessee within the demised premises including, without limitation, any personal injury, death or property damage caused or alleged to have been caused by the release of Hazardous Materials or other toxic substances into the air as a result of such contamination, whether such claims, causes of action or liabilities are first asserted during the term hereof or thereafter, and including without limitation claims made against the Lessor with respect to personal injury, death or property damage sustained by third parties caused or alleged to have been caused by the presence of Hazardous Materials or other toxic substances. 16. INCREASED DANGER OF HAZARD: Lessee shall not permit or suffer any public or private nuisance upon said premises. No use shall be made or permitted to be made of the demised premises nor acts done which will cause the cancellation of any insurance policy covering said premises or any building of which the premises may be a part, and if Lessee's use of the premises causes an increase in the cost of insurance premiums, Lessee shall pay the entirety of any such increase. 4 17. RIGHT OF LESSOR TO PERFORM: All covenants and agreements to be performed by Lessee under any of the terms of this Lease shall be performed by Lessee at Lessee's sole cost and expense and without any abatement of rent. If Lessee fails to pay any sum of money, other than rent, required to be paid by it hereunder or shall fail to perform any other act on Lessee's part to be performed hereunder, and such failure shall continue for ten (10) days after notice by Lessor, the Lessor may, without waiving or releasing Lessee from any obligations of Lease, make any such payment or perform any such act on Lessee's part to be made or performed as provided in this Lease, but Lessor shall not be obligated to take any such action. All sums so paid by Lessor and all necessary incidental costs together with interest thereon at the maximum rate permitted by law from the date of such payment by Lessor shall be payable as additional rent to Lessor on demand, and Lessee covenants to pay any such sums, and Lessor shall have, in addition to any other right or remedy of Lessor, the same rights and remedies in the event of the non-payment thereof by Lessee as in the case of default by Lessee in the payment of the rent. 18. DESTRUCTION OF PREMISES: (a) In the event of a partial destruction of said premises prior to the commencement of or during the said term hereof by any cause covered by the typical standard form fire, extended coverage, and malicious mischief insurance, Lessor shall, to the extent such insurance proceeds are made available to Lessor, forthwith repair the same, provided such repairs can be made within 120 days after the destruction under the laws and regulations of Federal, State, County or Municipal authorities. Such partial destruction shall in no way annul or void this Lease, except that Lessee shall be entitled to a proportionate reduction of rent while such repairs are being made, provided that such damage is not the result, in whole or in part, of the negligence or willful misconduct of Lessee or Lessee's agents, contractors, employees, invitees, or licensees. Such proportionate reduction shall be based upon the extent to which the making of such repairs interfere with the business carried on by Lessee in the said premises. If such repairs cannot be made within 120 days after the destruction, Lessor may, at its option, make same within a reasonable period of time, this Lease continuing in full force and effect and the rent to be proportionately abated as provided in this Paragraph. In the event that Lessor does not so elect to make the repairs which cannot be made in 120 days after the destruction, or such repairs cannot be made under such laws and regulations, this Lease may be terminated at the option of either party giving written notice to the other within thirty (30) days after the occurrence of such damage. In the event that the building in which the demised premises are situated may be destroyed to the extent of more than 33 1/3% of the replacement cost thereof, Lessor may elect to terminate this Lease, whether the demised premises be injured or not. A total destruction of the building, excluding foundations, in which the said premises are situated shall terminate this Lease. If the premises are partially destroyed or damaged during the last twelve months of the term of this Lease, Lessor or Lessee may, at either party's option, with no liability to the other party, cancel and terminate this Lease as of the date of occurrence of such damage by giving written notice to the other party of Lessee's or Lessor's election to do so within thirty (30) days after the date of occurrence of such damage. If the premises are to be repaired by Lessor under this Paragraph, such repairs shall not include, and Lessor shall not be required to repair, any damage by fire or other cause to the property of Lessee or any repairs or replacements of any paneling, decorations, railings, floor coverings, or any alterations, additions, fixtures or improvements installed on the premises by or at the expense of Lessee; Lessee shall repair and replace those items at its own cost and expense if Lessor repairs the damage to the building under this Paragraph. In the event this Lease is terminated under the provisions of this Paragraph, the portion of any rentals paid in advance by Lessee to Lessor covering the period following such termination shall be repaid by Lessor to Lessee. Lessee waives any right to terminate this Lease as a result of any statutory provisions now or hereafter in effect pertaining to the damage or destruction of demised premises of the building of which demised premises are a portion except as expressly provided herein. (b) ARBITRATION OF DISPUTES: In the event of any dispute between Lessor and Lessee relative to the provisions of this Paragraph 18, they shall each select an arbitrator, the two arbitrators so selected shall select a third arbitrator and the three arbitrators so selected shall hear and determine the controversy, and their majority decision thereon shall be final and binding upon both Lessor and Lessee. In the event Lessor's and Lessee's arbitrators cannot agree to a third arbitrator, the President of the Board of Realtors or court of the city in which the demised premises are located shall be asked to designate said third arbitrator. Lessor and Lessee shall use their best efforts to bring the dispute to an expeditious conclusion and shall each bear the cost of their respective arbitrators, and they shall equally bear the cost of the third arbitrator. (c) NOTICE: BY INITIALLING IN THE SPACE BELOW YOU ARE AGREEING TO HAVE ANY DISPUTE ARISING OUT OF THE MATTERS INCLUDED IN THE "ARBITRATION OF DISPUTES" PROVISION DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY CALIFORNIA LAW AND YOU ARE GIVING UP ANY RIGHTS YOU MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN A COURT OR JURY TRIAL. BY INITIALLING IN THE SPACE BELOW YOU ARE GIVING UP YOUR JUDICIAL RIGHTS TO DISCOVERY AND APPEAL, UNLESS THOSE RIGHTS ARE SPECIFICALLY ----- INCLUDED IN THE ARBITRATION OF DISPUTES PROVISION. IF YOU REFUSE TO SUBMIT TO ARBITRATION AFTER AGREEING TO THIS PROVISION, YOU MAY BE COMPELLED TO ARBITRATE UNDER THE AUTHORITY OF THE CALIFORNIA CODE OF CIVIL PROCEDURE. YOUR AGREEMENT TO THIS ARBITRATION PROVISION IS VOLUNTARY. WE HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT DISPUTES ARISING OUT OF THE MATTERS INCLUDED IN THE ARBITRATION OF DISPUTES PROVISION TO NEUTRAL ARBITRATION. LESSOR'S INITIALS /s/ P/S LESSEE'S INITIALS ________________ ____________________ 5 19. ASSIGNMENT AND SUBLETTING: Lessee shall not voluntarily or by operation of law assign, transfer, mortgage, sublet, hypothecate or otherwise transfer or encumber all or any part of Lessee's interest in this Lease without Lessor's prior written consent. Lessor shall not unreasonably withhold consent to the subletting of demised premises or the assignment of this Lease in the event the proposed sublessee or assignee meets reasonable credit, business/qualification and reputation requirements and the occupancy resulting from such subletting or assignment is consistent with the general character of the business as described in Paragraph 3 of this Lease. Any of the foregoing acts without Lessor's prior written consent shall be void and shall, at the option of Lessor, terminate this Lease. Any transfer or change in ownership of fifty (50%) percent or more of the stock or interest in Lessee shall constitute an assignment for purpose of this Paragraph. No consent by Lessor to any assignment or subletting by Lessee shall release Lessee of Lessee's obligation to pay the rent and to perform all the obligations to be performed by Lessee hereunder for the term of this Lease or any extension thereof. The acceptance of rent by Lessor from any other party shall not be deemed to be a waiver by Lessor of any provisions hereof. A consent to one assignment or subletting shall not be deemed to be a consent to any subsequent assignment or subletting. Lessee shall reimburse Lessor for any expense incurred by Lessor in connection with the assignment or subletting of this Lease, such as, but not limited to, the cost of review of any documents by Lessor's attorney. 20. EMINENT DOMAIN: If the whole or any part of the premises shall be taken or condemned by any competent authority for any public or quasi-public use, then this Lease and all rights and liabilities of the parties thereafter accruing shall cease after the date when such possession shall be required or title to be vested, without apportionment to Lessee of the award or other compensation, if any, by reason of such requisition, taking or condemnation; but nothing herein contained shall deprive Lessee of the right, if any, to receive from the requisitioning or condemning authority award for compensation or loss of or damage to any of Lessee's tangible property or business, provided the same is not in diminution of the award or compensation payable to Lessor; and Lessee shall make payment of all rent and other charges accrued and pro-rated to the date of such requisition, taking or condemnation. In the event this Lease is terminated under the provisions of this Paragraph, the pro-rata portion of any rentals paid in advance by Lessee to Lessor covering the period following such termination shall be repaid by Lessor to Lessee. For purposes of this Paragraph, a voluntary sale or conveyance in lieu of condemnation, under threat of condemnation, shall be deemed a taking under the power of eminent domain. 21. ENTRY BY LESSOR: Lessee shall permit Lessor, or the agents of Lessor, to enter into and upon said premises at all reasonable times for the purpose of inspecting the same or for the purpose of maintaining the building in which the same premises are situated, or for the purpose of making repairs, alterations or additions to any other portion of said building, including the erection and maintenance of scaffolding as may be required (without the same constituting an eviction of Lessee in whole or in part), providing that all such work shall be performed as promptly and with as little interference to Lessee as reasonably possible, or for the purpose of posting notices of non-responsibility for alterations, additions or repairs, or for the purpose of placing upon the property in which the said premises are located any usual or ordinary "for sale" signs without any rebate of rent to Lessee for any loss of occupancy or quiet enjoyment of the premises thereby occasioned. Lessor, or the agents of Lessor, shall have the right during the last thirty (30) days of the term, to enter upon said premises, and to affix upon any suitable part thereof a notice for re- letting the same, and Lessee will not remove said notice. 22. INABILITY TO PERFORM: This Lease and the obligations of the Lessee under this Lease shall not be affected or impaired because Lessor is unable to fulfill any of his obligations hereunder or is delayed in doing so, if such inability or delay is caused by reason of strike, labor troubles, acts of G'd, or any other cause beyond the reasonable control of the Lessor. 23. LATE CHARGES: IT IS AGREED BETWEEN THE PARTIES HERETO THAT LATE PAYMENT BY LESSEE OF RENT, ADDITIONAL RENT, OR OTHER SUM DUE HEREUNDER WILL CAUSE LESSOR TO INCUR COSTS NOT CONTEMPLATED BY THIS LEASE, SUCH COSTS INCLUDE, WITHOUT LIMITATION, PROCESSING AND ACCOUNTING CHARGES, LOSS OF USE OF FUNDS, AND UNFORESEEN ADVANCEMENTS BY LESSOR FOR MORTGAGES AND OTHER FINANCING COSTS. IN THE EVENT OF ANY SUCH DEFAULT BY LESSEE (I) IT WOULD BE IMPRACTICABLE OR EXTREMELY DIFFICULT TO DETERMINE AND FIX THE ACTUAL DAMAGES SUFFERED BY LESSOR, AND (II) THE CHARGES HEREINBELOW SET FORTH ARE, AS OF THE DATE HEREOF, A FAIR AND REASONABLE ESTIMATE OF LESSOR'S DAMAGES. SHOULD LESSOR NOT RECEIVE ANY PAYMENT WHEN DUE, LESSEE AGREES TO PAY LESSOR FORTHWITH A LATE CHARGE FOR EACH SUCH LATE PAYMENT IN AN AMOUNT EQUAL TO TEN (10%) PER CENT OF THE DELINQUENT SUM. ACCEPTANCE OF ANY LATE CHARGE SHALL NOT CONSTITUTE A WAIVER OF THE DEFAULT WITH RESPECT TO THE OVERDUE AMOUNT AND SHALL NOT PREVENT LESSOR FROM EXERCISING ANY OF ITS RIGHTS AND REMEDIES UNDER THIS LEASE, OR APPLICABLE LAW. LESSOR'S INITIALS /s/ PS LESSEE'S INITIALS ________________ ___________________ 6 24. DEFAULTS AND REMEDIES: A. Definition of Default. Without limitation thereto, each of the following events is deemed to be a default hereunder: (1) Lessee's interest, or any part of Lessee's interest, in this Lease is assigned or transferred in whole or in part, voluntarily or by operation of law, except with Lessor's prior written consent. (2) A finding or judgment of insolvency of Lessee is made, or a voluntary or involuntary petition in bankruptcy is filed; or a writ of execution of the business of Lessee or on the assets of Lessee located on the leased premises is levied, which is not discharged within five (5) days after the date of said levying; or a petition for reorganization, or for an arrangement, is filed by or against Lessee, or any member of Lessee if Lessee is a partnership or joint venture; or a receiver is appointed of the business or of the assets of Lessee (except a receiver appointed at the instance or request of Lessor); or Lessee makes a general assignment, or any assignment for the benefit of its creditors. (3) Lessee abandons or vacates the leased premises. (4) Lessee fails (a) to make any payment of rent or any other payment required to be made by Lessee herein, as and when due or (b) in keeping of any other term, covenant or condition of this Lease, when such failure continues for ten (10) days after notice thereof by Lessor. (5) Within one calendar year, Lessee shall have been in default in the payment of any sum due under this Lease more than two times and, as a result thereof, Lessor shall have served Lessee within said calendar year two or more three-day notices to quit or pay rent (which default shall be deemed a non- curable default). (6) The commission by Lessee of waste and/or nuisance. (7) The failure of Lessee to perform in accordance with the provisions of Paragraph 15 hereof. B. Lessor's Remedies: In the event of Lessee's defaults as defined in Paragraph 24 A hereof, in addition to all other rights and remedies which Lessor may have in equity or in law, Lessor shall have all of the following remedies: (1) Lessor shall have the right, without any further demand or notice, to terminate this Lease, re-enter the leased premises and eject all persons from the leased premises, using all necessary force to do so, without prejudice to any other remedies that Lessor may have. (2) In the event of any such termination, Lessor shall have all the rights and remedies of a lessor provided by law. The amount of damages which Lessor may recover includes: (a) the worth at the time of award of the unpaid rent or other charges which had been earned at the time of termination; (b) the worth at the time of award of the amount by which the unpaid rent or other charges which would have been earned after termination until the time of award exceeds the amount of loss of such rental and other charges that Lessee proves could have been reasonably avoided; (c) the worth at the time of award of the amount by which the unpaid rent and other charges for the balance of the term after the time of award exceeds the amount of the loss of such rental and other charges for such period that Lessee proves could be reasonably avoided; (d) any other amount necessary to compensate Lessor for all detriment proximately caused by Lessee's failure to perform Lessee's obligations under this Lease, including, by way of illustration and not limitation, real estate commissions, or which in the ordinary course of events would be likely to result therefrom. The "worth at the time of award" as utilized in sub-parts (a), (b), (c) and (d) hereinabove shall be computed by allowing interest at the rate which is the maximum permitted by law. (3) The Lessor has the remedy described in California Civil Code Section 1951.4 (Lessor may continue Lease in effect after Lessee's breach and abandonment and recover rent as it becomes due, if Lessee has right to sublet or assign, subject only to reasonable limitations). (4) In the event Lessor gives Lessee written notice that Lessor elects not to terminate this Lease, Lessee shall have the right to sublease the leased premises or assign Lessee's interest in this Lease, or both, subject to all other provisions of this Lease pertaining to assignments and subleasing, and Lessor shall have all the remedies of a lessor provided by law. Notwithstanding any such election by Lessor not to terminate this Lease, Lessor may at any time thereafter elect to terminate this Lease for any subsequent breach or default. (5) Lessor shall have the right to cause a receiver to be appointed in any action against Lessee to take possession of the leased premises and/or to collect the rents or profits derived therefrom. Said receiver may, if it is necessary or convenient in order to collect such rents or profits, take possession of any property belonging to Lessee and used in the conduct of such business and may use the same in conducting such business on the leased premises without compensation to Lessee for such use. Neither the application for the appointment of such receiver nor the appointment of such receiver shall constitute an election on the part of Lessor to terminate this Lease unless a written notice of such intention is given to Lessee. 25. ATTORNEY'S FEES: In the event of any action at law or in equity to interpret or enforce the provisions of this Lease, the prevailing party shall be entitled to recover from the other reasonable attorney's fees and costs. If Lessor, without fault on Lessor's part, be made a party to any litigation instituted by or against Lessee, Lessee shall pay to Lessor all costs and expenses incurred by Lessor, including attorney's fees. In the event that Lessor should be required to retain counsel for the collection of rent or the enforcement of any provision hereof, and such collection of rent or enforcement hereof does not necessitate the bringing of an action at law or equity, then Lessor shall be entitled to any and all costs and attorney's fees incurred by Lessor, and the same shall be paid by Lessee within five (5) days after receipt by Lessee of written demand by Lessor for the same. Lessee agrees to indemnify, defend and hold harmless Lessor from and against any liability arising from any breach by Lessee hereof, including attorney's fees and costs incurred in connection therewith, whether such claim arises before or after the expiration or termination of this Lease. 7 26. In the event Lessor and Lessee extend or renow the term provided for in this Lease. Lessor shall pay Blatteis Realty Co., Inc. an additional real estate commission of four (4%) percent of the rent for the extended term upon the commencement of the extended term. Furthermore, if Lessee purchases or otherwise acquires all or any portion of the property of which the demised premises is a portion, Lessor agrees to pay Blatteis Realty Co., Inc. a real estate commission equal to six (6%) percent of the gross sale price, payable upon the consummation of such sale and purchase. 27. TRANSFER OF LESSOR'S INTEREST: In the event of a sale or conveyance by Lessor of Lessor's interest in the property of which said demised premises are the whole or a portion, after the date of such transfer Lessor shall be relieved from all liability as respect to Lessor's obligations thereafter to be performed, provided that any funds in the hands of Lessor at the time of transfer in which Lessee has an interest, shall be delivered to the successor of Lessor. The obligations contained in this Lease to be performed by Lessor shall, subject to the foregoing, be binding on Lessor's successor only during their respective periods of ownership. 28. SUBORDINATION. Lessee expressly agrees that this Lease is and shall be subject and subordinate to all mortgages, deeds of trust, or other encumbrances now or hereafter placed upon the demised premises or property by Lessor, provided that such mortgages, deeds of trust, or other encumbrances contain Lessee non-disturbance clauses in standard form. Lessee further agrees that within ten (10) days after being requested in writing to do so by Lessor, Lessee will execute, acknowledge, and deliver any documents prepared by Lessor that are required to effect such subordination. Should Lessee fail to execute, acknowledge, and deliver such instruments within the ten (10) day period, Lessee shall be deemed to have irrevocably appointed Lessor, and each of Lessor's successors and assigns, to be Lessee's attorney-in-fact to execute, acknowledge and deliver any such instruments for and on behalf of Lessee. 29. ESTOPPEL CERTIFICATE: Upon written notice from Lessor, the Lessee shall execute, acknowledge and deliver within ten (10) days to Lessor a certificate certifying: (a) That this Lease is unmodified and in full force and effect (or, if there have been modifications, that this Lease is in full force and effect, as modified, and stating the date and nature or each modification); (b) The date to which the rental and other sums payable hereunder have been paid; (c) That no notice has been received by Lessee of any default which has not been cured, except as to defaults specified in said certificate; and (d) Such other matters as may be reasonably requested by Lessor or any lender or buyer of the land underlying the property of which the demised premises are a portion. Any such certificate may be relied upon by any prospective purchaser, mortgagee or beneficiary under the deed of trust on the property of which the demised premises is a portion or any part thereof. 30. WAIVER: The waiver by Lessor of any breach of any term, covenant or condition herein contained shall not be deemed to be a waiver of such term, covenant or condition or any subsequent breach of the same or any other term, covenant or condition herein contained. The subsequent acceptance of rent hereunder by Lessor shall not be deemed to be a waiver of any preceding breach by Lessee of any term, covenant or condition of this Lease, other than the failure of Lessee to pay the particular rental so accepted, regardless of Lessor's knowledge of such preceding breach at the time of acceptance of such rent. No covenant, term or condition of this Lease shall be deemed to have been waived by Lessor, unless such waiver be in writing by Lessor. No payment by Lessee or receipt by Lessor of a lesser amount than the rent and additional rent herein provided shall be deemed to be other than on account of the earliest amount due and payable hereunder, nor shall any endorsement or statement on any check or any letter accompanying any check or payment be deemed an accord and satisfaction, and Lessor may accept any such check or payment without prejudice to Lessor's right to recover the balance of such rent or additional rent or to pursue any other remedy provided for in this Lease. 31. DEFAULT BY LANDLORD: Lessee's Remedies. (a) In the event that Lessor shall be liable to Lessee for any damages sustained by Lessee as a result of Lessor's breach, it is expressly understood and agreed that any money judgment resulting from any default or other claim arising under this Lease shall be satisfied out of the rents, profits and other income "Income" for the purposes of this Paragraph 31 only) actually received from the operation of the subject property in which the demised premises are located, and no other real, personal or mixed property of the Lessor wherever situated shall be subject to levy on any such judgment obtained against Lessor, and if the Income is insufficient for the payment of such judgment, Lessee will not institute any further action, suits, claim or demand, in law or in equity, against Lessor for or on account of such deficiency. Lessee hereby waives, to the extend waivable under law, any rights to satisfy said money judgment against Lessor except from income received by Lessor from the operation of the property in which the demised premises are located. 8 (b) Notwithstanding anything herein contained to the contrary, Lessee hereby waives, to the extent waivable under any law, any right to specific performance in the event of Lessor's default referred to herein, and Lessee expressly agrees that except as provided in the immediately following sentence, Lessee's remedy shall be limited to the monetary damages referred to in this Paragraph 31. Notwithstanding the foregoing, in the event of failure by Lessor to give any consent as provided in Paragraph 19 Lessee shall be entitled to specific performance at law, but in no event shall Lessor be responsible in monetary damages for failure to give such consent unless said consent is withheld maliciously or in bad faith. 32. SURRENDER: Lessee agrees that on the last day of said term, or other sooner termination of this Lease, to surrender said premises in the same condition as received subject to reasonable use and wear thereof will permit (damage by act of G'd excepted), swept broom clean, and to remove all rubbish from said premises. All locks, bolts, alterations and additions which may be affixed to or made by either of the parties hereto upon the said premises, except movable furniture and movable fixtures put in at the expense of Lessee, shall be the property of Lessor, at the option of Lessor, and shall remain upon and be surrendered with the premises as part thereof at the termination of this Lease, without disturbance, molestation or injury unless Lessor instructs Lessee to remove any of said items; and immediately upon receipt of notice from Lessor, Lessee shall, at Lessee's sole cost, remove any such items. Lessee shall repair any damage to the demised premises occasioned by the removal of Lessee's fixtures, furnishings and equipment. 33. HOLDING OVER: Any holding over after the expiration of the said term shall be construed to be a tenancy from month to month only, and shall otherwise be upon the same terms and conditions herein specified, so far as applicable, except the rent shall be at a monthly rate equal to two hundred (200%) percent of the monthly rent in effect at the termination of this Lease. Lessee shall indemnify and hold Lessor harmless, for any loss, damage or liability resulting from Lessee's delay in surrendering the premises, including without limitation any claims made by any succeeding tenant based upon such delay. Nothing contained in this Paragraph shall waive Lessor's right of re-entry or any other right, and Lessee shall be only a lessee at sufferance while Lessee is holding over without Lessor's written consent. 34. NO REDEMPTION: Lessee hereby expressly waives any and all rights of redemption or relief from forfeiture granted by or under any present or future laws in the event of any judgment declaring a forfeiture of or terminating this Lease for any cause, or in the event of Lessor obtaining possession of the demised premises by reason of the violation of the Lessee of any of the covenants and conditions of this Lease or otherwise. The rights given to Lessor herein are in addition to any rights that may be given to Lessor by any statute or otherwise. 35. ENTIRE AGREEMENT: Lessee hereby acknowledges that there are no written or oral agreements between Lessor and Lessee affecting this Lease, and this Lease may not be modified except by written instrument by the parties or their successors in interest. This Lease supersedes and cancels all previous negotiations, arrangements, brochures, agreements and other statements, if any, between Lessor and Lessee made or displayed by Lessor to Lessee with respect to the subject matter of this Lease, or of the demised premises. This Lease shall not be modified by an oral agreement, either express or implied, and all modifications hereof shall be in writing and signed by both Lessor and Lessee. Submission of this instrument for examination or signature by Lessee does not constitute a reservation of or option for the Lease, and this instrument is not effective as a Lease or otherwise until execution and delivery by both Lessor and Lessee. 36. SEPARABILITY: If any term, covenant or condition of this Lease or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the other application of such term, covenant or condition shall not be affected thereby and each term, covenant or condition of this Lease shall be valid and be enforced to the fullest extent permitted by law. 37. LAW GOVERNING: This Lease shall be governed by the laws of the state in which the demised premises are located. 38. PARAGRAPH CAPTIONS: Paragraph captions are not a part hereof and are for reference purposes only. 39. TIME IS OF THE ESSENCE: Time is of the essence of this Lease in the performance of each and every term, covenant and condition of this Lease except in respect to the delivery of possession of the demised premises at the commencement of the term hereof. 40. PLATS AND RIDERS: Clauses, plats and riders, if any, signed by the Lessor and the Lessee and endorsed upon or affixed to this Lease become a part of this Lease. 41. RECORDING: Lessee shall not record this Lease without the prior written consent of Lessor. Lessee agrees to sign a short form Lease in recordable form at Lessor's request which may be recorded by Lessor. 42. CORPORATE AUTHORITY: If Lessor or Lessee is a corporation, each individual executing this Lease on behalf of said corporation represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of said corporation in accordance with the By-laws of said corporation and that this Lease is binding upon said corporation in accordance with its terms, and that Lessee is qualified to do business in the state in which the premises is located. 9 43. SECURITY DEPOSIT: Upon execution of this Lease, Lessee has deposited with Lessor the following sum: Eleven Thousand Dollars and no/100ths Dollars ($11,000.00), receipt of which is hereby acknowledged by Lessor. Said sum shall be held by Lessor as security for the faithful performance of Lessee of all the terms, covenants and conditions of this Lease by said Lessee to be kept and performed during the term hereof. If at any time during the term of this Lease any of the rent herein reserved, or any other sum payable by Lessee to Lessor hereunder, shall be overdue and unpaid, then Lessor may, at the option of Lessor, (but Lessor shall not be required to) appropriate and apply any portion of this Security Deposit to the payment of any such overdue rent or other sum. In the event of the failure of Lessee to keep and perform all of the terms, covenants and conditions of this Lease to be kept and performed by Lessee, then at the option of Lessor, the Lessor may, after terminating this Lease, appropriate and apply the entire Security Deposit, or so much thereof as may be necessary, to compensate Lessor for all loss or damage sustained or suffered by Lessor, due to such breach on the part of Lessee. Should the entire Security Deposit, or any portion thereof, be appropriated and applied by Lessor for the payment of overdue rent or other sums due and payable to Lessor by Lessee hereunder, the Lessee shall, upon the written demand of Lessor, forthwith remit to Lessor a sufficient amount in cash to restore said Security Deposit to the original sum, and Lessee's failure to do so within five (5) days after receipt of such demand shall constitute a breach of this Lease. Should Lessee comply with all of said terms, covenants and conditions and promptly pay all of the rental herein provided for as it falls due, and all other sums payable by Lessee to Lessor hereunder, said Secirity Deposit shall be returned in full to Lessee at the end of the term of this Lease or upon the earlier termination of this Lease under the provisions of Paragraph 18 hereof. Lessee acknowledges that this Security Deposit is not prepaid rent and shall not be applied by Lessee to the payment of any rent due Lessor herein. No interest shall be paid on this Security Deposit by Lessor to Lessee. In the event that Lessor transfers said Security Deposit to Lessor's successor in interest, Lessor shall be discharged from any further liability with respect to such Security Deposit. 44. NOTICES: Whenever it is required that any notice be given herein, the same shall be sufficiently served by depositing the same in the United States Mail, Certified and Return Receipt Requested, postage prepaid, and addressed to the addresses set forth below: To Lessor at: 2266 Union Street, SF, CA 94123 ---------------------------------------------------------- To Lessee at: 2266 Union Street, SF, CA 94123 ---------------------------------------------------------- or to such other addresses as a party may designate by written notice to the other party in the manner herein provided. Paragraphs 45 through 54 were added to and made a part hereof prior to execution by Lessor and Lessee. IN WITNESS WHEREOF, Lessor and Lessee have executed this Lease the day and year first above written. LESSOR LESSEE /s/ Colleen Brent Aristotle Publishing, Inc., a Delaware Corp. - ------------------------------ Colleen Brent /s/ Leland Dobbs /s/ John Phillips - ------------------------------ -------------------------------------------- Leland Dobbs By: John Phillips /s/ Barrett Levine - ------------------------------ ____________________________________________ Barrett Levine Its: CEO ______________________________ ____________________________________________ THIS LEASE HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR HIS APPROVAL. NO REPRESENTATION OR RECOMMENDATION IS MADE BY BLATTEIS REALTY COMPANY, INC. OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION RELATING THERETO. 10 45. NOISE: Lessee agrees that Lessee will at all times conduct and carry on said business in such a manner that a minimum of noise shall emanate from the demised premises and not be offensive or objectionable to the Lessor or to the other Tenants of the building of which demised premises are a portion. 46. IMPROVEMENTS: Prior to possession by the Lessee, Lessor will do the following improvements: a. Ensure that the current gas line going into the space is functional b. Provide 50 amps of electrical power in the space c. Install a new roof d. Provide a second floor restroom in good, usable condition (paint and put in new floor, new toilet, new sink, new shower/tub, new linoleum flooring) e. Install slip-resistant tread on the stairway leading to the restroom. 47. SECURITY: Lessee hereby acknowledges that the rental payable to Lessor does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the premises, Lessee, its agents, invitees and their party from the act of third parties. 48. FIRE EXTINGUISHERS: During the term of this lease, Lessee shall keep at least one approved fire extinguishers in operable condition on the demised premises at all times. Said fire extinguishers shall comply with the San Francisco Fire Department codes and regulations. 49. GARBAGE, JANITORIAL, AND UTILITIES: Lessee, at its sole expense, is responsible for its own garbage removal, janitorial, and utilities for the premises. 50. ACCESS: Lessee shall have unrestricted access to the premises twenty-four hours a day, seven days a week, subject to Lessor's reasonable security provisions. 51. RESTROOM: Lessee shall have the exclusive use of the restroom located at the northerly side of the second floor of the three story building located directly south of and adjacent to the premises. Lessee shall be responsible for cleaning said restroom and maintaining the restroom pursuant to Paragraph 13 of this Lease. The Lessor may, after the initial 3-year base term, recover the second floor restroom. However, should this occur, the Lessor, at its sole cost and expense, will provide another restroom on the first floor for the Lessee. Said restroom will also contain a toilet, sink, and shower. 52. AWNING: Subject to Paragraph 10, the Lessee has the exclusive use of the street awning. 53. SPRINKLER SYSTEM: Prior to possession by the Lessee, Lessor will ensure that the existing sprinkler system in the front ramp area is in good operable condition. 54. OPTION: Providing Lessee is in possession of the demised premises at 2266 Union Street, San Francisco, California on November 30, 2002, and is not in default of the terms and conditions of the lease, then Lessee shall be entitled to an option to renew this Lease for an additional term of TWO (2) YEARS, namely from December 1, 2002, to November 30, 2004. If Lessee desires to avail itself of this option, Lessee must so notify Lessor in writing by certified mail no earlier than June 1, 2002, and no later than August 31, 2002. All of the terms and conditions of this Lease shall apply during this option period except that the rent during this option period shall be increased by 10% above the base rent for the previous 3-year term. 11 EX-10.11 10 LEASE AGREEMENT DATED 1/15/2000 EXHIBIT 10.11 OFFICE LEASE THIS LEASE AGREEMENT made this 15th day of January, 2000 between COUNCIL ON AMERICAN-ISLAMIC RELATIONS, (hereinafter referred to as "Landlord"), and ARISTOTLE PUBLISHING INC., (hereinafter referred to as "Tenant"). 1. DEFINITIONS For purposes of this Lease: A. "Lease Year" shall mean a twelve-month period during the Term, commencing on the Commencement Date or anniversary thereof, and ending on the last day of the twelfth month thereafter (e.g., January 15/th/, 2000 to January 15th, 2001 equals one "Lease Year"). B. "Net Rentable Square Feet" shall mean the "rentable area" as that term is defined and measured in conformity with the ANSI/BOMA American National Standard of Measurement (ANSIIBOMA Z65.1-1996). C. "Normal Business Hours" shall mean between the hours of 8:00 A.M. and 6:00 P.M., Monday through Friday and 8:00 A.M. to 6:00 P.M. on Saturday (but not including Legal Holidays). D. "Real Estate Taxes" shall mean all taxes, assessments and public charges of every kind and nature, general and special, extraordinary as well as ordinary, foreseen and unforeseen, which may be levied, assessed or imposed by any governmental entity having jurisdiction to impose such taxes or assessments upon the Building and all improvements and on the underlying real property. 2. DEMISE AND TERM: Landlord does hereby lease to Tenant, and Tenant does hereby hire and take from Landlord, all that certain space depicted on Exhibit A, attached hereto and made a part hereof, being, more particularly described as commercial office space containing approximately 2,299 square feet of basic rentable area (the "Premises") and being a portion of the third floor of the office building located at 5O E Street, S. E., in the City of Washington, in the District of Columbia (the "Building"). The term of this Lease shall be twelve ( 12) months (the "Term"), beginning on January 15th, 2000 (the "Commencement Date") and ending, without the necessity of further notice from either party to the other, on January 15th, 2001 (the "Termination Date"). 3. RENT A. Minimum Rent: The Minimum Rent payable by Tenant during the Term shall be Sixty Eight thousand nine hundred seventy and 00/100 Dollars ($68,970.00) per annum, payable in equal monthly installments of five thousand seven hundred forty seven and 50/100 Dollars ($5,747.50). B. Minimum Rent is due on the first day of each month of the Term, commencing on the Commencement Date. Payments received after the 10th day of the month are subject to a late charge of 10% of the amount due. C. Place of Payment: All rentals and other sums payable hereunder shall be payable to Landlord without demand, notice or setoff, during normal business hours at the address set forth in Article 21 hereof, or at such other place as Landlord may direct, in writing, from time to time. 4. OPTION TO EXTEND: Tenant has no option to extend the term. 5. USE OF PREMISES: The Premises are to be used for general office use, including administrative and executive offices, secretarial, computer support, word processing and such other incidental uses that are commonly associated with an executive, administrative or professional office, and for no other use. Tenant shall have 24 hour daily access to the Demised Premises, seven (7) days a week. 6. POSSESSION: Tenant acknowledges that Tenant is in possession of the Premises as of the Commencement Date of the Lease. 7. SERVICES: Landlord covenants and agrees to furnish the following services, the cost of which are included in Tenant's Minimum Rent: (A) Lighting and electricity for the operation of customary electrical office equipment, provided, however, that, Tenant shall not install or connect systems or other heavy electrical equipment of any type which may overtax the Building's electrical system to the detriment of the Building or other tenants therein. If Tenant requires special or extraordinary electrical power, Tenant may, with Landlord's prior written approval and at Tenant's sole expense, upgrade the electrical system as needed. The cost of electricity resulting from the use of such heavy equipment approved by Landlord shall be charged to and paid by Tenant as Additional Rent hereunder. (B) Heat and Air-Conditioning for comfortable occupancy during Normal Business Hours. (C) Passenger elevator service during Normal Business Hours and an elevator subject to call at all other times when normal passenger service is not furnished. (D) Hot and Cold Water. Should Tenant require air-conditioning and heating service, electrical service or any services other than those specified above outside of Normal Business Hours, Landlord, upon reasonable advance notice by Tenant, shall furnish such additional services and Tenant agrees to pay to Landlord, within ten (10) days after billing, Landlord's cost to provide such additional services. Landlord shall not be liable for any failure to furnish any of the above services if such failure is due to a shortage of materials, supplies, labor, services or other cause reasonably beyond its control. Furthermore, Landlord reserves the right to interrupt, curtail or suspend the services required to be furnished by Landlord under this Section when the necessity therefore arises by reason of accident, emergency, mechanical breakdown or when required by law, order or regulation of any federal, state or municipal authority, or for any cause beyond the reasonable control or authority of Landlord. 8. REPAIRS: Tenant shall, at its expense, maintain the Premises and make all repairs and replacements to the Premises itself, the fixtures and appurtenances thereto and to its personal property and equipment. In addition, Tenant shall repair all damage or injury to the Premises or to the Building caused by Tenant moving property in or out of the Building or by installation or removal of furniture, fixtures or other property or caused by the negligence of Tenant, its employees, agents or invitees. Repairs, restorations and replacements shall be in quality and class equal to the original work or installation. 9. ALTERATIONS: Tenant shall not make any alterations, additions or improvements to the Premises without the prior written consent of Landlord. In no event shall any structural change or any change or modification to the heating, electrical or plumbing elements be undertaken by Tenant or any employee or agent of Tenant without Landlord's prior, written consent. Any approved alterations, additions or improvements shall be performed in a good and workmanlike manner and in accordance with the applicable laws and ordinances of any public authority having jurisdiction over the Building and in accordance with the building and zoning rules and regulations of any such authority. Tenant hereby expressly assumes full responsibility for all damages and for injuries which may result to any person or property by reason of, or resulting from said alterations, additions or improvements. All alterations, improvements, additions or fixtures, whether installed before or after the execution of this Lease, and to the extent they represent "fixtures" as that term is generally understood, shall remain upon the Premises at the expiration or sooner termination of this Lease and shall become the property of Landlord. In making any approved alterations, additions or improvements, Tenant shall promptly pay all contractors, materialmen, and laborers so as to eliminate the possibility of a lien attaching to the Building or the underlying real property. Should any such lien be made or filed, Tenant shall bond against or discharge same within twenty (20) days after written request by Landlord and provide Landlord with evidence of same. 10. LIMITATION OF LANDLORD'S LIABILITY: Unless caused solely by Landlord's negligence, or the negligence Landlord's agents, servants and employees, Landlord shall not be liable for, and Tenant hereby releases Landlord and Landlord's agents, servants and employees from, all claims for injury to persons or damage to property (including loss or interruption of business) sustained by Tenant or any person claiming through Tenant, resulting from any fire, accident or occurrence or condition in or upon the Premises or the Building, including, but not limited to, claims for damage resulting from: A. Any defect in or failure of the plumbing, sprinkler systems, heating or air conditioning equipment, elevator, electrical wiring or installation thereof, water pipes, stairs, railings or walks; B. Any equipment or appurtenances becoming out of repair; C. Bursting, leaking or running of any water pipe, tubing, radiant panel, electric fixture, valve, fitting, tank, washstand, water closet, waste pipe, drain or any other pipe or tank in or upon the Premises or the Building; D. Backing-up of any sewer pipe or downspout; E. Escape of steam, gas, or hot or cold water; F. Water, snow or ice being upon or coming through the roof, walls or foundation of the Building or any other place upon or near the Premises or otherwise; G. Failure or falling of any fixture, plaster or stucco; H. Broken glass; I. Any act or omissions of co-tenants or other occupants of the Building or any act or omission of parties other than Landlord, its employees or agents and/or; J. The exercise of any rights by Landlord under this Lease. In addition to the foregoing, Landlord's liability under this Lease shall be limited to its estate in the Building and the rents derived therefrom, it being agreed and understood that no other assets of Landlord shall be subject to levy, execution or other procedures for the satisfaction of any judgment or any other remedy or claim of Tenant hereunder. 11. ASSIGNMENT AND SUBLETING: Tenant may not assign this Lease nor sublet the whole or any part of the Premises without the prior, written consent of Landlord, which consent shall not be unreasonably withheld. In the event of an assignment or sublease, Tenant shall remain liable for the performance of any and all obligations under the Lease. 12. CASUALTY LOSS: A. Major Destruction. In the event that the Premises are totally destroyed or so damaged by fire or other casualty, not occurring through fault or negligence of the Tenant or those employed by or acting for Tenant, that the same cannot, in Landlord's reasonable opinion, be repaired or restored within 120 days of the date of destruction, this Lease shall absolutely cease and terminate as of the date of such casualty. In such event, Tenant will be liable for Minimum Rent and Additional Rent up to and including the date of such casualty. B. Partial Destruction. If the damage caused by fire or other casualty be only partial and such that, in Landlord's reasonable opinion, the Premises can be restored within 120 days to their condition existing immediately prior to the damage, then Landlord shall restore the same with reasonable promptness reserving the right to enter upon the Premises for that purpose. The Landlord also reserves the right to enter upon the Premises whenever necessary to repair damage caused by fire or other casualty to the Building, even though the effect of such entry may be to render the Premises or a part thereof untenantable. In such event the Minimum Rent and Additional Rent shall be apportioned and/or suspended during the time the Landlord is in possession, taking into account the proportion of the Premises rendered untenantable and the duration of Landlord's possession. C. Election to Repair. Landlord shall make its election to repair the Premises or terminate this Lease as set forth herein by giving notice thereof to Tenant within thirty (30) days from the date Landlord receives notice that the Premises have been destroyed or damaged by fire or other casualty. Moreover, and notwithstanding anything herein to the contrary, Landlord or Tenant may cancel this Lease if any casualty covered by this Section occurs within the last 180 days of the Term, irrespective of whether Landlord elects to repair. D. No Liability. Landlord shall not be liable for any damage compensation or claim by reason of inconvenience or annoyance arising from the necessity of repairing any p 13. INSURANCE: Tenant will procure and maintain in full force and effect, at its sole cost and expense, as long as this Lease remains in effect, the following types of insurance coverage: A. Public liability insurance, including contractual liability with respect to the Leased Premises, with companies and in form acceptable to Landlord, having a minimum limit of one million Dollars ($1,000,000) on account of bodily injuries to or death of one person and Three Million Dollars ($3,000,000) on account of bodily injuries or death as a result of any occurrence, accident or disaster; and B. Property damage insurance with minimum limits of One Million Dollars ($1,000,000); and C. Fire and extended coverage insurance on Tenant's personal property, including inventory, trade fixtures, floor coverings, furniture and other property, and Tenant's leasehold improvements. Tenant will deliver the policy or policies of such insurance, or certificates evidencing the existence of same, to Landlord prior to Tenant taking occupancy of the Premises. Such policies shall name Landlord and Landlord's mortgagee, if any, as additional insureds and such policy or policies shall contain a provision stating that such policy or policies shall not be cancelled except after thirty (30) days written notice to Landlord. If the nature of Tenant's operation is such as to place any or all of its employees under the coverage of local workmen's compensation or similar statutes, Tenant shall also keep in force, at its sole cost and expense, and so long as this Lease remains in effect, workman's compensation or similar insurance affording statutory coverage at statutory limits. If Tenant shall not comply with the covenants made in this section of the Lease, Landlord may cause insurance as aforesaid to be issued and, in such event, Tenant agrees to pay, as Additional Rent, the premium paid by Landlord for such insurance upon written demand. In addition, Landlord reserves the right to increase the policy limits set forth herein as Landlord, in its reasonable discretion, deems appropriate. 14. QUIET ENJOYMENT/LANDLORD'S RIGHT OF ENTRY: Tenant, upon paying the Minimum Rent and Additional Rent, if any, and observing and performing all the terms, covenants and conditions on its part to be observed and performed, may peaceably and quietly enjoy the Premises without hindrance or molestation. Notwithstanding the foregoing, Landlord and persons designated by Landlord have the right to enter the Premises at reasonable hours and upon reasonable advance notice to examine same and to do such work as Landlord is obligated to do under the terms hereof or to do such work as Landlord shall deem necessary for the safety or preservation of the Premises or Building provided, however, that except in the case of an emergency, the same shall not interfere unreasonably with the conduct of Tenant's business. 15. DEFAULT BY TENANT/ REMEDIES: The occurrence of one or more of the following events shall constitute a default and breach of this Lease by Tenant: (a) the vacating or abandonment of the Premises; (b) the failure by Tenant to make any payment of rent within five (5) days after such payment falls due; (c) the failure by Tenant to make any other payment required to be made by Tenant hereunder, as and when due, where such failure shall continue for a period of 10 days after notice from Landlord that said payment is due and payable; or (d) the failure by tenant to observe or perform any of the covenants, conditions or provisions of this Lease, to be observed or performed by the Tenant, other than those described above, where such failure shall continue for a period of 30 days after written notice thereof by Landlord to Tenant. In the event of any default or breach by Tenant, Landlord may at any time, without waiving or limiting any other right or remedy available to it, terminate Tenant's rights under this Lease by written notice or by any lawful means, or reenter and take possession of the Premises (with or without terminating this Lease) in which event all Minimum Rent and Additional Rent due hereunder shall be accelerated and become immediately due and payable, or itself pay or perform the obligation as, to which Tenant is in default (in which event Landlord's cost of so doing shall be immediately reimbursed to it by Tenant), or pursue any remedy allowed by law. Tenant agrees to pay to Landlord the cost of recovering possession of the Premises, all expenses associated with reletting, and any other costs or damages arising out of Tenant's default. Notwithstanding any re-entry or termination, the liability of Tenant for the Minimum Rent and Additional Rent provided for herein shall not be extinguished for the balance of the term of this Lease, and Tenant agrees to make good to Landlord any deficiency arising from reletting the Premises at a lesser rent than applies under this Lease. Any rent or other charges under this Lease not paid by Tenant when due shall bear interest from the due date thereof at the rate of eighteen percent (18%) per annum or the maximum contract rate allowed by law, whichever is less. 16. CONDEMNATION: If the whole of the Building or Premises shall be acquired or condemned by eminent domain for any public or quasi-public use or purpose, then the term of the Lease shall cease and terminate as of the date of title vesting pursuant to such proceeding and all rentals shall be paid up to that date. If any part of the Building shall be acquired or condemned as aforesaid, and such partial taking or condemnation shall render the Premises unsuitable for the business of the Tenant, then the term of this Lease shall cease and terminate as of the date of title vesting pursuant to such proceeding. In the event of a partial taking or condemnation, which is not extensive enough to render the entire Premises unsuitable for the business of the Tenant, then this Lease shall continue in full force and effect, provided, however that where the Premises are partially taken or the area of the Building reduced, the Minimum Rent and Additional Rent shall be adjusted based upon the square footage of the remaining area of the Premises or Building, as the case may be. In the event of either a complete or partial taking, Tenant shall have no claim against Landlord or the condemning authority for any compensation for any such taking awarded the Landlord, whether through a negotiated settlement or through formal condemnation proceedings. 17. SUBORDINATION: This Lease is automatically, and without further action by Tenant, subject and subordinate to the lien of any mortgage, ground lease, and/or other encumbrances which may now or hereafter affect such leases or the Premises, and also to all renewals, modifications consolidations and replacements of said underlying mortgages and leases or other encumbrances and Tenant further agrees at the election of any such mortgagee to attorn to any holder of any mortgage to which this Lease is subordinate. Notwithstanding the foregoing, Tenant shall execute and deliver upon demand such further instrument or instruments confirming such subordination of this Lease to the lien of any such mortgage and/or other encumbrance as shall be desired by any mortgagee or proposed mortgagee, or by any other person to whose interest this Lease is required to be subordinated. Notwithstanding the foregoing, any holder of any mortgage may at anytime subordinate its mortgage to this Lease without Tenant's consent by notice in writing to Tenant and without regard to their respective dates of execution and delivery. 18. ESTOPPEL CERTIFICATES. Tenant, upon request of Landlord, Landlord's mortgagee or any prospective purchaser shall, without charge, execute and deliver to the Landlord, in recordable form, a certificate stating that this Lease is unmodified and in full force and effect or, if modified, setting forth the modifications. 19. SURRENDER OF PREMISES: Tenant shall surrender the Premises to Landlord at the termination of this Lease in the same condition as the Premises are in at the beginning of the Lease Term, reasonable wear and tear excepted. 20. NOTICES: Any notice by either party to the other shall be in writing and shall be mailed by registered or certified mail in a postpaid envelope or sent by a generally recognized "overnight courier", such as Federal Express, to the following addresses: A. To Landlord: Council on American Islamic Relations C/O Sealander -------------------------------------- Brokerage Ltd., 200 G Street N.E., Washington, D.C. 20002 B. To Tenant: Aristotle Publishing Inc., 50 E. Street S.E., Washington, DC. 20003. C. Every notice shall be deemed to have been given (i) if by certified mail, at the time it shall be deposited in the mail or (ii) if by overnight courier, upon delivery to the party to whom addressed. 21. HOLDING OVER: If Tenant remains in possession of the Premises after the expiration of the term hereof, without the written consent of Landlord, such occupancy shall be construed to be a tenancy from month to month under the same terms and conditions existing on the day prior to the termination date. 22. PARKING: Landlord and Tenant have entered into a separate agreement for parking in the Building pa [sic] rights to Tenant in the Building. 23. CAPTIONS: The captions and headings used herein are for convenience and reference only and shall not constitute a part of this Lease, nor shall they affect the meaning, construction or effect of this Lease. 24. FORCE MAJEURE: Neither party shall be liable or responsible for any delays due to strikes, riots, fire, acts of God, shortages of labor or materials, failure of power, insurrection, governmental laws, regulations, restrictions or any other cause whatsoever beyond its control. 25. RECORDING: The parties agree that this Lease may be recorded. In the alternative, each party shall, at the request of the other party and without charge, execute and acknowledge a short form lease or memorandum of lease. The parties agree that the recording of this Lease, short form Lease, or a memorandum of lease shall be at the expense of the recording party. 26. GOVERNING LAWS: This lease shall be governed exclusively by the provisions hereof and by the laws of the District of Columbia. 27. NO IMPLIED WAIVERS: The failure of Landlord or Tenant to insist at any time upon the strict performance of any term, covenant or condition or to exercise any option, right or remedy contained in this Lease shall not be deemed a waiver or a relinquishment of such option, right, power or remedy. 28. NO PARTNERSHIP: Nothing contained in this lease shall be deemed or construed by parties hereto or by any third parties to create the relationship of principal and agent or of partnership of joint venture or of any other association between the parties hereto, except the relationship of Landlord and Tenant. 29. ATTORNEY'S FEE: If one party is required to commence litigation in order to enforce the covenants and agreements in this Lease the party prevailing in such litigation shall have the right to reimbursement from the other party of all reasonable costs, expenses and attorney's fees. 30. PARTIAL INVALIDITY: Any term or condition of this Lease which is found to be invalid, void or illegal by court decision or other governmental authority shall not impair or invalidate any other term or condition hereof and such other terms and conditions shall remain in full force and effect. 31. SIGNATORY AUTHORITY: If either party is a business organization (i.e., a corporation, partnership, LLC, etc.), each individual executing this Lease on behalf of such organization represents and warrants that he/she is duly authorized to execute and deliver this Lease on behalf of said organization in accordance with a duly adopted resolution of the governing body of such organization in accordance with the rules, by-laws or agreement governing its operations, and that this Lease is binding upon said organization in accordance with its terms. Each party that is a corporation, at the request of the other party, shall deliver, within thirty (30) days of such request, a certified copy of a resolution of its Board of Directors authorizing such execution. 32. SUBMISSION OF LEASE: The submission of a copy of this Lease for examination does not constitute a reservation, option or offer. This Lease shall be effective only upon its complete execution and delivery by both Landlord and Tenant. 33. PRIOR AGREEMENT: This Lease incorporates any and all previous negotiations, arrangements, agreements and undertakings pertaining to the Premises, if any, between the parties hereto, all of which shall be deemed superseded by, and incorporated in, this Lease Agreement. The Exhibits and/or Documents listed below shall be deemed part of this Lease Agreement; Exhibit A: Floor Plan of Premises Exhibit B: Parking Agreement 34. SECURITY DEPOSIT: Tenant shall provide Landlord a security deposit of five thousand seven hundred forty seven 50/100 dollars ($5,747.50) to assure Tenant's full and faithful compliance with the terms of this lease. The deposit is to be held as collateral security and applied on any rent or unpaid bill that may remain due and owing at the expiration of this lease, any extension thereof or holdover period, or applied to any damages of the premises caused by the Tenant, its employees or customers or other damages and expenses suffered by the Landlord as a result of a breach of any covenant or provision of this lease. Tenant may not utilize the security deposit as rent and it shall not apply the same as the last month's rent. In the event that any part of the security deposit shall be utilized by the Landlord in accordance with the terms hereof or applicable law, the Tenant shall, upon delivery of notice of said utilization, immediately deposit with the Landlord the amount so applied by the Landlord so that the Landlord shall have the full deposit on hand at all times during the term of this lease and any renewal thereof or holding over. The Landlord shall provide the Tenant within thirty (30) days after the end of the tenancy by first class mail directed to the last known address of the Tenant, a written list of any damages to the premises together with a statement of costs actually incurred. Within forty five (45) days after the end of the tenancy, the Landlord shall return the deposit to the Tenant less any expenses for damages properly withheld. In the event of a sale of the property upon which the premises is situated or the transfer or assignment by the Landlord of this lease, the Landlord shall have the right to transfer the security deposit to the transferee and the Landlord shall be considered released from all liability for the return of the security deposit and the Tenant shall look solely to the new Landlord for the return of the security deposit. IN WITNESS OF, the parties have caused this Lease to be executed and sealed on the date first above written. d: COUNCIL ON AMERICAN-ISLAMIC RELATIONS _____________________ By:________________________________________________ Attest: Tenant: ARISTOTLE PUBLISHING INC. /s/ illegible By: /s/ Rob Christ ______________ _______________________________________________ LICENSE AGREEMENT FOR PARKING EXHIBIT "B" This Agreement is made and entered into on this 15TH day of January, 2000 between Council on American-Islamic Relations, (hereafter referred to as "CAIR") and Aristotle Publishing Inc., (hereafter referred to as "Licensee"). Recitals A. Licensee is a Tenant of CAIR in a three story building (the "Building") owned by CAIR at 50 E. Street S.E., in the City of Washington, District of Columbia, under a Lease Agreement dated January 15th, 2000. The Building includes a basement having an area of approximately 3,000 square feet, which CAIR has made available for the parking of 12 automobiles (the "Parking Area"). B. The January 15th, 2000 Lease conveys no parking privileges. C. CAIR desires to grant to Licensee a Parking Permit for one or more parking spaces for the consideration hereinafter set forth and upon the terms and conditions set forth in this License Agreement. Agreement 1. CAIR hereby grants permission to Licensee to use two (2) assigned parking spaces in the Faring Area. The location of the assigned spaces shall be designated by CAIR. 2. As consideration for the two assigned parking spaces covered by this License Agreement, Licensee shall pay CAIR a monthly fee of $250.00 ($125.00 per parking space), subject to change as set forth in paragraph 5, below. 3. This License Agreement shall cover a period of twelve ( 12) months, commencing January 15th, 2000 and ending, without further notice, on January 15th, 2001. 4. In order to obtain access to the Parking Area, CAIR shall supply Licensee with one Genie electric door opener relay console ("Genie") for each parking space covered by this License Agreement. For each Genie supplied, Licensee shall deposit with CAIR the sum of $25.00. In the event the Licensee misplaces or loses a Genie, or a Genie is rendered unusable, Licensee shall pay CAIR the full replacement cost of the Genie. Should CAIR revoke the License granted herein, Licensee shall deliver the Genies to CAIR and CAIR will refund the amount deposited. 5. Licensee shall be responsible for ensuring that it uses only the spaces assigned to Licensee. CAIR reserves the right to enforce the parking of vehicles in only those spaces designated hereunder, as well as to change the designated spaces, provided Licensee is at all time granted the right to use the number of spaces contemplated hereunder. 6. By executing this Licensee Agreement, the licensee releases CAIR from any claims or liability for loss, damage to Licensee's vehicles, their contents and/or accessories, resulting from theft, fire, collision, vandalism or any other cause. 7. This Agreement supersedes and replaces any prior Agreements for Parkhog Permit between CAIR and Licensee. Licensee: ARISTOTLE PUBLISHING, INC. By: /s/ Rob Christ __________________________________ Rob Christ - Chief Financial Officer COUNCIL ON AMERICAN-ISLAMIC RELATIONS (CAIR) By: _______________________________________________ EX-10.12 11 LEASE AGREEMENT DATED 9/30/1996 Exhibit 10.12 AGREEMENT OF LEASE THIS LEASE made as of the 30/th/ day of September, 1996, effectively as of June 1, 1996, by and between Sydney S. ZLOTNICK and RENEE Z. KRAFT (hereinafter referred to as the "Landlord" or "Lessors" or "Lessor"); and JOHN PHILLIPS, an individual trading as Aristotle Industries (hereinafter referred to as the "Tenant" or "Lessee"). RECITALS. -------- (A) Landlord is the owner of certain land situate in the District of Columbia now known for assessment and taxation purposes as Lots 807 and 808 in Square 762 (said Lots 87 and 808 being collectively herein referred to as the "Land") and the buildings and other improvements thereon consisting of a three- story building with basement now known by street addresses as 205 and 207 Pennsylvania Avenue, S.E. (said "buildings" or "Building" or "Buildings"). The Land and the Buildings are herein sometimes herein collectively referred to as the "Real Property". (B) Pursuant to a certain Sublease (the "Sublease") between Tenant and Capitol Hill Management Corporation ("Sublessor"), Tenant as sublessee heretofore sublet from Sublessor and heretofore occupied a portion of the space in 205 Pennsylvania Avenue, S.E. (the "205 Building"), said space being only that portion of the 205 Building now occupied by Tenant and located on the Second (2/nd/) and Third (3/rd/) Floors and in the Penthouse of the 205 Building, and including the existing stairway which connects said 3/rd/ Floor to said Penthouse, and also the separate stairway and street entry vestibule which affords access from the street to the 2/nd/ and 3/rd/ floors of the 205 Building (the space in the 205 Building now occupied by Tenant is described above, being herein referred to as the "Original Premises"). (C) Tenant confirms that the Sublease expired by its terms as of May 31, 1996, and has not been renewed or extended, and that Tenant has not and will not enter into any extension, renewal or replacement sublease or other arrangement of any kind with Sublessor concerning the Premises. (D) It is recognized that, without Landlord's permission or consent, Tenant has continued to occupy and use the Original Premises (and the New Premises, described below) during the period from June 1, 1996 through and including September 30, 1996 (the "Interim -1- Period"), without payment of any rentals, use and occupancy payments, passthrough share of Impositions and of premiums for Insurance, and without any lessor and lessee relationship existing between Landlord and Tenant during said Interim Period. Nevertheless, Tenant confirms that it has received the benefit of the use and occupancy of the Original Premises and said New Premises during the Interim Period, and Tenant agrees to pay to Landlord rentals, passthroughs of Impositions and of premiums for Insurance allocable to said Interim Period, all as hereinafter provided, as a material inducement to and in consideration for Landlord's execution of this Lease. (E) Tenant further confirms that it has occupied and used certain space in the Buildings comprising a portion of the space in 207 Pennsylvania Avenue, S.E. (The "207 Building"), said space (the "New Space") comprising all of that space formerly sublet by Sublessor to and formerly occupied by Dan R. Williams (the "Williams Sublease"), and located on the Second (2/nd/) and Third (3/rd/) Floors of the 207 Building, and including as part thereof the existing stairway and street level vestibule entry which affords access from the street to the 2/nd/ and 3/rd/ floors of the 207 Building. The New Space does not include any space which is now leased to the existing store tenants of the first floor level stores in the Buildings or which is used by said store tenants for street access to their space. (F) Tenant has requested that Landlord lease to Tenant all of the Original Premises and all of the New Space described above, under a direct lease (namely, this instrument) from Landlord as lessor to Tenant as lessee, for the rentals and upon the terms and conditions herein set forth; and Landlord is willing to do so upon and subject to the terms, conditions and provisions herein contained. (G) Landlord owns the Land the Buildings. However, in no event shall Landlord have any liability for any defaults, acts, omissions or obligations of Sublessor under the Sublease or under the Williams Sublease (together, the "Subleases"), nor for refund of any security deposit of Tenant or any prepaid rents or other amounts posted or paid by Tenant under the Subleases or either of them, nor for any matters involving the Subleases. Tenant confirms and agrees that it has no rights to offset or defenses against rentals, nor any rights to any waivers, credits or abatements with respect to any rentals or other amounts, nor any claims of any kind, against Landlord; and the Tenant hereby expressly and irrevocably waives any and all such claims. -2- (H) The Original Premises and New Premises are herein collectively referred to as the "demised premises", the "premises", the "Premises", the "Demised Premises", the "Leased Premises", or the "leased premises." The foregoing Recitals are made an integral part of this Lease. NOW, THEREFORE, in consideration of the foregoing Recitals and of the rentals and other sums herein reserved by Landlord to be paid by Tenant, and for other good and valuable consideration paid by each of the undersigned parties to the other, the sufficiency and receipt of which are hereby acknowledged, the parties intending to be legally bound do hereby covenant and agree as follows: FIRST: Demised Premises. ---------------- (A) Landlord hereby rents, demises and leases the Premises to Tenant, and Tenant hereby takes, hires and rents the Premises from Landlord, for the term, at the rental and upon the conditions, covenants and agreements hereinafter set forth. (B) This leasing of the Premises to Tenant is made subject to all applicable zoning, building, fire and other codes, laws, ordinances, rules, orders and regulations now or hereafter in force, and subject to the use in common (by Tenant and the present and any future lessees or occupants of the Buildings, and the customers, employees and invitees of all such other lessees and occupants) of all common areas serving the Buildings, including but not limited to stairways, entrances, entry areas, exits and vestibules (collectively, the "Common Facilities" or the "common areas"). However, Tenant's use of the Common Facilities shall be limited to the portion thereof reasonably necessary as a means of pedestrian access to the Premises from the exterior street entrances of the Building which now provide access therefrom to the Leased Premises. Tenant agrees that it will obstruct in any manner or otherwise interfere with or prohibit the use of any Common Facilities by the other present or future occupants or lessees of the Buildings ("Other Lessees") or by the customers, invitees, employees or contractors of such Other Lessees. Tenant confirms that it heretofore has occupied and now occupies the Premises and conducts its business therein for the purposes herein permitted, and has inspected and is fully -3- satisfied with the physical condition of the Premises and of the structural elements and all other elements thereof and all mechanical, plumbing, electrical lines, systems and equipment serving same and the now existing heating, ventilating, and air conditioning system and equipment thereof and all other elements and features of the Premises and of the Buildings of which same is a part, and Tenant hereby accepts the Premises and its use of the Common Facilities "as is", "where is" and with all faults, and further agrees and confirms that neither Landlord nor its agents have made any assurances, representations or warranties of any kind concerning any such matters, whether of an inducement nature or otherwise. In no event shall Landlord have any obligation to provide or pay for or contribute to any costs of the maintenance, alteration, repair, replacement or restoration of the Premises, the Buildings or any elements thereof (except as may be expressly otherwise provided in this Lease). In no event shall Landlord be obligated to provide or pay for any public utilities or other utilities, nor any monitoring, policing, maintenance, repairs, replacements, servicing, upkeep, janitorial or cleaning or trash storage or removal services, nor any cleaning, lighting, security or other services of any kind for the Buildings, the Premises or the Common Facilities; it being agreed that Tenant alone shall bear, perform and pay for all such matters for the Premises and for the Common Facilities which serve same, as herein provided. SECOND: Term of Lease. ------------- (A) The term of this Lease (the "term" or the "initial term") shall be five (5) years, commencing therefor as of June 1, 1996 and fully ending without notice at midnight on May 31, 20001 (unless sooner terminated pursuant to the provisions hereof). (B) In consideration of the execution of this Lease by Landlord, the Tenant does hereby expressly waive and relinquish all rights to receive any and all statutory or other notices of the expiration of the term of this Lease, and of the Tenant's obligation to quit and surrender possession of the demised premises at the aforesaid expiration date of the term hereof, and Tenant agrees to promptly surrender to Landlord possession of the demised premises on the expiration date state hereinabove. However, if Tenant shall fail to quit and vacate the demised premises at the expiration of the stated term of this Lease, and if Landlord shall not require the -4- immediate surrender of possession of said premises on such date then and in such event any holding over of possession by Tenant shall be deemed to create only a tenancy from month to month, beginning therefor on the day immediately following the expiration of the term of this Lease, such monthly hold-over tenancy to be upon all of the same terms and conditions contained herein, except that such hold-over tenancy shall be a monthly tenancy terminable by either party upon giving to the other at least thirty (30) days prior written notice of termination (except that Tenant shall have no right to, and hereby waives, any such notice of termination if it is in default hereunder), and further excepting that the monthly rental payable during such hold-over tenancy shall be at twice the monthly rate payable during the last month of the initial term of this Lease. THIRD: Rental. The Tenant hereby covenants and agrees to take and hold ------ the demised premises, as tenant of the Landlord, for the term hereinabove set forth, and agrees to pay to Landlord basic rental for the demised premises as follows: (A) Basic Annual Rental. ------------------- (1) For purposes hereof, the phrase "lease year" shall mean each separate and successive period of twelve (12) consecutive calendar months during the term hereof, commencing for each lease year on June 1/st/ and ending on the following May 31/st/, with the first (1/st/) lease year to begin on June 1, 1996, and to end on May 31, 1997. (2) Tenant covenants and agrees to pay to Landlord as basic annual rental during each lease year of the initial term hereof Forty-Two Thousand Dollars ($42,000.00) per annum, the same to be due and payable in equal monthly installments of Three Thousand Five Hundred Dollars ($3,500.00) each (the "basic monthly rent") in advance without deduction, setoff or demand on the first (1/st/) day of each and every calendar month during the term hereof, commencing for the first such monthly installment as of June 1, 1996. The basic monthly rent and all other sums payable by Tenant under this Lease shall be pro-rated on a per diem basis for any fraction of a full -5- calendar month at the termination of this Lease, as determined by Landlord, and such pro-rated amounts shall be paid by Tenant to Landlord within seven (7) days after Landlord's written request. Tenant agrees to make the following payments with respect to the Interim Period (i.e., the period from June 1, 1996 through and including September 30, 1996): (i) Upon execution of this Lease, Tenant shall pay to Landlord Fourteen Thousand Dollars ($14,000.00) representing basic monthly rental at the rate of $3,500.00 per month for each of the four (4) months in said Interim Period. (ii) Within seven (7) days after the date Landlord sends Tenant any invoice therefor, Tenant agrees to pay to Landlord the full amount of Tenant's Proportionate Share (i.e., 22-1/2%) as described in Article Fourth below) of all Impositions and Insurance Premiums which are allocable to the Interim period, as determined and invoiced by Landlord. It is recognized that the Interim Period comprises part of the term of this Lease, and accordingly, all costs of providing and of use of utilities to, at and for the entire Premises (including but not limited to electricity, gas if any, hot and cold water, plumbing, sanitary sewer, and telephone service and lighting, ventilation, air conditioning and heating) allocable to the Interim Period or to any other periods within the term of this Lease or any renewal, extension and holdover terms, shall be borne and paid solely by Tenant without contribution thereto by Landlord. In addition to (but not in limitation of) the amounts to be paid by Tenant to Landlord for the Interim Period as set forth above, Tenant shall continue payment of basic monthly rental at the rate of Three Thousand Five Hundred Dollars ($3,500.00) per month throughout the entire initial term hereof, commencing for the next such payment (following the initial payment aforesaid) on October 1, 1996 and continuing the 1/st/ day of each calendar month thereafter -6- during the initial term hereof. Tenant shall also pay to Landlord all other amounts provided for in this Lease, when and as the same become due and payable hereunder, during the entire term hereof and during any renewal, extended and holdover terms. (B) All amounts payable by Tenant under this Lease, other than the basic monthly rentals specified in Article THIRD (A)(2) above are herein referred to as "Additional Rent" and shall be deemed additional rental for all purposes hereof. All rentals, additional rentals and other sums payable by Tenant hereunder shall be paid in lawful currency of the United States of America which shall be legal tender for payment of all public and private debts and dues, and shall be paid by good check (subject to collection) drawn on a federally insured bank or savings institution having offices in the Metropolitan Area of the District of Columbia. Payments of all rentals, additional rentals and other sums due or payable by Tenant hereunder shall be made by checks payable to Landlord as aforesaid and delivered to Landlord c/o Mr. Sidney S. Zlotnick at 1616 H Street, N.W., Suite 810, Washington, D.C., 20006, or to such other party and address as Landlord may from time to time designate to Tenant in writing. Regarding all of Tenant's payments, agreements, covenants, duties and obligations under this Lease, time is hereby agreed to be of the essence. If any installment of basic monthly rent or any other sum payable by Tenant hereunder is not paid in full within ten (10) days after the date due, then (in addition to but not in limitation of all other available remedies) Landlord at its option and discretion may require Tenant to pay, in addition to the sums in arrears, a "late charge" in the amount of five percent (5%) of the sums in arrears, such late charge to be immediately due and payable upon demand of Landlord. No payment by Tenant or receipt by Landlord of a lesser amount than the monthly rent herein stipulated shall be deemed to be other than on account of the earliest stipulated rent, nor shall any endorsement or statement on any check or an letter accompanying any check in payment of rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's rights to recover the balance of such rent and/or to pursue any other remedy provided in this Lease, at law and/or in equity. FOURTH: Real Estate Taxes; Assessments; Insurance; and Other Charges. ------------------------------------------------------------ -7- (A) During the term of this Lease the Landlord shall pay directly to the appropriate governmental authorities all real estate taxes which shall be assessed upon the Real Property. (B) For purposes of this Lease, the term "Impositions" shall mean and refer to any and all real estate taxes and assessments (general and special), ordinary and extraordinary, and all water and sewer rates and rents and charges, public subsurface vault space rentals, front foot benefit charges (if any), governmental rents, fees and other charges for the use of any public sidewalks, alleys or other public space, personal property taxes assessed, levied or imposed on any personal property forming a part of the Real Property, or installed by Tenant, and all other governmental and quasi-governmental charges, general and special, foreseen and unforeseen, ordinary and extraordinary, and including also all assessments for public or other improvements or benefits, and also any taxes, charges, assessments and levies imposed and/or collected by any governmental or quasi-governmental authority in respect of bus, subway or other public transportation facilities operating in the Metropolitan Area of the District of Columbia, any or all of which items described in this paragraph are or may be assessed, levied, confirmed, imposed on or become or may become a lien upon all or any part of the Real Property and/or which may be or become payable by Landlord or by Tenant with respect to the Real Property or any portion thereof during the term of this Lease or any extension, renewal or holdover term. If (1) at any time during the term of this Lease, the methods or scope of taxation prevailing at or after commencement of the term hereof shall be altered or enlarged so as to cause the whole or any part of the taxes, assessments, levies, charges or other impositions now or hereafter levied, assessed or imposed on real estate and the improvements thereon to be levied, assessed or imposed, wholly or partially as a capital levy, a "value added tax", or otherwise, on or in respect of all or any part of the Real Property, Landlord's interest therein and/or rents received therefrom, in substitution of, or in addition to, a tax levied or imposed against real estate, or if (2) by reason of any such alteration or enlargement of the methods or scope of taxation, any tax, unincorporated or corporation franchise tax, assessment, levy (including but not limited to any municipal, state, or federal levy), charge or any other imposition or any part thereof, shall be measured by or based in whole or in part upon all or any part of the Real Property, or the value thereof and/or the rentals, additional rentals or other sums payable by Tenant hereunder, and shall be imposed upon Landlord, then all such taxes, assessments, levies, charges or impositions, -8- or the part thereof so measured or based, shall also be deemed to be included within the term "Impositions" for purposes hereof, and shall be included within the Impositions covered by and to be paid by Tenant as set forth in following paragraph (C) of this Article FOURTH. (C) The phrase "Tenant's Proportionate Share" as used in this Lease shall mean twenty-two and one-half percent (22-1/2%). Tenant agrees to pay to Landlord, as additional rent hereunder, Tenant's Proportionate Share of all of the Impositions which are paid or payable during or are allocable to each lease year during the term hereof or fractional lease year at the beginning or end of the term hereof or during any extended or hold-over term; each such payment to be made by Tenant to Landlord within ten (10) days after each request from Landlord. Landlord at its sole option may calculate such payments to be made by Tenant under this Paragraph in respect of the Impositions, by reference to those Impositions payable during or allocable to the periods measured by a given lease year or by a given calendar year or measured by a given lease year or by a given calendar year or fiscal tax year. Tenant's payments under this Paragraph shall be adjusted, pro rated and paid for any fraction of a lease year, calendar year or fiscal tax year (as determined by Landlord) at the beginning and at the end of the term hereof. (D) Tenant further agrees to pay when due all personal property taxes and assessments levied or assessed with respect to Tenant's personal property in or at the demised premises. (E) Landlord will furnish Tenant a copy of the applicable real estate tax bills or assessment notices, with each request for payment to be made by Tenant toward the Impositions or as soon thereafter as same are available; such bills or notices to be deemed conclusive evidence of the amount thereof. (F) Tenant further covenants and agrees to pay to Landlord, within ten (10) days after each request, an amount equal to Tenant's Proportionate Share of all premiums and other charges (collectively, the "Insurance Premises") for all general and public liability insurance, and for all hazard and property damage insurance including vandalism and malicious mischief coverages, -9- and all rental interruption insurance, plate glass, boiler and pressure vessel, and other insurance of any kind maintained from time to time by Landlord with respect to the Real Property or any portion thereof. Tenant's payments required under this paragraph are in addition to (but not in limitation of) its payments to be made to Landlord pursuant to Article Thirteenth (C) of this Lease. FIFTH: Use of Premises. Tenant covenants and agrees to use and occupy the --------------- demised during the term hereof only for general office use (the "Permitted Use"). Tenant's business at the Premises shall in all events shall be conducted and operated by Tenant in full compliance with all applicable federal, municipal and other laws, codes, orders, rules, regulations and requirements now or hereafter in force. Tenant and its assignees and sublessees shall not use, occupy or operate the demised premises in whole or part for any purpose other than the Permitted Use, without Landlord's prior written consent, which consent may be granted, granted with conditions, or withheld and denied in Landlord's exclusive, absolute and arbitrary discretion without regard to any standards of reasonableness ("Landlord's Exclusive Consent"). Tenant shall not use or permit use of all or any part of the premises for sleeping, residential, immoral or unlawful purposes. Tenant shall not operate at the premises any loudspeaker, musical or other instruments or equipment emitting sound, noise, vibration or other features nor allow to emit from or operate at the premises any odors, smoke, vapors, flashing or bright lights of any kind, which disturb or annoy other occupants of the building of which the demised premises forms a part or of neighboring buildings. Tenant at its own expense agrees at all times to keep all HVAC ducts, fans and equipment, and all drains, plumbing lines and equipment, and all of its furnishings, fixtures, equipment and supplies and its business conducted at the Premises in neat, clean, sanitary and proper condition and in compliance with all applicable health, life/fire/safety and other laws, codes, orders, rules and regulations now or hereafter in force. Tenant shall not conduct any cooking or preparation of foods in or at the Premises. Tenant shall not conduct any soliciting, canvassing or similar activities in the Buildings with respect to other lessees or occupants thereof or their customers, employees or visitors, nor otherwise annoy them. All heating, ventilating and air conditioning equipment ("HVAC") at or serving the Premises, and all furniture, furnishings, fixtures and equipment shall be provided, maintained, replaced when and as necessary, and kept in first class operating condition at all times by and at the sole -10- expense of Tenant. Tenant agrees at its own expense to provide removal of trash and garbage from the Premises by a licensed, competent trash removal service at least twice each week. Tenant at its own expense agrees to provide regular and adequate pest exterminating service for the Premises, and will keep the Premises fee of insects, rodents, vermin, termites and the like. Tenant will provide Landlord, promptly on receipt, copies of all notices issued by an governmental authorities concerning the Premises or the business conducted by Tenant thereat; but nothing herein contained shall obligate Landlord to comply with or pay for compliance with any such notices. Tenant shall not annoy other lessees and occupants of the Building in the conduct of its business, by solicitation thereof or other means. All rest rooms and lavatories serving the Premises shall be kept in a neat, clean, attractive and sanitary condition and adequately supplied at all times,, by and at the sole expense of Tenant. Truck and other deliveries of merchandise, supplies and trade fixtures to Tenant shall be performed in compliance with all applicable laws, and without obstructing Common Areas, sidewalks, alleys or stairways. SIXTH: Assignment and Subletting. Tenant shall not assign this Lease, nor ------------------------- sublet the demised premises or any part thereof nor any desk space therein, nor mortgage or hypothecate this Lease or its interest herein, without the prior written consent of Landlord in each instance, which consent may be withheld or denied in Landlord's exclusive, absolute and arbitrary discretion. Consent of Landlord to any such assignment or subletting shall not operate as a waiver of the necessity for its consent to any subsequent assignment or subletting, and the terms of such consent shall be binding upon Tenant and any party holding by, under or through the Tenant. No assignment or subletting shall relieve Tenant from its liability hereunder for payment of rent and performance of all other obligations hereunder during the full term hereof. If Landlord consents to any assignment or subletting by Tenant, then Tenant agrees to account to Landlord for and pay to Landlord all amounts by which the rentals and other sums paid to Tenant by its assignees and sublessees (as the case may be) exceed the rentals payable to Tenant to Landlord under this Lease; such payments to be made to Landlord within seven (7) days after Tenant's receipt of payments under any assignment or sublease. Landlord and its representatives shall have the right on request to inspect Tenant's books and records to verify the amount of payments made to Tenant by its assignees and sublessees. Any transaction by which (a) the shares of corporate stock in Tenant are sold, exchanged, transferred or otherwise disposed of in -11- such manner that the voting and management control of Tenant becomes thereby vested in parties other than the parties who now own a majority of said shares, or (b) all or any substantial part of the assets of Tenant are sold, exchanged, transferred or otherwise disposed of, is herein referred to as a "Transfer Event". Any Transfer Event shall be deemed for purposes of this Lease to be an assignment of this Lease, for which the prior written consent of Landlord (in its sole, absolute and arbitrary discretion) must first be obtained. Any assignment of this Lease, or any such Transfer Event, or any subletting of the Premises in whole or part, which is done without the prior written consent of Landlord as aforesaid, shall constitute a default of Tenant under this Lease, which shall entitle Landlord at its sole option and discretion to terminate this Lease and/or to pursue and enforce any and all rights and remedies available hereunder, at law and/or in equity. SEVENTH: Utilities, Repairs, Maintenance, Cleaning and Alterations; Net -------------------------------------------------------------- Lease. - ----- (A) Tenant agrees to provide and to pay all costs and expenses of providing and of all use and consumption of, all utilities serving or used at the Demised Premises, including but not limited to gas, water, sanitary sewer, telephone service and electricity, and all lighting (including replacement of light bulbs and tubes, ballasts, lighting fixtures and equipment), and all hot and cold water, and all heating, ventilation, air cooling and air conditioning, and for all maintenance, repairs and replacements of and costs to use and operate all hot water heaters, water coolers, and all heating, ventilation, air cooling and air conditioning, and for all maintenance, repairs and replacements of and costs to use and operate all hot water heaters, water coolers, and all heating, ventilation and air conditioning equipment ("HVAC"), and all electrical wiring and equipment, and all bathroom and plumbing lines, fixtures and equipment, which now or hereafter serve and/or are located at the Premises, or arising out of or connected with Tenant's occupancy and use of the demised premises, promptly when and as the same shall become due, and Tenant at its own expense shall promptly make any meter and submeter deposits required therefor. Tenant also shall pay for all electricity for the exit lights in the building, and all costs of replacement of bulbs for said exit lights and Tenant shall replace said lights and all other lights in or at the Premises promptly when necessary. Landlord shall have the right (but not the obligation) at its sole discretion to install or cause the installation of separate meters, submeters or checkmeters -12- for any or all utilities services for the demised premises; in which event Tenant agrees to reimburse Landlord within seven (7) days after Landlord's demand all installation and deposit charges for all meters, submeters and checkmeters and to pay for all utilities use charges when and as due. (B) In addition to all of its obligations under this Lease, Tenant at its own expense agrees at all times to maintain in neat, clean, safe and attractive condition and appearance all stairways, vestibules, entry and exit areas serving or forming part of the Premises and to keep said areas free of trash, packages and obstacles of any kind. When not in use for access, Tenant agrees to keep all exterior doors and windows of the Premises locked. Tenant at its own expense will provide any and all burglar, smoke detector, fire alarm and annunciator and fire sprinkler equipment as required by applicable laws or codes or governmental orders or regulations or by any insurance company providing insurance for the Building or any part thereof; and Tenant will keep such equipment in first class operating condition and repair at all times. (C) If Landlord elects to make any replacements or repairs to the structural elements of the Premises, i.e., the exterior walls, the load-bearing floors, structural beams and supports, or to the foundations of the Buildings (collectively, the "Structural Elements"), then Tenant agrees to pay to Landlord within ten (10) days after Landlord's request an amount equal to Tenant's Proportionate Share (as defined in Article FOURTH (C) hereof) multiplied by the cost incurred or paid by Landlord for such work multiplied by a fraction, whose numerator is the total number of days remaining unexpired in the then operative term of this Lease as of the date of Landlord's invoice, and whose denominator is the total number of days in the then operative term of this Lease. However, if such repairs or replacements of the Structural Elements are necessitated as a result of any act, omission, negligence or damage caused by Tenant or its assignees or subleases or by its or their agents, employees, contractors, clients, customers, guests or invitees (collectively, with Tenant, the "Tenant Parties"), then Tenant agrees to pay to Landlord within seven (7) days after demand all costs of such repairs or replacements (in addition to but not in limitation of Landlord's other rights and remedies in such circumstances). -13- (D) All repairs made by the Tenant shall be at least equal in quality and usefulness to the original improvements and equipment on the Premises at the date hereof. Tenant shall have the right prior to expiration of this Lease (if Tenant is not in default hereunder) to remove any trade fixtures which Tenant may have placed in the Premises before the Lease expiration date, provided that, in the sole judgment of Landlord, the removal of such fixtures will not damage the Premises or the Buildings. Any damage to the Premises, or to the Buildings, or to property of others, caused by or resulting from the removal of trade fixtures installed by the Tenant shall be repaired, at Tenant's sole cost and expense, in a manner which is acceptable to the Landlord, prior to expiration of this Lease. The obligation of Tenant to maintain the Premises shall include the obligation to maintain the exterior of the Premises and any adjacent grounds and sidewalks. If on the Lease expiration or termination date there is any damage to the Premises which is not due to ordinary wear and tear, then in such event (in addition to but in limitation of Landlord's other rights and remedies), it is agreed that if Tenant is insured for any such damage, Landlord may at its sole discretion require Tenant to either (i) apply the insurance proceeds to repair such damage, or (ii) surrender such insurance proceeds to Landlord. (E) All improvements to and equipment installed in the Premises by or for Tenant shall be maintained, repaired, replaced and insured by and at the expense of Tenant. All such insurance shall provide coverage in the amount of the full replacement value of such improvements and equipment, and shall name Landlord as an additional insured as its interests may appear. (F) All alterations, modifications, furnishing, decorating, fixturing and repairs required of or desired by the Tenant for the operation of its business shall be performed by and at the sole cost and expense of the Tenant; it being expressly agreed, however, that Tenant will make no changes or other alterations of a structural nature, nor change or alter the exterior portions of said premises, nor any windows, doors, stairways, mechanical, plumbing, heating, ventilating or air conditioning equipment in or serving the premises, without Landlord's prior written consent in each instance. -14- (G) Landlord agrees that it will make or cause to be made all repairs to the foundation, roof and exterior walls of the Building (excluding glass and glass doors) within a reasonable time after receipt of written notice of the necessity thereof; PROVIDED, HOWEVER, that if the repair or any replacement thereof is necessitated as a result of any act, omission or negligence of Tenant and/or of any other Tenant Parties (a "Tenant Fault"), then in any such event Landlord at its sole option and discretion (i) may require Tenant to perform the repairs or replacements at Tenant's expense (and Tenant shall do so promptly), or (ii) may cause the repairs or replacements to be made and Tenant will have to pay to Landlord within five (5) days after request all costs and expenses incurred and/or paid by Landlord in connection with such work. Such repairs or replacements shall be made by and at the expense of the Tenant promptly when and as necessary or upon Landlord's request. (H) Tenant shall at all times during the term of this Lease, at its own expense keep the interior of the demised premises properly painted and decorated, and will make all repairs, maintenance and replacements when and as necessary to keep the demised premises (including also without limitation all plate and other glass doors and all windows thereof, all electrical, mechanical and plumbing equipment, and the heating, air conditioning and ventilating equipment serving the demised premises (the "HVAC") and which serves and/or is situated in or adjacent to the premises or the Buildings or on the roofs of the Buildings) in good condition, maintenance and repair. Tenant at its own expense agrees to replace promptly when and as necessary or as directed by Landlord all broken or cracked plate glass and other glass windows and doors and walls or partitions of the premises, with glass of like or better kind and quality. Tenant at its own expense agrees to keep in force at all times a policy of plate glass insurance for the Premises in form and content and issued by a company reasonably acceptable to Landlord, naming Landlord as an additional named insured, and Tenant will provide Landlord a copy thereof on execution of this Lease, and will provide Landlord renewal certificates at least thirty (30) days before expiration thereof with evidence of premiums paid for at least one (1) year in advance. Tenant, at its own expense, will keep in force at all times with a competent, licensed service company, a service and maintenance contract for the HVAC serving the premises, and will cause said HVAC to be properly serviced and maintained (including also all necessary replacements) at all times in good operating condition. At the expiration or termination of this Lease, Tenant shall surrender -15- to Landlord exclusive possession of the demised premises, including (unless otherwise specified by Landlord under Section SEVENTH (J) hereof) all replacements, additions, renovations and alterations performed by Tenant as herein permitted, in good order and condition, subject to normal wear and tear, and free of subleases and occupants. (I) Tenant agrees at all times and its own expense to maintain the premises in a neat, clean and sanitary condition, free of vermin, rodents and insects, and will at its own expense provide adequate pest extermination service and trash removal service for the premises. Tenant shall not place, display or permit to accumulate any merchandise, boxes or other articles on the sidewalks or in the common areas or alleys, or at the entrance or exits of the premises or the building. (J) Tenant shall not make or permit to be made any alterations, additions or changes whatever to the Structural Elements, windows, doors, exterior, foundations, footings, roofs, or exterior walls of Buildings or of the demised premises, nor to the interior of the Premises, and Tenant shall not paint, cut, disfigure or alter the facades or exterior of said Buildings, nor alter any utility or mechanical, plumbing or HVAC lines or equipment, without obtaining Landlord's Exclusive Consent in each instance. Tenant agrees that neither Tenant nor any Tenant Parties shall tamper with, connect into, use or alter in any manner any electrical, plumbing, telephone, communications, computer cabling or other equipment or lines serving any space in the Buildings (including space not leased to Tenant); and Tenant agrees to indemnify, defend and hold Landlord harmless from all litigation, costs, expenses, fines and claims arising out of any violation of this covenant or any other breach of this Lease by Tenant or any other Tenant Parties. In any addition to (but not in limitation of) its other rights and remedies, Landlord shall have the right (but not the obligation) to remove any such prohibited alterations, and to restore the altered equipment and lines to their condition which existed just prior to Tenant's violation of this paragraph, and Tenant shall pay to Landlord on demand all costs incurred in such actions. If Landlord consents in writing to any alterations proposed by Tenant, then Tenant shall cause same to be made at its own expense in compliance with all provisions of this Lease and the terms of Landlord's consent, and shall see that such alterations (i) do not damage the structural -16- soundness or integrity of the building nor interfere with the use and enjoyment by other tenants of the building of their leased space therein; (ii) are performed free of all liens and claims of mechanics and material men (it being agreed that Tenant shall and hereby does indemnify,, defend and save Landlord harmless from and against such liens), (iii) are done in compliance with all applicable governmental laws and orders, (iv) are performed in a god and workmanlike manner, and (v) do not cause cancellation of or increase in premiums for or adversely affect any policies of insurance required to be obtained and maintained by Tenant or which are maintained by Landlord. All alterations and additions to the premises made by Tenant shall at all times be and remain the property of Landlord, and shall be surrendered to Landlord at the expiration or termination of this Lease. Provided, however, that if Landlord so notifies Tenant in writing at least sixty (60) days before the end of the term hereof, the Tenant shall at its own cost remove such alterations and additions made by it, as covered by Landlord's notice, prior to the expiration of the Lease term or termination of this Lease, and Tenant shall repair all damage caused to the premises by such removal. (K) Tenant shall notify Landlord in writing promptly as to any defect in or damage to the Building or any equipment or lines thereof. However, nothing herein contained shall obligate Landlord to perform, provide or pay in whole or part for any repairs, replacements or restoration or other work, except as expressly provided for in this Lease. (L) Prior to commencing any work at or for the Premises, Tenant shall obtain and deliver to Landlord written and unconditional waivers of mechanics' and material men's liens upon the Premises and the Building, for all work, labor and services to be performed, and materials to be furnished by them in connection with such work, signed by all contractors, subcontractors, material men and laborers to become involved in such work, or an adequate payment and performance bond acceptable to Landlord. All of such alterations, decorations, additions or improvements permitted by Landlord or performed by or for Tenant shall conform to all rules and regulations established from time to time by the Underwriter's Association of the District of Columbia and shall conform to all requirements of the Federal and District of Columbia governments. -17- EIGHTH: Liability Insurance and Indemnity. Tenant covenants and agrees to --------------------------------- indemnify, defend and hold harmless the Landlord against and from any and all liability, damages, expenses, causes of action, suits, litigation, court costs, reasonable attorneys' fees, judgments and claims of any and every nature of any person, firm or corporation or others arising out of or in any manner connected with injury or death to person(s), and damage to or loss of property, in, or on or about the demised premises (or occurring elsewhere in the building if involving or caused in whole or part by Tenant or any Tenant Parties). In confirmation thereof, Tenant covenants and agrees that it will, at all times during the term hereof, at its own expense carry and keep in full force and effect in companies satisfactory to Landlord, and under policies in form and contents acceptable to Landlord, general liability insurance in form satisfactory to Landlord, with combined single limits of (i) at least TWO MILLION DOLLARS ($2,000,000.00) for injury, including death, to one or more person(s) in any one casualty or occurrence, and (ii) with property damage coverage of TWO HUNDRED FIFTY THOUSAND DOLLARS ($250,000.00), or in such greater coverage amounts as Landlord may from time to time reasonably require. All such policies of public liability and property damage insurance shall name Landlord and Tenant as parties insured, and shall contain a provision that the same many not be canceled or amended (including for non-payment of premiums) without giving to the Landlord and Tenant at least thirty (30) days' prior written notice. Each policy of insurance required of Tenant under this Lease, or certified copy thereof and a certificate showing the same to be in force, shall be delivered to Landlord at the commencement of the term hereof, and renewals thereof shall be delivered to Landlord within ten (10) days prior to the expiration of any such policy. All insurance maintained by Tenant on the premises and/or on Tenant's personal property or business shall include waiver of subrogation endorsements for Landlord's benefit, in form and content acceptable to Landlord. Tenant shall provide Landlord copies of paid receipts for premiums on all insurance required of Tenant under this Lease for at least one (1) year in advance, on request. Additionally, during the term of this Lease, Tenant at its sole cost and expense, and for the respective interests of Landlord and Tenant, shall keep the Premises insured against loss or damage by fire and the hazards included in the standard extended coverage endorsement, in an amount equal to one hundred percent (100%) of the replacement value of the Premises, which policy shall name the Landlord as an additional insured. If Tenant's alterations -18- result in an increase in the insurable value of the Premises, then Tenant shall increase the face amounts of all hazard insurance policies required of Tenant under this paragraph. Tenant shall also at its own expense provide and keep in force property damage insurance in amounts sufficient to cover all of its equipment at and all leasehold improvements which are made by Tenant in or to the Premises, and business interruption insurance in amounts sufficient to cover all rent and other payments due under this Lease. Tenant agrees to look only to its business interruption and property damage insurance policies, and not to Landlord or its agents or employees, for reimbursement for any damages or losses incurred as a result of any of the foregoing occurrences, and that said policies must contain waiver of subrogation clauses. NINTH: Subordination. This Lease and all rights of Tenant hereunder, are ------------- subject and subordinate to any mortgages and deeds of trust which now or may hereafter affect the demised premises, the Land and/or the building, and to any and all renewals, modifications, consolidations, replacements and extensions thereof. It is the intention of the parties that this provision be self- operative and no further instrument shall be necessary to effect such subordination of this Lease. Tenant shall, however, upon demand at any time or times, execute, acknowledge and deliver to Landlord any and all instruments that may be necessary or proper to subordinate this Lease, and the rights of Tenant hereunder, to any such mortgage or deed of trust, or to confirm or evidence said subordination. Notwithstanding the subordination of this Lease as aforesaid, any present or future mortgagee or beneficiary under any deed of trust on the building or the Land may, by giving Tenant written notice thereof, require that the Lease shall be senior in lien to such mortgage or deed of trust. Tenant covenants and agrees, in the event of foreclosure of any such mortgage or deed of trust, to attorn to the purchaser at such foreclosure sale, and to recognize such purchaser as the Landlord under this Lease. Tenant agrees to execute and deliver to Landlord, within ten (10) days after request of Landlord or of any such holder, any instrument which, in the reasonable judgment of Landlord, may be necessary or appropriate in any such foreclosure proceedings or otherwise to evidence such attornment. Tenant further waives the provisions of any statute or rule of law, now or hereafter in effect, which may give or purport to give Tenant any right or election to terminate or otherwise adversely affect this Lease, and the obligations of Tenant hereunder, in the event of any such foreclosure. -19- TENTH: Eminent Domain. Tenant agrees that if the demised premises, or -------------- any part thereof, shall be taken, condemned or acquired for public or quasi- public use or purpose by any competent authority, whether by condemnation proceedings, lease or purchase, this Lease at Landlord's option shall terminate and the Tenant shall quit and vacate the premises by the date required in such condemnation proceedings. Tenant shall have no claim against Landlord and shall not have any claim or right to any portion of the amount that may be awarded as damages or be paid as a result of any such condemnation, lease or purchase; it being agreed that the full amount of such award or other proceeds, if any, made or paid by the taking authority shall be paid to and retained by Landlord, free of any claim by Tenant to any portion thereof; and that all rights and claims of Tenant to damages therefor, if any, are hereby assigned by Tenant to Landlord. Should all or any part of the demised premises be so taken or acquired, the term of this Lease shall cease and terminate from the date on which Tenant is required, by said taking authority, to surrender possession of said premises, and the Tenant shall have no claim against Landlord for the value of any unexpired term of this Lease. All rentals and other sums payable by Tenant hereunder shall be adjusted to the date on which Tenant is required, by said taking authority, to surrender possession of said premises. Provided that Tenant is not in default under this Lease, Tenant shall have the right, in the event of any such condemnation, to pursue in an action separate from Landlord's condemnation proceedings, and at Tenant's own expense, any claims that Tenant may have against the condemning authority for loss of Tenant's business and/or moving expenses occasioned by such condemnation, provided that the amounts sought or awarded to Tenant in such separate action shall not in any manner reduce or adversely affect or in any manner delay or interfere with Landlord's award or claims. ELEVENTH: Damage to Tenant's Property. It is agreed that Landlord shall --------------------------- not be liable for any damage to property of Tenant or other persons upon the demised premises arising from rain, snow, or water which may leak into or fall into any portion of the demised premises, or which may occur from broken pipes or any other causes. TWELFTH: Damage by Fire or Casualty. -------------------------- -20- (A) If the demised premises is damaged by fire, the elements or other casualty which is actually then covered by the Landlord's fire and extended coverage insurance policies in force on the demised premises, the Landlord (at its cost) shall diligently and promptly repair all damage to and restore the demised premises to its condition just prior to the damage. However, in no event shall the rentals or any other amounts payable by Tenant under this Lease abate or be reduced as a result of any fire or other casualty or damage of any kind to the Premises or to Tenant's equipment, trade fixtures, merchandise or personal property; it being agreed that Tenant shall rely on its policies of casualty and business interruption insurance for all such losses or loss of income from any such occurrences, and Tenant shall have no right to any diminution in rent nor any claims against Landlord in any such events. Landlord's restoration work under this paragraph shall be limited to the premises as originally tendered to Tenant (reasonable wear and tear excepted), herein called "Landlord's Restorations"; it being agreed that Tenant at its own expense shall repair and replace all alterations and leasehold improvements, fixtures, furnishings and equipment installed by or for Tenant. Notwithstanding anything herein contained to the contrary, all damage tot he Premises caused by Tenant or any Tenant Parties shall be repaired promptly by and at the sole expense of Tenant. (B) Notwithstanding the foregoing, if more than fifty percent (50%) in value of the demised premises is destroyed or made unusable by any such fire, the elements or other casualty, or if the building of which the demised premises is a part shall be damaged or destroyed to the extent that Landlord, in its opinion deems it advisable to remove the remainder of the building or to substantially or entirely reconstruct the same (even though the portion leased to the Tenant hereunder is not rendered untenantable or is made only partially untenantable), or if the demised premises is damaged by any casualty or other cause which is not fully covered and insured under the Landlord's fire and extended coverage insurance policies then in force, then and in any such event the Landlord shall have the right in its sole discretion to terminate this Lease by giving Tenant written notice of such termination at any time within sixty (60) days following the occurrence of such casualty, and in the event of such termination hereof rent shall be adjusted to the date Tenant was deprived of the use of the demised premises as the result of such casualty, and the Landlord and Tenant shall be relieved of any further liability hereunder. However, in no event shall Landlord be subject to any claims or liability as a result of any casualty or other -21- damage or any interruption in or loss of Tenant's business as a result thereof or of repairs necessitated thereby. Tenant shall include in its casualty insurance policy a waiver of subrogation endorsement for Landlord's benefit in form and content acceptable to Landlord. THIRTEENTH: Compliance with Governmental Orders: Tenant Insurance. ------------------------------------------------------- (A) The Tenant shall, at its own expense, during the entire term hereof, properly and promptly comply with all laws, orders, ordinances, rules, regulations and requirements, as the same now exist or as the same may hereafter be enacted, amended or promulgated, of any Federal, State, County or municipal authority, and/or any department or agency thereof, and of the Board of Fire Underwriters, and any similar organization having jurisdiction thereof, relating to Tenant's use or occupancy of the demised premises or to the operation of the Tenant's business therein. Tenant at its own expense (and at nor cost to Landlord) agrees to obtain and keep in force (and provide Landlord promptly on request copies of) all certificates, licenses and permits required for use and occupancy of the demised premises and for conduct of Tenant's business thereat. (B) Tenant, at its own expense shall at all times during the term hereof carry fire and extended coverage insurance on its furniture, trade equipment and its other personal property and all leasehold improvements to or located at the demised premises, in coverage amounts equal to their full replacement cost, and in good responsible companies licensed in the District of Columbia. Such policies shall include waiver of subrogation provisions acceptable to Landlord. Complete copies and certificates of such policies shall be furnished to Landlord within seven (7) days after each request. However, Tenant shall not carry any insurance which duplicates or adversely affects any policies of insurance maintained by Landlord, without Landlord's express prior written consent. (C) Fire Insurance Increases. Tenant will not carry on any activity ------------------------- in or about the demised premises, nor on the sidewalks abutting said premises, nor do or permit anything to be done therein or thereat, which is contrary to any law, ordinance, order or regulation of the -22- Federal, State, County or municipal governments, or of any board, agency or department thereof; and Tenant shall not permit nor do anything which would increase the basic rate of the fire insurance or any other insurance carried by Landlord, as established by the appropriate agency having jurisdiction. For purposes of definition herein, the "basic rate" shall be such rate as is published by the said appropriate agency, exclusive, however, of any excess or surcharges appended thereon by virtue of or directly attributable to so-called faults of management. If any use of or activities or occupancy at the demised premises or on the sidewalks, alleys, or other areas in the vicinity of the Premises by Tenant, its assignees or sublessees causes any increase in the Landlord's insurance premiums or rate for the building over and above the basic premiums and/or rate for construction of the type of the Premises occupied for the purpose permitted by Landlord, then Tenant, upon written notice from Landlord, shall immediately take all necessary steps to eliminate the excess charge attributable to such faults of management. Should Tenant refuse or fail to take such action as may be necessary to eliminate the cause for said excess charges, Tenant shall pay to Landlord on demand as additional rent, that portion of the aforesaid fire and extended coverage and other insurance premiums caused by such excess charge on all outstanding insurance carried by Landlord on the building. (D) Tenant will not use the demised premises nor conduct any business therein (nor permit any Tenant Parties to do so) in a manner which disturbs or interferes with the business, use or occupancy by other lessees of space in the building; and Tenant shall immediately cease any activities or conduct by Tenant or any Tenant Parties which violate the provisions of this paragraph. FOURTEENTH: Bankruptcy. ----------- (A) Events of Bankruptcy. For purposes of this Lease, the following --------------------- shall be deemed "Events of Bankruptcy" of Tenant: (i) if Tenant becomes "insolvent", as defined in Title 11 of the United States Code, entitled "Bankruptcy", 11 U.S.C. Section 101 et. seq. (the "Bankruptcy Code"), or under -------- the insolvency laws of any state, district, commonwealth or territory of the United States of America ("Insolvency Laws"); or (ii) if a receiver or custodian is appointed for any or all of Tenant's property or assets, or if there is instituted a foreclosure action -23- on any of Tenant's property; or (iii) if Tenant files a voluntary petition under the Bankruptcy Code or Insolvency Laws; or (iv) if there is filed an involuntary petition against Tenant as the subject debtor under the Bankruptcy Code or Insolvency Laws which is not dismissed within thirty (30) days of filing, or results in issuance of an order for relief against the debtor; or (v) if Tenant makes or consents to an assignment of its assets, in whole or in part, for the benefit of creditors, or a common law composition of creditors. (B) Landlord's Option to Terminate Lease. Upon the occurrence of an ------------------------------------- Event of Bankruptcy, or if Tenant takes advantage of any Insolvency Laws, then in any such event Landlord at its option and sole discretion may terminate this Lease by written notice to Tenant (subject, however, to applicable provisions of the Bankruptcy Code or Insolvency Laws during the pendency of any action thereunder involving Tenant as the subject debtor). If this Lease is terminated under this paragraph, Tenant shall immediately surrender to Landlord possession of and vacate the demised premises, waives all statutory and other notice to quit, and agrees that Landlord's obligations under this Lease shall cease from such termination date, and Landlord may recover possession by process of law or in any other lawful manner. Furthermore, if this Lease is terminated under this paragraph, Landlord shall have all rights and remedies against Tenant provided in case of defaults of Tenant in payment of rent (subject, however, to applicable provisions of the Bankruptcy Code or Insolvency Laws). (C) Assumption of Lease. If Tenant becomes the subject debtor in a -------------------- case pending under the Bankruptcy Code, Landlord's right to terminate this Lease under this Article shall be subject to the applicable rights (if any) of the trustee in bankruptcy to assume or reject this Lease as then provided for in the Bankruptcy Code. However, the Trustee in Bankruptcy must give to Landlord and Landlord must receive proper written notice of the Trustee's assumption or rejection of this Lease, within sixty (60) days after the date of the Trustee's appointment or such longer period if any provided by applicable law (the "Assumption or Rejection Period"); it being agreed that the failure of the Trustee to five notice of such assumption hereof within the Assumption or Rejection Period shall conclusively and irrevocably constitute the Trustee's rejection of this Lease and waiver of any rights of the Trustee to assume -24- or assign this Lease. The Trustee shall not have the right to assume or assign this Lease unless said trustee (i) promptly and fully cures all defaults of Tenant under this Lease, (ii) promptly and fully compensates Landlord for all monetary damages incurred as a result of such default, and (iii) provides to Landlord "adequate assurance of future performance" (as defined hereinbelow). Landlord and Tenant hereby agree in advance that "adequate assurance of future performance", as used in this paragraph, shall mean that all of the following minimum criteria must be met: (a) Tenant's gross receipts in the ordinary course of business during the thirty (30) day immediately preceding the initiation of the case under the Bankruptcy Code must be at least twenty (20) times greater than the next payment of rent due under this Lease, (b) both the average and median of Tenant's monthly gross receipts in the ordinary course of its business during the six (6) months immediately preceding initiation of the case under the Bankruptcy Code must be at least twenty (20) times greater than the next payment of rent due under this Lease, (c) Tenant must pay to Landlord all rentals and other sums payable by Tenant hereunder including also therein its share (as estimated by Landlord) of the cost of all services (if any) provided by Landlord (whether directly or through agents or contractors, and whether or not the cost of such services is to be passed through to Tenant), in advance of the performance or provision of such services, (d) the Tenant must agree (by writing delivered to Landlord) that the Tenant's business shall be conducted in a first class manner, and that no liquidating sales, auctions, or other non-first class business shall be conducted in, at or on the demised premises, and that the use of the demise premises as stated in this Lease will remain unchanged. In the event Tenant is unable to (i) cure its defaults, (ii) reimburse Landlord for its monetary damages, (iii) pay the rents due under this Lease or any other payments required of Tenant under this Lease on time, or (iv) meet the criteria and obligations imposed by (a) through (d) above in this subparagraph, then Tenant hereby agrees in advance that Tenant has not met its burden to provide adequate assurance of future performance, and this Lease may be terminated by Landlord in accordance with Paragraph FOURTEENTH (B). (D) Damages. It is further stipulated and agreed that, in the event -------- of the termination of this Lease by the happening of any such event described in this Article FOURTEENTH, Landlord shall forthwith, upon such termination, and any other provisions of this Lease to the contrary notwithstanding, become entitled to claim and recover as and for -25- damages caused by such breach of the provisions of this Lease all amounts permitted by applicable law. (E) Consent to Lift Sty. In the event that this Lease is terminated -------------------- by notice and the Tenant shall thereafter seek protection under the Bankruptcy Code or any equivalent state Insolvency Laws or regulations, then the Tenant (if a debtor-in-possession) agrees to consent to any application by the Landlord to terminate the automatic stay provisions of the Bankruptcy Code or any Insolvency Laws on the grounds that there is no equity in the Lease as a result of the pre- petition termination notice. FIFTEENTH: Signs; Equipment. (A) It is recognized that Tenant heretofore ----------------- has installed on the exterior of the Building certain signs which now are in place (the "Existing Signs"). Tenant covenants and agrees, at its own expense, to remove said Existing Signs by not later than October 15, 1996, and to repair immediately all damage to the Building caused by installation or removal of said Existing Signs. It is recognized that said Existing Signs encroach onto portions of the Buildings occupied by other lessees, and that Tenant's Permitted Use of the Premises is limited to office use as aforesaid. Accordingly, in no event shall Tenant be entitled to place, continue the existence of, add to or replace or install any signs on the exterior of or which are visible from the exterior of the Building. Tenant further covenants and agrees not to install, place, hang or otherwise display on the exterior of the Buildings any banners, signs or other items or materials of any kind, nor to obstruct from view, alter or otherwise affect any signs, show windows or other windows, doorways, doors, entrances, exits or other elements or areas of the Buildings now or hereafter displayed or used by or leased to any other tenant or occupant. In addition to (but not in limitation of) its other rights and remedies, Landlord shall have the right to remove (at Tenant's risk and expense) any items installed by Tenant at any time in violation of this paragraph. Tenant agrees to indemnify, defend and hold Landlord harmless from all loss, costs, damage, expense and claims (including damages from loss of any other lease or prospective lease of space in the Buildings), arising from or caused by default of Tenant under this paragraph or under any other provision of this Lease. -26- (B) No sign, advertisement, notice, or awning shall be inscribed, painted, affixed or otherwise displayed on any part of the exterior of the Building except in such place, number, size, color and style as is in Landlord's judgment harmonious with the design of the Buildings and their furnishings; nor shall any such items be installed without obtaining Landlord's Exclusive Consent. Any such sign, advertisement, notice or awning shall be installed, maintained, kept in good repair and appearance and in compliance with laws and insurance requirements, by Tenant at its own cost and expense. Tenant shall not install any flashing, moving, strobe, neon or other bright or unattractive lights or lighted signs without Landlord's prior written Exclusive Consent. If any sign, advertisement, notice or awning which does not conform to the foregoing is nevertheless installed by or for Tenant, then Landlord shall have the right (but not the obligation) at its sole discretion to remove the same, and Tenant shall be liable for any and all expenses incurred by Landlord in said removal. Tenant further specifically agrees that any sign, advertisement, notice or awning erected in accordance with this provision shall be removed, at Tenant's sole cost and expense, within seven (7) days after Landlord's request. (C) Furnishings. Landlord shall have the right to prescribe the ------------ weight and position of safes and other heavy equipment or fixtures, which shall, if considered necessary by the Landlord, stand on plank strips to distribute the weight. Any and all damage or injury to the Building or the Premises caused by moving the property of Tenant into, in or out of the Premises, or due to the same being in the Premises, shall be repaired by and at the sole cost of Tenant. All moving of furniture, equipment and other materials (if Landlord so determines) shall be under the direct control and supervision of Landlord who shall, however, not be responsible for any damage to or charges for moving the same. Tenant shall promptly remove from the sidewalks and alleys adjacent to the Building any and all of its furniture, equipment or other material there delivered or deposited. (D) Tenant's Equipment. Tenant shall not install any equipment, ------------------- machinery or trade fixtures of any kind or nature whatsoever which will or may necessitate any changes, replacements or additions to, or in the use of, the water system, heating system, plumbing -27- system, air-conditioning system, or electrical system of the Building without the prior written consent of Landlord. SIXTEENTH: Defaults. --------- (A) In the event that (i) Tenant shall fail to pay when and as due any payment of rent or of Additional Rent or any other amount payable by Tenant hereunder, or (ii) Tenant shall violate any other term, provision, covenant or condition of this Lease or shall neglect or fail to perform or to observe or comply with any of the other terms, conditions or covenants herein contained on Tenant's part to be performed or observed and Tenant shall fail to remedy the same within twenty (20) days after Landlord shall have sent Tenant written notice specifying such violation, neglect or failure, or (iii) this Lease or the Demised Premises or any part thereof shall be taken upon execution or by other process of law directed against Tenant, or shall be taken upon or subject to any attachment at the instance of any creditor of or claimant against Tenant, and said attachment shall not be discharged or disposed of within thirty (30) days after the levy thereof; of (iv) Tenant shall abandon, vacate or desert the Demised Premises, or fail to continuously operate the Demised Premises for the Permitted Use specified in Article Fifth hereof; then in any one or more of such events, Landlord shall have the right, at its option, exercisable by sending written notice thereof to Tenant, to terminate this Lease, in which event Tenant agrees to immediately surrender to Landlord possession of the Demised Premises, without any notice to quit or demand for possession of the Demised Premises whatsoever, all statutory and other notice to quit or of intention to re-enter the same being hereby expressly waived by Tenant, and Tenant hereby grants Landlord full and free entrance to, into and upon the Demised Premises or any part thereof, to take possession thereof with or without process of law and to expel and remove Tenant or any other person occupying the Demised Premises or any part hereof, and Landlord may repossess itself of the same as if its former estate, but such entry shall not constitute trespass or forcible entry or detainer, nor shall it cause a forfeiture of rents due by virtue hereof nor waiver of any covenant, agreements or promises in this Lease contained to be performed by Tenant. If this Lease shall be terminated as aforesaid, the Demised Premises, or any part thereof, may be re-let by Landlord for the account and benefit of Tenant, for such rent and upon such terms and to such person or persons and for such period or periods as may seem -28- fit to Landlord, and if a sufficient sum shall not be received form such reletting to satisfy the rent reserved in this Lease, after paying the expense of reletting and collection, including reasonable commissions to agents and reasonable attorneys' fees, and any court costs, Tenant agrees to pay and satisfy any and all such deficiencies; but the acceptance of a lessee by Landlord in place of Tenant shall not operate as a release of Tenant from the performance of any covenant, promise or agreement herein contained, and the performance of any substitute tenant by the payment of rent, or otherwise, shall constitute only satisfaction pro-tanto of the obligations of Tenant arising --------- hereunder. Any damages or deficiencies, at the option of Landlord, may be recovered by Landlord in separate actions, from time to time, as Tenant's obligations to pay would have accrued if the term had continued, or from time to time as said damages or deficiencies shall have been made more easily ascertainable by relettings of the Demised Premises, or any such action by Landlord may, at the option of Landlord, be deferred until the expiration of the term hereof. Notwithstanding anything to the contrary contained in this Lease, to the extent not expressly prohibited by applicable law, in the event of any default of Tenant under this Lease, Landlord at its sole option and discretion may terminate this Lease and/or Tenant's right to possession of the premises, and may accelerate and declare that all rentals and other amounts reserved for the entire remainder of the term hereof shall be immediately due and payable, in which event Tenant agrees to pay same on demand. If and to the extent Tenant makes the payments demanded by Landlord pursuant to the preceding sentence (the "accelerated rent") and provided such payments are free of challenge by and are not recovered by Tenant's creditors, trustee or receiver in any creditor proceedings, then it is agreed that Landlord will refund to Tenant (to the extent only of said Accelerated Rent) any actual Net Re-Letting Proceeds (defined below) thereafter received by Landlord during the remainder of the stated term of this Lease. The phrase Net Re-Letting Proceeds as used herein shall mean the total amount of rent and other consideration paid by any Replacement Tenants, less all Costs of Re-Letting, during a given period of time. "Costs of Re-Letting" shall include without limitation, all reasonable costs and expenses incurred by Landlord for any repairs, maintenance, changes, alterations and improvements to the Premises, brokerage commissions, advertising costs, attorneys' fees, any customary free rent periods or credits, tenant improvement allowances, take-over lease obligations and other customary, necessary or appropriate economic incentives required to enter leases with Replacement Tenants, and costs of collecting rend from Replacement Tenants. The -29- phrase "Replacement Tenants", as used herein, shall mean any party or parties to whom Landlord relets the Premises or any portion thereof pursuant to this Article. (B) Tenant hereby expressly waives any provision of law now in force or which hereafter may be enacted giving Tenant the right under any condition after default to the redemption and repossession of the Demised Premises or any part thereof. (C) No payment by Tenant or receipt by Landlord of a lesser amount than the monthly installments of rent herein stipulated shall be deemed to be other than on account of the earliest stipulated rent, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction, and the Landlord may accept such check or payment without prejudice to the Landlord's right to recover the balance of such rent or to pursue any other remedy in this Lease provided. (D) Notwithstanding anything to the contrary set forth hereinabove, in the event of a default hereunder by Tenant, Tenant covenants and agrees to pay to Landlord all costs and expenses incurred by Landlord in connection with such default, including but not limited to reasonable attorney's fees, whether or not suit was instituted. (E) In the event Tenant shall default under any provision of this Lease, Landlord shall have the right (but not the obligation) at its option, and at the sole cost of Tenant, in addition to all other rights and remedies, to take the action necessary to cure the default, in which event Tenant shall pay Landlord all costs incurred plus fifteen percent (15%) thereof on demand. SEVENTEENTH: Rights Reserved by Landlord. The Landlord reserves the right --------------------------- to enter the demised premises at all reasonable times (1) for the making of inspections or repairs, as Landlord may deem necessary or desirable; (2) to exhibit the premises to prospective tenants during the last twelve (12) months of the term of this Lease, and to prospective purchasers and -30- lenders at any times during the term hereof; and (3) for any purpose whatsoever relating to the safety, protection or preservation of the demised premises. Landlord shall have the further right, during the last twelve (12) months of the term hereof, to place the usual sign or notice "For Rent", and at any time during the term hereof to place the notice "For Sale", upon any part of the premises hereby demised to Tenant, which sign or notice Tenant agrees to permit to remain thereon without interference, molestation or obstruction. EIGHTEENTH: Surrender of Possession. At the expiration or other ----------------------- termination of this Lease, Tenant shall surrender and deliver up possession of the demised premises to Landlord in good order and condition, ordinary wear and tear excepted, free of occupants and subleases. By not later than the termination of this Lease or expiration of the term hereof, the Tenant may remove its trade fixtures and equipment installed by it on the condition, provided, however, that any damage to the demised premises resulting from such removal (or the installation thereof) shall be fully and promptly repaired by and at the sole expense of Tenant. Tenant may not remove any of its trade fixtures or other property while Tenant is in default hereunder. Any of Tenant's personal property not removed from the premises by expiration or termination of this Lease may be retained as Landlord's property or be disposed of by Landlord at Tenant's risk and expense, all at Landlord's exclusive discretion. NINETEENTH: Notices. All notices required under this Lease shall be given ------- in writing and shall be deemed to be properly served by Tenant if sent by certified or registered United States mail, return receipt requested, postage prepaid, addressed to Landlord c/o Sidney S. Zlotnick, 1616 H Street, N.W., Suite 810, Washington, D.C. 20006, or to such other party and address as Landlord may from time to time designate in writing. Such notices shall be deemed to be properly served by Landlord if sent by certified or registered United States mail, postage prepaid, addressed to Tenant at the demised premises or to such other address as Tenant may from time to time designate to Landlord in writing, or such written notices may be delivered in person by Landlord or Landlord's agent to Tenant or Tenant's employees at the demised premises during regular business hours. -31- TWENTIETH: Non-Waiver. The failure of Landlord to insist, in any one or ---------- more instances, upon a strict performance of any of the covenants of this Lease, or to serve any notice, or to institute any action or summary proceedings, shall not be construed as a waiver or relinquishment for the present or future of such covenant or option, or right thereafter to service notice, but such covenant or option shall continue and remain in full force and effect. The receipt by the Landlord of rent, with knowledge of the breach of any covenant hereof, shall not be deemed a waiver of such breach, and no waiver by the Landlord of any provision hereof or breach thereof by Tenant shall be deemed to have been made unless expressed in writing and signed by the Landlord or its duly authorized agent. The Landlord's rights and remedies herein created are cumulative, and the use of one remedy shall not be taken to exclude or waive the right to the use of another. Receipt or acceptance by Landlord of any rent after the due date thereof in any one or more instances shall not constitute a waiver of the obligation of Tenant to pay all rentals and other sums hereunder on the date due, nor be deemed to prevent Tenant's failure to make such timely payments from constituting default of Tenant under this Lease. TWENTY-FIRST: Quiet Possession. The Landlord covenants that if and so ---------------- long as the Tenant shall not be in default under this Lease, the Tenant shall quietly hold, occupy and enjoy the leased premises during all of the term hereof, without hindrance or molestation by the Landlord. TWENTY-SECOND: Entire Agreement. This instrument contains all the ---------------- agreements made between the parties hereto, and may not be modified orally or in any other manner than by agreement in writing, signed by all the parties hereto or their respective successors in interest. TWENTY-THIRD: Binding Effect of Agreement. The terms, covenants, --------------------------- conditions, obligations and agreements herein contained shall be kept and performed by the respective parties hereto, and will be binding upon them and each of them, their and each of their respective heirs, executors, administrators, personal representatives, successors and (subject to Article SIXTH hereof) assigns. -32- TWENTY-FOURTH: Landlord's Liability. If the Landlord shall sell, convey -------------------- or otherwise transfer the demised premises and/or the building in which same is located, then the undersigned Landlord shall be deemed to be released of all obligations hereunder from and after the date of such transfer, and the transferee shall be deemed the Landlord hereunder. Landlord's liability under this Lease shall be limited to its interest in the demised premises. In no event shall the individuals or any other parties comprising Landlord have any personal liability for any payments or performance under this Lease; it being agreed that Tenant shall have no recourse to any assets or properties of Landlord (other than the demised premises) for enforcement of the rights and remedies of Tenant and any Tenant Parties under this Lease, at law or in equity. The Landlord and Tenant shall not be deemed to be partners or joint venturers; it being agreed that their only relationship is that of lessor and lessee respectively. TWENTY-FIFTH: Brokerage. Tenant hereby represents and warrants that it --------- has not dealt with any real estate broker, agent or salesman in connection with this Lease, and Tenant agrees to indemnify, defend and hold Landlord harmless from any commissions or claims sought or asserted by any broker, agent or salesmen in connection with this Lease. TWENTYSIXTH: Miscellaneous. ------------- (A) Severability. If any term or provision hereof, or any portion ------------ thereof, or the application thereof to any person(s) or circumstances shall, to any extent, be held by a court of competent jurisdiction to be invalid or unenforceable, then the remainder of this Lease, or the application of such term or provision to persons or circumstances other than those as to which it is so judicially held to be invalid or unenforceable, shall not be affected thereby, and each term -33- and provision of this Lease shall be valid and be enforceable to the fullest extent permitted by law. (B) Landlord and Tenant each hereby waive all rights to trial by jury in any litigation or proceedings instituted by either party against the other concerning this Lease. (C) This Lease is made pursuant to, and shall be construed and enforced in accordance with, the laws of the District of Columbia. TWENTY-SEVENTH: No Liability. (A) Landlord shall not be liable to Tenant, ------------ its employees, agents, business invitees, licensees, customers, clients, family members or guests for any damages, compensation or claim arising from the necessity of repairing any areas of the premises or the building, the interruption of the use or occupancy of the premises, any accident or damage resulting from the use or operation (by Landlord, Tenant, or any other person or persons whatsoever) of heating, cooling, electrical or plumbing equipment or apparatus; or the termination of the Lease by reason of the destruction of the premises; or from any fire, robbery, theft, mysterious disappearance and/or any other casualty or from any leakage in all or any part of the premises or the building, or from water, rain or snow that may leak into or flow from any part of the premises or the building, or from drains, pipes, or plumbing work in the building, or from any other cause whatsoever. Any goods, property or personal effects, stored or placed by the Tenant or its employees in or about the premises or building, shall be there at the risk of the Tenant; it being agreed that Landlord shall not in any manner be held responsible therefor. The employees of the Landlord are prohibited from receiving any packages or other articles delivered to the building or Tenant, and if any such employee receives any such package or articles, such employee shall be the agent of the Tenant for such purposes and not the agent of the Landlord. -34- Tenant shall not be entitled to any rent abatement in any circumstances described in this paragraph. (B) Tenant's Equipment. Tenant's machines and equipment which cause ------------------ noise or vibration that may be transmitted to the structure of the building or to any space therein to such a degree as to be objectionable to Landlord or to any other tenant in the Buildings shall be installed and maintained by Tenant, at Tenant's expense, on vibration eliminators or other devices sufficient to eliminate such noise and vibration. TWENTY-EIGHTH: Captions - General ------------------ (A) The paragraph captions of this Lease are for convenience of reference only, and in no way define or limit the scope or intent of this Lease, nor in any way affect this Lease. (B) Wherever in this Lease the singular is used, the same shall include the plural; and the use of any gender shall be deemed to include all genders. (C) Tenant at its own expense will obtain and keep in force throughout the term of this Lease all certificates of use and occupancy, business licenses and other permits required for its use and occupancy of the demised premises and for the conduct of its business therein. (D) Tenant will not store or place or permit any flammable, explosive or other hazardous or extra-hazardous materials in, upon or about the demised premises. Tenant further agrees that it will not place or install in, below, on or above the premises nor permit to enter the premises from any adjoining property any materials or equipment containing asbestos, urea formaldehyde insulation, polychlorinated biphenyls ("PCBs"), or other toxic or hazardous -35- substances or materials which are at any time deemed under any laws or governmental regulations or Insurance Requirements or otherwise to be hazardous to human health (collectively, "Hazardous Materials"), nor install any storage tanks for fuel oil or other toxic substances on, above or below ground; and Tenant will not permit any other parties to do so. Tenant hereby indemnifies, defends and holds harmless Landlord from and against any and all litigation, prosecutions, fines, penalties, liens, judgments, death and injuries to persons, damage to property, costs of clean up and removal of contaminated soil and materials, and claims of any nature, arising from or caused by any breach or default of Tenant under this paragraph. (E) Nothing contained in this Lease shall be deemed an authorization or request by Landlord for Tenant to act as Landlord's agent to incur any expenses or contract for, order or arrange for any work which might give rise to any mechanic's or material men's liens against the demised premises, the Land and/or the Buildings (collectively, "Liens"). Tenant at its own expense will indemnify, defend and hold Landlord harmless from and remove of record within ten (10) days after filing thereof any and all Liens against the demised premises, the Land and/or the building resulting from any work, labor or materials requested by or furnished to Tenant or any Tenant Parties. (F) All powers of consent and approval conferred on Landlord under this Lease and any exercise thereof and conditions imposed by Landlord if it grants such approval are included and exercised solely for Landlord's benefit and protection, and shall not constitute a representation or warranty (express or implied) from Landlord or its representatives as to the legality, technical sufficiency, adequacy, accuracy, compliance with life/health/safety requirements of laws, or any other matters. -36- TWENTY-NINTH: Operating Procedures. -------------------- Tenant covenants and agrees to comply with the following requirements throughout the term hereof: (A) Garbage and trash shall not be permitted to accumulate in or about or outside the Premises, but instead shall be disposed of at Tenant's sole cost and expense. Proper and adequate receptacles for collection of garbage and trash shall be maintained by Tenant so that offensive odors shall not be permitted to exude or escape from the premises at any time. Such garbage and trash shall be placed in covered, odor-free receptacles at a location inside or outside the premises as directed by Landlord. (B) Tenant will not place or maintain any merchandise or other articles in any entry of the premises, on the sidewalks adjacent thereto or elsewhere on the exterior thereof, or in any stairways or public corridors or in any entryways, exit areas or vestibules of the Buildings. (C) Upon expiration or termination of this Lease, Tenant will return to Landlord all keys to the demised premises, and all keys to the building in its possession. (D) Tenant shall conduct its business at the Premises in a first- class and tasteful manner. Tenant agrees to require its clients, staff, employees and invitees while is or visiting the Premises to, at all times, conduct themselves in a manner consistent with that associated with a first- class commercial building, and Tenant agrees to take any and all steps necessary to prevent loitering and disorderly conduct of the Premises and adjacent areas. (E) Nothing contained herein shall prevent the enforcement of any claim Landlord may have against Tenant for anticipatory breach of the unexpired term of this Lease. In the event of a breach or anticipatory breach by Tenant of any of the covenants or provisions hereof, Landlord shall have the right of injunction and the right to invoke any remedy allowed at -37- law or in equity, just as if re-entry, summary, proceedings and other remedies were not provided for herein. (F) Landlord hereby reserves to itself and its successors and assigns the following rights (all of which are hereby consented to by Tenant): (i) to change the street address and/or name of the Building, and (ii) to erect, use and maintain pipes and conduits in and through the Premises provided such construction shall (a) not interfere with the operation of Tenant's business, (b) be done in a first-class manner, and (c) not adversely affect the esthetic or structural integrity of the Premises. Landlord may exercise any or all of the foregoing rights without being deemed to be guilty of an eviction, actual or constructive, or a disturbance or interruption of Tenant in business, use or occupancy, and with no rent abatement. (G) Any installment of rent or any other payment required of Tenant under this Lease which is not paid within five (5) days after the due date thereof shall bear interest at the rate of fifteen percent (15%) per annum from due date until paid in full; and Tenant agrees to pay said interest to Landlord on demand (together with the amount so unpaid). This Lease is for commercial and business purposes only, and in no event shall Tenant have any defense or claim of usury, nor an right to offset against rents. (H) Tenant acknowledges that neither Landlord nor any agent or employee of Landlord has made any representations or promises with respect to the Premises or the Building, and no rights, privileges, easements or license are acquired by Tenant except as herein expressly set forth. THIRTIETH: Submissions Non-Binding. Neither the submission of this Lease ----------------------- or of any modified drafts hereof to Tenant unsigned by Landlord, nor any negotiations, discussions or -38- communications of any kind between Landlord and Tenant and/or their attorneys or agents, shall constitute a binding obligation or commitment of any kind or be deemed to be a reservation of the premises for leasing to or use by Tenant. Any binding obligation between Landlord and Tenant in respect of the premises shall only be pursuant to written lease executed by Landlord and Tenant. THIRTY-FIRST: Estoppel Certificates Mortgages. ------------------------------- (A) Tenant agrees, at any time and from time to time during the term of this Lease, upon not less than five (S) days prior written notice from Landlord, to execute, acknowledge and deliver to Landlord a statement in writing which shall contain substantially the following provisions: (i) a statement that this Lease is unmodified and in full force and effect (or if there have been modifications, that this Lease is in full force and effect as modified and stating the modifications), (ii) a statement of the dates to which the rent and any other charges hereunder have been paid by Tenant, (iii) a statement of whether or not, to the best knowledge of Tenant, the Landlord or Tenant is in default in the performance of any covenant, agreement or condition contained in this Lease, and if so, specifying each such default of which Tenant has knowledge, (iv) a statement of the address to which notices to Tenant should be sent, (v) a statement that Tenant has accepted the Premises and the improvements therein, (vi) a statement that Tenant will not attempt to terminate this Lease by reason of Landlord's default or omission without giving written notice of such default or omission to Landlord and its mortgagees of whom Tenant has knowledge, (vii) whether or not Landlord holds any security deposit under this Lease (and the amount thereof, if any) and (viii) such other statement or statements as Landlord or any existing or prospective mortgagees of Landlord may reasonably request. Any such statement delivered -39- pursuant hereto, may be relied upon by any mortgagees or purchasers of the Building. Tenant agrees to make such reasonable changes or modifications to this Lease as may be required by any mortgagee of the Landlord's interest in the Premises, provided that such changes or modifications shall not increase the amount of rent required hereunder, shorten the term of this Lease or change or redefine the Premises. (B) any of Landlord's mortgagees or any purchaser of the Building at foreclosure, shall not (a) be bound by any prepayment of rent or additional rent for more than thirty (30) days in advance of the due date of such rent or which Tenant might have paid for more than the current month to any prior lessor (including Landlord); (so that rent shall be payable after any deed of trust or mortgage foreclosure in case of a requested attornment by the mortgagee, in accordance with the terms of this Lease as if such prepayment of rent for more than one month in advance had not been made), nor (b) be bound by any amendment or modification to this Lease or by any waiver or forbearance on the part of any prior lessor (including Landlord) made or given without the prior written consent of Landlord's mortgagees; nor (c) be liable for any act or omission of any prior lessor (including the Landlord); nor (d) be subject to any offsets or defenses which Tenant might have against any prior lessor (including Landlord); and furthermore, Landlord's mortgagees shall be discharged of any responsibility hereunder to Tenant which may have arisen (by reason of the mortgagee becoming a mortgagee in possession, a lessor or otherwise) after such mortgagee disposes of its interest in the Building. Tenant hereby agrees not to look to Landlord's mortgagees, as mortgagees, mortgagees in possession, or successor in title to the building for accountability for any security deposit, except to the extent such Purity deposit is actually received by such mortgagee. -40- THIRTY-SECOND: Security Deposit. Simultaneously with the execution of this Lease, Tenant shall deposit with Landlord the sum of Seven Thousand Dollars ($7,000.00) as a security deposit. Such security deposit (which shall not bear interest to Tenant) shall serve as partial security for the payment and performance by Tenant of all of Tenant's obligations, covenants, conditions and agreements under this Lease. Within thirty (30) days after the expiration of the term hereof, Landlord shall (provided that Tenant is not in default under the terms hereof) refund such security deposit to Tenant, less such portion thereof as Landlord shall have applied to make good any default by Tenant with respect to any of Tenants obligations, covenants, conditions or agreements under this Lease. In the event of any default by Tenant under this Lease, Landlord shall have the right, but shall not be obligated, to apply all or any portion of the security deposit to cure such default, in which event Tenant shall within five (5) days after request from Landlord, deposit with Landlord the amount necessary to restore the security deposit to its original amount aforesaid at all times. The use of said security deposit by Landlord, as aforesaid, shall not excuse Tenant's liability for defaults hereunder nor limit Landlord's remedies. In the event of the sale or transfer of Landlord's interest in the Buildings, Landlord shall transfer the security deposit to such purchaser or transferee, in which event Tenant shall look only to the new lessor for the return of the security deposit, and Landlord shall thereupon be released from all liability to Tenant for the return of such security deposit. Tenant agrees that it will not look to any mortgagee, as mortgagee, mortgagee in possession, or successor in title to the Buildings, for accountability for any security deposit or related sums held by Landlord or its successor lessors hereunder, unless and only to the extent such sums have actually been received by said mortgagee. -41- IN WITNESS WHEREOF, the Landlord and Tenant have hereunto set their hands and seals; all done as of the date first above written. LANDLORD: /s/ Sidney S. Zlotnick (SEAL) __________________________________ Sidney S. Zlotnick /s/ Renee Z. Kraft (SEAL) __________________________________ Renee Z. Kraft TENANT: /s/ John Phillips (SEAL) __________________________________ John Phillips /s/ illegible _______________________________ Witness -42- EX-10.13 12 FORM OF PROPRIETARY INFORMATION AGREEMENT Exhibit 10.13 ARISTOTLE PUBLISHING, INC. EMPLOYEE PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT In consideration of my employment or continued employment or grant of options to purchase common stock by Aristotle Publishing, Inc. (the "Company"), and the compensation now and hereafter paid to me, I hereby agree as follows:
1. NONDISCLOSURE. compensation of other employees of the Company. Notwithstanding the 1.1 Recognition of Company's foregoing, it is understood that, at Rights; Nondisclosure. At all all such times, I am free to use times during my employment and information which is generally known thereafter, I will hold in in the trade or industry, which is strictest confidence and will not gained as result of a breach of not disclose, use, lecture upon this Agreement, and my own, skill, or publish any of the Company's knowledge, know-how and experience to Proprietary Information whatever extent and in whichever way (defined below), except as such I wish. disclosure, use or publication may be required in connection 1.3 Third Party Information. I with my work for the Company, understand, in addition, that the or unless an officer of the Company Company has received and in the expressly authorizes such in future will receive from third writing. 1 will obtain Company's parties confidential or proprietary written approval before publishing information (" Third Party or submitting for publication any Information")subject to a duty on the material (written, oral, or Company's part to maintain the otherwise) that relates to my work confidentiality of such information at Company and/or incorporates any and to use it only for certain Proprietary Information. I hereby limited purposes. During the term of assign to the Company any rights I my employment and thereafter, I will may have or acquire in such hold Third Party Information in the Proprietary Information and strictest confidence and will not recognize that all Proprietary disclose to anyone (other than Information shall be the sole Company personnel who need to know property of the Company and its such information in connection with assigns. I have been informed and their work for the Company)or use, acknowledge that the unauthorized except in connection with my work for taking of the Company's trade the Company, Third Party Information secrets could result in a civil unless expressly authorized by an liability under California Civil officer of the Company in writing. Code Section 3426, and that, if willful, could result in an award 1.4 No Improper Use of Information for double the amount of the of Prior Employers and Others. During my Company's damages and employment by the Company I will not attorneys'fees; and is a crime under improperly use or disclose any California Penal Code Section confidential information or trade 444(c), punishable by imprisonment secrets, if any, of any former for a time not exceeding one employer or any other person to whom (1)year, or by a fine not exceeding I have an obligation of five thousand dollars (%5,000), or confidentiality, and I will not bring by both. * onto the premises of the Company any unpublished documents or any property 1.2 Proprietary Information. The belonging to any former employer or term "Proprietary Information" any other person to whom I have an shall mean any and all obligation of confidentiality unless confidential and/or proprietary consented to in writing by that knowledge, data or information former employer or person. I will use of the Company. By way of in the performance of my duties only illustration but not information which is generally known limitation, "Proprietary and used by persons with training and Information" includes (a) trade experience comparable to my own, secrets, inventions, mask which is common knowledge in the works, ideas, processes, industry or otherwise legally in the formulas, source and object public domain, or which is otherwise codes, data, programs, other provided or developed by the Company. works of authorship, know-how, improvements, discoveries, 2. ASSIGNMENT OF INVENTIONS. developments, designs and techniques (hereinafter 2.1 Proprietary Rights. The term collectively referred to as "Proprietary Rights" shall mean all "Inventions"); and trade secret, patent, (b)information regarding plans for research, development, new products, marketing and selling, business plans, budgets and unpublished fmancial statements, licenses, prices and costs, suppliers and customers; and (c)information regarding the skills and - ----------------------------- *For California employees only.
copyright, mask work and other 2.4 Nonassignable Inventions. This intellectual property rights Agreement does not apply to an throughout the world. Invention which qualifies fully as a nonassignable Invention under Section 2.2 Prior Inventions. 2870 of the California Labor Code Inventions, if any, patented or (hereinafter "Section 2870"): I have unpatented, which I made prior reviewed the notification on Exhibit to the commencement of my A (Limited Exclusion Notification)and employment with the Company are agree that my signature acknowledges excluded from the scope of this receipt of the notification. Agreement. To preclude any possible uncertainty, I have 2.5 Obligation to Keep Company set forth on Exhibit B Informed. During the period of my (Previous Inventions)attached employment and for six (6)months hereto a complete list of all after termination of my employment Inventions that I have, alone with the Company, I will promptly or jointly with others, disclose to the Company fully and in conceived, developed or reduced writing all Inventions authored, to practice or caused to be conceived or reduced to practice by conceived, developed or reduced me, either alone or jointly with to practice prior to the others. In addition, I will promptly commencement of my employment disclose to the Company all patent with the Company, that I applications filed by me or consider to be my property or on my behalf within a year after the property of third parties termination of employment. At the and that I wish to have time of each such disclosure, I will excluded from the scope of this advise the Company in writing of any Agreement (collectively Inventions that I believe fully referred to as "Prior qualify for protection under Section Inventions"). If disclosure of 2870*; and I will at that time provide any such Prior Invention would to the Company in writing all cause me to violate any prior evidence necessary to substantiate confidentiality agreement, I that belief. The Company will keep in understand that I am not to confidence and will not use for any list such Prior Inventions in purpose or disclose to third parties Exhibit B but am only to without my consent any confidential disclose a cursory name for information disclosed in writing to each such invention, a listing the Company pursuant to this Agreement of the party(ies)to whom it relating to Inventions that qualify belongs and the fact that full fully for protection under the disclosure as to such provisions of Section 2870*. I will inventions has not been made preserve the confidentiality of any for that reason. A space is Invention that does not fully qualify provided on Exhibit B for such for protection under Section 2870*. purpose. If no such disclosure is attached, I represent that there are no Prior Inventions. 2.6 Government or Third Party. I If, in the course of my also agree to assign all my right, title employment with the Company, I and interest in and to any particular incorporate a Prior Invention Company Invention to a third party, into a Company product, process including without limitation the or machine, the Company is United States, as directed by the hereby granted and shall have Company. nonexclusive, royalty-free, irrevocable, perpetual, worldwide 2.7 Works for Hire. I acknowledge license (with rights to sublicense that all original works of authorship through multiple tiers of which are made by me (solely or sublicensees)to make, have made, jointly with others)within the scope modify, use and sell such Prior of my employment and which are Invention. Notwithstanding the protectable by copyright are "works foregoing, I agree that I will not made for hire," pursuant to United incorporate, or permit to be States Copyright Act (17 U. S. C., incorporated, Prior Inventions in Section 101). any Company Inventions without the Company's prior written consent. 2.8 Enforcement of Proprietary Rights. I will assist the Company in 2.3 Assignment of Inventions. every proper way to obtain, and from Subject to Sections 2.4, and time to time enforce, United States and 2.6, I hereby assign and agree foreign Proprietary Rights relating to assign in the future (when to Company Inventions in any and all any such Inventions or countries. To that end I will Proprietary Rights are first reduced to practice or first ------------------------------ fixed in a tangible medium, as *For California employees only. applicable)to the Company all my right, title and interest in and to any and all Inventions (and all Proprietary Rights with respect thereto)whether or not patentable or registrable under copyright or similar statutes, made or conceived or reduced to practice or learned by me, either alone or jointly with others, during the period of my employment with the Company. Inventions assigned to the Company, or to a third party as directed by the Company pursuant to this Section 2, are hereinafter referred to as "Company Inventions."
-2- execute, verify and deliver such documents and perform such other acts (including appearances as a witness)as the Company may reasonably request for use in applying for, obtaining, perfecting, evidencing, sustaining and enforcing such Proprietary Rights and the assignment thereof. In addition, I will execute, verify and deliver assignments of such Proprietary Rights to the Company or its designee. My obligation to assist the Company with respect to Proprietary Rights relating to such Company Inventions in any and all countries shall continue beyond the termination of my employment, but the Company shall compensate me at a reasonable rate aher my termination for the time actually spent by me at the Company's request on such assistance. In the event the Company is unable for any reason, after reasonable effort, to secure my signature on any document needed in connection with the actions specified in the preceding paragraph, I hereby irrevocably designate and appoint the Company and its duly authorized officers and agents as my agent and attorney in fact, which appointment is coupled with an interest, to act for and in my behalf to execute, verify and file any such documents and to do all other lawfully permitted acts to further the purposes of the preceding paragraph with the same legal force and effect as if executed by me. I hereby waive and quitclaim to the Company any and all claims, of any nature whatsoever, which I now or may hereafter have for infringement of any Proprietary Rights assigned hereunder to the Company. 3. RECORDS. I agree to keep and maintain adequate and current records (in the form of notes, sketches, drawings and in any other form that may be required by the Company)of all Proprietary Information developed by me and all Inventions made by me during the period of my employment at the Company, which records shall be available to and remain the sole property of the Company at all times. 4. ADDITIONAL ACTIVITIES. I agree that during the period of my employment by the Company I will not, without the Company's express written consent, engage in any employment or business activity other than for the Company. I agree further that for the period of my employment by the Company and for one (1)year after the date of termination of my employment by the Company I will not solicit the business of any client or customer of the Company (other than on behalf of the Company). 5. No CONFLICTING OBLIGATION. I represent that my performance of all the terms of this Agreement and as an employee of the Company does not and will not breach any agreement to keep in confidence information acquired by me in confidence or in trust prior to my employment by the Company. I have not entered into, and I agree I will not enter into, any agreement either written or oral in conflict herewith. 6. RETURN OF COMPANY DOCUMENTS. When I leave the employ of the Company, I will deliver to the Company any and all drawings, notes, memoranda, specifications, devices, formulas, and documents, together with all copies thereof, and any other material containing or disclosing any Company Inventions, Third Party Information or Proprietary Information of the Company. I further agree that any property situated on the Company's premises and owned by the Company, including disks and other storage media, filing cabinets or other work areas, is subject to inspection by Company personnel at any time with or without notice. Prior to leaving, I will cooperate with the Company in completing and signing the Company's termination statement. 7. LEGAL AND EQUITABLE REMEDIES. Because my services are personal and unique and because I may have access to and become acquainted with the Proprietary Information of the Company, the Company shall have the right to enforce this Agreement and any of its provisions by injunction, specific performance or other equitable relief, without bond and without prejudice to any other rights and remedies that the Company may have for a breach of this Agreement. 8. NOTICES. Any notices required or permitted hereunder shall be given to the appropriate party at the address specified below or at such other address as the party shall specify in writing. Such notice shall be deemed given upon personal delivery to the appropriate address or if sent by certified or registered mail, three (3)days after the date of mailing. 9. NOTIFICATION OF NEW EMPLOYER. In the event that I leave the employ of the Company, I hereby consent to the notification of my new employer of my rights and obligations under this Agreement. 10. GENERAL PROVISIONS. 10.1 Governing Law; Consent to Personal Jurisdiction. This Agreement will be governed by and construed according to the laws of the State of Delaware, as such laws are applied to agreements entered into and to be performed entirely within Delaware between Delaware residents. I hereby expressly consent to the personal jurisdiction of the state and federal courts located in the State of Delaware -3- for any lawsuit filed there against me by Company arising from or related to this Agreement. 10.2 Severability. In case any one or more of the provisions contained in this Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect the other provisions of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. If moreover, any one or more of the provisions contained in this Agreement shall for any reason be held to be excessively broad as to duration, geographical scope, activity or subject, it shall be construed by limiting and reducing it, so as to be enforceable to the extent compatible with the applicable law as it shall then appear. 10.3 Successors and Assigns. This Agreement will be binding upon my heirs, executors, administrators and other legal representatives and will be for the benefit of the Company, its successors, and its assigns. 10.4 Survival. The provisions of this Agreement shall survive the termination of my employment and the assignment of this Agreement by the Company to any successor in interest or other assignee. 10.5 Employment. I agree and understand that nothing in this Agreement shall confer any right with respect to continuation of employment by the Company, nor shall it interfere in any way with my right or the Company's right to terminate my employment at any time, with or without cause. 10.6 Waiver. No waiver by the Company of any breach of this Agreement shall be a waiver of any preceding or succeeding breach. No waiver by the Company of any right under this Agreement shall be construed as a waiver of any other right. The Company shall not be required to give notice to enforce strict adherence to all terms of this Agreement. 10.7 Dispute Resolution Procedure. I agree that any dispute arising out of or related to the employment relationship between me and the Company, including the termination of that relationship, and any allegations of unfair or discriminatory treatment arising under state or federal law or otherwise, shall be resolved in accordance with the dispute resolution procedures set forth in my letter of offer of employment from the Company dated ________________ (the "Offer Letter"). If there is no Offer Letter or if the Offer Letter does not include a dispute resolution procedure, then I agree that all such disputes shall be resolved by final and binding arbitration in accordance with the following procedures: The parties shall first submit any dispute to non-binding mediation before a mediator to be jointly selected by the parties. The Company will pay the cost of any mediation. If the mediation does not resolve the dispute, the parties agree that the dispute shall be resolved by final and binding arbitration, pursuant to the Employment Dispute Resolution Rules of the American Arbitration Association. Each party shall be responsible for paying its own legal fees. If I prevail, the Company will pay the costs of the arbitration. If the Company prevails, I will pay half of the costs of the arbitration or $500, whichever is less. Subject to the following paragraph, arbitration shall be the exclusive final remedy for any dispute between the parties, including but not limited to disputes involving claims for discrimination or harassment (such as claims under the Fair Employment and Housing Act, Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act, or the Age Discrimination in Employment Act), wrongful termination, breach of contract, breach of public policy, physical or mental harm or distress, except that either side may appeal the arbitrator's decision regarding or relating to matters involving the Company's Proprietary Information to a court of competent jurisdiction in or servicing the State of Delaware. Nothing herein shall limit the right of the Company to obtain injunctive relief for violation of the portions of this Agreement dealing with protection of the Company's Proprietary Information, in order to preserve the status quo or prevent irreparable harm pending arbitration and, if applicable, appeal. In addition, either party may bring an action in a court of competent jurisdiction located in or serving the State of Delaware regarding or relating to matters involving the Company's Proprietary Information. 10.8 Entire Agreement. The obligations pursuant to Sections 1 and 2 of this Agreement shall apply to any time during which I was previously employed, or am in the future employed, by the Company as a consultant if no other agreement governs nondisclosure and assignment of inventions during such period. This Agreement is the final, complete and exclusive agreement of the parties with respect to the subject matter hereof and supersedes and merges all prior discussions between us. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, will be effective unless in writing and signed by the party to be charged. Any -4- subsequent change or changes in my duties, salary or compensation will not affect the validity or scope of this Agreement. This Agreement shall be effective as of the first day of my employment with the Company, namely: __________________, 1999. I HAVE READ THIS AGREEMENT CAREFULLY AND UNDERSTAND ITS TERMS. 1 HAVE COMPLETELY FILLED OUT EXHIBIT B TO THIS AGREEMENT . Dated: ____________________ _______________________________________ (Signature) _______________________________________ (Printed Name) ACCEPTED AND AGREED TO: Aristotle Publishing, Inc. By: ___________________________________ Title: _______________________________ _______________________________________ (Address) _______________________________________ Dated: ________________ -5- EXHIBIT A LIMITED EXCLUSION NOTIFICATION THIS IS TO NOTIFY you in accordance with Section 2872 of the California Labor Code* that the foregoing Agreement between you and the Company does not require you to assign or offer to assign to the Company any invention that you developed entirely on your own time without using the Company's equipment, supplies, facilities or trade secret information except for those inventions that either: 1. Relate at the time of conception or reduction to practice of the invention to the Company's business, or actual or demonstrably anticipated research or development of the Company; 2. Result from any work performed by you for the Company. To the extent a provision in the foregoing Agreement purports to require you to assign an invention otherwise excluded from the preceding paragraph, the provision is against the public policy of this state and is unenforceable. This limited exclusion does not apply to any patent or invention covered by a contract between the Company and the United States or any of its agencies requiring full title to such patent or invention to be in the United States. I ACKNOWLEDGE RECEIPT of a copy of this notification. By: ________________________________________ (PRINTED NAME OF EMPLOYEE ) Date: ______________________________________ WITNESSED BY: _______________________________________ (PRINTED NAME OF REPRESENTATIVE ) Exhibit A EXHIBIT B TO: Aristotle Publishing, Inc. FROM: ___________________________ DATE: ___________________________ SURJECT: Previous Inventions 1. Except as listed in Section 2 below, the following is a complete list of all inventions or improvements relevant to the subject matter of my employment by Aristotle Publishing, Inc. (the "Company")that have been made or conceived or first reduced to practice by me alone or jointly with others prior to my engagement by the Company: [_] No inventions or improvements. [_] See below: [_] Additional sheets attached. 2. Due to a prior confidentiality agreement, I cannot complete the disclosure under Section 1 above with respect to inventions or improvements generally listed below, the proprietary rights and duty of confidentiality with respect to which I owe to the following party(ies): Invention or Improvement Party(ies) Relationship 1. _________________________ ______________ _________________________ 2. _________________________ ______________ _________________________ 3. _________________________ ______________ _________________________ [_] Additional sheets attached. Exhibit B EX-23.1 13 CONSENT OF KPMG PEAT MARWICK LLP EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT The Board of Directors Aristotle International, Inc. The audits referred to in our report dated May 15, 2000, included the related financial statement schedule for the year ended December 31, 1999, included in the registration statement. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audit. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We consent to the use of our report included herein and to the references to our Firm under the headings "Selected Financial Data" and "Experts" in this prospectus. /s/ KPMG LLP McLean, Virginia May 15, 2000 EX-23.2 14 CONSENT OF KELLER BRUNER & COMPANY LLC EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT The Board of Directors Aristotle International, Inc. The audits referred to in our report dated October 29, 1999, included the related financial statement schedule for the years ended December 31, 1997 and 1998, included in the registration statement. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We consent to the use of our reports included herein and to the references to our Firm under the headings "Selected Financial Data" and "Experts" in this prospectus. /s/ Keller Bruner & Company, LLP Bethesda, Maryland May 15, 2000 EX-27.1 15 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 2,404,956 0 1,086,962 (74,830) 0 3,602,648 344,800 (168,879) 3,801,617 1,000,717 0 0 3,500,000 3,000 (2,019,033) 3,801,617 3,912,563 3,912,563 1,250,064 1,250,064 4,685,184 0 7,263 1,914,571 0 1,914,571 0 0 0 (1,914,571) (0.64) (0.64)
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